Disinflation Alert

Marketwatch reports:

Consumer prices in the United States fell 0.1% on a seasonally adjusted basis in April as energy, housing, auto and apparel prices declined, the Labor Department reported Wednesday.

It was the first decline in the consumer price index since March 2009. The consumer price index is up 2.2% in the past year.

The core CPI -- which excludes food and energy prices in order to get a better view of underlying inflation -- was unchanged in April, lowering the year-over-year increase in core inflation to 0.9%, the lowest rate since January 1966.

The report was better than expected. Economists surveyed by MarketWatch nailed the 0.1% drop in the headline CPI, but were expecting a 0.1% gain in the core rate. See our complete economic calendar and consensus forecast.

Not sure how a negative print and a 0.9% year over year core print are "better than expected"; to me this is a sign of disinflation (or potential deflation). Not only was the year over year core the lowest level in 44 years, but the rate will likely be headed lower in the near future due to all the concerns that are causing a flight to the dollar (an increase in the value = a decrease in the cost of goods / services all else equal).

First details of the latest headline print showing almost all "inflation" remains in transportation costs.



And details of transportation price increase show they are almost entirely concentrated in fuel.

With a 15% drop in the price of oil over the past month and more favorable year over year comparisons going forward, expect the headline rate to come down further in the coming months.

Source: BLS

PPI Drops Slightly in April

Automated Trader details:

Producer prices ticked down 0.1% in April, under forecasts of a 0.1% rise and following a 0.7% increase in March. Falling prices for finished energy goods and food products sparked the headline turndown, with liquified petroleum gas off 5.8%, natural gas down 1.3%, and gasoline down 2.7%.

Meanwhile, Intermediate goods prices rose 0.8% and crude goods fell 1.2%, pulled down by a 19% drop in natural gas. Headline PPI was 5.5% higher compared to April 2009. Core prices showed a 1% increase from the same month last year.

Year over Year



Month over Month



Source: BLS

U.K. Inflation Continues Uptick

My take? The issue will be containing this run up in inflation, but it is an easier task dealing with moderate (for now) inflation than disinflation / deflation.

Market Oracle details:

UK Inflation has yet again hit a new high of CPI 3.7% up from last months inflation peak of 3.4%, with RPI rocketing even higher to an eye watering 5.3%, a level not seen since 1991. The academic economists were again taken by surprise. The Bank of England's failure in its primary duty of targeting inflation has prompted the Governor Mervyn King to write another letter to this time the new Chancellor George Osbourne that will again state for the fifth time this year that the rise in inflation above 3% was temporary and not to worry, it should come down, eventually (fingers crossed).

The concern is that it appears the upward trend in prices is widespread (i.e. not just an energy phenomenon per the U.S.).

The largest upward pressures to the change in the CPI annual rate between March and April came from:

• Clothing and footwear where prices, overall, rose by 2.2 per between March and April this year but rose by only 0.2 per cent a year ago; this was mainly due to garments and, in particular, women’s clothing.
• Food and non-alcoholic beverages, mainly due to the food component where upward effects were widespread rather than from one particular food group. Reports have suggested that the closure of European airspace as a result of the Icelandic volcano had a limited impact on food prices in April.
• Alcoholic beverages and tobacco where prices, overall, rose by 2.1 per cent between March and April this year (driven by the increases in excise duty that came into force towards the end of March) but were unchanged a year ago.

Darn volcanos!

Source: Stats.Gov.UK

It Isn't Always a Liquidity Problem

The AP reports:

The Treasury Department said Monday it will lose $1.6 billion on a loan made to Chrysler in early 2009. Taxpayer losses from bailing out Chrysler and General Motors are expected to rise as high as $34 billion, congressional auditors have said.

Remember the good old days (waaaaayyyy back in the summer of '08) when this was just a "liquidity" problem? Lets go back to what GM was saying at the time (via an August 2008 Bloomberg article):

"Our plans, which require significant investments, are at risk because of limited access to capital,'' said Greg Martin, a spokesman for Detroit-based GM. He declined to comment on whether GM is seeking more than the original $25 billion. "This program will open capital that is necessary to make sure our transformational plans continue at full speed and give us the best chance to succeed.''

And what better way to look back at that "liquidity" problem than some recycled charts from EconomPic.

August 2008



The "liquidity" (i.e. "loans") provided as it was not officially called a bail out at the time:



And finally, when it was officially a solvency problem following the May '09 financial release (one month prior to the bankruptcy filing):



To summarize....

• Leveraged entity
  
• Didn't watch expenses (i.e. overpaid employees)
  
• Performed very well during economic boom (see leveraged entity)
  
• Got into "liquidity" trouble when growth stalled (see leveraged entity)
  
• Was given "loans" for "liquidity" problem
• Turns out it wasn't a liquidity problem, but a solvency problem

Where have I heard this before?

Major Players Still Buying Treasuries

For full details as to why China and the United Kingdom have been combined in the chart below, see a previous post China Sells Treasuries... or Did They?

Source: Treasury

Growth of Empire Manufacturing Index Slows in May

Marketwatch details:

Manufacturing activity in the New York region improved at a slower pace in May, the New York Federal Reserve Bank said Monday. The bank's Empire State Manufacturing index decelerated to 19.1 in May from 31.9 in April. The drop suggests the pace of growth slowed in May. New orders and shipments moved lower but remained in positive territory.

The index for the number of employees rose to its highest level since 2004.The Empire State index is of interest to investors and economists primarily because it's seen as an early indicator of what the Institute for Supply Management's May national factory survey due out in two weeks may show. In April, the ISM manufacturing index showed continued good news for manufacturers, jumping to 60.4, the first time it had exceeded the 60 threshold since June 2004.

Source: NY Fed

France and the PIIGS

Apparently French President Nicolas Sarkozy threatened to pull France off of the euro, which helped push the 750 billion euro intervention through. But, Ex-SKF provides some numbers that support the theory that Sarkozy was most certainly bluffing (recreated below in chart form).



Ex-SKF reasons:

Merkel probably relented because she didn't want to be accused of breaking up the eurozone and endangering the EU collapse. She should know better, as France cannot possibly afford to go it alone. She should have called Sarkozy's bluff.

Source: NY Times

EconomPics of the Week (5/14/10)

Debt Levels / Europe
The (Abridged) Story of Greece
Europe: Too Much Debt? Add ~$1 Trillion More
Public Debt to GDP: Fastest Jump Since WWII

Economic Data
Job Openings / Hires Off of Lows
Europe Grows (Barely)... Future Expectations Muted
Wholesales Sales Jump... How Much is "Real"
Times They are A-Changing
Retail Sales Strong
U.S. Trade Rebounding Back to Imbalance
Consumer Credit Steady... Details Mixed
Hedge Funds Show Continued Strength in April

Assets / Returns
Chinese Real Estate Prices Jump Most in 5 Years
Oil Stocks Up... Prices Down...
Gold ETFs Exploding
One Size Doesn't Fit All... and Gold
Reflation Trade... Back On

And your video of the week... the "classic" Red Hot Chili Pepper's Under the Bridge. I hate to admit that this can be classified as "classic", but this song came out 18 years ago [1992]. The difference between 1992 and the year the Eagles released Hotel California (something I would have labeled a "classic" in high school)? 16 years. In other news... I feel old.

Times They are A-Changing

The WSJ reports (hat tip Dead Cats Bouncing):

John Lonski, chief economist at Moody’s Investor Service, points out an interesting nugget within the March trade figures, released on Wednesday by the Commerce Department, in a note to clients today. March was “a watershed month,” he says, as “For the first time in recorded history, the moving 12-month sum of $227.6 billion of U.S. merchandise exports to Asia’s emerging market countries surpassed the… $223.7 billion of such exports to the European Union.”

In the year through March, he notes, U.S. merchandise exports to emerging Asia — which includes China, India, Hong Kong, Taiwan, Korea plus a handful of smaller nations — rose by 3.7% while shipments to the EU dropped by 13.9%. In other words, U.S. exports to Europe have already been dwindling while Asia has become
an increasingly important destination for U.S. goods. That should help U.S.
companies avoid too much of a hit from euro zone woes.

While my figures don't exactly match those detailed above, the story is the same. The emerging world is becoming a larger and more important partner to the United States by the day, while Europe is moving the other direction (and will continue to do so as long as the Euro continues down its current path).

In fact, one can (and plenty have) argue that the only way for the U.S. to get out of the issues currently faced is through the demand coming out of the emerging world.



Source: Haver

Retail Sales Strong

Reuters details:

Sales at U.S. retailers rose more than expected in April, lifted by a surprise gain in motor vehicle purchases, government data showed on Friday.

The Commerce Department said total retail sales rose 0.4 percent following an upwardly revised 2.1 percent surge in March. Sales in March were previously reported to have increased 1.9 percent. Retail sales have now increased for seven straight months.

