Posts filed under “Think Tank”

An Inconclusive Start to the Q2 Earnings Season?

Good Evening: After an upside surprise from Alcoa and much better than expected initial jobless claims, U.S. stocks were poised to go much higher this morning. Given the almost 10% pullback in some of the major averages during the past four weeks, the news portended some short-covering, or at least a decent sized bounce. Unfortunately, the rally was mostly a no-show today, as the initial upticks were met with shrugs and even some selling. Though some risk-taking was evident today, the set up going into the real earnings reporting season (which begins next week) would, on the surface at least, appear to be inconclusive.

Stocks in Asia mostly continued their recent losing streak last night (stretching the skid there to seven straight days for Asia in the aggregate), but U.S. stock index futures chose to follow the bourses in Europe, which were up 1% or more prior to the open in the U.S.. Alcoa kicked off the Q2 earnings season by beating analysts’ estimates last night, and this news also helped boost our stock index futures. Calling Alcoa’s results an “earnings beat” is a misnomer, for while AA posted numbers ahead of Street estimates, the company’s bottom line was still red to the tune of almost half a billion dollars. Still, market participants were encouraged enough by AA’s results to push U.S. index futures higher prior to the jobless claims report.

Though he didn’t mean to do so, CNBC’s Rick Santelli then set the tone for the entire trading day when he disclosed the jobless claims figures to viewers. First came the good news (initial claims dropped well below the “magic” 600K mark), and then, less enthusiastically, came the bad news (continuing jobless claims jumped to a new record high). In response, and in keeping with the sequential theme hinted at above, index futures popped in celebration of the hefty fall in initial claims. For a good explanation of why the claims data later came to be viewed with some suspicion (i.e. seasonal adjustments played a role), please see the BAC-MER report below. Today’s data did nothing to dispel the notion that we have a large and growing unemployment problem. As I noted in my previous market commentary, even those with jobs are working fewer and fewer hours. What I neglected to mention about the chart I used to back up this assertion is that it came to me courtesy of Philip Grant at CF Global (my apologies, Philip).

The interest in equities inspired by AA and jobless claims didn’t spark much upside momentum once trading commenced in New York, however, and the major averages could only manage gains of just more than 0.5% in the early going. Perhaps contributing to this morning’s dullness were the mixed to disappointing June chain store sales which dribbled out during this time frame. Adding some noise was the official “Public-Private Investment Partnership” announcement, but the scaled down nature of this latest version of the PPIP — and PIMCO’s mysterious withdrawal from it — led to an understandably muted market response. Credit did catch a bit of a bid, and shares of financial companies did creep higher.

The rest of the session was then spent going sideways until a modest late day sell-off trimmed this morning’s gains. The S&P and Dow Transports did cling to gains of just under 0.5%, but the Dow Industrials and Russell 2000 fell back to finish virtually unchanged. In addition to the summertime blahs, the poor results from today’s auction of 30 year Treasury bonds may have also hampered equities (see below). After the stellar 3 and 10 year note auctions that preceded it, there was a demonstrated lack of enthusiasm among investors to lend the U.S. government funds for three decades at a mere 4.3%. The G-8 meeting may have been a complicating factor in tendering those bids, since a bland communiqué belied a behind the scenes squabble about the future role of the U.S. dollar (see below). Currency traders were not fooled by the G-8 statement, and they marked down the U.S. dollar index by more than 1% on Thursday. Needing some good news after recent drubbings, commodities went up as the greenback went down. Grains and copper were the standout performers as the CRB index rose 1.4%.

One of the questions most asked both on trading desks and on cable T.V. today was: “Is the earnings news from Alcoa going to be indicative of Q2 earnings for the rest of the tape?” The answer is obviously unknowable in advance, but the action in AA was interesting. After jumping over a bar that had been set pretty low, AA parlayed that smaller than expected loss into a gain of more than 5% last night and this morning. Interestingly, though, this “beat” wasn’t enough to prevent Alcoa’s stock from sliding until it finished down by almost 2.5%. For those who think a company’s “guidance” is more important than the actual earnings, this decline was registered in spite of some hopeful statements by AA’s CEO.

I don’t know if the rest of earnings season will play out for others the way it did for Alcoa today, but the set up is intriguing. The major averages enjoyed a 30+% rally off the March lows into April and May, only to see June go sideways. The green shoots advocates were sure the bottom was in for the stock market and that the economy would follow in Q3. The shocking drop in consumer confidence on June 30 then challenged these assumptions, and last week’s unemployment figures triggered a decent correction in stock prices. The battle lines are thus drawn between the following camps. There are those who believe a torrent of cash will come pouring in off the sidelines when companies meet or beat the downwardly revised Q2 estimates, and there are others who have fresh worries about the economy and may not have sold much before last autumn’s fall.

