C.M.O. 10.10.2011

The number of new 52 week lows on the NYSE last week was 1,296.  The number of new highs was 33.  I watch those numbers each week and since the lows were larger than the highs we’ll call last week’s ratio -39.27:1.  This is the largest negative number I’ve seen since the depths of the 2008 route.  I will also say that I have not seen anything close to that on the positive side since I started writing this column.  As loyal readers know I have created and maintain my own set of metrics which appear near top of my web page and are updated each time I publish so following numerical measures is not something new to the author.  (If you are reading this on Seeking Alpha I invite you to come by for a visit.)

In another, possibly spurious, comparison the S&P 500 closed at 1099.23 on Monday October 3, 2011 which exactly matched its closing level on 10.3.2008.  What was not the same was the unemployment rate which stood at 6.1% then but is 3% higher now.  Douglas Kass of Seabreeze Partners noted in Barron’s this week that the other number that is different is the P/E ratio which was 15 in ’08 but is 12 now.

Additional comparisons to 2008 can be found in the fact that as of September’s close the market has been down 5 months in a row which last happened when things seriously kicked in on the negative side in the year in question; only then it occurred in January.  The $87BN that was withdrawn from U.S. equity mutual funds in the last 4 months is also a number that is only bested in the naught that ended in eight.

All of this negative sentiment can most easily be summed up by quoting Jason Trennert of Strategas Research Partners who recently said that is was hard to believe that a sustained bull market could begin “until policy makers address in a serious manner the great sources of the world’s current misallocations of capital”.

Also relating to an earlier time, John Steele Gordon wrote a piece in this week’s Barron’s which starts off  “A bill that would profoundly restructure the American economy by greatly increasing government control of some of its major sectors passed the House easily but had a tougher time in the Senate”.  Mr. Gordon asks the reader if they think this is a description of the passing of the Patient Protection and Affordable Care Act, affectionately known as “Obamacare”?  He answers his own question by stating that it is not but was instead the National Industrial Recovery Act (NRA) of 1933 which was part of Franklin Delano Roosevelt’s “New Deal”.  It would appear, after cursory review, that another commonality they share is that they would both ultimately turn into a raw deal for the economy.

Within 2 years of its passing public opinion was turning against the NRA and a popular columnist of the time, Walter Lippman, wrote: “The excessive centralization and dictatorial spirit are producing a revulsion of feeling against bureaucratic control of American economic life.”  As they say, “the more things change, the more they stay the same.”  The country is still divided on this later occurrence of “excessive centralization and dictatorial spirit” but if it too has a 2-year life span hopefully the damage will be limited.

Now before you open that window and climb out onto the ledge realize that on Friday the Labor Department announced that the economy added 103,000 jobs in September and revised the “zero” number from August to a positive 57,000.

More people having more jobs along with the more people keeping more jobs translated into more people spending more money as a group of 23 retailers tracked by Thomson Reuters saw same store sales (try saying that three times fast) rise by 5.1%.  In particular Nordstrom’s sales were 10.7% higher while on the other side of the scale; Costco’s were 7.0% higher, so it would appear the increases were even across the socio-economic spectrum.

Craig Johnson, president of Customer Growth Partners, was quoted recently as saying: “For the first time in a long time, there’s some excitement”, when asked about the upcoming holiday shopping season.  He continued, “They may not be doing $50,000 kitchens and bathrooms, but they will spend a few bucks to freshen up their wardrobe”.  Mr. Johnson believes holiday retail sales will be 5.1% higher this year when compared to last and reach $226BN which, if it happens, would top the $222BN figure reached in 2007.

Additionally, U.S. auto sales were up over 14% in the 3rd quarter as demand for SUV’s and light trucks rebounded.  Looks like folks are getting more concerned about spending their green than being green.

Back on the metrics front Ned Davis Research says that since WWII quarters that have seen losses greater than 14% (3Q11 was 14.3%) have seen an average bounce of 5.3% the following quarter.

And if all else fails there is always that phenomenon known as the “Santa Claus effect” which uses the fact that since 1945 the S&P 500 has gained an average of 3.7% in the last three months of the year.  What could provide an additional boost this year is that in those years where the average dropped more than 10% in the 3rd quarter (see above), the average gain has been 7.2%; all this according to Standard & Poor’s Equity Research.  Let’s just hope they’re better at this than rating CDO’s.

Frank Fantozzi, president of wealth management firm Planned Financial Services, is increasing his clients equity exposure by 15% in the next few week to take advantage of what he thinks will be a positive 4th quarter for stocks.  “I think the market is going to finish much better than people realize”, he said.

Fingers crossed he is right.

Enjoy the week.

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