The Daily Dose: Markets Up! Economy Down!

 | Sep 18, 2013 | 8:30 AM EDT
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Has the Fed been friendly or not to the globe? That is the trillion dollar question. Until now, one would say somewhat friendly.

Stocks are up, jobs are being created, consumer confidence has rebounded and even Europe is alive (except for new car demand, as seen on Tuesday). However, there is a worrying layer of truth (truth in that there is data to support it) on the U.S. economy that we are about to come to realize more deeply as the Fed prepares to undertake a major shift in policy.

Bottom line: One has had to choose their investments much more carefully in the past three months, and I think selection will become tougher over the next 12 months. As we prepare to embark down a road named Fed that has not been traveled before, here are a couple macro reminders.

Eight Sobering Global Economic Stats

  1. The Brazilian Real, Indian Rupee, and Turkish Lira are down 20%, 15%, and 10% year to date on concerns the Fed will halt its easing efforts. Basically, the Fed is making it tougher for U.S. companies to sell in overseas markets amid depreciating currencies.
  2. At the August rate, it will take nine years and 10 months to return to pre-recession job levels.
  3. One of seven people in the U.S. is on food stamps. The total SNAP program cost has ballooned to $83 billion from $35 billion in 2007.
  4. Median unemployment duration actually increased to 16.4 weeks in August from 15.7 in July -- despite 169,000 in "headline" jobs created.
  5. Capital equipment prices as seen in the Producer Price Index report have stayed in a range of 0% to 0.1% in the past three months. #Unhealthy and not a sign of a robust economic recovery or that the Fed's magic is doing anything other than creating lower wage hourly jobs at McDonald's (MCD) and housing jobsites, underground cash paying jobs and jobs with poor/no benefits. It remains an employer market.
  6. The low rates that the Fed has championed have now driven supply constraints in the U.S. housing market, and pushed prices higher. Hence, affordability is becoming an issue. Does that sound familiar?
  7. By maintaining low rates since late 2008, the Fed has put corporate execs to sleep, not igniting them to spend and invest on fear of hire borrowing costs. Most teams I talk to are looking to hold capital expenditures as a percentage of revenue consistent in 2014 vs, 2013 (and below long-term averages).
  8. Merger and acquisitions activity--You would think that is a positive sign on the economy. Is it really? I think that right now we are seeing companies buying other ones to get instant sales, earnings and cash flow as opposed to reinvesting in their own businesses for the future.

Miscellaneous Notes

  • One positive to an underwhelming economy is that foods costs are declining such as proteins and soft drinks. But, wages aren't really growing, so consumers are unlikely to purchase large quantities of lower priced goods anyway.
  • Buybacks by S&P 500 companies increased 18.1% in 2Q13 compared to 1Q13 (+2% excluding Apple (AAPL)). Companies are using cash to offset options dilution born from higher stock prices, which are being fueled by the Fed. Cash spent on buybacks is less cash spent on reinvestment and job creation.
  • Investors are likely to hear a great deal on the Fed's "forward guidance" this week. In my view, it has proven quite ineffective in the past since the QE programs have been launched (see chart below). You will have the Fed going toe to toe with market forces, and the market usually wins (which may force the Fed quickly back into buying its current level of bonds if the stock markets go into a tailspin).
  •  Recent earnings warnings: Urban Outfitters (URBN) Francesca's (FRAN) Lululemon Athletica (LULU), Joy Global (JOY) (shows third quarter 20113 off to slow start). The next sector to surprise negatively would be the financials amid a slowdown in the mortgage market (layoffs already have begun).

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