Weekly Economic Indicators: What's Behind the Equity Rally?

The economic release schedule for the week of January 28th is as follows:

  • Monday:  Durable Goods Orders, Pending Home Sales Index, and Dallas Fed Mfg Survey
  • Tuesday:  FOMC Meeting Begins, ICSC-Goldman Store Sales, S&P Case-Shiller HPI, Consumer Confidence, and State Street Investor Confidence Index
  • Wednesday:  MBA Purchase Applications, ADP Employment Report, GDP, and FOMC Meeting Announcement
  • Thursday: Challenger Job-Cut Report, Jobless Claims, Personal Income and Outlays, Employment Cost Index, Chicago PMI, and Fed Balance Sheet
  • Friday:  Motor Vehicle Sales, Employment Situation, PMI Manufacturing Index, Consumer Sentiment, ISM Mfg Index, and Construction Spending

I spoke with Arthur Cashin, Managing Director of Floor Operations at UBS Financial Services, and frequent CNBC commentator, about what he will be watching most closely next week. Cashin is focused on the overall market, weekly jobless claims, the two day FOMC meeting, 4th quarter earnings, housing data, ISM, PMI, and non-farm payroll data.

Overall Market

The equity market is at a five year high and Cashin is concerned, since the last time we were here, the financial meltdown of 2007 was around the corner. He pointed out that new money has been coming into equities this year, albeit in European and Brazilian equities. He added that investors don’t have a better place to put their money, however. Cashin is more concerned with bond yields and the bubble that exists in the bond market. Cashin said, “just because the equity market is rallying higher, does not mean the economy is doing much better.” Retirement funds are pouring money into equities because they have been sitting on the sidelines and waiting; they can’t delay anymore, so this is driving the equity markets higher.

Market Influences Positives & Negatives

Cashin highlighted some positives for the equity market, including the fact that Dow transports are at an all time high. Fourth quarter earnings are beating because of lowered estimates; the number of shares outstanding has decreased due to corporate buybacks; the debt ceiling facedown was postponed; this has been the best January in 15 years, the 1st 5 days of January and the Super Bowl indicator favors the bulls, especially since the Ravens are an old NFL team. Some negatives, he pointed out are that Mark Hulbert of The Hulbert Financial Digest, says market newsletters recommend 81% of “long” position are at the highest level since 2000, cost of equity puts are rising - making it harder to buy projection, economic data shows some signs of slowdown, no geo-political risk being priced in to the market, sentiment levels show overbought condition (shorts interest etc.), VIX at lowest level since 2007, and technical’s – Tom DeMark who writes the New Science Of Technical Analysis sees possible top/heavy resistance at S&P 1495/1500 level.

Two Day FOMC Meeting

Cashin will be reading the tea leaves to see what the members of the FOMC discussed this week at the agency’s meeting, particularly what Chairman Ben Bernanke has to say about when the Fed plans to end its asset purchase program. Also, Japan’s aggressive monetary policy, which could start a currency war with the US. He referenced the Federal Reserve’s transcript from the 2007 meetings, before the financial crisis, when Janet Yellen, President of the Federal Reserve Bank of San Francisco, and Richard Fisher, President of the Federal Reserve Bank of Dallas, sounded the alarm about the tremendous risk inherent within the banking institutions and the housing market. Cashin added that at the time Bernanke was not willing to rock the boat, and believed the pending crisis was going to sort itself out; Treasury Secretary Tim Geithner, then head of the NY Federal Reserve, questioned whether Fisher had the capacity to evaluate Bear Stearns' exposure to counterparties. Geithner said the risk associated with Bear Stearns was minimal in the overall scheme of things. This shows that some Fed members were out of the loop on what was about to happen to the financial markets and raises some questions about current policy.

4th Quarter Earnings

Despite better than expected earnings being reported by a majority of the S&P 500 companies, Cashin questions whether companies are doing better in this competitive environment. Thus far, 147 of the S&P 500 companies have reported earnings, and approximately 66% have beaten estimates on revenues, while 75% have beaten on earnings forecasts. He pointed out that after all the corporate buy backs, companies are bound to report better earnings, since the number of shares outstanding has decreased, earnings per share will be up.  In addition, many of the big companies lowered guidance after the 3rd quarter and expectations were subpar. Thus, the revenue number becomes more important, as it provides a forecast for future earnings.

Housing Data

Cashin remains skeptical about the health of the housing market. This week investors will get reports on pending home sales, S&P Case Shiller HPI, and MBA purchase applications. On January 22, 2013 the National Association of Realtors reported sales of existing homes unexpectedly dropped in December, restrained by the lowest supply of properties in more than a decade. In addition, data from the Richmond Fed Manufacturing Index was disappointing. Cashin pointed out that this is the underlying reason why he remains cautious about the housing data.  On the S&P Case Shiller HPI data Cashin will look at the number of vacancies.

Non-Farm Payroll

Cashin will be looking for hints in activity in earnings and workweek overtime, and salary pressure. The ADP data will be leading up to the employment data, which will be followed by initial jobless claims etc. This will be particularly important since the Fed made the unemployment rate of 6.5% as a policy target.