Crude Oil Inventories at 16 Year High

WSJ reports:

Crude oil futures ended lower Wednesday as U.S. inventories soared to 16-year highs, but they found support from a sharp drop in stockpiles at a key oil hub.

The federal Energy Information Administration reported that U.S. crude oil inventories jumped 3.3 million barrels to 356.6 million in the week ended March 20, more than double analysts' forecasts, to send stockpiles to the highest level since July 1993.

However, crude inventories at Nymex delivery point Cushing, Okla., were down 2.2 million barrels, while gasoline and distillate levels also fell much more than expected.

Source: EIA

State Per Capita Incomes

The BEA reports:

The range of state growth rates was wide. The high end included oil producing states such as Alaska, Wyoming, Oklahoma, and Texas which benefitted from the rise in oil prices, which peaked in the first half of 2008. Annual employment levels in 2008 in these states exceeded their 2007 levels. At the other end, personal income growth was less than the 3.3 percent national inflation rate in 13 states in 2008. These states include Florida, Arizona, Michigan, and Nevada which had among the largest percentage declines in employment in 2008.

Per capita personal income (personal income divided by population) grew 2.9 percent nationally in 2008 down from 4.9 percent in 2007. Across states, per capita personal income growth rates ranged from 0.4 percent in Arizona (down from 1.7 percent) to 9.0 percent in North Dakota (down from 11.9 percent).

Change in Per Capita Personal Income by State (YoY)

Personal income declined nationally and in 41 states in the fourth quarter of 2008. The 0.2 percent national decline was the first since 1994Q1 and contrasts with a 0.2 percent increase in the third quarter. Personal consumption prices fell 1.3 percent in the fourth quarter of 2008, the largest quarterly decline ever.

The largest contributors (by industry) to the decline in personal income were the cyclically sensitive manufacturing and construction sectors as well as the trade sector, at both the wholesale and retail levels.

Change in Personal Income by State (QoQ)


Finally, for those interested in how your state stacks up in per capita personal income, have at it (gotta love those politician's raking it in).

Per Capita Personal Income by State


Source: BEA

Durable Goods: Good News Alert? Not Necessarily

WSJ reports:

Durable goods orders unexpectedly climbed during February, but demand in the prior month was revised down deeply, an adjustment countering the idea of a rebound in the slumping manufacturing sector. Manufacturers' orders for long-lasting goods increased by 3.4% last month to a seasonally adjusted $165.56 billion, the Commerce Department said Wednesday.

The 3.4% increase was a big surprise. Wall Street expected a decline of 2.0% for February. It was the largest increase since 4.1% in December 2007. But durables, which are goods designed to last at least three years, plunged 7.3% in January, revised way down from a previously estimated 4.5% decrease. Year over year, February durables were 28.4% lower, in unadjusted terms.

Source: Census

Japanese Export Dive or Just a Reversion to Mean Growth?

Bloomberg reports:

Japan’s exports plunged a record 49.4 percent in February as deepening recessions in the U.S. and Europe sapped demand for the country’s cars and electronics. Shipments to the U.S., the country’s biggest market, tumbled an unprecedented 58.4 percent from a year earlier, the Finance Ministry said today in Tokyo. Automobile exports slid 70.9 percent.

The collapse signals gross domestic product may shrink this quarter at a similar pace to the annualized 12.1 percent contraction posted in the previous three months, the sharpest since 1974. Prime Minister Taro Aso is compiling his third stimulus package as companies from Toyota Motor Corp. to Panasonic Corp. fire thousands of workers.

I chose to show it in linear scale because I don't necessarily believe trade is based on compounded growth (such as the case with GDP or equity price levels), BUT I was requested to do so, so here is...

In this case, it appears Japan has in fact reverted well through the long term pattern.

Is it possible this is just the end of the "globalization bubble"?

Source: TSOJ

"Oh Why Must I Feel this Way... Must be the Money"

While I posted Cash Rules Everything Around Me a few weeks back detailing those entities holding the most cash, Sandeep Shroff (via Felix Salmon) goes one step further, detailing net cash (cash, short-term investments, marketable securities less current debt and capital lease obligations) by those corporations with the most, and least:



As Felix details:

This possibly helps explain why General Electric stock has done so badly of late, and also why GE is not like all those other triple-A companies. But it doesn't shed much light on things like car companies: I don't think the fact that Ford has lots of cash and rising necessarily makes it a more solid automaker than Toyota, which has a negative cash position and falling.

Source: Market Movers

Existing Home Sales Breakdown

Yesterday, CNN Money reported:

Sales of existing homes unexpectedly rose in February, recovering from a sharp drop in the previous month, according to an industry report released Monday.

The National Association of Realtors said that existing home sales rose last month to a seasonally adjusted annual rate of 4.72 million million units, up 5.1% from a rate of 4.49 million in January. February sales were down nearly 5% from year ago levels.

