C.M.O. 10.24.2011

Twelve, 12, XII, a dozen, a number familiar to all of us if for no other reason than it represents the hours passed on a full sweep of the clock; half of what it takes to complete a day.  Interestingly though, given the world’s current population, it also represents the number of years it takes the folks on this small speck of dust floating through the universe to add another 1 billion inhabitants.  That, at least, is according to the people counters at the United Nations.  That august institution has decided that the world’s population will hit 7 billion on October 31st of this year which could well be the scariest thing about the upcoming Halloween..

In the effort of full disclosure Richard Kollodge, editor of the UN’s annual State of World Population report says, “We cannot pinpoint the exact moment when or exact place where that child will be born”.  That is in no way a sense of false modesty given that the UN was not able to use world census data later than 2005 for countries that contain 62% of the world’s population and there is no data what-so-ever for countries that contain 25% of this globe’s inhabitants.

Gerhard K. Helig, chief of population estimates and projections for the UN, hedges the impending threshold further by saying “We made it always clear that Oct. 31 is a symbolic date.  There is no country in the world where you can say the number of people living in a particular day or time.”

If the number twelve represents a dozen and if we stretch that to the “baker’s” version of that quantity and then subtract those number of years from today we come to the first time the S&P crossed the 1200 mark in 1998.  That we have made no progress for 13 years is not the least encouraging but Henry McVey, KKR’s head of global macro and asset allocation, provides some hope as he states in a recent white paper that “we are finally returning to a time of ‘stocks for the long run’, continuing, “anyone who believes in mean-reversion investing has to consider the current starting point for equities at least somewhat attractive.”

Jim Paulsen of Wells Capital thinks 1250 on the S&P represents “fair value” and calculated that every time in the past that the index was flat or down for the prior 12 years it was up an average 7.2% a year for the next 10 versus being up 4.7% when it wasn’t.

That things might get better in the long run is good to know, but getting to the long run is the problem.  Bespoke Investment group has counted 31 “all-or-nothing” days since the beginning of August.  This moniker is used for any day where the advance decline line on the S&P 500 hits up or down 400.  This year’s tally now beats 2008 and we don’t even want to think about that again, now do we?

Another measure of the degree to which everything appears correlated can be found in that there have been 62 days this year when the S&P has had an intraday trading range of more than 1%.  That is the index’s fourth longest stretch of such days since 1995 according to Birinyi Associates and is exactly half the 124 day stretch since the first half of 2009.  Additionally they found that the DJIA has finished 1% higher or lower 38 times since August 1, which compares to 25 times in the January to July period this year.  Strategas Partners says there have been 26 days when 90% of the S&P 500’s components have moved in tandem since July 1st of this year.  This, they say, should be compared to the period between 2002 and 2006 when that did not happen more than 5 times a year.

Staying with the 12 theme, it is also the number of years the new stainless steel automobile exhaust systems last according to Monro Muffler Brake Inc.’s CEO Rob Gross.  MNRO reported earnings last Thursday saying that income rose 14% YoY and sales were up 6.9% for the same period.  “For 14 straight years our exhaust business was in decline, but for the past two years it has been growing”, Mr. Gross said.  “They’re replacing their exhaust systems at year 11 or 12, (there’s that number again) which means they plan to keep that car for many more years.  You don’t spend $600 on exhaust if you plan to sell a car next year”, he went on to say.

A more conservative attitude can also be seen in total household debt numbers which shrank by $1.1 trillion from the end of June in 2008 to the end of that same month this year, a drop of 8.6% according to the Federal Reserve Bank of New York.  Auto loan and credit card balances dropped more in August of this year than they had since April of 2010.

It would appear that all is not lost however as retail sales were reported to be up 1.1% in September, helped in part by strong auto sales +3.6% and a revision to the August headline number to +0.3% from 0.0%.  Retail sales ex-autos were +0.6% and core retail sales (ex-autos, gas station sales and building material sales) were up +0.5%.  The consumer might be down but these numbers show they’re not out.

Some of the renewed vigor could be coming from the Fed’s Twist 2.0.  The operation’s intent was to lower rates on the long end and while it was initially thought to have little impact it has caused investors to move out of bonds and into other investments.  The stock market’s 5.8% rise MTD could be evidence of this and Kathleen Gaffney, co-manager of the Loomis Sayles Bond Retail fun said recently, “Specifically, what we’re seeing is a very strong bid in high-yield, and that has a very familiar feel to it.  When risk is on, the lowest quality assets, the riskiest assets, rally the hardest”.  This is borne out by Ken Hackel at CRT Capital Group who says risky assets have returned 2.99% so far in October.

Kathleen is not alone as Lipper & Co. reported that investors purchased $2.27BN of Junk Bond mutual funds in the week that ended last Wednesday and the spread to Treasuries is around 764bps versus 910bps at the start of the month.  “The market is being led by riskier names”, said Sean Feeley, MD at Babson Capital.  Mr. Feeley says he worries less about a company’s rating and more about their debt service ability.

More evidence can be seen in the Citi High Yield Master indexes as their CCC index has gained 6.2 cents since an October 4 low of 76.15 while the BB index has gained 3.9 cents and the B index has gained 5.19 cents.

With the hope of a resolution on the Sovereign debt crisis in Europe dashed before the summit even started and any agreement put off at least until Wednesday it is becoming increasing unclear when and what will ever be decided my Ms. Merkel and Mr. Sarkozy.

Let’s just hope it doesn’t take 12 years.

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