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Long time readers of Thoughts from the Frontline will be familiar with the name The Liscio Report. It is one of my “secret” sources of high quality analysis on a wide range of topics including taxes, employment and the underpinnings of the economic headlines that we read which can be so distorted. I say secret because they get nowhere near the attention their work deserves. Philippa Dunne & Doug Henwood, authors of The Liscio Report, do actual on the phone conversations with each of the various states on their tax collections, employment and so on. I find their primary research to be invaluable. Their real time proprietary research based on state withholding and sales tax receipts gives their clients a unique insight into the state of the US economy.

I have talked them into letting me send out their most recent letter, which I found very informative. While their work is not inexpensive ($7,500 annually), for hedge funds, banks, proprietary trading desks and those who need to know what is actually happening as opposed to whatever spin is being put out in the press, you should check them out at www.theliscioreport.com.

And before we jump into their report, I feel the need to comment on the revelations this last week about Lehman and what looks like can only be called fraud. How much more of this is going on? Regulators now have a road map to know what to look for. Auditors are now on notice that this lack of transparency and cooking the books at quarter’s end must not be condoned.

And while we re on the topic of transparency, for God’s sake, can’t we get credit default swaps on an exchange before they blow us all up again? Please? Someone? Anyone? It’s been two years. It’s what brought Bear and Lehman down. Bluntly, the reason the banks oppose this is that the commissions for an OTC credit default swap are astronomical when compared to what will become a $10 commission on an exchange.

OK, I’ll now stop my rant, and allow you to enjoy The Liscio Report. Have a great week.

John Mauldin, Editor
Outside the Box

Revenues stabilizing, though it helps to be rich

The Liscio Report

By Philippa Dunne & Doug Henwood

In February, 56% of the states in our survey met or exceeded their forecasted sales tax collections, up from 50% in January, and 13% reported positive collections over the year, down from 30% in January. Our intensity index, over-the-year rate of change weighted by state population, was –2.33%, about even with January’s –2.28%, and the aggregated divergence from forecast held in the positive range at 0.26%, down a bit from January’s 0.5%.

Both of the two last measures are showing real improvement: the over-the-year change, although still negative, is well off its record-setting lows (see below) and the divergence from forecast, with a few small exceptions, hasn’t been positive since the fall of 2006.

For the various geographic regions, the good news is generally of a muted variety, and uneven no matter how you break them up. The best results came from states with large investment banking sectors–a few were both positive over the year and above forecast, one quite substantially so. The housing-bubble states without such sectors are slowly clawing back in the long, slow haul they anticipated, with one actually beating forecast by a hair.

The Midwestern manufacturing states continue to report mixed results. One reported the strongest year-over-year gains in the survey, and our contact there believes the relative stability of the major auto-makers is allowing “those who have jobs” to spend a bit more freely. Other states in the region did not do so well, but continue to report a stabilizing trend.

Greatest impatience was expressed by revenue officials around the country in smaller states with mixed economies. They expect to see revenues now moving into positive territory and another month of disappointing results is hard to take.

Read the rest of this entry »

Some reading material you may find interesting:

• Apple, Wal-mart, and the “Market Capitalization Bigger Than” Thing (Infectious Greed)
• L.A. becomes a test case in battle to undo interest rate swap deals (LATimes)
• Special Interest (New Yorker) The private-equity fund manager’s tax dodge
• Our money laureate. (The Big Money)
• No one can stop Mr. Slim, the worlds richest man (Business management)
• China May Face ‘Massive’ Bank Bailouts After Stimulus Program (Bloomberg)
• Politics, shaky economy create no rush to restructure Fannie and Freddie (Washington Post)
• Who are the Online Publishing Companies That Matter? (Permuto)
• 26 Gigapixel Photos of Paris (Image) Try zooming in as far as it will let you…

What are you reading?

I think the WSJ gets this wrong:

The dearth of credit for hundreds of thousands of small businesses is keeping the economic recovery from gaining momentum. WSJ’s Neil Hickey reports.

NOTE: The NFIB reports its a lack of demand, not credit, that is hurting small business activities.

And the ladder company was referencing Capital, not Credit — there is a huge difference between the two.

3/14/2010 3:30:00 PM

The March NAHB home builder sentiment figure was 15, 2 pts below expectations, down from 17 in Feb and matches the lowest level since June ’09. Both Present conditions and Future expectations fell and the Prospective Buyers Traffic component was down by 2 pts to the lowest level since Mar ’09. The regional breakdown in this last category was mixed as traffic rose in the Northeast and West but was down in the Midwest and South. The NAHB chief economist said “the lack of available credit for new projects, the large number of distressed properties for sale and the continuing hesitancy of potential buyers due to the weak job market are definitely weighing on builder confidence.” So, here we are, $1.25T of MBS/Agency paper purchases later to suppress mortgage rates and a home buying tax credit to bring out 1st time home buyers and builders still have very little confidence even with historically low inventory of new homes.

