Posts filed under “Think Tank”

Data

May Pending Home Sales rose .1% m/o/m, about in line with expectations of flat and April was revised higher to a gain of 7.1% from 6.7%. The y/o/y gain was 4.6%. The Northeast and West saw gains while the Midwest and South fell. The $10,000 California tax credit would not be reflected in this data as it only applies to new homes but the $8000 federal tax credit does as it applies to first time buyers of either old or new homes. According to Bankrate.com, the average 30 yr mortgage rate in May was 5.02% (from 4.95% in April) and ended the month above 5.2%. Today it’s at about 5.4% so the data still doesn’t reflect this change. What did change of course in May was a dramatic improvement in the markets and in confidence after the Q1 pain but the labor market still remained tough. Refi’s have shown the largest beta to changes in interest rates over the past few months according to the MBA data.

The ISM manufacturing # is 44.8, about in line with the consensus of 44.9, up 2 points from May and is at the highest since Aug ’08. New Orders fell below 50, down almost 2 points to 49.2 while Backlogs fell a touch to 47.5. Production though rose 6.5 points to 52.5, the highest since Jan ’08. The Employment index rose 6.4 points to 40.7 to the highest since Sept ’08. Export Orders rose 1.5 points to just shy of 50 at 49.5 and it’s the highest since Sept ’08. Inventories still reflect the destocking as they fell 2 points to 30.8, the lowest since 1982 while customer inventories fell to the lowest since ’05. Prices Paid followed the rise in commodity prices and is back to 50, also since the first time since Sept ’08. Net-net, the question remains how long the bridge is from a slowing rate of contraction to a period of expansion. According to ISM, a PMI above 41.2, over time, does indicate an expansion of the overall economy but still a contraction in manufacturing.

Category: MacroNotes

ADP jobs #

ADP reports that the private sector shed 473k jobs in June, below expectations of a drop of 394k but is in line with the revised decline of 485k in May (from 532k). Small and medium sized businesses continue to lose the most amount of workers relative to large companies in both goods producing and service…Read More

Category: MacroNotes

China, China, China AGAIN

Both state owned and private sector weighted manufacturing indexes in China showed another month of expansion as both rose a touch from May and it helped to send the Shanghai index to another one year high. Japan’s Tankan report rose 10 points from the previous quarter (which was a record low dating back to 1974)…Read More

Category: MacroNotes

Confidence, Housing, and Unemployment are All Intertwined

Good Evening: An unexpected drop in consumer confidence today spoiled what investors had hoped would be a rousing finish to an otherwise strong second quarter for U.S. capital markets. Other data points, including those in the all important housing sector, were mixed. How confidence, home prices, mortgage delinquencies, unemployment, and the financial markets interact in…Read More

Category: Markets, Think Tank

Consider the components of equity returns

Consider the components of equity returns The raison d’être of investment or wealth management is to maintain, or hopefully improve, one’s standard of living, i.e. to earn a real return on the investment amount. This sounds easy enough if one considers that the S&P 500 Index (and its predecessors prior to 1957) delivered a nominal…Read More

Category: Think Tank

Fed President Bullard on exit strategies

Fed President Bullard is giving a speech on exit strategies for the Fed and begins by saying “monetary policy is very accommodative now…It will remain very accommodative for an extended period…This is appropriate, given low inflation and weak economic conditions.” He believes the liquidity facilities that are in place should “wind down naturally” as they…Read More

Category: MacroNotes

Consumer Confidence and the Chicago PMI

Consumer Confidence was 6 points less than expected at 49.3 and down from 54.8 in May as both the Present Situation and Expectations components fell. The overall # is still about twice the lows of Feb but the improvement has been almost solely due to Expectations. This # has risen to 65.5 from 27.3 in…Read More

Category: MacroNotes

Gasoline prices

With just days ahead of the July 4th long weekend, the average price of a gallon of gasoline, as of yesterday, has fallen for 8 straight days and is down .06 to $2.633 during this span according to AAA. This follows 54 straight days of gains that took prices to $2.693 from $2.048 (and up…Read More

Category: MacroNotes

Case/Shiller HPI

The April S&P/CaseShiller 20 city home price index fell 18.12% y/o/y but was better than the forecasted drop of a fall of 18.63%. It’s the smallest rate of decline since Oct ’08. The fall off the high in July ’06 is now 32.6% up from 32.2% in March. All 20 cities still have y/o/y drops…Read More

Category: MacroNotes

Jim Welsh: June Letter

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ECONOMY

In February I thought the stock market was on the cusp of the largest rally since the bear market began in October 2007, and that it would be ignited by economic statistics showing that the rate of decline in the economy was getting less bad. I thought the optimists would jump to the conclusion that less bad equaled recovery. Despite this expectation, the shift in psychology regarding the economy’s prospects has been remarkable. Four months ago, investors felt they were staring into an economic abyss deeper than the cosmic void. When the first series of less bad statistics suggested the economic hole was only as deep as the Grand Canyon, the sense of relief was palpable. Within weeks the phrase ‘green shoots’ was included in every serious discussion about the economy. Virtually over night any economist worth their salt had become a gardener. Initially, a few brave economists ventured that the economy might turn up in the first half of 2010. As additional stats in April and May improved from being extraordinarily bad to simply just awful, the notion that the recovery might begin before the end of 2009 took root. And after the Labor Department reported that only 345,000 jobs were lost in May, confidence that a V-shaped recovery blossomed. By mid June, conviction that a V-shaped recovery was so high the Federal funds futures were pricing a 70% probability that the Federal Reserve would raise rates in November. Green shoots had grown into mighty oaks in a matter of weeks. Who says economists don’t know a thing or two about hydroponic gardening?

