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

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Part 2 is here

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Source:
Fund chairman flags up US equities
Aline van Duyn
FT, January 17 2010 19:35 | Last updated: January 17 2010 19:35

http://www.ft.com/cms/s/0/25050a40-039d-11df-a601-00144feabdc0.html

Since the lows in March 2009, the market has yet to correct 10%. In June, there was a 9% pullback, followed by a 6.5% pullback in September.

So far, we have a volatile few days, but any 5 day chart is mostly noise:
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Day to Day Action: Its Mostly Noise

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As the 12 month chart shows, the long term trend remains in effect. Watch 1114 on the SPX. Major support at 1078 — that is the level most traders will be watching.
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Trend Remains in Place

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One last thing that few people admit: These trend lines are very subjectively drawn, and you can easily alter the outcome by selectively placing lines at bottoms or tops.

Airtime: Thurs. Jan. 21 2010 | 8:49 AM ET

Reading the markets before the opening, with Art Cashin, UBS.

The Jan Philly Fed manufacturing index was 15.2, almost 3 pts below expectations and down from 22.5 in Dec. The components were mixed. New Orders fell 5 pts to 3.2 but Backlogs rose almost 2 pts to 3.6. Employment rose slightly to 6.1 from 4.5. Inventories remained negative but much less so as it rose to -1.6 from -5.7 and now is near the best level since Nov ’07 and provides more evidence that it is predominantly the inventory part of the equation that is boosting economic activity for now. Prices Paid remained elevated but fell 3.4 pts. Prices Received rose to the highest since Oct ’08 at 1.4, positive after 13 months in a row of negative readings. The 6 month outlook rose to 43.3 from 35.9 and back in line with the 6 month average. Today’s below expectations figure follows the better than estimated NY survey and shows that while things are getting better in manufacturing, the process is still bumpy.

Carmine Gallo’s new book, The Presentation Secrets of Steve Jobs, can change f0r the better the way you give presentations:

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Initial Jobless Claims totaled 482k, 42k above expectations and up from 446k last week. It’s the highest reading since mid Nov and up for a 2nd straight week BUT a Labor Dept official did say that a backlog in the processing of claims due to the Christmas and New Yrs holidays was a factor in the surge this week but it wasn’t quantified. Also, some states had to estimate claim filings due to the MLK holiday. Thus, take today’s initial claims data with a grain of salt. BUT, those collecting benefits past the 26 week (delayed by 1 week) phase rose by a huge 612k as measured by EUC and Extended Benefits data (delayed by 2 weeks) after falling 135k in the prior week. Thus, those collecting benefits still are having difficulty in finding new jobs. I’m sure seasonal factors influenced the extended claims data at yr end but the trend upward unfortunately is continuing.

Two interesting things happened last November 24. One was pretty well publicized, the other not so much:

1. We got a downward revision of U.S. GDP for the third quarter, from an “advance” 3.5% to 2.8% (it was ultimately determined to be 2.2%) — in any event, it was the first positive print we’d seen in some time.
2. The National Bureau of Economic Research’s Business Cycle Dating Committee (BCDC) — the folks who date recessions — posted, with no fanfare whatsoever, a very interesting (and undated) statement at their website (the NBER provided me with the date upon a quick inquiry).

As I read the second paragraph of their brief statement, I’m left wondering if the NBER is angling for the (very real, IMO) possibility of a double-dip — which in this case they might well consider one long recession, notwithstanding a “short period of expansion.” Read for yourself (emphasis mine):

In both recessions and expansions, brief reversals in economic activity may occur—a recession may include a short period of expansion followed by further decline; an expansion may include a short period of contraction followed by further growth. The Committee applies its judgment based on the above definitions of recessions and expansions and has no fixed rule to determine whether a contraction is only a short interruption of an expansion, or an expansion is only a short interruption of a contraction. The most recent example of such a judgment that was less than obvious was in 1980-1982, when the Committee determined that the contraction that began in 1981 was not a continuation of the one that began in 1980, but rather a separate full recession.

