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

With most of the biggest companies having already reported Q3 earnings, attention shifts to a slew of important economic data over the next few weeks and also the two day FOMC meeting concluding a week from today. With the stock market getting tired (4 failed rallies in the past 5 trading days) and in correction mode, the Oct economic data coming will help to begin to clarify if the Q3 bounce is sustainable. ABC confidence fell 1 pt to -51, the lowest since July led by the Buying Climate (measures whether it’s a good time to buy things) component which fell to the lowest since Dec ’08. The MBA reported further evidence that the home buying tax credit hangover is continuing as the weekly purchase component fell for a 3rd straight week by 5.2% to the lowest since May. Refi’s fell 16.2% and is down 30% in the past two weeks. Benign, but rising, inflation data in Germany and an SAP earnings miss has the euro lower vs the US$.

Sept Durable Goods was about in line with expectations both headline and ex transports. Orders rose by 1% and were up .9% ex transports. Non Defense Capital Goods ex Aircraft were up 2% after the prior two months of declines. Orders for vehicles and parts in particular fell .1% after the two prior month gains. The core gain in orders was led by a 7.9% rise in machinery. Computers/electronic orders fell for a 2nd month. Shipments, which get directly plugged into the GDP calculation, rose .8% and are up for all of Q3, thus contributing to the Q3 GDP rebound which we will see confirmation tomorrow. Inventories fell again and the inventory to shipments ratio is down to 1.77 from 1.80 to the lowest level since Oct ’08. The moderation in the inventory decline in Q3 relative to Q2 will also provide a statistical boost to Q3 GDP. The Q3 GDP rebound is old news now and thus sustainability is the open question.

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Source:
Don’t Panic About Soaring U.S. Debt, But Do Worry, Economist Reinhart Says
Heesun Wee
Tech Ticker, Oct 26, 2009

http://finance.yahoo.com/tech-ticker/article/360429/Don’t-Panic-About-Soaring-U.S.-Debt-But-Do-Worry-Economist-Reinhart-Says

Interesting Miami Herald look at the rising trend of strategic defaults in Florida. Thanks to the eroding “social stigma of foreclosure,” such purely economic/business decisions (as opposed to moral or ethical choices) are increasing.

Some of the Herald’s Florida data points are amazing:

• Property values have plummeted by an average of 50%
• In Q4 2008, strategic defaults were 28% of defaults (Miami-Dade and Broward Counties)
• Same locations, Q4 2006: Strategic defaults were 20%;
• In September ’09, homeowners owed $62.7 billion more than their homes were worth (CoreLogic)
• Broward County 2006 purchases had a median negative equity = $75,000
• Miami-Dade 2006 purchases had a median negative equity = $63,000,
• Nationally, estimated 588,000 strategically defaulted in 2008 (Experian)
• Strategic defaulters with good credit scores (who remain current on other credit lines) can rehabilitate their FICO scores within 24 months after foreclosure.

Fascinating stuff . . .

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Source:
Homeowners walking away from underwater mortgages
MONICA HATCHER
Miami Herald, 10.24.09

http://www.miamiherald.com/251/story/1298873.html

From a major NY Trading Desk 10/27:

Central banker judgment is the ultimate regulatory loophole

Only time will tell how effective the new rules and regulations currently being implemented by policymakers in the Western world will be. I’ll throw my two cents in and say that simply letting bad businesses fail would greatly curtail the quantity of new legislation needed to create a more just, less fragile financial system. I’m arguing, implicitly, for a less activist Federal Reserve (if we insist on keeping this central banking model, although we’ll see how H.R. 1207 progresses) and a more principles-based monetary policy. Ad-hoc judgment from central bankers too often errs on the side of laxity and accommodation, their protestations to the contrary notwithstanding (and yes, even Paul Volcker was accommodative – look into his handling of the LDC debt crisis). This isn’t a criticism of any one individual, it’s an observation on human behavior.

Regulators, legislators take the spotlight
Stepping down from the soapbox, yesterday’s session was dominated by the noise out of Brussels and Washington D.C. First, as we in the U.S. were arriving to work, the European Commission ruled that Dutch financial services giant ING must sell its insurance business and its U.S. banking arm “as compensation for the state aid it has received during the financial crisis,” according to the Financial Times. The ruling will cut ING’s balance sheet nearly in half. The stock fell -18% in Amsterdam and is lower again this morning (though it appears to be rallying as I write).

