Posts filed under “Think Tank”
A long-awaited reversal in the monumental global stock market rally since early March finally arrived last week. As the first-quarter earnings season started winding down and post stress-test capital-raising weighed on some banks, investors were faced with a slew of gloomy economic reports suggesting the recent optimism about a global recovery might have been premature.
“This week, the hard economic data remind us that the global recession is ongoing: exports remain deep in the red; retail sales disappoint; inflation gets a small energy bump but is still down; and industrial production declines. However, the data are consistent with the story of a slowing economic decline, foretold by several ‘green shoot’ survey reports,” said Rebecca Wilder (News N Economics).
Source: Tom Toles, Washington Post.
“Less bad” economic reports provided investors with little comfort, sparking a reassessment of their risk appetite and leading to profit-taking on most bourses. Also, commodities retreated after recording four-month highs earlier in the week, and high-yield corporate bonds and emerging-market currencies came off the boil. On the other hand, safe-haven assets such as government bonds, gold bullion, the US dollar and Japanese yen attracted buying. Investment-grade corporate bonds and Treasury inflation-protected securities also closed the week in positive territory.
The performance of the major asset classes is summarized by the chart below.
After nine straight weeks of gains, global stock markets succumbed to profit-taking last week with the MSCI World Index falling by 3.4% (YTD +0.1%) and the MSCI Emerging Markets Index down by 2.4% (YTD +24.8%).
Similarly, the major US indices reversed course. The Nasdaq Composite Index (-3.4%, YTD +6.5%) and the Russell 2000 Index (-7.0%, YTD -4.7%) declined after rising for nine consecutive weeks and the Dow Jones Industrial Index (-3.6%, YTD -5.8%) and the S&P 500 Index (‑5.0%, YTD -2.3%) fell after being up eight out of nine weeks.
After last week’s sell-off the Nasdaq is the only major US index still in the black for the year to date, finding itself in the company of the majority of emerging and mature markets.
Click here or on the table below for a larger image.
Returns around the world ranged from top performers Serbia (+10.0%), Cyprus (+9.7%), Bermuda (+9.5%), Namibia (+8.5%) and Vietnam (+6.5%) to Romania (-12.2%), the Czech Republic (-8.3%), Finland (-6.9%), Luxembourg (-6.9%) and Indonesia (-6.0%) which experienced headwinds. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)
China (+33.3%), one of the leading stock markets for the year to date together with Brazil (+46.7%) and Russia (+94.6%), notched up another gain (+0.5%) last week despite disappointing economic data. A revival in Chinese property transactions has been a major contributor to China’s recent recovery in industrial activity. Good news for Chinese equity bulls is the close historical relationship between property sales and the performance of Chinese stocks.
Source: US Global Funds – Weekly Investor Alert, May 15, 2009.
With nearly all the US companies having reported first-quarter earnings, the S&P 500 saw earnings decline by 34.6% compared to the same quarter in 2008, reported Bespoke. At the start of the earnings season, a decline of 38.2% was expected. The percentage of companies lowering guidance was cut by more than half, while the percentage of companies raising guidance increased by over 70%. A tough second quarter undoubtedly still lies ahead, especially as companies will not have the advantage of non-recurring cost cutting.
John Nyaradi (Wall Street Sector Selector) reports that the strongest exchange-traded funds (ETFs) on the week were SPDR Russell/Nomura Small Cap Japan (JSC) (+6.1%), Market Vectors Agribusiness (MOO) (+5.4%) and iShares MSCI Chile Index (ECH) (+4.4%). On the other end of the performance scale KBW Bank (KBE) (-15.4%), iShares Dow Jones US Regional Banks Index (IAT) (-14.5%) and KBW Regional Bank (KRE) (‑13.7%) were underwater as positive catalysts for the banking sector dried up.
