China to the Rescue

The bull's case has been that the emerging market growth will more than make up for stagnant growth in the developed world. Data coming out of China doesn't do anything to counter that argument. Reuters details:

Chinese exports in May grew about 50 percent from a year earlier, sources said on Wednesday, a figure that blew past expectations and fuelled a rise in stock markets globally.

The key Chinese stock index .SSEC, which had been in negative territory, jumped 2.8 percent as the strong export growth reassured investors who have been worried that the European debt crisis would weigh on the global economy.

Exports, which are scheduled to be reported as part of broader trade data on Thursday, had been expected to rise 32.0 percent year-on-year in May after recording a 30.5 percent pace in April.

And that is not where China's impact on a global recovery ends. The Washington Post reports:

Nearly bankrupt and sullied in the eyes of foreign investors, Greece is moving to rebuild its economy by tapping the deep pockets of another ancient civilization: China.

Spurred on by government incentives and bargain-basement prices, the Chinese are planning to pump hundreds of millions -- perhaps billions -- of euros into Greece even as other investors run the other way. The cornerstone of those plans is the transformation of the Mediterranean port of Piraeus into the Rotterdam of the south, creating a modern gateway linking Chinese factories with consumers across Europe and North Africa.

The port project is emerging as a bellwether for Greek plans to pay down debt and reinvent its broken economy by privatizing inefficient government-owned utilities, trains and even casinos. This week, the Chinese shipping giant Cosco assumed full control of the major container dock in Piraeus, just southwest of Athens. In return, the Chinese have pledged to spend $700 million to construct a new pier and upgrade existing docks.

Source: Haver

U.S. Public Debt to Surpass GDP by 2012

Business Week details:

In the U.S., public borrowings passed $13 trillion for the first time this month, according to the Treasury Department. The debt will be larger than U.S. gross domestic product, now $14.2 trillion annually, in 2012, according to the International Monetary Fund.

Source: BEA / Treasury Direct

Diverging Global Economic Recovery

Whereas emerging markets are broadly setting new peaks of economic activity (i.e. real GDP levels), the developed world continues to sit below previous peaks (notice the Australian exception due in large part to... emerging market commodity demand).

Source: Haver

Consumer Credit Split

I wonder if this is the consumer taking advantage of low rates and locking them in for a longer period, but a definite divergence between revolving and non-revolving consumer credit.

Business Week details:

Consumer borrowing in the U.S. rose in April for the first time in three months, indicating a recovery in bank lending will take time to develop.

Revolving debt, which includes credit cards, dropped by $8.5 billion in April. The decline was the 19th straight and signals consumers are taking steps to reduce debt. A decline in late payments indicates they may be having some success.

Non-revolving debt, including loans for cars and mobile homes, increased by $9.4 billion in April, today’s report showed.

Source: Federal Reserve

The Too Big to Fail... Fail

The Big Picture details the huge issue with bailouts of the largest financial institutions:

One of the most compelling factors was the horrific impact past bailouts have had on other competitors in the sector. Bailouts rewarded the worst managements, the least deserving shareholders, and the most reckless creditors. (That’s not how capitalism is supposed to work).

As it turns out, the banking sector is no different than these other industries that have been bailed out. After the government’s largesse, bad companies do well — and at the expense of the well managed, responsible, non-reckless firms.

Forbes with the figures:

Thanks to government subsidies ranging from a steep yield curve to bailout funds (bold mine):

Six giant banks made $51 billion (including the loss by Citi) in profits last year, while the rest of the banking industry — the other 980 banking institutions — all lost money (in aggregate).

Source: Forbes

EconomPics of the Week (6/4/10)

Jumping off the world wide web early this week... everyone enjoy the weekend.

Investing
What is an Investment in Hedge Funds?
Show Me the Money
Even More on 'Equity Valuation'
Forget Dow 10,000... Agg 3-0-8!

