Wednesday, September 30, 2009

Chicago PMI... New Order Bounceback, Bounces Back

One more day of travel for the "real job" so expect to see tomorrow's pertinent data points (ISM, Personal Income, Auto Sales, Construction Spending) a day late.

This morning's data point as detailed by Peter Boockvar (via The Big Picture):

The September Chicago PMI was much weaker than expected and back below 50 at 46.1. Expectations were 52 vs 50 in August.

Maybe call it the Clunker hangover as New Orders fell 6 points to 46.3, a 3 month low and Order Backlogs fell 9 points to 36.7. Employment was little changed at 38.8. Inventories got a lift, rising 11.4 points to 38.9 and it’s the highest since Nov ‘08 likely following an increase in auto production where plants went back online in July.

Bottom line, manufacturing will be a key contributor to the Q3 GDP rebound with the question always being sustainability but with final demand still sluggish, there is only so much of an improvement that we will see and today’s number highlights that risk.

Source: News.Briefing

Full Circle... Treasuries vs. High Yield

Last week EconomPic recapped the amazing returns high yield bonds have posted to date in 2009 after a tumultuous 2008. Below is a chart of that performance on a monthly basis vs. treasuries.

So, where does that leave high yield and treasury investors cumulatively from the beginning of 2008?

Unbelievably in exactly the same place.

Source: Barclays High Yield / Barclays Treasury Indices

Japanese Industrial Production

Bloomberg details:

Japanese manufacturers increased production for a sixth month in August, capping the longest stretch of gains in 12 years, as emergency spending by governments worldwide rekindled global trade.

Factory output rose 1.8 percent last month after climbing 2.1 percent in July, the Trade Ministry said today in Tokyo. Economists surveyed by Bloomberg forecast a 1.8 percent gain.

Output has rebounded since a record collapse in the first quarter of the year left half the nation’s factory capacity sitting idle. The gains in production since March have yet to generate employment, trigger capital investment or return companies like Toyota Motor Corp. to profit.

“We’re not going to fall back into recession, but these production increases don’t bring us back to where we started,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. “You’ve still got a lot of excess capacity.”

The good... industrial production is up 21% from its lows. The bad... it is still 24% below its peak.

Source: Meti.GO

Tuesday, September 29, 2009

Consumer Confidence Trends Down

Details of this morning's release (traveling) per Money.CNN:

The Conference Board, a New York-based business research group, said its Consumer Confidence Index fell to 53.1 in September from an upwardly revised 54.5 in August.

Economists were expecting a reading of 57, according to a consensus survey.

"Consumers remain quite apprehensive about the short-term outlook and their incomes," said Lynn Franco, director of the Conference Board Consumer Research Center. "With the holiday season quickly approaching, this is not very encouraging news."

The index component that measures consumers' assessment of the present situation fell to 22.7 from 25.4. The expectation index, which gauges consumers' outlook over the next few months, dropped to 73.3 from 73.8 last month.

Source: Consumer Board

Home Prices Stabilizing

Bloomberg details:

Home values in 20 U.S. metropolitan areas declined less than forecast in the year ended in July, a sign the housing slump that led to the worst recession in seven decades is abating.

The S&P/Case-Shiller home-price index fell 13.3 percent in July from a year earlier, the smallest drop in 17 months, the group said today in New York. Adjusted for seasonal variations, the gauge rose 1.2 percent from the prior month.

Foreclosure-driven price declines, low borrowing costs and government tax credits for first-time buyers have lifted home sales for much of this year, helping to slow the decline in prices.

Stability in real-estate values and rising stock prices may help set the stage for a recovery in the consumer spending that accounts for two thirds of the economy.

Source: S&P

Chicago Fed National Activity Index Pointing to More Muddle

Modern Distribution Management with the nice recap of yesterday's release (traveling all week so expect some untimely posts):

The Chicago Fed National Activity Index was -0.90 in August, down from -0.56 in July. Three of the four broad categories of indicators made negative contributions to the CFNAI in August; the production and income category made a positive contribution to the index for the second consecutive month.

The three-month moving average, CFNAI-MA3, improved for the seventh consecutive month. At -1.09 in August (up from -1.61 in the previous month), the CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.

The production-related indicators made a smaller positive contribution of 0.29 to the index in August compared with 0.45 in July. Industrial production increased 0.8 percent in August, down slightly from 1.0 percent in the previous month; and manufacturing production increased 0.6 percent in August after rising 1.4 percent in July. July and August marked the first consecutive increases in industrial production since November and December 2007.

For more on the linkage between the rolling three-month figure and GDP go here.

Source: Chicago Fed

Have We Learned Anything?

Lots of interesting information in the Office of the Comptroller of the Currency's Quarterly Report on Bank Trading and Derivatives Activities for the Second Quarter of 2009. Regarding Derivatives... risk is highly concentrated and banks are making a lot of money from them. In other words, not much has changed.

Most derivatives activity in the U.S. banking system continues to be dominated by a small group of large financial institutions. Five large commercial banks represent 97% of the total banking industry notional amounts and 88% of industry net current credit exposure.
The top five exposures (in order) are held at JP Morgan, Goldman Sachs, Bank of America, Citibank, and Wells Fargo. Looking at Table 4, we can compare the credit equivalent exposure of those banks' derivatives (equal to the netted current credit exposure and potential future exposure of those contracts) to the risk based capital of those banks (tier one plus tier two capital).

After the financial system blew up the global economy, the key question is why isn't the use and concentration by these large banks being reduced (we know how well the banks' controls worked out last year)?

I think this quote from Satyajit Das (hat tip Paul Kedrosky) sums it up nicely:
Warren Buffet once described bankers in the following terms: “Wall Street never voluntarily abandons a highly profitable field. Years ago… a fellow down on Wall Street…was talking about the evils of drugs…he ranted on for 15 or 20 minutes to a small crowd…then…he said: “Do you have any questions?” One bright investment banking type said to him: “yeah, who makes the needles?

Derivatives and debt are the needles of finance and bankers will continue to supply them to all the Dr. Jekyll’s and Mr. Hyde’s alike for the foreseeable future as long as there is a buck to be made in the trade.
Source: Treasury

Monday, September 28, 2009

Deflationary Spiral in Japan?

Bloomberg reports:

Japan’s consumer prices fell at a record pace in August, heightening the risk that prolonged deflation may hamper the country’s recovery from its deepest postwar recession.

Prices excluding fresh food slid 2.4 percent from a year earlier, topping the previous month’s 2.2 percent decline, the statistics bureau said today in Tokyo. The drop matched the median estimate of 28 economists surveyed by Bloomberg News.

Companies from Fast Retailing Co. to Sony Corp. are lowering prices to attract consumers who face record unemployment and plunging wages. A return to deflation that the economy only shook off in 2005 may weigh on growth as consumers and companies cut back spending in anticipation that prices will keep falling.

“We’ll soon start to see that there isn’t enough domestic demand to push up wages,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “As households’ spending power falls, there’s concern that this deflation will lead to further deflation -- in other words, that we’ll enter into a deflationary spiral.”

Source: Stat.Go.JP

Dow Breakdown

Performance of the 30 companies that made up the Dow at the beginning of 2009.

Financials not starting with "Citi" / technology

Financials starting with "Citi", bankrupt autos, energy, and non-cyclicals that didn't sell off as much in 2008 (i.e. Verizon, McDonalds, Walmart)

Source: Dogs of the Dow

Emerging Market Bonds Roar

Last week we took a look at the stunning rally in corporate bonds. Now lets take a look at Emerging Market bonds. FT Alphaville reports the large flows coming into the asset class:

Investors poured $727m into emerging market bond funds during the week to September 23, the equivalent of 1.3 per cent of these funds’ total assets and the highest inflow since February 2006, EPFR data show.

Global and US bond funds posted their biggest inflows since early 2001, when EPFR first started tracking them.

Funds dedicated to emerging market equities attracted $2.1bn, a 39-week high, which brought the tally for 2009 to $18.2bn. Funds targeted at investments in Europe, the Middle East and Africa attracted $208m; LatAm funds drew $241m and funds targeted at Asia (excluding Japan) attracted $427m.
These flows have resulted in spreads coming in by more than 400 bps since the end of the year, propelling the asset class up more than 30% year to date.

Source: Barclays

Sunday, September 27, 2009

Lions Winning Streak at One

ESPN details:

Matthew Stafford held his head down on the bench for the final snap.

Dominic Raiola couldn't watch, either, fearing a 20th loss in a row and 100th setback of his nine-season career.

When Detroit's leaders looked up and saw Washington was out of time, they saw what they were hoping to see Sunday.

Lions 19, Redskins 14.

Believe it.


"We not only got the monkey off our back, we got King Kong off our back," said Lions owner William Clay Ford. "I'm hoping that this gets us over that hump and gives us a winning attitude."

Detroit (1-2) hadn't won since Dec. 23, 2007 and its 19-game skid matched the second longest in NFL history. The Lions no longer have to hear about Tampa Bay's record 26-game losing streak.

Source: Football.About

Friday, September 25, 2009

EconomPics of the Week (9/25/09)

Economic Data
New Home Sales Skew to Low-End
GDP Growth by Metro Area (2008)
Staycation Phenomenon
FHFA Home Price Index
Eurozone Industrials Continue to Bounce off Lows
Leading Indicators Show Continued Strength
Income for the Masses Not Keeping Up... For 40 Years
Durable Goods "Surprises" to Downside

Asset Prices
Corporate Bonds: From Cheap to Rich
Evaluating Equities
Crude Inventories Up, Price Down
Market Down Big... Market Up Big... Market Typical Continues to Go Up

Banker Pay Limits on the Way?

And with the video of the week, I present the best dancing baby in the world...

New Home Sales Skew to Low-End

Bloomberg detail:

Sales increased 0.7 percent to a 429,000 annual pace, less than anticipated, figures from the Commerce Department showed today in Washington. The worst
housing slump since the Great Depression may be drawing to a close as first-time buyers rush to take advantage of tax credits before a November deadline. Federal Reserve policy makers this week pledged to keep borrowing costs low to sustain the recovery past the time when the government stimulus measures wane.

“At least we continue to see an upward trend in place,” said Ellen Zentner, a senior economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York. “New-home sales are battling existing-home sale prices, which are incredibly attractive with the foreclosure pricing.”

Below is a chart showing how the new home market has dramatically shifted to the lower end market (or is it just that the values have shifted there due to lack of demand?).

Source: Census

Durable Goods "Surprises" to Downside

We noted last month that the jump in July durable goods came from a spike in commercial plane purchases, thus no surprise here that durable goods came full circle. Thus our surprise that "real" reporters and/or "real" analysts were "surprised".

ABC news reports:

New orders for long-lasting U.S. manufactured goods fell unexpectedly in August, dropping by their biggest margin in seven months, following a plunge in commercial aircraft orders, the government reported on Friday.

The Commerce Department said durable goods orders tumbled 2.4 percent, the largest decline since January, after rising by a revised 4.8 percent in July.

Analysts polled by Reuters forecast orders rising 0.5 percent in August. Compared with the same period last year, new orders were down 24.9 percent.

Source: Census

Saddled with Debt

Ed from Credit Writedowns reminds us that national income alone does not provide a full snapshot on the well being of the economy.

GDP is an inadequate measure for understanding how healthy an economy is. Nobel Prize-winning economist Joseph Stiglitz brought this issue into the public domain last week when he spoke in Paris, calling the focus on GDP a ‘fetish’ and favoring a broader measure of economic health.

