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

AIG shares soared over 21% on volume of nearly 132 million shares Thursday after new CEO Robert Benmosche halted the auction of the firm’s investment advisory unit and made some very aggressive statements in an interview on Bloomberg TV.

“We believe we will be able to pay back the government and we hope we will be able to do something for our shareholders as well,” Benmosche told Bloomberg TV in an interview from Croatia, where he owns a vacation home.

The Statistical Recovery, Part Three
Capacity Utilization Set to Rise
A Real Estate Green Shoot?
The Deleveraging Society
Some Thoughts on Secular Bear Markets
Weddings and Ten Years of Thoughts From the Frontline

This week we further explore why this recovery will be a Statistical Recovery, or one that, as someone said, is a recovery only a statistician could love. We look at capacity utilization, more on housing, some thoughts on debt and deflation, and some intriguing charts on volatility in the last secular bear-market cycle. This letter will print a little longer, but there are lots of charts. I have written this during the week, and I finish it here in Tulsa, where Amanda gets married tomorrow. (There is no deflation in weddings costs!)

Thanks to so many of you for your enthusiastic feedback about my latest Accredited Investor Newsletter, in which I undertook to examine the impact of last year’s dramatic increase in volatility on the performance of hedge funds and to ascertain those elements that led to success in the industry, such as select Global Macro and Managed Futures strategies, as well as the challenges. If you are an accredited investor (basically anywhere in the world, as I have partners in Europe, Canada, Africa, and Latin America) and haven’t yet read my analysis, I invite you to sign up here: www.accreditedinvestor.ws

For those of you who seek to take advantage of these themes and the developments I write about each week, let me again mention my good friend Jon Sundt at Altegris Investments, who is my US partner. Jon and his team have recently added some of the more successful names in the industry to their dedicated platform of alternative investments, including commodity pools, hedge funds, and managed futures accounts. Certain products that Altegris makes available on its platform access award-winning managers, and are designed to facilitate access for qualified and suitable readers at sometimes lower investment minimums than is normally required (though the net-worth requirements are still the same).

If you haven’t spoken with them in a while, it’s worth checking out their new lineup of world-class managers. Jon also tells me they just added yet more brilliant minds to their research team, making it, in my opinion, one of the foremost teams in the industry, focused solely on alternative investments. I invite you to have a conversation with one of their professional and seasoned advisors. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.) Now, let’s jump into the Statistical Recovery.

Capacity Utilization Set to Rise

Capacity utilization is a concept in economics that refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between actual output that is produced with the installed equipment and the potential output that could be produced with it, if capacity was fully used.

The chart below shows that capacity utilization in the US is at an all-time low, around 68%. That means that with the equipment we already have in place we could produce almost 50% more goods than we are now producing. However, most analysts think that 80% capacity utilization is a very good number.

If you look very closely at the bottom right-hand detail, you can see that there is a small uptick in last month’s data. Whether or not this is the “bottom” remains to be seen. But if it is not the bottom, it is close. You can only shut down so much production before inventories fall to levels that require restocking. And we are getting close to that level in many industries.

Before we wander too far away from the graph, I want you to notice that past dips (circa the recessions of 1968, ’74, and ’80-’82) had V-shaped recoveries in capacity utilization. But in the 1990-91 recession it took longer than it did in past recessions, and in the most recent recession (2000-02) the recovery took longer and we did not actually “recover” for four years.

Read the rest of this entry »

Congrats to Doug Short for being cited in today’ Barron’s. Mike Santoli mentions his 4 Bad Bears Market as an contrary indicator of trader sentiment.

He writes:

“Perhaps the time to become seriously concerned won’t arrive until professional traders and snack-table laptop investors quit passing around this latest version of the “Four Bad Bear Markets” chart (http://dshort.com/charts/bears/road-to-recovery-large.gif) so energetically.

It shows this rally to have about equaled the duration and magnitude of the doomed rebound off the 1929 lows, and to have outpaced the other post-bear recoveries of the past century. It argues, perhaps, for a true retrenchment or stall soon.”

There is a small URL error that needs to be addressed; this mistake suggests the basic premise of Mike’s argument is incorrect.

Unfortunately, the crack tech staff at Barron’s linked not to 4 Bad Bears Market but instead, pointed to the more recent D-Short chart, titled,”The Road to Recovery.” This chart looks not at the possible amount markets can fall, but rather, how much further the rally can run. It compares 3 prior bottoms with the current one. (Charts below)

From a contrary perspective, it argues for the exact opposite conclusion than the Four Bad Bears chart that I suspect Mike was referencing. Freudian slip or simple URL error, it shows the challenge of relying on blog posting for contrary sentiment.  You have to keep up not only with what is posted, but what is au courant at the moment. As we all know, that changes second to second.

I wonder: Does this change Mike’s view of the contrary factors?

UPDATE: August 22, 2009 11:58am

Mike Santoli replies:

I shouldve been clearer in my reference to the Short chart. I did intend to link to the recovery chart, so there isn’t a URL error. And it doesn’t change my thought on this chart’s popularity. Seems to me it’s being sent around mostly by folks who want to show that this rally at this stage is way ahead of all other “real” market recoveries and is most like ’29-30, thus we can’t plausibly expect it to deliver more upside soon and the market probably needs to correct hard.

I don’t view this as any raging contra signal, just another indication that sentiment remains more cautious than one might expect after a 50% ramp.

Thanks-
Mjs

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Is this a contrary indicator?

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Or is this newer chart the one that we should be focusing on ?

