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

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The Financial Crisis Inquiry Commission was created by the President on May 20, 2009 (via the Fraud Enforcement and Recovery Act of 2009).

The 10 member, bi-partisan Commission was established to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.”

This week hearings began. You can see PDFs of all of the witnesses written statements here.

Enjoy your weekend reading!

David A. Rosenberg is Chief Economist & Strategist at Gluskin Sheff,where he focused on providing a top-down perspective to the Firm’s investment process. Prior to joining Gluskin Sheff, David was Chief North American Economist at Bank of America-Merrill Lynch in New York. Mr. Rosenberg has ranked first in economics in the Brendan Wood International Survey for Canada for the past seven years and was on the U.S. Institutional Investor All American All Star Team for the last four years.

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U.S. retail sales came in weaker for December, at -0.3% MoM versus the +0.5% consensus estimate; excluding autos and gas, retail sales came in at -0.2% instead of +0.3%, as was widely expected; so across the board, a very soft print. Cushioning the blow was the upward revision to November, to +1.8% MoM on the headline from +1.3%; and +1.0% on the ex-autos/gas segment from +0.6% initially.

The problem with having a weak December retail sales figure is that the consumer spending momentum heading into the current quarter is nearly zero

The timing this year of American Thanksgiving and the difference in the number of holiday shopping days may have skewed the seasonal adjustment figures, so it’s probably best to take an average of the two months. Doing that shows average gains of 0.7% on the headline and an uninspiring +0.3% in the ex-auto/gas, though certainly better than a year ago and above expectations heading into the holiday season.

Even so, the problem with having a weaker December number is that the consumer spending momentum heading into the first quarter is pretty well non-existent (a zero build-in on the parts of the retail sales report that feeds into the consumer spending segment of GDP). Businesses will see what is happening to final demand and likely keep the “inventory build” story as a 2009 Q4 adjustment as opposed to a new cycle. Real GDP growth is likely to come in between 4.0-5.0% for Q4 and almost collapse towards 1.0% in Q1 (current quarter) and the surprise would be a Q2 relapse. Tough to handicap, but the expected second half slowdown (in some circles) may be sharper and earlier than many believe.

Taking November and December together, headline sales were up 3.9% YoY but the ex-auto/gas sector was a more tepid +1.6% — this is better than the -2.4% posting at the end of 2008, but outside of that post-Lehman collapse this was still the weakest holiday trend on record (data back to 1972 and that covers six recessions!). What is normal is +6.0% YoY ex-auto/sales growth come November-December; this year it was one-quarter of that and even lower than the 2001 period in the aftermath of 9/11. This is what likely prompted the Beige Book to conclude that “consumer spending in the recent 2009 holiday season was modestly greater than in 2008 for eight Districts, although as retailers in the Philadelphia and San Francisco Districts noted, 2008 sales were so low compared with 2007, that the relatively small 2009 gains did not represent a significant shift in trend” (this information covered the period from December 2 to all the way into January 4, 2010).

Sector trends in the retail sales report:

• In terms of sectors, we have to admit that the electronics store showing of -2.6% sales sequentially was a huge surprise given all the anecdotal evidence to the opposite — and this wiped out almost all of the gain we saw in November too. Since April, there has been nary a penny of sales growth in this space.

• Furniture sales sagged 1.2% MoM in the steepest slide since March, and together with the 0.4% drop in building materials, is a sign that the housing industry is turning down again even with all the tax stimulus.

• Despite all the attention to the up-tick in unit auto sales in December, either there was a shift in the mix towards cheaper vehicles or there was large-scale discounting because dealer receipts actually fell 0.9% on the month.

• There are obviously intense competitive forces under way among the food retailers because sales sagged 0.8% in the worst showing for the year.

• Apparel stores have been suffering as sales posted a 0.6% decline and have fallen now for three months in a row, so this seems to be a downtrend in the making.

• General merchandise stores also recorded a disturbing 0.8% slide in sales in the poorest result since March (this includes department stores). Ditto for restaurants, a sector highlighted as one with eroding performance in the Beige Book, where sales fell 0.6% in December and have declined now in six of the past seven months.

Where were the bright spots?

• E-tailing rose 1.4% and managed to rise 10% on a YoY basis.

• Pharmacies posted impressive 0.8% growth in December, the fourth increase in as many months and the YoY trend has accelerated back above 5% for the first time since September 2007.

• Sporting goods/hobbies/book stores rang up an impressive 1.7% advance and this was the second up-month in a row — we have been hearing that books were a big seller during the holiday shopping season.

• Toys are also in this category and contrary to some of the anecdotal reports.

Headline CPI in Dec rose .1% and also rose .1% ex f&f. Y/o/Y CPI is now up 2.7% on easy comparisons and 1.8% at the core. Energy prices rose .2% after a 4.1% spike in Nov and food prices rose .2%. Owner’s Equivalent Rent (24% of CPI) was flat and has been either flat to down .1% for 5 straight months now and has been a main contributor to moderating the government reported CPI figure which the Fed relies so much on. This as a result of the lack of landlord pricing power due to elevated unemployment and competition from unsold homes. Commodity prices however, which influence 40% of CPI rose .2% overall and are now up 5.5% y/o/y and will be the offsetting factor in 2010. The Fed’s focus and modeling on the output gap and direction of wages will miss commodity induced inflation which will be the main driver in the next bout of price pressures, if not already. Gasoline prices in particular, according to AAA, are at a 13 month high.