The biggest increase came in the south, up a seasonally adjusted 6%.



The good news is these sales, while down year over year, weren't at fire sale prices (i.e. California'ish), as prices were up slightly despite the jump in sales.



Finally, looking at the relative prices in all regions, the chart below shows the "spread" of regional prices to the national average, with the West showing relative weakness.



Source: Realtor.org

Maybe This Inflation Thing Wasn't Actually Quashed (UK CPI Up)

Anytime I can use the word "quash", I am a happy man. ForexPros details the surprise jump in the UK's CPI:

"The U.K. Consumer Price Index moved higher in February, to 3.2%, from 3.0% one month earlier. Even though the CPI declined at a record pace last month, this month the inflation gauge rose. In addition, the Core CPI, which excludes volatile items, rose to 1.6% from 1.3% last month. To some extent, the CPI number does not justify the BoE’s concern of “undershooting” the inflation target.

The largest upward pressure on the CPI annual rate came from food and non-alcoholic beverages. The effect was widespread but the largest individual factor was the price of vegetables, which rose by more than a year ago. The only large downward pressure on the CPI annual rate came from housing and household services.

Source: Statistics.Gov.UK

Equity Market Boom... Ready for Bust

Bloomberg details (via The Big Picture):

U.S. stocks rallied, capping the market’s steepest two-week gain since 1938, as investors speculated the Obama administration’s plan to rid banks of toxic assets will spur growth and investor Mark Mobius said a new bull market has begun. Treasuries and the dollar fell.

Bank of America Corp. and Citigroup Inc. both soared at least 19 percent as the U.S. Treasury said it will finance as much as $1 trillion in purchases of distressed assets. Exxon Mobil Corp. and Chevron Corp. jumped more than 6.7 percent after oil rose to an almost four-month high. The Standard & Poor’s 500 Index extended its rebound from a 12-year closing low on March 9 to 22 percent as all 10 of its main industry groups advanced.

Which gets us back to a level not seen since... mid-February.



If I didn't know better I'd say that the S&P index is smiling at me letting me know it's time to get short...

Source: Yahoo

A Chart Worth 1000 Words? Corporate Bond Spreads (Now vs. Then)

Update: I received some feedback questioning where on the corporate curve I was pulling my data, so I've provided the detail for the original (five year maturity) and update (full corporate and high yield indices).

The spread of a AAA rated corporate bond today = the spread of a single B corporate bond less than two years back.

Original: Spread to Treasuries (5-Year Maturity)


Update: Spread to Treasuries (Full Indices)


Source: Barclays

Last Weeks Treasury Rally that Wasn't Abroad

While Treasuries have performed admirably in dollars (as defined by iShares Barclays 7-10 Year Treasury - IEF), they have SOARED over the past 6 months in Euros due to the strengthening of dollars.

Interestingly enough, while Treasuries soared last week (in dollars), those same foreign investors lost money on their investment due to the dollar sell-off after Ben's quantitative easing announcement.

Pre-Market Equity Boom

With the latest Private Public Partnership to be announced this morning at 8:45 AM, equity markets like what they hear. The Big Picture details:

Good Monday Morning. Looks like we have green on the screen this morning, with markets recovering from Friday’s sell off in the early going.

Asian markets were up huge: The Nikkei 225 had gains of 3.39%, the Hang Seng Index up 4.78%, and the S&P/ASX 200 Index tacking on 2.44%.

Nothing like the prospect a trillion giveaway to get the animal spirits moving . . .

Private Public Partnership: Cheap Financing = Lower Discount Rate = Higher Asset Prices

Before I dive in, I am not making the case that the Private Public Partnership likely to be announced Monday morning will in fact work. In addition, I am not making the case that the government should be providing a subsidy to private investors. What I am attempting to do is detail how it can work.

Thus, while I don't typically disagree with Yves from Naked Capitalism, her post Investor on Private Public Partnership: "One would have to be a criminal to participate in this" misses a HUGE detail of the plan (to be fair, I believe she nails it in a previous post here). First the basic assumptions in her example:

• Citi holds $100mm of face-value securities, carried at $80mm.
• The market bid on these securities is $30mm.
• Say with perfect foresight the value of all cash flows is $50mm.
• The investor buys the assets for $75mm, putting only 3% down and borrows the rest from the government (FDIC and Treasury) at a low rate.

Yves makes the case that this investment will no doubt result in a loss of $25mm. The line "say with perfect foresight the value of all cash flows is $50mm" combined with Yves stating the example “did not allow for time value of money” reveals her example is oversimplified to the point of missing what I feel is the most important part of the plan... that the plan reduces the rate at which the cash flows of the assets are discounted, which increases the present value of those cash flows.