Analysts polled by Reuters had forecast retail sales rising 0.2 percent last month. Compared to April last year, sales were 8.8 percent higher.

Motor vehicle and parts purchases unexpectedly rose 0.5 percent after increasing
6.7 percent in March. Analysts had expected auto sales to fall in April, after
automakers reported a decline in unit sales.

Month over Month



Year over Year



Source: Census

The (Abridged) Story of Greece

From 1996 - 2008, the Greek economy expanded faster than the broader European Union in each and every year (below is all the data I could dig up for a chart).

But, growth is a good thing right?

In most cases... sure, but all growth is not the same. Growth based on ever-expanding debt (think housing bubble) is surely not as good as one based on increased productivity. While there is no doubt that a lot of Greece's growth was due to increased productivity that came with being a member of the EU (i.e. open markets), a lot of this growth came from cheap financing which not only allowed the Greek economy to double within a 10 year period, but to double their debt levels as well.

This arrangement of growth and ever-increasing debt was all good... until it wasn't.



When the Greek economy turned south during the crisis, debt to GDP levels spiked as debt continued to grow, but the underlying economy didn't. When banks realized they all owned a boatload of this debt (as well as debt of other periphery nations in similar situations as Greece), they shunned further purchases.

Why? It turned out that the Greek economy that only grew in one direction (and faster than Europe as a whole), was loaded with debt and wasn't actually growing.

Source: Haver

Public Debt to GDP: Fastest Jump Since WWII

The Atlantic reports the record setting April:

The United States set two budget records in April. First, the $82.7 billion monthly budget deficit was the highest ever for that month. Second, it was our 19th consecutive monthly deficit, the longest streak of red ink on the books.

Rolfe Winkler the broader meaning of deficits:

Don’t look now, but total U.S. public debt outstanding is approaching $13 trillion.

Each incremental trillion is going by so quickly, it’s hardly news anymore…

$6 trillion: February 28, 2002
$7 trillion: January 15, 2004 (22.5 months)
$8 trillion: October 20, 2005 (21 months)
$9 trillion: August 31, 2007 (22 months)
$10 trillion: September 30, 2008 (13 months)
$11 trillion: March 16, 2009 (5.5 months)
$12 trillion: November 16, 2009 (8 months)
$13 trillion: May-June 2010 (6-7 months)

While the pace is rather astounding, what is interesting (to me) is that the pace of increase is actually much slower in nominal terms (i.e. steepness of the blue line) than what we saw throughout the 1970's (due to higher inflation) and 1980's (due to massive tax cuts to "starve the beast").

Remarkably, the problem is currently less related to the level of nominal debt (still a problem) as much as the fact that our economy is not keeping pace (not a surprise as the increase in the level of debt was a response to the economic slowdown).

The result... the fastest increase in debt relative to GDP (i.e. the steepness of the red line) since WWII.

Source: Treasury Direct / BEA

Job Openings / Hires Off of Lows

BLS reports (hat tip Calculated Risk):

There were 2.7 million job openings on the last business day of March 2010, the U.S. Bureau of Labor Statistics reported today. The job openings rate was unchanged over the month at 2.0 percent. The hires rate (3.3 percent) was little changed, and the separations rate (3.1 percent) was unchanged in March. This release includes estimates of the number and rate of job openings, hires, and separations for the total nonfarm sector by industry and geographic region.

The chart below shows the level of job opening and hires as a ratio of the total number of unemployed.

Source: BLS

Oil Stocks Up... Prices Down...

WSJ reports:

U.S. crude inventories [increased] by more than twice the expected volume in the week ended May 7, according to data released Wednesday by the Energy information Administration unit of the U.S. Department of Energy.

Crude oil stockpiles rose 1.9 million barrels to 362.5 million barrels, compared with an average survey estimate of a rise of 800,000 barrels.

Refining capacity utilization fell by 1.2 percentage points to 88.4%. Analysts had
expected a 0.2 percentage point drop.

The relevance...



Inversed (to show the relationship)...



Source: EIA

U.S. Trade Rebounding Back to Imbalance

Marketwatch details:

Global trade rebounded further in March, driving U.S. exports and imports to their highest levels since October 2008, the Commerce Department estimated Wednesday.

The U.S. trade deficit - the difference between exports and imports of goods and services - increased by $1 billion to a seasonally adjusted $40.4 billion, the highest since December 2008 when global trade contracted violently after the September 2008 financial crisis.

