- - Thursday, October 14, 2010


Over the past several weeks, the tone of my columns has become more cautionary because of signs that the economic recovery has slowed and, despite stimulative efforts, job growth has proved elusive. Last week, non-farm payrolls for September, as reported by the Labor Department, fell more than the expected 94,000, and the data were weaker than for August.

It would seem bad news was followed by more of the same this past week.

Earlier this week, the Conference Board reported that its Employment Trends Index fell from 97.3 in August to 97.0 in September. While the index is up nicely from last September, more than 9 percent, it is up only modestly from April, 0.6 percent. Many will try to put their spin on this, but the Conference Board sees the data suggesting a strong likelihood of more job losses in the coming months. More specifically, Gad Levanon, associate director of macroeconomic research at the Conference Board, says, “As employment lags changes in the economy, and with GDP growth forecasted to slow even further in early 2011, we may see negative job numbers next year.”

The gross domestic product, or GDP, growth is to slow even further in 2011? When did that happen? Oh yeah - also earlier this week.

To be more precise, on Monday, a panel of 46 economists surveyed by the National Association for Business Economics (NABE) cut its growth forecasts for both this year and next. The panel expects GDP to grow at a pace of 2.6 percent in both 2010 and 2011, down from the group’s previous prediction of 3.2 percent. About 37 percent of survey respondents said they expect the recovery to remain “subpar as severe wealth losses and onerous debt burdens inhibit spending and lending.”

The NABE report goes on to say that business will continue to lead the slow recovery. While the panel raised its forecast for business spending on equipment and software, it reduced its outlook for consumer spending and said it expects the job market to pick up slightly in the second half of 2011.

I noted in my Sept. 30 column, “Dour forecasts begin for a yule shopping season,” that we would start getting spending forecasts for the Christmas holiday shopping season in the following weeks. Well, here we are.

As part of their overall reduction in consumer-spending outlooks for both 2010 and 2011, NABE economists forecast this year’s holiday retail sales to be “especially weak,” rising just 2.5 percent from last year. This is slightly ahead of the National Retail Federation’s forecast for a 2.3 percent increase to $447.1 billion in sales during November and December. As always, context is key, and NRF data show holiday sales rose 0.4 percent last year after falling 3.9 percent after the financial market meltdown in 2008.

As I mentioned at the time, forecasts can be all over the map, depending on the underlying assumptions, and we see this in the disparity between the Nielsen Co., which expects holiday sales to be flat with last year, and the view from the International Council of Shopping Centers, which projects a 3 percent to 3.5 percent sales improvement, or the largest year-on-year improvement since 2006. As I commented a few weeks back, we will have to keep close tabs on near-term spending data but also on any forecast revisions, good or bad. The takeaway to me from these forecasts is the following: While spending may be up slightly year on year, odds are it will be weak, and I suspect it will favor discounts and value-priced offerings.

Also this past Monday, the minutes from the most recent Federal Open Market Committee meeting were made available. Those September minutes revealed that Federal Reserve officials thought the struggling recovery might soon need more help. The minutes also showed that those officials discussed several ways to provide support to the economy, including the possible adoption of a price-level target, but focused on buying additional longer-term Treasury securities. These minutes are the latest in a growing conviction that the stock-market rally over the past few weeks has been fueled by the idea that the Federal Reserve would implement another round of asset purchases.

Now let’s layer in some of the sentiment indicators I have discussed in past columns. Remember, these tend to be contra indicators. The most recent American Association of Individual Investors survey is at a 49 percent bullish rate, the second-highest this year, while Investors Intelligence, which samples newsletters, is near 46 percent bullish, the highest since mid-May. Those numbers would suggest the market is getting overheated.

Taking all of this into my investment mosaic, my concern is this might be a “buy the rumor, sell the news” setup. Not to get all Chicken Little on you, but while the market is looking for the Federal Reserve to act, what happens if the Federal Reserve’s actions fail to live up to market expectations?

If it does turn out to be a “buy the rumor, sell the news” event, we could be in for more than a bumpy ride. In the meantime, l’ll be watching corporate earnings as it goes into high gear this week. So far, earnings from the likes of Intel and CSX have been good, but there are hundreds of companies yet to go.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at [email protected] At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

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