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

The Bureau of Economic Analysis released its first revision (the “preliminary” report) of Q2 GDP.

Consensus is that the original print (“advance” report) of minus 1% will be revised downwards to -1.5% quarter/quarter, as we get updates on Personal consumption, gross private investment, government consumption, and the difference between exports and imports, mostly to the downside. (The green shoots crowd is looking for a greater than expected inventory reduction)

I am looking for a revised -2%.

I will update this when GDP hits. Updated:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 1.0 percent in the second quarter of 2009, (that is, from the first quarter to the second quarter), according to the “second” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 6.4 percent.

The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the decrease in real GDP was also 1.0 percent.

The decrease in real GDP in the second quarter primarily reflected negative contributions from private inventory investment, nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, and exports that were partly offset by positive contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.”

Similar to parents who realize after a period of no adult supervision, someone has to watch the kids to make sure they don’t get into too much trouble, after their stock market close yesterday China’s State Council said they want the steel, cement, coal, glass and power industries to reverse the excess capacity that has built up. China bank loans in the first half of ’09 exceeded all of ’08 as their stimulus plan was massive and up to now effective in maintaining growth. But, the content of the growth was predominantly in fixed asset investment and channeled thru state enterprises and China has been slowly moderating the strength of the stimulus to prevent a nasty hangover. In response, Asia markets traded lower and Europe shrugged off good economic data and did too. German consumer confidence rose to the highest since June ’08, Italian confidence rose to the most since Mar ’07, and a UK home price index was also much improved.

The FDIC is estimated it will need $70 billion to cover bank failures through 2013 — about 5X recent cash holdings of $13 billion. Through March 2009, the FDIC recorded over $19 billion in losses. The most recent failure is Texas Guaranty Bank, at a cost to the agency’s insurance fund of $3 billion dollars.

The FDIC is one of those rare regulatory agencies that operates, for the vast majority of the time, without taxpayer funding. Bank fees pay for the insurance of the Federal Deposit guarantees.

Given the enormous increase in bank failures — some estimates are for more than 300 this year — we will very likely see some taxpayer support of the deposit insurer.

This was all but inevitable:

“The coffers of the Federal Deposit Insurance Corp. have been so depleted by the epidemic of collapsing financial institutions that analysts warn it could sink into the red by the end of this year.

That has happened only once before — during the savings-and-loan crisis of the early 1990s, when the FDIC was forced to borrow $15 billion from the Treasury and repay it later with interest. The government agency that guarantees depositors against the loss of their money in a bank failure may need its own lifeline.

The FDIC on Thursday will disclose how much is left in its insurance fund, and update the number of banks on its list of troubled institutions. That number shot up to 305 in the first quarter — the highest since 1994 and up from 252 late last year. FDIC Chairman Sheila Bair may also use the quarterly briefing to discuss how the agency plans to shore up its accounts.”

This was in no small part behind the FDIC decision to make it easier for private equity to acquire failed banks at distressed prices.  There are that many fewer large banks who are potential buyers. Hence, the new rules allow private equity buyers to maintain a failed bank’s reserves “at levels equal to 10 percent of its assets.” Prior rules set a higher requirement, and mandated new owners maintaining a bank’s minimum capital levels for three years.

The theory is that softening these requirements will attract the attention of more potential buyers, bringing in fresh capital to the FDIC.

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Previously:
How Over-Extended is FDIC Insurance ? (April 6th, 2009)

http://www.ritholtz.com/blog/2009/04/how-over-extended-is-fdic-insurance/

Source:
Hammered by bank failures, FDIC may need to draw cash from banks or government STEVENSON JACOBS
AP Business, August 26, 2009 | 9:48 p.m

http://www.latimes.com/business/nationworld/wire/sns-ap-us-fdic-shrinking-fund,0,1644675.story

Good Evening: U.S. stocks went virtually nowhere today, allowing both the bears and the bulls to claim victory. Those predicting an imminent decline in U.S. share prices took note that a slight majority of stocks went down on a day when the economic data came in stronger than expected. For their part, those forecasting a continuation of the rally since March can rightly say that the major averages have held in well and refuse to sell off in spite of a laundry list of worries. Perhaps we are all straining our eyes too much in looking for directional clues. To me it seems as if everyone wants to chase what’s “working now” in favor of what is well priced to work in the future.

