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Weekly Advisory – September 7, 2010
The Economy: The Case-Shiller 20-city home price index rose 1% in June. This is the 3rd straight monthly increase in this price index, but analysts note that the data is for June. The homebuyer’s tax incentive expired in April, but buyers had until June 30th to close on the purchase. Analysts are waiting to see what this price index does in the coming monthly reports after the tax incentive expired. The Commerce Department reported that consumer spending rose 0.4%, personal income rose 0.2% and personal savings were 5.9% in July. The consumer spent at chain stores in August as sales at stores open more than a year rose a strong 3.3% in August (the beginning of the back-to-school period for retailers). Auto sales declined in August 2010 as compared to August 2009 primarily because auto sales were boosted in 2009 by the government’s “cash for clunkers” program. General Motors reported August sales declined by 10.6% for continuing models and Ford reported that sales declined by 10.7%. The Institute for Supply Management (ISM) reported that its manufacturing index rose to 56.3% in August from 55.5% in July. The manufacturing sector is still growing at a healthy pace. The ISM manufacturing index is an excellent coincident index so many economists concluded that the U.S. economy is growing slowly and has not stalled completely. An equivalent purchasing managers’ survey in China remained stable at 51.7% in August from 51.2% in July. The ISM’s non-manufacturing index (services sectors) fell to 51.5% in August from 54.3% in July, so activity in the services sectors is clearly slowing. The Labor Department reported that non-farm payrolls declined by 175,000 in June, 54,000 in July and 54,000 in August. Additions to private payrolls (which excludes temporary census workers) were 61,000 in June, 107,000 in July and 67,000 in August. Private payrolls are finally expanding, but at a very sluggish pace. Average weekly hours in production increased very slightly to 33.5 hours in August from 33.4 hours in July. As a result of the latest revisions to quarterly GDP, the Labor Department reported that productivity (output per hour) in the non-farm business sectors rose 3.7% in the 2nd quarter as a percentage change from the 2nd quarter of 2009 (versus 6.3% in the 1st quarter of 2010) and unit labor costs in the non-farm business sectors fell 2.8% on the same basis (versus -2.9% in the 1st quarter of 2010). Corporate profits are likely to rise in the 3rd quarter of 2010 but not as fast as in the 2nd quarter. Markets: The S&P 500 stock index rose 3.75% for the week and is down 0.94% year-to-date. QInsight discussed last week that investors are concerned that sluggish growth in the U.S. economy will mean relatively high unemployment and relatively low personal consumption, so corporate profits may have peaked in the 2nd quarter of 2010. The latest employment data and productivity data seems to confirm these concerns. Many economists are worried that high unemployment is due partially to structural issues (i.e., a mismatch between job skills needed and existing job skills) and results from more than just weak demand. The skills mismatch is made worse by the sharp decline in housing prices since many of the unemployed would have to default on mortgages in order to move to areas in the U.S. where jobs are more plentiful. The best-performing industry sector year-to-date in 2010 is the Consumer Services sector (+5.10%) followed closely by the Industrials sector (+4.74%). The worst-performing sector year-to-date is the Oil and Gas sector (-6.15%) followed closely by the Health Care sector (-5.64%). QInsight’s proprietary business cycle model remains in the early REVIVAL phase. The Basic Materials (and Chemicals), Industrials, Technology and Real Estate sectors have historically led the broad stock market indexes during the REVIVAL phase. Graph of the Week:
Since the QInsight Group defines the US economy to be in a REVIVAL period, investors may buy or hold stocks with the following characteristics: 1. The stocks should be in industry groups that have historically outperformed in the REVIVAL phases of the business cycle (see www.qinsight.com/current.htm for a list of these industry groups). 2. The industry groups should show rising relative strength (on a 52-week basis) as compared to the S&P 500 index. 3. The stocks should have excellent “valuation” characteristics (as measured by a price-to-earnings ratio, price-to-sales ratio or price-to-cashflow ratio well below the industry average) to avoid stocks that may have become overvalued.
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