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Blogger’s Take: Hard or Soft Landing ?

Posted By Barry Ritholtz On November 1, 2006 @ 7:00 pm In Blog Spotlight | Comments Disabled

This is the fourth edition of our new feature: Blogger’s Take.

We have seen an unusually active flow of economic data, and it has been pretty rough. While much of Wall Street has built-in expectations of a "Soft Landing," the
recent economic data flow has been rather negative; Earnings have been
excellent, but GDP, NAPM, Housing data are all ugly.

Today’s Question: Is Goldilocks still alive? Are we heading for a soft
landing, a hard thump, or something even worse? 

Here’s the Blogger’s Take:

"Financial entities now seem hard at work inflating earnings via some largely undisclosed version of (problem?) securities sales, and ratcheting up “fees” to customers. Of course my suspicion is that these transactions are conducted with Enron style off-balance sheet entities, or quasi-related hedge fund operators. But, we aren’t going to get even close to that aspect from public information. No sir, not even to first base. Here are some excerpts from the Citigroup conference call. If you actually listen to the call, the tone of the questions are NOT hostile, but polite. Given the failure of management to deal with these analysts in a forthright manner, I am amazed at their patience.

First, the analyst asks for the amount of the security gain. Finally, after slithering through the grass like a snake by responding about something else, namely “hedging performance” (another can of worms?), the exec gives a half ass response, as opposed to an answer:, coining the vague term “single biggest part” of the $296 million gain is from sale of securities. Hearing this, I wonder why she just doesn’t give the number? The analyst asks if the “number” is in “one of the pages”. The response is “no”, and then Krawchek ignores the followup question, “where can I get it.” We then get a direct question about consumer fees, and once again we merely get another response, as opposed to an actual answer.  Webster’s defines answer as "a correct response to a question" and defines response as "a reply, a rejoiner".

Russ Winter, Winter (Economic & Market) Watch [1]


To bet on a soft landing is to bet that the market will defy
its own history. Clearly, there has been the occasional soft landing before,
there will be soft landings every so often in the future and this may be one of
them but it is important to know that history is working against you.

We are at a point now where data point after data point is
pointing to a slowing of some magnitude. That the economy will slow does not
seem to be the debate but the magnitude of the slowing is the debate. Usually
the stock market anticipates a recession by six to nine months. So far the
market does not seem to be pricing in a recession which is one solid talking
point for the no-recession-ever again guys. The bears say it is coming, just

My take is that recessions are a normal part of the cycle. I
have no reason to think this cycle will be different or strangely long in
duration. This plus the state of the yield curve which, Chinese buying
notwithstanding, is a warning. A recession in 2007 would set up for a big up
year for stocks in either 2008 or 2009. Many decades have two or three really
big up years, this decade has only had one; 2003. Iʼm not betting against
history on this one.

-Roger Nusbaum, Random Roger [2]


There is little doubt among market participants that the U.S. economy
is slowing
. The only question is how
much and for how long? This most recent
equity market run was driven in large part by lower interest rates predicated on
the assumption of a soft landing. The Fed is not really tipping their hand with
expectations that they will remain on hold through the December
and January meetings
. A question for
equity market participants is what effect an economic slowdown may have on
corporate profits?

Post Internet bubble U.S. corporations have done an
admirable job of raising profit margins. Some may argue that this has come largely at the expense of labor,
broadly defined. Others claim that the
Internet revolution has finally trickled down to the bottom line of corporate
America. For instance, John Hussman at Hussman Funds [3] has
written extensively on the idea that currently high profit margins will mean
revert to historical norms. An economic
downturn, soft landing or not, will put both hypotheses to the test. For those betting on continued earnings
buoyancy they had better hope that it really is different this time and
historically high profit margins continue at, or near, record levels.

-Abnormal Returns [4]


I believe the risk of a hard landing is not insignificant, but recent data does not point in that direction. We are not seeing the hallmarks of a hard landing such as collapsing core durable goods orders, rising jobless claims, or plummeting consumer confidence. Without those signals, the Fed will stick to the soft landing story. Consequently, the Fed is not likely to view 3Q06 report as disastrous; they will view as in line with their expectations. Will those expectations be correct? Time will tell.

-Mark Thoma, Economist’s View [5]

Remember last January? Everyone was talking about the yield curve even though it
was barely inverted at the time. Now, almost no
one is talking about the
yield curve [6], the one set of numbers that someone can and should
believe. The Yield curve is what it is, and it is quite inverted, signaling a
recession. Forget Goldilocks, the next recession will be an extremely hard
affair, led by a falloff in consumer spending, rising unemployment, and a
continued slowdown in housing.

I guess it’s different this time.
No one believes it because the Fed Fund rate is so much lower. Everyone is
forgetting about the massive leverage in the housing sector and what it will
mean to jobs when it implodes.

-Mish’s Global Economic Trend Analysis [7]


Wall Street does have built-in expectations of a soft landing, but they get paid to be optimists.  Most people on Wall Street aren’t in the business of protecting capital, they are in the business of generating returns.  Those are two very different ways of looking at investment opportunities.  Overall, the data looks bad.  Pockets of earnings look great, but earnings have also become somewhat disconnected from the underlying economic realities they were intended to represent.  I discount their value as an indicator of economic health.  So what does that mean for a soft landing?  Ask me after the election.

-Rob May, Businesspundit [8]


Over the last six to nine months the market’s mood has undergone a clear shift. Earlier in the year, when economic releases were weaker than expected, our screens reacted with lots of green, as it was a sign that the economy wasn’t getting too hot. Today (literally and figuratively), weaker reports are causing the market to sell off, as traders fret that the economy is starting to come in at
a harder angle than previously thought. At this point, it sounds almost too cliché to say (when aren’t we placing extra emphasis on future data), but each data point will be scrutinized
for any clues as to the economy’s direction.

One lesser known indicator which we have found to be quite useful over the last
several months is the commodities survey within the monthly ISM manufacturing
report. In this survey, ISM asks respondents what commodities are rising in price and what commodities are falling. In the past, peaks and troughs in this survey have been pretty reliable
forecasters of the direction of inflation (see the chart below).

In this month’s survey, on a net basis, six commodities saw price declines which
is the first negative reading since 2002.  When we first highlighted this
survey earlier in the year, we argued that the downtrend in the number of
commodities rising in price would likely lead to a decline in inflation.
Now that inflation has in fact declined, future readings in the ISM survey will
be even more important, as market watchers look for clues as to how hard or
soft the economy’s landing will be.

While current levels are certainly tolerable, any further significant weakening is unlikely to go over well in the market.

Ism_survey [9]

-Paul Hickey, Tickersense [10]


Very nicely done guys.  I’m all ears for topic suggestions going forward . . .

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/11/bloggers-take-hard-or-soft-landing/

URLs in this post:

[1] Winter (Economic & Market) Watch: http://wallstreetexaminer.com/blogs/winter/

[2] Random Roger: http://randomroger.blogspot.com/

[3] Hussman Funds: http://www.hussmanfunds.com/wmc/wmc060807.htm

[4] Abnormal Returns: http://abnormalreturns.com/

[5] Economist’s View: http://economistsview.typepad.com/economistsview/2006/10/fed_watch_soft_.html

[6] yield curve: http://www.bloomberg.com/markets/rates/index.html

[7] Global Economic Trend Analysis: http://globaleconomicanalysis.blogspot.com/2006/10/numbers-game.html

[8] Businesspundit: http://www.businesspundit.com/

[9] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/ism_survey.png

[10] Tickersense: http://www.tickersense.com/

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