You Take the Good. You Take the Bad.

A few data points from today...

The Good

This morning's Chicago PMI showed that delivery times have slowed. How is this possibly a good thing? Well, if corporations are slowing delivers due to a lack of capacity, they are more likely to invest in more capacity, add (or at least stop laying off) employees, or in a perfect world... both.



The Bad: Sustainability of Consumption

Also released this morning was personal income and consumption for March. The chart below shows personal income, personal consumption, and personal consumption less transfer payments (defined as money given by the government to its citizens). Excluding these payments, which includes unemployment benefits, the savings rate is... wait for it... negative (good over the short run perhaps, but without hiring this hardly seems sustainable).



Source: ISM / BEA

CWP=D: Part I - Where Are The Jobs At?

This is the first of a multi-part post on CWP=D (consumption without production equals debt) that will hopefully provide some clarity into how we got into this current mess (high levels of debt and unemployment) we are in. The reason for the multi-part structure? I am not exactly sure where this is going.

What I do know is the last section will hopefully be “What Does it All Mean for Investing?” and follow up sections may include more on the Federal Reserves misunderstanding of NAIRU, “forced” consumption, misallocation of capital, the subsequent rise in private then public debt, and what it means for future growth.

Let’s see how this goes…

Part I: Where Are The Jobs At?

The chart below outlines the dramatic shift in the Chinese labor force from 1999-2009, which along with a number of mercantilist emerging economies dramatically shifted the global labor force. Specific to China, the number of workers within primary sectors (defined as sectors that extract or harvest products from the earth) declined, while the number in secondary sectors (sectors of the economy that manufacturer finished goods) and tertiary sectors (those that provide services to the general population) spiked. To put this in perspective… that 50 million increase in the secondary sector labor force is equal to roughly 40% of the ENTIRE U.S. labor force.

Some may argue that the increase in secondary labor was caused by U.S. demand for Chinese goods rather the Chinese riding on the coat tails of the U.S. consumer, but either way it is clear from the following two charts (trade balance and currency reserves) that China's secondary workforce increased not only to meet aggregate demand coming from China, but global (and U.S.) demand as well.

U.S. – China Trade



Chinese Currency Reserves



The impact of a huge supply shock in any good or service (all else equal) should be a substantial decrease in the price of that good or service. In the case of U.S. employment, which tends to be sticky (i.e. prices have a hard time going down), the impact would also mean a decline in the quantity of U.S. labor demanded by the global economy.

As I will outline in section two, the Fed's misunderstanding of the source of the reduced demand for U.S. labor (i.e. the jobless recovery experienced early last decade) led to a monetary response that emphasized easy money to stimulate aggregate demand, when aggregate demand from the U.S. was not the issue.

To Be Continued....

Source: Haver Analytics

Taking a Look at the "Transitory" Slowdown in Q1 GDP

UPDATED: made a mistake in the earlier version (apparently I'm a bit rusty).

Bernanke per his testimony (bold mine):

Most of the factors that account for the slower growth in the first quarter appear to us to be transitory. They include things like, for example, lower defense spending than was anticipated, which presumably will be made up in a later quarter. Weaker exports, given the growth in the global economy. We expect to see that pick up again. And other factors like weather and so on.

Now, there are some factors there that may have a longer-term implication. For example, construction, both residential and nonresidential was very weak in the first quarter. That may have some implications going forward.

So I would say that roughly that most of the slowdown in the first quarter is viewed by the committee as being transitory. That being said, we've taken our forecast down just a bit, taking into account factors like weaker construction and possibly just a bit less momentum in the economy.

I have a hard time believing a decline in government spending will stop any time soon and that drop in exports Chairman Bernanke referenced seems non-existent in the numbers. Also note that the level of real imports ignores the fact that the price of those imports spiked. In real terms imports reduced GDP by only -0.79%, but a whopping -4.16% in nominal terms.

Finally, when looking at the sustainability of growth, one always needs to consider how we are building the infrastructure (i.e. productive non-residential investment) for future growth. On that front, this was a HUGE disappointment.