In March, imports increased 3.1% to $188.3 billion, while exports climbed 3.2% to $147.9 billion. Shipments of raw materials increased the fastest, but all categories of imported and exports goods showed growth.

Trade flows have not fully recovered from the brutal global recession, however. Real imports remain about 10% below the peak established two years ago. Real exports are 7% beneath the peak of August 2008.

Source: Census

Europe Grows (Barely)... Future Expectations Muted

The NY Times details:

The economy in the euro area expanded only modestly during the first quarter of the year, as demand in countries like Germany and France remained sluggish despite the recovery in exports.

Gross domestic product expanded by 0.2 percent in both the 16-member euro area and 27-member European Union, compared with the previous three months, according to initial estimates from Eurostat, the statistical office of the European Union.

While full details of the euro-area numbers are not yet available, analysts noted that business surveys point to a stronger pickup from the end of first quarter going into the second.

Gilles Moëc, an economist at Deutsche Bank in London, said that on one side, fairly strong external demand, helped by the depreciation of the euro, is giving exports a lift. On the other hand, the employment situation is grim, and “the consumer element is missing.”

The concern from here is the impact of austerity moves on these European economies. Per Business Week:

Greece’s economy contracted in the first quarter as the government cut spending and raised taxes in a bid to trim the European Union’s second-biggest budget gap. Gross domestic product shrank 0.8 percent from the fourth quarter, when it fell by the same amount, the Athens-based Hellenic Statistical Authority said in an e-mailed statement today.

The pace of the contraction will accelerate in the next two quarters as the austerity moves, coupled with higher inflation and job losses, lead to “a double-digit decline in household disposable income,” said Nicholas Magginas, an economist at National Bank of Greece SA in Athens. “The sharp drop in imports will only mitigate the negative impact on GDP growth.”

Source: Eurostat

Gold ETFs Exploding

Commodity Online provides details of the massive flow into gold via ETFs:

Investors have been stocking up on gold in the face of sovereign debt issues in Greece and other countries. Combined exchange traded fund gold holdings reached a record 59.11 million ounces by 6 May, up 943,686 ounces in one week.

59.11 million ounces / 32,000 ounces in a tonne = ~1850 tonnes of gold in ETFs.

How much is that? A LOT.

Below is a chart detailing the eleven largest holders of gold; nine central banks, the International Monetary Fund and ETFs.



Absolutely wild considering the first Gold ETF was launched in 2003. And Business Week details that it isn't only private investors diving into the metal:

Central banks added the most gold to their reserves since 1964 last year amid the longest rally in bullion prices in at least nine decades, data compiled by the World Gold Council show.

Combined holdings rose 425.4 metric tons to 30,116.9 tons, an increase worth $13.3 billion at last year’s average price, according to the data. India, Russia and China said last year they added to reserves. The expansion was the first since 1988, the data from the London-based council show.

Central banks, holding about 18 percent of all gold ever mined, are expanding their holdings for the first time in a generation as investors in exchange-traded funds amass bullion as an alternative to currencies.

So... are you ready to ride the golden bubble?

Source: IMF

Wholesales Sales Jump... How Much is "Real"

Peter Boockvar (via The Big Picture):

March Wholesale Inventories rose .4%, a touch below expectations of a gain of .5% and with a 2.4% rise in sales, the inventory to sales ratio fell to a record low of 1.13 months down from 1.16 in February.

Thus, while we’ve seen a big reversal in the absolute level of inventory drawdowns that has lifted GDP over the past 4 quarters, the restocking that typically follows in past recoveries has been muted. Of course though, the backdrop is very positive for production if the pick up in end demand becomes sustainable.

Auto inventories at the wholesale level rose for a 2nd straight month but are still down 11.2% y/o/y. Inventories of computers rose for the 6th month in the past 7 and are up 10.7% y/o/y but the sales of computers are up 15.4% y/o/y. Wholesale inventories of machinery fell for the 14th straight month.

The chart below shows the components of the jump, which is widespread.



But as EconomPic has detailed before... these are in nominal terms (unfortunately no time to break out how much is real vs. nominal). The biggest increase was in lumber, which jumped ~15%. Unfortunately, the price of lumber also jumped ~15% in March (and is up a whopping 50% YTD) and the second largest jump was in petroleum, but oil jumped ~7% in March (and has since collapsed a bit).

I am hopeful with the reduced inventory levels should the economy pick up, but don't read too into the whopping sales figure.

Source: Census

One Size Doesn't Fit All... and Gold

Europe is in a tough situation as all European economies are not in the same situation with regards to debt levels (i.e. solvency risk) or shorter term economic strength.

