The Stock Market Pulse

($49.95/month value)

January 12th, 2009

 

Weekly review of the markets

 

Last week,

Monday, construction spending came out a little higher then expected at -0.6% when it was expected to be around -1.4% but it didn’t help much. The markets didn’t go anywhere.

 

Tuesday,the day started with a rally but as it's often the case a news came out to drop gold icy water on it... Factory orders were much lower then anticipated at -4.6% vs. a 2.5% reduction. This result followed -6% the month before... New home sales also came out lower then expected with -4% Vs. -1%. Geez...you'd think by now those analysts would know the economy is struggling! The FOMC minutes highlighted a severe contraction of the economic activity in the 4th quarter (surprise surprise!). It also mentioned the jobless claims would continue to rise until 2010 (ouch). On the positive side, it reiterated it would continue to buy bad debt from creditors but it wasn't enough to help the market go much higher

Wednesdaythe ADP employment report which measures nonfarm payrolls variations noted a loss of 693000 jobs. It didn't look good for the up coming employment report coming on the Friday... Plus, Intel lowered its earnings forecast for the last quarter of 2008. I guess this Wednesday was on the cautious side and we saw some profit taking.

 

Thursday Wal-Mart joined the dance and announced poor "same store" results and since investors know the "real driving data is coming on Friday not much happened on this day

 

Friday we learned the American economy lost 524000 jobs in December. A Giant number but a little better then forecasted (Finally!) as 550000 jobs were expected to be lost. That being said, the unemployment rate went from 6.8% to 7.2%, i.e. 0.2% higher than the consensus... of course an increase in the unemployment rate automatically means a reduction in spending, thus further reduction in the US economy. The market, considering the disastrous news, didn't react so bad although we did finish lower but not long ago such news would have caused a major drop...

 

This Week

Last week confirmed, once again, the US economy is in deep trouble. Obama announced an extra $800 Billion would be injected on top of the $700B which will be used in the financial sector. it will take a while for this program to show its effect in the economy but the stock market usually reacts as much as 6 months in advance. This means we will see the stock market bounce before we start seeing good economic news, so keep this in mind when thinking about your investment strategies. This week a lot of economic data will impact the markets so make sure to read about them in the Economic Calendar section. One more thing: Right now the issue is no longer inflation but deflation.

 

Technically, there's no point adding another chart so I'll leave last weeks chart. Suffice to say we seem to be going into negative territory.

Stay sharp!

 

*if you want more information on technical indicators and Technical analysis in general I strongly recommend you click here

 

 

Economic Calendar Data Source: Bloomberghttp://www.bloomberg.com/markets/ecalendar/index.html

(Reports I consider will impact the market the most with definitions and expectations)

 (Soon to be a section for Investor Rules members only ) Not a member yet? Just go to

 

http://www.InvestorRules.com/membership.html

 

 

Monday January 12th  

Nothing interesting

Tuesday January 13th 

 ICSC-Goldman Store Sales

7:45ET

Definition
This weekly measure of comparable store sales at major retail chains, published by the International Council of Shopping Centers, is related to the general merchandise portion of retail sales. It accounts for roughly 10 percent of total retail sales.

Why Do Investors Care?
Consumer spending accounts for more than two-thirds of the economy, so if you know what consumers are up to, you'll have a pretty good handle on where the economy is headed. Needless to say, that's a big advantage for investors.

The pattern in consumer spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Retail sales growth did slow down in tandem with the equity market in 2000 and 2001, but then rebounded at a healthy pace between 2003 and 2005.

The ICSC-Goldman index is one of the most timely indicators of consumer spending, since it is reported every week. It gets extra attention around the holiday season when retailers make most of their profits. It is also a useful indicator when special factors can cause economic activity to momentarily slide. For instance, it was widely watched in the aftermath of Hurricanes Katrina and Rita which hit New Orleans and the Gulf Coast in 2005. The ICSC-Goldman Sachs store sales series previously was known as ICSC-UBS before Goldman Sach's involvement with ICSC. The name change took place with the September 30, 2008 release.

 

International Trade (Important this week)
08:30ET ET
Consensus -51.5B

 

Market Consensus Before Announcement

The U.S. international trade gap in October widened to $57.2 billion from a $56.6 billion deficit in September. The latest widening in the trade deficit was led by the oil deficit which grew to $32.7 billion from $31.9 billion in September. The nonoil goods deficit actually shrank an incremental amount - to $35.6 billion from $35.7 billion in September. In the latest month, the disconcerting part of the report was another drop in exports. In October, exports declined 2.2 percent while the larger imports component slipped 1.3 percent. Looking ahead, we will see dueling softness in both exports and imports as demand is weakening in both the U.S. and overseas. But another drop in oil import prices is likely to result in at least a temporary shrinkage in the U.S. deficit. This month there is a larger than usual forecast range.