Jan NY manufacturing survey, the 1st Jan industrial # out, was 15.9, almost 4 pts above expectations and up from 4.5 in Dec. The figure though has been extremely volatile over the past 3 Q’s as monthly moves have ranged from 4 pts to 18. New Orders spiked to 20.5 from 2.8 but was 31 in Oct. Shipments which follow orders rose to 21.1 from 8.4. Backlogs jumped from -21 to +2.7 with the 6 mo average -5.5. Employment rose to 4 from -5.3 but is up for 3 out of the last 4 months. Inventories remained depressed at -17.3 and have been positive in only 1 month going back to the fall of ’07. Prices Paid spiked to 32 from 19.8 to the highest since Sept ’08 and Prices Received rose to 2.7 from -9.2 and is positive for the 1st time since Nov ’08. The overall 6 month outlook rose to 56 from 52.6 but down from 57.9 in Nov. Net-net, this data confirms that manufacturing will continue to contribute to GDP growth for now but we need to see other surveys to determine the degree.

INTC’s modest stock response to much better than expected earnings and guidance follows the same reaction from LLTC on Wednesday and SAP yesterday, thus a sign that current stock levels in some areas of tech have priced in the news. Throw in a revenue miss from JPM on top of market weakness in Europe on concerns with Greece and we have the futures lower. Greece’s deficit plan gets seen by the EC today and Greek bonds are up a touch but their CDS is at fresh record high. After an overnight rumor that Merkel in Germany was resigning which was vehemently denied and the Greek credit concerns, the euro is falling to a one week low. Chinese bank loans in Dec were 70b yuan above estimates and totaled 9.6T in ’09, 96% above the level of ’08 and a pace that the Chinese government clearly wants to slow down based on recent policy moves.

The biggest banks and brokers are on pace to award $145 Billion in bonuses for 2009, Up 18% from the year before, according to a WSJ study.

This bonus bonanza is based on two simple factors: Zero % money, courtesy of the Fed, and a massive accounting fraud — one that happens to be legal.

Ask yourself how hard it is for any finance firm to make money — risk free! — when they can borrow from the Federal Reserve at a rate of zero, and then turnaround and “lend” that same cash to the Treasury (buying bonds) at 3% ?

I suspect this was essentially the Bernanke/Paulson plan (now Bernanke/Geithner) all along — to s-l-o-w-l-y recapitalize the banks via the Japanese model. They selected  the easier but less effective Japan option versus than the Swedish model, which forces insolvent institutions to reorganize, write down bad loans, recapitalize the banking sector (which allows banks to start lending again), but punished bondholders and wipes out shareholders.

That is how capitalism is supposed to work. Instead, the socialist bankers saved the banks (and their own asses), rather than the banking system.

What may thwart the massive Fed giveaway is the self-interested institutions, who are not lending, not writing down debt, and capturing the lion share of this wealth via bonuses. Perhaps they realize the true state of their balance sheets, and are making hay while the sun is shining.

On top of this, the recapitalization plan only works if these insolvent institutions get to hide their massive losses from their owners — namely, the shareholders (and in some instances, the taxpayers).

Thanks to the Congressionally mandated FASB rule changes back in March of 2009, Mark-to-Market was replaced with Mark-to-Make-Believe. We do not if these banks are actually profitable (GS), whether they are barely solvent (Chase/JPM), somewhat insolvent (BofA) or totally bankrupt (Citi). Given the lack of transparent accounting, we simply do not, and cannot, know.

Hence, once again we see record bonuses based on huge profits that may not be real. And we won’t find out the truth until the FASB forces accountants to accurately report losses.

Until then, we must accept an unfortunate reality: We have built our recovery upon a financial system, loosely based on fantasy!

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Source:
Banks Set for Record Pay
STEPHEN GROCER
WSJ, JANUARY 14, 2010

http://online.wsj.com/article/SB10001424052748704281204575003351773983136.html

Hat tip Bruce Mac

click for ginormo graphic

Source: Investment Strategy Group, Federal Reserve

Note: This material represents the views of the Investment Strategy Group of the Investment Management Division of Goldman Sachs and is not a product of the Goldman
Sachs Global Investment Research Department.

Source:
Stop Complaining and Start Acting; We Need to Solve the Problem With Wall St. Bonuses
Peter Gorenstein
Yahoo Tech Ticker, Jan 13, 2010

http://finance.yahoo.com/tech-ticker/stop-complaining-and-start-acting-we-need-to-solve-the-problem-with-wall-st.-bonuses-black-says-403607.html

John Sherffius on Google vs China:

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I am on Dylan Ratigan’s new show today at 4pm, discussing the TBTF tax and other bail9iut related items.

Dylan’s show just moved to the 4pm this week (its an hour). This is a better slot for him, as he gets to do commentary versus breaking news in the early am.

I’ll post the video after it goes live . . .

On Monday, I showed a chart via The Economist magazine that hugely made doing global comparisons of real estate prices as snap.

My boy Paul showed me how to get the embed working properly!

Check it out: