Movie Business Still Golden

Box Office Guru details another strong weekend, in a year that is handily beating the record year that was 2009:

The Red Queen ruled once again as Disney's Alice in Wonderland remained at number one for the third consecutive frame beating out another pack of new releases. Fox's tween comedy Diary of a Wimpy Kid beat expectations to open in second place while Sony's Jennifer Aniston-Gerard Butler vehicle The Bounty Hunter enjoyed a solid debut of its own close behind in third. But Universal's new action entry Repo Men flopped in fourth with a miserable showing. The overall box office was up over 2009 for the fourth straight weekend.

YTD box office results are now a whopping 33% higher than just 4 years ago.



Source: Box Office Mojo

EconomPics of the Week: Go Pitt Edition

I didn't go to Pitt, but I grew up with them and I hope they can help the Big East rebound from the opening day fiasco.

Investing
Quality Spread Rotation
High Yield vs. Investment Grade Corporates
China "Officially" Largest Treasury Holder
Housing Starts Stagnant

Economics
Leading Economic Indicators Point to Slowing Recovery
CPI Shows Lack of Inflationary Pressure
PPI Stabilizing
Industrial Production Grows Despite Weather
NY Manufacturing Index Shown Strength

Random
March Madness Bracket Help

In honor of the NCAA tournament (and the time it has taken away from blogging), here is a highlight of the best buzzer beaters in NCAA tourney history.

Leading Economic Indicators Point to Slowing Recovery

Missed this yesterday as my mind was elsewhere (think hoops). Businessweek detailed:

The index of U.S. leading indicators rose 0.1 percent in February, the smallest gain in almost a year, pointing to an economy that may expand at a slower pace in the second half of 2010.

A pickup in manufacturing in the last half of 2009 that helped spearhead the recovery has prompted companies to slow the pace of job cuts. Stronger economic growth hinges on employment gains that have yet to occur, one reason Federal Reserve policy makers this week kept interest rates near zero.

“We don’t expect this to be an especially strong recovery,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, who accurately forecast the LEI increase. At the same time, “growth is still positive,” he said, and the index “is still consistent with a gradual economic recovery.”

Source: Conference Board

CPI Shows Lack of Inflationary Pressure

Marketwatch reports:

U.S. consumer prices were unchanged on a seasonally adjusted basis in February, with falling energy prices offsetting increases in prices of cars, medical care and food, the Labor Department reported Thursday.

In the past year, the CPI has risen 2.1%. The core rate is up 1.3% in the past year, the smallest year-over-year increase in six years.

As can be seen below, the headline has been all transportation costs (i.e. price of gas) flowing through to the consumer.



Source: Federal Reserve / BLS

Quality Spread Rotation...

Earlier this week EconomPic took a look at the relative returns of high yield vs. investment grade corporate bonds given the spread between the yield levels of the two. In a nutshell, when spreads between high yield and investment grade are 600+ bps, high yield has significantly outperformed. Otherwise, performance has been mixed (see chart).

Below, equities are thrown into the mix. The chart uses the same x-axis as yesterday's analysis (the spread between high yield and investment grade corporate bonds), while the y-axis shows one year forward excess return of both the S&P 500 (including dividend reinvestment) and high yield.



Unlike the strong correlation between changes in high yield spread and the performance of the S&P 500 that we've seen in the past, the performance of each is very different when spreads are low or when spreads are high*.

Which leads to the next chart detailing returns of investment grade, high yield, and the S&P 500 using the same "spread" metric, but showing the average annual performance of each in absolute terms across three "spread buckets" since 1994.



Now the fun begins.... assigning a 'best performer' to each bucket (S&P 500 when spreads are narrow, investment grade credit when spreads are "mid", and high yield when spreads are wide) and allocating monthly to the 'best performer' based upon the month-end spread differential between high yield and investment grade, we get the 'rotation' returns generated below.



While investment grade, high yield, and equities (i.e. the S&P 500) have all provided remarkably similar returns since 1994 (which is as far back as I was able to pull high yield spread data), the 'rotation' returns have significantly outperformed, up more than 11% per year with a similar level of volatility (compared to 7.3% annualized returns for the S&P 500 with more than 15% volatility).

It will be interesting to re-run the analysis as I dig up high yield data going back further, but in the meantime we need an official name for this type of rotation as "Quality Spread Rotation" isn't cutting it.

Any ideas?


Source: Barclays Capital


* Low:

When spreads between high yield and investment grade are low it likely:

• Means that more investors are risk seeking on the margin
• Reflects a decent economic environment
• Equates to cheap fixed income financing for corporations (low spreads on borrowing costs)

All of which feed into higher earnings (all else equal) and earnings flow through to equity investors. Throw in the potential P/E multiple expansion when spreads are tighter and you get a great environment for equities.