International trade balance Consensus Forecast for November 08: -$51.5 billion
Range: -$58.0 billion to -$39.0 billion
 

Exports grow when foreign economies are strong. The weaker the foreign exchange value of the dollar, the less expensive goods and services are to foreigners, and this also helps spurt export activity. Imports grow when U.S. economic growth is robust. Imports are also spurred by a strong foreign exchange value of the dollar.

Data Source: Haver Analytics  

The international trade balance has posted a deficit almost continuously since the 1980s. Any trade deficit is a drag on U.S. GDP growth, but a smaller deficit adds to growth, while a larger deficit decreases GDP growth.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/13 2/11 3/13 4/9 5/12 6/10 7/10 8/12 9/10 10/9 11/13 12/10 Released For: Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

 

Definition
The international trade balance measures the difference between imports and exports of both tangible goods and services. Imports may act as a drag on domestic growth and they may also increase competitive pressures on domestic producers. Exports boost domestic production.
Why Do Investors Care?
Changes in the level of imports and exports, along with the difference between the two (the trade balance) are a valuable gauge of economic trends here and abroad. While these trade figures can directly impact all financial markets, they primarily affect the value of the dollar in the foreign exchange market.

Imports indicate demand for foreign goods and services here in the U.S. Exports show the demand for U.S. goods in countries overseas. The dollar can be particularly sensitive to changes in the chronic trade deficit run by the United States, since this trade imbalance creates greater demand for foreign currencies. The bond market is also sensitive to the risk of importing inflation. This report gives a breakdown of U.S. trade with major countries as well, so it can be instructive for investors who are interested in diversifying globally. For example, a trend of accelerating exports to a particular country might signal economic strength and investment opportunities in that country.

 

 Redbook
08:55 ET

Definition

A weekly measure of sales at chain stores, discounters, and department stores. It is a less consistent indicator of retail sales than the weekly ICSC index. It is also calculated differently than other indicators. For instance, figures for the first week of the month are compared with the average for the entire previous month. When two weeks are available, then these are compared with the average for the previous month, and so on. It might be more useful to compare year-over-year figures since these are indeed compared to the comparable week a year ago. This index is correlated with the general merchandise portion of retail sales covering only about 10 percent of total retail sales.

Why Do Investors Care?

Consumer spending accounts for two-thirds of the economy, so if you know what consumers are up to, you'll have a pretty good handle on where the economy is headed. Needless to say, that's a big advantage for investors.

The pattern in consumer spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Retail sales growth did slow down in tandem with the equity market in 2000 and 2001, but then rebounded at a healthy pace between 2003 and 2005.

The Redbook is one of the more timely indicators of consumer spending, since it is reported every week. It gets extra attention around the holiday season when retailers make most of their profits. It is also a useful indicator when special factors can cause economic activity to momentarily slide. For instance, once again,  it was widely watched in the aftermath of Hurricanes Katrina and Rita which hit New Orleans and the Gulf Coast in 2005.

Treasury Budget
14:00 ET
Consensus: -83.0B

Definition

The U.S. Treasury releases a monthly account of the surplus or deficit of the federal government. Changes in the budget balance of the annual fiscal year (which begins in October) are followed as an indicator of budgetary trends and the thrust of fiscal policy.

Why Do Investors Care?

The budget data have several direct and indirect meanings for the financial markets. The most direct relationship lies between the size of the budget deficit and the supply of Treasury securities. The higher the deficit, the more Treasury notes and bonds the government must sell to finance its operation. From there it's simple supply and demand -- if demand is constant but the supply of bonds goes up, the price goes down. The same is true if the deficit falls or is eliminated altogether -- the government needs to sell fewer Treasury bonds, so the supply drops and the price of T-bonds rises. In the past few years, the budget deficit has increased dramatically, and this has put more Treasury securities into the market place.
The Federal government borrows money through the issuance of Treasury securities; so higher deficits mean a larger supply of securities and (again, assuming constant demand) lower prices. With notes and bonds, lower prices are equated with higher yields, so in this example, the government borrows money at higher interest rates. That impact ripples across all other interest rate-bearing securities and creates a higher interest-rate environment for stocks, which is bearish.
In addition to following the trend in the budget deficit or surplus, investors can gain valuable insight to the state of the economy by looking at the government's tax receipts. Higher tax receipts lead to an improved deficit situation when economic conditions

Market Consensus Before Announcement

The U.S. Treasury monthly budget report showed that the deficit in November, inflated by TARP payments, totaled $164.4 billion. Now two months into the fiscal year, the year-to-date deficit is a whopping $401.6 billion. The Treasury's budget is a mess, offering a clear illustration of the great troubles facing the economy. The past offers little guidance for the near term future other than showing the depth of current problems. The month of December typically shows a moderate surplus for the month. Over the past 10 years, the average surplus for the month of December has been $13.8 billion and $7.5 billion over the past 5 years. However, TARP and other issues are likely to turn December 2008 into a sharp deficit.

