Posts filed under “Think Tank”

Wholesale Inventories

June Wholesale Inventories, which make up about 25% of Business Inventories, fell a greater than expected 1.7% vs a forecasted drop of .9% and May was revised down by .4% to show a decline of 1.2%. The greater than expected fall IF followed by a similar drop in Business Inventories, will lead to a revision downward in Q2 GDP as the inventory drag would be more than expected. Because sales rose .4%, the inventory to sales ratio fell to 1.26, the lowest since Oct ’08 when it was at 1.21. While the inventory is somewhat old news, it gives us a snapshot of how the quarter ended and further quantifies the extent of the inventory contraction. It also should follow that the greater than expected drag in Q2 should lead to much less of one in Q3. Business Inventories are out on Thursday.

Category: MacroNotes

Baltic Dry Index falls for 9th straight day

Coincident with the July slowdown seen in the new bank loan data in China and also with a short term topping out in their stock market, the Baltic Dry Index today fell for a 9th straight day to the lowest level since May 18th. It’s down 25% over the 9 day stretch.

Category: MacroNotes

Productivity, NFIB and China

Over time, GDP growth is equal to population growth + productivity. With population growth in the US at about 1% and the 60 year average of productivity being 2.3%, GDP growth should be between 3-3.5% in order to maximize the country’s asset base. Anything below that means the US is not producing to its potential…Read More

Category: MacroNotes

Where to Next for Commodities?

Good Evening: U.S. stocks took a bit of a breather today after seeing little to dislike in Friday’s nonfarm payrolls report. The slight trimming to Friday’s gains came on light volume, and then only after another series of afternoon upticks. The weakest performers on Monday (and, actually, for much of the past week) were the…Read More

Category: Markets, Think Tank

Rate hike odds

After fully pricing in a 25 bps rate hike by the January FOMC meeting midday Friday after the better than expected jobs data, the February fed funds contract is backing off and now pricing in a 76% chance of a hike. There are a few levers the Fed will undertake before they start raising the…Read More

Category: MacroNotes

King Report: NSA 1.33 Million Lost Jobs

> The US economy lost 1.33 million jobs NSA in July. Hallelujah! WooHoo! The recession is over!! Last July the US economy lost 1.401 million jobs NSA. The 68k gain is about the 66,848 per month margin of error for the BLS’s NFP prelim estimate. (Table 2F) The Net Business Birth/Death jobs for July are…Read More

Category: Think Tank

Show us the money

On the heels of Friday’s payroll data, consequent rise in interest rates and ahead of $75b of Treasury auctions this week (3, 10 and 30 yr maturities), Treasury Secretary Geithner likely spent the weekend doing his best Jerry Maquire imitation yelling ‘Show me the Money’ to the Chinese and others in order to avoid any…Read More

Category: MacroNotes

Words from the (Investment) Wise August 9, 2009

Words from the (investment) wise for the week that was (August 3 – 9, 2009)

Risky assets last week again marched higher to the tune of economic data supporting the argument of a global economic recovery. A realization among investors that the economic transition from recession to recovery was gaining momentum resulted in many global stock markets and commodities scaling fresh peaks for the year.

09-08-09-01

Source: Steve Breen

The S&P 500 Index closed the week above the psychological 1,000 level, marking its highest level since November and capping four consecutive weeks of gains. And more upside lies ahead, said Abby Joseph Cohen, Goldman Sachs’ market strategist, who expects the Index to reach the 1,100 point by year end. (Is this a contrary indicator coming from a permabull?)

Many commodities such as crude oil, copper, aluminum, nickel, lead and zinc hit their highest levels of the year, not to mention sugar recording a 28-year peak. “The financial crisis has been addressed, the commodity crisis has not,” warned Goldman Sachs (via the Financial Times), predicting that this year’s rise in prices was “just the beginning” of another rally that was “ultimately likely to be even more extreme” than those seen in the past. However, the Baltic Dry Index – a measure of freight rates for iron ore and bulk commodities that correlates very well with base metal indices – has broken technical support on the downside and short-term weakness in metals prices looks likely, possibly as a result of the Chinese buying frenzy having come to an end.

