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

Airtime: Mon. Aug. 24 2009 | 9:10 AM ET

Art Cashin, head of floor operations at UBS, has the buzz from the NYSE.

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Our sympathies go out to traditional managers of public funds because they are being forced to abandon prudence and reason in order to generate short-term performance in a rigged casino.

Deceit and duplicity are encouraged if not demanded. Earnings are crafted; balance sheets cannot be trusted; government economic data is illegitimate.

Case in point: Last week Blessed Warren Buffett pens a NY Times op-ed that excoriates US solons for turning the US into a debt-laden banana republic. Within 24 hours, the White House says the deficit this year will be about one-quarter of a trillion dollars less than expected. Friday after the close, Reuters reports that the White House says the deficit will be $2 trillion more than expected, or $9T, over the next ten years.

Think about this for a minute; it epitomizes sanctioned deceit and duplicity in the markets. This chicanery cannot occur by accident. Solons obviously believe the investing public is hopelessly gullible.

Asian bourses tanked early on Friday but during European trading stocks surged. Later the reason appeared when Ben Bernanke, speaking from Jackson Hole, asserted that global economies are emerging from recession. BTW, how accurate has Ben’s forecasting record been over the past few years?

Nevertheless, twas expiration and traders, as well as investors, are rip-roaring bullish. Anyone that has been around for a few years knows that when funny money is flowing and traders are manipulating markets, investors become incontinent and start rationalizing instead of being rational.

At this point, critical analysis, especially of crafted economic data, disappears. This means we are right back to 2007 and early 2008. Bizarrely, many indicators like insider selling, cash holdings, sentiment, future expectations and even business surveys are back to 2007 levels.

But consumer confidence and disaffection is also falling back to 2007 levels. We clearly recall how the usual talking heads, shills and Bush apologists lambasted consumers for not being as jiggy as Wall Street. The peons did not realize how great the economy, as defined by soaring stocks & commodities, was.

There was a great disconnect between the real economy and Wall Street in 2007, due to funny money, crafted economic data and earnings, deceit, lax regulation and a decade or more of inculcated bullishness.

Rasmussen: Nationally, 29% of adults believe economic conditions in the U.S. are getting better while 46% say they are getting worse….

The Rasmussen Investor Index, which measures the economic confidence of investors on a daily basis, dropped a point on Sunday to 85.6. While the index is down three points over the past week, it is up 17 points over the past month. Investor confidence is now up 23 points from the beginning of the year. Among investors, 34% say economic conditions are improving and 41% say they are getting worse.

So the US official policy of manufacturing assets bubbles to paper over intractable economic and financial problems, including unserviceable debt continues.  The only difference is the debt is much more onerous and much more capital has been destroyed.  This means the system is even more levered.

Excerpt:

While initially slow to respond to the crisis and arguably a contributor to its rise as Fed governor, Bernanke nonetheless deserves credit for avoiding total disaster and thus another term as Fed chairman, says Barry Ritholtz, CEO of FusionIQ and author of Bailout Nation. Bernanke has “done a much better job than Alan Greenspan,” he says, if only because Bernanke listens to other voices whereas Greenspan famously ignored warnings from (among others) former Fed Governor Ed Gramlich about problems in subprime lending in the mid-2000s.

Source:“Anybody But Summers”: Reflections on Bernanke and Possible Replacement
Aaron Task
Yahoo TechTicker, Aug 21, 2009 11:30am EDT
http://finance.yahoo.com/tech-ticker/article/309095/”Anybody-But-Summers”-Reflections-on-Bernanke-and-Possible-Replacements

RIP the CFC program as of tonight and we’ll now get to see what the natural supply and demand dynamic is in the auto industry. The other major program, the Cash for Shelter plan providing tax credits for home purchases, runs to Nov 31st but there is already talk of enlarging its size and making it available to all home buyers, not just first time. Either way, what is most interesting about the markets is the differing opinions on growth that the stock market on one hand is sending and the US Treasury market is on the other. Stocks are at 11 month highs while the 10 year bond yield is 40 bps below the level of mid June. With the Fed’s monetary pedal to the metal, yields aren’t low because people expect low inflation to remain with the growth the stock market believes in, in my opinion. The consensus out of Jackson Hole seems to be that policy will be easy for a while to avoid nipping the recovery to early.

The latest housing consensus as sung in three part harmony amongst the media and green shoots crowd. Their song goes something like this:

1) The worst of the housing trouble is now behind us;
2) Only recently, Housing was “Getting worse more slowly;”
3) That has  transitioned to “Housing is getting better.”

