Around the Street
Experts Talk Housing, Inflation, Stocks, Dollar
By BW staff A mostly merry May? Investors received updates on the performance of the U.S. economy on June 16, with reports on May housing starts and wholesale inflation coming in ahead of Wall Street forecasts, while industrial production surprised on the downside. Meanwhile, the stock market meandered as investors pondered the strength of a recovery—and whether the three-month-old equity rally has come too far, too fast. What did market experts have to say about the latest data—and the outlook for equities and the dollar—on June 11? Here's a sampling of comments from Wall Street economists and strategists compiled by BusinessWeek: Michael Englund, Action Economics U.S. housing starts bounced by 17.2% to a 0.532 million-unit annual pace in May from the all-time low of 0.454 million (as revised) in April, as this forward-looking measure for housing construction seeks to establish a new bottom after the prior low in January of 0.488 million was undershot last month. The 4.0% bounce in permits in May to a 0.518 million pace should reinforce this assumption, as the recent permit pattern is consistent with starts in the 0.515 million-0.520 million range over the coming months. The geographic mix for starts showed a sizable 29% bounce in the West that left an outperformance in this region, alongside a 17% rise in the South, a 2.0% gain in the Northeast, and a 6% drop in the Midwest. Aside from the overperformance in the West, the rest of the figures largely corrected for the big gyrations over the prior five months that seemed to conform fairly closely to weather distortions. In May, however, we saw little alignment, given unusually wet conditions in the South in May, which overperformed, but dry conditions in the upper Midwest, which underperformed. Beth Ann Bovino, Standard & Poor's The producer price index rose 0.2% in May, but was down 0.1% excluding food and energy. There was less inflation than the market's consensus increases of 0.3% and 0.1%, respectively. Energy prices rose 2.9% in May, but finished food prices dropped 1.6%.…Intermediate goods prices rose 0.3%, while crude jumped 3.5% because of an 18.6% jump in crude oil prices and big increases in metals prices. Excluding food and energy, crude prices were up 6.7% and intermediate down 0.2%. The overall PPI is down 5.0% from last May, the biggest 12-month decline since 1949, but the core index is up 3.0%. Inflation remains muted, except for energy and metals prices. The [June 17] May consumer price index release is more important for the Fed, however. Industrial production dropped 1.1% in May, a little bit worse than the consensus estimate of a 0.9% decline. Manufacturing production dropped 1.0% after falling 0.6% the month before. Mining plunged 2.1% after falling 3.2% in April, in response to the winter drop in oil prices, while utilities fell 1.4% after rising 0.7% the month before. The drop took capacity utilization down to a new record low of 68.3% in May (65% in manufacturing). Industrial production is down 13.4% from a year ago (15.3% down for manufacturing). Within manufacturing, auto production fell 7.9% and machinery was down 3.4%. Alfred Goldman, Wells Fargo ( (WFC)) We don't like the expression "it's the economy, stupid," because it is demeaning for those to whom it is directed. But when it comes to the stock market, it is the economy that is one of the underlying forces behind moves both up and down. We believe the stock market is now trying to figure out what the economic recovery will be like and how much growth we will see in 2010. Some believe that the dramatic, 44% S&P 500 rally from the Mar. 9 lows says that we will see a strong economic recovery, typical of prior periods after sharp recessions. At this time, we believe that is unlikely. The labor market remains very soft, and is likely to stay that way for one to two years after the economy turns up. Also, the consumer has been hurt badly the past two years and, we believe, will be much more conservative with future spending. Also, banks and the credit markets are just starting to function again, and the recovery process will take time. Thus, we believe the odds favor a slow economic recovery. So what will take this market higher?…Very short-term, the market could get support from Friday's quadruple option-expiration session and then end-of-quarter window dressing by institutions. We believe the market will be higher by yearend because of a still-positive risk/reward ratio for stocks and prospects for a decent but modest economic recovery next year. Thus quality-growth and economy-sensitive stocks appear attractive to hold or buy as investments. Jason Todd, Morgan Stanley ( (MS)) We are increasing our 2009 and 2010 earnings estimates for the S&P 500 to $51 and $62 (from $40 and $57) and in turn bringing forward the trough in the earnings cycle (excluding Financials) to the third quarter of 2009. We are also increasing our yearend price target to 900 based on a 2009 price-to-earnings multiple of 14.5 times. Our first call to take profits at 850 on the S&P 500 has proved conservative as outsized policy action and the resulting speed and breadth of data improvement have raised conviction in recovery much faster than we had anticipated. Having breached the 950 level, the rally may now be over. We are reluctant to put too much weight on short-term price action, and recognize that there could be another leg up which would take it back into our tactical 950-1000 target range. Win Thin, Brown Brothers Harriman [A] communiqué [from a June 16 meeting of officials from Brazil, Russia, India, and China] reportedly contains no mention of the dollar, which in itself is dollar supportive. We had hoped that the BRICs would stay mum on the dollar, and that proved to be the case for now. Why talk the buck down when you're sitting on piles of dollar-denominated holdings? As expected, BRICs called for a bigger role for EM (emerging markets) in the global financial infrastructure, as well as calling for reforms of that infrastructure. It called for a stable, predictable global currency system, as well as bigger roles for India and Brazil in the U.N. (Russia and China currently have permanent seats on the Security Council). BRICs also said they are considering buying each other's bonds and initiating currency swaps. But if they are still worried about the dollar, then the BRICs are staying quiet. Of course, they want to chip away at U.S. dominance in global affairs, but that sort of thing doesn't happen overnight. The U.K. and sterling dominated the 18th and 19th centuries before slowly giving way to the U.S. in the 20th century. U.S. dominance may be challenged in the 21st century, but we don't see any near-term prospects.