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I don’t know what is more idiotic: This horrific Reuters misquote, or the impossibly idiotic commenting system they have in place.

First, the misquote:

“Turning to the housing market, Barry Ritholtz at The Big Picture is predicting the worst in housing is likely over. Sure prices could fall another 33 percent — but it’s unlikely –because homes are now priced where they should be in today’s market, Ritholtz writes.”

The excerpt is not remotely what I have been saying or writing. Even the link they point to explicitly states “My basis for saying the worst is likely over are prices: We are off 33% from the peak, and as of the end of Q1, were ~5-15% over fair value by traditional metrics.”

Whoever wrote this embarrassing excerpt might in the future consider actually reading what the person wrote. You know, the rest of the wordy bits after the headline? THATS where the quotes should come from, versus mis-interpreting the headline.

Normally, I would merely leave a comment — but its been 2 days since I did that, and the Reuters comment have not shown up.

As we noted in these pages a few weeks ago, Paul Kasriel gave Michael Boskin’s selective memory a who-dat-what-for.

This morning, Barron’s picks up the same theme:

IT’S PERVERSE OF US, WE ADMIT, but we get a real kick out of a dust-up between economists. If nothing else, it demonstrates that the dismal science is not a science and not necessarily dismal.

What occasions this somewhat less than profound observation is a recent commentary of Northern Trust’s director of economic research, Paul Kasriel, taking issue with an op ed piece in our sister publication, The Wall Street Journal, by Michael Boskin, a former chairman of the Council of Economic Advisers under the first President Bush.

Mr. Boskin blamed the lackadaisical recovery on the Obama administration’s economic policies, a view that is widely shared these days. Paul avers his intention is not to argue for or against those policies, but to express wonder that in fingering the causes of the feeble recovery Mr. Boskin somehow neglected to include the extraordinary contraction in bank credit.

In making his case, Mr. Boskin compared the current recovery with more robust ones, particularly the first quarter of 1983, when Martin Feldstein was chairman of the Council of Economic Advisers under President Reagan.

On that score, Paul finds it “curious” that Mr. Boskin makes no reference to the 1991 recovery when he was the Council’s top dog. Our initial reaction to the omission was, for gosh sakes, Paul, since when is modesty a sin?

Paul then proceeds to note that one year into the rebound in 1983, GDP growth weighed in at 7.7%, accompanied by a 6.4% growth in bank credit. That’s significantly better than the 3% rise in the first year of the present recovery, when bank credit actually contracted an awesome 7.9%.

And it also happens to be a heap better than the 2.6% rise in GDP in 1991, when bank credit rose only 1.4%.

It goes without saying, Paul concedes, that other factors besides bank credit play a part in GDP growth. But he insists that the shrinkage in bank credit has been a substantial element in the disappointing pace of this dispiriting recovery.

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The Chances of a Double Dip
September 17, 2010
Dr. Gary Shilling

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Dr. Gary Shilling graciously agreed to condense his September letter, where he looks at the risk of another recession in the US.

I look forward at the beginning of each month to getting Gary’s latest letter. I often print it out and walk away from my desk to spend some quality time reading his thoughts. He is one of my “must-read” analysts. I always learn something quite useful and insightful. I am grateful that he has let me share this with you.

If you are interested in getting his letter, his website is down being redesigned, but you can write for more information at insight@agaryshilling.com. If you want to subscribe (for $275), you can call 888-346-7444. Tell them that you read about it in Thoughts from the Frontline, and you will get an extra one month on your subscription.

The Chances of a Double Dip

By Gary Shilling

Investor attitudes have reversed abruptly in recent months. As late as last March, most translated the year-long robust rise in stocks, foreign currencies, commodities and the weakness in Treasury bonds that had commenced a year earlier into robust economic growth – the “V” recovery.

As a result, investors early this year believed that rapid job creation and the restoration of consumer confidence would spur retail spending. They also saw the housing sector’s evidence of stabilization giving way to revival, and strong export growth also propelling the economy. Capital spending, led by high tech, was another area of strength, many believed.