Consumer Metrics Institute is a (relatively) new econometric data and research firm.

What makes them so interesting to me is that they are not economists — they are simply number geeks trying to analyze U.S. consumer data in real-time. The goal is to uncover macro-economic trends by using different data then everyone else.

Rick Davis runs the place. He is a physicist enamored with what numbers say — and he is less than impressed with what the economics profession does:

My real gripes with the established economists are their lack of innovation. The lags and revisions in their data drive me crazy. There are enormous amounts of real-time data available that hardly anyone knows how to analyze. Our current problem is that we are so far ahead of the traditional data sources that hardly anyone takes us seriously.

Here is an example of a recent chart they have produced:

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Source: Consumer Metrics Institute

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Its not all good news: Their daily economic data of the ‘demand’ side of the economy has been shrinking at an annualized rate of over 1.5% during the trailing quarter. They expect this contraction will flow down to the ‘supply’ side of the economy over the next few months, with the lagging GDP shrinking in the second quarter (see this chart).

An interesting indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The relative movement of the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December 2008, showing that bond investors have favored more speculative bonds over high-grade bonds over the past 15 months. (Note that this is a relative comparison, as both categories have improved, but lower-quality bonds more so than high-grade ones.)

It is interesting that the Index has surpassed its pre-Lehman level, but still has more work to do in order to reach pre-crisis levels. As an aside, the S&P 500 Index has to gain another 8.8% in order to reach its pre-Lehman level of 1,252, and 36.1% to reclaim the 2007 pre-crisis peak. As equities and corporate bonds scale fresh cycle peaks, this should serve as a reminder that the economic recovery still has quite a way to go.

Source: I-Net Bridge

Barron’s Confidence Index – more work to do

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I mentioned earlier how much I liked the 60 Minutes piece with Michael Lewis.

Janet Tavakoli called foul this morning on Lewis assertions, pointing to a Bloomberg column he wrote in 2007, titled “Davos Is for Wimps, Ninnies, Pointless Skeptics.” Tavakoli specifically points to this paragraph:

“None of them seemed to understand that when you create a derivative you don’t add to the sum of total risk in the financial world; you merely create a means for redistributing that risk. They have no evidence that financial risk is being redistributed in ways we should all worry about.”

That statement, as of 2007, was simply wrong. Plenty of people were warning about this, and as his And, the column trashed variant perspectives warning about derivatives and an unhealthy credit market — Lewis, according to Tavakoli is guilty of precisely the sort of groupthink he criticized in both his book and on 60 Minutes.

I’m a big fan of Lewis’s work — I defended his book against some Amazon idiot reviewer trashing it only because the kindle version isn’t out yet — but back in2007, he got derivatives, Sarbox, and risk all wrong.

Score this one for Tavakoli . . .

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Sources:
Michael Lewis: Junior Salesgirlieman
Janet Tavakoli
Huff Po. March 15, 2010 06:26 AM
http://www.huffingtonpost.com/janet-tavakoli/michael-lewis-junior-sale_b_498781.html

Davos Is for Wimps, Ninnies, Pointless Skeptics
Michael Lewis
Bloomberg, January 30, 2007
http://www.bloomberg.com/apps/news?pid=20601039&sid=aaagOLYMd4yg&

Janet Tavakoli home page
http://www.tavakolistructuredfinance.com/

Michael Lewis Bloomberg Columns
http://www.bloomberg.com/news/commentary/lewis.html

Recent Books

Lewis:
The Big Short: Inside the Doomsday Machine

Moneyball: The Art of Winning an Unfair Game

Tavakoli:
Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street

Collateralized Debt Obligations and Structured Finance : New Developments in Cash and Synthetic Securitization

On Friday, the Federal Reserve released their Z.1 Flow of Funds statement for Q4 2009.

FoF is essentially a snapshot of households, companies and governement’s balance sheet. It showed a very modest improvement in the aggregate debt levels.