Stock index futures weren’t doing much prior to this morning’s data releases, and market participants were nonplussed by both a rise in mortgage applications and a surge in durable goods orders (see below). This usually volatile statistic jumped 4.9% in July, thanks mostly to orders in the transportation sector (think: cash for clunkers). The 0.8% rise in the ex-transportation component actually just fell shy of consensus estimates of 0.9%, so there wasn’t much news in this release.

Equities opened 0.5% this morning before swinging higher by the same amount after new home sales figures were announced. Market participants double-checked their screens when they saw sales rise almost 10%. Double digit sales gains and housing have not shared the same sentence for many moons, but percentages can play tricks on the mind when the base is low enough. Plus, new home sales are but 15% of total sales (existing home sales account for the other 85%). It was thus easy to understand why the averages rolled over and went back below unchanged in the wake of this report.

The trading was then very dull for the rest of the day. The averages bobbed over and under the unchanged mark all the way into the bell. By day’s end, only the Dow Transports (-1.3%) were more than a fraction away from Tuesday’s closing levels. Treasurys, too, saw a pretty slow session. A 5 year note auction was fairly well received, and it helped support bond prices after an early decline. Yields finished 1 to 3 bps lower. The U.S. dollar index (+0.4%) caught a minor bid, while commodities went the other way by a similar amount. A 1% retreat in crude oil and other energy products paced the CRB index to a loss of 0.5%.

It’s been 3 years since traders, salespeople, and investors have been able to take a vacation in August without too much angst about the next twitch in stock prices. I guess we’re all a bit out of practice when it comes to relaxing during the two weeks preceding Labor Day, and it shows. You can’t open up a newspaper, go to a financial website, or turn on Bubblevision (a term for CNBC that Bill Fleckenstein coined more than a decade ago) without being assaulted by the latest speculative opinion about which direction the stock market is headed during the next 5 minutes — give or take a commercial break.

The bull/bear debate I described in the opening paragraph is symptomatic of our instant gratification, gotta-know-now society. Like waiting for the latest polls during election season, equity investors have fallen prey to waiting for the latest bit of information to seize upon before deciding what to do next. And earnings season has almost become a joke, since the only thing that seems to matter is whether or not a company “beat the Street” last quarter. Investors only want to see a win, and they don’t seem to care what has actually been “won” or how victory has been achieved.

Take Williams-Sonoma — please! Down on this struggling, mid to high-end retailer going into today’s earnings report, analysts were expecting the company to lose 9 cents a share (see below). When the company revealed that it actually MADE 5 cents, the buy orders flew in well ahead of the serious questions about how WSM did it (the stock rose 11.25% to finish the day at $15.47 — I have never owned or shorted a single share). The company turned punk revenues into a profit by closing stores, slashing their advertising budget, and delaying planned capital expenditures — hardly the strategy one hopes to see in a growth stock. But is WSM a value stock at these levels? Let’s say the company’s thriftiness persists and it continues to earn a nickel every quarter. Let’s also be generous and say the company triples this amount during the quarter encompassing the holiday season. After a year, WSM would post a profit of .30 versus a stock price north of $15 per share. Paying 50 times earnings for a company that is trying to shrink its way to prosperity is hardly the stuff that would make Ben Graham or Warren Buffett reach for a buy ticket. True, “normalized” earnings might well be more than $1.00 per share, but this is the “new normal” for consumers, not the old normal.

