Hurricane Sandy Creates Havoc Throughout the USA
To state the obvious, the event creating the greatest impact this past week was Hurricane Sandy. Much of the eastern section of the USA is dealing with Sandy’s aftermath and this will continue for days and weeks to come. Power for hundreds of thousands of people will not be restored until the end of next week. In New Jersey, some gas lines were almost a mile long. Initial estimates of Sandy’s damage are running at $50 billion in losses. The human toll is much greater.
Sandy’s impact was also felt by the USA stock exchanges. The New York Stock exchange closed for Monday and Tuesday. How unusual was this closure of the New York Stock Exchange? You have to go back to 1888 which was the last time the New York Stock Exchange was closed for two days because of weather.
When the stock exchange opened on Wednesday, the markets rallied for about a 1% gain. However, by the end of the week, the markets had given up most of Wednesday gains. For the week ending November 2nd – the S&P 500 closed at 1,414 – a gain of 3 points for the week.
In The Photo Section is a chart of the S&P 500 for the year 2012:
(See Chart of The S&P 500 in The Photo Section)
Technology continues to be the worst performing sector of the market. And for the first time almost two years, the stock of Apple (AAPL) has been under-performing the rest of the market. Apple broke below it’s 200 day moving average on Friday for the first time in over a year. Apple is now trading down $120 (17%) from it’s most recent highs of $708. Since Apple has been the leading stock for the stock markets for the past 24 months of this bull market, it’s recent under-performance “could” be a leading indicator of more market weakness to come.
Final Job Report before the Election on Tuesday
Today is the day when the Bureau of Labor Statistics (BLS) releases the final Monthly Non-Farm Payroll Job Growth report before the election. This report measures the number of jobs the USA economy added in the prior month. Many of you may remember how last months jobs report released by the BLS created significant controversy.
Today’s report showed continuing strength in the employment market. The economy added 171,000 jobs in October. Also, August & September numbers were also revised higher by 84,000 additional jobs,
Leading the gains in jobs for October were the following industries – Note how these jobs reflect how the USA economy has become a service economy:
- Professional & Business Services 51,000
- Retail 36,000
- Health Care 31,000
- Leisure & Hospitality 28,000
In The Photo Section is a chart of the monthly total job growth in the USA since September 2008. This chart clearly illustrates just how far the labor markets fell in 2008 and how much the labor market has recovered since then.
(See Chart of The Monthly Total Job Growth in The Photo Section)
Fridays release of the jobs report did not result in the same amount of controversy as last months report did. You might remember the charges that the jobs report was manipulated for political purposes.
To test the integrity of the jobs report, we ran an analysis of Auto’s and Light Vehicle sales as compared to Unemployment Claims.
Historically, Auto sales have tracked the employment market in almost a 100% reverse correlation. When Unemployment Claims are increasing then Auto Sales are decreasing. Likewise, when Unemployment Claims are decreasing then Auto Sales are increasing.
In The Photo Section is a chart that we have prepared comparing unemployment claims with Light vehicle (autos) sales for the last 35 years.
In RED on the Chart is Unemployment Claims.
In BLUE on the Chart is Light Vehicle (Auto) Sales.
(See Chart of The Unemployment Claims to new Auto Sales in The Photo Section)
Note how auto sales are in almost an exact reverse correlation with unemployment claims for the entire period of 35 years. Looking to the right of the chart, you can see Unemployment Claims starting to decrease coming out of the recession in 2009 and a corresponding increase in Auto Sales. This relationship has continued through October, 2012. So the continued growth of Auto Sales in proportion to the decrease in Unemployment Claims provides independent confirmation of an improving labor market.
Also providing independent confirmation of an improving labor market is that consumer confidence is currently at 12 month highs.
More Confirmation that the Real Estate Downturn is Over & Your Local Real Estate Market is in Recovery
This week saw the release of the latest Case-Shiller home price index for the 20 largest cities in the USA. The index shows that the composite increase is 2% through August, 2012.
In The Photo Section is a chart of the Case-Shiller Home Price Index. The chart shows the year over year percentage change in home prices. You can see from the chart that home prices turned positive in 2012.
(See Chart of The Cae-Shiller Home Price Index in The Photo Section)
News also broke this week that the world’s greatest investor – Mr. Warren Buffet – has purchased a majority interest in a venture to manage a U.S. residential real- estate affiliate network. Mr. Buffet’s firm plans to offer a new franchise brand titled “Berkshire Hathaway Home Services”, starting next year. This new firm has previously operated under the Prudential Real Estate and Real Living Real Estate brands. Warren Buffet’s new Real Estate Services Company is expected to do over $70 billion in residential real estate sales in 2013.
50 Years of history shows that it is good move to be investing alongside Mr. Buffet. Mr. Buffet is making it clear by his large investment in residential real estate services that he believes that the worst of the real estate crises is behind us and that future prospects for residential real estate is brighter.
However The Fiscal Cliff Looms and Large Companies are Wary
We have recently reported that the economic outlook is starting to diverge between businesses & consumers. While c. We have a chart which demonstrates how businesses are growing more pessimistic about the near term prospects for the economy.
The US Federal Reserve performs semi-annual surveys of Senior Loan Officers in over 60 banks across the USA . One of the questions that they ask these loan officers is “Is the demand for businesses loans in your area increasing or decreasing”? The US Federal Reserve tally’s the responses and releases it twice a year.
In The Photo Section is a chart of banks reporting stronger demand for business loans. As you can see, the demand for business loans peaked in April, 2012 and has been declining since. October's demand for business loans was negative for the first time since November, 2011.
(See Chart of The Growth In Demand for Business Loans in The Photo Section)
The big three events that businesses are worried about are the Fiscal Cliff, the recession in Europe and the slowdown in China.
The markets are now entering the historically best performing months of the year. Those months are November – April. Over the past 50 years, the vast majority of stock market gains have come during the months of November – April. Whereas in May – October the gains in the market are historically very small. This is where the old Wall Street Axiom “Sell in May and Go Away” comes from. The markets recent pullback from it’s highs have presented investors with an opportunity to increase equity exposure for this seasonally stronger period of time
Tuesday election will resolve some uncertainty. It appears that Wall Street has now moved towards favoring an Obama victory because of his support for Fed Chairman Ben Bernanke. Mitt Romney has indicated that he would replace Fed Chairman Bernanke if elected. Wall Street is very fond of .
We would expect a rally on Wednesday if Obama wins because Wall Street would assume that Bernanke and the easy money polices which have been so helpful for increasing asset values will continue.
Once the Presidential contest is settled then we would expect congress to finally begin to address the Fiscal Cliff which has much of the Business Community worried. Some estimates are that the Fiscal Cliff will take 4.5% off the USA GDP in 2013. If that were to happen then the USA economy would almost certainly fall back into another recession. And if a recession were to occur you can be assured that it will impact you and your family at your local level.
John Patrick Bray, CPA, is President of Bellevue-based Reliance Investment Management LLC a Registered Investment Advisor Firm.
This communication reflects the opinions of Reliance Investment Management LLC and is being provided for informational purposes only and is not intended as a recommendation, an offer or solicitation for the purchase or sale of any security referenced herein or investment advice. It is being provided to you on the condition that it will not form the primary basis for any investment decision. We recommend that you consult with your investment advisor before the purchase or sale of any securities. The information contained herein is of the date referenced and Reliance Investment Management LLC does not undertake an obligation to update such information. Reliance Investment Management LLC has obtained all market prices, data and other information from sources believed to be reliable although its accuracy or completeness cannot be guaranteed. Such information is subject to change without notice. The securities mentioned herein may not be suitable for all investors.