Posts filed under “Think Tank”

Everyone Has a Stock Market Forecast

Good Evening: This may sound like a recording, but stocks overcame another early dip to again finish higher on Tuesday. At least the averages had some economic data behind this rally, with retail sales and the Empire Manufacturing survey both coming in well ahead of expectations. Then again, PPI rose at a stagflationary pace, and Fed Chairman. Ben Bernanke declared the recession all but over. That equities were able to surmount these minor obstacles, especially the Chairman’s begging-to-be-jinxed forecast, is not a surprise. Nor will it turn many heads that two former Salomon Brothers department heads disagree over the future direction of the capital markets. No; the shocker, one year after the demise of Lehman Brothers, is that anyone ventures a forecast at all in this environment.

Overnight activity was a bit of a snooze, but those reading sections of the newspaper not marked Business had to put the newsprint down once this morning’s batch of data hit the tape. Retail sales were the most anticipated figures of the bunch, and they didn’t disappoint the bulls. Headline sales in August were + 2.7%, +1.1% ex the cash for clunkers phenomenon, and +0.6% ex autos and gasoline sales. All of these numbers were well above consensus expectations and confirmed hopes for a solidly positive reading for GDP in Q3. One of the factors used to determine whether the nominal growth in the economy is “real’ or not is inflation, and, on this front, investors were disappointed with the +1.7% PPI reading in August.

Perhaps market participants were confused, since 1.7% isn’t much of an annualized rate. The inconvenient truth is that this reading is a monthly rate, one more worthy of a South American nation, but after last month’s 0.9% decline, investors weren’t in the mood to worry about the stagflationary implications in today’s PPI release. Finally, the Empire Manufacturing survey printed a positive 19 (after rounding), rather than the positive 14 that had been expected. All things considered, the government-issue data was supportive of the thesis that the economy is, at least for now, on the mend.

Less confusing to all concerned, at least on the surface, was Chairman Bernanke’s remark today about the U.S. economy. “Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time,” (source: Bloomberg article below). In receipt of this official economic forecast from the Fed Chairman himself, market participants seemed to immediately suffer a mild case of vertigo. U.S. stocks actually started sinking after a nearly unchanged open, and the downticks may in part have been due to the discomfort economic bulls felt over having Mr. Bernanke agree with them. If the Fed is saying the recession is over, or so the logic went, who is left to convert to the growth camp?

Stocks bounced after this brief dip when investors considered the second half of the Chairman’s remark. The “feel weak for some time” phrase can be interpreted literally, but most chose to infer a policy meaning. The term “weak” calls to mind low policy rates and easy money for most market observers, especially when those words are uttered by the man who sits at the head of the table during FOMC meetings.

The resulting rally in the major averages for the rest of the session was thus fairly easy to understand. When Tuesday’s closing bell rang, the major indexes had posted gains of between 0.3% (S&P) and 0.8% (Russell 2000). Treasury prices gave a little ground, but the 2 to 4 basis point increases in yield were modest. The dollar declined 0.2%, but commodity prices took flight. Oil was up 3%, the precious metals were up 1% or more, and parts of the agricultural complex flirted with “limit up” levels. It is strange, therefore, that two separate pricing sources depicted no change in the CRB index today. Given the changes in the markets I could measure, the CRB should have finished higher by 1% or more.

Since the meltdown in home values and mortgage-backed securities (not to mention a toxic amount of leverage) brought down Lehman Brothers one year ago, it was interesting to see Lewis Ranieri’s comments hit the tape today. The Chairman of Hyperion Partners was one of the founding fathers of the mortgage-backed securities market while he served time as the head of the mortgage unit at Salomon Brothers. This man is no stranger when it comes to the inner workings of structured credit, and he said today that the U.S. “financial system isn’t fixed yet, it only looks like it’s fixed” (source: Bloomberg article below) Perhaps Mr. Ranieri agrees with Nassim Taleb, who proffers the common sense argument that the solution to a debt crisis isn’t more debt. Certainly today’s reports of credit card performance in August only buttressed Mr. Ranieri’s arguments (see below), but before we could all look for beds under which to hide, one of his former colleagues piped up to offer a different take on the state of our capital markets.

U.S. stocks “have a lot of room to run”, says Laszlo Birinyi, who heads the firm bearing his name (see below). What’s more, Mr. Birinyi sees a growing economy and a firm stock market lasting at least until the U.S. averages have surpassed their old highs. His case seems to rest on a firm tape (i.e. momentum), but such is the type of forecast that technically-oriented analysts are paid to issue. When Mr. Ranieri was busy inventing different ways to slice up and repackage mortgage loans, Mr. Birinyi was chief technical strategist at the same firm. Both left Salomon before it was sold to Travelers and integrated into Smith Barney (now Citigroup), but it’s interesting to see them offer up such different perspectives.

So which of these two veterans will ultimately be proven right with their opposing forecasts? Let us recall that someone once said, in effect, that opinions about where the stock market is headed are like the terminal destination of the human digestive tract. “Everyone has one and they are useless more than 95% of the time”. With said warning affixed, I will offer a forecast of my own. I think they’ll both be proven right. Stocks could indeed continue to run, especially if portfolio managers who are currently underweight start to panic. At some point, though, the reality will set in that we are not likely headed back to the heady days of 2006 anytime soon. As for just when these twin predictions will come to pass, and from what level in the S&P 500 the next decline will begin, I’ll leave it to readers to decide for themselves. Like everyone else’s, my opinion about where the market is headed is useful only some of the time.