As far as the economic sector ETFs are concerned, defensive sectors outperformed during the week, with Health Care SPDR (XLV) and Consumer Staples SPDR (XLP) leading the way. Financial SPDR (XLF) and cyclicals such as Consumer Discretionary SPDR (XLY) and Industrial SPDR (XLI) were on the receiving end of the selling pressure.
Lower interbank lending rates indicated reduced strains in the financial system, as seen from the three-month dollar, euro and sterling LIBOR rates declining to record lows. After having peaked on October 10 at 4.82%, the three-month dollar LIBOR rate declined to 0.83% on Friday. LIBOR is therefore trading at 58 basis points above the upper band of the Fed’s target range – a great improvement, but still high compared to an average of 12 basis points in the year before the start of the credit crisis in August 2007.
Gold bullion seems to be regaining its luster and again edged higher last week. “As sure as night follows day, the Federal Reserve’s purchase of bonds and home mortgages and the resulting rapid increase in bank reserves (quantitative easing in Fed-speak) – unless soon reversed – are underwriting a coming acceleration of inflation,” said gold specialist Jeffrey Nichols. “… by the time the broad financial markets register a worsening of inflation expectations gold will already have made a major move to the upside. It provides an early warning or leading indicator of inflation, signaling the coming acceleration long before financial markets begin to quiver.”
As to be expected, there is a strong relationship between the yellow metal (green line) and Treasury inflation-protected securities (red line).
The quote du jour relates to whether the fact that bank stocks have rallied and in some instances been able to raise private capital, augurs an end to the financial crisis. Barry Ritholtz, editor of The Big Picture blog and author of Bailout Nation, a newly published and must-read book, succinctly remarked: “You can’t drink yourself sober and you can’t leverage your way out of excess leverage.” Many big banks remain technically insolvent and “are only being held together by spit, bailing wire and tape,” said Ritholtz in an interview with Yahoo Finance, Tech Ticker.
The banking system needs more time, at least three to five years, to deleverage before it can be left to its own devices, Ritholtz remarked, suggesting only time can heal the sector’s wounds.
In other news, the US Treasury announced that it would make $22 billion available to insurers from the Troubled Asset Relief Program (TARP), and the Obama administration sought new authority to bring transparency to the credit derivatives markets and also to crack down on the credit card industry.
Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “market”, “financial”, “prices”, “banks”, “government” and “economy” again featured prominently. For the rest, it is really a bit of everything.
Back to the stock market. An analysis of the moving averages of the major US indices shows the spring rally having encountered resistance at the important 200-day line and/or the early January highs. The highs of May 8 are the most immediate target to the upside, whereas the levels from where the rally commenced on March 9 should hold in order for base formations to remain in force.
May 15, 2009
By John Mauldin
- Can I Have Some More of that Data, Please?
- The Fault, Dear Brutus, is Not in Our Stars Faith-Based Economics
- Is Unemployment a Lagging or a Leading Indicator?
- An Unsustainable Trend in Debt
- Some Thoughts on the Health Care Problem
Why does government data need to be revised so often? Is it conspiracy, as some claim, or is it methodology? And if it is methodology that leads to faulty data, then why not change the methodology? Is unemployment a lagging indicator, as conventional wisdom suggests? We look again at the underlying assumptions to suggest that things are not always the same. And finally, we look at unsustainable trends, fiscal deficits, and health care — there is a connection.
But first, a quick note about the latest “Conversations with John Mauldin” that I just did with Don Coxe and Gary Shilling. These two esteemed analysts have different views on whether commodity prices will rise or fall, and are not afraid to make their views known. I edited the final transcript today, and I can tell you that even though I was “at the table” I learned a lot reading it the second time. If you want to understand the nature of what is a very central debate, this is a must-read. This was a VERY lively debate. Most of my friends know that I am not shy, but it was hard to get a word in edgewise as these guys went at it. It was great fun to watch.