I don’t believe it. IMO, all 3 are misleading or outright wrong. This post explains why.

On Friday, the market rallied smartly –  and while expiry had something to do with it, the larger part of the gains came after the release of the Existing Home Sales data. Traders’ kneejerk reaction seemed to reflect the belief that not only is the worst of Housing now behind us, but that Housing was actually getting better.

Indeed, Housing is going to be a growth driver for the economy going forward!

Only, not so much. A close look at the data reveals this to be a false premise. If you only read the NAR spin, its easy to fall into their web of happy talk. (We’ve said it so many times, it still bears repeating: The National Association of Realtors are a highly misleading news source. Look past what they say to the  actual numbers if you seek economic truth).

In the past, I have gone so far as to imply the Realtors group are spinmeisters. This month, I will be more blunt: Their actual data has become untrustworthy, their spokesmen lie for a living, and their “news releases” is little more than misleading junk.

Investors who rely on the NAR version of the news do so at their own great financial peril.

Witht hat intro, lets dig intot he actual data to show why the real estate trade group happy talk is misleading bunk. IF YOU ARE INTERESTED IN HOUSING, then you need to thoroughly fisk the NAR data, put it into context, and strip the lipstick off the pig.

Let’s do just that: A closer look at the actual unspun data reveals the NAR fantasies. Rather than recently improving, we see that January to July 2009 is actually the weakest 7 month period in 5 years — since the market topped in ’05.

Consider Mark Hanson’s analysis: He points out that “If not for a surprise and suspect 16k increase in Northeast condo sales, Existing Home Sales would have been lower month-over-month and only up 12k units from July 2008, which was the worst year on record for housing.”

Let’s see what happens if we back out those condo sales to look at just Single Family Homes ex Condos — which accounts for the vast majority of the US housing market. We see a very different picture. Existing home sales (ex-Condos) were down 10% from July 2007, flat from July 2008, and off 5% from June 2009.

Hence, the boom in cheap Northeast condo units accounted for all of the excitement in Friday’s EHS release. Indeed, the overall UNADJUSTED data shows not only that housing is not getting better, it is still getting worse.

Let’s go back to the NAR release. As noted on Friday, on a NON-seasonally-adjusted basis, existing home sales were nowhere near as strong as advertised. According to M Hanson Advisors:

“Even with condos included, the all-important Western Region was down 10% m-o-m. It is consensus that the housing market in the West is booming. While sales are booming at low end, I have argued for months that demand from first-timers and investors was at peak levels and July’s results prove this.Such weak results m-o-m and relative to 2008 underscore how critically injured the housing market remains.

Think about it…prices are down sharply y-o-y; rates are at historic lows; moratoriums and modification initiatives have kept hundreds of thousands of foreclosures off the market; housing sentiment is worlds better; a tax credit is available; and still, y-o-y sales are flat for all intents and purposes and down 6.5% from weak 2007 levels when pricing was near the peak. Conditions won’t get much better than this in the future — what is it going to take to sell houses?

This confirms my prior view that there are a lot of federal forces focused mightily to merely maintain housing in a gentle downdraft. But for this extraordinary government intervention, Housing would actually be much much worse. Foreclosures would be driving prices much lower — a good thing IMO, as it would hasten the cleansing of the boom’s excesses.

Recall that as the market topped out in 2005-06, cheaper Condo sales became a disproportionate source of total volume, as struggling buyers ran low on both cash & credit and were forced to move downstream.

That is now replaying over again. Perhaps its a sign of tight credit conditions or retiring boomers downsizing. Regardless, the mix of condos to single family homes is especially noteworthy.

Have a look at the chart below, which Hanson rolled out to show the impact Condos have had on the overall Housing sales:

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Existing Home Sales, NSA, 2005-09

chart courtesy of M Hanson Advisors

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We see  above that in 2009 (red line) Sales were behind 2008 (yellow line) until June/July. That is when we jumped 45k in sales ahead of last year — Out of 2.8 million housing units sold.

But as Hanson writes:

“Look at what was thrown at it in order to get this rounding error. We have thrown in over a trillion dollars to buy rates down, countless $8k tax credits, mortgage mods, foreclosure moratoriums plus hundreds of billions more, and it only bought 45k yoy additional sales over June & July combined. After a 50% to 70% price hit in the hardest hit areas — that are also the busiest now — only 45k sales out 2.8 million sold this year are responsible for the national consensus that housing has bottomed, which is the golden key to the consumer recovery spending chest.”

