WSJ details:
The producer price index for finished goods increased 1.8% in June from May, the Labor Department said Tuesday, nearly double the 1% rise that economists in a Dow Jones Newswires survey had expected. It was the sharpest rise since November 2007. Producer prices were down 4.6% from one year ago.
The core PPI, which excludes food and energy, rose 0.5% from May, the biggest rise since October 2008. Economists had expected no change.
Bloomberg loves the term "unexpected":
German investor confidence unexpectedly fell in July, suggesting the recovery in Europe’s largest economy may take longer to materialize.
The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months ahead, declined to 39.5 from 44.8 in June. Economists expected a gain to 47.8, the median of 36 forecasts in a Bloomberg News survey showed.
The government says gross domestic product will plunge 6 percent this year, the most since World War II, even as the economy shows signs of stabilizing after its first-half freefall. Industrial output jumped 3.7 percent in May from April, the biggest gain in almost 16 years, and business confidence increased for a third month in June. The benchmark DAX share index has advanced 30 percent in the past four months.
What do you get when you multiply the total number of private workers and average weekly hours worked (by those private workers)?
Total private weekly hours worked of course... and the largest year over year drop on record... and a level last seen in November 1997 (when the civilian noninstitutional population was 15% smaller).
Source: BLS
The WSJ details:
The U.S. budget deficit broke past $1 trillion in June, a grim testament to the recession and financial crisis. The federal government spent $94.32 billion more than it made in the ninth month of fiscal 2009, the Treasury Department said Monday in its monthly budget statement.
With that latest spill of red ink, the budget gap, for the first nine months of fiscal 2009, widened to $1.086 trillion. A year earlier, the deficit was $285.85 billion for the same nine months.
In June 2008, the government ran a surplus of $33.55 billion. Fiscal years start Oct. 1. The White House has predicted the deficit will climb to $1.841 trillion this fiscal year. The biggest deficit for any fiscal year on record is $454.8 billion, which was rung up in fiscal 2008.
A survey of economists by Dow Jones Newswires forecast a June deficit of $97.0 billion. June federal government spending totaled $309.68 billion, compared to $226.37 billion in June 2008.
Year-to-date federal government spending totaled $2.67 trillion, compared to $2.22 trillion in the first nine months of fiscal 2008.
Markets remain volatile, thus while there is concern that a weak dollar will result in commodity prices once again rising, if green shoots continue to shrivel than import prices will likely reverse the recent ascent. Marketwatch reported on Friday:
Prices of imported goods rose 3.2% in June, the largest increase since November 2007 and the fourth consecutive monthly gain, as petroleum prices shot higher, the Labor Department estimated Friday. Analysts polled by MarketWatch had expected the import price index to rise 2.5% in June. Despite the monthly gain, import prices were down a substantial 17.4% in the past year.
In May, the imports index rose a revised 1.4%, compared with a prior estimate of a 1.3% gain. In June, imported petroleum prices increased 20.3%, the largest monthly gain since April 1999 and the fifth consecutive monthly increase. However, the petroleum imports price index is down almost 46% over 12 months.
Fund My Mutual Fund details (hat tip Abnormal Returns):
Stock markets of developing countries like India and Brazil have gone through the roof since early March, reversing some of their declines from last year. The MSCI Emerging Markets Index is up about 34% for the first six months of the year, after losing 54.5% in 2008. Some niche markets have had wilder swings. Russia’s benchmark RTS index is up 56% for the year’s first half, after losing 72.4% in 2008.The chart below shows the three month rolling performance of the iShares MSCI Emerging Markets Index ETF (EEM). After last Fall's massive free fall, the ETF has performed exceptionally well.
If you've been around these markets for a while you generally know by the time the retail investor is piling into a group, chasing huge scores - it's generally time to run away (at the least) and for the 5% among us who short, begin to think seriously about betting against the small fry. It sounds cold, but this is just the way it tends to work ... trust me, I used to be one of these people, so I learned the hard (read: expensive) way. As we read the piece below let us trust in the fact that none of these people were buying in early March, but most likely jumped in when it was "safe" a month or so later.And jumped they have:
In the first five months of this year, investors poured a net $4.9 billion into diversified emerging-market mutual funds, more than reversing the net $2.6 billion they pulled out in all of 2008, according to Morningstar Inc.There have been numerous studies on "dumb money". One such study by Andrea Frazzini and Owen Lamont Dumb money: Mutual fund flows and the cross-section of stock returns concludes:
That on average, retail investors direct their money to funds which invest in stocks that have low future returns. To achieve high returns, it is best to do the opposite of these investors.So, the next time you hear from your neighbor about the next big thing, think twice. Or just bet against them...
The last time stocks in developing countries got this expensive was in October 2007, just before the MSCI Emerging Markets Index began a 12-month tumble that erased half its value.
The MSCI gauge trades at 15.4 times reported earnings, compared with 14 for the Standard & Poor’s 500 Index, according to weekly data compiled by Bloomberg. When developing nations last commanded a premium, the 22-country benchmark sank 54 percent in the next year.
Well, apparently my two week vacation invigorated me as I don't recall posting this many "long" posts (i.e. not just a chart and a link) ever. I hope you all enjoyed, but don't expect it to continue. Especially over the next two weeks as I will be a BUSY traveler for my "day" job.
As a reminder, if you want to keep up with anything interesting I find over the weekend, check out EconomPic on Twitter at www.twitter.com/EconomPic
Investments
Help Jake Invest...
The Ultimate Armageddon Stock
Hedge Funds Continue to Outperform Equities
Hedge Fund Performance Since '02
Q2 Earnings: Front and Center
Inflation
Capacity Utilization vs. Inflation
I'm Impressed with the Fit...