And if you have not yet subscribed, you can go back and listen to my Conversation with Chris Whalen and Rick Lashley on the banking crisis, and see if you can figure out what motivated the Manhattan district attorney’s office to call me asking for clarification. Plus the quintessential piece with Lacy Hunt and Ed Easterling on the fundamentals of the current economic crisis, which many subscribers said was worth the price of an annual subscription. And then there is the Conversation I did with Nouriel Roubini. It is all there for you.
The new Conversation will be posted early next week. Subscribers will get an email notifying you when it is up. Also, George Friedman of Stratfor and I are going to start doing a regular quarterly Conversation that will be a separate product, but if you subscribe today you will get it as part of the regular service for a year.
Right now, we are offering a subscription for $109, $90 off the regular $199 price. To learn more, you can click here and subscribe, if you haven’t already. Insert code JM77 for this special offer. You can enter that code on the final screen of the subscription process.
Can I Have Some More of that Data, Please?
One of my regular reads is the blog The Big Picture. They featured a short piece by Michael Panzner this week. He put together some rather interesting data and then asked a question, which gives me an opportunity for discussing government data. Let’s see what he had to say, and then I will make my comments.
“Many market-watchers claim that U.S. economic statistics are increasingly being revised downward in subsequent periods, suggesting that the figures initially being reported by Washington are “puffed up,” so to speak, most likely for political purposes.
“Well, I went back and had a look at the differences between the reported and revised data for various series, including monthly retail sales, nonfarm payrolls, industrial production, and durable goods orders, to try and figure out if the cynics are right.
“Using data from Bloomberg, I calculated whether the revised data for each month was lower than the first-cut estimate. Then I tabulated 12-month running totals for each series to see if there has been some sort of systematic bias (in other words, whether the pattern of monthly downward revisions was trending higher instead of undulating up and down).
“To make the comparisons easier, I subtracted the 12-month tally as of May 2002 (an arbitrarily chosen date) from the monthly totals for all four economic series so that the starting point for each would be the same … zero.
“Based on a quick read of a graph of the data (see below), it does seem as though the pattern of negative revisions has been trending higher lately, especially during the past year or so, suggesting that the cynics may be on to something.
“That said, I am not a statistician, and the results may be nothing more than “noise.” There is also the possibility that my methodology is lacking (because, for example, the margins-of-error for each month’s data are relatively large, or because of certain quirks that crop up when an economy is in transition). Still, you gotta wonder…”
Actually, Mike (can I call you Mike?) your last thought is the correct one: “or because of certain quirks that crop up when an economy is in transition.”
Go back to 2003-04. Notice that the numbers of downward revisions in non-farm payrolls are negative in your graph? Remember all the talk back then about the “jobless recovery”? We can now look back and see there were a lot of jobs being created. They just did not show up in the early statistics. And look at the opposite reaction in industrial production: here they revised strongly downward for a the better part of two years, yet it turned out there was a production boom going on.
Was all this a conspiracy on the part of the Bush administration to make things look worse than they actually were? Hardly seems like rational political behavior.
The “problem” comes from the methodology. There is no exact data for any of those statistics. They have to get as much data as they can and then make estimates. Part of the process of estimation uses previous trends. It is as if we were using past erformance of a mutual fund or stock to project future returns. Even though we look at the past performance, we should know that past performance is not indicative of future results. Just look at some of the top-performing value-oriented mutual funds in the recent bear market, like superstar Bill Miller’s Legg Mason Value Trust fund (LMVTX), the after-fee returns of which had beaten the S&P 500 index for 15 consecutive years, from 1991 through 2005. It did rather poorly last year, even in comparison with the S&P, which was horrid. Past performance is interesting, but it can disappoint. And sometimes rather viciously.
Now, just as saying that a fund on average will produce a 10% return does not mean that it will yield 10% every year, neither do government statistics work that way. While the methodology for each series of data is different, they all are more or less trend-following. They take past relationships in the data they can gather and use them to estimate current numbers. And — this is important — on average and over longer periods of time, they are pretty accurate.
They will revise the data many times over the coming years, getting closer and closer to the actual numbers.