Treasury Statement Consensus Forecast for December 08: -$83.0 billion
Range: -$150.0 billion to -$26.0 billion.

The U.S. Treasury releases a monthly account of the surplus or deficit of the federal government. Changes in the budget balance of the annual fiscal year (which begins in Octo

The federal budget balance is not seasonally adjusted. Consequently, it is useful to compare the current month's budget deficit or surplus to the same month for a couple of years. Some months are known to have large surpluses because quarterly estimated tax payments are received by the government.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/13 2/11 3/11 4/10 5/12 6/10 7/13 8/12 9/11 10/13 11/12 12/10 Released For: Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

 

Wednesday January 14th  

 

MBA Purchase Applications
07:00ET

Definition

The Mortgage Bankers' Association compiles various mortgage loan indexes. The purchase applications index measures applications at mortgage lenders. This is a leading indicator for single-family home sales and housing construction.

Why Do Investors Care?

This provides a gauge of not only the demand for housing, but economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as the Mortgage Bankers Association purchase applications, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Each time the construction of a new home begins, it translates to more construction jobs, and income which will be pumped back into the economy. Once a home is sold, it generates revenues for the home builder and the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items new home buyers might purchase. The economic "ripple effect" can be substantial especially when you think a hundred thousand new households around the country are doing this every month.

Since the economic backdrop is the most pervasive influence on financial markets, housing construction has a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the MBA purchase applications index carries valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.

 

Retail Sales (Important this week)
 8:30 ET 
Consensus is -1.2%

Definition

Retail sales measure the total receipts at stores that sell durable and nondurable goods. Consumer spending accounts for two-thirds of GDP and is therefore a key element in economic growth.

Why Do Investors Care?

Consumer spending accounts for more than two-thirds of the economy, so if you know what consumers are up to, you'll have a pretty good handle on where the economy is headed. Needless to say, that's a big advantage for investors.

The pattern in consumer spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Retail sales growth did slow down in tandem with the equity market in 2000 and 2001, but then rebounded at a healthy pace between 2003 and 2005.

Retail sales not only give you a sense of the big picture, but also the trends among different types of retailers. Perhaps auto sales are especially strong or apparel sales are showing exceptional weakness. These trends from the retail sales data can help you spot specific investment opportunities, without having to wait for a company's quarterly or annual report.

Market Consensus Before Announcement
Retail sales are looking ugly at year end. Overall retail sales fell 1.8 percent in November, following a 2.9 percent record drop in October. Overall retail sales have fallen for five consecutive months. In the latest month, weakness was primarily in gasoline and motor vehicle sales which fell 14.7 percent and 2.8 percent, respectively. Excluding motor vehicles, retail sales dropped 1.6 percent in November, after a 2.4 percent pullback the previous month. Excluding motor vehicles and gasoline, retail sales in November made a partial rebound, rising 0.3 percent after slipping 0.7 percent the month before. Looking forward to December numbers, we may or may not see a modest gain in the headline number as a boost in auto sales is likely to be offset in part or more by non-auto sales. Chain store sales have been very disappointing recently and a drop in gasoline prices will likely tug down on service station sales.

Retail sales Consensus Forecast for December 08: -1.2 percent
Range: -2.1 to -0.3 percent

Retail sales excluding motor vehicles Consensus Forecast for December 08: -1.3 percent
Range: -2.6 to -0.4 percent

Nearly 75 percent of the time, changes in monthly retail sales are between +1 percent and -1 percent. However, there are many months in which the monthly change falls outside that range. Most of the time, excessive increases or decreases are due to higher/lower spending on motor vehicle sales. Year-over-year changes in retail sales can be volatile as well, but tend to be smoother than monthly changes.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/14 2/12 3/12 4/14 5/13 6/11 7/14 8/13 9/15 10/14 11/16 12/11 Released For: Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

 

Import and Export Prices
Import Prices Consensus : -5.3%
Export Prices Consensus : N/A

Definition
Indexes are compiled for the prices of goods that are bought in the United States but produced abroad and the prices of goods sold abroad but produced domestically. These prices indicate inflationary trends in internationally traded products.