With all this liquidity being pumped into the system, Europeans must now also deal with potential overheating in those parts of Europe in less need of stimulus. With all this uncertainty over the Euro, it is not a surprise that gold has spiked to a record high in Euros (the chart below is an estimate of this figure using GLD [gold ETF] and FXE [Euro ETF] as approximations - multiply by 100 to get an approximation of Gold in Euros).

Source: Eurostat

Chinese Real Estate Prices Jump Most in 5 Years

Bloomberg details:

China’s property prices rose a record in April, defying government measures to stem gains and suggesting more drastic curbs are needed.

Residential and commercial real-estate prices in 70 cities climbed 12.8 percent from a year earlier, the National Bureau of Statistics said on its website. That topped the 11.7 percent surge in March, which was a record then for the data series that goes back to 2005.

Below is a chart of the national "70 Medium-Large Sized Cities" real estate index, along with China's 5 largest cities showing the widespread jump for new, existing, and the broader index.



And while there are conflicting reports (the Bloomberg article has a quote claiming “the only reason why April posted a gain was the low basis of comparison from last year”), the data seems to show the pace was accelerating. Economic Times with those details:

Property prices rose 1.4 percent from the previous month, higher than the 1.1 percent pace in March and logging the quickest pace since December, when the monthly increase was 1.5 percent.

Moreover, many analysts say the way the index is compiled seriously understates the degree of property inflation. Real estate investment in the first four months increased 36.2 percent compared with the same period last year. Year-to-date investment in the first three months of 2010 was up 35.1 percent.

A chart showing the year over year change vs. the month over month change annualized seems to show an increased appreciation.



China is now apparently ready to do whatever it takes to fight the bubble:

China, trying to peel back the effects of a $586 billion stimulus package and lending binge that drove a surge in home prices, is stepping up efforts to cool the market with policies Deutsche Bank AG described as “draconian.” It ordered developers not to take deposits for sales of uncompleted flats without proper approval, curbed loans for third-home purchases, and on May 2 boosted banks’ minimum reserve requirement for the third time this year.

How much of an impact can this all have? Well, if one were to believe a Business Week article (I believe the direction, not the scale) a LOT.

Beijing News said property prices in the capital slumped more than a third over the past one month.

Housing prices fell 31 percent for the week ending May 9 from the week ending April 11, to average price of 16,898 yuan per square meter, the Beijing News reported today, citing statistics from consulting firm Comprehensive Real Estate Services Corp.

I don't buy 31% in a week, but it shows just how much air is in the bubble if that kind of number seems somewhat reasonable.

Source: National Bureau Statistics of China

Reflation Trade... Back On

Source: Yahoo

Consumer Credit Steady... Details Mixed

The latest consumer credit released occurred late Friday. Business Week details:

Consumer borrowing in the U.S. unexpectedly rose in March for the second time in three months, indicating Americans are becoming more optimistic about the recovery.

Confidence to finance spending may grow as more people are hired after the creation of 290,000 jobs in April, the most in four years. Consumer purchases, which account for about 70 percent of the economy, rose at the fastest pace in three years during the first quarter, pointing to a broadening of the economy.

“Consumption has recovered in recent months, and should continue the recovery in light of an improving jobs market,” said Win Thin, senior currency strategist at Brown Brothers Harriman & Co. in New York.

Even though consumer credit outstanding expanded, that level decreased as a percent of overall consumption as consumers utilized transfer payments, wealth created from financial asset reflation, and perhaps cash that "should have" gone to their mortgage (i.e. strategic defaults).



There was something funny looking in the Federal Reserve's release, specifically a crash in the amount of consumer credit in the securitized market and spike in the amount held by commercial banks.



The Atlantic provides the "why"details:

Financial institutions adopted accounting standard FAS 166/167 this month, which required them to take some securitization debt on balance sheet. As a result, pools of securitized assets plummeted by nearly 70% for the month, but that caused large increases for credit held by commercial banks and finance companies.

In other words, this is just the shadow banking system making its way back to the banks' balance sheets (likely delayed to ensure banks could first build up the required capital).

The Atlantic does detail an area that is perhaps more concerning:

But the Federal government continued to hold more credit, increasing its holdings at an annualized rate of 31% for the month.

Source: Federal Reserve

Hedge Funds Show Continued Strength in April

In what can broadly be described as PR for Paulson & Co rather than an article, the WSJ details (Paulson & Co references removed):

Hedge funds returned more than 1% on average in April as stock and bond markets rallied strongly, according to early estimates released Friday by firms that track performance in the industry.

