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

Ahhh, good to be back in the saddle after a week away. Quite a few very worthwhile reads crossed my desk today:

• Treasuries at Odds With Stocks (Barron’s)

• Martin Wolf: The political genius of supply-side economics (FT.com)

• Sixteen Dow Recoveries: Update (D Short)

• The Great Mortification: Economists and the Crisis of 2007 (Infectious Greed)

• Ten Stock-Market Myths That Just Won’t Die (WSJ)

• Stephen Roach on The Consumption Gap: They thought Asia would save the world economy. They were wrong. (Foreign Policy)

•  22 Statistics That Prove The Middle Class Is Being Systematically Wiped Out Of Existence In America (Business Insider)

• Clay Shirky: What I Read (The Atlantic)

• London Times loses 90% of online readership: Less than three weeks after the Times paywall went up, data shows a massive decline in web traffic  (Guardian) See also Newspaper Chain’s New Business Plan: Copyright Suits  (Wired)

• World’s best street food  (CNN)

Whats on your browser?

Last month, when new home sales fell 33%, I warned investors that “This data series is notoriously noisy, and you are must better off using a 3 month moving average than reading too much into any single month.”

This month, we see that New Home sales jumped 24%. The same caveat applies: Ignore the swings, look at the moving average to smooth out the volatility.

In fact, the series is so noisy that way back in 2005, we had to to a study to figure out what to make of it. Our conclusion?

“Looking back over the past 15 years of data, we see that a mean regression has followed nearly all double digit monthly gains. The subsequent month’s data was significantly lowered — flat to negative in nearly every case.”

I have yet to do study on the negative double digit months, but I have a suspicion it would be the same. Bottom line: Anytime you see a big gain or drop in this data series, you should expect a reversal the following month.

>

click for larger chart

Courtesy of Calculated Risk

>

Previously:
New Home Sales Data: Don’t rely On It Either (November 30th, 2005)

New Home Sales Plunge 33% (June 23rd, 2010)

Source:
NEW RESIDENTIAL SALES IN June 2010
U.S. Department of Commerce, Manufacturing and Construction Division APRIL 23, 2010 AT 10:00 A.M. EDT
Erica Filipek or Stephen Cooper
http://www.census.gov/const/newressales.pdf

Legg Mason’s Michael Maubossin looks at the difficulties in untangling outcomes that are based on skill or luck or both as applied to the universe of investing.

His conclusions?

• The outcomes for most activities combine skill and luck.

• Separating skill and luck encourages better thinking about outcomes and
allows for sharply improved decision making.

• There are good methods to sort skill and luck in sports, business, and
investing.

• We define the key features of skill in the investment business.

This is going to be my train reading on the way home . . .

>

>

Source:
Untangling Skill and Luck: How to Think About Outcomes—Past, Present, and Future
Fortuna, by Albrecht Dürer
Legg Mason, July 15, 2010
http://contenta.mkt1710.com/lp/26966/115068/Untangling%20Skill%20and%20Luck.pdf

Interesting chart that Macro Market Musings calls “The Revenge of the Balance Sheets.”

Each of our double peak in assets — dot com stocks and housing — sent the ratio to unsustainable levels and back again.

You may recall at each of these peaks, some idiot was invariably trotted out to discuss how the debt to asset ratio was very favorable, so there was nothing to worry about (move along!). Of course, to reach this conclusion, they had to ignore the simple fact that assets fluctuate in value, but debt persists until it is paid off.

Here’s today’s chart:

