Don't be fooled by the smoke and mirrors of the recent unemployment and manufacturing data, warn Goldman economists, things aren't as great as they appear.
Data released by the U.S. Labor department showed a 0.4% drop in unemployment over the past two months. The Institute for Supply Management’s factor index grew more than 3 points since the end of August.
So what's the problem?
According to analysts at Goldman Sachs and Nomura Securities International, the data isn't reliable. The models that are used "to smooth the data for seasonal changes" have been shaken up by the financial collapse of 2008-2009.
Consider construction, which "would always pick up in the summer, when the weather is milder, and decline in the winter." Ellen Zentner, a senior U.S. economist at Nomura said in a phone interview with Bloomberg, "around April the seasonal bias turns and starts working against the data ... The model ends up adjusting for a growth pattern that isn't there."
Bad news
According to Zentner's calculations, the 0.4% drop in jobless rate is overcompensation. Perhaps 0.2% of the 0.4% is due to the bias. "Economists at Goldman Sachs forecast unemployment will average 8.5 percent this year, unchanged from December's reading. Nomura's estimate is 8.4 percent."
As for construction, the industry has seen growth, even with the seasonal adjustment.
Business section: Investing ideas
Goldman is advising their clients not to read too much into the 2012 rally, but which stocks are most vulnerable to this thesis?
To illustrate this concept, we wanted to identify the 2012 rallies that appear to be vulnerable by looking at institutional money flows and short-seller activity.
We started with a list of 2012's top performing stocks, and identified a list of six rallying stocks that have seen a sharp increase in shares shorted over the last month (i.e., an increase in bets that these stocks will decline).
This is significant, especially when you consider that short-sellers tend to be more sophisticated investors (due to the fact that they require strict credit approval to perform these trades). So if these investors are turning bearish on a stock, it's worth paying close attention.
To further refine the quality of our list, we collected data on institutional money flows, and identified the rallying stocks that have seen significant institutional selling during the current quarter.
Big money managers have extensive resources to analyze investing ideas. So if they're dumping a certain stock, it's worth paying close attention.
These companies might have started 2012 on a strong footing, but sophisticated investors don't think these are sustainable rallies.
Do you agree? Or is this excessive pessimism a contrarian buy signal? (Click here to access free, interactive tools to analyze these ideas.)
1. KB Home
2. Ancestry.com
3. Veeco Instruments
4. RAM Energy Resources
5. Federated Investors: Provides its services to individuals, including high net worth individuals, banking or thrift institutions, investment companies, pension and profit sharing plans, pooled investment vehicles, charitable organizations, state or municipal government entities, and registered investment advisors. Year-to-date return stands at 21.65%. Net institutional sales in the current quarter at -7.7M shares, which represents about 8.29% of the company's float of 92.87M shares. Shares shorted have increased from 8.61M to 10.09M over the last month, an increase which represents about 1.59% of the company's float of 92.87M shares.
6. Renren
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Institutional data sourced from Fidelity, short data sourced from Yahoo! Finance.