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

Initial Jobless Claims totaled 584k, 9k higher than expected and the prior week was revised up by 5k to 559k. This should be the first clean number in weeks where it’s not influenced by the seasonal distortions that was brought by the differing time schedules of auto plant shutdowns. The insured unemployment rate was unchanged at 4.7% and there is a sigh of relief in the market that it didn’t spike higher now that the claims data is not artificially suppressed due to seasonal distortions. Continuing Claims were 103k less than expected and down 54k below last week. Due to the dynamic of people no longer collecting the initial 26 week time period and thus weighing on those collecting Continuing Claims (as opposed to seeing a pick up in job growth), those getting emergency unemployment compensation rose almost 25k (not seasonally adjusted). The amount added to extended benefits fell by 37k.

After a 5% drubbing, the Shanghai index bounced back 1.7% as the PBOC quelled concerns that monetary policy would change much. Good earnings reports in Japan also helped to lift spirits. European stocks rallied after the July Euro Zone economic confidence # rose almost 3 points from June and was 1 point more than estimated. Also, Germany’s July unemployment report was better than expected and UK home prices rose more than forecasted m/o/m in July. As a result of the above, the risk trade is back on, buy stocks and commodities and sell the US$ and Treasuries. The key test of the week for Treasuries will come this afternoon when we see the results of the 7 yr note auction as the maturity falls into the part of the yield curve where inflation expectations and government finances become a focus. Jobless claims are expected to total 575k and may be a clean # that isn’t impacted by the auto plant disruptions.

One of the more fascinating things about a crisis and its resolution is the post-mortems: The after-the-fact analyses that some folks do to explain what occurred.

These analyses are fascinating for what they reveal about the beliefs, methodologies, biases and cognitive failures of the many crisis watchers.

Human fallibility being what it is, we can divide this universe into 3 buckets of observers:

1) Those who get it mostly wrong.

2) Those who can correctly describe a small slice of what happened;

3) Those who understand the full boom and bust — how all the moving parts came together to cause the crisis.

The first bucket is the easiest to both understand and dismiss: It contains the ideologues and market worshipers, as well as the perma-bulls — none of whom have much in the way of methodology. They are believers who know that in the long run stocks (and houses for that matter) will come back, whether we are dead or not. For the most part, they missed all of the warning signs of recession, credit crisis and boom and bust of the housing collapse. They called it a “mental recession.”

This motley crew says it was all the fault of too much regulation, no it was CRA/Fannie Mae — Why do we even have a Fed? That was the cause — No its mortgage interest deduction — no its all Barney Frank’s fault, no wait, it was caused by too much minority home buying — no, it goes back to FDR — No, Its all the Government’s fault, there should be no State — All hail John Galt, we should be free without any government intervention whatsoever — Bababooey!

As you might imagine, their ravings throw off a lot more heat than light. They provide no insight into the what actually occurred — But hey, its great theater.

The second group is a lot more instructive and interesting. They accurately detail a tiny aspect of the crisis in great detail. These observers are like the 6 blind men describing an elephant: Partly correct, yet mostly incomplete. Their individual descriptions accurately describes various body parts (Trunk, tusk, ear, etc.) but they never describe the creature in its entirety.

This group includes those who blame the entire debacle on derivatives or the formula for Value at Risk. The original concept of securitization. Wildly misaligned compensation incentives. They blame the ratings agencies and/or the the deification of markets via EMH, or the massive increase in use of credit since the 1950s. Some blame allowing Lehman to fail as the cause; others blame bailing out Bear Stearns, yet still others say it was all Goldman Sach’s fault. Fill in your own blank.

In the hunt for the unified field theory of the economic crisis, these observers may accurately describe a single aspect of what happened, but they fail to capture the fullness of what caused the debacle. They miss the crisis’ gestalt.

Lastly, we have the Big Picture observers (no pun intended). These folks try to put all of the moving pieces together. They look for proximate causes, not abstract theories. They try to see how one event led to the next event and the next and so on down the entire cascading collapse. These folks understand complexity, causation, risk, statistics and cycles. They are pragmatic, not ideological.

They are unfortunately, all too rare.

I only can wish that more of the people trying to repair what happened, and prevent the next crisis, were in the third group . . .

If Timothy Geithner is as bad at handling the economy as he is at picking bathroom tiles, he won’t need to sell his house.

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Good Evening: Just as they have during 9 of the past 10 sessions, U.S. stocks suffered a setback in the morning, only to rally late in the day. Unlike so many recent sessions, however, all the major averages remained in the red as the closing bell rang on Wednesday. A sell off in China, some weakish economic data, falling commodity prices, and a poor 5 year note auction gave Mr. Market a list of reasons to retreat today. That he cedes ground only grudgingly is a testament to the old gentleman’s resilience, but it may also mean a larger move (up or down) is coming. The VIX, for example, is proving just as resistant to decline as are the main indexes. PIMCO’s Bill Gross would argue that the old man would be well advised to keep his pulse in check until nominal GDP growth shows some resilience of its own.