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Source:
Gummy Bears
MICHAEL SANTOLI
Barron’s AUGUST 24, 2009

http://online.barrons.com/article/SB125089395111750479.html

At the end of the interview, Jim raised some eyebrows by suggesting Bernanke would not be reappointed (see the last 30 seconds).

This is not new. He argued this exact point last month: His view is a bit different. Greenspan made himself irreplaceable and no president would dare replace him.

Bernanke, while competent, has not achieved this status. So, Obama has the opportunity to appoint someone else if he so chooses. We believe he is seriously considering that possibility, which is why we would put the odds of his appointment at even money. Note that the Intrade market (in the tables to the right) puts the odds of a Bernanke reappointment at 77% to 79%.

July Existing Home Sales, 85% of the housing market and a measure of actual closings, totaled 5.24mm annualized, 240k more than expected and the highest since Aug ’07. The inventory to sales ratio though remained unchanged at 9.4 months because the improvement in single family homes to 8.6 from 8.9 was offset by a spike in condos/co-ops to 15.1 from 13.1. The total number of homes rose to the highest level since Nov ’08 too. The average 30 year mortgage rate in July was 5.37% according to bankrate.com, down from 5.48% in June. The NAR said 30% of homes bought were first time buyers, many of which took advantage of the $8000 tax credit which expires on Nov 30th. Distressed home sales totaled 31%, about in line with the June tally. Prices were down 15.1% y/o/y and both single family and condos/co-ops saw a drop sequentially. Sales rose in every region except the West m/o/m. Bottom line, there is no question that the housing market is showing continued signs of bottoming but this is the busy season and the $8000 credit has been a big help to the lower end of the housing market. The question now, based on the Q2 delinquency data yesterday, is what happens to the prime area of the market looking out over the next few quarters.

Hitler becomes some what annoyed when he is informed that he has missed the Bull market.

Some afternoon reading for your pleasure weekend:

• Corporate bond defaults hit record (FT) The number of companies defaulting on their debts has risen to record levels this year, according to Standard & Poor’s, while investment returns for risky corporate debt have skyrocketed since January. S&P said 201 borrowers with $453.1bn in debt have defaulted this year, exceeding the 126 defaults for all of 2008, which comprised debt worth $433bn

• The Zero Hedge backlash begins: BLOGGER MAY HAVE A PAST My assumption was that everyone had a past — and a present and future too, but my bias is due to my existence in 4 dimensions.

• Rise of the Super-Rich Hits a Sobering Wall: (NYT) The rich have been getting richer for so long that the trend has come to seem almost permanent. They began to pull away from everyone else in the 1970s. By 2006, income was more concentrated at the top than it had been since the late 1920s. But economists say — and data is beginning to show — that a significant change may in fact be under way. The rich, as a group, are no longer getting richer.

• Back-to-school looks weak for apparel retailers (Reuters)

• Big banks still hold FDIC captive Sheila Bair has moved with impressive alacrity to shutter failed small and medium-sized banks. But she is still held hostage by the too-big-to-fail four.   (Rolfe Winkler)

• Bankers Craving Bonuses Fudge Loan-Loss Reality (Bloomberg)   Bankers apply a light touch to loan-loss reserves, allowing them to reap profits — and bonuses — even though a day of reckoning may result. This means that the collapsed banks hadn’t created adequate reserves for possible losses, leading their loans to be wildly overvalued. The Federal Deposit Insurance Corp. is left to clean up the mess.

• In New Phase of Crisis, Securities Sink Banks (WSJ)   U.S. banks have been dying at the fastest rate since 1992, mainly because of bad loans they made. Now the banking crisis is entering a new stage, as lenders succumb to large amounts of toxic loans and securities they bought from other banks.

• AAR Rail Time Indicators Association of American Railroads, combines rail traffic data with more than 15 key economic indicators (such as consumer confidence, housing starts, and industrial production) in a non-technical snapshot of the U.S. economy.

• The 50 Funniest Internet Infographics Warning: Giant time suck

• Since the summer is coming to an end, The Science of BBQing

Anything else clickworthy? Use comments.

Enjoy your weekend!

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

Airtime: Fri. Aug. 21 2009 | :50:0 09 ET

A few additional thoughts on Housing:

1) The hottest markets are where foreclosures have driven prices down 50% or greater;

2) Inventory remains significantly elevated — its closer to 10 months than historic averages of 5-6 months;

3) Mortgage rates are at unusually low levels — despite this, sales remain generally soft;

4) Prices remain elevated by historic norms;

5) Big increase on the low end — Starter homes and Condos — are moving units; The middle and larger (jumbo mortgages) are a vast wasteland; But for the 16k increase in condo sales in the NorthEast, monthly sales would have been negative;

6) Indeed, on a NON-seasonally adjusted basis, [but for that 16k condo bump] National existing home sales were up a mere 12k units year over year.

7) Lots of “shadow” inventory is waiting to come on the market once prices improve; These were specs, vacation property, etc that got caught when the market collapsed — they are renting them out or they are vacant.

Finally, have this last look at the details of sales and inventory over the past 13 months:

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Existing Homes Sales: Sales, Inventory, and Months Supply

Today’s chart illustrates how the recent plunge in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line).

The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s). As a result of the recent plunge in earnings and recent stock market rally, the PE ratio spiked and just peaked at 144 – a record high. Currently, with 97% of US corporations having reported for Q2 2009, the PE ratio now stands at a lofty 129.

Source: Chart of the Day