Economic Data
Jobs Data Disappoints
School's Out for Summer.... Now What?
Employment: Higher Among Parents
Strength in Servicing
Auto Sales Bouncing Off Lows...
ISM Manufacturing Shows Continued Rebound
Euro Zone Unemployment Hits 12 Year High

And as a result of this morning's disappointing jobs data and yet another risk asset sell-off, EconomPic is going with Weezer's SAY IT AIN'T SO for your video of the week:

Jobs Data Disappoints

Posting this from 20,000+ feet. Gotta love technology.

RTT News details the latest employment report:

The report showed that non-farm payroll employment increased by 431,000 jobs in May following an unrevised increase of 290,000 jobs in April. The job growth fell short of economist estimates for an increase of about 500,000 jobs.

While the increase in jobs in May marked the fastest pace of job growth since March of 2000, the increase was primarily due to the addition of 411,000 temporary employees to work on Census 2010.

At the same time, the Labor Department said that the private sector added only 41,000 jobs in May after adding 218,000 jobs in April. The modest increase marked the weakest pace of private sector job growth since January.

Paul Ashworth, senior U.S. economist at Capital Economics, said, "This is a timely reminder that, although the economic outlook is improving, the recovery is still pretty tepid."drop in construction jobs.

The details below... notice the drop in overall labor force, a reversal of the past few months which many saw as an indication confidence in the economy was returning. Also note the utter disaster that is teenage employment (more on that here).



Any with the increase in overall employment and drop in labor force, a downturn in the unemployment rate(s).



Source: BLS

What is an Investment in Hedge Funds?

With the equity market selling off broadly in May, it should come as no surprise that hedge funds also underperformed across the board...



Why?

They have historically exhibited a very strong relationship to equities (especially in recent years when the level of assets managed have spiked). The chart below shows the relationship between the S&P 500 and the broad Barclay Hedge Fund Index (i.e. not just the 'equity long bias' sub-sector index) going back 10 years.



What hedge funds have been able to do (as can be seen above) is "hedge" some of the downside risk through diverse allocations outside of traditional asset classes, while maintaining the "upside" beta to equities when equity markets have rallied. As a result, rather than pure absolute return vehicles (very few are), hedge funds can simply be thought of as very good deep value equity managers (that can also diversify into other asset classes).

Case in point... through the art of data mining, I found a fund (the First Eagle US Value Fund [FEVAX]) with a strong 9 year track record. I am not vouching for this fund, I do not own this fund, and I have not researched this fund thoroughly (though I do have a TON of respect for Bruce Greenwald, the director of research of the fund), but for this exercise simply note that it has performed exceptionally well (and very in line with the broader Barclay Hedge Fund index) since its October 2001 inception.

Returns of Barclay Hedge Fund Index, First Eagle US Value Fund, S&P 500



What's my point?

The hedge fund world has gotten so large that there is no way that all (or even most) provide consistent pure 'absolute ' return or even exhibit low correlation to equities. As the hedge fund universe grows and becomes a larger part of the broader market, it becomes increasingly difficult to do.

Instead, the broader hedge fund community should admit what they are... managers of equity beta that have outperformed significantly over the years in part by being able to take a longer view on their investments than a daily liquidity fund, in part by not having to manage to an under-performing benchmark, and in part by being exceptional managers of the equity asset class.

Source: Barclay Hedge / Yahoo

Strength in Servicing

What businesses are saying (per the ISM):

• "Our business continues to grow. We are significantly above last year's pace." (Information)
• "Business is steady right now — not the normal spring for construction, but improving." (Construction)
• "Outlook is still generally flat for the remainder of this year, with signs that orders and activity will be picking up." (Professional, Scientific & Technical Services)
• "Continuing our pattern of cautious optimism. Consumers appear to be coming out of hibernation and willing to spend. We expect that if this trend can remain solid, we'll in turn spend additional dollars to support and drive sales activities." (Retail Trade)
• "Customers' activity is improving in some parts of the country." (Wholesale Trade)
• "We continue to 'staff to volume' in order to control labor and supply costs. Census continues to be low." (Health Care & Social Assistance)

Source: ISM

Show Me the Money

After looking at historical equity and bond data (going back to 1871) for my equity valuation analysis posts, I was reminded of the following Peter Bernstein piece regarding an event that occurred in 1958 (and was to last 50 years):

In the second quarter of 1958, the dividend yield on stocks was 3.9% and the yield on 10-year Treasuries was 2.9%. Three months later, dividend yields were down to 3.5% while Treasuries had climbed to match them at 3.5%. The next three months made history, as stock prices kept rising and pushed the dividend yield down to 3.3% while bond prices kept falling and drove the bond yield up to 3.8%. As the graph on page 2 demonstrates, this, too, was unprecedented. The two yields had come close in the past but had always backed away at the critical moment. In 1958, they reversed their historical positions and have never looked back.

