Market Talk

Another directionless premarket setup for stocks, as investors prepare to digest a burst of economic data this morning.

January retail sales, import prices and NY Fed’s February Empire State manufacturing survey all due at 8:30am ET; December business inventories and homebuilders’ Feb sentiment index set for 10:00am. Cleveland Fed’s Pianalto also scheduled to speak about economic conditions around 10:00am.

Prediction: Any better-than-expected data helps stock rally, but anything that stinks gets dismissed as skewed by bad weather.

Dell reports results after the close. FedEx profit warning late yesterday gets shrugged off, as it seems everyone saw this one coming, what with all the bad weather and soaring fuel costs. FDX actually pointed higher premarket, the spin no doubt suggesting “it could’ve been worse.” Well, the weather may get better, but don’t hold your breath on those fuel prices, citizens.

Stocks in Europe mostly higher, euro is firmer, USD index off 0.3%.

S&P futures flat; 10-yr note lower, yield at 3.65%.

Today’s Upshot column in The Wall Street Journal looks at business inventories, and the tightrope companies are walking in balancing them.

The choppy U.S. economic recovery is testing companies’ skill at finding just the right inventory levels to maximize their profits.

Business inventories, slashed during the recession, had been climbing since June on a year over year basis, according to U.S. Department of Commerce figures. But, amid December’s strong auto and retail sales, the build-up of finished goods may have cooled off when the month’s figures are disclosed, some economists say.

 

The rebound in demand so far has been uneven, and combined with a rapid rise in commodity costs since the third quarter, it’s becoming trickier for manufacturers to balance their production with sales. The stakes are high—produce too much and if demand falls, be forced to pare overstock at margin-killing prices; play it too safe with lean inventories and potentially miss out on additional sales.

 

Kimberly-Clark Corp., for instance, cut production in the fourth quarter of 2010 compared to 2009 as consumer demand for its well-known brands fell off last year. But the Dallas maker of Kleenex and Huggies cut too deeply, giving up what it estimated was $20 million in profits.

 

“With soft demand, we’re working hard…to keep our inventories in line,” Chief Financial Officer Mark Buthman said during a conference call Tuesday. The maker of Kleenex tissues and Huggies diapers is “much more attuned to taking downtime when demand doesn’t support production,” he added.

C'mon, bears, 5.7%! 5.7%!

Don’t get too jazzed about this morning’s GDP report. The better-than-expected reading, fueled by slower inventory liquidation rather than consumer spending, likely isn’t sustainable.

The headline 5.7% jump looks good on paper. But there are reasons for concern. For all of 2009 GDP fell 2.4%, marking the biggest drop for an entire year since the 10.9% slide in 1946.

And as Calculated Risk points out, residential investment and personal consumption expenditures, the leading sectors for GDP, both slowed in 4Q. The declines aren’t surprising, especially since the personal savings rate rose and will likely continue increasing in next year or two, blog says. Also don’t expect residential investment to start rising until excess housing inventory is absorbed.

“The transitory boost from inventory changes is frequently a great kick start to the economy at the beginning of a recovery – as long as the leading sectors (PCE and RI) are also picking up,” Calculated Risk says. But this report is concerning as “underlying growth remained weak.”

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Have faith, citizens, we're on the job.

We’re going to be especially cranky today, because we’re going to be spending this whole day listening to every sell-side talking head vaunt about today’s GDP report, which if you read past even the headline number you’ll see isn’t anywhere near what it’s cracked up to be.

Okay, the headline number came in well above expectations. GDP rose at an annualized pace of 5.7% for the fourth-quarter, well ahead of consensus views of 4.8%. Keep in mind though that a lot of folks we read and talk to thought it could come in higher, about where it did print.

But understand that the biggest factor in that “blistering” number was this: businesses cut inventories by only about $33 billion, compared to $139 billion in the third quarter. Because of the way inventories are accounted for within GDP, that difference ended up contributing 3.39 percentage points of the 5.7%. Consumer spending, by contrast, contributed 1.44 percentage points.

That inventory kick is a one-time thing, consumer spending is what drives growth over the long term.

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Onward the march of progress, citizens.

Torrent of quarterly earnings reports eases up for today, but there’s a trio of economic data releases that should arouse some interest this morning.

First look at 4Q GDP due at 8:30 a.m., with guesses on growth ranging from 4% to well over 5%, largely based on businesses rebuilding inventories. Frankly, we haven’t been too convinced that the scale of inventory restocking will be as impressive as economists tout, mainly since anecdotal comments from truckers and railroads — the ones that transport the goods for replenishment — suggest little pick-up in volumes in the quarter. We know retailers weren’t aggressive with inventories headed into the holiday season, and consumer goods makers have said retail is still being careful on how much they stock.

January Chicago ISM (used to be PMI) due at 9:45am ET, and Reuters Univ of Michigan final look at Jan consumer sentiment at 9:55am.

US dollar index flat. S&P futures perking up, now up 4.40; DJ futures up 41. Ten-year flat, yield at 3.65%.

