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November 06, 2003

Closing Bell
by Adam Oliensis

Weekly Economic News Diffusion Index (WENDI)

The positive trend in economic news continued last week with Durable Goods Orders, 3Q03 GDP, and both Chicago the Chicago PMI and the NY NAPM numbers blazing the trail. The net positive tenor of the news was somewhat mollified by a weak Help Wanted Index, and continued concerns that the jobs market may not be improving fast enough to keep consumer spending strong.

The Weekly WENDI rose to 28%, the 4-Week Weighted Moving Average was pulled by a larger than average number of components up to 27% and the Cumulative WENDI rose to a new high at 11.5. In aggregate the economic news continues to support the recent strength in the stock market.

In case youre not watching the Packers on ESPN, here are this week's WENDI components.

Home Sales: Existing Home Sales came in far ahead of expectations for September, to an all-time high by a large margin. New Homes softened a bit but remained extremely robust. Bullish (1)
Consumer Confidence (Conference Board): Rose to 81.1 for October from 77 in the prior month, however it remains below May and June levels. Both Present Situation and expectations improved, but there's a long way to go. Very Qualified Bullish (0.25)
Durable Goods Orders: For September the headline number was a slight disappointment (+0.8%), however that came on the heels of a strong upward revision for August, so the actual level for Sep. was ahead of expectations. Additionally Nondefense Capital Goods Ex-Aircraft (our proxy for business spending) rose at a 3.9% seasonally adjusted annual rate. Bullish (1)
BT-M Chain Store Sales: Fell 0.9% for the week of Oct. 25 but were up 5.8% Y/Y. It looks like October was weak last year as well. BT-M revised down October growth projections further to 2.5-3% (from their initial projection of 4.5-5%). If the Y/Y number wasn't so strong we'd give this a worse score. As it is this is a Qualified Bearish (-0.5)
ABC News/Money Mag Consumer Comfort Index: Rose a point for October 26 but remains at a low level at -18. Neutral (0).
MBA Mortgage Application Survey: Declined by 0.5% last week but remains robust. Neutral (0).
Chicago Fed National Activity Index: Rose above 0 in September (at long last). Last month's number was revised down slightly, which qualifies the improvement. Qualified Bullish (0.5)
Jobless Claims: Initial Claims came in at 386K, below the benchmark 400K level. We have to give it some credit for showing sustained levels below the benchmark but the prior week's number was revised up to 391K and Continuing Claims rose a bit. Qualified Bullish (0.5)
Employment Cost Index: Rose 1% in 3Q03, pretty much on trend with the Private Sector outpacing Government employment costs. Benefit costs are rising about 50% faster than wages, which benefits neither employers nor workers (though it does benefit healthcare companies, which is probably an important secular theme in the market). There are so many ways to argue this story! Small increases are good for profit margins but bad for aggregate demand. Large increases are bad for profit margins but good for aggregate demand. Moderate steady increases are positive (which we have) but rising healthcare costs offset this. Neutral (0).
Gross Domestic Product: Real GDP rose 7.2% in 3Q03, the fastest pace since '84. Bullish (1)
Help Wanted Index: Flat in September at 37, near its bear market low of 35. Bearish (-1)
Chicago Purchasing Mangers' Index: Rose 3.8 in October to 55. (50 is neutral.) Improvements were seen in Production, New Orders, Prices Paid, and Employment. Bullish (1).
U of M Consumer Sentiment Survey: The final value was unchanged from the preliminary value of 89.6. Neutral (0).
Personal Income & Savings: Income rose on trend at 0.3% for September. Consumption Fell 0.3%. The Savings Rate fell 0.6% to 2.9%. That's a positive and two negatives. Qualified Bearish (-0.5)
NAPM--NY: Business Conditions in New York City improved smartly with the index rising 1.9% in October. Gains were broad-based, led by the Services sectors. Bullish (1).

Gross Domestic Product

The headline number on 3Q03 GDP last week was 7.2% growth Q/Q annualized. Perhaps even more impressive was that Private Sector growth was at an 8.5% rate. Government spending and investment actually shrank. Remember when 2Q numbers came out and everyone poo-pooed the data because defense spending contributed so much? Well, in 3Q both government spending and Inventories actually DETRACTED from GDP...and yet the private sector rate was even stronger than the headline.

How about the Personal Consumption Expenditures (the wobbly consumer)?

The red line shows the absolute figure. Notice that during past recessions the red line has flattened out. Not so recently. The light blue line shows Q/Q annualized growth, which was 6.6% for 3Q03, the strongest quarter in 6 years. The dark line shows Y/Y growth, now turning up from a cyclical low...but the HIGHEST cyclical low in decades.

Through 3Q the consumer accelerated his contribution to the economy.

And business spending?

The above chart shows a strengthening in business investment, but the line remains 3% off its all-time high. Let's see how that breaks down.

Rust Belt investment remains unimpressive at best. Industrial Equipment is languishing at '97 levels and Transportation Equipment, while it turned up in the quarter, is still in a downtrend.

Above we see that business spending on Information Processing has broken to a solid new high.

And in the chart just above we see that investment in Computers & Peripheral Equipment is soaring, up in the neighborhood of 60% above '00 levels.

Now there is some issue as regards "hedonic pricing," which relates to adjustments in GDP statistics for the improving speed of computers and just how much computing power can be purchased for a given dollar in a given time period. I have tried to understand how the government does this, but I have to be honest and say that I do not understand just what they're doing there. I will say this, though. First, whatever adjustment methods they use, things are clearly improving in the GDP report. Nominal GDP (unadjusted for inflation) grew at a 9% annualized rate for the quarter. All these things considered, I think we have to accept that the question of whether fiscal and monetary stimuli have gained traction has been answered in the affirmative, at least temporarily. And Earnings growth, below, supports the bullish case

Earnings

The consensus estimate for Forward 12-Month Earnings rose another $0.15 last week to $60.23. (That's a time-weighted analysis of quarterly estimates as recorded at Thomson Financial.) That's up at a 17% annualized rate over the past 3 months, also up at a 17% annualized rate over the past 6 months, and up 10.2% over the past year.

The question as regards earnings (as well as GDP and its components) is just how they will all respond to the waning of the effects of tax rebates, tax-rate reductions, and extremely accommodative monetary policy.

We'll want to look for signs of such weakening especially in consumer spending. We have seen some preliminary wobbling in the BT-M Chain Store Snapshot. Let's keep our eyes peeled in that direction.

SPX

As I am away from home and working on a laptop...and suffering some data deprivation, we'll just look at the SPX this week, rather than our dozen indices.

The index is sitting on top of a lot of support. 1054 could be tough overhead. If that level breaks then we're still looking for 1070, which is R2, launched at the final bull market high.

If R1-S6 (1041-42) breaks to the downside then we're looking for S3-S5 (1020-27). And if S3 breaks then we're looking for S4. A trip to S4 would be a real threat to the bullish formation and a move under that level would take a lot of conversations to whether key support at 965 might not be in trouble.

Bottom Line

Short-Term: Neutral between SPX 1041 and 1054. Bullish over 1054, bearish under 1041.

MID-TERM: Seeing 1070 as maximum upside over the next few weeks. Would become more bullish on a move over 1070 that tested down to that level and gave a buy signal. Would become bearish on a dip below S4.

LONG-TERM: Bullish. Looking for at least 1070 by year-end with a possible trip to 1187 if current earnings and WENDI trends continue.

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Best regards and good trading!

Adam Oliensis,
Editor The Agile Trader

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