When this inversion occurred, my two older partners assured me it was an anomaly. The markets would soon be set to rights, with dividends once again yielding more than bonds. That was the relationship ordained by Heaven, after all, because stocks were riskier than bonds and should have the higher yield. Well, as I always tell this story, I am still waiting for the anomaly to be corrected.

This "anomaly" corrected briefly during the crisis, but Treasury yields are once again higher than dividend payouts.



But is this about to change?

Rather than paying out dividends (or using cash to make acquisitions), corporations have been hoarding cash at an unprecedented level. Marketwatch provides the money quotes:

"Keeping cash on hand for a rainy day is a good idea. The currency stores at some tech firms, however, leave them prepared for a stormy 40 days and 40 nights," said Patrick McGurn, special counsel for RiskMetrics, a shareholder advisory firm.

And the details:



Which makes me wonder... if companies continue to prefer to act like cash cows (rather than make capital expenditures) and cash continues to yield close to zero, what is the chance corporations begin to give some of this cash back to shareholders and reverse this long term trend?

Source: Irrational Exuberance

Auto Sales Bouncing Off Lows...

The Good (per the AP):

Americans shrugged off fewer discounts and a scary stock market plunge last month, snapping up new automobiles and delivering another month of higher sales for carmakers.

The industry's double-digit jump in sales shows that consumers feel the economy is healthy enough for them to buy a new car or truck. It's easier to get a car loan and gas prices are holding steady. Those factors helped ease any jitters about the 8 percent drop in the stock market last month.

"Clearly we are in a recovery," said Jeff Schuster, executive director of global forecasting for J.D. Power.

The long-term perspective (we are still running ~4-5mm units per year below previous levels):

Source: Auto Blog

Even More on 'Equity Valuation'

Following my post Equity Valuation Matters, I received a request to show the results in real terms (presented here).

As I said then:

Please note this still misses a HUGE sources of return (dividends), which accounts for a much larger share of actual returns than people think. An almost identical amount as change in index in fact (dividend yield has averaged 4.49% since 1871, while returns on the index have averaged 4.45% over that same time frame). It makes the current ~2% dividend yield look awfully small.

I will look to show results of total S&P 500 return vs. the Fair Value method next week.

Here goes...



Source: Irrational Exuberance

Employment: Higher Among Parents

Yesterday we took a look at the (lack of) employment among teens... today we look at employment of their parents.

The BLS reports:

Forty-four percent of all families included children (sons, daughters, step- children, and adopted children) under age 18. Among the 34.8 million families with children, 87.8 percent had an employed parent in 2009, down from 90.0 per-cent in 2008. The mother was employed in 67.8 percent of families maintained by women with no spouse present in 2009, and the father was employed in 76.6 percent of those maintained by men with no spouse present.

Among married-couple families with children, 95.7 percent had an employed parent in 2009, down from 97.0 percent in 2008. Both the mother and father were employed in 58.9 percent of married-couple families with children in 2009, also lower than a year earlier.

So, do couples with kids tend to be employed more often to support those kids... or do those with secure jobs, tend to be more likely to have kids? Either way... it seems that those with (or without) kids are all feeling the pain of the recent downturn.

Source: BLS

Forget Dow 10,000... Agg 3-0-8!

We have a new milestone to watch... the Barclays Capital Aggregate Bond Index (i.e. the most popular US dollar fixed income benchmark) closed at a mere 3.08% on May 21st. That is the lowest level EVER (well, at least since the benchmark's January 1973 inception).