At one point today the bulls were on the ropes, and I mean Rocky in the 14th round against Apollo Creed on the ropes. The Dow was down 180 and falling like a stone. The S&P 500 was clinging to the 1080 level with desperation. The whole thing looked like it was about to crack wide open, and various charts don’t show much holding up the market below 1080. But the market did hold. Like Rocky, the bulls came back with powerful body blows, and sent their attacker back to his corner clutching his side. For now.

Alright, maybe that’s a bit over the top, but not by much. The market was on the verge of a major selloff this morning, and with the Dow still closing down 116, and the 10000 mark back on the radar, a big one may not be far off.

Which brings us to tomorrow’s main event: fourth-quarter gross domestic product. This is the one that’s going to give the V-shapers their bonafides, prove that the economy’s rocketing up and the recession is behind. According to a Dow Jones survey, it’s expected to come in at 4.8%. A good many people are speculating it could be even higher.

Forget for a second that the rise is going to come very largely from the internal math that determines how GDP is calculated, like the way inventories are handled. Falling inventories subtract from GDP, rising inventories add to it. So even without a strong inventory build, if they merely stop falling, they will add to GDP just by virtue of their not subtracting from it any more. Neat, huh?

But, to get back to our main point, what if GDP comes in merely in step with expectations, or, God forbid, even worse. The market, like I said, was on the verge of a major selloff late this morning, and remains vulnerable. What do you think traders will do if GDP doesn’t meet the lofty expectations set for it?

They thought the worst was over in 1930, too.

Last week was frenetic. From the special election in Massachusetts Tuesday to Friday’s closing bell, more stuff came out of left field than anybody’s seen in a while. So today, on a quiet (and here in metropolitan New York dreary) Sunday, it’s a good time to step back and try and get the view from 30,000 feet, so to speak.

The mantra for 2009 was recovery. The White House chanted it, the Fed chanted it, Wall Street chanted it. And, of course, in a way it’s true: the worst of the downturn is surely over (and we better all hope that’s true.) Anything that happened or happens afterwards is part of the recovery. But the unspoken implication has been that everything is going to start getting better in a steady line upward. That’s proving to be not quite as true.

Briefly and most obviously, unemployment remains a major problem. The government’s “official” unemployment rate is 10%, and effectively it is most assuredly higher. This is dragging the entire recovery downward. Consumer spending and demand is down, which drags down corporate sales, which drags down hiring, which exacerbates the unemployment problem. This vicious circle has not been broken, despite government efforts.

Fourth-quarter GDP, of which we get our first look this week, is going to come in at a number we’ve haven’t seen in a few years. Most people peg it somewhere around 4%, but quite a few sober observers think it could be higher, even in the 5% range. This will surely bring about another chorus of “the recession’s over.”

From a technical standpoint they may be correct, but it will still be a long time before everything’s better. It could be years, in fact. Continue reading…

Five guys? Bet We could make do with three.

The more we hear, the more we think this whole inventory rebuilding thing that everybody’s been pushing since forever is going to turn out to be one big fiction. We have yet to see any real evidence of an inventory rebuilding cycle that will kick start job (and wage) growth in response to some surge in demand that’s been manufactured by government stimulus.

Yesterday, Daimler’s CEO Dieter Zetsche visited Dow Jones’ midtown offices, and I got to sit in on the meeting. There was talk about Chrysler, of course, and Zetsche let on that they’re thinking about introducing a small car in the US. I got in only one question.

How are your inventories?

“We’ve never been as cleared out as we are now,” he said, in his somewhat familiar German accent. That comports with most of the data we’ve seen, right? Inventories across a range of businesses have been, as he said, cleared out. So, I asked, what are your plans now? (Okay, I got in two questions.)

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I say, that's a bloody good surprise.

It won’t happen here, but imagine if it did.

GDP in the UK surprisingly came in at negative 0.4% in the third quarter; it was expected to show a slight rise of 0.1%, and it marked the sixth straight quarter of contracting GDP in the teeming womb of royal kings, as Shakespeare called it.

“Attention now turns to the Bank of England and how this miserable data will affect its extraordinarily accommodative monetary policy stance,” Dow Jones’ Dave Cottle wrote.

The Bank of England this week basically came out and said that it had done all it could, and wouldn’t be expanding its quantitative easing policies (i.e., flooding the economy with cash and debasing the currency.) How steely will their nerve remain? Or will “Swervin’ Mervyn” make a comeback?
But more to the point for the home crowd, is there a takeaway here for the Yanks?
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US stocks fall as the FOMC begins its two-day confab, and reports show a big jump in productivity and cut to inventories.

DJIA falls 97 to 9241, its biggest one-day slide since July 7; S&P 500 loses 13 to 994, Nasdaq Comp drops 23 to 1970. Financials fall sharply, as do energy stocks, as crude futures slip under $70/barrel. Citi, Wells lose 6%, BofA 5%.

Productivity rose sharply in June, and inventories fell sharply as well. That dovetails well with the general consensus, that a big rebuild in inventory levels is going to boost both GDP as well as corporate profits. But there’s reason to doubt whether or not companies can create demand just by cranking out material. Got three minutes? Watch us discuss it here.

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