The big news overnight was not earnings related, but China related. Whispers are flowing from Beijing that the central government either is, or soon will be, attempting to rein in the breakneck pace of lending by that nation’s banks. I have no idea whether these rumors will prove to be true, but they were given currency by a 5% fall in Chinese stock prices today, as well as by the large thumping delivered to the types of commodities China loves to consume. Then again, these moves could simply be a corrective head fake after long upside runs, so market participants will be watching China’s next PMI number (Thursday night) for clues. Since Chinese demand has been the fertilizer to the green shoots spotted here and in Europe, any threats to that demand will likely have a cooling effect on global risk appetites.

U.S. stock index futures were thus on the defensive this morning when word hit the tape that Yahoo! and Microsoft had finally struck a deal. In an interesting display of how things have changed over the 20 month courtship between the two companies, Yahoo went from being the subject of a $40 billion takeover to simply sharing some search assets with MSFT. No cash will be changing hands, so Microsoft will be getting most of what it wanted from Yahoo, while YHOO’s shareholders are left to wonder why its former CEO didn’t simply hit a bid and get a check back in 2007. Above $34/share back when the takeover talk was thick, YHOO today finished just north of $15. Settling for less than one had hoped (just ask anyone trying to sell a home) has become a theme since the great tumult arrived, and what happened to Yahoo! is emblematic of our times.

Stocks opened 1% lower this morning before recouping most of those losses. Durable goods orders sent a mixed message, with the headline figure a disappointment and the ex-transportation figure an upside surprise (see below). The Fed’s Beige Book was similarly filled with positives and negatives for analysts to argue over, but after the morning lows more or less held this afternoon, the major averages rallied into the bell. As they did yesterday, energy and materials names weighed on the averages. For once, though, the indexes were all moving together, and the final losses ranged from the Dow’s 0.3% to the Russell 2000′s 0.65%.

Treasurys were up when stocks were down this morning, but they, too, finished mixed after a poor 5 year note auction. Both the bid to cover and indirect bidder ratios were much weaker than in other recent auctions. I guess that’s what happens when a government offers record amounts of new paper. The dollar built upon yesterday’s rally and finished 0.7% higher, a fact which only encouraged further liquidation in the commodity pits. The rumors from China and the firm greenback were already conspiring against commodities when a report showing a huge build in crude oil inventories knocked that market for a loop. Falling energy prices were the biggest factor in today’s 2.7% drubbing suffered by the CRB index.

Tonight I’d like to discuss two different articles that came out today, and while the authors (Barry Ritholtz and Bill Gross) may not have much in common, they both would like to remind investors not to get too carried away with the recent batches of less poor economic data. Barry’s gripe has to do with the latest housing data, and it’s posted on his fine website, The Big Picture (see Permalink below). I’ll let Barry tell the tale in his own words, but the key point to take away is that the reported rise in the June new home sales figures was less than meets the eye. New home sales for June of 2009 were in fact the worst totals for any June since 1982. Barry offers multiple charts to buttress his main point — that a return to “a healthy market cleared out of excess inventory with genuine price increases is likely years away . . .”

PIMCO’s Bill Gross would also like to waggle a finger at those who think global warning better describes the current investment climate. Though many investors may think they’ve found a “love potion” in the frisky stock market action since March, Mr. Gross warns folks not to be led astray by hope. He contends that our leveraged economy was structured to live in a world of 5% nominal GDP growth, a rate he sees as unattainable in the “New Normal”. Returns on risk assets will suffer in this environment, Gross says, and those who hope all the government’s efforts at stimulus will return the U.S. economy to status quo ante are bound to be disappointed.

There are what he calls “quality constraints” (i.e. collateral haircuts and actual down payments!) on most of these federal lending programs, and he sees nominal GDP settling in around a sub par 3%. He wraps up by saying that “a 3% nominal GDP ‘new normal’ means lower profit growth, permanently higher unemployment, capped consumer spending growth rates, and an increasing involvement of the government sector, which substantially changes the character of the American Capitalistic model”. Rather than a love potion, it would seem Doctor Gross is prescribing a dose of the Cod Liver Oil remedy of past generations. Well, just as Yahoo’s shareholders realized today, I guess we’ll all have to settle for less in the “new normal”.

– Jack McHugh

U.S. Markets Wrap: Stocks, Treasuries, Oil Drop, Dollar Rises
U.S. Durable Goods Orders Rise Excluding Cars, Planes
Worst June New Home Sales Since 1982, by Barry Ritholtz
Investment Outlook: Investment Potions, by Bill Gross, PIMCO

1. The End Of Wall Street: Why It Happened

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.

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2. The End Of Wall Street: Why It Happened 7/23/2009

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.”

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3. The End Of Wall Street: What Happens Next 7/24/2009

Chapter Three: This final chapter of the crisis on Wall Street tells the story of the $700-billion bailout, as seen through a reporter’s eyes, and looks at what’s ahead for the global economy.

I notice that Jim Cramer is yowling on TheStreet.com today, pounding the table on US Bancorp (NYSE:USB) and Webster Savings Bank (NYSE:WBS).  Jim, how much you want to buy?  These institutions are going to be shoveling money into the furnace for another 3-4 quarters.  We’ll have a post up on TBP tomorrow on our view of the banks, BTW, including a profile for WBS.