Why Do Investors Care?
Changes in import and export prices are a valuable gauge of inflation here and abroad. Furthermore, the data can directly impact the financial markets such as bonds and the dollar. The bond market is especially sensitive to the risk of importing inflation because it erodes the value of the principal (the original investment) which is paid back when the bond matures. It also decreases the value of the steady stream of interest rate payments on this type of security.
Inflation leads to higher interest rates and that's bad news for stocks, as well. By monitoring inflation gauges such as import prices, investors can keep an eye on this menace to their portfolios.

Market Consensus Before Announcement
Import prices in November fell 6.7 percent after dropping 5.6 percent in October. However, the worst weakness was tied to commodities prices - which are very sensitive to both changes in demand and supply. Nonetheless, the latest decline was a record monthly decline for the series. Another record was the month-to-month decrease in import prices excluding petroleum, down 1.8 percent after a 0.9 percent dip in October. We will likely see another decline in import prices in December on lower oil and other commodity prices. But with weakening demand, consumer and capital goods prices could also dip.

Import prices Consensus Forecast for December 08: -5.3 percent
Range: -8.5 to -2.1 percent  

Yearly changes in import and export prices reveal long term trends in inflation for tradable goods.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/14 2/18 3/13 4/9 5/13 6/12 7/10 8/13 9/11 10/14 11/13 12/11 Released For: Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

 

Business Inventories
10:00 ET
Consensus -0.5%

Definition
Business inventories are the dollar amount of inventories held by manufacturers, wholesalers, and retailers. The level of inventories in relation to sales is an important indicator of the near-term direction of production activity.

Why Do Investors Care?
Investors need to monitor the economy closely because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more moderate growth that won't generate inflationary pressures.
Rising inventories can be an indication of business optimism that sales will be growing in the coming months. By looking at the ratio of inventories to sales, investors can see whether production demands will expand or contract in the near future. For example, if inventory growth lags sales growth, then manufacturers will have to boost production lest commodity shortages occur. On the other hand, if unintended inventory accumulation occurs (that is, sales do not meet expectations), then production will probably have to slow while those inventories are worked down. In this manner, the business inventory data provide a valuable forward-looking tool for tracking the economy.
Market Consensus Before Announcement
Business inventories have been declining but not fast enough. Business inventories fell 0.6 percent in October after a 0.4 percent decline in September. However, business sales plunged 3.5 percent in the latest month, resulting in a jump in the inventory-to-sales ratio to 1.34 from 1.30 in September. This ratio is at its highest since 1.35 for June 2003 when businesses, in contrast, were building inventories with the expectation of heavier demand.

Business inventories Consensus Forecast for November 08: -0.5 percent
Range: -2.4 to 0.0 percent

Inventories tend to rise when economic conditions are strong; since sales are rising at the same time, the inventory-to-sales ratio may remain stable, or rise at a very slow pace. Inventories tend to drop when economic conditions are weak; since sales are falling at the same time, the inventory-to-sales ratio may remain relatively stable. The I-S ratio then begins to rise as sales fall more quickly than inventory growth.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/14 2/12 3/12 4/14 5/13 6/11 7/14 8/13 9/15 10/14 11/16 12/11 Released For: Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

 

EIA Petroleum Status Report (Pay attention to this one)
10:35 ET

Definition
The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S., whether produced here or abroad. The level of inventories helps determine prices for petroleum products.

Why Do Investors Care?
Petroleum product prices are determined by supply and demand - just like any other good and service. During periods of strong economic growth, one would expect demand to be robust. If inventories are low, this will lead to increases in crude oil prices - or price increases for a wide variety of petroleum products such as gasoline or heating oil. If inventories are high and rising in a period of strong demand, prices may not need to increase at all, or as much. During a period of sluggish economic activity, demand for crude oil may not be as strong. If inventories are rising, this may push down oil prices.

Crude oil is an important commodity in the global market. Prices fluctuate depending on supply and demand conditions in the world. Since oil is such an important part of the economy, it can also help determine the direction of inflation. In the U.S. consumer prices have moderated whenever oil prices have fallen, but have accelerated when oil prices have risen.

 

Beige Book
2:00 ET 

Definition
This book is produced roughly two weeks before the monetary policy meetings of the Federal Open Market Committee. On each occasion, a different Fed district bank compiles anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts.