High:

When spreads are high, those higher coupon payments are made to the high yield investor and everything detailed above is reversed. At the same time, high yield investors have a more secure spot in the capital structure than owners of equity, thus first rights to a corporation's assets if there are defaults (i.e. they have recovery value, whereas equity investors do not).

PPI Stabilizing...

Marketwatch reports:

Wholesale prices fell a larger-than-expected 0.6% in February after seasonable adjustments, with energy prices falling 2.9%, the Labor Department reported Wednesday. This is the largest decline since last July. The producer price index has risen 4.4% in the past year, the government said.

The core PPI - which excludes food and energy prices - rose 0.1% in February, more than expected. Core prices are up 1.0% in the past year. Economists surveyed by MarketWatch expected a 0.3% fall in the headline PPI and a 0.1% decline in the core rate. The PPI had risen 1.4% in January, while the core rate was up 0.3%.

Of all the information portrayed in the chart below, the most telling is the relatively low year over year headline PPI figure when compared to the spike in energy and materials.

It shows just how powerful the relationship is between the cost of labor and finished goods.

Source: BLS

Housing Starts Stagnant

Business Week details:

Housing starts in the U.S. fell in February as record snowfall in parts of the country hampered construction, while fewer building permits signaled demand is stagnating.

Builders broke ground on 575,000 homes at an annual rate last month, down 5.9 percent from January’s revised 611,000 pace that was higher than initially estimated, Commerce Department figures showed today in Washington. Building permits, a sign of future construction, decreased for a second month.

The overall drop has been nothing short of epic...



Source: Census

March Madness Bracket Help

A repost from last year just in time for opening tip off (note the chart does not include games from 2009)...



Source: Bleacher Report

High Yield vs. Investment Grade Corporates

As of the end of February, the spread on the investment grade corporate bond index was ~170 bps and the high yield index ~650 bps (up from the 1994-2010 average of 140 bps and 510 bps respectively). Below is a chart of the variance between the two since 1994 (as far back as I was able to pull data).



Below is the relationship between this variance and the subsequent 12 month out/under performance of high yield relative to investment grade corporate bonds. As can be seen, there appears to be a weak relationship between spread variance and performance when spreads are "tight" (in this case less than 600 bps [in blue], where correlation is -0.31), but when spreads were north of 600 bps [in red], correlation spiked to 0.75 (though it is important to note that spreads have only been this wide in two periods and 19 months since 1994 [i.e. small sample set]).



Below is a chart of the above data in a different form broken out by spread "bucket" rather than as a scatter plot. Again, except when spreads were at "world is ending" levels (and the world didn't end), high yield has tended to underperform.



The important point I will make is that any investment in high yield is by definition... risky. Especially at relative "tight" levels coming out of the worst credit crisis since the Great Depression.

Source: Barclays Capital

Industrial Production Grows Despite Weather

WSJ reports:

U.S. industries reduced manufacturing output in February because of severe weather, while overall production totals inched ahead slightly. Industrial production last month increased by 0.1%, the Federal Reserve said Monday. That falls in line with the expectations of economists surveyed by Dow Jones Newswires. January output remained unchanged at 0.9%.

The biggest gain in the report showed output in the mining industry rose 2.0% after climbing 1.1% in January. Mining capacity use rose to 88.2% from 86.4%. Still, manufacturing production in February decreased 0.2% from the previous month's 0.9% increase, the report said. Car and parts output showed a steep dip of 4.4%. excluding autos, production in all other industry remained stagnant.

Source: Federal Reserve

China "Officially" Largest Treasury Holder

Last month Bloomberg reported:

China’s ownership of U.S. government debt fell in December by the most since 2000, allowing Japan to regain the position as the largest foreign holder of Treasury securities. Japan’s holdings rose 1.5 percent in December to $768.8 billion while China’s dropped 4.3 percent to $755.4 billion, Treasury Department figures today showed. China allowed its short-term Treasury bills to mature and replaced them with a smaller amount of longer-term notes and bonds, the data showed.

As I countered last month:

So (most of / some of?) these purchases by the United Kingdom were likely on behalf of China.

It looks like a portion of the figures were revised in the latest release.



China's total holdings of Treasuries is now listed at $889 billion, compared to $765 billion for the Japanese.

So China is still THE major player... BUT if they decided to reduce this dominance, Paul Krugman makes the case that it would not be a bad thing given the current situation.

The US private sector has gone from being a huge net borrower to being a net lender; meanwhile, government borrowing has surged, but not enough to offset the private plunge. As a nation, our dependence on foreign loans is way down; the surging deficit is, in effect, being domestically financed.

The bottom line in all this is that we don’t need the Chinese to keep interest rates down. If they decide to pull back, what they’re basically doing is selling dollars and buying other currencies — and that’s actually an expansionary policy for the United States, just as selling shekels and buying other currencies was an expansionary policy for Israel (it doesn’t matter who does it!).