We’ll find out in the weeks to come, but I could easily see the market rising or falling 10% during the next month. We could even see both outcomes if today is any indication. Remember that the financial stocks report early in the cycle, and with asset prices rising during Q2, it’s quite conceivable many of them will report outstanding results (especially if they can still mark their toxic assets however they see fit). There are many investors who believe financial stocks hold the directional key to the stock market, and good earnings news from this sector could propel a rally in the whole tape — especially after the swoon since the mid June high in the S&P. Of course, a slew of earnings disappointments will have the opposite effect, potentially opening the trap door to a retest of the March lows.

The pivot point might just end up being the release of the July employment data on August 7. By that time, the earnings picture should be a little clearer, making the employment picture the crucial variable. Alcoa achieved much of its “success” last quarter through severe cutbacks in jobs and other expenses management deemed easy to throw overboard. This strategy, while worthy of an “A” in just about any of our nation’s business schools, only works in the micro sense. From a macro perspective, the more companies that adopt the “slash and burn the expenses” strategy, the larger the negative impact on aggregate demand. If too many companies chop the head count to please analysts and shareholders, then a smart strategy will soon become a vicious cycle. Decision making at the micro (company) level takes on greater importance in the wake of a broken credit bubble. Just ask Japan. Hmmm; maybe Alcoa’s earnings report and topsy turvy stock action are a far from inconclusive start to the Q2 earnings season after all.

– Jack McHugh

U.S. Stocks Rise as Bank Rally Tempers Drop in Drug Shares
Treasuries Decline as Demand Drops at $11 Billion Bond Auction
Gap, Abercrombie June Sales Trail Analysts’ Estimates
G-8, G-5 Dodge Dollar Spat, Vow to Avoid Devaluations
Initial claims better cont cla.pdf

Category: Markets, Think Tank

US$ index

Add Nicolas Sarkozy to the choir of calls on the US$ as he is saying at the G8 that the US$ can’t remain the only reserve currency. Even before his comments, the $ index has been weak all day on the heels of the Bank of England MPC statement this morning. The $ index is…Read More

Category: MacroNotes

Federal Reserve independence

Vice Chairman Donald L. Kohn

Federal Reserve independence

Before the Subcommittee on Domestic Monetary Policy and Technology, Committee on Financial Services, U.S. House of Representatives, Washington, D.C.

July 9, 2009

Chairman Watt, Ranking Member Paul, and other members of the Subcommittee, I appreciate the opportunity to discuss with you the important public policy reasons why the Congress has long given the Federal Reserve a substantial degree of independence to conduct monetary policy while ensuring that we remain accountable to the Congress and to the American people. In addition, I will explain why an extension of the Federal Reserve’s supervisory and regulatory responsibilities as part of a broader initiative to address systemic risks would be compatible with the pursuit of our statutory monetary policy objectives. I also will discuss the significant steps the Federal Reserve has taken recently to improve our transparency and maintain accountability.

Independence and Accountability
A well-designed framework for monetary policy includes a careful balance between independence and accountability. A balance of this type conforms to our general inclination as a nation to have clearly drawn lines of authority, limited powers, and appropriate checks and balances within our government; such a balance also is conducive to sound monetary policy.

The Federal Reserve derives much of the authority under which it operates from the Federal Reserve Act. The act specifies and limits the Federal Reserve’s powers. In 1977, the Congress amended the act by establishing maximum employment and price stability as our monetary policy objectives; the Federal Reserve has no authority to establish different objectives. At the same time, the Congress has–correctly, in my view–given the Federal Reserve considerable scope to design and implement the best approaches to achieving those statutory objectives. Moreover, as I will discuss in detail later, the independence that is granted to the Federal Reserve is subject to a well-calibrated system of checks and balances in the form of transparency and accountability to the public and the Congress.

The latitude for the Federal Reserve to pursue its statutory objectives is expressed in several important ways. For example, the Congress determined that Federal Reserve policymakers cannot be removed from their positions merely because others in the government disagree with their views on policy issues. In addition, to guard against indirect pressures, the Federal Reserve determines its budget and staff, subject to congressional oversight. Thus, the system has three essential components: broad objectives set by the Congress, independence to pursue those legislated objectives as efficiently and effectively as possible, and accountability to the Congress through a range of vehicles.