Why Do Investors Care?
This report on economic conditions is used at FOMC meetings, where the Fed sets interest rate policy. These meetings occur roughly every six weeks and are the single most influential event for the markets. Market participants speculate for weeks in advance about the possibility of an interest rate change that could be announced upon the end of these meetings. If the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching.
If the Beige Book portrays an overheating economy or inflationary pressures, the Fed may be more inclined to raise interest rates in order to moderate the economic pace. Conversely, if the Beige Book portrays economic difficulties or recessionary conditions, the Fed may see the need to lower interest rates in order to stimulate activity.
Since the Beige Book is released two weeks before each FOMC meeting, investors can see for themselves at least one of the many indicators which Fed officials will use to determine interest rate policy, and can position their portfolios accordingly.

 

Thursday January 15th  

Producer Price Index (Important this week)
8:30 ET
Consensus -2.0%
Core 0.1%

Definition
The Producer Price Index (PPI) is a measure of the average price level for a fixed basket of capital and consumer goods received by producers.

Why Do Investors Care?
The PPI measures prices at the producer level before they are passed along to consumers. Since the producer price index measures prices of consumer goods and capital equipment, a portion of the inflation at the producer level gets passed through to the consumer price index (CPI). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months.

While the CPI is the price index with the most impact in setting interest rates, the PPI provides significant information earlier in the production process. As a starting point, interest rates have an "inflation premium" and components for risk factors. A lender will want the money paid back from a loan to at least have the same purchasing power as when loaned. The interest rate at a minimum equals the inflation rate to maintain purchasing power and this generally is based on the CPI. Changes in inflation lead to changes in interest rates and, in turn, in equity prices.

The PPI comes in three versions: finished goods; intermediate supplies, materials & components; and crude materials that need further processing. The finished goods PPI is most often cited in the media. This index covers final products bought from producers by businesses to sell to consumers or to use for capital equipment.

The PPI is considered a precursor of both consumer price inflation and profits. If the prices paid to manufacturers increase, businesses are faced with either charging higher prices or they taking a cut in profits. The ability to pass along price increases depends on the strength and competitiveness of the marketplace.

Producer prices are more volatile than consumer prices. The CPI includes services components - which are more stable than goods - and the PPI does not. Wages are a bigger share of the costs at the retail level than at the producer level. Commodity prices react more quickly to supply and demand. Volatility is higher earlier in the production chain. Food and energy prices are major sources of volatility, hence, the greater focus on the "core PPI" which excludes these two components.

The bond market rallies when the PPI decreases or posts only small increases, but bond prices fall when the PPI posts larger-than-expected gains. The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

Market Consensus Before Announcement
The producer price index continued to soften in November, largely on lower energy cost as the overall PPI dropped 2.2 percent, following a 2.8 percent fall in October. The core PPI rate eased to a 0.1 percent gain after jumping 0.4 percent in October. Dragging the headline number down was a monthly 11.2 percent drop in energy costs. Within energy, gasoline plummeted 25.7 percent after a 24.9 percent fall in October.

PPI Consensus Forecast for December 08, m/m: -2.0 percent
Range: -2.9 to -0.7 percent

PPI ex food & energy Consensus Forecast for December 08, m/m: +0.1 percent
Range: -0.3 to +0.4 percent
 

It is always a good idea to look at more than a few months of data to get a sense of changes in established trends. Monthly changes in the PPI are mainly volatile because of sharp fluctuations in food and energy prices. The core PPI eliminates the sharper fluctuations.

Data Source: Haver Analytics  

Yearly changes tend to smooth out more severe monthly fluctuations and give a better idea of the underlying rate of inflation. Even with the smoother trend, note that the core PPI does not fluctuate as much as the total PPI.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/15 2/19 3/17 4/14 5/14 6/16 7/14 8/18 9/15 10/20 11/17 12/15 Released For: Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

 

Empire State Mfg Survey ( General business condition Index)
08:30 ET
Consensus -25.0%

Definition
The New York Fed conducts this monthly survey of manufacturers in New York State. Participants from across the state represent a variety of industries. On the first of each month, the same pool of roughly 175 manufacturing executives (usually the CEO or the president) is sent a questionnaire to report the change in an assortment of indicators from the previous month. Respondents also give their views about the likely direction of these same indicators six months ahead. This index is seasonally adjusted using the Philadelphia Fed's seasonal factors because its own history is not long enough with data only going back a couple of years. (Federal Reserve Bank of New York)

Why Do Investors Care?
Investors track economic data like the Empire State Manufacturing Survey to understand the economic backdrop for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers a moderate growth environment that won't generate inflationary pressures.

The Empire Manufacturing Survey gives a detailed look at New York state's manufacturing sector, how busy it is and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on the markets. Some of the Empire State Survey sub-indexes also provide insight on commodity prices and other clues on inflation. The Federal Reserve closely watches this report because when inflation signals are flashing, policymakers can reset the direction of interest rates. As a consequence, the bond market can be highly sensitive to this report. The equity market is also sensitive to this report because it is the first clue on the nation's manufacturing sector, reported in advance of the Philadelphia Fed's business outlooks survey, the NAPM-Chicago index and the ISM manufacturing index.

