The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

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‘We’re all technicians now!’ Stocks again are so divorced from reality and economic fundamentals that investors must be technicians in order to capture upside and avoid the inevitable recoupling with economic and financial reality…Remember the last recoupling of a few quarters ago?

Please recall the Goldman CFO, David Viniar, warned in early February 2008 that there is a “total disconnect between the equities market and the credit market.” [King Report 2/7/2008] We are now witnessing a historic disparity between stocks and GDP as well as employment. The autumn is going to be very, very interesting.

Globe & Mail: Stocks surged Thursday morning when the Bank of Canada said it has seen signs that the US economic recession has reached its bottom. We don’t recall the Bank forecasting the economic collapse last year.

Hasn’t it already been decreed that the US economy has bottomed? Haven’t stocks already discounted this? Of course – it’s just traders fooling with stocks during the summer – on thin volume.

Why do so many people heed the bottom-braying of people that never forecast the biggest economic and financial collapse since The Great Depression? The economic and financial collapse that occurred last year was as easy to recognize as humanly possible – and look how many people missed it.

Old Ben Bernanke is rebubbling stocks because the market believes he’s back in funny-money mode. And the last thing the US needs is another asset bubble that is intended to paper over structural problems.

The WSJ: Ford Posts $2.3B 2Q Profit On One-Time Gains;Beats Estimates The company burned through about $1 billion in cash – down from $3.7 billion in the first quarter – during the quarter as it controlled incentive spending around the world while increasing output in its North American plants. Ford’s profit came largely from a $3.4 billion gain it received related to debt-restructuring actions in April. Excluding the one-time gains, the company would have narrowed its quarterly loss to $424 million compared with a loss of $1.03 billion a year earlier. It would have been the company’s fifth consecutive quarterly loss…

Once again we have accounting gimmicks (non-cash factors) manufacturing earnings.

One of the most difficult things you encounter when discussing the bailouts is getting people to understand concepts of enormity that are literally beyond comprehension.  “Trillion” is one of those concepts.

Jess Bachman, who did some of the fantastic charts and graphics in Bailout Nation, helped to create this animation (for mint.com) to explain what a trillion dollars is:

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Excerpt:

It’s official, trillion is the new billion. No longer is government spending talked about in terms of a mere ten digits. With the recent flurry of government spending, we are going to need another three zeros to make sense of it all. One trillion dollars is a number that few people can comprehend, let alone your standard nine digit calculator. So what does one trillion dollars look like?

Overall, I find this a little simplistic — but its intriguing nonetheless

Chapter Two of A WSJ series: What was going through the minds of CEOs, corporate boards, fund managers and mortgage lenders as they created hard-to-understand derivatives Warren Buffett once called “weapons of financial mass destruction.”

Chapter One: In the first of this three-part series, WSJ reporters explain how the housing bubble inflated and burst, and why easy money led to the collapse of Wall Street’s biggest financial institutions.

9:28

This is an astonishing datapoint:

“There were 18.7 million vacant homes in the U.S. during the second quarter as the steepest recession in 50 years sapped demand for real estate and banks seized properties from delinquent borrowers.

The number of vacant properties, including foreclosures, residences for sale and vacation homes, was little changed from 18.6 million a year earlier, the U.S. Census Bureau said in a report today. Households that own their own residence stood at 67.3 percent, seasonally adjusted.

Home values dropped 33 percent since 2006, according to the S&P/Case-Shiller index, and the unemployment rate in June rose to the highest in almost 26 years. Tumbling home prices and rising job losses have thwarted government efforts to reverse the housing decline at the heart of the longest U.S. recession since the 1930s.”

Note that the recent record in April of this year was 19.2 million in April 2009.

As Peter Boockvar points out, Commerce just released Q2 Home Ownership rates. Its now at 67.4%, way off the record high of 69.2% in the last quarter of 2004. For comparison’s sake, in 1965 the rate was 65.3%.

For those people looking for a bounce back, we may still be reverting back towards the long term mean.

With little or no pent up demand for housing, it’s hard to see how vacancies or ownership point are a bottom stat . . .

[Note: I updated the headline to reflect the higher Q1 data released in April  '09]

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Source:
U.S. Home Vacancies Hit 18.7 Million on Bank Seizures
Kathleen M. Howley
Bloomberg, July 24 2009

http://bloomberg.com/apps/news?pid=20601110&sid=an17jgiccivM

CENSUS BUREAU REPORTS ON RESIDENTIAL VACANCIES AND HOMEOWNERSHIP http://www.census.gov/hhes/www/housing/hvs/qtr209/files/q209press.pdf

I have been discussing back and forth with Dennis Kneale the war he seems to have found himself with the bloggers. As was pointed out last night by Bill in SF, some viewers are less than enthralled with Dennis’ channel.