"Hedge funds posted broad-based gains in April as sovereign credit risks escalated and currency adjustments remained at the forefront of investor concerns," Kenneth Heinz, president of Hedge Fund Research, said in a statement.

Important to remember that...

These hedge fund industry gains don't include the recent drop in stock and credit markets that turned into a rout on Thursday.

We shall see how well they were able to react in next months release.

Source: Barclay Hedge

Europe: Too Much Debt? Add ~$1 Trillion More

Bloomberg details the "shock and awe":

European policy makers unveiled an unprecedented loan package worth nearly $1 trillion and a program of securities purchases as they spearheaded a drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro. Jolted into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, governments of the 16 euro nations agreed to make loans of as much as 750 billion euros ($962 billion) available to countries under attack from speculators.

The ECB will also embark on “very significant operations,” European Union Economic and Monetary Commissioner Olli Rehn told reporters in Brussels after the 14-hour meeting. “The ECB has taken a decision to intervene in the secondary markets of government securities.”

Under pressure from the U.S. and Asia to stabilize markets, the European governments gambled that the show of financial force would prevent a sovereign-debt crisis and muffle speculation that the 11-year-old euro might break apart.

The European Central Bank will announce “intervention” in financial markets, Luxembourg Finance Minister Luc Frieden told reporters, without giving further details.

Some of the "unwind" the EU / IMF are trying to "rewind" is detailed in the chart below.



This doesn't address the core issue of too much debt (actually, it adds to it). Rather, this kicks the can down the road and gives peripheral Europe and European banks the time to address their solvency issues (the big concern with sovereign default was the fact that European banks hold a boatload of sovereign debt, thus a Greek default could have triggered a chain of events that I really don't want to think about).

Going forward, these countries will need to deal with the inevitable pain associated with deleveraging and belt tightening. My guess is the pain will prove too much for at least a few of these countries and default / restructuring of debt will happen. At that point my concern is not that the EU is shifting the peripheral countries (Greece, Portugal, Spain) refinancing problems to the broader EU. It is that they are shifting the solvency problems to the EU as well.

Source: BarCap

EconomPics of the Week... I Deserve a Drink Edition

Financial Markets / Asset Classes
The Certainty of Uncertainty
The Great Reflate
The Low Quality Corporate Bond Rally
The One Day Unwind? PART II (5/4)
Make that a Two Day Unwind (5/5)
Well, That Was Interesting (5/6)
ADP: Three Straight Months of Increased Employment...
Sell in May... Don't Go Completely Away

Economic Data
Not Sustainable
Employed... Labor Force... Unemployment Rate... All Jump
Hours Worked per Person Picking Up
Productivity vs. Employment
ISM Services Index Grows at Same Pace
Auto Sales Mixed, but Show Continued Rebound
Manufacturing Continues Expansion in April
Are Retirement Ages Going to Increase?

And your video of the week... Sublime w/ 40 Oz to Freedom

Hours Worked per Person Picking Up

A figure EconomPic has not shown in a while... the number of hours worker per person (i.e. person as in every person in the U.S. - more details here).



Not exactly booming, but definitely off the December low...

Source: BLS

Employed... Labor Force... Unemployment Rate... All Jump

The number of individuals employed jumped in April showing signs of life in the job market (red bars in the first chart below). In addition, the number of unemployed individuals jumped (yellow bars) as people returned to the labor market (green bars).



The result in the numerator (unemployed) increasing more than the denominator (labor force) is an increase in the unemployment rate and underemployment rate.

Source: BLS

Well, That Was Interesting

This post was timely!

Following a tough two days, we momentarily saw a complete meltdown as liquidity completely disappeared from the market (due to potential computer errors?). The below ETFs broke away from their respective benchmarks at times, but the chart below provides a sense into just how disorderly the sell-off was at times (daily peformance in red, how far things sold-off in yellow).



Update: want some insight into what happened today? I think this covers it.

Source: Yahoo Finance

Productivity vs. Employment

Reuters details:

U.S. non-farm productivity growth slowed sharply in the first quarter, government data showed on Thursday, suggesting businesses will have to raise employment to boost output.

The Labor Department said non-farm productivity rose at a 3.6 percent annual rate, the smallest advance in a year, after expanding at a brisk 6.3 percent pace in the fourth quarter.

Analysts polled by Reuters had forecast productivity, which measures the hourly output per worker, rising at a 2.5 percent rate in the January-March period.