Source: BEA

Germany as the Poster Child for Fiscal Responsibility

In yesterday's post on European Debt, I noticed:

What is interesting (to me) is that debt levels in Germany are almost (or at least in the ball park) of Portuguese and Irish levels at 83% of GDP. While Ireland is WAY over their heads with a death spiraling economy, Portugal has actually been relatively lockstep with Germany; Germany's GDP and public debt levels have grown 2.7% and 32% since 2007, Portugal's 1.9% and 39%.

The below chart takes a look at Germany from a different perspective, comparing their debt dynamics (i.e. the responsible ones) to that of the U.S. (i.e. the wild child) rather than a country within the EU periphery.

While the United States has certainly outpaced Germany in terms of the amount of debt supported by the underlying economy, Germany is:

• Not far off
• Perhaps only lagging because they are a step or two behind (what do things look like post periphery bailout)

Source: Haver

European Debt Once Again Front and Center

Don't call me the Brett Favre of bloggers yet. I'm not officially back, but getting the itch and may post here and there (and likely more to be a long form post - we shall see). Not sure why the below is my first entry back (nothing epic or new about the below), but it piqued my interest as restructuring seems FINALLY likely to happen (thank goodness, especially for the individuals of Ireland who are currently in a severe downward spiral).

Bloomberg details the history of the liquidity solvency problem in the European periphery:

Today’s data brought the debt crisis back to where it started. Greece last year obtained a 110 billion-euro lifeline from European governments and the International Monetary Fund. Ireland followed with a 67.5 billion-euro package and Portugal is now negotiating for 80 billion euros in aid.

A bail out for Portugal? Must mean that things are improving (i.e. the bailouts helped) Greece and Ireland... or not.

Greece’s debt ballooned to 142.8 percent of GDP, the highest in the euro’s 12-year history, the EU figures showed. Ireland’s debt surged the most, by 30.6 percentage points to 96.2 percent of GDP.

What is interesting (to me) is that debt levels in Germany are almost (or at least in the ball park) of Portuguese and Irish levels at 83% of GDP. While Ireland is WAY over their heads with a death spiraling economy, Portugal has actually been relatively lockstep with Germany; Germany's GDP and public debt levels have grown 2.7% and 32% since 2007, Portugal's 1.9% and 39%.

Source: Eurostat

EconomPics Turns Three... EconomRIP Edition

Well, its been a full year since EconomPic Turned Two, which means EconomPic turned 3 today (unreal). As many a reader may remember, I begged and pleaded (or at least asked) a year back for help finding a job in San Francisco. After a lot of reader insight, help, and connections... nothing. Apparently there are easier things in life than finding a job 3000 miles away, during a jobless recovery, following a severe recession, when you don't know anyone in that city.

So, finally determined to move I had "the talk" with my "real job" (i.e. I gave my intention to move even if it meant walking away) and guess what? They are open to me (with some interesting arrangements) living in San Francisco after all. Who knew! So after 11 long, great, amazing years in New York City, I am headed west.

Which brings me to EconomPic. From this blogs March 4th, 2008 inception, through one of the more interesting / scary recessions of the past 70-80 years and subsequent rebound, blogging has been a pure joy. It provided me with an outlet to hone my "craft" (what I do here is very applicable to my "real" job) and it's taught me a TON about the world (it provided a huge incentive to "dig" into the data and my readers taught me more over the years than I imagined possible).

BUT, all good things must come to an end.

As long time readers are already well aware, my postings have been WAY down (i.e. lower quantity) and the posts I have done are much less commentary and much more day to day data in chart form (i.e. lower quality from templates I've created over years) the past 3-4 months. This is simply a result of what has been a lack of desire / lack of time to post (the "real" job has been taking up a lot more of my "free" time, the new arrangement will make that much worse). As a result, my three year anniversary seems like an ideal time to bow out. At least for now.

So, while I will not count out coming "out of retirement" if the desire returns or if the economy starts to go a new and interesting direction (or the new working arrangements don't work out), should that not happen I want to take this time to let all my royal readers over the past three years (2300+ RSS subscriber is still shocking) that I will miss you all.