Remove government interventions, and the housing market collpase would continue unabated.

Finally, let’s look at one last factor: The impact of Foreclosures on Seasonal adjustments. We know that the NAR’s takes each month’s data, then runs it through their own meat grinder:  They annualize the number, they hamhandedly seasonally adjust it, they do whatever they can to accentuate the positive, while ignoring some of the ugly context the data exists in.

Like Foreclosures.

Have a look at this chart — showing total sales, with foreclosures broken out.

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Foreclosures as a Portion of Existing Home Sales

chart courtesy of M Hanson Advisors

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The three part harmony that the consensus is singing is out of tune. While the very worst of housing trouble may be behind us, we are still looking at falling prices and increasing foreclosures. The Housing getting worse more slowly camp is ignoring the massive Federal subsidies required to get worse more slowly. As to “Getting better,” the data argues persuasively otherwise, and I will make appropriate bets against this viewpoint.

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Special thanks to Mark Hanson for his assistance with this piece.

This story is guaranteed to generate some buzz today. I suspect its going to be much ado about nothing:

“At the meetings, Goldman analysts identify stocks they think are likely to rise or fall due to earnings announcements, the direction of the overall market or other short-term developments. Some of their recommendations differ from ratings printed in Goldman’s widely circulated research reports. Some Goldman traders who make bets with the firm’s own money attend the meetings.

Critics complain that Goldman’s distribution of the trading ideas only to its own traders and key clients hurts other customers who aren’t given the opportunity to trade on the information.

Securities laws require firms like Goldman to engage in “fair dealing with customers,” and prohibit analysts from issuing opinions that are at odds with their true beliefs about a stock. Steven Strongin, Goldman’s stock research chief, says no one gains an unfair advantage from its trading huddles, and that the short-term-trading ideas are not contrary to the longer-term stock forecasts in its written research.”

I am no GS fanboy, but unless its inside information, how they distribute their calls is their business.

For those that don’t like it, I suggest you take your business elsewhere . . .

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Source:
Goldman’s Trading Tips Reward Its Biggest Clients
SUSANNE CRAIG
WSJ, AUGUST 24, 2009

http://online.wsj.com/article/SB125107135585052521.html

Andy Xie is a former Morgan Stanley economist now living in China; The following is from the South China Morning Post:

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The A-share market is collapsing again, like many times before. It takes numerous government policies and “expert” opinions to entice ignorant retail investors into the market but just a few days to send them packing. As greed has the upper hand in Chinese society, the same story repeats itself time and again.

A stock market bubble is a negative-sum game. It leads to distortion in resource allocation and, hence, net losses. The redistribution of the remainder, moreover, isn’t entirely random. The government, of course, always wins. It pockets stamp duty revenue and the proceeds of initial public offerings of state-owned enterprises in cash. And, the listed companies seldom pay dividends.

The truly random part for the redistribution among speculators is probably 50 cents on the dollar. The odds are quite similar to that from playing the lottery. Every stock market cycle makes Chinese people poorer. The system takes advantage of their opportunism and credulity to collect money for the government and to enrich the few.

I am not sure this bubble that began six months ago is truly over. The trigger for the current selling was the tightening of lending policy. Bank lending grew marginally in July. On the ground, loan sharks are again thriving, indicating that the banks are indeed tightening. Like before, government officials will speak to boost market sentiment. They might influence government-related funds to buy. “Experts” will offer opinions to fool the people again. Their actions might revive the market temporarily next month, but the rebound won’t reclaim the high of August 4.

This bubble will truly burst in the fourth quarter when the economy shows signs of slowing again. Land prices will start to decline, which is of more concern than the collapse of the stock market, as local governments depend on land sales for revenue. The present economic “recovery” began in February as inventories were restocked and was pushed up by the spillover from the asset market revival. These two factors cannot be sustained beyond the third quarter. When the market sees the second dip looming, panic will be more intense and thorough.

The US will enter this second dip in the first quarter of next year. Its economic recovery in the second half of this year is being driven by inventory restocking and fiscal stimulus.

However, US households have lost their love for borrow-and-spend for good. American household demand won’t pick up when the temporary growth factors run out of steam. By the middle of the second quarter next year, most of the world will have entered the second dip. But, by then, financial markets will have collapsed.

China’s A-share market leads all the other markets in this cycle. Even though central banks around the world have kept interest rates low, the financial crisis has kept most banks from lending. Only Chinese banks have lent massively. That liquidity inflated the mainland stock market first, then commodity markets and property market last. Stock markets around the world are now following the A-share market down.