Not So Fast

But a funny, or not so funny, thing happened on the way to super-charged, capacity-straining growth. In April, investors began to realize that the eurozone financial crisis, which had been heralded at the beginning of the year by the decline in the euro, was a serious threat to global growth. Stocks retreated (Chart 1 ), commodities fell and Treasury bonds rallied and the dollar rose. It is, after all, just one big trade among these four markets, so their correlated actions on the down as well as the up side aren’t surprising.

Furthermore, investors began to worry about the health of the U.S. economy and the prospects for a second dip in the Great Recession that started in December 2007. The gigantic 2009 fiscal stimuli of close to $1 trillion was running out, threatening a relapse in an economy that was running on government life support. The $8,000 tax rebate for new home buyers was expiring April 30 and might be followed by a drop in house sales as had its predecessor that expired in November 2009 as the spike in activity early this year only borrowed from future sales. The outlook for exports had turned negative with the robust buck, sagging European economies and the current “stop” phase of China’s “stop-go” monetary and fiscal policies. With unemployment remaining high last spring, investors began to fret that consumer spending would falter as fiscal stimuli was exhausted.

Deleveraging

Although investor views of the economy have reversed in the last five months, the reality probably hasn’t. The good life and rapid growth that started in the early 1980s was fueled by massive financial leveraging and excessive debt, first in the global financial sector, starting in the 1970s and in the early 1980s among U.S. consumers. That leverage propelled the dot com stock bubble in the late 1990s and then the housing bubble. But now those two sectors are being forced to delever and in the process are transferring their debts to governments and central banks.

This deleveraging will probably take a decade or more – and that’s the good news. The ground to cover is so great that if it were traversed in a year or two, major economies would experience depressions worse than in the 1930s. This deleveraging and other forces will result in slow economic growth and probably deflation for many years. And as Japan has shown, these are difficult conditions to offset with monetary and fiscal policies.

The deleveragings of the global financial sector and U.S. consumer arena are substantial and ongoing. Household debt is down $374 billion since the second quarter of 2008. The credit card and other revolving components as well as the non-revolving piece that includes auto and student loans are both declining. Total business debt is down, as witnessed by falling commercial and industrial loans.

Meanwhile, federal debt has exploded from $5.8 trillion on Sept. 30, 2008 to $8.8 trillion in late August. Many worry about the inflationary implications of this surge, but the reality is that public debt has simply replaced private debt. The federal deficit has leaped as consumers and business retrenched, which curtailed federal tax revenues, while fiscal stimulus, aimed at replacing private sector weakness, has mushroomed.

Four Cylinders

As discussed in our May 2010 Insight, in the typical post-World War II economic recovery, four cylinders fire to push the economic vehicle out of the recessionary mud and back out on to the highway of economic growth. At present, only one – the ending of inventory liquidation – is generating significant power. The other three – employment gains, consumer spending growth and a revival in residential construction – are sputtering at best.

The Inventory Cycle

Historically, the liquidation of excess inventories accounts for major shares of the decline in economic activity in recessions. Around business cycle peaks, the sales of manufacturers, wholesalers and retailers begin to weaken but their managers can’t tell whether that’s the beginning of a major drop in business or just a minor dip in an upward trend. So they delay cutting production and orders until the downward trend is firmly established. Meanwhile, inventory-sales ratios leap as the numerators, inventories, rise and the denominators, sales, fall. That makes cuts in production and orders imperative and propels the economic downward trend in the process.

That was also the case in the Great Recession. In our view, it really started in early 2007 with the collapse in subprime residential mortgages, and then spread to Wall Street that summer with the implosion of the two Bear Stearns hedge funds in June. But these were financial declines, and recessions are measured by production, employment and spending, which are dominated by the goods and nonfinancial services segments of the economy. So the recession didn’t officially start until December 2007.