-Jake


P.S. In the coming weeks, I plan to post a "Table of Contents" that will help direct readers through the 2224 posts (by topic) and data sources

Employment Picture Improved

The economy added 250k jobs per the household survey and 192k per the establishment survey (222k private jobs) on a seasonally adjusted basis. Non-seasonally adjusted, the economy added almost 500k jobs per the household survey and 810k per the establishment survey. Not a blow out, but a definitive improvement.





Source: BLS

Getting There

I'm expecting an above consensus employment number tomorrow (i.e. 250+), as I think January's employment figure was artificially low due to weather and past data missing the (albeit small) turn.



We shall see...

Source: DOL

Autos Over the Long Term

4 years later we're making some real progress in the economy across the board, but showing how deep the dive was... auto sales are still ~20% below the level seen four years ago.



More telling. Lots of US autos near the bottom and only one (Cadillac) with more sales than pre-crisis.

Source: Autoblog

Nothing is Sacred

In a recession (the below is year over year change using January prints)...

Source: Census

Manufacturing Expands at Fastest Pace Since 1983

ISM respondents are saying:

• "A continued weak dollar is increasing the cost of components purchased overseas. It is going to force us to increase our selling prices to our customers." (Transportation Equipment)
• "We continue to see significant inflation across nearly every type of chemical raw material we purchase." (Chemical Products)
• "Our plants are working 24/7 to meet production demands." (Fabricated Metal Products)
  "Prices continue to rise, while business limps along at last year's pace." (Nonmetallic Mineral Products)
• "Overall demand is off 10 percent." (Plastics & Rubber Products)

Source: ISM

More on Personal Consumption

In response to my post Something Sustainable reader Tom Lindmark commented:

As I understand the numbers, real PCE declined 0.1% and disposable income was up only 0.1% if you net out the effects of the reduction in withholding taxes and the expiration of Making Work Pay.

From a quick look it appears taxes actually rose $55 billion in the period in nominal terms (not sure real terms), but Tom is correct that real PCE declined in January, but predominantly due to a decline in real energy consumption (though nominal consumption remains high). This can be seen in the below chart that compares components of real PCE over 3 and 12-months. Notice that real consumption has declined in all areas, with the exception of services and energy.



Source: BEA

Something Sustainable

Over the past twelve months the rate of personal spending is up even though personal savings has risen (the obvious key is that personal wages have risen more than consumption).

Why is this such good news? It means that the consumer is rebuilding their personal balance sheets and is not causing a drag on the broader economy by reducing their spending.

Source: BEA

Q4 GDP Revised Down to 2.8%

Breakdown of the 0.4% shift below.

Source: BEA

Durable Goods Orders Up... Not Exactly What it Seems

Marketwatch with the details:

Orders for U.S.-made durable goods rose 2.7% in January on stronger demand for civilian aircraft, the Commerce Department reported Thursday. The increase in total orders was very close to the 2.5% gain that was the consensus forecast of economists polled by MarketWatch. This is the first increase in durables in four months. Orders for December were revised up sharply to a decline of only 0.4% from the prior estimate of a 2.3% decline.

Nondefense aircraft orders were up a whopping 4900% (after a crash in December). Without nondefense aircraft, orders were actually down a bit (though smoothing December, durable goods orders were actually up 2% ex nondefense aircraft).



Source: Census

Growing Secular Volatility?

The Big Picture notes that today's S&P 500 performance (-2.05%) was the worst in 6 months.



More interesting is the frequency of -2% days over the past 60 years. The chart below shows the number -2% days over 100 trading day periods over that time. As can be seen, while we had a "great moderation" from October 2003 through February 2007 (a whopping 850 trading days without a 2% down day), the frequency seems to be growing steadily since the early 1970's when there are periods of market duress.



Source: Yahoo Finance

Confidence Improves... Still Poor Jobs Outlook

Source: Conference Board

Home Prices Heading Down

Source: S&P

Case Shiller Price Index

Haven't posted this in a while...