Market Consensus Before Announcement
The Empire State manufacturing index remained deep in contraction mode in December although this index was little changed at minus 25.8. Weak demand for output has led to a plunge in price readings. The prices paid index fell nearly 30 points to minus 7.5 while prices received declined more than 20 points to minus 11.7. The orders picture was not favorable for production in the near term as the new orders index came in at minus 20.8 and backlogs were at negative 27.7.

Empire State Manufacturing Survey Consensus Forecast for January 08: -25.0
Range: -28.0 to -20.0

The Empire State Manufacturing Survey has a much shorter history than the Philadelphia Fed's business outlook survey. The two series tend to move in tandem much of the time, although not each and every month. They are both considered leading indicators for the ISM manufacturing survey.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/15 2/16 3/16 4/15 5/15 6/15 7/15 8/17 9/15 10/15 11/16 12/15 Released For: Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

 

Jobless Claims
08:30ET ET
Consensus 500K

Definition
New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market. The four-week moving average of new claims smoothes out weekly volatility.

Why Do Investors Care?
Jobless claims are an easy way to gauge the strength of the job market. The fewer people filing for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy. Nearly every job comes with an income that gives a household spending power. Spending greases the wheels of the economy and keeps it growing, so a stronger job market generates a healthier economy.

There's a downside to it, though. Unemployment claims, and therefore the number of job seekers, can fall to such a low level that businesses have a tough time finding new workers. They might have to pay overtime wages to current staff, use higher wages to lure people from other jobs, and in general spend more on labor costs because of a shortage of workers. This leads to wage inflation, which is bad news for the stock and bond markets. Federal Reserve officials are always on the look out for inflationary pressures.

By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked jobless claims and adjusted their portfolios to anticipate these events.

Just remember, the lower the number of unemployment claims, the stronger the job market, and vice versa.

Market Consensus Before Announcement
Initial jobless claims for the week ending January 3 unexpectedly fell a steep 24,000 to 467,000. The decline may be due to the holiday shortened week but the Labor Department said there are no special factors. In contrast, continuing claims continued to swell, jumping 101,000 to 4.611 million for the worst level since 1982. The latest change in continuing claims is likely more reflective of current conditions in the labor market than initial claims. While those filing initial claims may or may not have been affected by the New Year's holiday than usual, it is clear that laid off workers are having a harder time getting back on a payroll.

Jobless Claims Consensus Forecast for 1/10/09: 500,000
Range: 442,000 to 700,000

  

Weekly series fluctuate more dramatically than monthly series even when the series are adjusted for seasonal variation. The 4-week moving average gives a better perspective on the underlying trend.

Data Source: Haver Analytics  

 

Philadelphia Fed Survey
10:00 ET
Consensus -35.0%

Definition
The general conditions index from this business outlook survey is a diffusion index of manufacturing conditions within the Philadelphia Federal Reserve district. This survey, widely followed as an indicator of manufacturing sector trends, is correlated with the ISM manufacturing index and the index of industrial production.

Why Do Investors Care?
Investors need to monitor the economy closely because it usually dictates how various types of investments will perform. By tracking economic data such as the Philly Fed survey, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more moderate growth which won't lead to inflation.

The Philly Fed survey gives a detailed look at the manufacturing sector, how busy it is and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on market behavior. Some of the Philly Fed sub-indexes also provide insight on commodity prices and other clues on inflation. The bond market is highly sensitive to this report because it is released early in the month and is available before other important indicators.

Market Consensus Before Announcement
The general business conditions component of the Philadelphia Fed's business outlook survey index remained sharply negative in December - but not quite as severely as in November. The Philly Fed's general business conditions index pulled up somewhat to minus 32.9 from minus 39.3 in November. But contraction has been significant as this index has been at very negative levels for three months. New orders point to further weakness ahead as this index came in at minus 25.2. The unfilled orders index also remained significantly negative. Price pressures eased further as the prices paid index fell to minus 33.2 from minus 30.7 in November. Also, prices received dropped sharply to minus 37.8 from minus 15.5 the month before.

Philadelphia Fed survey Consensus Forecast for January 09: -35.0
Range: -41.3 to -23.7  

The Philadelphia Fed's business outlook survey is a good leading indicator for the index of industrial production. It is reported in the third week of the month and thus has a lead time of nearly three weeks.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/15 2/19 3/19 4/16 5/21 6/18 7/16 8/20 9/17 10/15 11/19 12/17 Released For: Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

 

 

EIA Natural Gas Report (Pay attention to this one)

10:35 ET

Definition
The Energy Information Administration (EIA) provides weekly information on natural gas stocks in underground storage for the U.S., and three regions of the country. The level of inventories help determine prices for natural gas products.