I hope more people get to experience the strange feeling I had today when I tried to establish a small long position in a tiny company that I think has a strong balance sheet and a bright future. The Charles Schwab order system wouldn’t allow me to place the order, however, offering me a phone number to call instead. When I actually reached a live person, I soon discovered the problem. I couldn’t buy the name because Schwab doesn’t log a stock into its database until someone wants to buy (or sell) it. That’s right; I’m the first investor in Schwab history to try to buy shares in this thinly traded name. “Wow”, said the order taker on the other end of the line, “I’ve never seen this happen before. And you know what? There’s no listing of any analyst coverage, either!” I may or may not make a dime owning this company, but it sure felt nice to be far away from the pulsating throng that felt the need to compete over shares of Williams-Sonoma today

What’s been lost in the modern approach to investing is a true sense of value. It’s been replaced by a deification of momentum. Thus conditioned, the investor class is starting to become a herd of momentum seekers, chasing the latest information or movements in price. Judging from the email traffic I’ve received from readers, even smart people are trying to game what the less cranially endowed crowd is doing so they can try to profit from zigging after the next zag. No matter where the market goes in the next month or two, let us hope all the short term focus, this zany worshipping of momentum, starts to fade in favor of a return to the basic principles of value. If chasing momentum was such a fruitful endeavor, then why do we laugh at dogs that chase their tails?

– Jack McHugh

Most U.S. Stocks Drop After Report on Orders for Durable Goods
U.S. Economy: July Home Sales and Goods Orders Jump
Williams-Sonoma Rises After Profit Beats Estimates

“Toto, I’ve a feeling we’re not in Kansas anymore.” The USA, the bastion of global capitalism, entrepreneurship, with the goal of achieving the American dream is now home to people who would rather work for the government. According to Rasmussen Reports, a government job remains “the top employment choice in today’s economic environment.” While below the level of 37% in Jan, “29% of adults believe it is better to work for the government than to work for themselves or for a private co.” There is some hope though as 24% think it’s better to work for themselves in the current economy, up 7 pts from the Jan survey and “Americans believe, by a 9-1 margin, that the creation of a new job in the private sector is better for the economy than the creation of a new government job.” “Worker confidence” in the jobs market is the likely reason for the desire for government work as it fell in July to its lowest level in over a year.

July New Home Sales, about 15% of the market, totaled 433k annualized, 43k above estimates and up from a revised 395k in June. It is now at the highest level since Sept ’08. Months supply fell to 7.5 from 8.5 and to the lowest level since April ’07 and is an obvious big improvement as its now well off its high of 12.4 in January and close to its 30 year average of 6.1. The gains were seen in the Northeast, South and the West. The Midwest saw a drop. The absolute number of homes for sale fell to 271k, down 9k from the prior month and is now the smallest amount since April ’93. The median price fell 11.5% y/o/y and down a touch m/o/m. According to Bankrate.com, the average 30 yr mortgage rate was 5.37% in July, down from 5.48% in June. The $8,000 tax credit for 1st time home buyers continues to help and we’ll see if it continues past the Nov 30th deadline. Today’s # also squares with the cautious optimism given from some homebuilder CEO’s.

Recently, I had a chat with some people about Twitter.

I occasionally use it. I appreciate the instantaneous communication of micro bursts of info, but cannot help but wonder if its part of a culture of dumbing everything down. All nuance, all subtlety, all fine lines of discussion get lost in 140 characters.

Like the people who read newspaper headline but not the articles, I wonder if this is a form of Orwellian Newspeak.  War is Peace, and apparently, Less is More.

Perhaps this is just the first step. The text based Twitter will be replaced with an audio based “Grunter.”  Rather than spend a full 140 characters, you have your choice of 10 gutteral grunts registering surprise,  anger, sadness, joy, etc.

Then we can move to the next phase: Grimacer. Just pictures depicting how you feel.

You read it here first . . .

A quick tenner:

• Kass: Market Has Likely Topped (TheStreet.com) Investors today face the polar opposite of conditions that existed only a few months ago, with economic optimism, improving valuations and positive sentiment. Doug Kass believes the U.S. stock market has peaked for the year. To most investors, today the fear of being in has now been eclipsed by the fear of being out as the animal spirits are in full force. Bears are now scarce to nonexistent in the face of steady price gains in equity and credit prices.

• Do you suffer from GSR aka Goldman Sachs Rage? (Time)

• More Roubini Backlash: Waiting for Economy Roubini Can Believe In Means Missing Rally of Century (Bloomberg) Anyone attempting to apply Roubini’s wisdom to stocks may be forgiven for missing the biggest rally since the 1930s as the Standard & Poor’s 500 Index climbed 52 percent in six months. While Roubini said in March the advance was a “dead-cat bounce,” that it may “fizzle” in May and warned in July that the economy’s “not out of the woods,” the MSCI World Index was posting a 58 percent gain, the largest since it began in 1970.