It has since "spiked" to 3.20%.

More on how to add incremental yield here and some perspective on investing in a low return environment here.

ISM Manufacturing Shows Continued Rebound

ISM details what respondents are saying:

• "Tight supply conditions exist for electronic components." (Computer & Electronic Products)
• "No signs of the ramp-up abating anytime soon." (Machinery)
• "Volatility of steel and steel-making components is forcing us to raise prices on our shipped goods to automotive customers." (Fabricated Metal Products)
• "Aftermarket sales increased 25 percent during the past quarter." (Transportation Equipment)
• "Sales exceeded budget for the fourth consecutive month." (Food, Beverage & Tobacco Products)

Source: ISM

Euro Zone Unemployment Hits 12 Year High

The WSJ reports:

The euro zone's unemployment rate rose to its highest level for almost 12 years in April, while growth in manufacturing output slowed sharply last month as the currency bloc's sovereign-debt crisis deepened, figures showed Tuesday.

The European Union's Eurostat agency said the unemployment rate across the 16 countries that share the euro increased to 10.1% in April from 10.0% in March, the highest level since June 1998. Economists were expecting the rate to hover at 10.0%.

There were 15.9 million unemployed people across the 16 countries that share the euro in April, more than the entire populations of Austria and Ireland combined. But there are signs the jobless rate may be close to peaking after only 25,000 people joined jobless queues in April, the second-smallest increase since March 2008, Eurostat said.

Source: EuroStat

School's Out for Summer.... Now What?

Calculated Risk details 'Few Jobs for Students this Summer':

For summer jobs, this will probably be the worst year since the Great Depression.

This graph shows the unemployment rate for workers 16 to 24 years old (from the BLS), and the headline unemployment rate (blue). The unemployment rate hit a record 19.6% in April for this group.

No question that the chart Calculated Risk shows (16-24 year old unemployment) is ugly. As detailed above, the 19.6% is the highest rate on record, yet does compare closely with the 19% rate seen in November 1982 for 16-24 year olds. What is completely dislocated from the past is what we are currently seeing among 16-17 year olds (i.e. the high school [rather than college] working class).

While the unemployment rate among 16-17 year olds is 29.1% (from a 1980's peak of 27.1%), that rate is missing the fact that high school age kids quite simply are no longer bothering to look for jobs, thus are not counted in the unemployment rate. The following chart shows the percent of the 16-17 and 16-19 year old population employed as a percent of the population (the 16-17 year old employment levels have literally been halved over the last 10 years).



My concern regarding these unemployed teens is not necessarily related to their current situation (it sucks, but their consumption isn't dependent on their compensation - it is more broadly the "income" they are getting from their parents that matters). Rather, my concern is how this market will impact these workers over the long term. How many of "us" previous generations learned what it meant to "work" from these initial high school and college jobs (I was a painter, waiter at a diner, factory worker, lawn mower, and retirement community chef at various times before I turned 18)?

Source: BLS

EconomPics of the Memorial Day Weekend

Economic Data
GDP Revised Slightly Down to 3% in Q1
Not Sustainable - Part II
New Home Sales Jump... Test Comes Next Month
Durable Goods Orders Mixed in April
U.S. Economy on Continued Life Support
Case Shiller: Housing Rebound Losing Steam?
Confidence Improves in May

Returns / Asset Classes
Treasuries... Full Circle
Equity Valuation Matters...
Real: Equity Valuation Matters
What Volatlity?
The Month of the Draw Down
Dow 10,000!!!!
Low Quality Rally Unwind

And your video of the week... Eddie Vedder covers Tom Petty's I Won't Back Down.



Everyone in the U.S., enjoy the long weekend!

Real: Equity Valuation Matters

Following my post Equity Valuation Matters, I received a request to show the results in real terms. Here you go...

Please note this still misses a HUGE sources of return (dividends), which accounts for a much larger share of actual returns than people think. An almost identical amount as change in index in fact (dividend yield has averaged 4.49% since 1871, while returns on the index have averaged 4.45% over that same time frame). It makes the current ~2% dividend yield look awfully small.