Source: Treasury

NY Manufacturing Index Shown Strength

Marketwatch details:

Manufacturing activity in the New York region continued at a solid pace in March, the New York Federal Reserve Bank said Monday. The bank's Empire State Manufacturing index slipped to 22.9 in March from 24.9 in February. The index had plunged in December but has since recovered. The details of the report were strong. The new orders index shot up 17 points to 25.4. Shipments also moved higher. Inventories climbed above zero for the first time since August 2008.

The index for the number of employees rose to its highest level in more than two years. The Empire State index is of interest to investors and economists primarily because it is seen as an early indicator of what the Institute for Supply Management's March national factory survey due out in two weeks may show. In February, the ISM manufacturing index inched lower to 56.5 but continued to point to solid growth in the factory sector.

Source: NY Fed

Consumer = Unhappy, but Spending

Confidence Falls

Per Marketwatch:

U.S. consumer sentiment dipped in early March, according to media reports on Friday of the Reuters/University of Michigan index.

Amid signs that the labor market is approaching a trough but remains frail, the consumer sentiment index declined to 72.5 in March from 73.6 in February. Economists surveyed by MarketWatch had been expecting the sentiment index to hit 74 in March.

Yet, Still Shopping

Retail sales showed strength in February. Per the AP:.

For February, sales rose 0.3 percent, the Commerce Department said Friday. That surpassed expectations that sales would decline 0.2 percent.

The overall gain was held back by a 2 percent decline in auto sales, reflecting in part the recall problems at Toyota. Excluding autos, sales rose 0.8 percent. That was far better than the 0.1 percent increase excluding autos that economists had forecast.

If you're going to stay home (unemployed), perhaps that is cause for the new flat panel TV or laptop?

Calculated Risk does point out that while the trend is improved, the overall level is actual less than what was reported just one month ago:

January was revised down sharply. Jan was originally reported at $355.8 billion, an increase of 0.5% from December.

February was reported at $355.5 billion - a decline without the revision to January.

In other words, reports got ahead of themselves (no surprise), but the actual trend remains moving in an upward trajectory even though things quite frankly suck for the average consumer.

Source: Census

The Changing Face of American Debt

The Federal Reserve released their latest Flow of Funds report, which contains TONS of great info. Below is a look at the change in debt outstanding by sector (as a percent of GDP) over a variety of periods since 1979.



1979 - 1989:

The "decade of debt" was led by the Federal government (Federal debt to GDP jumped from 26% to 41%) thanks to huge tax cuts, but businesses weren't far behind due to the leveraged buyout craze that saw over 2000 leveraged buyouts between 1979 and 1989 (and business debt to GDP from 53% to 66%).

1989 - 1999:

This decade saw continued growth in housing related debt (home mortgages grew from 33% in 1979 to 41% in 1989 to 47% in 1999). On the other hand, businesses and all three segments of the government delevered as there was a Federal budget surplus (seems impossible).

1999 - 2007:

In the next 8 years, the housing bubble was king. Home mortgages grew to 75% of GDP (2.3x the level of 1979) and helped keep consumer debt in check (have credit card debt? Simply take out a home equity loan to pay it down). Businesses once again levered up with cheap financing and a wave of private equity buyouts (business debt grew from 65% of GDP to 76%). The Federal government did continue to delever, as the economy outpaced the growth in the Federal government's debt (though the majority of this was due to a 5% decline in the Federal debt level from 1999 to 2000 (from 39% to 34%).

2007 - 2009:

The financial crisis wiped out a significant share of these debt levels, with home mortgages declining 2.5% and consumer credit a bit less than 1%, though as discussed earlier this was due to default vs. paydowns. The big story of course has been the change in outstanding debt issued by the Federal government (from 36% of GDP to 55% in 2 years!).

Source: Federal Reserve

Update: Changed the title of this post based on a title given to it when linked to by Real Clear Markets... credit, where credit is due

On the Price Stickiness of Imported Oil

In brief... there doesn't appear to be much...

(NOTE: the axis on the right hand side is REVERSED )



Source: EIA / Census

U.S. Trade Back to "Normal"

Marketwatch details the latest release:

After widening dramatically for two months, the U.S. trade deficit reversed course and narrowed unexpectedly in January, government data indicated, suggesting that the economic recovery remains tentative.

The trade deficit shrank a seasonally adjusted 6.6% to $37.29 billion from $39.90 billion in December, the Commerce Department said Thursday.

The one-month improvement in the deficit marked the biggest since last September.
The trade gap had jumped by 9.7% in November and by 10.5% in December -- reports that economists said had a strong-economy feel about them as the appetite for imported goods was robust.

The chart below details the longer term trend for imports and exports. For imports, an increase is a negative (a drag on GDP) whereas an increase in exports is positive (a plus on GDP). It shows that things have "normalized" after a huge reversal in post-crisis.

Source: Census

Was Consumer Delevering Part II

On Monday I asked if the consumer was relevering and showed the below chart (makes special note of the revolving debt).