 

Why Do Investors Care?
Natural gas product prices are determined by supply and demand - just like any other good and service. During periods of strong economic growth, one would expect demand to be robust. If inventories are low, this will lead to increases in natural gas. If inventories are high and rising in a period of strong demand, prices may not need to increase at all, or as much. During a period of sluggish economic activity, demand for natural gas may not be as strong. If inventories are rising, this may push down oil prices.

 

 

 Friday January 16th  

Consumer Price Index (Important this week)
 8:30 ET 
Consensus
CPI - M/M -0.9 %
CPI - Y/Y change-0.2 %
CPI less food & energy 0.1 %
CPI less food & energy - Y/Y change 1.9 %

Definition

The Consumer Price Index is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation.

Why Do Investors Care?

The consumer price index is the most widely followed indicator of inflation in the United States. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets- and your investments.

If someone borrows $100 dollars from you today and promises to repay it in one year with interest, how much interest should you charge? The answer depends largely on inflation as you know the $100 won't be able to buy the same amount of goods and services a year from now. The CPI tells us that prices rose about 4.7 percent a year in the U.S. during the first half of 2006. To recoup your purchasing power, you would have to charge 4.7 percent interest. You might want to add one or two percentage points to cover default and other risks, but inflation remains the key factor behind the interest rate you charge.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Federal Reserve generally follows "core" inflation-inflation excluding volatile food and energy components. The Fed's preferred inflation measure is the core personal consumption deflator but core CPI data largely make up the core PCE deflator and CPI numbers come out sooner each month. In the long run, the overall CPI and core CPI track each other.

Market Consensus Before Announcement
The consumer price index in November fell for the fourth month in row due to lower energy costs. The headline CPI dropped 1.7 percent in November, following a 1.0 percent decrease in October. September is reported as no change but before rounding the CPI edged down incrementally. Meanwhile, the core rate in November was unchanged and followed a 0.1 percent outright decline in October. Keeping the core rate soft were declines in lodging while away from home, new and used vehicles, and in public transportation (which includes airline fares). For the latest month, energy fell a monthly 17.0 percent, pulled down by a 29.5 percent plunge in gasoline prices.

CPI Consensus Forecast for December 08, m/m: -0.9 percent
Range: -1.5 to -0.4 percent

CPI Consensus Forecast for December 08, y/y: -0.2 percent
Range: -0.8 to +0.2 percent

CPI ex food & energy Consensus Forecast for December 08, m/m: +0.1 percent
Range: -0.1 to +0.2 percent

CPI ex food & energy Consensus Forecast for December 08, y/y: +1.9 percent
Range: +1.7 to +1.9 percent

It is always a good idea to look at more than a few months of data to get a sense of changes in established trends. Monthly changes in the CPI are mainly volatile because of sharp fluctuations in food and energy prices. The core CPI eliminates the sharper fluctuations.

Data Source: Haver Analytics  

Yearly changes tend to smooth out more severe monthly fluctuations and give a better idea of the underlying rate of inflation. Even with the smoother trend, note that the core CPI does not fluctuate as much as the total CPI.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/16 2/20 3/18 4/15 5/15 6/17 7/15 8/14 9/16 10/15 11/18 12/16 Released For: Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

 

Treasury International Capital
9:00ET

Definition
These Treasury data track the flows of financial instruments into and out of the United States. Instruments tracked include Treasury securities, agency securities, corporate bonds, and corporate equities.

Why Do Investors Care?
TIC data have been issued for the past 30 years, but only recently, due to an enormous rise in foreign participation in our markets, have they grabbed the attention of the international financial markets. Although methodologically limited, TIC offers a measure of foreign demand for our debt and assets. Bonds and the dollar are most sensitive to the data, therefore bond and foreign exchange markets are more likely to react to this report than the equity market.

Strong inflows (demand for U.S. securities) are needed to keep downward pressure on interest rates. Strong inflows also underpin the value of the dollar since foreigners must purchase dollars in order to buy our securities. A strong dollar helps to maintain stability in all U.S. financial markets. Since foreign ownership of U.S. equities is comparatively small, the equity market is less concerned about this report.

 

Industrial Production (Important this week)
 9:15 ET 
Consensus is -1.0%
Capacity Utilization Rate 74.6%

Definition

The index of industrial production measures the physical output of the nation's factories, mines and utilities. The industrial sector accounts for less than one-fifth of the economy but for most of its cyclical variation. The capacity utilization rate reflects the usage of available resources among factories, utilities and mines. A high and rising operating rate may signal that resources are being utilized to their fullest capacity -- a warning sign of inflationary pressures.