The note concludes:

The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP). The Committee’s use of these indicators in conjunction with the broad measures recognizes the issue of double-counting of sectors included in both those indicators and the broad measures. Still, a well-defined peak or trough in real sales or IP might help to determine the overall peak or trough dates, particularly if the economy-wide indicators are in conflict or do not have well-defined peaks or troughs.

Now, when I look at the St. Louis Fed’s “Tracking the Recession” page, I don’t see much that seems particularly “well-defined,” except for Industrial Production (IP). And many other indicators — first, second and third tier — are clearly “in conflict.” At the St. Louis Fed’s page, other than IP, I see three flatlines for Employment, Real Retail Sales and Real Income.

I’d note that the NBER does not care where growth comes from. Several weeks before their November statement, I queried some members of the BCDC as to how they would view stimulus-induced growth. This is how one replied (speaking only for himself, and including the classic economist’s “on the one hand, on the other”):

On the one hand, we feel no need to strip out the effect of government spending to see what the private sector is doing. G is just as much a part of GDP as C+I+X-M.

On the other hand, there is always the danger that the economy might dip back down again in 2010 when the fiscal stimulus fades out, in which case that would probably count as part of the same recession as 2007-09. So in that sense, yes, the expansion has to “take root” organically.

I’d also note this comment from BCDC member professor Martin Feldstein on December 17, 2009:

“The recession isn’t over,” Martin Feldstein, former president of the Cambridge, Massachusetts-based NBER and a member of its Business Cycle Dating Committee, said in an interview with Bloomberg Radio today. “2010 is going to be a very weak year,” Feldstein also said, as American consumers limit spending and home prices may resume their slide.

I’m on record as saying the BCDC will take its sweet time with this one, and their November 2009 statement, in addition to Feldstein’s, gives me no reason to change that point of view. Their announcement — or lack thereof — will likely be a factor in the November mid-term elections (one wonders if there were any political considerations associated with their post-election, December 2008 announcement of a recession having begun one year prior).

On an easy comparison, Chinese Q4 GDP rose 10.7% y/o/y, .2% higher than expected but it came with higher inflation as Dec CPI rose 1.9% y/o/y, .5% above forecasts and is the main reason why China has taken the path of trying to tame lending excesses, particularly in the property market (in another step, they sold 3 mo bills today 4 bps above last week). Retail sales in China ran above estimates but IP was a touch below. After hitting a 4 week low, the Shanghai index rose slightly but Hong Kong fell to a 3 month low. The euro is at the lowest level since July ’09 after the Jan Euro zone services and manufacturing composite index unexpectedly fell. A European newspaper said the EU may lend money to Greece instead of them relying on the IMF but that has been denied as a German official said Greece must solve its own problems and the Greek Finance Minister said they aren’t expecting the help. Greek bonds are up but stocks are at 9 month lows.

“This has been terribly mishandled. There’s this pattern that emerges that the New York Fed, for a variety of reasons including not causing nervousness about who was an AIG counterparty, covered up its rather heavy-handed approach to the bailout.”

- James D. Cox, a professor of corporate and securities law at Duke University School of Law

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The fun never stops:

“American International Group Inc. submitted four rounds of regulatory filings in six months, with more than 1,000 redactions, as the Federal Reserve Bank of New York pressed the insurer to withhold data about bailout payments to banks.

The insurer made an initial filing on Dec. 2, 2008, about Maiden Lane III, the taxpayer-funded vehicle that bought assets from AIG’s trading partners. After the Securities and Exchange Commission asked for more information, AIG amended December filings three times. The last set of amendments, in May 2009, included more than 400 redactions, and the SEC granted the company permission to withhold the omitted data until 2018.

According to e-mails released this month, AIG was asked to limit what the public knew about the Maiden Lane transactions. The payments have been called a “backdoor bailout” by lawmakers because banks, including Goldman Sachs Group Inc. and Societe Generale SA, were reimbursed at 100 cents on the dollar for mortgage-linked securities that had declined in value.”

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Source:
AIG Took Four Tries on Filing as Fed Asked to Withhold Data
Hugh Son and Michael J. Moore
Bloomberg, Jan. 21 2009   
    http://www.bloomberg.com/apps/news?pid=20601087&sid=aRexIMpLtIL4&