Posts filed under “Think Tank”
Good Evening: Global equities suffered a broad retreat today, with most of the damage centered in Asia. China in particular has been a standout to the downside of late, a situation I tried to call attention to last Wednesday. Including Monday’s 6% drubbing, the major Chinese indexes have declined 15% or more (the CSI 300, for example, is down almost 17.5%) since their intraday highs on August 4. The major U.S. averages have been slower to correct, with the benchmark S&P 500 down less than 4% since setting its high on August 7. Economically sensitive equities have been leading the way lower, and, with risk appetites are suddenly on the wane, I will offer some thoughts as to why the storm clouds of correction seem to be gathering in what was only last week a seemingly crystal blue sky. My preliminary conclusion would be that it appears sentiment has leaped ahead of the fundamentals.
With Chinese demand for commodities and the resulting economic growth figures in that nation increasingly under question last week, Thursday marked a bit of a turning point in perception. July retail sales in the U.S. were very disappointing, especially in light of the tailwind provided by the “Cash for Clunkers” program. Since U.S. consumption is the final resting place for much of the world’s excess production, the retail sales figures were particularly unwelcome in markets outside the U.S. Our markets would probably have retained their early losses on Thursday if not for some euphoric hoopla surrounding John Paulson’s reported purchases of certain financial stocks.
Mr. Paulson did indeed see the credit crisis coming — and profited handsomely from its arrival in 2007/08 — but the fanfare given his purchases of Bank of America, Regions Financial, and others seems a bit misplaced. After all, these purchases were made during the quarter ending June 30, and we have little to no idea what has become of them since that date. Furthermore, Mr. Paulson set up a separate fund vehicle in late 2008 with the expressed purpose of buying distressed financial companies. It’s hard to draw performance fees from T-Bills these days, and those investing in his new fund were likely happy to see Mr. Paulson add some fallen angels during Q2 to what might have previously been lightly populated quarterly statements. Thus, the names that caught this smart investor’s fancy are likely less a commentary about Mr. Paulson’s bullishness on the whole financial sector as it might be on the relative attractiveness of the specific companies in which he took a stake. Whatever the real story may be, the averages re-tested their August 7 highs with the ringing of Thursday’s closing bell.
Friday brought a surprising decline in the University of Michigan’s consumer sentiment survey, a fact which only underscored the nascent concern surrounding retail sales and the health of U.S. consumers. The major averages took a 1.5% tumble early Friday morning, only to have a late rally halve those losses at the close. But investors in Asian securities handled these two economic data points with far less aplomb this morning. Adding to the angst in the Far East was a less than stellar GDP report for Japan. The resulting damage then spread to Europe, and our stock index futures were indicating losses of more than 2% early this morning. Lowe’s, itself a model of retail spending, then laid an earnings egg before trading commenced in New York. Neither the first positive reading in months for the Empire manufacturing survey, nor a surprisingly decent TIC report could stem the tide of selling at today’s open.
U.S. stock market indexes were 2.5% the worse for wear within minutes this morning, and they never did recover this lost ground. The rallies were as tiny as they were brief, and an uptick in the Housing Market Index was quickly dispatched. The 50 mark is neutral, so when the wire services hailed a reading of 18 as “a new high for 2009!”, the news was properly viewed as being little more than the tallest of this year’s 8 dwarves. When the Fed later released a survey showing bank loan officers continued to tighten lending standards last quarter, it overshadowed all the other economic data points (see below). If credit is the lifeblood of economic activity, then the U.S. looks set to remain a couple of pints short until lenders once again start saying “yes!” to loan applicants.
After the early drop, stocks mostly went sideways for the rest of Monday’s session. The vaunted late day rally was a no show today, and the major averages went out with losses ranging from 2% for the Dow, to 3.5% for the Dow Transports. Treasury investors were already in fine spirits (last week’s auctions went well), and the weakness in equities further enlivened them. Yields fell between 3 and 9 bps as the yield curve flattened. The dollar enjoyed a knee-jerk, flight to quantity rally of 0.5% today, and commodities continued to sink. Hit hard last week, prices fell in every sector of the CRB today as that index posted a loss of 1.6%.