>

Household Net Worth as Percentage of Disposable Personal Income

click for larger chart

Source: Macro and Other Market Musings

June New Home Sales, a measure of contract signings of new homes and thus post tax credit, totaled 330k, 20k more than expected but May was revised down by 33k to 267k, the lowest since at least 1963 where data goes back to. The 330k sales level combined with a drop of 3k homes for sale to 210k, brought the months supply down to 7.6 from 9.6 in May but still up from 6.1 in Apr. The West was the only region with a decline as that part of the country faces the biggest competition from foreclosures. The median new home for sale sold for $213,400, down .6% y/o/y and 1.4% m/o/m. Bottom line, while the figure was better than expected, new home sales make up less than 10% of the overall industry with existing homes making up the balance. It’s good to see a pick up in new home sales but an overall market that still has way to much inventory does not need too many new homes built.

~~~

Source:
Bernanke’s ‘Bullets’ are Blanks, Mark Dow Says: “The Fed Is Pushing on a String”
Aaron Task
Yahoo Tech Ticker Jul 26, 2010 08:46am
http://finance.yahoo.com/tech-ticker/bernanke’s-’bullets’-are-blanks-mark-dow-says-”the-fed-is-pushing-on-a-string”-532974.html

The Chicago Fed’s National Activity Index (CFNAI) printed this morning at 8:30 AM Eastern.  As always, Calculated Risk covered the release, so I won’t rehash what’s covered over there.

However, I will note — as I have before — that the Personal Consumption & Housing subcomponent remains mired in deeply negative territory.  In fact, it has not made a positive contribution to the overall index since December 2006, running negative now for 42 consecutive months.

To filter out the noise (as the Chicago Fed suggests), below is the 3-month moving average of the PC & H subcomponent:

Sales, Orders and Inventories (which together comprise one category) was the only positive contributor to the overall index, and even that metric only eked out a +0.05 add.

So the growth bulls continue to shoulder the burden of explaining specifically how we can muster a sustainable economic recovery — which is to say at or at least near trend — without the participation of the consumer and the housing market.

Towards the end of a great Rush concert at Jones Beach Saturday night, the band broke out into one of their classics, ‘Closer to the Heart.’ Following the release of the European bank stress tests where sovereign default was not a criteria and with growing pressure on the US Gov’t to show some spending restraint, the 1st line of the song never seemed more fitting, “AND THE MEN WHO HOLD HIGH PLACES MUST BE THE ONE TO START, TO MOLD A NEW REALITY…” We of course include women and the point I’m trying to make is that much of the direction in markets over the next 6-12 months will be highly influenced by the actions of governments in the developed world and whether the Europeans right now and inevitably at some point our very own Uncle Sam can meet the new fiscal reality the markets are demanding. “PHILOSOPHERS AND PLOUGHMEN EACH MUST KNOW HIS PART TO SOW A NEW MENTALITY…”

At the Agora conference, I addressed deficit concerns by discussing the record low yield on US Treasuries. If the investing universe was so concerned about deficits, why the record low yield?

Part of the answer is the lack of alternatives. Where else are you going to park yield seeking money? Euro denominated issues? UK debt? Japanese bonds, emerging markets? Amongst the motley crew of sovereign debt issuers, the US Treasury is the least ugly girl at the dance.

I believe my exact phrase was “In the land of the blind, the one-eyed man is king.”

This morning, I see Bloomberg noting that US two-year notes are selling with the lowest interest rates — ever:

“The combination of record-low yields on two-year notes, 10- year rates below 3 percent and a deficit projected to surpass $1.4 trillion for a second consecutive year is a signal that the bond market is less concerned with government spending than with getting the economy back on track. . .

While investors forced European governments to cut spending and grapple with their sovereign debt crisis and pushed yields on two-year Greek debt to 18 percent, demand at Treasury auctions is the highest on record. By keeping borrowing costs near record lows, investors are providing the Obama administration with the opportunity to pursue additional stimulus measures before demanding a reduction in the deficit.”

Go figure. The usual suspects have got it wrong again . . .

>

>

Source:
Deficits Don’t Matter as Geithner Gets Lowest Yield
Daniel Kruger and Rebecca Christie
Bloomberg, July 26 2010
http://noir.bloomberg.com/apps/news?pid=20601087&sid=an8dGISrAlzc&

I am winging my way home from Canada, flying over Minnesota into Wisconsin. I am catching up with some reading, but I had to comment on all the  Sturm und Drang about the expiration of the Bush Tax “cuts.”

A few thoughts:

• Temporary Stimulus: These tax cuts were passed as temporary tax cuts to stimulate an economy coming out of a recession. (At least, that was the sales pitch). As I have noted in these pages, that is appropriate government recession policy: Stimulate now, reduce deficit later. Of course, if these were really geared towards that purpose, they should have expired after 3 years or so.

• Inherent Gimmick: When a sunset provision is used to obscure how much tax cuts actually cost, you have a marketing gimmick Now, because of that precise gimmick, they are about to go away. Lesson to future administrations: If you really want permanent tax cuts, well, then you should pass, um, permanent tax cuts. And if you cannot sell an expensive tax cut to the public, perhaps that might be telling you something…

• Unfunded Tax Cuts: You will note that the I have the word “Cuts” in quotes. Why? To quote Milton Friedman, “When is a tax cut not a tax cut? When the so-called tax cut is accompanied by a larger rise in government spending than in prices.” In other words, all unfunded tax cuts — including these — are actually future tax increases on the next generation.

• Offsetting Spending: Of course, if the tax argument wasn’t a debate between cowards on one side and liars on the other, we would actually be discussing, as per Friedman, what spending to cut: Entitlements, Military, Education, etc.  Don’t hold your breath waiting for that healthy debate to take place.

~~~

Any thoughts on this subject ? (Note that I have only discussed facts, not my opinion about whether this should stay or go . . . )

>

UPDATE: July 26, 2010 9:33pm

Since 43 of you have sent me the same chart . . .