Meanwhile, our own regulators, if leaks from unidentified “House aides” are to be believed, are taking a different tack. Rather than force “systemically important,” or “too big to fail (TBTF),” financial conglomerates to break themselves up immediately as the Europeans appear to be doing, our regulators would rather allow them to continue doing business until they are teetering on the edge of collapse – at which point new legislation would allow the government to seize the institution (whether it’s a bank or not), “fire directors, wipe out shareholders and force creditors to take big discounts on their debt.” That’s according to the Financial Times. The FT and the Associated Press cite “one person involved” with the new legislation (currently being crafted by House Financial Services Committee Chair Barney Frank) and “a House aide familiar with the plan,” respectively, in reporting that the banks will not have to contribute regularly to any kind of fund that would be drawn on in the event of a seizure/restructuring. Rather, the seized institution would “contribute an amount after the event.” (FT) That sounds to me like profit clawbacks. Okay, I have to step back up onto my soapbox here: doesn’t the European plan make much, much more sense? Don’t we have bankruptcy courts? I get it – they’re systemically dangerous, so you can’t risk a sloppy bankruptcy…so…break them up, maybe? (source: Bloomberg; Financial Times; Associated Press)

Financials have a tough go of it

Stepping back down from the soapbox, the specter of heavy government involvement – in whatever form it materializes – with the biggest banks sent their shares reeling (C -4.3%; BAC -5.1%; JPM -3.1%; WFC -3%). The major financial institutions with the smallest commercial banking presence – Goldman Sachs and Morgan Stanley – fell just -0.6% each. Citigroup added Bank of America to its list of top stock picks midday, an announcement that evoked equal parts skepticism and amusement amongst the folks I talk to. The announcement had a minimal – if any – impact on B of A’s shares. The regional banks were submarined by a downgrade of SunTrust Banks and negative comments on the regional banking sector (“Recognition is developing that many regional banks, SunTrust included, may not show a profit until 2011”) from Rochdale Securities’ Dick Bove. The insurers also fell sharply (most down between -3% and -6%) in sympathy with ING. (source: Bloomberg)

And, finally, the home buyer tax credit

Adding to the woes of a market already skittish over the prospect of a re-regulated financial system, a note from research firm ISI Group that cast doubt on the notion that the $8,000 tax credit for first time home buyers would be extended (in some form) pulled the market off of its morning highs (+1.1% for the S&P 500) and by noon the market was lower by over -1%. Reassuring comments on the matter from Florida Senator Bill Nelson (he told reporters that the program would likely be extended later this week) failed to reverse the decline. Further gains from Amazon.com (+5.2%) and Microsoft (+2.4%) after their stellar earnings reports last week cushioned the blow for the Nasdaq, but all in all it was a very disappointing – and bizarre – session. (source: Bloomberg)

Sept Durable Goods was about in line with expectations both headline and ex transports. Orders rose by 1% and were up .9% ex transports. Non Defense Capital Goods ex Aircraft were up 2% after the prior two months of declines. Orders for vehicles and parts in particular fell .1% after the two prior month gains. The core gain in orders was led by a 7.9% rise in machinery. Computers/electronic orders fell for a 2nd month. Shipments, which get directly plugged into the GDP calculation, rose .8% and are up for all of Q3, thus contributing to the Q3 GDP rebound which we will see confirmation tomorrow. Inventories fell again and the inventory to shipments ratio is down to 1.77 from 1.80 to the lowest level since Oct ’08. The moderation in the inventory decline in Q3 relative to Q2 will also provide a statistical boost to Q3 GDP. The Q3 GDP rebound is old news now and thus sustainability is the open question.

VERY DISAPPOINTING THAT BLOOMBERG STOPPED EMBEDDABLE VIDEO AT YOUTUBE.

I WILL MOSTLY AVOID NONEMBEDS IN THE FUTURE . . .

Robert Shiller, an economics professor at Yale University and co-creator of the S&P/Shiller home-price index, talks with Bloomberg’s Carol Massar about the U.S. housing market. The S&P/Case-Shiller home-price index climbed 1 percent from the prior month, seasonally adjusted, after a 1.2 percent increase in July, the group said today in New York. From a year earlier, the gauge fell 11.3 percent, less than forecast.

click for video

Oct. 27 (Bloomberg)

With Halloween upon us, we are about to enter the prime US Holiday shopping season. So far, advertising has been subdued. Even without big inventory, we are likely to see significant discounting in the coming months, with sales and promotions dominating.

The bottom line: It is a buyers market.