As I left for home last Thursday evening, I really felt that what I was going to write about that night would prove useful for some readers. I had lined up both articles and data to support a conclusion that would be evident from the title alone: “Investor sentiment is way ahead of the economic fundamentals”. Alas, due to a last second change in my family’s social calendar, the bulk of the piece went unwritten. I toyed with the idea of trying to send out a brief version of it on Friday morning, but PIMCO’s Mohamed El-Erian beat me to it. As you’ll see from this story and its accompanying video, Mr. El-Erian’s comments rendered mine to somewhere just above copycat status. Given today’s worldwide downdraft in equities, however, I’ve decided to give last week’s thoughts another chance.
By the middle of last week, most economists and pundits were declaring the Great Recession over. Happier times lay dead ahead, at least in the eyes of the many economists who never saw our credit crisis coming. But I think U.S. consumers will be challenged to spend as much as they did when they had swollen amounts of equity in their homes and their stock market portfolios — not to mention access to overly easy credit. Now that equity values of all types still pale compared to those fetched only a year ago, and with credit standards still Scrooge & Marley tight, I have to agree with both Mr. El-Erian and the economists at BAC-MER when they conclude the 70% of the U.S. economy devoted to consumption will hobble GDP growth in the quarters ahead.
Investor Survey Results (an AAII exclusive) — Released August 17, 2009
Reported Date Bullish Neutral Bearish
August 13: 51.00% 16.00% 33.00%
August 6: 50.00% 14.84% 35.16%
July 30: 47.67% 20.93% 31.40%
July 23: 37.60% 20.00% 42.40%
July 16: 28.68% 24.26% 47.06%
July 9: 27.91% 17.44% 54.65%
July 2: 37.84% 17.57% 44.59%
June 25: 28.00% 23.20% 48.80%
June 18: 33.33% 20.24% 46.43%
June 11: 39.25% 21.50% 39.25%
June 4: 47.56% 15.85% 36.59%
May 28: 40.37% 11.01% 48.62%
May 21: 33.72% 20.93% 45.35%
May 14: 43.81% 20.95% 35.24%
May 7: 44.09% 22.58% 33.33%
April 30: 36.09% 20.30% 43.61%
April 23: 31.82% 29.55% 38.64%
April 16: 44.14% 20.00% 35.86%
April 9: 35.71% 20.00% 44.29%
April 2: 42.66% 20.28% 37.06%
March 26: 39.13% 18.48% 42.39%
March 19: 45.06% 16.67% 38.27%
If the foregoing analysis about the disconnect between the economic facts on the ground and the quoted prices for so many securities in the ether is on target, then what does investor sentiment tell us about the potential for a reversal of what have heretofore been growing risk appetites since March? I submit the table and article above. The table, courtesy of the American Association of Individual Investors (AAII), is meant to measure sentiment among individual investors. Unsurprisingly, this latest reading depicts the highest level of bullish sentiment since this bear market grew claws. The Bloomberg article you see below it attempts to measure the sentiment levels among institutional market participants. Here, too, are new highs, though still quite a bit below peak readings. If individuals and institutions are getting more bullish as the market goes higher, then who, pray tell, will be left to turn bullish?
Enter CNBC’s Jim Cramer. Faced last week with what he considers undo pessimism in the media about the market in general and some of his favorite stocks in particular, the video above in defense of S&P 1000+ is nothing short of a rave. Cramer squawks so much about why everyone should be bullish that I think he should co-host with Mark Haines and Erin Burnett every morning. Cramer screams and rants that the media is simply too negative about the stock market, that investors should be thankful many of the companies mentioned aren’t going bankrupt. Agreed, Mr. Cramer; we’re all grateful. What price should we then feel safe in paying for a business where revenues are down and earnings exist only due to the type of cost cuts that can neither easily be repeated nor can be called a macro positive for the rest of the economy? His rant is a great example of just how market prices can become disconnected from reality — at least in the short run. No wonder sentiment measures peaked almost as soon as this broadcast aired. I guess no price is too high when a market is going higher, but there’s an old saying on Wall Street: “When you’re yelling, you should be selling”. Cramer was yelling last week at the highs. Hmmm; what should we at least think about doing next?