Felix Salmon with some interesting analysis that shows perhaps they never really were:

It turns out that while total debt outstanding dropped by $93 billion, charge-offs added up to $83 billion — which means that only 10% of the decrease in credit card debt — less than $10 billion — was due to people actually paying down their balances.

Source: Cardhub

Explaining Inventory Rebuild

I received a comment asking for better clarity as to why this morning's Wholesale Sales / Inventories report may be good news (stronger sales, less of a freefall in inventories)... before I dive in, please note that the below assumes all the figures are real (i.e. adjusted for inflation, which they are not). Here goes...

First the Legend

Red = Wholesale Production (rolling three month change); as measured by three month change in sales +/- the three month change in inventory (if inventories increase, then production = sales + change in inventories as some production was used to add to inventory levels).

Blue = Wholesale Sales (rolling three month change)

Orange = Variance between the two



As can be seen there was a negative feedback loop when the initial financial crisis hit that resulted in sales falling AND actual production plummeting (business just sold out of inventory rather than re-order stock) due to all the uncertainty (the initial decline likely caused sales to drop further as businesses stopped receiving new orders, which caused production to drop even further....)

The good news (now) is that when the inventories stopped freefalling, production levels actually ramped up faster than sales as new orders flowed right through inventories. As detailed at the top of this post, production is calculated from sales +/- the change in inventory, thus as long as the negative change in inventories becomes smaller (it doesn't need to grow), the production level increases relative to sales (which it did starting last summer and is now ~5% higher than actual sales).

This led to a huge amount of the GDP growth in Q3 and Q4 (~2/3 of all growth in Q4 was inventory rebuild). My whole point is that the sales level is actually showing decent growth too, thus the base (ignoring inventories) for production is growing. Add to that base any incremental impact of an actual inventory rebuild and you have the makings for some very good news.

Source: Census

Promising Wholesale Figures

WSJ reports:

U.S. wholesalers' inventories unexpectedly fell 0.2% in January, the Commerce Department said Wednesday, as surging demand pulled goods off shelves in the first month of the year.

Wall Street analysts had expected inventories to rise by 0.2% in January. The unexpected decline followed a downward revision in December's inventory level showing December inventories contracted by 1.0%, rather than the 0.8% drop originally reported.

Sales by U.S. wholesalers in the first month of 2010 were up 1.3% to a seasonally adjusted $346.7 billion, the latest data showed. It was the tenth straight monthly increase in sales, according to the Commerce Department. Sales were particularly strong for cars and groceries.

The decline in inventories appears to be good news for the U.S. economy. A pileup in inventories doesn't always bode well for future production or for future economic growth, and a decline may indicate that demand is outpacing supply.

The amount of wholesale goods on hand relative to sales was 1.10 in January, a record low. The inventory-to-sales ratio measures how many months it would take for a firm to deplete its current inventory. The ratio in December was 1.12.

If one were to believe these figures, then on the margin this is likely a detractor for Q4 GDP and Q1 GDP (a decline in inventory means less was actually produced to meet end-user demand - I am just not convinced actual inventories declined for real in January, just as I didn't believe they actually jumped back in November). Either way, the jump in end-user demand is good news (as long as it is real and not nominal... not sure how to figure out the flows though).

Wholesale Sales



Wholesale Inventories



The question is when will businesses not only slow the trend of a decline in inventory levels, but actually build? If end-user demand continues to show its head, we may FINALLY be getting there (though there is likely plenty of excess capacity ready to meet this demand before it flows through to hiring and capex spending).

Source: Census

Japan: Machinery Orders and a (Potential) Recovery

WSJ details:

Japanese core machinery orders fell 3.7% in January after unusually strong growth in the previous month, the government said Wednesday, suggesting a full-fledged recovery in business investment is still some way off.

The findings suggest it may take more time before Japan's capital investment—which accounts for 15% of gross domestic product and is a pillar of domestic demand—starts recovering steadily and strongly. Core orders are considered a reliable gauge of future capital investment, and exclude often-volatile orders for ships and those from electronic power companies. The machinery orders were down 1.1% in January from the previous year.

Still, January's decline may be too moderate to dispel the view that demand for machinery is stabilizing. Previous data show core orders gained 0.5% on quarter in October-December for the first rise in seven quarters, and there are signs that the improvement in exports—a key incentive for manufacturers to invest—is gaining steam.

The below chart details the past 20 years of Japanese machinery order data in an attempt to avoid the short-term noise (while down in January, machinery orders were up more than 20% in December).



As indicated above, Japan has successfully relied heavily on exports in the past (at the beginning of last decade) to get their economy out of what was a more than a decade long period of slow / no growth. After peaking in mid-2007, the rug was taken out from under them when the continued lack of internal demand was met by a crash in external demand.

The key question is can the Japanese economy do it again? Business Week details news out of China, that on the margin, suggests they might:

China’s trade surplus shrank to the lowest level in a year in February as a surge in imports signaled the nation may start to outshine the U.S. as a destination for the world’s goods.