Here’s one such viewer’s take on the cable channel:

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click for larger graphic

photomontage courtesy of nilsonb

Hat tip:  Bill in SF

The final July U of Michigan confidence number was 1 point higher than expected at 66 and up from 64.6 in the preliminary reading but is still down from 70.8 in June which was the highest since Feb ’08. The improvement in the final survey was led by the Outlook component which rose 2.3 points while Current Conditions were up just .1 point. From June, Current Conditions fell 2.7 points and the Outlook fell 6 points. One year inflation expectations fell to 2.9% from the preliminary level of 3% and 3.1% in June likely due to lower gasoline prices which are down $.16 this month according to AAA, which if sustained, equates to an annualized savings to the consumer in the aggregate of around $22b. Confidence data is never market moving and is more anecdotal in nature as how individuals feel can differ from how they act.

Airtime: Fri. Jul. 24 2009 | 8:03 AM ET

Art Cashin, UBS Financial Services director of floor operations discusses the recent upswing in the markets.

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).

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Be Careful What You Ask For………..
July 24, 2009

Oh, Ben. Why did you offer this?

In his Q&A session at the Senate on the second day of his testimony, Federal Reserve Chairman Ben Bernanke offered a response to a question about the Fed’s role in consumer protection. He suggested that the Senator reopen “the Act” and add the consumer-protection role to the Fed’s mandate.

I cringed.

So did several others within the Federal Reserve who were in disbelief at what they heard. So did many others outside the Federal Reserve who have been championing the Fed’s independence when it comes to monetary policy. In Bernanke’s defense, he also added that any law changes must not alter the independent ability of the Fed to formulate monetary policy. Those words mean the Fed’s ability to raise interest rates when it deems it has to fight inflation.

But by inviting the Senate to open the law to changes while asking to remain independent is like putting your head in the lion’s mouth and asking the beast to be considerate. Chairman Bernanke is now engaged in a high-risk gambit.

Reopen the Federal Reserve Act?

I am now seriously worried that the Congress will take Bernanke up on his offer. Once an amendment to the Federal Reserve Act is on the table (which it is), anything may happen. Remember, this would be a bill that has to clear the Senate and the House (Pelosi, Frank, and company) and then get to a conference.

In the famous Geithner “white paper” which will receive Congressional discussion today by various witnesses including Bernanke, there is a proposed provision to give the Treasury Secretary a veto over the Fed’s use of emergency powers. Remember, the Treasury Secretary meets weekly and one-on-one with the President. What could be more political than that?

Picture a situation where there is a need for one of the Fed’s emergency actions, such as we have seen in recent months. If the Geithner proposal comes to pass, how would that work? And can we ever be assured that the policy positions of the Fed would be taken from a neutral starting place? I wonder.

Fed policy could easily become asymmetric and therefore inflation-biased. Imagine a situation where the Treasury has invested TARP funds and doesn’t want to admit losses. Isn’t it easier for them to have the Fed keep an entity alive with hope for a miracle rather than be embarrassed by a failure? Is it possible for a politician to admit an error and take a small loss rather than defer the loss, even though the final cost will be much larger? Decision-making biases are hard enough to overcome without imbedding a structure that worsens them.

Bernanke knows this. So why did he invite the Senate to reopen the Act?

Maybe his political advisors are not guiding him well. They may be telling Bernanke that this proposal will be disarming and soften the Fed’s critics. Maybe he is following a protocol of open democratic process that is a result of his academic career. Or maybe he believes the Act will be reopened anyway and it is better tactically to propose changes proactively, and try to modify the outcome, rather than resist it. No matter how one plays out this sequence, it is hard to find a good outcome. We fear the politicization of the central bank.

That said, markets are not focused on the Fed and political risk. Markets are looking only in the shorter term for Fed policy that remains highly stimulative. That means continued very low short-term interest rates are in the cards. For Treasury bonds that means retrenching (higher rates, lower prices) as the risk of an economic Armageddon subsides and as signs of a bottoming economy recur.

We continue to emphasize spread product on the bond side. Tax-free and taxable Munis offer good values in the bond turf.

Stocks have an upward bias. In the stock markets our accounts are fully invested. So far, the summer has been beneficial to clients in both fixed-income and equity asset classes. We are pleased with our ETF strategies as the stock markets of the world recover from the March lows. In the United States, we are targeting 1100 on the S&P 500 index by early next year.

David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok-at-cumber.com

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Cumberland Advisors
614 Landis Avenue Vineland NJ 08360-8007
1-800-257-7013 http://www.cumber.com

I received a request from a writer asking for examples of funny stuff written by me at the Big Picture.

I have no objectivity. I sometimes write things I find terribly amusing and no one else seems to have the same reaction. Othertimes what I consider throw away lines people find humorous..

Which leads to this request: What written thing here stick out as funny to you?