As discussed in the April and May letters, GDP will likely be positive in the fourth quarter, and maybe in the third quarter. As noted, most of the improvement will be statistical nonsense. In the first quarter, business slashed inventories, which sliced 2.8% from GDP. With sales stabilizing and likely to improve as fiscal stimulus lifts demand, companies will increase production to restock their inventories. This will cause the inventory component within GDP to swing from deeply negative to a slight positive. The wholesale inventory-to-sales ratio jumped from 1.09 months in June 2008 to 1.34 in January. In April, it dipped to 1.31 months, so it is still fairly high, and suggests sales will have to improve more before companies will actually need to increase production. The large decline in exports lowered first quarter GDP by -4%. This drag on GDP will moderate as the global economy helps U.S. export volume to be less bad in coming quarters.

By the end of 2009, the bar chart of GDP will show how the economy plunged from a growth rate of 2.8% in the second quarter of 2008 to a negative 6.1% in the fourth quarter, before reviving into positive territory again. It sure will look like a V-shaped recovery. For those economists who didn’t see the deepest recession since the depression coming, or grossly underestimated its depth, the V will
also mean Vindication. For politicians, the V will be heralded as a Victory of policy. In lieu of a parade, the electorate will endure weeks (months?) of chest thumping and back slapping. A few ingrates will question whether spending trillions of dollars we don’t have actually qualifies as ‘policy’. But as they say, you can’t please everyone, even when you’re dolling out trillions.

The stock market has rallied smartly since its low in March, as have a number of commodities. The V-shaped recovery crowd has been quick to point out that since markets look ahead six to nine months, the run up in stock prices and oil are telling us a real recovery is afoot. In recent weeks, I’ve heard at least one expert every day make this statement on CNBC or Bloomberg. And every day I hope the television anchor will ask the expert a couple of simple questions. “If the stock market is so good at looking forward six to nine months, what was the S&P telling you about the credit crisis in October 2007 as it made an all-time high? When crude oil sold for $147 a barrel in July 2008, what was it telling you about global demand? And given how wrong the stock market and oil market were, why are you so sure now that they are sending the correct message?” Like Don Quixote, believing markets possess a paranormal clairvoyance adds a bit of mystery, even romanticism to the mundane task of tracking daily fluctuations in prices. The truth is far more straight forward, and absolutely impersonal. At every top and bottom, the market is always wrong.

According to the International Energy Agency, there was enough oil in storage at the end of March to satisfy 62.4 days of demand, 14.7% more than a year ago. Last week, the IEA said global inventories in OECD countries jumped 10.4 million barrels in April and another 30.5 million barrels in May. In the first quarter, OECD countries accounted for 55% of global oil demand, while China accounted for 9%. According to Reuters, Chinese crude-oil demand rose 3.9% in April over the previous year, but demand was down almost 2% in the OECD countries. Since OECD consumption is 6 times larger than Chinese demand, total global demand is falling. GaveKal estimates commercial crude oil inventories are six billion barrels. With oil around $70 a barrel, that represents more than $400 billion of working capital tied up in holding onto all that oil. With prices rising, holding inventories is easy. But if prices crack, some of the excess inventory will be sold into a falling market.

Oil prices have risen from $34 a barrel to $72 on the growing perception of a V-shaped recovery and the decline in the dollar. When the dollar topped in early March, crude oil was $45 a barrel. Oil has run up from $50 to $72 since late April, as the dollar index fell from 87 to below 79 in early June. After peaking in July last year, crude oil collapsed, as the dollar rallied 25% between July and November. This suggests any decent rally in the dollar will trigger a decline in oil prices that could be fairly sharp since the underpinnings of oil demand are so weak.

In order for the V-shaped recovery in GDP to become a self sustaining economic expansion, private demand will need to be strong enough to carry the economy forward, after fiscal stimulus has run its course. Since the consumer represents 70% of GDP, most of the heavy lifting will be dependent on consumer spending. Obviously, the primary driver behind consumer spending is job growth, which is not going to improve for a long time. The Labor Department reported that 345,000 jobs were lost in May, after adding 220,000 jobs based on their Birth/Death adjustment model. In other words, the real number of jobs lost in May was near 565,000, or worse. From January through May, the average monthly job losses reported by the Labor Department were 584,000. If the faulty B/D model adjustment is excluded, monthly job losses averaged 652,000. On the surface, the 345,000 figure is 41% below the 584,000 five month reported average, which is a noticeable improvement. However, the improvement is only 13%, if the B/D adjustment is excluded (565,000 vs. 652,000). In May, nearly 25 million (16.4%) Americans were either unemployed, underemployed, or had given up looking for a job. The average work week for those with a job fell to a record low 33.1 hours. In the last year, average weekly earnings rose just 1.2%.

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Category: Markets, Think Tank