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

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Tonite I will be on Fast Money on CNBC for the full hour, discussing with the crew:

- RIMM, Apple and iPhone 4.0

- BP

- Retail environment

- Bear market psychology

- Financial regulation

- Double Dip versus soft (1.5-2.5% GDP) recovery

UPDATE: Video is here

Dan Gross looks at why Fed Chair Ben Bernanke doesn’t seem too concerned about job losses.He disposes of the usual explanations, and then posits two ideas:

“First, it could be that Bernanke and the Fed are simply exhausted. In 2008 and 2009, the central bank did everything in its power and then some to rescue the economy from depression. It took rates to zero, lent directly to companies, and expanded the Fed’s balance sheet massively . . . it bought $1 trillion of mortgage-backed securities . . . The Fed used up all its resources saving the system.

Second, it could be a failure of imagination. In recent years, Bernanke and the Federal Reserve have proved themselves to be poor predictors of how big macroeconomic trends—low interest rates, unregulated subprime lending, the rampant use of derivatives—can have negative social, economic, and political impacts. Whether it was forecasting continued growth as the economy was about to slip into recession, or underestimating subprime losses, Bernanke hasn’t shown much clairvoyance. So perhaps it’s not surprising that the Fed doesn’t see how persistent long-term unemployment can erode labor force skills. Or that it doesn’t fully grasp how a spell of high long-term unemployment—something we haven’t seen in more than a generation—can harm the economy at large.”

I would posit simpler third option: The Fed cannot do anything about high employment because they are simply powerless.

That, unfortunately, is a much longer conversation. Meanwhile, go read what Dan wrote.

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Source:
Get Me a Job, Ben!
Fed Chairman Bernanke doesn’t seem to care about high unemployment. Why?
Daniel Gross
Slate, June 24, 2010 
http://www.slate.com/id/2258099/

We haven’t looked at this in quite some time: The BDI, which shows increasing signs of stress.

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Chart courtesy of Ron Griess, The Chart Store

David R. Kotok
Chairman and Chief Investment Officer
Markets in flux?
June 24, 2010

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Markets are in flux and the situation outlook seems gloomy. Some bullets and unanswered questions follow.

1. Will markets start to “climb a wall of worry” or will they falter? If they climb, the correction will be deemed to be over and the next upward leg will be confirmed. If they selloff from here, the rally will be declared a false start and we will test lower levels. Our view favors positioning in the markets due to the massive and continuing liquidity and near zero interest rate outlook.

2.Is it a “W” for the economy (double dip)? Is there another stimulus spending bill coming? The answer to the second question is “maybe.” It is being discussed. Right or wrong the Obama administration seems to think that only way to address things is to keep borrowing and spending and making the government share larger and larger. Witness Geithner telling the G-20 not to impose austerity on their budgets. Imagine: the US is the sponsor of gradualism and not dynamism and of budget profligacy and not balance. Markets see right through this policy failure just as they saw right through the Geithner PPIP proposal and just as they watched him fail a credibility test when it was revealed that he was a tax-scofflaw. Obama is trapped with Geithner until after November. Geithner contributes to Obama’s falling approval ratings.

As for the “W”, we think it is going to be more like a square root sign. Sharply down for two years (2007-2008) was followed by a V-shaped inventory rebuilding led up leg that was not robust enough to carry the US economy back to the starting point of the prior down leg. Then things go flat and it just feels lousy day after day. Meanwhile, we expect the coming earnings season to show some pleasant surprises. Double dip is not our forecast. Flat and tepid growth and very low interest rates and near zero inflation is what we expect.

3. What will this FINreg law do to us? It is silent on Fannie and Freddie; these are the largest culprits and dwarf Lehman and others in losses. For reference, IndyMac was a $32 billion failure; it cost the FDIC about $11 billion. F&F are already nearly twenty times that cost and the numbers keep rising daily. Congress does not do anything about it. This contributes to the very low ratings that Americans have about their Congress. Some polls show scorpions as more popular.

4. US is embroiled now in the Obama Afghanistan war after rejecting the Bush Iraq war. When wars go badly, presidents get in a deep hole. Nixon and Vietnam, Carter and hostages in Iran are more recent examples of presidential trouble. There are many examples in history of geopolitical and military events sinking a president. It is happening to this one as it did to the last one. In addition, scandal with a general does not help matters.

5. When presidential approval ratings slip below 50% as midterm elections approach, the party in power can be creamed in November. See John Harwood‘s excellent analysis done on CNBC earlier today. www.cnbc.com will have it posted on their website. We will be adding our own comments on CNBC today at 11 AM on Morning call. Markets do not like weak leadership and failing presidents. That is another reason for the tepid performance.

6. BP events and the mess in the Gulf worsen daily. See our series on “Oil Slickonomics.” Found at www.cumber.com. The Obama administration lost a court test because it was offering an ill-conceived and hasty solution driven by politics. The judge ruled it as “arbitrary and capricious.” So now, they are embarrassed. Their continuing “on again-off again” policy regarding the use of dispersants is poisoning the Gulf. They still do not know what to do. Indecision and poor decision-making about the GOM events haunts this president.

