As a Lehman summer associate many moons ago, I split my ten weeks primarily between two desks – High Grade Corporates and Equity Program Trading.  The assignment coordinating gods smiled upon me as both groups were crown jewels at the bank, run by top shelf management with impeccable reputations and unmatched ability.  As part of the program, I did get to sample a few of the different areas on the Floor as we plebes needed as many people as possible to go to bat for us to secure the ultimate prize of a full time offer for the following September. 

One morning when I found myself on the Govie Desk, the Durable Goods numbers flashed across the Bloomberg of the trader I was sitting next to.  The headline ripped consensus which instantly sat on the Treasury market.  The economist for the firm who was unabashedly bearish broadcasted over the squawk “while the headline was a very strong number, if you strip out A, B, C, D and E***, then the report is somewhat weak and actually slightly negative versus last month.”  In response, the person immediately to my right sarcastically barked, “well, if you take out everything, then it’s exactly a 0.0% change versus last month.”

I was reminded of this nostalgic moment yesterday when Durables again printed solidly to best expecations across the board alongside upward revisions for June’s figures, yet the double dippers found solace that the statistics did not have the desired breadth across all sectors.  More generally, they argued that orders for non-defense capital goods excluding aircraft was weak even though the print beat estimates and was revised up sharply.  These same naysayers pointed to Tuesday’s Richmond Fed (the Richmond Fed, are you kidding me?) as evidence of further dark clouds on the horizon.

Since the beginning of August, the following major growth economic releases have beaten consensus:  ADP Estimate, Jobless Claims, Nonfarm Payrolls, Productivity, Retail Sales, Housing Starts, Industrial Production, Capacity Utilization, Leading Indicators, and Durable Goods.  For comparative purposes, the following reports fell short of expectations:  ISM, ISM Non-Manufacturing, UMich Sentiment, Empire Manufacturing, Philly Fed, Existing Home Sales, and New Home Sales.  If I remove the housing numbers as I have done consistently over the past two years, the resulting pattern is obvious.  Objective data have comfortably surprised to the upside while subjective surveys have supplied all of the misses. 

Similar to investor sentiment, I always have contended that I care more about what manufactures, consumers, and employers are doing than what they are saying, so I will maintain my steadfastness that another recession sits at least 18 months – 2 years away.  This should provide a favorable environment for companies, who for the most part have remained comfortable with aggressive estimates, to continue growing to support equity prices.  For the short term, these economic figures do not support any action from Ben Bernanke’s highly anticipated Jackson Hole speech tomorrow.  Consider the following table:

Economic Report

August, 2010

August, 2011

Private Payrolls

+71K

+154K

Jobless Claims – 4wk Avg

474K

402.5

Capacity Utilization

74.8%

77.5%

Durables Less Transport

-3.8%

0.7%

Productivity

-0.9%

-0.3%

Retail Sales Less Autos

0.2%

0.5%

Leading Indicators

0.1%

0.3%

ISM

55.5

50.9

UMICH Sentiment

69.6

54.9

Philly Fed

-7.7

-30.7

PCE Core – YoY

1.4%

1.3%

 

Without question, all objective data has significantly improved in the past 12 months.  The uptick in Claims and Capacity Utilization are startling.  I will concede that the current numbers represent tepid growth for a recovery; however, if the Chairman recognizes that the only true warning signs for negative growth arise from subjective surveys largely affected by the political rancor in Washington and tumbling stock prices, then he cannot possibly entertain thoughts of hinting at an imminent launching of QE3 tomorrow.

 

If Big Ben fails to cower to those screaming for another heroin shot of accommodation, the market should prove resilient.  In fact, I suspect Bernanke’s alluding to statistics similar to those above, but with a tone of vigilance, represents the best case scenario for equities, for he would declare the economy still on course for recovery such that the FOMC only would enact QE3 if the situation becomes more dire.  This would assuage inflation hawks as well keep calm many managers who feared the Fed would hit the panic button.  I suspect this expectation has crept into minds of many investors as the average monthly NYSE TICK has climbed 275 points to -8 since the lows earlier in the month.  Although this level still represents deeply oversold sentiment, it also indicates some buying momentum that could entice some of the biggest behemoths to put some real money to work.

 

S&P 500 SEP E-Minis Key Technical Levels

Support:  1153.50, 1142.50, 1120.25/18.50, 1113.75/11.25, 1100.00/1099.25

Resistance:  1176.75, 1181.50, 1206.75, 1212.75/15.50, 1228.50, 1241.00

***I was an economic neophyte in those days, so I have no recollection of the exact specifics the economist addressed at the time except that it was a laundry list of items.

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