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

An expected positive Q3 GDP reading will technically end the recession and the rebound should continue into Q4. The question though is what the sustainability of growth will be in ’10. Consumer demand will be the key factor in how that question is answered and the labor market outlook and thus the ability of consumers in servicing their debt will be the focus. In quantifying the huge debt load that our country carries, the Fed will release today the Q2 Flow of Funds statement which is a balance sheet of our country. In Q1, household debt (home mortgages + consumer credit) as a % of disposable income was at 120%. While that is down from the record high of 127% in ’06, we are still well above the level of 89% 10 years ago. Just as a company’s growth gets weighed down by too much debt, a country can be hindered by the same and that is why the deleveraging process at the consumer level is a freight train that will not be stopped by gov’t policy.

In the timeliest snapshot of the labor market, Initial Jobless Claims are expected to total 557k, up from 550k last week which was the lowest since early Jan, not including the seasonal distortions related to the auto sector in July. Continuing Claims are expected to rise by 12k and the Emergency Unemployment Compensation component will also be a focus as people fall off out of the Continuing Claims category before they find a job. Aug Housing Starts are expected to total 598k annualized and that would be the most since Nov ’08 and 120k above the low in April. Permits are also expected to rise but the sustainability of building will in the short term solely dependent on whether the home buying tax credit is expanded or not. The Sept Philly Fed survey is expected to rise 4 points.

Look at the raw Retail sales numbers, and you might think we were in a full blown recovery. Month over month for August, it was up +2.7% versus consensus expectations of a 1.9% increase.

The source? A huge 10.6% jump in motor vehicle sales, due to the $3 billion dollar, government sponsored, cash for Cash-for-Clunkers program, as well as a slate of state sales tax holidays.

Back out autos, and sales were up 0.7% MoM — still better than consensus expectations of +0.4%. August was the best month since February 09, and ends a five-month string of flat-to-negative results.

David Rosenberg of Gluskin Sheff also notes that seasonal factors used by Commerce were  the most aggressive in five years and helped give the data bit of a boost — in fact, one-quarter of that 2.7% gain came just from the more generous-than-usual seasonal factor.

Rosie notes very specific sector winners and losers.

The sectors posting good results were …

• Clothing, which we’ve highlighted before, is on a firming trend — up 2.3% Mom and gaining in three of the past four months.
• Electronics did well too — rising 1.1% but that followed a 1.0% decline in July. No evidence of a positive pattern here.
• Food/beverage stores had their best sales month, up 0.5%, since January.
• Drug stores also had their best month since March — up 0.4% last month and up in three of the past four months.
• Sports/music/book stores had their best tally since March 2007 with a huge 2.3% run-up last month.
• One of the big upside surprises was in general merchandise (mostly department stores) which posted a 1.6% MoM surge — the best performance since March 2007 too.

The laggards in the report included….

• Restaurants — up 0.3% and this followed two months of decline. The trend in restaurant sales is clearly down.
• E-tailing was flat — web-based sales have been stagnant or down now for six of the past seven months.
• The real weak parts of the report were in the housing-related areas, even though home sales have clearly picked up off the floor.
• Furniture stores saw a 0.2% sales loss — sales have been down now for six months running.
• Building materials posted a huge 1.2% decline, the third large falloff in a row.

So far, September seems to be starting off well. Year over year trends are negative 1.9%, but the monthly changes are positive.

Its not all wine and roses, as Discount stores are the leaders, reflecting frugality on the part of value driven consumers.  Spending remains restrained in terms of discretionary purchases.

One wonders what retail sales would look like in the absence of government stimulus, tax holidays, and special bailout programs.

Barrons.com’s Bob O’Brien comments on Ben Bernanke’s speech earlier this week in which he believes the recession is over, but not without qualifications.

Good Evening: U.S. stocks rose once again on Wednesday, extending what has become a rather remarkable equity rally. Taken in context with another down day for Treasurys and the U.S. dollar (and another up day for commodities), market participants should be forgiven for feeling Yogi Berra’s sense of deja vu all over again. A slate of strong economic releases were in part behind today’s ascent in share prices, with readings for the CPI, industrial production, capacity utilization, and the housing market index all coming in at, or well ahead of, consensus expectations. A report of very weak international capital flows into the U.S. (the TIC report) was largely shrugged off. What has been harder to overlook is the continuing strength of the U.S. stock market. It has left bulls and bears alike feeling confused. Very few investors seem to be feeling smart these days.