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Category: Federal Reserve, Think Tank

30 year bond auction

The reopening of the 30 year bond auction was mixed as the yield was about 1 bps higher than where the when issued was trading just prior at 4.303% (40 bps below the June auction) and the bid to cover at 2.36% was below the June reopening. But, going back to 2006 when the Treasury…Read More

Category: MacroNotes

Consumer Credit

Nice chart on Consumer borrowing via Asha Bangalore of Northern Trust’s Global Economic Research: > Asha notes: Consumers Continue to Borrow Less but Pace of Decline is Notable Consumer credit declined at an annual rate of 1.5% in May, after a 7.8% plunge in April and a 7.3% drop in March. The consumer deleveraging trend…Read More

Category: Credit, Think Tank

AAII invdividual investor stock market sentiment

Here’s a check up on stock market sentiment in light of the recent pullback that has taken the S&P’s back to levels last seen on May 1st. The AAII (American Assoc of Individual Investors) weekly measure of individual investor sentiment towards the stock market over the next 6 months showed a spread between bulls and…Read More

Category: MacroNotes

June retail comps

Retail Metrics said June comps fell 4.3% which is a touch better than the range of estimates of a decline of 4.5-5%. The month was impacted by the cold and rainy weather, tough comparisons with July ’08 rebate checks (which is the last month of this comparison) and of course sluggish consumer spending.

Category: MacroNotes

Wholesale Inventories

May Wholesale Inventories, which makes up about 25% of Business Inventories, fell .8%, .2% less than expected and April was revised up .1%. It’s the 9th straight month in a row of declines. The biggest contributor to the drop was in the durable good sector led by auto’s and computers. With overall sales falling .2%,…Read More

Category: MacroNotes

A Dubious Foundation

Paul Brodsky & Lee Quaintance run QB Partners, a private macro-oriented investment fund based in New York.


This month we discuss why we think longer term Treasury yields should be much higher than they are; why we are not investing in anticipation that they will rise; and how synthetically-low benchmark interest rates are sending false economic and investment signals. We also discuss, point by point, the justification behind our assertion that US monetary policy has been, and continues to be, terribly misguided and dangerous to the broad US economy.

American Fun House

We believe macroeconomic fundamentals imply longer-term US Treasury yields should be priced above 10%. We have been reluctant to express this view in the markets, however, because there are powerful structural forces blocking any fundamental reconciliation of value. These forces include bond markets comprised mostly of domestic and foreign investors with incentives that place them at odds with rational credit pricing, as well as central banks with unlimited spending capacity threatening (and being encouraged by all) to intervene when necessary to provide a ceiling on yields. As a result, we think the price of money and credit in the US and globally (because dollars are the world’s reserve currency) has been sending false macroeconomic signals.

Investors are being forced to judge asset values in a hall of mirrors. As Treasuries provide benchmark default-free nominal rates against which all investments are ultimately judged, we think the relative values of tertiary asset markets are also being compromised. Such illusionary forces are powerful and we do not expect them to change unless there is great economic and market upheaval. So, we have not been willing to express our fundamental view of benchmark US interest rates directly (by shorting Treasuries). Nevertheless, we believe there is great value in acknowledging this gross mispricing because it provides a critical cornerstone upon which to build more accurate valuation metrics that we think will generate positive real rates of returns from other assets.

True Inflation

Most bond investors may genuinely believe default-free interest rates are priced fairly or should be generally lower, not higher as we do. The argument against our view is that the rate of CPI growth has been minimal, even negative year over year, and that the prospects for substantial demand growth (dismissing, of course, considerations of supply growth) that would lead to higher prices seem remote. Therefore, it would follow to these investors that Treasury yields are positive in real terms today and likely to stay that way into the foreseeable future. We vehemently disagree.

As we’ve discussed at length (and won’t dwell on here), money growth is inflation and generally rising prices are frequently derivative of that money growth. When it comes to the changing prices of goods, services and assets, it is very easy to prove conceptually and empirically that, in macroeconomic terms, the changing stock of money overwhelms any potentially offsetting discrete changes in the supply/demand equilibriums of widgets, widget repairmen and Widget Inc. shares. The nominal prices for any or all of them will increase, all things equal, even if the supply of them were to rise by, say, 10%, the demand for them were to drop by 25%, yet the general money stock with which they might be bought triples. This logic should make sense to all, yet it is overlooked by the majority of contemporary investors and economists who seem to be modeling the money stock as a constant.



Sources: The Federal Reserve Bank of St. Louis; St. Louis Adjusted Monetary Base; QBAMCO


The Fed just doubled the monetary base over the past nine months (above) and has stated plans to continue this expansion (via Quantitative Easing) through at least the end of 2009. So, in monetary terms, we’ve already witnessed a massive dose of inflation. The growth in the US monetary base is the permanent addition of money to the system. It is money created from thin air by the Fed that is not self-extinguishing. Where did this new, permanent money go?

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Category: Think Tank

jobless claims

Initial Jobless Claims totaled 565k, much better than the consensus of 603k and it’s the first reading below 600k since Jan 23rd. The key factor in the lower than expected # has to do with the auto sector. Historically in July automakers normally shut down plants but because Chrysler and GM had plant shut downs…Read More

Category: MacroNotes