Consumers Go On Strike

Furthermore, it wasn’t until late 2008 that the collapse in home equity as house prices nosedived (Chart 2), rising layoffs (Chart 3) and the drying up of consumer lending drove consumers into retrenchment. But they suddenly went on a buyers strike in the last four months of 2008, and the results were leaps in inventory-sales ratios. Consequently, the cuts in inventories to get rid of unwanted stocks were far and away the biggest in the post-World War II era.

The reduction in inventory liquidation has been key to economic growth starting in the second half of 2009. In the third quarter of last year, it accounted for 66% of the 1.6% annual rate real GDP gain and 58% of the fourth quarter’s 5.0% advance. The inventory-building in the first quarter of this year was responsible for 67% of the 3.7% annual rate rise in real GDP and 36% of the rise of 1.6% in the second quarter. In total, in the last four quarters, the inventory swing provided 58% of the 3.0% rise in real GDP.

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Positives

1) Commodity prices move higher, good global economy?
2) Jobless Claims fall to lowest since early May not incl. July 4th holiday
3) Aug retail sales better than expected
4) Business Inventory rise will boost GDP
5) Current Conditions of German ZEW highest since Jan ’07
6) Greece sells 26 week paper
7) Spain sells 10 yr, 30 yr paper, separates itself from Greece, Ireland and Portugal concerns
8) Basel III provides capital clarity to banks.

Negatives

1) Commodity prices move higher, inflation?
2) UoM confidence lowest since Aug ’09
3) Philly and NY mfr’g data below estimates
4) Ireland bond yields and CDS shoot higher
5) Shanghai index closes at 3 1/2 week low
6) Gold at record, indictment of paper currencies and central bank policy
7) Contrarian take, AAII says Bulls rise to highest since Aug ’09, up 30 pts in 3 weeks
8) German ZEW 6 month economic expectations fall to lowest since Feb ’09.

-Peter Boockvar

I just came back from Bloomberg where I spoke with Tom Keene about numerous subjects (not online yet). In addition to talking stocks with Tony Dwyer, we discussed Elizabeth Warren with the Bloomie DC correspondent, the elections, and the conservative/liberal divide.

I ripped into each side as corrupt partisan hacks. I favor the NASCAR endorsement approach for Congress-critters: They should  all have to wear on their suit coats the stickers of their “sponsors” and campaign funders — like any NASCAR team. Only instead of Penzoil and Target, the sponsor logos on their blazers would say AIG and CITI and ENRON and HUMANA.

Tom dances around my party affiliation, and I tell him I have none.

Here’s why:

I am not a Democrat, because I have no idea what their economic policies are; And I am not a Republican, because I know precisely what their economic policies are.

Indeed, the entire left/right debate is false, an artificial framework for analyzing policy. In my mind, the real debate is the corporatocracy versus the individual.

And right now, the individual is losing . . .

Dan Gross has written what is likely the most informative and intelligent thing you will read about the tax cut expiration debate this entire year.

I want to excerpt all 5 bullet points — but I would end up posting the entire piece. Points 1, 2 and 3 are the most informative, but point 4 is the most amusing — so that’s the one I will excerpt here:

4) The bold and confident assertions made about the links between tax rates and economic growth, market performance, and prosperity are almost certainly wrong.

Turn on CNBC or look at the Wall Street Journal op-ed page these days, and you’ll learn that we must keep tax rates on capital gains, dividends, and income precisely where they are because shifting them to different levels will retard economic growth.

Keep this in mind: The people who designed the current, unsustainable tax system promised us that lower marginal rates, and lower taxes on capital and dividends, would boost the economy, promote investment, create jobs, spur market performance, and raise everybody’s income. They were wrong. (It’s no coincidence that these same people also warned us that raising taxes in 1993 would kill market returns and the economy. They were wrong then, too. They’re pretty much always wrong.)

As I’ve pointed out, the years under the current tax regime have been a lost decade. Pick your metric—median income, employment, stock market returns, economic growth—the low-tax ’00s sucked. Yet proponents of keeping the tax cuts persist in making the argument: To avoid a repeat of the past decade, we must have the exact same tax policies as we did for the past decade.