I will dispense with the usual recap of the day’s market action, offering instead the following summary. Most of the major averages went steadily higher all day and finished with gains of between 1% and 2%, though the Dow Transports were the exception by finishing flat. Treasury yields rose to challenge their September peaks, the dollar took another header, and commodities almost outdid stocks when the CRB index posted a gain approaching 2%.

“Never confuse brains with a bull market” is one of Wall Street’s oldest pieces of advice for investors. It teaches us to not feel too smug or smart about the levitation in one’s portfolio when the major averages, too, are rising. If what has been transpiring at the corner of Wall and Broad streets since March is indeed a bull market, then the usual celebratory cockiness is missing. Of the seeming lack of joy over this latest rally, one of my readers relayed the following impression of her recent trip to New York : “Even the ones who are making money aren’t happy”, she said. And frustrating as this essentially one way trip higher in stocks has been for the bulls (the under-invested ones, anyway), it has been more painful than a declawing for the bears.

With so few people feeling smart, is there any identifiable group exchanging high fives these days? Next week’s FOMC meeting might be the site of at least a few quiet ones. When the governors gather inside the Eccles building, one or two will no doubt smile when the Lehman anniversary and the August economic data come up for discussion. Catastrophe apparently averted, the Fed will be tempted to take a few bows. After all, and at the risk of being compared to President Bush’s 2003 carrier landing beneath the “Mission Accomplished” banner, didn’t Chairman Bernanke’s “the recession is likely over” statement yesterday betray at least some sense of achievement? The mood around the conference table will turn somber, however, when the FOMC gets around to deliberating about an exit strategy. There might even be a lonely voice asking whether or not the Fed should soon start the process of draining the pool of liquidity in which the global capital markets have been swimming for most of 2009.

Student and teacher of history both, Chairman Bernanke will probably cut short any “it’s time to take away the punchbowl” discussion by citing a similar policy mistake made during the Great Depression. Mr. Bernanke might not directly quote Jim Grant’s excellent book, “Mr. Market Miscalculates — The Bubble Years and Beyond”, but it would be appropriate if he did so. “(I)n 1935, it (the Fed) was given the power to set reserve requirements. It presently doubled reserve requirements, thereby entering a strong claim of paternity for the nasty 1937-38 recession…” (Page 261). Removing the stimulus too soon and risking a relapse in the economy is one of the many lessons of the Great Depression Chairman Bernanke is likely determined not to repeat. Remember, too, that his re-nomination has yet to receive approval in the Senate.

Even so, Mr. Bernanke might allow some mild exit strategy language to be inserted into next week’s statement. Even if the risk of a future inflation is the last thing on his mind, he may still not want to risk losing the bond market just now. Thus, any talk about removing monetary stimulus will probably be just that — talk. Mr. Bernanke will see to it that money printing will be with us until the bond market grounds his fleet of helicopters. Until that day comes, stocks could continue to be kited higher on the winds of easy money. Maybe, just maybe, Mr. Market came to this conclusion when quantitative easing measures were announced by the Bernanke Fed back in March. If so, he’s probably one of the few who feels smart these days.

– Jack McHugh

U.S. Markets Wrap: Stocks, Commodities Gain on Economic Outlook
U.S. Economy: Output, Prices Point to Growth Without Inflation
Buffett Says Economy Has ‘Hit a Plateau at Bottom’
Bernanke May Accept Slow Recovery to Fight Inflation

Here’s our latest item.  The reader comment at the top is great stuff.  A fishing buddy, all I’ll say.  Best,  Chris

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Exposure at Default: As Banks Shrink, So Does the Economy
The Institutional Risk Analyst

“I was just reading your testimony on subjectivity and risk in models. I agree, though isn’t the contrast between objectivity and subjectivity more of a continuum? Think about banks. Only 100% reserves makes a bank objectively safe from runs. Once you move to fractional reserve banking you have to accept some subjectivity and make assumptions to model the right level of reserves in order to assess risk. To me, the interesting point is the trade-off between that subjectivity (systemic risk) and economic efficiency. We can’t have zero systemic risk, or perfect objectivity in models without an unacceptable loss in economic efficiency. But how much subjectivity is too much? That’s one of the big challenges for financial economics right now, and until we get some sort of answer I don’t see how we can make the right decisions in designing appropriate regulations.”