Cheap Financing = Lower Discount Rate = Higher Asset Prices

In the example, the securities will only have $50mm in total cash flows, which equals the present value of those cash flows due to the ignoring of the time value of money. That makes the Private Public Partnership seem like a loser... if there are only $50mm in cash flows and an investor pays $75mm, the plan would be foolish.

However, even at low market prices, cash flows are MUCH HIGHER than $50mm. A current $30mm market bid doesn't mean that the security will have $30mm (or $50mm) in cash flows. It means the present value of all future cash flows discounted at the required rate of return on capital is $30mm. A security that pays $5 each year for 10 years and $50 in year ten may be worth close to $30 if discounted at 16%, but the cash flows are the full $100.

Visually, the chart below details the present value of a security that pays out that $5 per year for 10 years and then $50 in year 10 using a variety of discount rates. While the present value of these cash flows (i.e. the price of the security) is close to $30 assuming a 15% required return, it becomes clear that the value changes based upon the required return of the investor.



And that is the point of the Private Public Partnership. The government has a VERY low required return on investment, which it is providing to the private sector via the partnership. How low? As of Friday, the U.S. government was able to borrow over 5 years at 1.64% and over 10 years at 2.63%. Thus, if the government makes a return above these levels on an investment, it MAKES money. On the other hand, a private investor (or bank) requires a substantially higher return (let's call it 15% in the case of these bad assets) from an investment or asset because their cost of capital is substantially higher.

The Mechanism; 97% Cheap Financing

Calculated Risk reports that:

The FDIC plan involves almost no money down.

The FDIC will provide a low interest non-recourse loan up to 85% of the value of the assets. The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money ... Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

Thus, rather than discounting the cash flows at the required rate the private market requires (i.e. 15%), cheap government financing allows the cash flows of the security to be discounted at a much much lower rate (a weighting of 3% at the private rate and 97% at the government's much lower rate). This lower rate in turn props up the present value of all those cash flows (i.e. the asset price) AND makes it possible that BOTH the private investor and government can make money paying $75mm for assets currently priced significantly lower.

Is the program perfect? Not at all. For starters, I'd prefer the government go ahead and buy 100% of the assets and take 100% of the upside, but I understand the preference is to keep the assets in the hands of private investors. The important thing to remember is THERE IS NO PERFECT SOLUTION in the current environment and it is important to analyze how and why these plans may work before completely dismissing them.

EconomPics of the Week (3/21/09)

Economic Data
Men's Apparel Sticker Shock and Interview Sweaters
China Isn't the Issue...
And You Thought 8.1% Unemployment was Frightening?
Capacity Utilization Slippery Slope
Industrial Production Continues Freefall (February)
Producers Price Index (February)
Leading Economic Indicators (February)
Inflation Expectations Normalizing
CPI (February)

Asset Returns
Golden Bubble Cont'd (Part II)
GDP vs. S&P by Decade
Treasury Rally and Equity Markets

Banks
The AIG Public Relations Fiasco Continues
Investment Banking Bonus Matrix: AIG Edition
AIG... By the #'s
Why European Banks are in Trouble...

Other
NCAA First Round Winning Percentage by Seed
New York City Condos Ready to Collapse?
California Downgraded

Inflation Expectations Normalizing

California Downgraded

Reuters reports:

Ahead of a major bond sale next week by California, Fitch Ratings on Thursday cut its "A+" rating on $47.4 billion of state general obligation debt to "A" with a stable outlook, citing falling revenues and the weak economy in the most populous U.S. state.

Fitch analysts in a report noted California's "economic performance and revenue expectations have continued to decline since the state developed its current revenue forecast in November 2008," and pointed to a state unemployment rate of 10.1 percent and a recent state legislative analyst's warning of a "sizable" revenue shortfall in the next fiscal year.

Men's Apparel Sticker Shock and Interview Sweaters

Forget gold as the store of value... Highbeam reports:

Retail prices for men's apparel in February increased a seasonally adjusted 1 percent against January, well ahead of the average price for all consumer goods, which advanced 0.2 percent, the Labor Department reported Friday in its monthly Consumer Price Index.

On a year-over-year basis, however, men's apparel prices last month lagged that of the overall inflation rate, increasing 1.2 percent against February 1995 as prices for all retail goods rose 2.7 percent. Although men's wear retailers are pushing through moderate price increases, they are still under pressure to give value to consumers. Prices for boys' apparel in February reflected deep.

In looking at the six month change in the 'men's apparel' portion of CPI vs. the index, we see a spike that is unprecedented.



So what's the deal? My guess was that the demand for suits was rocketing as individuals are being thrown out of the workforce and once again interviewing (and suits being expensive would push the average price level higher). However, looking at the data we see that it isn't suits that are on the rise... it's shirts and sweaters. The WSJ asks:

What is going on with the price of mens’ shirts and sweaters? Over the last two months these prices are up at a 64% annualized rate. Mens’ apparel more generally is up at a record 29% rate, contributing to the strong 1.3% sequential increase in apparel prices in today’s report.