As I've previously detailed, CPI may not reflect actual price levels for an individual who:

• does not own a home
• would like to own a home
• will likely soon buy a home

Why? Full details here, but in a nutshell the CPI measure includes a 'home owners equivalent rent', which has not fluctuated nearly as much as the actual home price level in recent years (both on the way up and on the way down).

The below shows headline CPI vs. a "Case Shiller Price Index" that swaps in the actual home price levels (per the Case Shiller) for the equivalent rent figure (assuming a constant ~25% weighting of owners equivalent rent within the broader index and flat price levels in December and January).

By this measure we see much higher inflation pre-crisis than reported, much greater deflation post-crisis, and the potential beginning stage of another divergence.

Source: BLS / S&P

Leading Indicators Up Slightly in January

Marketwatch details:

The economy's expansion is expected to continue in coming months, though current conditions, which are slowly improving, remain weak, the Conference Board said Thursday as it reported that its leading economic index rose 0.1% in January.

Six of the 10 indicators included in the LEI made positive contributions in January, led by the interest rate spread. The largest negative contribution came from building permits. Economists polled by MarketWatch had expected the overall index to rise 0.2% in January.

Source: Conference Board

Producer Prices Continue to Rise... Feeding into Core

Bloomberg details:

Wholesale costs in the U.S. increased for a seventh consecutive month in January, led by higher prices for fuel.

The producer price index rose 0.8 percent, Labor Department figures showed today in Washington. The figure matched the median forecast in a Bloomberg News survey. The so-called core measure, which excludes volatile food and energy costs, rose 0.5 percent, the biggest rise since October 2008.

Source: BLS

Deficit Financing

The AP details:

Not since World War II has the federal budget deficit made up such a big chunk of the U.S. economy. And within two or three years, economists fear the result could be sharply higher interest rates that would slow economic growth.

The budget plan President Barack Obama sent Congress on Monday foresees a record deficit of $1.65 trillion this year. That would be just under 11 percent of the $14 trillion economy — the largest proportion since 1945, when wartime spending swelled the deficit to 21.5 percent of U.S. gross domestic product.

The good news (if you want to call it that) is that low borrowing costs via the Fed pushing rates (at the front-end of the yield curve) to zero has caused the borrowing cost (in the form of interest payments) to plummet as a percent of GDP, even in the face of record debt. Using interest expense figures from Treasury Direct, the chart below details the cost of debt financing (interest expense / total debt outstanding) and interest expense as a percent of GDP. Neither appears worrisome at first glance.

The concern is what happens when rates begin to rise, if there is not offsetting growth and/or inflation to keep costs low on a relative basis. Back to the AP:

"The moment when markets react negatively to our budget deficit cannot be known in advance, but we are absolutely in the danger zone," says Marvin Goodfriend, an economics professor at Carnegie Mellon University's Tepper School of Business.

Higher interest rates would also raise interest payments on the federal debt. It would be costlier for the government to finance its operations. The interest payments themselves could then make the deficit increase, creating a vicious cycle.

Source: Treasury Direct (interest) / Treasury Direct (debt)

Retail Sales Up... Inflation Edition

Marketwatch details:

The biggest increase in sales took place at gas stations, grocery and liquor stores, auto retailers and online and catalog merchants. Sales fell at clothing and building-supply stores.

It's not a surprise that this was the result in a period when commodity prices (in the form of food and energy) spiked. Removing these volatile sectors of the retail market and we get a much more mundane 0.04% increase in the month.

Source: Census

Natural Rate of Unemployment

Bloomberg details:

The new “normal” unemployment rate may now be 6.7 percent, rising as much as 1.7 percentage points from 5 percent before the recession began, according to researchers at the Federal Reserve Bank of San Francisco.

High rates of long-term joblessness, extended unemployment benefits and a mismatch of skills between workers and available jobs may be impeding a return to the previous level, said John Williams, the bank’s research director, and research associate Justin Weidner in a paper released today.

That's one explanation (and I can't disagree with the above facts), but perhaps the "natural" rate of unemployment was never as low as it appeared from the late 80's through late 00's either.



