Posts filed under “Think Tank”

Q3 Starts With Both a Bang and a Whimper

Good Evening: Better than expected manufacturing data points both here an in China catapulted U.S. stocks higher this morning, but the gains faded as the day wore on. Some other economic releases that weren’t quite as friendly may have caused the first day of the third quarter to end with a whimper after starting with a bang, but it’s also quite possible that market participants took some profits ahead of tomorrow’s employment statistics. With both jobless claims and nonfarm payrolls set to be released at the same time tomorrow, it will be interesting to see whether market participants give these numbers their due or instead decide to head out early for the beach. Investor uncertainty over how tomorrow may turn out, however, presents a good backdrop for considering Seth Klarman’s views about the merits of investing without certainty.

Stock index futures were already in frolic mode prior to the latest surge of economic data this morning. China’s PMI rose for the fourth straight month, proof positive for some that the real green shoots are made of bamboo. This early confidence was hard to shake, even though the early batch of economic data was mixed. The Monster employment report ticked lower, the MBA mortgage purchase index fell more than a little, and ADP’s estimate of job losses in June was worse than consensus forecasts. Then again, the Challenger Job Cut survey was rather benign, and the U.S. PMI — though in line — was once again higher on a sequential basis (see below).

Of all these releases, it was the PMI that encouraged buyers in the early going today, and stocks wasted little time before ratcheting higher by 1%. Weaker construction spending and a pending home sales index that only matched expectations did little to dampen investor enthusiasm for equities, and the indexes were soon up 1.5% or so. But that was it for the upside on Wednesday, as disappointing auto sales kept trickling in all day. The major averages spent the rest of the session giving back various portions of their early gains, and by the close the gains ranged from 0.4% (S&P) to 1.8% (Russell 2000). Treasury investors were uninspired and did little more than put one some curve steepening trades. Yields on the short end fell 7 bps, while those on the long end were fairly stable. Excepting the yen, currencies rallied against the U.S. dollar, though it did little to help energy related commodities. Crude oil and its products pulled back today (also possibly due to profit taking ahead of Thursday’s jobs report), while the grains were firmer on balance. It was left to the metals, both precious and base, to lift the CRB index by 0.5%.

Today’s varied and multiple economic reports did little to coax much volume out of market participants today, so I doubt today’s action mattered very much. Today’s releases were but the undercard to tomorrow’s main event, so I thought it might be nice to review some investing basics, courtesy of Baupost Group founder, Seth Klarman. Once 2008 was finally behind us, Mr. Klarman wrote his annual letter to clients, an excerpt of which you see below. “Uncertainty” bothers many investors, but it’s a situation which Mr. Klarman is grateful to exploit to the benefit of his clients. In “The Value of Not Being Sure”, Mr. Klarman bemoans the short term focus of so many money managers. He prefers to take a longer term approach, one that is unwavering even when Mr. Market downsizes one or more of his recent purchases. To Mr. Klarman, it is certainty and overconfidence about his investment decisions that must be guarded against. Instead of causing him sleepless nights, uncertainty motivates Mr. Klarman to constantly question his holdings and to always remain vigilant.

So what does this famed value investor think of the current investing climate? The final article below indicates that while Mr. Klarman saw numerous profitable opportunities late last year, he is finding far fewer of them after the recent rally. In a recent speech at the annual meeting of the Boston Security Analysts, Mr. Klarman told his audience that the rally off the March lows looks much like what he thought a bear market rally might look like. “Increasingly speculative” is one term he uses to describe the activity that returned smiles to so many investors’ faces in Q2. One of his best insights is “the pressure not to lose has been replaced by the pressure not to miss out”. Taking this thought one step further, he concludes that “the fear of missing out on a rally is greed, not fear”. Mr. Klarman has far more to say in these articles, and my recounting does him little justice. As we face tomorrow’s uncertain outcome once the unemployment data hit the tape, Mr. Klarman’s common sense advice offers us all a framework for making better investment decisions. Thus armed and prepared, let’s see what the BLS has in store for us tomorrow — before it all gets revised next month.

– Jack McHugh

U.S. Stocks Rise Following S&P 500’s Best Quarter Since 1998
U.S. Economy: Manufacturing Shrank Least Since August
U.S. Auto Sales Slide as GM, Toyota Miss Estimates
The Value of Not Being Sure, by Seth Klarman
Seth Klarman: Why Most Investment Managers Have It Backwards

Category: Markets, Think Tank

Fed Pres Evans chiming in on exit strategies

Following the speech by Fed Pres Bullard Tuesday on the Fed’s ‘exit strategies’ where the discussion was more on how they will unwind their different programs rather than when, Fed Pres Evans is adding his thoughts to the debate. I want to first say that setting a time period is of course difficult due to…Read More

Category: MacroNotes

Wage Deflation in Our Midst

I am especially pleased to introduce today’s Think Tank guest, Economist David Rosenberg of Canada’s Gluskin Sheff.  For most of you, however, David needs no introduction: A 20 year veteran of the Street, David most recently was Merrill Lynch’s chief North American Economist, where he correctly warned about the Housing and Credit Collapse and Recession in advance.

With Non-Farm Payroll scheduled to be released tomorrow, the timing is perfect to hear some thoughts from David about Employment . . .




A survey conducted by YouGov for the Economist magazine found that 5% of respondents had taken a furlough this year and 15% had accepted a pay cut (see The Recession and Pay: The Quiet Americans on page 33 of this week’s edition).

As wages deflate, workers are looking for ways to supplement their shrinking income base, for example, by moonlighting. Indeed, a poll undertaken by and cited in the USA Today found that one in every ten Americans took on an extra job over the last year; another one in five said they intend to do so in the coming year. These numbers are double for the 45 to 54 year olds who now see early retirement, once around the corner, as an elusive concept.

Most pundits who crow about green shoots and about an inventory restocking in the third quarter giving way towards some sustainable economic expansion live in the old paradigm. They don’t realize, for whatever reason, that the deflationary aftershocks that follow a post-bubble credit collapse typically last for 5 to 10 years. Businesses understand better than the typical Wall Street or Bay Street economist and strategist that everything from order books, to output, to staffing have to now be restructured to adequately reflect a permanently lower level of leverage in the economy.

Indeed, by our estimates, there is up to another $5 trillion of household debt that has to be eliminated in coming years and that process is going to require that consumers go on a semi-permanent spending diet. Companies see this, which is why they are not just downsizing their payroll, but have also cut the workweek to a record low of 33.1 hours. Fewer people are working and those that are still working have seen their hours dramatically cut this cycle.

Companies are finding other ways to save on the aggregate labour cost bill as well, which may be a factor reinforcing the uptrend in the personal savings rate (see more below). For example, a rapidly growing number of employers are now suspending contributions to worker 401(k) plans. According to a joint survey by CFO Research Services and Charles Schwab, nearly 25% of U.S. companies have either suspended their plans or are planning to do so (this is up from 2% at the turn of the year). Again, how we end up squeezing inflation out of the system when the labour market is clearly deflating wages and benefits for the 70% of the economy called the consumer is going to be interesting to watch.

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Category: Employment, Think Tank, Wages & Income


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…Read More

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