On a side note; while I will admit my explanation was wrong, in doing some more research I discovered that men are actually interviewing in sweaters these days (have I been in finance and New York City too long?). AskMen.com with the details in 'Dressing for a Job Interview':

With comfortable, professional clothes in mind, it is OK to wear a blazer or sweater over a tie and chinos when dressing for a job interview in the service industry. You want to look responsible and well-pressed as well as approachable to the public.

Not sure what I understand less; why men's apparel is on the rise or why people wear sweaters to interview. But while interview sweaters are a fascinating concept, if I can figure out why the price level of men's apparel is on the rise, I may be able to make some money buying the right retailer.

Any ideas?

And You Thought 8.1% Unemployment was Frightening?

While national unemployment is 8.1% and rising, the BLS reports many areas are facing a much more difficult environment:

Overall, 157 areas posted unemployment rates above the U.S. figure of 8.5 percent, 209 areas reported rates below it, and 6 areas had the same rate.

Two manufacturing centers in Indiana recorded the largest jobless rate increases from January 2008, Elkhart-Goshen (+13.0 percentage points) and Kokomo (+8.9 points). An additional 12 areas registered over-the-year unemployment rate increases of 6.0 percentage points or more, and another 26 areas had rate increases of 5.0 to 5.9 points. Waterloo-Cedar Falls, Iowa, was the sole area without an over-the- year rate change.

Elkhart sound familiar, the Indy Star reports:

President Barack Obama fanned the town of Elkhart’s hopes for relief on Feb. 9 by making it the poster child for his economic-stimulus bill. A month later, however, the city with a 19 percent jobless rate still is waiting for the promise of economic relief, Bloomberg reports today.

The problem lies in the lag between when the needs of states and municipalities are identified and how quickly decent (i.e. not completely wasteful) projects can be rolled out.

Jane Jankowski, a spokeswoman for Daniels, told Bloomberg that the state is “trying to sort through a lot of those same things to find answers to questions about how this will all be working.” She said that 40 counties will be aided by the 55 highway infrastructure projects they’ve announced so far.

White House officials say the city needs to be patient because help is on the way.

Source: BLS

NCAA First Round Winning Percentage by Seed

Source: Bleacher Report

Leading Economic Indicators (February)

RTT News details:

Thursday morning, the Conference Board released its report on leading economic indicators in the month of February, showing that its leading indicators index fell by less than economists had been anticipating.

The report showed that the leading index fell 0.4 percent in February following a downwardly revised 0.1 percent increase in January. Economists had been expecting the index to fall 0.6 percent compared to the 0.4 percent increase originally reported for the previous month.

Source: Conference Board

New York City Condos Ready to Collapse?

WSJ reports:

Moreover, Fannie and Freddie are both set to increase fees on condo buyers next month. Buyers without at least a 25% down payment will have to pay closing-cost fees equal to 0.75% of their loan, regardless of the borrower's credit score. The companies say these fees are necessary to protect against higher default rates.

The changes come as cities brace for a new flood of condo supply. Reis Inc., a New York-based real-estate firm, estimates that 93,000 new condo units will be completed this year, a 28% increase in new inventory from last year. More than 12,000 units will be completed in New York and northern New Jersey by year's end. Chicago will add 5,500 units, Seattle has 3,000 units coming online, and Los Angeles is readying 2,600 units, according to estimates provided by Reis.

Tougher credit standards, slowing economy, increase supply... not a good scenario for NYC housing to say the least.

Treasury Rally and Equity Markets

WSJ reports:

The Fed said that over the next six months, it would buy as much as $300 billion of Treasury's in maturities from two to 10 years, starting as early as next week. (See related article on the Fed's moves.)

The yield on the 10-year Treasury, which is used as a benchmark for mortgage rates, fell close to half a percentage point, its largest one-day point decline since Oct. 20, 1987.

So what does this all mean for equity and risk markets? Using history as a guide (data since 1962), when the 10-year Treasury Bond rallied by similar amounts, the equity market (as defined by the S&P) has tended to outperform over the next three months.


My thoughts? This isn't like those past situations. Rather than a Treasury rally due to a flight to quality, (which historically likely coincided with an equity sell-off, thus the next three month outperformance being a reversion to the mean), this was likely a flight ahead of the Fed / a lot of short covering. In addition, it coincided with a continuation of what very likely will be written in the history books as just another equity dead cat bounce. To brag a bit (I am wrong enough that I need to brag when I appear to have been right), just two weeks ago I made this comment in response to feedback on my post regarding hedge fund performance in February:

I will be more clear in my prediction. The market will bounce 20% back within the next month up from whatever low is hit this month. After the 20% is covered, I am shorting the crap out of this pig.

Unless the Fed begins buying actual equity, I still expect this rally to lose steam regardless of what the Fed does to help the economy.