Source: BLS

Budget Still Out of Control

You can argue that the dialogue around cutting the budget going forward is a good start, but increasing the deficit to $1.6 billion from an initial $1.4 billion is the wrong direction. Bloomberg details:

President Barack Obama will send Congress a $3.7 trillion budget that would reduce deficits by $1.1 trillion over a decade, setting up a battle with Republicans who have already deemed the plan insufficient to reduce federal debt.

The deficit for the current fiscal year is forecast to hit a record $1.6 trillion -- 10.9 percent of gross domestic product -- up from $1.4 trillion the administration estimated previously, according to documents released this morning by the administration.

Source: GPO Access

Japan's Lost Decade(s)

BusinessWeek details the latest:

Japan’s gross domestic product fell less than estimated in the fourth quarter in a pullback that may prove temporary as overseas demand revives production after the nation fell behind China as the world’s second-largest economy.

The annualized 1.1 percent drop in GDP in the three months through December was driven by a slowing in exports and fading of government stimulus programs, Cabinet Office figures showed today in Tokyo. The median forecast of 26 economists surveyed by Bloomberg News was for a 2 percent drop.

Source: ESRI

Inflection Point?

Source: Yahoo

Has Re-Leveraging Begun?

Non-revolving credit is now at new all-time highs and the revolving cliff dive has hit a bottom (i.e. it is turning up... for now).

Source: Federal Reserve

On the Prospects of G

The chart below shows the annual change in government spending and investment since 1960 (left hand side) and contribution to overall GDP growth (right hand side).

The takeaway? The government sector has been a consistent source of growth (positive in 36 out of 37 years), but with states acting like Europe (i.e. austerity) and the need to cut back, expect this to reverse course in the years to come.

Source: BEA

EconomPics of the (Since my Last EconomPics of the) Week

Economic Data
On the Job Non-Recovery
ISM Services Growth at Fastest Pace in 5 1/2 Years...
ISM Manufacturing Up for 20th Straight Month
The Importance of Small Business
Productivity Continues Hot Streak
European Retail Sales Decline
Auto's Continue Rebound
Chicago PMI Points to Heating Economy / Input Pric...
GDP Growth at 3.2% in Q4
Consumer Confidence Improves in January
Europe's Industrial Rebound: The Power of Mean Reversion
Housing Starts Quite Low
Empire Manufacturing Outlook at Seven Year High
Still Too Much Capacity

Asset Classes
Odd Month
The Bulldog Bubble
Taking a Look at the Cash Hoarders
Dividend vs. Buyback Yield... The Importance of Timing
Case Shiller Index Points to Housing Double Dip
China Hearts Silver... Market Top?
Housing Market Drives Leading Economic Indicators?...
The Equity Market is in Trouble... J-E-T-S Edition...
China Still NOT Selling Treasuries

And your video of the week... Passion Pit with Little Secrets

On the Job Non-Recovery

The disappointing jobs data this morning, perhaps due to weather, detailed by Bloomberg:

The U.S. jobless rate unexpectedly fell in January to the lowest level in 21 months, while payroll growth was depressed by winter storms.

Unemployment declined to 9 percent from December’s 9.4 percent, the Labor Department said today in Washington. Employers added 36,000 workers, short of the 146,000 median gain projected by economists in a Bloomberg News survey.

As we've detailed for some time the improvement in the unemployment rate is due to the denominator (in the unemployed / labor force equation) dropping off a cliff. The chart below details this phenomenon over the past twelve months according to the household survey. As can be seen, jobs are finally being added (~900 thousand), but during a time when the population of working age individuals in the U.S. grew by ~1.9 million. Add in a drop in the labor force (~420k) and you get ~2.3 million MORE individuals than last year that could be working, not working.



We need to do better than this.

Source: BLS

ISM Services Growth at Fastest Pace in 5 1/2 Years

ecPulse details:

The Institute for Supply Management released today the ISM services index, where the ISM Services index rose in January to 59.4 from the prior reported estimate of 57.1 and well above the expected estimates of 57.2. The services sector expanded in January at the fastest pace since August 2005.