Productivity expanded rapidly in the previous three quarters as businesses wrung more output from a small pool of labor. Despite the resumption of economic growth, firms have been reluctant to hire new workers, opting instead to increase working hours. With productivity slowing, they may need to start hiring workers to keep production up.

Looking at the chart, one can see that we have been squeezing out more, from less for 10+ years now. Productivity is a good thing, but it can be painful as the economy transitions to new technologies and requires new skill sets.

Source: BLS

The Certainty of Uncertainty

Abnormal Returns has a great post about uncertainty and investing; a topic that has been on my mind of late due to the bomb scare, oil spill, natural disaster, and of course sovereign crisis (for anyone interested, I asked for / received help in understanding the potential for a Eurozone breakup back in January '09). To the post:

Alexander Ineichen writes directly to the issue of time diversification and uncertainty:

We believe time amplifies risk. It is true that the annual average rate of return has a smaller standard deviation for a longer time horizon. However, it is also true that the uncertainty compounds over a greater number of years. Unfortunately, this latter effect dominates in the sense that the total return becomes more uncertain the longer the investment horizon.

The logic here is that over the longer term, more bad things can happen and the probability of failure (i.e., non-survival) is higher. The probability, for example, of San Francisco being wiped out by a large earthquake over the next 100 years is much larger than over the next 100 days. If accidents happen in the short term, one might not live long enough to experience the long term. After all, the long term is nothing else than many short term periods adjoined together.

Ineichen uses the recent example of Japan showing that sometimes a market, even a developed one, can go down and stay down. The issue isn’t one of better estimating the equity risk premium or volatility of returns. It stems more from the fact that we really don’t know what the future holds. Recognizing the limitations of our statistical knowledge is a necessary step in facing uncertainty.

And here it is... the chart shows the Nikkei 225 index and the change from its previous peak (note that the chart does not include reinvestment of dividends). 20+ years and the index is still 70% below its peak.



An outlier right?

Well, it took the U.S. Equity market* from 1929 - 1954 (i.e. ~35 years) to re-reach its prior peak post Great Depression.



These "outliers" are important to keep in mind as the global economy has never been more inter-connected or had less "cushion" if an event were to occur (sovereign balance sheets were sucked dry during the crisis making any large bailouts [sovereign or banking] much more difficult going forward).

The result is that any little hiccup (in any part of the world) may have a far greater impact on the entire system than the market is currently pricing in. While it may not happen over the next day, week, month, or even year(s)... it is coming.

* the S&P 500 recreated by Professor Shiller to pre-date its 1957 inception

Make that a Two Day Unwind...

Source: Yahoo Finance

ISM Services Index Grows at Same Pace

Marketwatch details:

Growth in the U.S. service sector was flat in April, but activity remained at the highest rate in four years, according to the Institute for Supply Management. The ISM non-manufacturing index stayed at 55.4% in April.

Readings over 50% indicate more firms believe business is getting better instead of worse. Economists surveyed by MarketWatch were looking for the index to rise to 56%. In April, 14 of 18 industries were growing. Yet the new orders index fell to 58.2% in April from 62.3% in March. And the employment index dipped to 49.5% in April from 49.8% in March.

ISM details what respondents are saying:

• "Best production/service levels in 24 months." (Wholesale Trade)
• "Selling prices for our products continue to decline." (Mining)
• "The market and other financial indicators point to an improving economy; however, that is being overshadowed by skepticism and lack of confidence. Capital spending is being constrained by concern over the economic view in a post-stimulus era, with double-digit interest rates and mounting debt." (Educational Services)
• "Market shows slight signs of tightening." (Information)
• "Business conditions are improving." (Management of Companies & Support Services)
• "There are signs of improvement which are leading us to be optimistic; however, as prices escalate the stability of the recovery is at risk." (Retail Trade)

Source: ISM

The Low Quality Corporate Bond Rally

The low quality (i.e. high beta) corporate bond rally has continued into 2010...



As a reminder... the SPECTACULAR rally of 2009.

We'll see if this continues. One day is in most cases just noise, but it looks like a high beta sell-off this morning as a flight to quality has sent 10 year Treasuries to 3.54% (down almost 50 bps over the last month).

Source: BarCap

ADP: Three Straight Months of Increased Employment

ADP reports:

Nonfarm private employment increased 32,000 from March to April 2010 on a seasonally adjusted basis, according to the ADP National Employment Report. The estimated change in employment from February to March 2010 was revised up, from a decline of 23,000 to an increase of 19,000.