– Jack McHugh
On the question of whether or not banks are lending and also where the level of demand is for loans, weekly Commercial and Industrial loan data (out on Friday) can be a helpful gauge. C&I loans outstanding for the week ended Aug 5th fell by $4.6b to $1.475t, the lowest since the week ended Feb…Read More
The August NY Fed survey, the first August industrial number out, was a much better than expected 12.1 vs the consensus of 3 and up from -.6 in July. It’s the first positive reading since April and the highest since Nov ’07. The number however does not measure the degree of the improvement, just the…Read More
David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).
Moody’s, Munis & Cousin BABs
August 16 2009
In their August 13 “Special Comment” Moody’s outlined the current condition of the state budgets and of the various revenue sectors like airports, toll roads, higher education facilities, and hospitals. Nearly two years into a recession, the report is not pleasant reading.
Expenditure budgets are being cut. Tax receipts continue to arrive below projections, which necessitates further budget cuts. A downward spiral seems to be underway. The Muni sector appears to be in a depression.
In part, the damage to state and local budgets has been blunted by huge federal stimulus. This is viewed as temporary by government finance officers, since they must attempt to balance their budgets and may only count on federal assistance that is funded. The term “funded” means that they have the money in hand or will definitely receive it so that they can pay the bills. Thus unfunded items do not count even though they may be anticipated.
Forward-looking projections for municipal bond issuers are truly bleak. They show reduced revenues based on the most current projections of economic weakness. Tax receipts are forecast at extreme recession levels. These budgets do not include any unfunded federal help. Projections are based on all federal programs expiring as determined by present law. Credit ratings by Moody’s and other agencies are based on these worst case scenarios, which is why so many issuers are on credit watch or have been downgraded.
Direct payments are one form of help from the feds to the states and locals. Indirect forms are another. Build America Bonds (BAB) are an example of the indirect form. When certain qualifications are met, the federal government will reimburse the state or local issuer 35% of the interest cost on BABs issued in 2009 and 2010. The current law that authorized BABs expires after 2010. No one knows if Congress will extend it; hence, local government savings from using BABs is not projected after 2010.
In 2009, between $60 billion and $80 billion of BABs will be issued as taxable fixed-income securities; these are substitute issues for what would normally be tax-free Munis. Buyers of these new instruments include tax-deferred accounts like pensions or IRAs in the US and various foreign investors who find the yields on BABs attractive. Neither of these bond-investor groups would be interested in lower-yielding tax-free Munis, since they are not paying taxes to the US government. But they are seizing the opportunity to own BABs.
There is no excerpt because this is a protected post.
Category: Think Tank
While many are surprised by the pullback in global equities this morning, people forgot last week what lifted the global economy off the mat in March and that was China. Chinese stocks as of Friday fell 12% over the past week and a half, with the S&P’s mostly ignoring that correction, and another 5.8% today….Read More
Joel Bowman is managing editor of the Rude Awakening and author of its Weekend Edition. His keen interest in travel and macroeconomics first took him to New York where he regularly reported from Wall Street, and he now writes from and lives all over the world. This missive comes from Taipei, Taiwan: It’s a good…Read More
Category: Think Tank
During the week marking the second anniversary of the start of the credit crunch, stocks, copper, nickel, zinc and sugar recorded fresh 2009 highs. But the celebrations came to an abrupt end as caution crept back into investors’ vocabulary on Friday when it dawned upon pundits that markets were running away from economic reality. On top of that, Chinese equities – a leading stock market on the way up – saw a reversal of fortune and declined to a five-week low.
This is where the Ecclesiastes-based lyrics of the Byrds’s classic, Turn, Turn, Turn, started resounding in my head: “To everything (turn, turn, turn), There is a season (turn, turn, turn), And a time for every purpose, under heaven, A time to gain, a time to lose …” (Click here for audio.)
Source: Mike Keefe (hat tip: The Big Picture)
Paul Kasriel, chief economist of Northern Trust, reports that the meeting statement of the Federal Open Market Committee (FOMC), released on Wednesday, was a bit more optimistic about the near-term economic environment, changing its language from “the pace of economic contraction is slowing” at the June 24 meeting to “economic activity is leveling out”. However, the communiqué also said that household spending would be constrained by “sluggish income growth”, in addition to the other constraining factors mentioned in the June 24 statement – “ongoing job losses, lower household wealth, and tight credit”.