The business activity index rose to 64.6 from 62.9, while the prices paid index rose to 72.1 from 69.5, new orders increased to 64.9 from 61.4, while the employment index rose to 54.5 from 52.6, new export orders slightly eased to 53.5 from 56.0 and imports increased to 53.5 from 51.0.

Source: ISM

Productivity Continues Hot Streak

Bloomberg details (bold mine):

The productivity of U.S. workers unexpectedly increased in the fourth quarter at a faster rate as companies sought to contain costs.

The measure of employee output per hour rose at a 2.6 percent annual rate, compared with a revised 2.4 percent gain in the previous three months, figures from the Labor Department showed today in Washington. Economists projected a 2 percent advance, according to the median forecast in a Bloomberg News survey. Labor expenses fell for fifth time in six quarters.

“There is a good chance that productivity will slow further this year, as firms are increasingly forced to hire more workers to expand output,” Paul shworth, chief U.S. economist at Capital Economics Ltd. in Toronto, said in a note to clients. “That is good news for the unemployed.”

Source: BLS

European Retail Sales Decline

Reuters details:

Euro zone retail sales unexpectedly fell in December with equal declines in food
and non-food sectors, a sign that consumers in the single currency bloc were reluctant to splurge even in the key holiday period.

The European Union's statistics office Eurostat said on Thursday retail sales in the 16 countries using the euro fell by 0.6 percent month-on-month, for a 0.9 percent year-on-year decline.

Economists polled by Reuters had expected a 0.5 percent month-on-month rise and a 0.2 percent increase year-on-year.

The new data came while European Central Bank policymakers met to decide on interest rates. Economists said they did not expect weak retail sales to prevent the ECB from issuing a warning on inflationary pressures.

The chart below shows the three month change by country and clearly shows the slowdown in aggregate demand within the region.

Source: Eurostat

The Importance of Small Business

It's where the growth is...

Source: ADP

Auto's Continue Rebound

Source: Autoblog

ISM Manufacturing Up for 20th Straight Month

Marketwatch details:

Conditions for the nation's manufacturers improved for the 20th straight month, the Institute for Supply Management reported Tuesday. The ISM index rose to 60.8% in January from 58.5% in December. This is the highest level of the factory index since last May. The report was much stronger than expected. The consensus forecast of estimates collected by MarketWatch was for the index to remain steady at 58.5%.

Readings above 50 indicate expansion. Below the headline, the report was also strong. The key employment index improved to 61.7% in January from 58.9% in December. New orders jumped to 67.8% in January from 62% in the prior month. Input prices soared in January. The price index jumped to 81.5 from 72.5 in the prior month.

Source: ISM

Odd Month

Justification for the below?

• Risk on / reflation in the developed world (continued dollar sell-off)
  
• Brakes thrown on in emerging market world
• Sell-off in rates across the board
• Gold and oil off because... who knows

Source: Google Finance

Chicago PMI Points to Heating Economy / Input Prices

Bloomberg detailed:

Businesses in the U.S. expanded in January at the fastest pace since July 1988, indicating the world’s largest economy has momentum at the start of the year.

The Institute for Supply Management-Chicago Inc. said today its business barometer rose this month to 68.8 from 66.8 in December. Figures greater than 50 signal expansion, and economists projected the gauge would slip to 64.5, based on the median estimate in a Bloomberg survey.

Source: ISM

GDP Growth at 3.2% in Q4

Pretty wild release. HUGE positive impact (more than 3%) by improvement in net exports. HUGE positive impact (more than 3%) by consumption (strong demand in durable and non-durable goods). HUGE negative impact (almost 4%) by inventory liquidation to meet final demand vs. new production.

My initial thoughts? I've been looking for a bump in aggregate global demand and the jump in consumption and net exports is a good sign. In addition, the fact that we have met final demand by depleting inventories, once again feeds the cycle that businesses have to ramp up production to meet final demand going forward (which will positively impact future economic growth).

Source: BEA

The Bulldog Bubble

Random? Yes, but I like dogs...