I will look to show results of total S&P 500 return vs. the Fair Value method next week.

Source: Irrational Exuberance

Not Sustainable - Part II

My Not Sustainable post from last month involved the same inputs; compensation (not to be confused with total income) and consumption. Noted back then was that real compensation has declined ~$400 billion, while consumption has jumped ~$150 billion since March 2007.

This month's 'Not Sustainable' goes back further... the recent period of over-consumption started as much as 30 years ago.



People now consume ~135% of compensation earned before taxes and ~155% of compensation earned after taxes paid. For some people, this may make sense (depends where you are in your life cycle / if you have other sources of wealth). But the ~135% and ~155% is the AVERAGE for every American at every age group and as we learned in 2007-2008, wealth can be fleeting.

Source: BEA

What Volatility?

Amazing how less volatile things seem when they are moving in the "correct" direction.

Source: Finance

GDP Revised Slightly Down to 3% in Q1

Marketwatch details:

The U.S. economy grew at a 3.0% pace in the first quarter - lower than the 3.2% previously reported - owing mainly to smaller increases in consumer spending and investment in business software, the government said Thursday. Economists surveyed by MarketWatch expected first-quarter growth to be revised up to 3.5%.

The latest revision incorporates data that is not available for the first reading of GDP. Consumer spending, the largest contributor to GDP, grew at 3.5% annualized rate in the first quarter, down from the initial estimate of 3.6%. The increase in business investment, meanwhile, was reduced to 13.1% from the original estimate of 14%.

Source: BEA

Equity Valuation Matters...

Step 1) Take the S&P 500 Index (lots of data here) and divide that level by the current level of nominal GDP (you can find that here).

Below is a chart of just that going back to 1950 and the corresponding 60 year average.



Step 2) Take that 60 year average (8.2184%) to normalize the first year of your 'Fair Value S&P 500' "FV" Index by taking nominal GDP at the starting date (in this case June 1950 = $284.5 billion) and multiplying by the percent (x 8.2184% = 23.83). In this case 23.83 = the FV Index level.

Step 3) Using that 23.83 (or calculated value using a different time frame) as the FV Index starting value, at each interval increase the index by the change in nominal GDP (note... in the chart below, I estimated the S&P value for Q2 end at today's closing level and Q2 GDP at 4.0% annualized). Why nominal GDP? Go here.

The below chart shows this FV Index against the actual S&P 500 index.



Step 4) Calculate the percent the S&P 500 Index is over or under valued relative to the FV Index.



Proof....



Note 1: under this methodology, the S&P 500 is currently slightly below fair value
Note 2: a change in the starting value of the FV Index would simply shift the x-axis to the right or left (i.e. it would not change the relationship between the two)

Source: Irrational Exuberance

New Home Sales Jump... Test Comes Next Month

The Washington Post details:

New homes sales surged last month as home buyers rushed to take advantage of a government tax credit that has helped lift the housing market, according to government data released Wednesday.

The sales of new single-family homes rose 14.8 percent in April compared with the previous month to a seasonally adjusted annual rate of 504,000, according to Commerce Department data. It was up 47.8 percent compared to the same period a year ago.

Sales rebounded the most in the Midwest, 31.6 percent. They rose 10.8 percent in the South, which includes the Washington region, and increased 21.7 percent in the West. Sales were flat in the Northeast.

That follows an industry report this week that sales of existing homes, which make up the majority of the market, jumped 7.6 percent in April.

Economists who follow the industry say the reports reflect the impact of low mortgage rates and a $8,000 tax credit available to some first-time home buyers and a $6,500 tax credit available to some repeat homeowners who buy a new primary residence. To qualify for the tax credit, a buyer must have entered into a contract by April 30 and complete the transaction by June 30.

Source: Census

Durable Goods Orders Mixed in April

The WSJ reports:

Long-lasting goods orders in April rose above expectations, primarily pushed forward by a huge surge in civilian airplanes.

Durable-goods orders increased 2.9% to a seasonally adjusted $193.9 billion, the Commerce Department said Wednesday.