Used Cars and the Inflation / Deflation Tug of War...
ISM Prices Paid Up... End of Deflation Concerns?
Employment
The "Exhaustion Rate" Underestimates the Issue
The "Joys" of the Unemployed Teenager
Other Economic Data
Will the U.S. Become an Export Nation?
Same Stores Sales Suck More Than Anticipated
Consumer Credit (May): Down 4th Straight Month
Wholesale: Sales Up, Inventories Down
Good News Alert! New Orders less Inventory Jumps
The Paradox of Thrift
Contraction is not an Improvement: Services Edition
Global
Aussie Miracle Waning
Japanese Economy "Unexpectedly" Crumbling
German Factory Orders Up 4.4% on the Month... Down 29.4% YoY
British Industrial Production Surprises to Downside
Japanese "Optimism"?
Back in March, I posted my belief that corporate bonds were a "Screaming Buy". At that time I liked being able to move up in the capital structure, while still being able to receive an 8%+ yield for investment grade and 20%+ for high yield. I detailed I was:
Invested at a ratio of ~70% investment grade / ~30% high yield via an assortment of close-end funds trading at a discount. For the record I do not shy away from risk, so my recommendation would be to tone down the high yield exposure if you are more risk averse.Since the time of the posting, the investment grade bond ETF (LQD) has rallied 11% and the high yield ETF (JNK) around 20%.
Nine months later, investment grade corporate bonds have recovered from the shock of Lehman Brothers’ implosion.The chart below shows the absolute yield of the Investment Grade Corporate Bond index, as well as the spread to Treasuries. While this is a great sign for corporations that can again finance their operations at levels seen pre-Lehman (i.e. less than 6%), it obviously makes corporate bonds less appealing to investors.
Spreads had taken quite the ride since spiking at the end of 2008. They soared as high as Spreads soared as high as 656 basis points December 5 before returning 100 basis points.
Baa corporate yields are between 50bps and 250bps wider than they were at the depths of the last three recessions, suggesting that there is a lot of “bad” news still priced in.And...
To be sure, corporate spreads have come in a long way from their nearby crisis highs but looking at prior peaks around major events and economic downturns, it does appear as though there is still a lot of very bad news priced into the sector.But again, after the massive rebound in "anything risk" over the past few months I am not so certain about valuation. After all the economic data I've walked through daily over the past year on EconomPic, I am not so certain that 50-250 bps of additional spread relative to the last three recessions is enough compensation for borderline junk bonds. After the recent rally in Treasuries, I am not so certain that I even like duration like I did just 2 1/2 weeks ago when the yield on a ten year Treasury was 50 bps higher.
I posted the below update directly to yesterday's post on Capacity Utilization vs. CPI, but as it was late in the day, had already moved down the blog, and involved the questioning of the validity of one of my beautiful charts, here it is again with a bit of additional analysis.
Scott Grannis of Calafia Beach Pundit apparently reads my blog, which is cool (for those that missed my earlier post, he is my favorite blogger to disagree with). He posted on the same topic of capacity utilization vs. CPI (bold mine). Here is an excerpt:
As a counterpart to my interpretation of events, I suggest you have a look at a similar post on EconompicData which has a chart that paints a very different picture than my chart. He argues that the change in capacity utilization has always been a good predictor (by 6 months) of inflation. I'm not all that impressed by the fit of the two lines on his chart (sometimes they move together, and sometimes they don't), and I don't think there is a logical reason to expect a strong fit in the first place.Here is the chart from yesterday which is referring to...
The study's authors, Joanne Wood and John Lee of the University of Waterloo and Elaine Perunovic of the University of New Brunswick, begin with a common-sense proposition: when people hear something they don't believe, they are not only often skeptical but adhere even more strongly to their original position. A great deal of psychological research has shown this, but you need look no further than any late-night bar debate you've had with friends: when someone asserts that Sarah Palin is brilliant, or that the Yankees are the best team in baseball, or that Michael Jackson was not a freak, others not only argue the opposing position, but do so with more conviction than they actually hold. We are an argumentative species.But, can anyone reasonably argue, whether or not they like the data or analysis, that this isn't at least a semi-strong correlation?
I likely got ahead of myself with the whole export nation thing, but if the dollar does weaken like many anticipate, then along with the reduced consumption by the U.S. consumer, this trade deficit may flip to positive territory sooner than later. Either way, this will definitely be a plus for second quarter GDP. Bloomberg with the details:
The U.S. trade deficit unexpectedly narrowed in May to the lowest level in almost a decade as exports jumped while imports of crude oil and auto parts declined.
The gap between imports and exports decreased 9.8 percent to $26 billion, the smallest deficit since November 1999, from a revised $28.8 billion in April that was lower than previously estimated, the Commerce Department said today in Washington. Imports fell while exports rose the most since July 2008.
A shrinking deficit signals trade will contribute more to U.S. growth as exports to emerging economies such as Brazil increase. Meanwhile, U.S. demand for imported auto parts was held down in May by production cutbacks and factory shutdowns by Detroit-based General Motors Corp. and Chrysler LLC, based in Auburn Hills, Michigan, two of the nation’s three largest automakers.
There is some confusion out there as to what exactly the "exhaustion rate" is (I had been confused myself). The following definition has been commonly used by many blogs and media pundits alike:
The United States Department of Labor publishes statistics on the "exhaustion rate" - this is a measure of the number of people who have used up their benefits, and will no longer be receiving unemployment checks.This definition had been correct. And if this were still true, the chart below would show just how large a crisis we were in with those that are no longer able to receive unemployment at almost 50% of their "unemployment" class.
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