– Jack McHugh

Retail Sales in U.S. Jump 2.7%, Most in Three Years
U.S. Credit-Card Defaults Resume Ascent as Unemployment Worsens
Bernanke Says U.S. Recession ‘Very Likely’ Has Ended
U.S. Stocks Have ‘A Lot of Room to Run,’ Birinyi Says
Financial System ‘Only Looks’ Fixed, Ranieri Says

Category: Markets, Think Tank

Penury, self-imposed or inflicted, the new normal?

One of my favorite sources of information is The Liscio Report by Philippa Dunne & Doug Henwood. Among other things, each month they survey all the states about tax revenues, expenses and then give us the results in a very pithy fashion. No one pays taxes unless they have to, and thus taxes tell us…Read More

Category: Think Tank

We Can’t Break Up the Giant Banks, Can We? Yes We Can!

Washington’s Blog strives to provide real-time, well-researched and actionable information. George – the head writer at Washington’s Blog – is a busy professional and a former adjunct professor. ~~~ Top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion. Even the Bank…Read More

Category: Think Tank

Economic data

Aug Retail Sales were much better than expected. Including clunkers, sales were up 2.7% vs expectations of a gain of 1.9%. Ex clunkers, sales were up 1.1%, .7% more than expected and ex clunkers and gasoline stations, sales were up .6% vs the estimates of flat. Sales for auto/parts were up 10.6% and gasoline station…Read More

Category: MacroNotes

Lehman’s Legacy Still Being Written

Good Evening: After small stutter steps on Friday and this morning, U.S. stocks marched ahead today for the sixth time in the last seven trading sessions. The early dip in prices could probably be attributed to some nascent nervousness over a brewing trade dispute between the U.S. and China. But market participants took little time…Read More

Category: Markets, Think Tank

Capital markets/bank lending

To the question of whether banks are lending to businesses and the flip side of what’s the demand for loans, from Friday’s Federal Reserve data for the week ended Sept 2nd, Commercial and Industrial loans outstanding fell for a 9th straight week and is at the lowest level since Jan ’08. Fortunately though for many…Read More

Category: MacroNotes

An economics lesson from ‘Ferris Bueller’s Day Off’

“In 1930, the Republican controlled House of Rep, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the…Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act which, anyone? anyone? Raised or lowered?… Raised tariffs, in an effort to collect more revenue for the federal gov’t. Did it work? Anyone?…Read More

Category: MacroNotes

Elements of Deflation, Part 2

Just as water is formed by the basic elements hydrogen and oxygen, deflation has its own fundamental components. Last week we started exploring those elements, and this week we continue. I feel that the most fundamental of decisions we face in building investment portfolios is correctly deciding whether we are faced with inflation or deflation in our future. (And I tell you later on when to worry about inflation.) Most investments behave quite differently depending on whether we are in a deflationary or inflationary environment. Get this answer wrong and it could rise up to bite you.

The problem is that there is not an easy answer. In fact, the answer is that it could be both. Today I got another letter from Peter Schiff, who seems to be ubiquitous. He says the rise in gold is because of rising inflation expectations among investors. Gold is predicting inflation. Maybe, but the correlation between gold and inflation for the last 25-plus years has been zero. I rather think that gold is rising in terms of value against most major fiat (paper) currencies because it is seen as a neutral currency. The Fed and the Obama administration seem to be pursuing policies that are dollar-negative, and they give no hint of letting up. The rise in gold above $1,000 does not really tell us anything about the future of inflation.

In fact, it is my belief that if the Fed were to withdraw from the scene of economic battle, the forces of deflation would be felt in short order. The answer to the question “Will we have inflation in our future?” is “You better hope so!”

I wrote in 2003, when Greenspan was holding down rates too long in order to spur
the economy, that the best outcome or endgame over the course of the full cycle would be stagflation. I still think that is the most likely scenario. The Fed will fight deflation and knows how to do that. They also know what to do when inflation becomes too high. But there is a cost.

It is not a matter of pain or no pain; it is a matter of choosing which pain we will face and for how long, and perhaps in what order. As I wrote a few weeks ago, like teenagers, we as an economic polity have made some very bad choices. We are now in a scenario where there are no good choices, just less-bad ones.

In a normal world, the amount of monetary and fiscal stimulus we are witnessing would
produce inflation in very short order. That is what has the gold bugs of the world excited. It is their moment. They keep repeating that Milton Friedman taught us that inflation was always and everywhere a matter of too much money being printed. The answer to that is that the statement is mostly true, but not always and not everywhere (think Japan). The reality is somewhat more nuanced. Let’s review something I wrote last year about the velocity of money, and this time we are going to go into the concept a little more deeply. This is critical to your understanding of what is facing us.

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Category: Think Tank

Reflection on 9/11

September 12, 2009 It has been two pensive days. Somehow the words won’t come. Difficult for me since I write 100 times a year. I sit staring at the keyboard. No words. Everyone is/was so busy with 9/11. Public moments of silence, ceremonies, TV filled with remembrances, talk shows, websites, commentaries, footage of planes and…Read More

Category: Think Tank, War/Defense

Gold net longs at record highs

According to the just reported CFTC data for the week ended Tuesday, the net spec long position in gold rose to an all time record high (dating back to 1993), up 22% on the week to a net 225k contracts. Silver net longs rose to the most since Aug ’08 and net longs in platinum…Read More

Category: MacroNotes