Imports rose a more-than-estimated 44.7 percent from a year ago, the customs bureau reported on its Web site today. The surplus was $7.61 billion, and exports gained 45.7 percent.

While the bulk of these imports are in the form of commodities, China is increasing their demand for "value-add" goods on the margin. If they (and other emerging Asian countries) continue to do so, Japan may have a shot...

Source: ESRI

More on the Improved Labor Market

Some additional detail behind the improvement we've seen on the margin in the labor market year to date. The AP reports:

Job openings rose sharply earlier this year, a sign that employers might be preparing to step up hiring.

The number of openings in January rose about 7.6 percent, to 2.7 million, compared with December, the Labor Department said. And the job openings rate climbed to 2.1 percent, the highest in nearly a year. That rate measures available jobs as a percentage of total employment.

There are now about 5.5 unemployed people, on average, competing for each opening. That's still far more than the 1.7 people who were competing for each opening when the recession began. But it's down from just over 6 people per opening in December 2009.

The gradually brightening jobs picture corresponds to what many job search Web sites are reporting.

As can be seen below, while the number of openings has jumped, the level of hires has not necessarily improved (possibly partially explained by the wariness of those with jobs to make the plunge).



While not anywhere near normalized, the unemployed to job opening ratio has turned sharply.

This will be another important metric to watch in coming months.

Source: BLS

Small Business Outlook Subdued

Marketwatch details (hat tip Calculated Risk)

An index measuring small-business optimism fell 1.3 points to 88.0 in February, erasing January's gain, according to a monthly survey released Tuesday by the National Association of Independent businesses. The index is far below its average, but has gained from 81.0 in March 2009, the second-lowest reading ever. Small businesses were cutting workers and prices in an effort to increase sales, the survey said. Fewer businesses reported problems getting credit, with 9% of firms saying they couldn't find the credit they need.

Source: NFIB

More on Consumer Credit

Yesterday I asked if the consumer was relevering?

While the latest consumer credit balance did tick up slightly, even in the face of declining disposable personal income (ex transfer payments) the overall path barely left its downward trend and remains well above the "normal" 20% level.



Source: Federal Reserve / BEA

Is the Consumer Relevering?

Sure looks like a possibility based on Friday's consumer credit release. Marketwatch details:

In an encouraging sign for the economy, U.S. consumers increased their debt in January for the first time in a year, just the latest hint that household demand may be on an upswing.

Although the economy has picked up steam lately, many economists don't believe it will be on a sustainable path unless consumers restart their spending.

This wasn't too big a surprise following last week's downturn in savings (paying down debt counts as savings), but maybe we should not be counting out the consumer in the short run. We shall soon see... later this week we get February's retail sales figure.

Source: Federal Reserve

The One Way Credit Bet...

Deutsche Bank’s Jim Reid (via FT Alphaville):

Anyway it’s a big anniversary week as tomorrow marks the 12-month point of the dramatic decade-plus lows in equity markets. Since then the S&P 500 and Euro DJ Stoxx 600 have returned 71.4% and 69.6% respectively (including dividends). US and European HY are 53% and 78.8% higher and BBBs have returned 31.2% and 28.6% respectively in the two regions.

So a stunning period for returns across equities and credit. If we look back at historic 12-month price moves in the S&P 500 this period will likely rank in the top 130 of the 20,263 rolling 12-month periods we have data for back to 1928.

Source: Yahoo

The Attractiveness of Dividend Yields

This isn't meant to be an attack on Surley Trader's post (which I believe unintentionally presents what I feel is misleading data), but rather to inform retail investors on the misleading data itself.

Surly Trader (hat tip Abnormal Returns) details:

Right now, the IShares Investment Grade Corporate Bond ETF (LQD) earns an indicated yield of 5.05% with an average maturity of over 12 years. On the equity side, the WisdomTree Dividend ex-Financials ETF (DTN) is currently earning an indicated yield of 5.04% without the same exposure to rising interest rates. Utilities alone (XLU) have an indicated current dividend yield of 4.93%.

The 5.04% indicated yield is not the yield of the fund, but rather the "current" fund distribution yield. According to WisdomTree, this yield is:

The annual yield a Fund investor would receive in distributions if the most recent Fund distribution stayed consistent going forward.

This measurement becomes irrelevant if dividends are widely varying. The most recent distribution for the WisdomTree Dividend ex-Financials ETF (DTN) was a 53 cent quarterly distribution in December (0.53 x 4 / $42 ETF price = 5.04%). Unfortunately, the dividend is not stable (the prior dividend was 0.368, which would have made the distribution yield just 3.5% back in November if the ETF were priced at its current level).

A more accurate yield is likely closer to 3.77%, which is what WisdomTree details as the SEC 30-day yield and according to Answers.com:

It is based on the most recent 30-day period covered by the fund's filings with the SEC. The yield figure reflects the dividends and interest earned during the period, after the deduction of the fund's expenses. This is also referred to as the "standardized yield."