Airplane demand pushed the overall gain, which was bigger than the 2.2% expected. Nondefense aircraft and parts surged 228.0% in April.

Outside of the transportation sector, orders for all other durables decreased 1.0% in April. Yet the report contained evidence of the health in the manufacturing sector -- which has been a leader of the U.S. economy's recovery -- and softened fear lurking about what impact the Greek debt crisis might have on U.S. exports into the euro zone.

Durable Goods (April)

Transportation within Durable Goods (April)



Source: Census

Treasuries... Full Circle

Paul Krugman points out that no matter how much some things have changed, Ten Year Treasury rates (though noisy) have remained the same (note: I am hesitant to agree with his argument... a lot of what has happend over the past 12 months [struggling global economy / geopolitical conflict / uncertainty, austerity measures, re-regulation] are all reasons why Treasury rates would stay low).

Anyhow, to Paul:

I posted this item, about the foolishness of people who believed that

fiscal expansion will actually be contractionary, because it will drive up interest rates

on May 2, 2009. Markets were actually closed that day; but on May 1, the interest rate on 10-year bonds was 3.17 percent. As of right now, the rate is 3.14 percent. Just saying.

Source: Yahoo

U.S. Economy on Continued Life Support

Calculated Risk details that according to the CBO, stimulus (i.e. the American Recovery and Reinvestment Act "ARRA") raised GDP in Q1 by an estimated range of 1.7% to 4.2%. Since reported GDP growth was 3.2% annualized for the quarter, this means that if the impact of stimulus was at the high-end of the range, GDP "would have" been negative in Q1.

The chart below shows actual GDP and a range for GDP ex-stimulus (simply actual GDP less the estimated impact of the stimulus at the low and high-end ranges as detailed by the CBO).



The bad news?

This shows just how fragile the system is.

The good news?

The impact of stimulus is expected to be strong the remainder of the year (Q2 '10: 1.7% - 4.6%, Q3 '10: 1.4% - 4.2%, Q4 '10: 1.1% - 3.6%)

Source: BEA

Case Shiller: Housing Rebound Losing Steam?

LA Times reports:

“The housing market may be in better shape than this time last year, but, when you look at recent trends there are signs of some renewed weakening in home prices,” said David M. Blitzer, chairman of the Index Committee at Standard & Poor’s. “In the past several months we have seen some relatively weak reports across many of the markets we cover.”

A separate Case-Shiller index that is released quarterly and covers the U.S. showed home prices fell a seasonally adjusted 1.3% in the first quarter of the year compared to the fourth quarter of 2009.

This weakening becomes more interesting due to all the buyers that flooded the market to take advantage of the tax credit. One would think this would have resulted in higher prices, but we'll see the full impact of that in April's figure (and potential decline post-credit in May).



Source: S&P

Confidence Improves in May

Just getting to some posting, as I took the day off (planned for a few weeks). As today just happened to coincide with the nicest day of the year, I must say that my own outlook is improved.

Speaking of an improved outlook... consumer confidence jumped in May (how is THAT for a segue!). These numbers are still VERY low (less than 5% of those polled see a plentiful job market), but improved none-the-less. To the details (per the Biz Journal):

Consumer confidence has risen again this month, the third-straight month of gains, according to The Conference Board.

The Conference Board Consumer Confidence Index rose to 63.3 in May, compared with 57.7 in April.

“Consumer confidence posted its third consecutive monthly gain, and although still weak by historical levels, appears to be gaining some traction,” Lynn Franco, director of the New York nonprofit’s Consumer Research Center, said in the release.

The base year, 1985, equals 100 in the index.

Source: Conference Board

The Month of the Draw Down

Diversifying across risk assets doesn't work when systemic crisis shift correlations to one.



Source: Yahoo

Dow 10,000!!!!

As of this post, Dow futures are off big. You know what that means? Break out the whistles and confetti.... Dow 10,000!!!



Not as much fun going this direction...

Source: Yahoo

Low Quality Rally Unwind

Bloomberg details:

Corporate bond sales are poised for their worst month in a decade, while relative yields are rising at the fastest pace since Lehman Brothers Holdings Inc.’s collapse as the response by lawmakers to Europe’s sovereign debt crisis fails to inspire investor confidence.