“Given our current view that the recovery is going to be subdued and uneven over the next several quarters, we do not expect any federal funds rate increases from the FOMC until June 2010, at the earliest,” said Kasriel.
Shorter-dated US, UK and other government bond yields – securities that are sensitive to interest rate movements – declined on indications that benchmark interest rates would remain at low levels for an extended period of time. Longer-dated US yields also fell after the Fed announced that its Treasury purchase program would be extended until October. “The point is the Fed said it would keep the punch bowl open an extra month but it would not increase the punch that is already in the bowl. It will just dole it out in smaller increments over an extra month,” remarked Bill King (The King Report).
To James Grant (Grant’s Interest Rate Observer) the level of Treasury yields spells danger. He said: “Vacation-time thought experiment: With the knowledge that the US government will be borrowing as much as $3.5 trillion from the public in fiscal years 2009, 2010 and 2011, approximately matching the Treasury’s cumulative borrowing between 1789 and 1994, would you have guessed that the yield on the 10-year Note would today be hovering in the neighborhood of only 3.7%? If ‘yes’ is your answer, you must not go away on vacation this month. You have too hot a hand to stay away from the office.”
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.
The MSCI World Index (+0.1%) and MSCI Emerging Markets Index (unchanged) marked time last week, but are still showing solid year-to-date gains of +15.6% and +50.4% respectively. As weakness crept in towards the close of the week, the US and a number of other markets snapped a winning streak of four straight weeks. Emerging markets underperformed developed markets for the second week running since the beginning of May, indicating signs of risk appetite abating somewhat.
Click here or on the table below for a larger image.
Top performers in the stock markets this week were Bulgaria (+9.4%), Lithuania (+6.7%), Estonia (+6.5%), Vietnam (+5.5%) and Venezuela (+4.5%). The top three positions were again occupied by countries from Eastern Europe that are still playing catch-up as the scare of a banking collapse in the region dissipates. At the bottom end of the performance rankings, countries included China (_6.6%, last week -4.4%), Nigeria (-4.5%), Luxembourg (-3.6%), Cyprus (-3.2%) and Israel (-2.8%).
Category: Think Tank
The Statistical Recovery, Part Two
August 14, 2009
By John Mauldin
The Statistical Recovery, Part Two
A Recovery Statisticians Can Love
A Few Thoughts on the Housing Market
Some Thoughts from Maine
Tulsa, Birthdays, Weddings, and Paul McCartney
A few weeks ago I first used the term “statistical recovery” to describe the nature of today’s economic environment. Today we are going to further explore that concept, as it is important to have a real understanding of what is happening. This coming “recovery” is not going to feel like a typical one, and those expecting a “V”-shaped recovery are simply making projections from previous economic recoveries, which, based on the fundamentals, are not warranted. And of course, a few thoughts coming back from Maine are in order. There is a lot to cover, and this may take more than one letter.
But first, let me note to subscribers to Conversations with John Mauldin that we have posted my Conversation with George Friedman of Stratfor and will soon post a very interesting Conversation I had with John Burns (of John Burns Real Estate Consulting) and Rick Sharga of RealtyTrac. These may be the two most knowledgeable people on the housing market in the country. There is a lot of poorly informed speculation about the housing market, and I think this Conversation will help clear away a lot of the fog. PLUS, they both agreed to allow me to post their eye-opening PowerPoint stacks to Conversation subscribers (normally only available to their clients), so you get a very special bonus. And finally, David Galland of Casey Research is allowing me to post a most thought-provoking interview he did with Neil Howe. This is one of the best things I have run across in a long time. I do work on giving my Conversations subscribers good value.
George and I are going to be doing a regular quarterly Conversation called Geopolitical Conversations with John Mauldin and George Friedman. We believe that these new Conversations will help you better understand not only the global political landscape but also how it affects the financial umbrella that we are under. In this first Conversation, we talked about the “exogenous” risks to the markets (those from outside the markets themselves) posed by the geopolitical world.