While high-yielding commodity-linked and emerging-market currencies were in favor, the US greenback dropped to its weakest level since October before staging a rally on Friday after the announcement of the US employment data had pleased some traders (see comments in the “Economy” section below). Government bonds (with the exception of emerging markets) again sold off as the bond vigilantes cottoned on to the improved economic outlook.

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers that indicates continued investor appetite for risky assets (albeit with investment-grade and high-yield corporate bonds taking a breather).

09-08-09-02

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

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Category: Think Tank

Six Impossible Things Before Breakfast

The Efficient Market Hypothesis, according to Shiller, is one of the most remarkable errors in the history of economic thought. EMH should be consigned to the dustbin of history. We need to stop teaching it, and brainwashing the innocent. Rob Arnott tells a lovely story of a speech he was giving to some 200 finance professors. He asked how many of them taught EMH – pretty much everyone’s hand was up. Then he asked how many of them believed it. Only two hands stayed up!

And we wonder why funds and banks, full of the best and brightest, have made such a mess of things. Part of the reason is that we have taught economic nonsense to two generations of students. They have come to rely upon models based on assumptions that are absurd on their face. And then they are shocked when the markets deliver them a “hundred-year flood” every 4 years. The models say this should not happen. But do they abandon their models? No, they use them to convince regulators that things should not be changed all that much. And who can argue with a model that was the basis for a Nobel Prize?

I am again out of town this week, but I have been saving a speech done by my friend James Montier of Societe Generale in London on the problems with the Efficient Market Hypothesis (EFM). While parts of it are wonkish, there are also parts that are quite funny (at least to an economist).

Ideas have consequences, and bad ideas usually have bad consequences. The current maelstrom from which we are emerging (finally, if in fits and starts) has many culprits. A lot of bad ideas and poor management that came together to create the perfect storm. Today, we look at some of the ideas that are part of the problem but are too often glossed over because they are “academic” and not of the real world. However, gentle reader, academic ideas that are taught and accepted as gospel by 99% of the professors have real-world consequences. Where does your money manager stand on these topics? It does make a difference. And now, let’s jump into James’s speech.

Six impossible things before breakfast, or how EMH has damaged our industry

What follows is the text of a speech to be delivered at the CFA UK conference on “What ever happened to EMH”. Dedicated to Peter Bernstein – Peter will be fondly remembered and sadly missed by all who work in investment. Although he and I often ended up on opposite sides of the debates, he was true gentleman and always a pleasure to discuss ideas with. I am sure Peter would have disagreed with some, much and perhaps all of my speech today, but I’m equally sure he would have enjoyed the discussion.

The Dead Parrot of Finance

Given that this is the UK division of the CFA I am sure that The Monty Python Dead Parrot Sketch will be familiar to all of you. The EMH is the financial equivalent of the Dead Parrot. I feel like the John Cleese character (an exceedingly annoyed customer who recently purchased a parrot) returning to the petshop to berate the owner:

“He’s passed away, This parrot is no more, He has ceased to be! He’s expired and gone to meet his maker. He’s a stiff! Bereft of Life, he rests in peace! If you hadn’t nailed him to the perch he’d be pushing up daisies! His metabolic processes are now history! He’s off the twig! He kicked the bucket. He’s shuffled off his mortal coil, run down the curtain and joined the bleedin’ choir invisible! This is an ex-parrot!!!”

The shopkeeper (picture Gene Fama if you will) keeps insisting the parrot is simply resting. Incidentally, the Dead Parrot Sketch takes on even more meaning when you recall Stephen Ross’s words that “All it takes to turn a parrot into a learned financial economist is just one word – arbitrage”.

The EMH supporters have strong similarities with the Jesuit astronomers of the 17th Century who desperately wanted to maintain the assumption that the Sun revolved around the Earth. The reason for this desire to protect the maintained hypothesis was simple. If the Sun didn’t revolve around the Earth, then the Bible’s tale of Joshua asking God to make the Sun stand still in the sky was a lie. A bible that lies even once can’t be the inerrant foundation for faith!

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Category: Think Tank

Where are those evil speculators?

In the context of the CFTC hearings this week discussing speculators, particularly in the crude contract, the CFTC today said the net speculative long position in crude totaled 34k, a 6 week high but is just 7k contracts above its average since March 2003 when the economy began its prior recovery. It got as high…Read More

Category: MacroNotes