Whoa! What a party!
We’re not talking about the surge on Wall Street at the end of last week. We’re talking about a real party, right here in Charm City.
The Dow rose 198 points on Friday, breaking a week-long losing streak. Gold was more or less flat.
The interesting thing about the stock market was that it seemed to have its head screwed on right. The Bureau of Labor Statistics said unemployment fell to 7% in November.
And this time they weren’t fooling. Even the labor participation rate went up. They weren’t just taking people out of the labor pool to get a lower unemployment number. That was good news.
Lately, investors have been interpreting anything that sounds like good news as bad news. Economic improvement is thought to signal imminent “tapering” by the Fed of its bond-buying program.
Investors worry that if the Fed stops its QE – at $ 1 trillion a year, the largest debt monetization program in history – asset prices should fall. “Good news” gives the Fed a reason to back off. So, it is taken as bad news by investors.
Hey… we didn’t design this system. We’re just reporting.
So why didn’t stocks fall on Friday?
How come investors suddenly seemed to screw their heads on right?
C’mon, dear reader. Everyone knows that even a little cutback in the Fed’s buyback program should mean falling stock and bond prices.
A trillion dollars a year is a lot of money – in fact, it’s 7% of GDP. Imagine a corporation with annual revenue of $100 billion. Imagine that it buys back its own shares at the rate of $7 billion a year. Then try to imagine what would happen to the share price when the largest single buyer drops out.
It doesn’t take a genius to figure it out. Even Fed economists can see it. That’s why they won’t taper. And everybody knows it.
That’s why bad news is now good news. And good news is good news. Everything Is Good News!
And that’s why US stock prices are so high (more about that tomorrow).
Back to the real party…
A Technicolor Battle
At the appointed hour, the strings of blue lights turned on… and then the bombs began bursting in air. White, blue, green, red. Kaboom! It was a warm, foggy night. The lights and smoke seemed to blend together with the fog, creating a fantasyland of color and sound – a Technicolor battlefield with no casualties.
Yes, dear reader, something is happening in Baltimore. We hadn’t fully noticed it until the big party last week. Thousands of young, hip, well-educated people came to the annual celebration – the lighting of the George Washington Memorial in downtown Baltimore.
They crowded onto Mount Vernon Place… cheered the band… oohhed and aahhed at the fireworks… and then went on to dozens of other private parties in the area.
This was an area made famous by the popular TV show “The Wire.” It used to be a no-go zone… at least at night. Now, there are people all over the place… including young women walking alone. They’re buying up the old mansions… and the derelict storefronts. They’re turning them into houses, coffee shops and loft apartments.
In the morning, we go into a local coffee shop. At 10 a.m. there are 20 “hipsters” sitting at tables talking… or alone, with their laptops open. Where do they come from? What are they doing? What’s going on?
We put the question to a young reveler…
“Well, I’d say the mentality has changed. People of my generation are not interested in getting in a car and driving. We grew up with that. We’ve had enough of the suburbs and commuting. Suburban houses are boring. Driving is boring. The lifestyle is boring.
“So, we come to the city. We admire the wonderful old architecture in Baltimore. And we imagine we can live better here. We walk to shops. We bicycle to work. At least, I do. The houses are still relatively cheap. I come from LA… and to me they seem very cheap. And there are a lot of people like us here. So, there is a sense of community… of people doing exciting things. You don’t get that in a suburban life.”
“But what are you going to do when you have children,” we asked, thinking he must be aware of Baltimore’s notoriously awful public schools.
“We’ll worry about that when it happens. Maybe we’ll set up a little school in the area… a cooperative. I don’t know… but we’re not worried about it now.”
Down in Doobies Coffee Shop
One group that doesn’t have to worry about schools is retirees. They’re past that problem. And now, if the crowd in Doobies Coffee Shop is any indication, they, too, are coming back to town.
You see them with their laptops… or talking on their cellphones. In their 50s and 60s. Not exactly retired, but not working nine to five either. Maybe they are among the millions who have been taken out of the labor force by BLS statisticians. Maybe they are self-employed. Maybe they are consultants or writers. Or maybe they are just having a cup of coffee.
“I wasted years of my life driving back and forth to work,” we confessed to our young interlocutor. “It was awful. It took me an hour of driving every morning to get to the office. I left the house at 7 a.m. to try to get a jump on the traffic. But by then the Washington beltway was already slowing down, so dense were the cars and trucks.
“What was worse was that I would get so wound up by competitive driving that I was already exhausted before I got to work.
“That’s no way to live. One of the best moves I ever made was moving into the city just a block from where I work. I save two hours a day… I don’t have to stop to buy gas… and the whole experience is much more agreeable.”
Did Good Manufacturing News Hurt Stocks?
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
The S&P 500 fell four basis points last week. This comes after eight consecutive up weeks for the index.
One major piece of good news (which, in this perverted market, meant bad news to the bulls) came from the monthly ISM Manufacturing Index.
This tracks national conditions in the manufacturing industry based on surveys of more than 300 firms.
As you can see from the chart below from Bespoke Investment Group, the index rose to 57.3 in November. That beat the consensus forecast of 55.1… and is the strongest reading since April 2011.
November’s reading also marked the sixth straight month in which the index came in better than expected and above 50 (which indicates expansion for the manufacturing sector) – something that last happened in 1998.
In a world without Fed intervention, this kind of result would be cheered by stock market bulls. Last week, it coincided with the first down week for stocks in over two months.