Economic Data Mostly Turkeys

This morning we got a tsunami of new economic data, and in honor of Thanksgiving, most of the numbers were turkeys. Starting with the least-bad numbers:

    
• Initial claims for unemployment insurance fell to 529,000 from 543,000 last week. It's good that it is down, but it is still extremely high.  The week-to-week numbers can be volatile, so it makes more sense to look at the 4-week moving average of claims. That rose to 518,000 from 507,000 last week and is now at its highest level since 1983. Keep in mind that employment is a lagging indicator and that the new claims figures (4 week avg.) usually peak out at the end of a recession.  We are nowhere close to the end of this recession, so look for the number to continue to climb.    
• Personal Income rose 0.3% in October, up from 0.1% in September (but was originally reported as up 0.2%). This was a better-than-expected number, but the revision to the September number offsets it. Not huge, but it could have been worse.    
• Personal Spending fell 1.0% on the month. That is a huge drop -- the largest since the 9/11 attacks. Consumer spending makes up about 70% of the economy. Remember, this is a month-to-month number, not a seasonally adjusted annual rate number, so 1.0% is very, very bad.  In combination with the rise in personal income, it indicates that the savings rate is increasing.  Over the long term, this is needed and a good thing. However, short term it is a serious problem.    
• New Home Sales fell to a seasonally adjusted annual rate of 433,000, down from 457,000 (-5.3%) in September (originally reported as 464,000) and well below expectations of 450,000. New home sales are off 40.1% and are at their lowest level since 1982. Inventories are at 11.1 months of sales. Due to declining housing starts, inventories are starting to decline, off from the August peak of 11.4 months of supply, but are still extraordinarily high.  For perspective, the all-time record was set in April of 1980 at 11.6 months of supply. A few years ago, 4.0 months of supply was considered "normal."    
• New orders for durable goods plunged 6.2% in October, and September's orders were revised down to a decline of 0.2% from an increase of 0.8%.  The October number was far worse than the expected -- a 2.5% decline. Durable goods inventories, however, were up 0.4% to a record $341.1 billion. This does not bode well for the future.    
         
  • Excluding transportation, orders (a very volatile group) fell 4.4% following declines of 2.3% in September and 4.2% in August.       
  • Non-Defense capital goods (NDCG) orders fell 3.6% in October following declines of 1.0% in September and 7.8% in August.       
  • NDCG ex-aircraft orders were down 4.0% following declines of 3.3% in September and 2.3% in August. NDCG is a very good proxy for business investment spending. Aircraft are a very large and volatile segment of NDCG, and because of this economists like to exclude those orders to get at the underlying trend. This is 3 months in a row of very large declines, and the declines are accelerating.    

 It is clear that we are in a very deep recession, and things are continuing to deteriorate. At this time, investors need to focus on the least economically sensitive equities with the strongest balance sheets. A high, well covered dividend yield is a plus. 

Major drug companies like Pfizer, Inc. (PFE - Analyst Report) and Bristol-Myers Squibb Co. (BMY - Analyst Report) fit that description. Consumer Staples firms like The Hershey Company (HSY - Analyst Report) and Kimberly Clark Corporation (KMB - Analyst Report) also fit the bill.

Investors should also consider moving up the capital structure and look at corporate bonds, which are trading at steep discounts.  Since buying individual bonds from brokers is usually an expensive proposition, look at well-run and low-cost mutual funds that specialize in investment-grade corporate debt. Corporate spreads over treasuries are at record highs and are presenting a golden opportunity. I suspect you will be thankful a year from now if you do.

Read the full analyst report on PFE.

Read the full analyst report on BMY.

Read the full analyst report on HSY.

Read the full analyst report on KMB.

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