• Wall Street Fox Beds Down in Taxpayer Henhouse (Bloomberg)

• Decade of Debt: $9 Trillion (WSJ) Plunging tax receipts, soaring spending and a sluggish recovery will push the nation’s deficits dramatically higher over the next decade, creating new complications for President Barack Obama’s domestic agenda. The deteriorating budget picture, detailed Tuesday in separate White House and congressional reports, comes just as Democrats and Republicans prepare to resume the battle over Democratic plans to spend $1 trillion overhauling the nation’s health-care system.  See also Your Federal Budget, in Pictures (Economix)

• One Citi employee is entitled to a $100 million bonus. Should the company stiff him? (Slate)

• Beijing loves IKEA — but not for shopping (LA Times) “We just came here for fun. I suppose we could have gone somewhere else, but it wouldn’t have been a complete experience.”

• 5 Myths About Health Care Around the World (Washington Post)

• Comedy Central Tries to Gauge Passion of Its Viewers (NYT) DO your friends who watch Jon Stewart and Stephen Colbert, the late-night hosts on the Comedy Central cable channel, stop you on the latte line the next morning or e-mail, text or tweet you to quote lines from those shows? And when they do, do you think that they’re kind of cool? Comedy Central has research that says you do — or at least some committed fans of those shows are convinced that you do. A little over 20 percent of hard-core fans of Mr. Stewart and Mr. Colbert said in a “multi-engagement study” conducted by Harris Interactive Research that “people think I’m cool because I watch” those two programs.

• Very funny: Joe Cocker Subtitled

Anything else intriguing?

Excerpt:

Both the Dow and S&P hit their highest levels of 2009 intraday Tuesday, and all seems well for the bulls. But Howard Lindzon of Knight’s Bridge Capital isn’t among them and candidly admits to being “clueless” about the rally at this point.

One reason is the big volume in shares of “bankrupt” companies such as Citigroup, Fannie Mae, Freddie Mac, Sirius XM Radio and AIG, which don’t seem to be moving on any fundamental growth, says Lindzon, who is also co-founder of Stocktwits. There are “just no underpinnings of real growth,” he says. “The markets seem broken.”

How about blaming the alleged “vampire squid” known as Goldman Sachs? From “trading huddles” to high-frequency trading, Goldman has been taking an image-beating as of late. Lindzon argues we should be focusing on our policymakers — not guys at Goldman, who are doing what bankers should do — making money. In fact, everyone had the opportunity to buy at the bottom of the market — not just the Goldman gang.

So what’s Lindzon trading now? He’s “mainly watching” but short Capital One and Best Buy and long a few Chinese stocks, oil, Netease.com and US Natural Gas ETF.

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How does the web see you?

That is the question that MIT Media wanted to depict visually by “creating a data portrait of one’s aggregated online identity.”

Enter your name, and Personas scours the web for information and attempts to characterize the person – to fit them to a predetermined set of categories that an algorithmic process created from a massive corpus of data. The computational process is visualized with each stage of the analysis, finally resulting in the presentation of a seemingly authoritative personal profile.

In a world where fortunes are sought through data-mining vast information repositories, the computer is our indispensable but far from infallible assistant. Personas demonstrates the computer’s uncanny insights and its inadvertent errors, such as the mischaracterizations caused by the inability to separate data from multiple owners of the same name. It is meant for the viewer to reflect on our current and future world, where digital histories are as important if not more important than oral histories, and computational methods of condensing our digital traces are opaque and socially ignorant.”

Kinda neat, though I am not sure what the portrait (above) actually means.

See also
Persona

http://personas.media.mit.edu

Connections Exhibit

http://web.mit.edu/museum/exhibitions/connections/

MIT Video

http://smg.media.mit.edu/Projects/Metropathologies/metro_finalcut2_web.mov

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Hat tip Flowing Data