There’s been lots of conomic data over the past couple of days. I covered the NAHB builder survey yesterday. Regardless of the fact that the housing market is at pathetic levels historically, the builder data showed the rebound off the lows to be on track. Today, the government released data on housing starts to add to the mix, and the Fed also released its industrial production indexes. Yesterday we also got the Commerce Department’s advance retail sales data for March.
Is there a common thread in all this data, or not? And what does the data suggest about the stock market? Conomic data is really only useful to investors if there’s a historical correlation between the data series and market performance. Otherwise, it’s just more diversionary noise.
The first task in understanding the message of the data is to cut through all the noise and ignore the mainstream media and Wall Street pundit spin. The game of whether a number misses or beats expectations is a ridiculous diversion. If you’re a trader you can win the game by being familiar with the trend of the actual data, to give you a better idea whether the Wall Street consensus guess is likely to be high or low. You would need to extract the seasonal factors and do some projections based on actual data to back into the likely seasonally smoothed headline number. If you know the truth about the underlying trend, then you could fade the reaction if it’s in the “wrong” direction. That can be done, but it’s not the focus here.
For the big picture, which for most investors and traders is either the intermediate or longer term trend, what we need to know is whether the actual data is consistent with the current trend, or indicative of change. The only way to do that is to look at a picture of the actual data, not the phony seasonally adjusted and smoothed pablum put out by the Street shills and their media handmaidens. By looking at the actual, not seasonally fudged number we can see where the trend is headed and whether it is changing direction. Then by overlaying that graph with a chart of the stock market, we can get an idea if the data is relevant to us as investors. We want to know whether there’s been a strong correlation with stock prices, and if there has been, whether a divergence is developing that might tip us off to a change in market direction.
The news on housing starts today was supposedly bearish because the seasonally fudged number was a huge miss in terms of Wall Street consensus (or was it consensual) expectations. But the fact is that the housing starts data is an irrelevant number, with about zero correlation with stock prices.
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The headline number indicated an annualized decline of 44,000 for total starts, or a monthly rate of decline of 3,666. Most of that was due to multifamily starts, which are wildly volatile. Drilling down into the data, single family starts actually rose by 7,300 units in March, which is a far cry from the headline number implication that the housing market is falling apart. Single family starts normally increase in March and this March was weaker than usual, but is that a bad thing?
It seems that Wall Street analcysts and media shills forget the law of supply and demand. Fewer starts mean reduced supply, especially considering the incipient rebound in housing demand, however small. Reduced supply versus increasing demand eventually leads to equilibrium, and ultimately to rising prices if those trends continue. Here’s a snippet from the Wall Street Examiner Professional Edition Housing Update.
The downtrend in starts has leveled off but it remains near record lows. That could be a bullish factor for the market if sales increase even slightly. Single family housing starts fell by 1,700 units (after revision) in February to 31,500. This is 4,900 more than February 2011. Blame the warm weather for most of that. March and April data could show a drop in starts, which would be bullish because it reduces the supply stream.
New home sales rose by an estimated 3,000 in February to 25,000 putting the starts to sales ratio at 1.26. A certain number of units are always being lost to obsolescence so that a ratio near 1 would actually help to clear excess inventory under normal circumstances. If the obsolescence rate increases, as it probably is now with the huge “shadow inventory,” then a somewhat higher starts to sales ratio might be normal. It’s difficult to say what that rate is, but with low prices and the removal of substantial existing inventory from the for sale market, 1.26 could be a “good” enough level for the market to work toward equilibrium. The proof will be in the behavior of prices over the next 5 months of peak selling season.
Builders responding to the NAHB survey reported stable sales in February on top of a strong increase in January. If that translates into closed sales down the road, this could be the beginning of a recovery.
Released yesterday, retail sales beat consensus expectations by a wide margin. The market reaction to that piece of good news was tepid because the dealers had to settle $23 billion in net new Treasury paper on Monday and didn’t have time or the cash to play games with stock prices all day.
Today they did because that paper has been put to bed and the dealers are looking forward to a $50 billion cash windfall on Thursday thanks to Treasury bill paydowns (which are known in advance). While Rupert Hacker Murdoch’s and Hizzoner Mike Bloomberg’s mercenaries are scratching their heads looking for reasons why the market is up so much today, there’s your reason. Dealer trading accounts will be flush with cash come Thursday, and they got their short squeezes started early in anticipation of that cash settling. The New Yawk Timids was so confused about why the market was up, they actually made a word stew, tweeting “Markets soar on corporate profits, Spanish debt sale, Apple stock recovery, and no strikingly bad news.”
But, I digress.
The headline number for retail sales yesterday was an increase of 0.8% month to month, seasonally adjusted, versus a conomic consensual sextimate of 0.3%. The market had a little premature ejaculation in the morning, then the dealers went back to their business of paying for the new Treasuries hitting their accounts yesterday.
We’re interested in actual volume of sales, not the inflation skewed dollar total. To get to the kernel of that, I like to look at the real, not seasonally adjusted retail sales, adjusted by top line CPI inflation (not core which grossly understates the actual). Then I back out gasoline sales, which are a substantial portion of total retail sales. Gasoline sales distort total retail sales higher when gas prices are rising, when they actually act like a tax on disposable income and reduce non-gasoline sales. To get the real picture of the strength of the consumer sector, we must back that out. Therefore the number that I track is real, inflation adjusted sales, ex gasoline.
March is always an up month for that series. This year the gain was 10.5% in March. Sounds good, but it’s not. In fact it’s much worse than the headline number report suggested. Last March the gain in this number was 13%. In March 2010 the gain was 15.4%. Even in the pits of the depression in March 2009, this number gained 9.3%. The average gain for March from the past 10 years was 12.38%. Excluding recession years, the average gain for March in the last decade was 13.7%. Any way you slice it, this was a really bad number, far more recession-like than like a recovery.
In spite of that weak performance, the year to year gain of 4.6% was right on trend. It was a bad month but well within the parameters of the current growth trend. The history of the past decade suggests that stock prices won’t tank until the annual rate of change in this series goes negative. But beware, there were a couple of false starts in 2006, when the annual rate of change did drop below zero, but the stock market bubble persisted for another year. Based on the current data from this series the bull trend in stocks looks safe for a while.
Tomorrow I will analyze industrial production with particular attention to electric power generation.
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