While not perfect, by this measure the IShares Investment Grade Corporate Bond ETF yields 4.71% or ~100 bps higher than the WisdomTree Dividend ex-Financials ETF. This is not to say that the 3.77% yield is unattractive, especially when compared to the dividend yield of the components of the DJIA (only 6 corporations within the DJIA have a dividend yield above that level, which makes the 4.77% yield of investment grade corporate bonds even more attractive on a relative basis).

Back to the Surly Trader, who asks:

Why would you hold long-maturity fixed income bonds in a low interest rate environment on the precipice of an inflation wave when you can earn the same income from solid equity companies with upside potential?

Even if incomes were the same (they aren't), there is an important point missing... dividend yields do not always go up. In fact, as we learned in 2008-09, they can fall and fall quickly.

Source: Yahoo

EconomPic Turns Two / Jake Has a Favor to Ask

I was debating whether to first thank you all for the support that has allowed EconomPic to "blossom" over the past two years and then ask a favor OR to first ask the favor and then thank you all. At the risk of sounding insincere in my appreciation to all of you readers, I will lead with the favor… (hey, I think this is the first favor I've asked in these two years so give me a break).


The favor… Anyone Know of a Job for Jake in the San Francisco Area?

Maybe not the best timing considering unemployment is near a 30 year high, but I have reached the point where I am now ready to begin actively looking for a new opportunity. However, I am in the awkward position of not wanting to reveal my real identity to 5000+ potential viewers (I actually really like my current job… definitely more so than being unemployed which is a potential result if my current employer were to discover that I was actively looking to leave).

Thus, the question… how do I attempt to lever my readership (i.e. those that understand my point of view, share a strong interest in the field of which I am pursuing a new opportunity) while not risking my current employment?

Solution (for now) = “Jake”.

I apologize if this bursts the bubble, but my name is not Jake (shocker!). In fact it does not even start with a J (or does it?). That said, let me provide true (somewhat murky) facts about “Jake” (if referring to a fake name, it is not third person… right?).

Jake:

• Works in the field of investment management
• Graduated from an Ivy League Business School ~ 3 years ago and has an undergrad degree from a large “state school” (results in my rare blend of "sophistication" and beer drinking skills)
• Since business school has worked for a well-known firm and received a nice promotion ~ one year ago
• Lives in New York City (and has for most of the last 10 years)
• Is ONLY looking for an opportunity in the California Bay Area (this is actually driving the decision to look… again, the current job is great, just not in the Bay Area)
• Is hoping to move to a position even more aligned with his strengths and interests; currently works closely with a number of very large institutional clients on the relationship / marketing side of the business, but is looking for a role that is more 'data / research / investment decision making' driven
• That said, he is looking at all possibilities including roles and employers (hedge funds, mutual funds, consultants, endowments, foundations, etc...)
• While money is an important factor to a point (would like to pay the bills), the much larger factor will be whether it is a role that makes him excited to go to work on a Monday (or Saturday and Sunday if need be)
• Is not scared to travel (I am actually becoming a professional at it), but would prefer to limit this to 5 days or less / month
• Has a passion for both economics and financial markets (see econompicdata.com for more details)
• Loves to look at broad swaths of data and make it more understandable (see econompicdata.com for more details)
• Can be considered a risk taker when he has strong views
• Has a mind that can race 1000 miles an hour, but is known to sit down and read long (supposedly boring) documents when he feels he can learn more about something
• Enjoys coming up with broad ideas when his mind does race and likes to test those ideas with market data (see econompicdata.com for more details)

FAVOR: So... does anyone out there know someone in the Bay Area in the field of investment management or even better, know of an opportunity that I may be qualified for? If so, PLEASE drop me an email at econompicdata@gmail.com or direct my email address to your contact and I would be happy to share more about my background.


Now... To the Sincere Appreciation

Back on March 4th, 2008 EconomPic came to be with this sorry looking chart of CPI. The point of the blog was simply to store charts that I had been creating to get a better sense of what made up headline economic figures that were reported (lazily at best, intentionally misleading at worst) by traditional media outlets.

Here and there, I would send Barry over at The Big Picture (I used to correspond with Barry from my business school days) some of these charts, which on occasion he would post and to my amazement I would get a few hundred hits from his site.

I didn't post a single word (literally, I didn’t even source my initial posts as I didn’t think anyone was reading them) on EconomPic until June 11th, 2008 when I wrote a post titled "Why Not Deflation?". I honestly didn't expect a single person to read the post, but I wanted to document this belief so I could prove to a friend or two that I had called it right when the economy slowed. Likely due to my own click through to Naked Capitalism (I linked to a post at Naked Capitalism, which likely made Yves aware that my blog even existed), to my utter amazement, it was made one of her links of the day.