–An IRA Reader

This week in the IRA Advisory Service, we provided our institutional clients our estimate for the size of the deficit in the FDIC deposit insurance fund (“DIF”) through the current economic “cycle” and what it may imply for future bank earnings. If you have not already done so, read the Picking Nits comment posted last month by IRA CEO Dennis Santiago.

Stare at the second table in the Picking Nits post showing the assets of the various banks in the different ratings strata from A+ through F as of Q2 2009. What does the $4 trillion or so in “F” rated banks suggest about losses to the DIF? Contact us if you want information about the IRA Advisory Service.

Suffice to say that before Treasury Secretary Tim Geithner and the other G-20 finance ministers set about to raise capital levels, they need to understand that the earnings of the banking industry are going to be impaired for years as the cost of resolving failed banks is repaid. Restoring solvency is the first issue for many banks, then we can talk about increased capital and restrictions on risk taking equally. And as the banking industry shrinks defensively in order to conserve capital and fund liabilities impaired by realized losses, the credit available to the US economy also shrinks. You can’t have economic growth without credit growth.

Looking at the banking industry, it is really remarkable that Fed Chairman Ben Bernanke has decided that the recession is over – but not surprising. After the past decade or more of credit fueled exuberance, no surprise that the maddening crowd wants to go back to the way it was. Many of the bankers and Buy Side investors with whom we speak feel that the worst of the economic crisis is behind us. And we do see increase activity in the secondary markets for loans and failed properties, an encouraging sign that may – emphasis may – push down the ultimate cost of cleaning up the mess in the banking industry. There are many other indicators that suggest consumers and business are rebounding from the summer of dread.

Read the rest of this entry »

I am in the 2nd half of the interview:

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Over the past year, bankers have been blamed for much of the financial crisis. But how does it look from the perspective of those working in the banks? The BBC’s Matt Wells reports from Wall Street.

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Source:
Aftershock: how well has the financial crisis been handled?
14 september, 2009 – 13:50 GMT

http://www.bbc.co.uk/worldservice/news/2009/09/090914_lula_and_wells_wt_dm.shtml

The current recovery is just a consequence of the fact that consumption fell so dramatically in 2008 and people have to buy things they need in 2009, Rogers told “Worldwide Exchange.”

“How can the solution for debt and consumption be more debt and more consumption? How can that be the solution to our problems?,” he said.

Video: Jim Rogers, CEO of Rogers Holdings, told CNBC Monday that when Lehman Brothers failed he thought “thank goodness they’re finally letting somebody collapse.”

“I would expect there to be a currency crisis or a semi-crisis this fall or next year. It’s crony capitalism, Bernanke and Greenspan have brought crony capitalism to America … but that’s not going to solve the world’s problems,” Rogers added

CNBC.com

The Nat’l Assoc of Home Builders index was 19, in line with expectations but is up 1 point from August. It’s now at the highest level since May ’08 but is still well below the magic level of 50 which is the breakeven between those that say things are better and those that say worse. Present conditions rose two points to 19 but the Future outlook fell 1 point to 29 and maybe is a reflection of some nervousness ahead of the expiration of the home buying tax credit on Nov 30th. Prospective Buyers Traffic rose one point to 17 as the clock ticks on the tax credit if it is not renewed. All 4 regions saw gains in this category. The Nat’l Assoc of Realtors in particular is in major lobbying mode to get the tax credit extended and expanded,

http://takeaction.realtoractioncenter.com/campaign/hbtc?qp_source=dotorg&LID=RONav0021

In terms of the tax credit and its impact going forward, here is a quote from the Chairman of the NAHB who is also a home builder from Tulsa, Okla, the tax credit “window is now basically closed for being able to start a new home that can be completed in time for buyers to take advantage of the tax credit before it expires at the end of November, and builders are concerned about what will keep the market moving once the credit is gone. Congress needs to act now to keep the credit from expiring just as its intended effect on buyer demand is starting to materialize.”

Some interesting reading today:

• Martin Wolf: Don’t Learn Wrong Lessons from Lehman (Financial Times)
• Where are the subprime perp walks? (CNN/Money)
• Huzzah! Judge Rejects Settlement Over Merrill Bonuses (NYT)
• Lehman Estate Blasts Barclays ‘Windfall’ (WSJ)
• Sick and Wrong: How Washington is screwing up health care reform – and why it may take a revolt to fix it (MATT TAIBBI, Rolling Stone)  
• Extreme steel ‘Velcro’ takes a 35-tonne load (New Scientist)