Barron’s noted that consumers showed some signs of cleaning up their balance sheets ever so slightly:

The Numbers
1.3%: gain in U.S. household net worth in the fourth quarter from the third
$54.18 trillion: household net worth in the fourth quarter
1.7%: decline in U.S. household debt in 2009, the first annual drop since record-keeping began in 1945
$13.5 trillion: total household debt in 2009

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Sources: Federal Reserve, Barron’s

The Mar NY mfr’g survey, the first Mar industrial # out, was a touch above expectations at 22.9 vs the forecast of 22 and down from 24.9 in Feb. The components though were strong as the headline is not a sum of its parts. New Orders rose to 25.6 from 15.1 and its the highest since Oct ’09. Employment rose to 12.4 from 5.6, the highest since Oct ’07. Backlogs rose to 4.9 from 2.8, the highest since June ’06. Inventories went positive for the first time since Aug ’08. Prices Paid fell 2 pts but remains 6 pts above its 6 month average and Prices Received doubled to 8.6, the highest since Oct ’08 and is a sign that businesses are having some success in passing on some higher costs. The 6 month outlook rose 1.5 pts to 54.3 and is in line with the 6 month average. In a related question, 24% of firms surveyed, down from 39%, saw more tightening in credit availability with 11% noting easing. Net-net, mfr’g continues to be the focal point of recovery.

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Jan TIC data below expectations but China still rules

Jan long term net foreign purchases of US assets totaled $19.1b, below expectations of +$47.5b and down from $63.3b in Dec. Treasury purchases remained healthy at $61.4b but foreigners sold $5b of GSE paper and $24.6b of corporate bonds (selling now in 9 of last 10 months). Foreigners bought a net $4.3b of US stocks and have been a net buyer for 11 straight months now. US investors bought $17b worth of foreign bonds and stocks. China sold $5.8b of US Treasuries but some to all of that may have been the maturing of short term securities rather than outright selling of longer term maturities. They remain well in the lead of largest holders still at $889b. Japan, at #2 has $765.4b worth after selling a modest amount in Jan.

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Feb IP a touch better but mfr’g falls

Feb IP rose .1%, above expectations of flat with Capacity Utilization at 72.7%, .2% higher than forecasts and is up from 72.5% in Jan. Utilization, while well below the long term average of 80%, and the basis behind the output gap worries of the Fed, is at the highest since Dec ’07 but the gain was led by mining and utilities as manufacturing utilization was down slightly to 69%. The overall gain in IP was also led by mining and utilities as manufacturing IP fell .2% due to a 4.4% drop in motor vehicle production. With lean inventories as seen in last week’s data, producers just need some more confidence that end demand will see sustainable growth in order to further pick up production and get us to a self sustaining recovery. While there are some signs of it, the inconsistencies in them with still major debt overhangs apparent are combining to create the lumpiness in the recovery.

Feb IP rose .1%, above expectations of flat with Capacity Utilization at 72.7%, .2% higher than forecasts and is up from 72.5% in Jan. Utilization, while well below the long term average of 80%, and the basis behind the output gap worries of the Fed, is at the highest since Dec ’07 but the gain was led by mining and utilities as manufacturing utilization was down slightly to 69%. The overall gain in IP was also led by mining and utilities as manufacturing IP fell .2% due to a 4.4% drop in motor vehicle production. With lean inventories as seen in last week’s data, producers just need some more confidence that end demand will see sustainable growth in order to further pick up production and get us to a self sustaining recovery. While there are some signs of it, the inconsistencies in them with still major debt overhangs apparent are combining to create the lumpiness in the recovery.

Jan long term net foreign purchases of US assets totaled $19.1b, below expectations of +$47.5b and down from $63.3b in Dec. Treasury purchases remained healthy at $61.4b but foreigners sold $5b of GSE paper and $24.6b of corporate bonds (selling now in 9 of last 10 months). Foreigners bought a net $4.3b of US stocks and has been a net buyer for 11 straight months now. US investors bought $17b worth of foreign bonds and stocks. China sold $5.8b of US Treasuries but some to all of that may have been the maturing of short term securities rather than outright selling of longer term maturities. They remain well in the lead of largest holders still at $889b. Japan, at #2 has $765.4b worth after selling a modest amount in Jan.

The Mar NY manufacturing survey, the first Mar industrial # out, was a touch above expectations at 22.9 vs the forecast of 22 and down from 24.9 in Feb. The components though were strong as the headline is not a sum of its parts. New Orders rose to 25.6 from 15.1 and it’s the highest since Oct ’09. Employment rose to 12.4 from 5.6, the highest since Oct ’07. Backlogs rose to 4.9 from 2.8, the highest since June ’06. Inventories went positive for the first time since Aug ’08. Prices Paid fell 2 pts but remains 6 pts above its 6 month average and Prices Received doubled to 8.6, the highest since Oct ’08 and is a sign that businesses are having some success in passing on some higher costs. The 6 month outlook rose 1.5 pts to 54.3 and is in line with the 6 month average. In a related question, 24% of firms surveyed, down from 39%, saw more tightening in credit availability with 11% noting easing. Net-net, manufacturing continues to be the focal point of recovery.