In addition, the revised estimate of the monthly change in employment from January to February 2010 shows a modest increase of 3,000. Thus, employment has increased for three straight months, albeit only modestly. The slow pace of improvement from February through April is consistent with the pause in the decline of initial unemployment claims that occurred during the winter months.

Unlike the estimate of total establishment employment to be released on Friday by the Bureau of Labor Statistics (BLS), today’s ADP Report does not include any federal hiring in April for the 2010 Census. For this reason it is reasonable to expect that Friday’s figure for nonfarm total employment reported by the BLS will be stronger than today’s estimate for nonfarm private employment in the ADP Report.

Not exactly a huge number (and the market doesn't seem pleased), but a bottoming none-the-less.

Source: ADP

The One Day Unwind? PART II

After last weeks European induced sell-off, EconomPic asked if it was a one day event (last week... it was).



How about this time?

Source: Finance

Sell in May... Don't Go Completely Away

There is always lots of "Sell in May, Go Away" chatter this time of year. Marketwatch's Mark Hulbert (via Abnormal Returns) details why:

There are surprisingly strong statistical reasons for "selling in May and going away," many nevertheless find it difficult to actually do what the strategy calls for -- sitting on one's hands from now until Halloween.

It is especially hard to do now, in fact, with the bull market defying all odds and continuing to chug along. Money managers tell me that the worst crime that they can commit, at least in the eyes of many of their clients, is being out of the market when it is rising.

Agreed... and while EconomPic in no way, shape, or form advocates investing in the manner described below, it is interesting none-the-less. Rather than "Sell in May and Go Away", the chart below details the results of the "Secret Sauce" (i.e. Sell S&P 500 in May and then invest in the Long Government / Credit bond index, rather than sit in cash) vs a buy and hold S&P 500 strategy (note that these returns include reinvestment of dividends).



Why does this work?

I have no idea...

Source: S&P / BarCap

The Great Reflate

Tony Boeckh (via John Mauldin):

To rescue the economy and financial system from near-total meltdown, the government created an unprecedented package of bailouts, stimulus, free money and massive fiscal deficits. It succeeded, and a 1930s style debt deflation and depression were aborted. Liquidity, on a vast scale was unleashed into the financial system, demonstrating, once again, the power of such flows to drive up the prices of stocks, commodities and other risky assets.

And those driven up returns through April (via Capital Spectator).



And the concern...

This effort to reflate—pump air back into the balloon—had to be on a scale at least as large as the bubble itself. It is an experiment never before attempted in the context of U.S. experience, and it will have consequences unlike anything seen before.

More here.

Source: Capital Spectator

Auto Sales Mixed, but Show Continued Rebound

The Atlantic details:

April was a good month to be in the U.S. auto business. The top-seven auto companies all saw increased sales compared to a year ago. For that group, sales were up an aggregate 19%. But not all car makers did equally well.

Now a little perspective... autos have shown a nice rebound over the past 12 months, but levels are still well below 2008 levels (though it appears automakers are profitable at these levels).



But back to the point of mixed results...

As you can see, GM saw a 6.7% rise, but that's pretty weak compared to its competitors. All others had at least double-digit sales increases. Nissan and Hyundai outshined the others.

Really, this news has to be pretty worrisome to GM. Even though it saw more sales, through a little analysis, you can quickly see that its market share fell.

Ford on the other hand (i.e. the American manufacturer that isn't owned by the taxpayer), continues to perform very well.

Source: Auto Blog

Manufacturing Continues Expansion in April

Bloomberg details:

Manufacturing expanded in April at the fastest pace since 2004, propelling a U.S. recovery that’s getting a bigger lift from consumer spending.

The Institute for Supply Management’s factory index rose to 60.4, the highest level since June 2004 and exceeding the median forecast in a Bloomberg News survey of 76 economists. Readings greater than 50 signal expansion and today’s report marks a ninth consecutive month of growth.

ISM repondents report:

• "Finances continue to be tight, and we are decreasing safety stock levels to reduce inventory." (Electrical Equipment, Appliances & Components)
• "Business conditions continue to improve. Actual sales exceeded budget for the third straight month." (Food, Beverage & Tobacco Products)
• "Demand from automotive manufacturers has continued to improve month over month." (Fabricated Metal Products)
• "We are finally seeing a turnaround." (Primary Metals)
• "Upward price pressure still evident." (Chemical Products)

Continued strength, but a surprise decline in inventory levels.

Source: ISM