Why Do Investors Care?

Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more subdued growth that won't lead to inflationary pressures. By tracking economic data such as industrial production, investors will know what the economic backdrop is for these markets and their portfolios.

The index of industrial production shows how much factories, mines and utilities are producing. The manufacturing sector accounts for less than 20 percent of the economy, but most of its cyclical variation. Consequently, this report has a big influence on market behavior. In any given month, one can see whether capital goods or consumer goods are growing more rapidly. Are manufacturers still producing construction supplies and other materials? This detailed report shows which sectors of the economy are growing and which are not.

The capacity utilization rate provides an estimate of how much factory capacity is in use. If the utilization rate gets too high (above 85 percent) it can lead to inflationary bottlenecks in production. The Federal Reserve watches this report closely and sets interest rate policy on the basis of whether production constraints are threatening to cause inflationary pressures. As such, the bond market can be highly sensitive to changes in the capacity utilization rate. In this global environment, though, global capacity constraints may matter as much as domestic capacity constraints.

Market Consensus Before Announcement
Industrial production in November resumed its strong downtrend after a technical rebound in October. Overall industrial production in November fell 0.6 percent, following a 1.5 percent rebound in October. The rebound in October was due to oil and chemical facilities coming back online after Hurricanes Gustav and Ike. In November, the all-important manufacturing component dropped 1.4 percent after a 0.6 percent partial rebound the month before. Within manufacturing, declines were widespread. Overall capacity utilization in November dropped to 75.4 percent from 76.0 percent in October and came in lower than the consensus forecast for 75.7 percent. Looking ahead, manufacturing output is likely to be ugly in January as manufacturing production hours plummeted a monthly 2.4 percent for the month, according to the employment situation report.

Industrial production Consensus Forecast for December: -1.0 percent
Range: -2.0 to -0.2 percent

Capacity utilization Consensus Forecast for December 08: 74.6 percent
Range: 73.2 to 75.2 percent

The industrial sector accounts for less than 20 percent of GDP. Yet, it creates much of the cyclical variability in the economy.

Data Source: Haver Analytics  

The capacity utilization rate reflects the limits to operating the nation's factories, mines and utilities. In the past, supply bottlenecks created inflationary pressures as the utilization rate hit 84 to 85 percent.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/16 2/18 3/16 4/15 5/15 6/16 7/15 8/14 9/16 10/16 11/17 12/15 Released For: Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

 

Consumer Sentiment
10:00 ET
Consensus 59.0

Definition
The University of Michigan consumer surveyquestions 500 households each month on their financial conditions and attitudes about the economy. Consumer sentiment is directly related to the strength of consumer spending. Consumer confidence and consumer sentiment are two ways of talking about consumer attitudes. Among economic reports, consumer sentiment refers to the Michigan survey while consumer confidence refers to The Conference Board's survey.

Why Do Investors Care?
The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Consumer confidence did shift down in tandem with the equity market between 2000 and 2002 and then recovered in 2003 and 2004. Consumers became more pessimistic in 2005 when gasoline prices surged.

Consumer spending accounts for more than two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.

Market Consensus Before Announcement
The Reuter's/University of Michigan's Consumer sentiment index in December edged 1 point higher to 60.1, reflecting slight improvement in the expectations component. Levels, however, are still extremely depressed. The positive numbers is that inflation expectations have been trending down. For December, 1-year inflation expectations held steady at a low 1.7 percent while 5-year expectations eased a bit lower to 2.6 percent.

Consumer sentiment Consensus Forecast for preliminary January 09: 59.0
Range: 54.0 to 62.0  

Consumer sentiment is mainly affected by inflation and employment conditions. However, consumers are also impacted by current events such as bear & bull markets, geopolitical events such as war and terrorist attacks. Investors monitor consumer sentiment because it tends to have an impact on consumer spending over the long run (although not necessarily on a monthly basis.)

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/16 1/30 2/13 2/27 3/13 3/27 4/17 5/1 5/15 5/29 6/12 6/26 7/10 7/24 8/14 Released For: Jan Jan Feb Feb Mar Mar Apr Apr May May Jun Jun Jul Jul Aug   Released On: 8/28 9/11 9/25 10/16 10/30 11/13 11/25 12/11 12/23             Released For: Aug Sep Sep Oct Oct Nov Nov Dec Dec

 

 

That's it for this week,

Trade safely

 

Yours truly,

 

 

Eric LeRiche

http://www.InvestorRules.com

 

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