In my now 1600+ posts, I've learned more about the economy and world of finance than I thought possible (yet I still know little). This is only possible by the great reader base and other great bloggers I read daily that have made traditional media seem flat and out of touch. The thought of giving back to this community provides the motivation to keep making 10-20 posts per week. The fact that EconomPic has ~1800 RSS subscribers through Google Reader alone is mind boggling.

So thank you to everyone who has read or contributed, which has enabled EconomPic to be something more than a storage space for these tacky charts.

Employment Shows Signs of Life

The long term horror...


And the shorter term signs of life...

Source: BLS

Employment: Noise or Stabilization

Barry of (The Big Picture fame) reminds us that we should ignore the noise of any single payrolls report (especially given the snowstorms that will add extra noise):

Given the potential impact of the snowstorms across the United States during the BLS survey week, the potential range of NFP for this month is half a million people wide. Any jobs report between +100k and -400k would not surprise us.

That said, the actual number was better than forecast (per Bloomberg).

The jobless rate in the U.S. held at 9.7 percent in February and employment declined less than forecast even as severe winter weather may have forced some employers to temporarily close.

Payrolls dropped 36,000 last month after a 26,000 decrease in January, figures from the Labor Department in Washington showed today. Employment fell in construction and increased at temporary-help services. While more people entered the workforce, the unemployment rate was unexpectedly unchanged.

Non-farm figures show people re-entering the workforce and a HUGE jump from teens.



And the longer trend to the unemployment rate (unemployment was flat at 9.7%, while the alternative broader measure was up slightly to 16.8% from 16.5%....



Source: BLS

Investing with a Steep Yield Curve

World Beta with some great analysis on how a variety of asset classes have historically performed given the steepness of the 3 month to 10 year points in the yield curve in his post Investing Based on the Yield Curve – REITs Like it Steep.

Here is the data in chart form separating returns into times when the yield curve was relatively flat (less than 1%), moderate (1-2%), or steep (more than 2%)....



Surprising (to me) is not the outperformance of REITs during periods in which the yield curve is steep (steep yield curves are good for banks, which means in normal times they are more willing to lend [this time may be different warning]), but the STRONG underperformance of commodities and gold during these times (I figure most of the times that the yield curve was steep over this period was during downturns when the Fed was adding liquidity or in other words disinflationary periods, which aren't good for commodities).

Unemployment by State = Nowhere to Hide

BLS reports:

Annual average unemployment rates rose in 2009 in all regions, divisions, and states, the U.S. Bureau of Labor Statistics reported today. Employment-population ratios decreased across all of these geographic areas as well. The U.S. jobless rate jumped by 3.5 percentage points from the prior year to 9.3 percent, while the national employment-population ratio fell by 2.9 points to 59.3 percent.

The chart is "squished", but should be legible (click for larger image).



Source: Eurostat

Inflation is Off the Table

The Business Financial Newswire reports:

Nonfarm business sector labor productivity increased at a 6.9% annual rate during the fourth quarter of 2009, the US Bureau of Labor Statistics reported today (4 March). The gain in productivity reflects a 7.6% increase in output partially offset by a 0.6% increase in hours worked.

From the fourth quarter of 2008 to the fourth quarter of 2009, productivity increased 5.8% as output declined 0.2% and hours fell 5.7%.The annual measure of productivity increased 3.8% from 2008 to 2009.Unit labor costs in nonfarm businesses fell 5.9% in the fourth quarter of 2009, the result of productivity increasing faster than hourly compensation.

So productivity up and real compensation trending down = unit labor declining massively in Q4.

Unit labour costs decreased 4.7% from the same quarter a year ago, the largest four-quarter decline since the series began in 1948.

The relevance? Well, if the past is any indication of the future (in this case I believe it is), then inflation is not a problem (at least in the near future) and the most recent period is simply noise from the whipsawing of commodity prices and massive monetary / fiscal stimulus.

Source: BLS

Services Employment Stabilizing

The headline figure that's reported regarding ADP news (per Marketwatch):

According to today's ADP National Employment Report(R), private sector employment decreased by 20,000 in February. The ADP National Employment Report, created by Automatic Data Processing, Inc. (ADP(R)), in partnership with Macroeconomic Advisers, LLC, is derived from actual payroll data and measures the change in total nonfarm private employment each month.

And the corresponding chart.



But hidden in the release is this...

Automatic Data Processing, Inc, in conjunction with Macroeconomic Advisers, LLC, has published the scheduled annual revisions to the estimates of employment shown in the ADP National Employment Report. This month's ADP Report incorporates revised historical estimates based on the 2010 benchmark revisions to establishment employment published by the Bureau of Labor Statistics on February 6, 2010.