In his latest rant, Cramer is once again showing himself the Goldman/Geithner shill. He attacks the FDIC, falsely claiming on the same clip that it is the fault of the deposit insurance agency for  not resolving dead banks. In doing so, Cramer shows his ignorance and lack of homework — again.  It is especially scary when Jim talks banks because, like most generalists, the only thing he knows about banks is how to use the ATM.

Let’s start with the basics on bank failure.

It is the primary regulator, Jim, OCC/OTS/state agency that pulls the plug on a bank.  Only then is the FDIC appointed receiver by process of law.  The FDIC has been trying to move the process along, but the fact is that politicians in Washington and down in the states, and the regulators at both the state and federal level, are dragging their feet.

Why?

Because once the bank charters are gone, communities will lose jobs and credit, regulators will lose jobs and in many cases there will not be a new de novo bank started in these locations.  Banks are huge political engines in small town America.

Like Barack Obama and, apparently, Jim Cramer, the political class believes that eventually the storm will blow over and that we should be adding exposure to banks now. But no Jim, you are mistaken IMHO.

There are probably 1,000 plus banks in floating storage as of June 30, 2009.  It was only until a few months ago that the FDIC finally had the financing and now the personnel in line to resolve several hundred banks in the next six months.  But the biggest obstacle, dear Jim, is politics.

Jim, next time the boys at GS or Tim Geithner call and ask you to take a shot a Sheila Bair and our colleagues at the FDIC on TheStreet or CNBC, just know that I will put you into the boards every time.  And I am looking forward to it with the greatest anticipation.

Here’s a challenge to Jim Cramer.  If you want to talk banks some evening on your show, I know the way to CNBC HQ and will be happy to talk to the flock anytime you say.  But are you able to “walk the walk” on the banks with an analyst who actually covers the sector?  I don’t think you can.

Chris

Airtime: Wed. Jul. 29 2009 | 11:05 AM ET

Does Wall Street have it right or are they being too optimistic about the impending recovery? Erik Ristuben, of Russell Investments, and Peter Boockvar, of Miller Tabak, share their insight.

I keep getting carried away with the daily clickage/linkfest. Today, its only 10 links for Wednesday:

• Foreclosures Are Often In Lenders’ Best Interest Government initiatives to stem the country’s mounting foreclosures are hampered because banks and other lenders in many cases have more financial incentive to let borrowers lose their homes than to work out settlements, some economists have concluded. (Washington Post)

• The war being waged on the TARP watchdog’s independence (Salon)

• Stephen Roach writes: I’ve been an optimist on China. But I’m starting to worry (FT)

• UBS’ Andy Lees is giving away for free his book on fixing the crisis:  The Credit Crunch – Treating the disease rather than the symptoms

• Study Finds Underwater Borrowers Drowned Themselves with Refinancings (WSJ Development)

• Quant Paul Wilmott asks if we are Hurrying Into the Next Panic? (NYT)

• New Wrinkle in Health-Care Debate (Barron’s)

• Madoff: Can’t Believe I Got Away with It (ABC)

• Prof. Gates’ Unconstitutional Arrest (Forbes)

• Uranium Ore (Amazon)    The reviews are hilarious . . .

I like the new strategy: Limit myself to no more than 10 of the most interesting and off the beaten path links each day.

Rather than being comprehensive, force myself to just 10.

Thoughts?

The Current Economic Conditions, aka The Beige Book, is a Federal Reserve report published 8X/year. Each Fed District gathers anecdotal information on current economic conditions in each District and reports back to the Fed.

The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis.

Current findings are that the “Pace of Economic Decline” is slowing.

Excerpts:

Reports from the 12 Federal Reserve Districts suggest that economic activity continued to be weak going into the summer, but most Districts indicated that the pace of decline has moderated since the last report or that activity has begun to stabilize, albeit at a low level.

Five Districts used the words “slow”, “subdued”, or “weak” to describe activity levels; Chicago and St. Louis reported that the pace of decline appeared to be moderating; and New York, Cleveland, Kansas City, and San Francisco pointed to signs of stabilization. Minneapolis said the District economy had contracted since the last report.

Most Districts reported sluggish retail activity.

Manufacturing activity showed some improvement, with some moderation of declines and most other Districts indicated that manufacturing activity continued at low levels.

Residential real estate markets stayed soft in most Districts, although many noted some signs of improvement. By contrast, commercial real estate markets weakened further in recent months in two-thirds of the Districts and remained slow in the others.

Districts reported varied—but generally modest—price changes across sectors and products, with competitive pressures damping increases;

Most Districts indicated that labor markets were extremely soft, with minimal wage pressures, and cited the use of various methods of reducing compensation in addition to, or instead of, freezing or cutting wages.

Consumer spending in the early summer remained below previous-year levels in most Districts, as households continued to be price conscious.

Read the entire release for details on each district and sector.

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Source:
SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS BY FEDERAL RESERVE DISTRICTS
JULY 2009

http://www.federalreserve.gov/FOMC/Beigebook/2009/20090729/fullreport20090729.pdf