This time of year, we also will see lots and lots of surveys. On the whole, these tend to be mostly meaningless, if not horrifically wrong. We have seen surveys forecasting 22% holiday sales gains, only to see low single digit improvements. The Media dutifully report these false forecasts, despite the fact that Humans are terrible at forecasting their own behavior. What you primates say versus what you actually do are quite frequently two different things.

Deloitte Consulting did a rather extensive survey of 10,878 consumers from Sept. 24 to Oct. 2 — much broader than the typical surveys we see.

“U.S. shoppers will buy fewer gifts and spend more on items such as clothes, entertaining and home furnishings during the holiday season, according to consulting firm Deloitte LLP.

Fifty-one percent of consumers polled said they hope to spend at least as much as last year during the holiday season, according to a survey to be released today. Fewer presents will be purchased, the study showed. Shoppers plan to cut spending on gifts to $452 from $532 last year and $569 in 2007.

Consumers who have deferred spending on home goods and clothing for themselves will come out to seek bargains, said Stacy Janiak, vice chairman and head of U.S. retail at New York- based Deloitte.”

The most interesting aspect of the survey response to me is the plan to spend more on home goods — perhaps this reflects an acceptance of the changing lack of mobility in residences.  Many underwater or constrained homeowners are realizing they are going to be  stuck where they are for some time to come. Hey, might as well make the best of it.

I am less inclined to agree with Marshal Cohen, chief industry analyst for NPD Group, who claims consumers are suffering from “frugal fatigue.” After a 50 year credit binge, a season or two of modest spending is hardly exhausting.

The bigger issue is if they are suffering from a surplus of debt and a dearth of credit. Perhaps a better phrase than “frugal fatigue” might be “lack of cash/credit syndrome.”

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Holiday shopping seasons from 1993 to 2008

Data courtesy of Deloitte Consulting

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Sources:
Holiday Cheer Makes a Comeback
Consumers are warming up to spending, although gift giving is expected to decline
Deloitte, October 28, 2009

http://bit.ly/bwr2b

Holiday Sales: Historical Data

http://bit.ly/1Dzzg5

Shoppers Plan to Buy Fewer Gifts, Spend on Home
Lauren Coleman-Lochner
Bloomberg, October 28, 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=an3zomxVQe.M

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Previously:
Holiday Sales Numbers Don’t Add Up (December 1st, 2005)

http://www.ritholtz.com/blog/2005/12/wsj-holiday-sales-numbers-dont-add-up/

More Bad Data from the NRF? (November 2006)

http://www.ritholtz.com/blog/2006/11/more-bad-data-from-the-nrf/

Repeat After Me: Spending Surveys Are Meaningless (October 2007)

http://www.ritholtz.com/blog/2007/10/repeat-after-me-spending-surveys-are-meaningless/

How Good Were Holiday Sales Really? (January 2008)

http://www.ritholtz.com/blog/2008/01/how-good-were-holiday-sales-really/

Spinning Black Friday Retail Sales (December 1st, 2008)

http://www.ritholtz.com/blog/2008/12/spinning-black-friday-retail-sales/

Interesting event tonight at the NY Historical Society:

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The Future of the Stock Market and the World Economy
Wednesday, October 28

The potential meltdown of the global financial system is like nothing we’ve seen for 80 years. Is long-term investing possible any more? How long until the economy starts growing again? Will inflation pick up? If so, what’s the best protection? A diverse group of leading industry figures will help us figure it out.

MODERATOR: Byron R. Wien, vice chairman of Blackstone Advisory Services.

PANELISTS:
• Famed short-seller James Chanos, founder & president of Kynikos Associates.
• Leon Cooperman, chairman & CEO of Omega Advisors.
• James Grant, founder of The Interest-Rate Observer and originator of Barron’s “Current Yield” column.
• Lewis Sanders, retired chairman & CEO-AllianceBernstein L.P.

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UPDATE: It appears to be sold out .  . .

Nice interactive chart in the NYT, in an article that is surprisingly realistic:

“Even as new figures show house prices have risen for three consecutive months, concerns are growing that the real estate market will be severely tested this winter.

Artificially low interest rates and a government tax credit are luring buyers, but both those inducements are scheduled to end. Defaults and distress sales are rising in the middle and upper price ranges. And millions of people have lost so much equity that they are locked into their homes for years, a modern variation of the Victorian debtor’s prison that is freezing a large swath of the market.”

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Home Prices in Selected Cities, Through August 2009
click for graphic

via NYT

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Source
Fears of a New Chill in Home Sales
DAVID STREITFELD
NYT, October 27, 2009

http://www.nytimes.com/2009/10/28/business/economy/28home.html