Companies have issued $47 billion of debt in May, down from $183 billion in April and the least since December 1999, data compiled by Bloomberg show. The extra yield investors demand to hold company debt rather than benchmark government securities is headed for the biggest monthly gain since October 2008, Bank of America Merrill Lynch’s Global Broad Market index shows.

Concern that European leaders won’t be able to coordinate a response to rising levels of government debt from Greece to Spain, while U.S. legislation threatens to curb credit and hurt bank profits, is driving investors away from all but the safest securities. The rate banks say they charge each other for three- month loans in dollars has almost doubled since February.

And the corresponding month-to-date low quality (high beta) corporate bond sell-off.



Source: BarCap

EconomPics of the Week (5/21/10)

Global Economy
Major Players Still Buying Treasuries
France and the PIIGS
It Isn't Always a Liquidity Problem

Economic Data
Leading Economic Indicators Negative for First Time in a Year
Disinflation Alert
PPI Drops Slightly in April
U.K. Inflation Continues Uptick
Growth of Empire Manufacturing Index Slows in May

Financial Markets / Asset Returns
May 19th in Brief
Look Out Below (Morning of 5/20)
U.S. Dollar is King (Evening of 5/20)
Blood in the Streets (Also Evening of 5/20)
Commercial Real Estate Resumes Decline

And quite frankly because it's time to rock.... your video of the week. Metallica w/ Master of Puppets.... Master.... Master....

U.S. Dollar is King (for Now)

Source: Bloomberg

Blood in the Streets...

Okay, perhaps an exaggeration, but it sure felt that way today. A severe sell-off across all assets, with the exception of Treasuries (strong rally) and the Euro (Credit Writedowns with some details).



Source: Yahoo

Leading Economic Indicators Negative for First Time in a Year

With everything else going on in the world, the markets did not take the following well.

Daily Markets details:

Thursday morning, the Conference Board released its report on leading economic indicators in the month of April, showing that its leading economic indicators index unexpectedly declined for the first time in more than a year.

The report showed that the leading economic index edged down by 0.1 percent in April following a downwardly revised 1.3 percent increase in March. The decrease came as a surprise to economists, who had expected the index to increase by 0.2 percent.

Source: Conference Board

Look Out Below...

As of 8:30 AM...

Source: Yahoo

Commercial Real Estate Resumes Decline

After the Moody's/REAL Commercial Property Price Index appeared to be bottoming in January, EconomPic stated:

So have we hit a bottom? For the time being... possibly. But longer term, I am not so sure in nominal terms and even less confident in real terms.

Lets put the current price level in perspective. We have come a LONG way (down 44% from peak to current trough), but price levels are now just slightly below the level seen in January 2001 (in real terms). What's different now than then?

• Less demand (3,000,000 less people employed and office vacancy rates at 18% [up from 8%] in 2001)
• Significantly more supply (anyone have a source for square footage?)
• Less credit available for purchases

Fast forward two months later and it turns out that "long term" may not have been all that long term after all.



Noise? Perhaps. That said, fundamentals still don't appear to be strong.

Source: MIT

May 19th in Brief

Recap in brief...

• Squeezed Euro (though I personally think a further rebound is possible)
• Oversold financial rebound (see GS)
• Continued flight to high quality yield (a 3.36% 10 year Treasury yield when 4% was "rich" a bit more than a month ago... amazing for sure, but is it now overbought?)
• Most notably... an inflation protection (i.e. hard asset) sell-off (was it once people digested the CPI print?)

There are too many people (including me) piled into the reflation trade with the view that the Fed will do anything it takes to get the job done (i.e. the strong preference for inflation vs. deflation). Thus, when it moves the other way... it MOVES the other way.

The issue is that over the shorter term it is likely to move the other way often as we are in an extremely disinflationary environment (high unemployment, low capacity utilization, low growth, deleveraging private and public balance sheets via increased savings).

That said, I am allocating for "reflation" as once it moves (in months / years), it could move quickly.

Source: Yahoo

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?