And the revision (vs. last month's release) was as follows:



So, ADP reports almost 1.4 million less people employed than last month, BUT it is important to note that this revision was done only to match that of the BLS (thus, don't expect a similar revision in Friday's national release). This may in part explain why the ADP report has been reporting stronger employment in the services sector, while the ISM services report shows continued contraction more aligned with the BLS. This month is no exception. ISM reports (hat tip Calculated Risk):

Employment activity in the non-manufacturing sector contracted in February for the 26th consecutive month. ISM's Non-Manufacturing Employment Index for February registered 48.6 percent. This reflects an increase of 4 percentage points when compared to the seasonally adjusted 44.6 percent registered in January.

We'll see Friday how this plays out in the BLS figure, but it appears that a slight decline in the services sector is likely, though we are getting close to what appears to be the bottom.

Source: ADP / ISM

Ford Taking Advantage of Toyota's Weakness

Chicago Tribune details:

Ford Motor Co. said Tuesday that its February sales rocketed 43 percent from a year earlier, helping it to surpass General Motors Co. as the largest U.S. automaker for the month.

GM also posted gains, but Toyota Motor Corp. saw its sales plunge almost 9 percent, hurt by a series of recalls and federal investigations into safety defects.

Ford's sales report underscores how a lineup of new products and Toyota woes have helped to fuel a turnaround at the Dearborn, Mich., automaker. Ford sold 142,285 vehicles last month, taking over the top spot from GM by about 300 vehicles. Ford last outsold GM in August 1998.

Year over Year Auto Sales



Looking closer, Ford (the big winner) sales lept more than 40,000, while Toyota (the big loser besides a discontinued brand) dropped more than 10,000, resulting in Ford sales outpacing Toyota by more than 40,000.



Source: Auto Blog

More on Disposable Income

The chart below details the year over year change (in this case 12 months ended January of each year) in the categories that makes up disposable income, as a percent of disposable personal income. The goal is to clearly show the shift in the makeup in personal income growth over the past 10+ years.

As a reminder, personal current transfer receipts are (per the BEA):

Payments to persons for which no current services are performed. It consists of payments to individuals and to nonprofit institutions by Federal, state, and local governments and by businesses.

As a result, the chart shows that outside of rental income, the only growth in personal income has been due to reduced taxes paid and payments for no services performed.



Were the tax cuts and transfers needed? I would say probably given the crisis.

That said, don't be fooled into thinking the relative stability in disposable personal income is anything more than the public sector adding new liabilities just to maintain the status quo.

Source: BEA

Japanese Unemployment (and Employment?) Drop

The Good

Bloomberg details:

Japan’s unemployment rate unexpectedly fell in January.

The jobless rate dropped to 4.9 percent from a revised 5.2 percent in December, the statistics bureau said today in Tokyo. The median forecast of 25 economists surveyed by Bloomberg News was for the rate to be unchanged from a preliminary 5.1 percent.

A decline in the unemployment rate is one of the first signs that a rebound in exports is starting to benefit workers, whose job prospects falter last year during Japan’s worst postwar recession. It may still be too early to expect “clear improvements” in the labor market because companies still have excess workers, said economist Tatsushi Shikano.

The Bad

According to Trading Economics:

The unemployment rate is defined as the level of unemployment divided by the labour force. The employment rate is defined as the number of people currently employed divided by the adult population (or by the population of working age).

And the decline is purely the fact that the number of those participating in the workforce has also declined (thus the employment rate has declined along with the unemployment level).



Source: Stat.GO


Update:

GetYourselfConnected asks which is more ironic:

• The US follows the Japan QE fighting deflation war to no avail for years on end
• Japan copies US data reporting to show better than expected results with cooked books

I'll go with a tie

Why Save?

One reason for the continued low savings rate (and continued spending)?

No place to store it (unless you want limited return).

The below chart details the historical savings rate vs. the three year Treasury yield (I used three year yields as this is a relatively safe investment on the duration side).



Coincidence or a legitimate relationship?

Source: Federal Reserve / St. Louis Fed

ISM Manufacturing Expands in February

Respondents are stating:

• Depends on division, plant and market served." (Transportation Equipment)
• "Current economy has killed new capital sales." (Machinery)
• "Commodities are firming again." (Food, Beverage & Tobacco Products)
• "First quarter orders up compared to prior two years!" (Fabricated Metal Products)
• "...lead times for electronic parts are pushing out to 8 to 24 weeks." (Computer & Electronic Products)

Source: ISM

Income Stagnant + Consumption Up = Savings Down

RTT News details:

the Commerce Department released a report on Monday showing that personal income increased by less than anticipated in the month of January, the report also showed a bigger than expected increase in personal spending.

The report showed that personal income edged up by 0.1 percent in January following a downwardly revised 0.3 percent increase in December. Economists had expected income to increase by 0.4 percent, matching the growth originally reported for the previous month.

At the same time, the Commerce Department said that personal spending rose by 0.5 percent in January after rising by an upwardly revised 0.3 percent in the previous month. The increase exceeded economist estimates for 0.4 percent growth.

Real personal income is now flat year over year, while real consumption is up. No surprise then that personal savings is once again trending down.



Source: BEA