Golden Bubble Cont'd (Part II)

Another case for gold entering bubble territory. Tim Iacono at Seeking Alpha with the details:

To me, it's just fun to watch their stash grow as inventory at the world's most popular gold ETF passes holdings by central banks all around the world. Switzerland, you're next! Soon, GLD will be number six in the world and then it'll be a long way to go in relative terms to catch Italy at almost two and a half thousand tonnes but, at the rate they're going in 2009, that'll happen by this fall. Then it's just a chip-shot away to surpass France.

With net assets of over $33 billion, GLD is already the second largest ETF in net assets according to Yahoo! Finance behind only its SPDR brother SPY at about double that figure. Somehow, it seems like that gap might narrow rather quickly over the next year or so.

AIG... By the #'s

Infectious Greed details:

• The top recipient received more than $6.4 million
• The top seven bonus recipients received more than $4 million each
• The top ten bonus recipients received a combined $42 million
• 22 individuals received bonuses of $2 million or more, and combined they received more than $72 million; 73 individuals received bonuses of $1 million or more
• Eleven of the individuals who received "retention" bonuses of $1 million or more are no longer working at AIG, including one who received $4.6 million.

In total, 11 of 73 received a $1 million bonus and no longer work there... the chart below shows roughly the same ratio; 6 of 36 to put that in perspective.

Apparently, the $1 million "retention bonuses" weren't enough. After AIG became the "poison ivy" of the financial community, cash in hand no longer served any purpose to stay.

CPI (February)

Traveling most of the day today, but I do have some posts on the way. Most important datapoint of the day... CPI. Reuters details:

U.S. inflation rose in February on higher gasoline and apparel prices, government data showed on Wednesday, pointing to some pricing power in the recession-hit economy and easing fears of deflation for now.

The Labor Department said its closely watched Consumer Price Index rose 0.4 percent, the biggest monthly gain since last July, after increasing 0.3 percent in
January.

It said about two-thirds of the rise in the headline figure was from the jump in gasoline prices. "The one-time shock from lower commodity prices and stronger dollar late last year has faded. We haven't slipped into a worrisome deflation situation," said Zach Pandl, an economist at Nomura Securities International in New York.

The BLS claims 0.20% CPI year over year, but using their figures and weights, it comes out to 0.5% (used above). The chart shows the only item showing deflationary pressures YoY was transportation (though I don't believe housing is up year over year), yet transportation costs are on the rise MoM due to the rebound in oil.

Source: BLS

China Isn't the Issue...

Interest Rate Roundup reported:

"Chinese Premier Wen Jiabao said Friday that he is "worried" about the country's vast $1 trillion holdings in U.S. Treasuries and that China will pursue a policy of diversification when comes to its future foreign exchange holdings. "Wen's remarks, which were made at the close of the annual National People's Congress meeting in Beijing, echoed those that have been made by other high-ranking policymakers and bankers over the past year since the subprime crisis devastated the value of the mortgage-backed securities that made up a large chunk of China's U.S. holdings.

Yet China continues to buy U.S. Treasuries...



While China may in theory be "worried" about their exposure, they have minimal flexibility with what they can do as long as the U.S. consumer remains so vital to their economy. If China stops buying U.S. denominated assets, their currency will gain in value, thus making their products less desirable to the U.S. consumer.

The bigger issue with U.S. Dollar denominated assets are all those investors that flocked to the assets in the Fall due a the flight to quality or unwind of shorts. The Financial Times reports:

Foreign investors cut their holdings of US long-term securities in January although China and Japan purchased more Treasury bonds, according to Treasury data issued Monday. The latest Treasury International Capital report, known as TIC, revealed net sales of $43bn in long-term US securities in January, following purchases of $34.7bn in December. US residents purchased a net $24.2bn of foreign securities, the first net buying since last June as repatriation flows halted.

Brad Setser (i.e. "Mr. TIC") follows:

Banks stopped piling into US assets. In October — at the peak of the crisis — private investors abroad bought $64 billion US T-bills and increased their dollar deposits by $196 billion dollar-denominated liabilities. In January, credit conditions eased a bit, and private investors reduced their t-bill holds by $44 billion and the banks reduced their (net) dollar deposits by $119 billion.

Looking at net purchases of U.S. Long-Term Securities for both China (the headline risk) and banks / investors (the actual risk) as defined by the Cayman Islands (the largest portion of the Caribbean Banking Centers in the chart above... I'll explain more below) we see a massive sell-off.



So... why should we be worried about the Cayman Islands? Because the Cayman IS the banking community. According to Wikipedia:

The Cayman Islands are a major international financial centre. With the biggest sectors being "banking, hedge fund formation and investment, structured finance and securitization, captive insurance, and general corporate activities." Regulation and supervision of the financial services industry is the responsibility of the Cayman Islands Monetary Authority (CIMA).