Shorter version: You suck now, you sucked then, you are highly likely to suck in the future, too!

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Source:
Taxing My Patience
Five points to keep in mind as Congress debates the Bush tax cuts.
Daniel Gross
Slate, Sept. 16, 2010
http://www.slate.com/id/2267681/

The FOMC meets Tuesday and the flat core CPI will be a focus as will the drop in inflation expectations one year out (notwithstanding the unch level 5 yrs out) in the UoM data. One thing they should but may not focus too much on are commodity prices. As of last night’s close, the CRB Raw Industrials sub index of 22 commodities that are “either raw materials or products close to the initial production stage” broke out to the highest level since May ’08 and at 517.3, is just 8.5 pts from a record high reached the same month. Included in the index are metals, textiles/fibers, livestock and products, fats/oils, foodstuffs and other raw industrials. A company’s costs are more than just commodities of course as labor is a majority of them but margin pressure can still occur if prices can’t be passed on. Thus, whether businesses feel the impact or consumers do, inflation pressures are clearly evident to those looking at market signals.

Duly noted in a research piece by Merrill Lynch, the wealth gap continues to widen, poverty grows:

The following article caught our attention on the Wall Street Journal Online, “Millionaire Population Soars – Again.” The Wall Street Journal is reporting on a survey performed by Phoenix Marketing International’s Affluent Market Practice. According to the survey, the number of American households with investible assets of $1 million or more rose 8% in the 12 months ended in June. In total, according to this survey, there are more than 5.55 million US households with investible assets of $1 million or more. The millionaire count has now returned to 2006 levels, but is still below the peak reached in 2007 of 5.97 million.

In stark contrast to the previous article, the Census Bureau released its annual snapshot of American living standards. The Census Bureau found that the fraction of Americans living in poverty rose sharply to 14.3% in 2009, up from 13.2% previously. This is the highest level since 1994. In total, 43.6 million Americans were living in poverty last year. To read more, check out the Wall Street Journal Online article, “Poverty Rate Rises To 14.3%.”

The Census snapshot also indicated that the gap between the best-off and worst-off Americans widened a bit more in 2009, a long-standing trend, but not by much. The top fifth of households accounted for 50.3% of all pre-tax income; the bottom two-fifths got 12%. In 1999, the top fifth claimed 49.4% and the bottom got 12.5% of the income. Have a look at page A1 of the WSJ, “Lost Decade for Family Income.”

I hope to have more on the Census Bureau’s just-released report early next week,  as it’s chock full of good data (as will be today’s release of the Fed’s Flow of Funds).  Suffice to say the news is not good; it is saddening to see the poverty rate on the rise and engulf almost 44 million Americans.

Dick Arms has spent nearly half a century following, trading and writing about Stock Markets. Best known for his Arms Index, or TRIN, his other major contributions to Wall Street methodology include Equivolume Charting, Ease of Movement, Volume Adjusted moving averages, Volume Cyclicality, and a number of volume based indicators. These tools are revealed and explained in his six books, the most recent titled Stop and Make Money.

Dick has received many of the highest awards in Technical Analysis, including the Market Technicians Association award for lifetime achievement. He has been inducted into the Traders Hall of Fame. Located in Albuquerque, New Mexico, Dick advises a select group of institutions with his weekly letter and personal consultation package, priced at $8000 per year.

(reproduced here with permission of author)

rarms -at- swcp -dot- com
505-293-4438

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In the last few days I have become aware of a couple of different commentaries in the media dealing with the long term sixteen-to-seventeen year cycles that I have written about many many times ever since the early 1980’s. I was somewhat bothered by the fact that neither of the two gurus gave any attribution, while I felt I had originated the concept. I happened to comment on this to my good friend Charlie Kirkpatrick.

Charlie, whom you probably all know, is expert on all manner of technical analysis, and is a great market historian. His books trace technical analysis all the way back, I believe, to the Garden of Eden, where Adam, to his delight, first identified the “Rib Formation” which far predated the “Head-and-Shoulders”. Charlie informed me that I was actually a Johnny-come-lately, and that the sixteen-year cycle I had been writing about and claiming for my own was previously recognized by Edgar Lawrence Smith in his book Common Stocks as Long Term Investments in 1928! So, I apologize to Mr Smith. I evidently merely reinvented it.

