It's a recession. No it's a boom. The economy's falling off a cliff. No it is white hot. The Fed's tightening just when it should be doing nothing. The Fed's so right at everything it does including tightening, how dare you question their homework.
That insane position is where we are right now. I don't think I have ever seen anything like it. And it's like this every day! Classic case: at 8:30 this morning we got an astoundingly strong jobless claims report, 206,000 the lowest since September and 20,000 lower than the median expectation. We are dealing with an unemployment rate that's the lowest since 1969.
These are boomtime numbers. There is no denying it. They signify the continued tightness in employment that has driven wages up to where employees' wages are up more than 3% year over year. Score one for the rate hikers.
Now, I, personally, am not all that concerned that people are finally able to make a little more money than they did the year before. Many expenses, especially health care, have gone up and, to me, it's a reasonable increase. Some areas of the country have almost no unemployment so, naturally the wages are going higher. Other areas have mandated wage gains because of minimum wage guidelines.
Still, with this incredibly low weekly jobless claim number, the last before the big Fed meeting, it's difficult to reconcile not being tough on inflation and taking the Fed Funds Rate higher. .
But then there's the other side of the ledger. There are many different goods that are coming down in price because of the sudden collapse in oil since the last Fed meeting. The drop is just now starting to filter through the system. It could lower prices for all of the goods in the energy chain, and they are a substantial chunk of companies' costs.
Ah, but then there's the flipside. We have retail sales tomorrow and industrial production and I think they are going to be bountiful. I believe aggregate retail figures will be strong in part because of the lowering of gasoline. But, the last few retail earnings reports and research comments indicate a pretty severe downtick in sales. I didn't like the negative comparable store sales numbers from Dave and Busters (PLAY) that we got the other day. Signet (SIG) , yesterday, told us that Christmas is promotional. American Eagle Outfitters (AEO) gave us a disappointing forecast. The stock of Tailored Brands (TLRD) , the holding company for Men's Wearhouse and Jos. A. Bank, got slaughtered today after a very weak quarter last night. We got a research note that told us Best Buy's (BBY) having some weakness. These are all in contrast to what the national retail sales figures, aided by lower gasoline will tell us.
Energy itself is problematic. We got a big upgrade of the stock of Procter & Gamble (PG) from Merrill Lynch today with a price target boost from $85 to $108. Organic growth is good and costs are low. Price increases are sticking. We had a positive note on Clorox (CLX) yesterday, similar story, price hikes are sticking. There is only one problem. The prices hikes were largely put through because of higher energy prices. Now the energy costs are coming down but the price to the consumer isn't. You know what that is, don't you? That's pure inflation.
When we get that industrial production number tomorrow I think it will be big, bolstering the case for an immediate hike. But so much industrial production is linked to the once booming energy patch. I think we are going to see a radical scale down in drilling beginning in January. It could be very disappointing, possibly even making this the last strong industrial production number. Doesn't it pay to wait to see if you are the Fed? Not clear -- perhaps the president's relentless drive to bring manufacturing home is starting to have an impact. The tax cuts could still be helping, too.
Still, I think the Fed has to be very careful about not just the construction industry, but specifically the homebuilding industry. How do we deal with the fact that housing seems to be rolling over because of a one-two punch of mortgage rates screaming higher on a percentage basis and issues in some areas with the end of the deduction for state and local taxes. Do you want to trade up to a new home with a 5% mortgage when you have a 3% mortgage? No wonder the average prices of homes is coming down, particularly in areas that were already unaffordable for many. We know it is only going to get worse because in many areas, particularly the coasts, we are seeing the decline in the numbers of homes sold. That's a prelude to price breaks and a spiral down that's hard to stop.
Hold your horses though. We are now seeing mortgage rates come down because of a lack of demand and because the 10-year Treasury's yield is coming down. So maybe housing heats up you say? I say maybe the Fed won this battle and housing prices are tilting down even with slightly lower mortgages.
We can play this hot-cold game all over the place. Transports fell apart today with the stock of Federal Express (FDX) hitting a 52 week low and the stock of XPO Logistics , the gigantic freight company, falling an astounding 22%, bringing the stock to an almost 50% decline. So things must be very soft of their stocks would be soaring, no?
Again though, ying to yang, perhaps Federal Express is getting crushed by too much omnichannel demand, and it is falling prey to what happened with United Parcel in previous years where an overwhelmed situation caused costs to skyrocket.
And XPO (XPO) ? A short selling research firm put out a devastating piece about the company, which they allege is playing fast and loose with the numbers and management can't be trusted. Those investors who were invested in it because Amazon's (AMZN) lowering shipping fees longer than usual leading up to Christmas and offering a two-hour delivery up until midnight of Christmas eve, got a rude awakening. Instead of Santa, they got the short-selling Grinch who Stole Christmas.
Then there's trade. We know that the world is going to slow if we put through all of the tariffs in Chinese goods that the president wants if they don't play ball. But tariffs also raise the price of goods; very inflationary. Which is it going to be? Pretty binary.
Finally the tug of war even extends to individual stocks. Over the last few weeks bears were spreading concern that General Electric (GE) with about $100 billion in liabilities could be in more trouble than anyone thinks, hence the decline to $6.66 cents the other day. GE's so big it could cause some real risk to the economy.
Yet, today Steve Tusa, one of the greatest analysts of our time, told JP Morgan clients that he is going from a sell to a hold on the stock. What an amazing call. When GE was at $28 I had then CEO Jeff Immelt on and questioned him about Tusa's brilliant sell call. That's right he was trying to get you out at $28, and he scoffed at Tusa's work, saying he would be dead wrong. Oops. Tusa knew a heck of a lot more about the company that Immelt did.
Tusa believes that Larry Culp, the new CEO, should be doing an equity offering to be sure that it has enough cash to get through the wilderness while Culp spins off and sells off assets to raise capital. I bet if Culp did it, Tusa might be tempted to go to a buy because for all of the GE's sturm and drang business is pretty darned good.
And that's really the point of this whole exercise. There's enough conflicting evidence that the economy is slowing, perhaps even dramatically, that the Fed shouldn't move. But these big retail and unemployment numbers say the Fed must raise for certain. My take? I'd let the Fed raise a quarter of a point. However, after that the Fed would be nuts not to wait, to say "look we said we could put through three rate increases to get normalized, but we aren't sure what normal is. So we will let the data and prudence dictate our next move." On the eve of Christmas, is that too much to ask for?