The Cayman Islands are the fifth-largest banking centre in the world; with $1.5 trillion in banking liabilities. They are home to 279 banks (as of June 2008), 19 of which are licensed to conduct banking activities with domestic (Cayman based) and international clients, the remaining 260 are licensed to operate on an international basis with only limited domestic activity.

One reason for the Cayman Islands’ success as an offshore financial centre has been the concentration of top-quality service providers. These include leading global financial institutions (incl. UBS and Goldman Sachs), over 80 administrators, leading accountancy practices (incl. the Big Four auditors), and offshore law practices (incl. Maples & Calder and Ogier).

To summarize... we should be less concerned with China (they NEED to buy) and more concerned that major investors continue to pile out.

Source: Treasury

Capacity Utilization Slippery Slope

Reported with yesterday's industrial production, capacity utilization took a turn for the worse... worse since inception that is.

Capacity utilization also dropped to 70.9%, matching a December 1982 record low for the series which itself dates back to 1967. Capacity utilization was at 71.9% in January.

At least it's not a cliff dive. More like a slippery slope. A slippery slope in appearance and in the notion that if we don't do something soon, we're not going to be able to climb back up anytime soon.

Source: Federal Reserve

Producers Price Index (February)

Briefing.com reports:

The core rate in PPI rose 0.2% for February. This follows gains of 0.2% in December and 0.4% in January.

The core rate continues to defy the weak demand which is undoubtedly pressuring producers as capital equipment prices 0.1%.

It is likely that the trend in core prices will weaken in the months ahead.

The total PPI was up 0.1%. A surprising 1.6% drop in food prices held back the overall gain. Energy prices were up 1.3%, about as expected. Food and energy each account for about 18% of the total index.

The overall data reflect few price pressures as the year-over-year increase for PPI is at -1.3%. The core rate is at 4.0% on a year-over-year basis but falling.

Year over Year



Month over Month



Source: BLS

Investment Banking Bonus Matrix: AIG Edition

In my post about AIG's bonuses and backdoor bailouts I got the following comment from 罗臻:

I don't understand why people blame AIG. Instead of letting it fail and getting rid of all the executives, bonuses, and most employees, the government saved AIG and now it is a continuing business. Paying bonuses is what businesses have to do to retain their workers.

"Have to do"?????? Looks like it is AGAIN time to whip out the Investment Banking Bonus Matrix (apologies for those sick of seeing this thing... but apparently I haven't shown it enough to get comments like that). Definitely an argument from the bottom right quadrant.

Why European Banks are in Trouble...

The chart below shows the size of global capital markets in relation to the GDP leading up to the crisis. What's clear is that bank assets were a much greater percent of GDP in the EU than in the United States, explaining (along with currency issues) why the EU has been hit especially hard.

On the bright side... the U.S. is in "relatively" good shape.

Source: IMF

GDP vs. S&P by Decade

As a follow up to last week's breakdown of the S&P 500 vs. GDP, here is a breakdown of performance by decade.



Comparing this chart to the real historical earnings and dividend yields below (i.e. yields less CPI), we see that outperformance of equities in the 1950's, 1980's and 1990's is correlated to the decrease in required earnings and dividend yield (i.e. P/E and P/D expansions).



For equities to outperform going forward we need either earnings to grow faster than GDP or the required yield to drop (i.e. multiplier to once again expand). Not an easy thing given the earnings pressure due from the economic turmoil (and increased cost of financing) or the historically low levels of yield the equity market already "requires".

Source: Irrational Exuberance

Industrial Production Continues Freefall (February)

Bloomberg reports:

Industrial production fell in February for the fourth consecutive month as auto cutbacks and collapsing exports spilled across the U.S. economy.

Output at factories, mines and utilities dropped 1.4 percent last month, more than forecast, after a revised decline of 1.9 in January, the Federal Reserve said today in Washington. The amount of factory capacity is use slumped to 70.9 percent, matching the lowest level on record.

Source: Federal Reserve

The AIG Public Relations Fiasco Continues: Bonuses and Backdoor Bailouts

This Saturday, Marketwatch reported:

In a letter to Treasury Secretary Timothy Geithner, AIG Chief Executive Edward Liddy said that AIG had committed to paying the bonuses to employees of the financial-products unit and that the payments were "binding obligations," the Journal reported.

The $450 million in bonuses are over and above $121.5 million of incentive payments for 2008 that AIG will make to about 6,400 of its employees. And AIG is laying out another $600 million in retention payments to more than 4,000 employees, the Journal reported.

Liddy told Geithner that he did not like the $450 million bonus arrangement but that outside counsel had advised the company that it must go through with it, the Journal reported.

More specifically, the $450 Billion in bonuses were focused on employees in the unit that lost $40.5 Billion in 2008. Not sure what is in place that guarantees these bonuses, but why not withhold these bonuses and make AIG fight tooth and nail through the legal system for the money?