For instance, I can’t remember exactly when, but it was several years later that we learned that we were already in a recession in the third quarter of 2000, at the very time most economists were calling for a robust economic future! (Except for your humble analyst, who was predicting a recession, and had been for some time because of the inverted yield curve, but that’s another story.)
But in the short run, at economic transitions they are going to get it wrong, because the backward-looking data is mean-reverting. But how else would you do it? One of the keys to economic transitions is to look at the direction of the revisions. Recently, the revisions have all been negative. Things are actually getting worse than the initial data suggested. And during the last recovery the data kept getting revised upward, especially six months and one year later.
While its only one week and much can change, in looking at the pullback in the stock market this week, I believe one can glean a trend that we may see over the next few years in those groups that have underperformed the overall market this week. On the belief that the US economy was…Read More
The preliminary May U of Michigan confidence # was a touch higher than expected at 67.9 and up from 65.1 in April. It’s now at the highest level since Sept ’08 when it reached 70.3 before falling to 55.3 in Nov. The survey is done via phone just within the last few days so it…Read More
April CPI was flat but core CPI was up .3%, .2% more than expected and its the 1st .3% reading since July ’08. Y/o/Y CPI fell .7% after falling .4% in Mar and its the biggest drop since ’55 but with the recent rise in energy and food prices, that trend will reverse. The y/o/y…Read More
Location, location, location doesn’t only apply to buying the right house or piece of real estate, it also means being near the few countries in the world that are showing growth. March Japanese core Machinery Orders fell 1.3% m/o/m, better than forecasts of a drop of 4.6% and foreign orders rose by a record 46.4%…Read More
Good Evening: U.S. stocks persistently drifted higher today after 3 straight down days. The economic and earnings news was mostly of the offsetting variety, thus helping to hold prices in a fairly narrow range as volatility continued to ebb. Since yields on everything from Treasurys, to corporate bonds, to credit cards were the subject of…Read More
Chrysler, GM and the New Industrial Policy
May 14, 2009
IRA Releases Preliminary Q1 2009 Bank Stress Ratings and Index Results
Bruce Minton & John Stewart
The Fat Years and the Lean
International Publishers (1940)
The response to our release of the preliminary Q1 2009 results for the IRA Bank Stress Index has been excellent. We appreciate the user feedback and the media attention. Bottom line is that the jump in the Stress Index, from 1.8 at year-end 2008 to 5.7 at the end of Q1, suggests a year-end 2009 loss rate peak for commercial and residential exposures. Click here to learn more.
To us, the use of the enhanced FDIC data distribution technology illustrates how better public access to financial disclosure and automated distillation can improve timeliness and relevance, thereby encourage debate and dialog among and between analysts, and in turn drive better asset allocation choices by investors. Our census of the US banking industry also shows that, more often than not, politicians prevaricate when speaking about the soundness of large financial institutions – who are their clients, after all.
In the most recent comment in IRA’s Advisory Service, we talk about bank valuation in the age of “Industrial Policy” reborn, reflecting the clear shift away from the interests of private investors visible in the White House’s handling of the Chrysler bankruptcy and in prospect with the impending failure of General Motors (NYSE:GM) and GMAC.
In the cases of both companies, several sources tell the IRA, Obama Administration officials have threatened professional advisers with various official sanctions if they do not go along with the new political agenda of giving control of GM and Chrysler to the UAW. The unions have taken a disproportionate share of the economic output from the Big Three automakers for decades, measured by salary and benefits, but now Washington will give the UAW the rest, leaving creditors disenfranchised by the arbitrary action of the Executive Branch?
Category: Think Tank
> Many market-watchers claim that U.S. economic statistics are increasingly being revised downward in subsequent periods, suggesting that the figures initially being reported by Washington are “puffed up,” so to speak, most likely for political purposes. Well, I went back and had a look at the differences between the reported and revised data for various…Read More
Category: Think Tank