7. Einstein described insanity as doing the same thing repeatedly and expecting a different outcome. It may take a November debacle to get true “change” in policy. However, that does not mean we will not get it. The new congress will be much different than this one. In addition, the Obama administration will look much different next year after it is reconstructed with new faces.

8. Jobs is the big issue and it will remain so. The numbers are disconcerting. It will take years to restore some balance to the labor situation in the US. That means the Fed’s policy is going to be continued and the term “extended period” is to be believed. We remain fully invested in stocks in the US and see the market eventually closing the Lehman gap. Our target is an S&P 500 index level of 1250 to 1300. We like well-selected and good quality taxable and tax-free bonds of long duration. We prefer spread product to US treasuries. Our bond accounts are similarly fully invested. Our cash target remains zero.

Lastly, we thank our readers for their many comments on Oil Slickonomics. Several asked why we sent a retraction on the statement about Tom Daschle. The reason is simple. We did not include the word “advisory” in our original text. That has been fixed on the website version. Senator Tom Daschle was not on the BP global board of directors; his service to BP was on the BP America advisory board. Therefore, we made a technical mistake and published an immediate correction.

This afternoon, we are off to Maine for some quiet reading, some conversation and a hoped for encounter with friendly smallmouth bass. Fly rod is ready and packed. Barbs are removed from the hooks. We will be back on Monday.

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David R. Kotok, Chairman & Chief Investment Officer, Cumberland Advisors, www.cumber.com

For those of you thinking about trading currencies, I have one word: Don’t !

The vast majority of individual (non professional) currency traders blow up eventually. Currency brokers have enormous churn, turning over their entire client base each year.

May Durable Goods fell 1.1%, a touch better than the expected drop of 1.4% but ex transports were a touch light as it rose .9% vs the forecast of 1%. Including the April revision upwards, the ex transport figure was in line with estimates. Non Defense Capital Goods ex Aircraft orders bounced back 2.1% after a 2.7% fall in April and that is the true bright spot within the data. It’s now up 18.4% y/o/y. Shipments which follow orders and get plugged into GDP, fell .4% but after gains in the prior two months. Inventories did rise .8% and the inventory to sales ratio rose to 1.55 as a result but remains well below the high of 1.83 back in Jan ’09. Bottom line, notwithstanding the headline # where a 30% drop in aircraft sent it lower, cap spending still remains pretty good and manufacturing has been the beneficiary. We should be thankful for the strong balance sheets of corporate America and hope they continue to invest.

Initial Jobless Claims totaled 457k for the week ended June 19th, 6k below expectations and is down from 476k last week which was revised higher by 4k. The figure of 457k remains very elevated at this stage of an economic recovery but it’s a 6 week low. Continuing Claims thru 26 weeks fell by 45k but were in line with expectations. Extended benefits past 26 weeks rose a net 45k. Bottom line, it was good to see the drop off in claims following last weeks spike but the absolute level still remains high and points to a still sluggish labor market. The Gulf mess hasn’t yet shown up in the data as the Labor Dept reported that for the week ended June 12th, Mississippi, Louisiana and Alabama actually had declines in initial claims filings.

Bloomberg discusses the schism in views on US residential real estate I am obviously biased, but I cannot believe there is much of a debate in this:

Dean Maki, chief U.S. economist at Barclays Capital, says the worst is over for the U.S. housing sector. Dean Baker, co-director of the Center for Economic and Policy Research, expects another painful decline.

They reflect an almost even split among forecasters on the outlook for residential real estate, and whichever side turns out to be right will have made a call on more than just home prices. Housing will play a crucial role in the direction of the nation’s economy and global financial markets, just as it triggered a two-year recession that erased more than 8 million U.S. jobs and $37 trillion from world stock markets

Housing Bulls:
Dean Maki, chief U.S. economist at Barclays Capital
Maury Harris, chief economist of UBS Securities
Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities

Housing Bears:
Dean Baker, co-director of the Center for Economic and Policy Research
Meredith Whitney, founder of Meredith Whitney Advisory Group
Joshua Shapiro, chief U.S. economist for MFR Inc.
Nariman Behravesh, chief economist of IHS Global Insight

Outside of the late ’08, early ’09 panic into US Treasuries where the 10 yr yield got to 2.06%, the 10 yr bond yield is now at the lowest level since at least 1962 (as far back as Bloomberg goes) at 3.07%, breaking the June ’03 level of 3.11% less than 2 weeks before Greenspan cut the fed funds rate to 1%. Greek 5 yr CDS has risen to a record high of 965 bps, surpassing the previous high close of 940 bps back in May. While their 2 yr note is trading higher today (Euro backstop lasts 3 yrs), 5 yr and 10 yr bonds are lower, in part to forced end of Q selling but the action in 5 yr CDS is sending a clear message of expectations of inevitable debt restructuring at some point. In European money markets, stress continues to grow as the 3 mo Euribor spread to 3 mo EU LIBOR is at a fresh record high. Likely in response to China’s move on the Yuan and with a strong economy, Taiwan unexpectedly raised interest rates by an 1/8 pt to 1.375%.