By next spring, another stimulus story, involving even bigger sums, will surface. “Experts” will offer opinions again on its potency. After a month or two, people will be at it again. Such market movements are bear-market bounces. Every bounce will peak lower than the previous one. The reason that such bear-market bounces repeat is the US Federal Reserve’s low interest rate.

The final crash will come when the Fed raises the interest rate to 5 per cent or more. Most think that when the Fed does this, the global economy will be strong and, hence, exports would do well and bring in money to keep up asset markets. Unfortunately, this is not how our story will end this time. The growth model of the past two decades – Americans borrow and spend; Chinese lend and export – is broken for good. Policymakers have been busy stimulating, rather than reforming, in desperate attempts to bring growth back. The massive increase in money supplies around the world will spur inflation through commodity-market speculation and inflation expectations in wage setting. We are not in the midst of a new boom. We are at the last stage of the Greenspan bubble. It ends with stagflation.

Hong Kong’s asset markets are most sensitive to the Fed’s policy due to the currency peg to the US dollar. But, in every cycle, stories abound about mysterious mainlanders arriving with bags of cash. Today, Hong Kong’s property agents are known to spirit mainland-looking men, with small leather bags tucked under their arms, to West Kowloon to view flats. Such stories in the past of mainlanders paying ridiculous prices for Hong Kong flats usually involved buyers from the northeast. In this round, Hunan people have surfaced as the highest bidders. The reason is, I think, that Hunan people sound even more mysterious. But, despite all this talk, the driving force for Hong Kong’s property market is the Fed’s interest rate policy.

Punters in Hong Kong view the short-term interest rate as the cost of capital. It is currently close to zero. When the cost of capital is zero, asset prices are infinite in theory. At least in this environment, asset prices are about story-telling. This is why, even though Hong Kong’s economy has contracted substantially, its property prices have surged. Of course, the short-term interest rate isn’t the cost of capital; the long-term interest rate is. Its absence turns Hong Kong into a futile ground for speculation, where asset prices increase more on the way up and decrease more on the way down.

When the Fed raises the interest rate, probably next year, Hong Kong’s property market will collapse. When the Fed’s policy rate reaches 5 per cent, probably in 2011, Hong Kong’s property prices will be 50 per cent lower.

Andy Xie is an independent economist

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Boom and burst
Don’t be fooled by false signs of economic recovery. It’s just the lull before the storm
Andy Xie
South China Morning Post Aug 24, 2009

http://www.scmp.com/portal/site/SCMP/menuitem.2af62ecb329d3d7733492d9253a0a0a0/?vgnextoid=e625067403743210VgnVCM100000360a0a0aRCRD&ss=China&s=News

Europe’s Week Ahead: Results from GDF Suez 8/21/2009

European markets will be focused on results from French energy giant GDF Suez and Germany’s latest economic indicators in the week ahead.

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Week Ahead in Asia: GDP data, earnings in focus 8/21/2009

Thailand and Malaysia will report second-quarter gross domestic product data next week, while their central banks are expected to keep interest rates on hold. Bank of China and China Telecom will report earnings. Polya Lesova reports.

I keep looking over the EHS data from Friday, and its clear that something isn’t right. I haven’t put my finger on it yet, but I will eventually figure it out. Tomorrow, I plan on going into greater detail.

Here is what I see this evening:

1) Seasonality effects are being ignored by everyone;

2) The Condo market seems to be growing much faster than single family homes;

3) Foreclosures are still ramping up, and have yet to peak;

4) Many people are now convinced that the worst of Housing is behind us, and that we are seeing true improvements;

5) An awful lot of government effort is going into “Saving” housing.

I believe all of these factors are significant.

I don’t believe they are reflected in the mainstream’s viewpoint about “The” Housing recovery . . .

This could potentially be amusing:

CAPITALISM: A LOVE STORY’ – In Theaters October 2nd

“It’s a crime story. But it’s also a war story about class warfare. And a vampire movie, with the upper 1 percent feeding off the rest of us. And, of course, it’s also a love story. Only it’s about an abusive relationship.

“It’s not about an individual, like Roger Smith, or a corporation, or even an issue, like health care. This is the big enchilada. This is about the thing that dominates all our lives — the economy. I made this movie as if it was going to be the last movie I was allowed to make.

“It’s a comedy.” — Michael Moore

Check back for updates at http://www.michaelmoore.com

Hat tip Paul