The American Kennel Club (hat tip Skip) details:

This year’s list included some shakeups in the top 10 – the Beagle overtook the Golden Retriever for the 4th spot and the Bulldog, who has been steadily rising up in rank, took 6th place away from the Boxer, who dropped to 7th in 2010.

"Not since the early 20th Century has the Bulldog enjoyed such sustained popularity," said AKC Spokesperson Lisa Peterson. "‘Bob’ was the first AKC registered Bulldog in 1886, and today the breed enjoys its highest ranking in 100 years at number 6."

Source: American Kennel Club

Taking a Look at the Cash Hoarders

The Huffington Post details the top 11 cash hoarders.

Instead of building plants or hiring workers, corporate America is clinging to its cash.Companies are sitting on $1.93 trillion in cash and liquid assets, the highest level since 1959, the Wall Street Journal reports.

With high unemployment and families still limiting their spending, corporate America is backing away from expansion. But with interest rates on the heaps of cash so low, that $1.3 trillion might as well be stuffed in a mattress.

Below is a chart of the cash levels for 10 of the 11 (I excluded GM as they don't have 12 month's of positive earnings), the earnings yield of each company (defined as the inverse of the P/E ratio), and the adjusted earnings yield that backs out the cash from the corporation's market value to determine the earnings power of the company less cash (normally you would have to account some earnings to the cash, but in the current environment, that is minimal).



Note that all cash data is directly from Huffington Post and Google Finance (I did not go through financials) and is presented without analysis or determination as to whether any of the figures should be adjusted for any reason. That said, if the cash is returned to investors via dividend or buyback OR the cash is put to good use, corporations appear cheaper than they might first appear.

Dividend vs. Buyback Yield... The Importance of Timing

Professor Damodaran (via World Beta and Abnormal Returns):

S&P's most recent update indicates that US companies, after a pause for about a year after the banking crisis, are back in the buyback game. In the third quarter of 2010, the S&P 500 companies bought back almost $ 80 billion of stock, up 128% from the third quarter of 2009.

The below chart shows the dividend yield (dividends divided by the S&P 500's market cap) and buyback yield (buybacks divided by the S&P 500's market cap) on a quarterly basis (annualized) going back to 2004.

While getting cash back to shareholders is the whole point of investing in stocks (timing of returning that cash is potentially a broader question), the higher buyback yield is not necessarily a great thing; it is a great thing if the cash is buying back stock when cheap... not when expensive. And when were corporations buying back the most? Q2 and Q3 2007 (i.e. the market peak). The lowest? Q1 and Q2 2009 (i.e. the market trough).

Professor Damodaran does provide some rationale / discussion into why the trend has moved to buyback vs. dividend:

• Manager compensation: buybacks increase the price of stock for manager option grants
• Uncertainty about earnings: buybacks are a lot more flexible than a steady dividend
• Changing investor profiles: investors that are more focused on stock price
• Higher earnings per share: less shares outstanding = more earnings per share (tested here)

Source: S&P

Consumer Confidence Improves in January

Marktetwatch details:

An index of U.S. consumer confidence jumped to 60.6 in January, reaching the highest level since May, with more consumers optimistic about income and jobs, as well as current business conditions, the Conference Board reported Tuesday.

Note that this does not mean consumers are confident, just that their confidence has improved. Taking a look at the details behind the index we see an improvement across the board, but from very low levels.



Source: Conference Board

Case Shiller Index Points to Housing Double Dip

Source: S&P

Europe's Industrial Rebound: The Power of Mean Revision

RTT News details:

Eurozone industrial new order growth quickened in November, led by Portugal, Finland and Germany, official figures showed Monday. Industrial orders rose 2.1% month-on-month in November, after rising 1.4% in October, the European Union Statistical office Eurostat said. On an annual basis, industrial order growth accelerated to 19.9% from 14.8% recorded in the preceding month. The rise exceeded the 17.5% increase economists had forecast.

The below charts show that much of this is purely a rebound off lows, with a relatively strong relationship between those reporting strong results in 2010 off of lower figures in 2009.





Source: Eurostat