The sad thing is... the above is nothing compared to the latest and greatest PR fiasco from AIG. As a little background, last weekend the WSJ detailed bailout funds were being diverted "backdoor to the banks":

The beneficiaries of the government’s bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.

Among those institutions are Goldman Sachs Group Inc. and Germany’s Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.

Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Société Générale SA.

More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document.

Forget $50 Billion... late last night AIG has released the following (the FT reports):

AIG paid out $22.4bn of collateral related to credit default swaps, $27.1bn to help cancel swaps and another $43.7bn to satisfy the obligations of its securities lending operation. The payments were made between September 16 and the end of last year.

Goldman Sachs, which has also accepted US government support, received payments worth $12.9bn. Three European banks – France’s Société Générale, Germany’s Deutsche Bank and the UK’s Barclays – were paid the next-largest amounts. SocGen received $11.9bn; Deutsche $11.8bn; and Barclays $7.9bn.

Please note that Felix at Market Movers makes the case that it may not be exactly as bad as first thought... I'll follow up with details if they come out.


Look... I understand the importance of preventing systemic failure (i.e. a Lehman fiasco), but clearly communicating where the money is going (in real-time), why it is going there, and doling it out in a fair and objective manner is the only way the people of the United States will accept (without force) the injection of trillions of dollars back into the financial system. I concede that fair is relative, but when you try to secretly move $80+ Billion into the financial system in a backdoor manner, you lose trust which is REQUIRED in this environment.

Specifically, I have the following problems with the above mentioned backdoor bailout (drum roll please).....

1. We were told AIG was bailed out due their importance to the system. Not to bail out supposed "solvent" institutions (with taxpayer money indeed going directly towards "solvent" institutions, why isn't the taxpayer receiving at least an additional equity stake)


2. The moral hazard associated with bailing out "counter-party risk" (i.e. IT WAS PRICED TOO LOW) only makes it more likely that counter-party risk will once again be under-priced AGAIN in the future (hell, if the government is willing to step in, why do the credit work?)


3. As Yves from Naked Capitalism pointed out, Goldman Sachs was bailed out to the tune of $12 billion (via AIG), but Goldman "had a seat at the table during the AIG rescue talks". How is this possible? That would be like a homeowner, that has failed to make their home payments, joining the board of a mortgage servicer and cramming down his own loan. Would that possibly ever happen?


4. U.S. taxpayer money was used to bailout non-US institutions! Again, in return for a 0% equity stake in any of these firms!

In fact, three of the top four AND eight of the top eleven beneficiaries by amount received above, were non-US institutions.

Source: AIG

EconomPics of the Week (3/14/09)

Assets / Markets
The 30 Year Equity Cycle?
Help Jake Understand: Equity Returns Lower than Economic Growth
Ready to Ride the Golden Bubble
EIA Cuts Oil Price Forecast
Gold... Has It Really Stored Value?
LIBOR on the Rise...
Financials: Here We Go Again Edition
"Cash Rules Everything Around Me"
Inflation Adjusted w/ Dividend S&P 500
NASDAQ Soars to Levels Not Seen Since.... Last Wednesday

Economic Data
Inventories...Negative = Positive
How Can an 8.6% Drop in Retail Sales be a Positive?
Budget Cliff Dive (February)
Wholesale Sales: Durable Goods Down... Nondurables Up
You Don't Have to Go Home, But You Can't Stay Here...
Long Booze and Drugs / Short Oil and Autos

Other
World's Wealthiest Individuals
Box Office Continues Hot Streak
Global Stimulus as a Percent of GDP

The 30 Year Equity Cycle?

Taking data from this morning's post on equities vs. GDP, the following charts take the 10 year return of the S&P (including dividends) and subtracts out the 10 year GDP growth...



Is this all just one long-term equity cycle...

Equity Returns Lower than Economic Growth

Update: I had completely forgotten that reader AJK had provided detailed return analysis going back to 1950 on the same topic, so credit to him for this post...

In response to my post on gold vs. equities, Irrational Doomsday stated:

That's good. I think the next logical step would be how far investment returns can diverge from real underlying economic growth (ie Real GDP growth).

As requested... it's not too surprising that in recent years the real returns of the S&P 500 has been highly correlated to real economic growth.



Source: Yale

Inventories...Negative = Positive

Some more positive data came out yesterday I initially missed. While it may be counterintuitive at first to think a drop in inventories is a positive thing for future economic growth, when inventory needs to be replaced, production that was sitting on the sidelines is put back to work. Forbes reports:

Business inventories fell 1.1% in January, more than the consensus 1.0% decline and the fifth consecutive monthly drop, the Commerce Department reported today.

Inventories were down in all major sectors in January. Manufacturing inventories fell 0.8%, wholesale inventories fell 0.7%, and retail inventories dropped 1.7%, the largest decline since November. Within retail, auto dealer inventories fell by 4.4%, the largest drop since July 2005.