We will offer this service, which will be priced separately, at some point in the near future. Now, here is the important part: all current subscribers and anyone who subscribes now will receive these Geopolitical Conversations free, as a thank you. (Current members can log in now.) If you have not yet subscribed, you can do so and receive a discount by clicking the link and typing in the code JM49 to subscribe for $149. This is a large discount from our regular price of $199; plus, we are including the bonus Geopolitical Conversations that are worth $59. And now, to the regular letter.
The Statistical Recovery
The unemployment numbers came out last Friday, and Steve Liesman of CNBC did several interviews live from Leen’s Lodge in Maine. I postponed an hour of fishing to be on air with Martin Barnes (of the Bank Credit Analyst) to comment on the numbers. Everyone seemed quite excited that the US lost “only” 247,000 jobs. However, it is still almost twice as large as a year ago, and at that time 128,000 lost jobs seemed pretty bleak. However, comparing it to the average of 692,000 lost jobs per month in the first quarter, those looking for good news immediately started talking about how a recovery is around the corner.
The unemployment numbers are some of the most seriously revised numbers in all of government data. The first monthly estimate is notoriously imprecise. Why people make investment decisions based on this release is beyond me. As I mention continuously, because of seasonal adjustment factors, the unemployment numbers understate job losses in a recession and also understate job gains in a recovery. About the most we can get from the current data is the broad trend. Admittedly, the trend is getting better, but we are still in a hole and no one has stopped digging.
What we can see is that we are down 6.7 million jobs since the beginning of 2008! We have roughly eliminated the job growth of the last five years. And that does not take into account the 150,000 new jobs that are needed each month just to maintain the employment rate because of the increase in population. It took 55 months once the 2001 recession was officially over to get back to the previous employment peak. That is 4.5 years, gentle reader, and we are further down now and faced with massive deleveraging. It is going to take a lot longer this time. Let’s look at some of the reasons why.
I took a different tack in the CNBC interview. I pointed out that even though it is possible (likely?) we will see a positive number for GDP for the third quarter, it is not going to feel like a recovery for quite some time.
By the middle of next year (2010), when I think we will finally hit an unemployment bottom, we will be down close to 8 million jobs, wiping out all the jobs created since the middle of 2004. Unemployment is likely to be more than 10%, unless they keep playing games with the number.
A Recovery Statisticians Can Love
What I mean by that remark is that the unemployment number went down even though we lost 247,000 jobs. How can that be, you ask? Well, the government assumes that if you were not looking for a job within the last month, then you are not unemployed; therefore, on a statistical basis the number of people unemployed went down by 400,000. (There are 2.3 million such discouraged workers.) More in a minute on the problem that will cause down the road.
Assume that we will need 9 million jobs over the next five years (150, 000 jobs a month for 60 months) and add the 8 million lost jobs. That means we have to add 17 million jobs in the next five years to get back to the 4.5% unemployment of 2007, let alone the under-4% we saw in 2000.
That means we need to grow employment by about 12% over the next five years. But it’s worse than that. What is known as U-6 unemployment is over 16%. There are another approximately 8.8 million people who are either working part-time but want full-time jobs or are among the 2.3 million discouraged workers as mentioned above.
(The definition of U-6 unemployment from the BLS web site: “Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.” http://www.bls.gov/news.release/empsit.t12.htm.)
Let’s make the assumption that the part-time workers want to go to full-time (which they say they do). Typically employers will increase the hours of part-time employees before adding new workers. That will be a major drag on potential job growth. It is the equivalent of creating at least 4 million jobs, except that no new jobs are created. Plus, those who want jobs but are not looking will come back into the market if jobs are available. That adds another 2 million. Now we are seeing the need for 23 million new jobs in five years, to get back to the “Old Normal.”
That is an increase of 15% total employment from today’s levels over the next five years. That type of jobs growth will only happen with significant economic growth. Normally, you should expect the economy to rebound to at least 3% trend GDP growth. That is what has happened historically. But we are not in the Old Normal. We are entering the era of the New Normal, where looking back at historical trends will prove to be misleading at best.
Category: Think Tank