But then I got to wondering why I was just now seeing these commentaries. After all, it looks as though we are already ten years into this cycle. Where were they in 1999? But then I looked back in history and into my memory, and found some interesting parallels Perhaps the fact we are now reading and hearing these thoughts is in itself an indictor of where we are in the market, and perhaps we can learn from it.

Lets first go back and look at the cycles. The concept is that the markets have, at least for the last century, traced a pattern that looks very repetitive. We have had periods of consolidation, lasting about sixteen or seventeen years each, followed by periods of rapid and consistent movement, lasting a similar amount of time. Markets were flat between 1934 and 1950. Then in 1950 they took off in a long and steady advance until 1966. From 1966 until 1984 they were in a new consolidation. The breakout in 1984 led to the spectacular bull market that carried until late 1999. Since then we have been in another flat period, which is now ten years old. That means, if the pattern continues to hold true, the sideways markets have another six years or so to go. The last part of the data is shown on the chart below of the Dow Industrials going back to 1970. The vertical scale is a log scale.

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Dow Jones Industrial Average 1970-2010

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The consolidation we are in has its highs around 11,500 and its lows around 7,500. But it also has the ominous appearance of a very long-term head and shoulders, with the left shoulder in the year 2000, the head in 2007 and the right shoulder just a few months ago.

That would suggest that the next really major move is likely to be downward toward that neckline. That would, of course, take a long time, probably a number of years. We are now near the top of the probable trading range, so the path of easier movement would seem to be downward. I have been saying, ever since the high point in April and the subsequent breaking of the uptrend line, that the bull market that began in March of 2008 had been stopped. So we are now in a small consolidation within the much larger consolidation. And that smaller consolidation also has the look of a head and shoulders. The critical level is around 9800, which must hold in order to not turn the consolidation into a bear market. Such a break could easily, it appears, lead to a bear move taking us to, or at least a long way toward, that neckline in the very long-term pattern. It would be a bear move similar to that seen between 2001 and 2003. So, that is my thinking behind the current consolidation. But the question arises, “Why do we seem to have these long term sixteen year moves?” My cynical response is that it takes about sixteen years to train a whole new group of investors as to what is obviously the true nature of the stock market, at which time we change the rules.

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Dow Jones Consolidation

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So, that is my thinking behind the current consolidation. But the question arises, “Why do we seem to have these long term sixteen year moves?” My cynical response is that it takes about sixteen years to train a whole new group of investors as to what is obviously the true nature of the stock market, at which time we change the rules.

During a rising market such as we saw between 1984 and 1999 it became increasingly more obvious that markets always went up. At first those who had weathered the 1966 to 1984 period stuck by what they had learned, that markets went up and down and there were times when it was worthwhile to be in cash. But as the advance continued, and new participants joined the ranks, the new mantra became that Cash is your enemy. Success goes to the fully invested at all times. We can all recall being told, in deep and knowing voices, that nobody can time the market, and that the only way to go is to buy and hold stocks for the long run . . .  because stocks always go up.

Looking back at history, there was a flattish period in the markets in the early 1990s. But then the very steep move toward the top started in 1995. That cinched the argument. Timers were idiots and long term buying, even buying blindly by indexing, was the gospel. Interestingly that phase came in about five years before the end of the secular bull market. Which brings us back to what we started looking for. Now everyone seems to be getting on the bandwagon, that we are in a sideways market. Hence the comments that I remarked upon, and took undue umbrage with. Now that the consolidation has gone on for ten years perhaps it is becoming the new “truth”. Maybe it is a sign that we are getting toward the next shift. Then after another few years the rules will change as they did in in 2000, just as they did in 1950, 1966 and 1984.

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Li-ion Motors Corp.’s Wave II

Source: CNN/Money