The retail sales number that came out with the inventory data is one month behind the retail sales data Commerce put out earlier today. Commerce's earlier release revised January retail sales up to a 1.8% increase, the largest gain in three years.

Source: Census

Ready to Ride the Golden Bubble

First the chart, then my explanation…

People seem to forget this, but all bubbles start with a seemingly strong premise. In the case of gold it's that the printing press is going wild, thus gold should strengthen relative to the dollar. This makes sense to a degree. The Internet DID change the world, but Pets.com didn't become a worldwide leader in pet accessories; oil SHOULD have increased in price due to a global economic boom, but at $145 / gallon businesses failed and people stopped driving; financial innovation DID allow many first time buyers the access to finance a new home, but someone making $20,000 a year should not be buying a $1,000,000 house.

In other words, a great story can explain why the boom begins, but it doesn't justify the price if it becomes outlandish. As money pours in and the bubble gets larger, investors pour in more money. Gold has been a similar story as the shiny metal formerly used in jewelry vs. 401k's has become exceptionally self-feeding as gold has been one of the few asset classes that has shown strength, attracting new capital.

The following are a few reasons why I believe gold may be entering the next bubble:

1. The same people that argued gold is a BUY BUY BUY because of inflation are now coming up with well-articulated reasons why gold is a BUY BUY BUY because of deflation. I personally don’t have a clue how deflation or a decrease in credit can possibly be good for gold.
2. Pre-house bubble pop, everywhere you looked there was housing TV show this (i.e. Flip that House), housing seminar that, become a realtor this. Now there are "gold guys" preying on frightened investors' 401k’s, infomercials about gold coins, and the Internet sensation CASH4GOLD.
3. Gold serves no useful purpose, to my knowledge, outside of a minor uses in electronics / dentistry and major uses (at lower prices) in jewelry. I say "at lower prices" because gold is already to being replaced by cheaper metals in jewelry (the demand for gold jewelry was down 35% in the fourth quarter) and the existence of CASH4GOLD means people may be net sellers of gold in jewelry (I personally like to picture a frightened investor selling all their prized jewelry out of fear, only to take that cash and invest it in gold out of fear of inflation).
4. The wildest thing to me is that in most cases this investment is not in bars you can actually see (the value in gold is supposedly its beauty), but in an ETF where you see its value in your account statement. (In addition: if you think the financial system is melting... don't put your money into an ETF).

After all that you’d think I’m shorting gold? Well, I actually am in the short-run (The Financial Ninja read my mind with his post regarding that opportunity), but I am ready and waiting for gold to make new highs to reverse my positioning with expectations that this bubble train is far from over. I've learned my lesson with the Internet Bubble (and recent housing bubble) that most people are illogical and invest based on fear (sometimes fearing loss, sometimes fearing they will miss out on the next big thing) and money can be made even if the premise makes absolutely no sense in the long run. As long as fear reigns supreme and equity markets remain volatile, there will be plenty of people convinced gold is the only "safe" investment.

My expectation is that eventually the golden bubble will run its course and come crashing back down to earth. If the economy gets worse, people will realize you can't eat the stuff and investors will sell their stakes to pay for necessities. On the other hand, if the economy recovers, investors will have much better opportunities with their capital… as I mentioned Tuesday, asset inflation, especially in precious metals, serves no economic purpose in the long run.

How Can an 8.6% Drop in Retail Sales be a Positive News Alert?

Marketwatch reports:

Retail sales dropped 0.1% on a seasonally adjusted basis in February, better than the 0.4% decline expected by economists surveyed by MarketWatch. January's sales gain was revised much higher, to a 1.8% gain from the 1% increase estimated a month ago. Sales are down 8.6% in the past year and had declined for a record six straight months before January's surprising gain. Sales had plunged 3.1% in December.

While certainly not pretty...

The second derivative is turning positive (i.e. things are getting "less worse")...

And that is something we can all get behind...

Source: Census

World's Wealthiest Individuals...

Bloomberg (had to quote something from Bloomberg... congrats Mayor, you were the only top 25 representative to have increased your wealth!) reports:

Microsoft Corp. Chairman Bill Gates regained the title of world’s richest person on Forbes magazine’s annual ranking of billionaires worldwide, as the global recession slashed the size of the list by 30 percent.

The number of billionaires fell to 793 from 1,125 last year. It was the first time since 2003 that the number of people on the list decreased, and the biggest drop since the magazine began the ranking 23 years ago.

The total net worth of the list fell to $2.4 trillion from $4.4 trillion last year, with the average billionaire worth $3 billion, down from $3.9 billion. The three wealthiest -- Gates, Berkshire Hathaway Inc. Chairman Warren Buffett and Mexican telecommunications magnate Carlos Slim Helu -- lost a combined $68 billion in the past year.

Source: Forbes