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

I’ve been playing with the Barron’s iPad app, and I can tell you this: It is vastly superior way to consume the weekly magazine than either the print or web version. The app is free, but you need a subscription to access it, unless you buy single issues.

I have been very critical of Rupert Murdoch for politicizing/de-financializing the Wall Street Journal, but the WSJ app is the best I have seen for consuming media period. The Barron’s app is not too far behind.

Like the Journal’s app, the Barron’s app has a small menu on the bottom right edge of the iPad. The part marked Sections is the key menu item — touch it, and you have a choice of Cover, Features, Columns, Market Week, Review, Preview Barron’s.com and Archive. This is nearly identical to the way the WSJ app works.

Key sections:

-Cover is the full graphic of the cover;

-Touch that and you get the cover story. Its part of the Features, section. Showing up in the right hand column are all of the Feature stories headlines. You can swipe through them one by one, or touch the headline in that column for the full story.

-The Columns behave the same way — Abelson, Santoli, etc. Touch any story, and the same 90/10 split of the screen occurs. The article shows up in the left, with the right hand column containing the full list of articles from that section, all accessible by a single touch.

-MarketWeek gets its own section with the same rules as Features and Columns.

I have only been playing with this for a few days, but I have 3 criticisms of the app:

1. The entire front cover should be interactive — but it isn’t; Touch anything on the cover, including other headlines or photos, and you only get taken to the cover story.

2. Where is all of the Market Data Center I can access with the online version?

3. No video!

Note that the WSJ app does not have a separate video section, but embeds related video into many articles. I assume that Barron’s will have that capability eventually. Given how much Dow Jones is spending on video production, I am surprised they did not build video its own dedicated section in these apps.

Like the Journal, the Barron’s app manages to deploy the best of both worlds. I used to read Barron’s cover to cover early in my career, dragging it on the train during the 1st few days of the week, but its sheer bulk was an impediment (I eventually stopped that madness). The online version isn’t bad, but its not the same as browsing the print edition. The app is better than either print or online; it makes me think I will end up reading more of the mag each week.

I have yet to play with the Wired app — I am a print subscriber (shouldn’t I get the app content included with the print subscription?)  — but I’ve heard good things about that, as well as the German ZEIT online . . .

I love this chart from Jame’s Montier’s latest missive, In Defense of the “Old Always.” We learn that major events occur quite regularly, while P/Es fluctuate fairly constantly . . .

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Graham & Dodd P/E, 1881-2010

click for ginormous chart

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Source:
In Defense of the “Old Always” (PDF)
James Montier
GMO, 12/22/2010
http://bit.ly/gc7h6m

There are forecasts everywhere of better times ahead in terms of employment, retail, inflation, GDP. David Rosenberg is having none of it. He sees the market as heavily propped up by the Fed. This is his look forward for 2011.

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1. In Barron’s look-ahead piece, not one strategist sees the prospect for a market decline. This is called group-think. Moreover, the percentage of brokerage house analysts and economists to raise their 2011 GDP forecasts has risen substantially. Out of 49 economists surveyed, 35 say the U.S. economy will outperform the already upwardly revised GDP forecasts, only 14 say we will underperform. This is capitulation of historical proportions.
The last time S&P yields were around this level was in the summer of 2000, and we know what happened shortly after that.

2. The weekly fund flow data from the ICI showed not only massive outflows, but in aggregate, retail investors withdrew a RECORD net $8.6 billion from bond funds during the week ended December 15 (on top of the $1.7 billion of outflows in the prior week). Maybe now all the bond bears will shut their traps over this “bond-bubble” nonsense.

3. Investors Intelligence now shows the bull share heading up to 58.8% from 55.8% a week ago, and the bear share is up to 20.6% from 20.5%. So bullish sentiment has now reached a new high for the year and is now the highest since 2007 ― just ahead of the market slide.

4. It may pay to have a look at Dow 1929-1949 analog lined up with January 2000. We are getting very close to the May 1940 sell-off when Germany invaded France. As a loyal reader and trusted friend notified us yesterday, “fighting” war may be similar to the sovereign debt war raging in Europe today. (Have a look at the jarring article on page 20 of today’s FT — Germany is not immune to the contagion gripping Europe.)

5. What about the S&P 500 dividend yield, and this comes courtesy of an old pal from Merrill Lynch who is currently an investment advisor. Over the course of 2010, numerous analysts were saying that people must own stocks because the dividend yields will be more than that of the 10-year Treasury. But alas, here we are today with the S&P 500 dividend yield at 2% and the 10-year T-note yield at 3.3%.

From a historical standpoint, the yield on the S&P 500 is very low ― too low, in fact. This smacks of a market top and underscores the point that the market is too optimistic in the sense that investors are willing to forgo yield because they assume that they will get the return via the capital gain. In essence, dividend yields are supposed to be higher than the risk free yield in a fairly valued market because the higher yield is “supposed to” compensate the investor for taking on extra risk. The last time S&P yields were around this level was in the summer of 2000, and we know what happened shortly after that. When the S&P yield gets to its long-term average of 4.35%, maybe even a little higher, then stocks will likely be a long-term buy.

Source: Haver Analytics, Gluskin Sheff

6. The equity market in gold terms has been plummeting for about a decade and will continue to do so. When measured in Federal Reserve Notes, the Dow has done great. But there has been no market recovery when benchmarked against the most reliable currency in the world. Back in 2000, it took over 40oz of gold to buy the Dow; now it takes a little more than 8oz. This is typical of secular bear markets and this ends when the Dow can be bought with less than 2oz of gold. Even then, an undershoot could very well take the ratio to 1:1.

7. As Bob Farrell is clearly indicating in his work, momentum and market breadth have been lacking. The number of stocks in the S&P 500 that are making 52-week highs is declining even though the index continues to make new 52-week highs.

8. Stocks are overvalued at the present levels. For December, the Shiller P/E ratio says stocks are now trading at a whopping 22.7 times earnings! In normal economic periods, the Shiller P/E is between 14 and 16 times earnings. Coming out of the bursting of a credit bubble, the P/E ratio historically is 12. Coming out of a credit bubble of the magnitude we just had, the P/E should be at single digits.

Source: Haver Analytics, Gluskin Sheff

9. The potential for a significant down-leg in home prices is being underestimated. The unsold existing inventory is still 80% above the historical norm, at 3.7 million. And that does not include the ‘shadow’ foreclosed inventory. According to some superb research conducted by the Dallas Fed, completing the mean-reversion process would entail a further 23% decline in real home prices from here. In a near zero percent inflation environment, that is one massive decline in nominal terms. Prices may not hit their ultimate bottom until some point in 2015.

10. Arguably the most understated, yet significant, issue facing both U.S. economy and U.S. markets is the escalating fiscal strains at the state and local government levels, particularly those jurisdictions with uncomfortably high pension liabilities. Have a look at Alabama town shows the cost of neglecting a pension fund on the front page of the NYT as well as Chapter 9 weighed in pension woes on page C1 on WSJ.

Consumer spending was taken down 0.4 of a percentage point to 2.4%, which of course you never would have guessed from those “ripping” retail sales numbers.

In the absence of Chapter 9 declarations or dramatic federal aid, fixing the fiscal problems at lower levels of government is very likely going to require some radical restraint, perhaps even breaking up existing contracts for current retirees and tapping tax payers for additional revenues. The story has some how become lost in all the excitement over the New Tax Deal cobbled together between the White House and the lame duck Congress just a few weeks ago.

Over at TheMoneyIllusion, Scott Sumner takes a shot at what he refers to as “Disinflation Denial.” His point is that prior to the recent run-up, “commodity price indices fell by more than 50%.” Thus, if the run-up in commodity prices suggests loose policy now, they must have been signaling tight policy earlier.

I am hesitant to endorse the view that any subset of prices gives us a clear view of inflation trends. What I do endorse in the Sumner piece is the advice that “the Fed look at a wide range of indicators.” I can tell you that is exactly what we do at the Atlanta Reserve Bank and, as just one example within the Fed System, in this post I’ll review the battery of indicators that we are currently looking at here. Most of these will be no surprise, but I find it useful to occasionally see them in one place. So here we go. (Note that throughout this blog post I will focus most of my comments on the consumer price index [CPI], but most of what I say also applies to the personal consumption expenditure [PCE] price index as well.)

First up, of course, are the so-called (and often maligned) core measures of inflation. I am completely sympathetic to the view that the traditional core index, which subtracts out food and energy components, is a somewhat arbitrary cut of the price statistics. For that reason, Ipersonally tend to lean more heavily on median and trimmed-mean measures.

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In Atlanta, we have been monitoring a newer core inflation measure, called the “sticky-price CPI,” jointly developed by Mike Bryan and Brent Meyer (of the Atlanta and Cleveland Feds, respectively). As described by Bryan and Meyer:

“Some of the items that make up the Consumer Price Index change prices frequently, while others are slow to change… sticky prices [those that are slow to change] appear to incorporate expectations about future inflation to a greater degree than prices that change on a frequent basis… our sticky-price measure seems to contain a component of inflation expectations, and that component may be useful when trying to gauge where inflation is heading.”

Like the other core measure, the sticky-price CPI shows a pronounced downward movement over the past several years, with some sign of (an ever-so-slight) recovery as of late.

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Though I disagree with the assertion that core measures are a convenient way to ignore unpleasant movements in the overall CPI—there is evidence that core measures are useful in predicting where total CPI inflation is heading—it is almost surely a bad idea to ignore what is happening to headline statistics. (After all, in the end it is the average of all prices with which we are concerned.)

Here too, the evidence suggests, at the very least, there is scant evidence that disinflation has left the scene:

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I find it useful to take at least two more cuts at the overall price data. One, which has a decidedly short-term focus, involves examining the distribution of price changes in the broad categories that make up the headline CPI. Though a popular criticism of Fed policy—discussed and critiqued at Econbrowser—tries to deflate deflation concerns by reciting a number of prices that are rising, it is obvious that one could just as easily tick off a reasonably large list of prices that are falling:

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(The individual colors in the chart represent different components of the CPI. The underlying data can be found from this link to the explanation of the median CPI.)

The graph of the November price change distribution is actually somewhat encouraging. What it tells us is that almost half of the price changes in the CPI market basket, weighted by their shares of total consumer expenditures, fell in the (annualized) range of 0 percent to 2 percent. Furthermore, about as many price changes were below this range as they were above it.

A closer look at the prices that fall in the 0 percent to 2 percent category, however, reveals that individual price changes are skewed to the downside of the range:

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On a month-to-month basis, the distribution of individual prices does shift around, so these statistics are nothing more than suggestive short-run snapshots (but I believe they are informative nonetheless).

At the other end of the temporal scale is a look at how inflation has behaved over time. If the central bank had a long history of missing its stated inflation objectives, we might feel very different about an inflation rate that is below what Chairman Bernanke has referred to as “the mandate-consistent inflation rate” of “about 2 percent or a bit below” than we would if average prices were hewing pretty close to the target path. As I have previously noted, over the past 15 years or so, the Federal Open Market Committee (FOMC) has delivered an average inflation rate, measured as growth in the PCE price index, that is wholly consistent with this mandate. Here’s the case in a graph, adjusting the mandate-consistent inflation rate to account for an assumed upward bias in the CPI relative to the PCE index:

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Actually, those short-run complications are mostly associated with falling expectations of inflation. In my last macroblog post, I argued that the stabilization of market-based CPI inflation expectations and the associated decline in the perceived probability of deflation should arguably be counted as a success of the Fed’s current policy stance. The latest on market-based expectations was included in our previous macroblog item. For completeness, survey-based expected long-term inflation remains somewhat below the levels prior to the onset of the recession:

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I believe this is basically the bottom line: whether we look at headline inflation (straight-up, component-by-component, or in terms of the long-run trend), core inflation measures (of virtually any sensible variety), or inflation expectations (survey or market based), there is little a hint of building inflationary pressure.

While I don’t dismiss the usefulness of looking at other indicators (stock prices, bond prices, foreign exchange rates, commodity prices, and real estate prices are on Scott Sumner’s list; I would add various measures of labor costs to mine), you have to be pretty selective in your attentions to build the contrary case.

But feel free. We’ll keep watching.

By Dave Altig
Senior vice president and research director at the Atlanta Fed

Hey, the week is over (as far as equities are concerned) and I am sure there are many things on your pre-holiday minds.

So, what are you mulling over, stressing about, or just thinking might be important next week month or year?

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What say ye?

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To hell with Zuckerberg, says the Financial Times, its Jobs:

“Buoyed by the iPad, Apple’s shares finally surpassed Microsoft in May to make it the world’s most valuable technology concern. Others now have Apple in their sights, forcing Mr Jobs into the competitive moves that would once have seemed out of character. Apple has acknowledged its rivalry with Facebook, for instance, by releasing Ping, a me-too social network for iTunes users that a prouder Steve Jobs would not have let out the door.”

Query: Which firm is more likely to have greater revenues and/or profits in 5 years — Apple or Facebook? 10 years? 20 ?

(Note: FT is a business publication, and does not meet our Cover indicator criteria)

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Previously:
The Single Company Magazine Cover Indicator (March 20th, 2006)

Source:
Silicon Valley visionary who put Apple on top
Richard Waters and Joseph Menn
NYT, December 22 2010
http://www.ft.com/cms/s/0/f01db172-0e06-11e0-86e9-00144feabdc0.html#axzz18wGFiPjs

I mentioned last week that we like the Energy sector, particularly Oil and Coal. The two stocks mentioned Arch Coal (ACI) and SunCor (SU).

Several people tagged me to ask about Natural Gas.The bullish argument is rising oil prices will drag Nat Gas with it.

The bear case, however, is controlling at the moment. Given the huge new finds in both shale rock frac-ing and Barnett and Haynesville finds, along with the Marcellus find, makes the fundamental supply story bearish. North America has a ~200 year supply of Nat gas.

The technicals are even worse: Nat Gas still in still in a deep downtrend (red line) – only a move above $4.60 (purple line) would suggest the secular bear move is over.

Chart courtesy of FusionIQ

Here is another series I have never seen a single episode of, but have friends who insist its the best show on TV ever. The Wire

And, we have another Amazon 1 day special:  $200, 23 DVD, on sale for $75.

That works out to $3.26  per DVD (today only)

All 60 episodes on 23 discs
Bonus features from all five seasons, including audio commentaries by cast and crew
Three prequels explore life before The Wire
Never-before-seen gag reel