Stiglitz was responding to reporters after a study on alternative measures of economic growth commissioned by French president Nicholas Sarkozy was released. At the time, Bloomberg reported Stiglitz saying:

GDP has increasingly become used as a measure of societal well-being and changes in the structure of the economy and our society have made it increasingly poor one…

So many things that are important to individuals are not included in GDP. There needs to be an array of numbers but we need to understand the role of each number. We may not be able to aggregate everything together.

Stiglitz is talking about the social costs of growth here. Think about pollution, infant mortality rate, healthcare, life expectancy, or rates of obesity to name a few. And his views are echoed in an article which prompted this tirade from me called “Emphasis on Growth Is Called Misguided" by Peter Goodman in [the] New York Times. Read it.

However, in this (go here to read it) post, I want to focus on one narrow issue: debt.

Ignoring the massive spike in government related debt (Federal, State, AND Local) for the time being and focusing instead on household liabilities as a percent of the national income, we see mortgage debt is now at 70% of GDP (more than double the level seen in the 1980's and 50% more than that seen at the beginning of this decade) and consumer debt is now at 18% of GDP.

The importance of all this is of course that all that debt that has been added over the years has been a huge contributor to that GDP. The fear is that the debt has just pulled a lot of consumption forward rather than infrastructure or other long term investments that will provide future growth opportunities.

Source: BEA / Federal Reserve

Thursday, September 24, 2009

Banker Pay Limits on the Way?

Bloomberg details:

World leaders are poised to crack down on banker pay and better coordinate economic policies as they seek to temper the excesses that helped trigger the worst financial crisis since the Great Depression.

President Barack Obama and other Group of 20 leaders meeting in Pittsburgh are uniting behind a plan to force banks to tie compensation more closely to risk and tighten capital requirements, U.S. officials said.

“There will be broad agreement around many elements of a compensation package,” Michael Froman, Obama’s liaison to the G-20, told Bloomberg Television today.
For those newer to EconomPic, let me dust off the old Investment Banking Bonus Matrix to show everyone how things currently work in the banking world.

As for the new limits... I will believe it when I see it.

Source: EconomPic

GDP Growth by Metro Area (2008)

BEA details:

In 2008, real GDP by metropolitan area declined in 111 of the 366 MSAs. Many metropolitan areas in the Sun Belt, which had previously experienced large growth in the housing market, were adversely affected by protracted housing declines. Much of the decline in the housing-related industries (construction and finance and insurance) can be attributed to metropolitan areas in Arizona, California, Florida, and Nevada.

In contrast, growth accelerated in 146 metropolitan areas, most notably in areas where natural resources and mining industries are concentrated such as Casper, WY and Grand Junction, CO. Grand Junction had the fastest real GDP growth (12.3 percent) of any metropolitan area in 2008 due largely to growth in natural resources and mining. The professional and business services industry group also showed strong growth in 2008, contributing the most to real GDP growth in 112 metropolitan areas.

What isn't mentioned is the horrendous turn of events for those metro areas within Indiana, devestated by the downturn in the RV business.

Source: BEA

Corporate Bonds: From Cheap to Rich

In March I loaded up on both investment grade and high yield bonds (see Are Corporate Bonds a Screaming Buy?) as a long term investment (the key I thought was long term).

Yet by July, I was already beginning to cash out of the positions as I thought they had rebounded too far, too fast. 5% more gains for the investment grade and 20% for the high yield universes gets us to a point where bonds went from CHEAP to what now seems RICH in just about 6 months. Bloomberg details the implications and relative value of bonds to equities:

Stocks offer greater value than bonds and are poised to “catch up” with a rally in corporate debt, according to Rod Smyth, chief investment strategist at Riverfront Investment Group LLC.

The CHART OF THE DAY shows that the difference in yield between corporates and 10-year Treasury notes has narrowed more quickly than the Standard & Poor’s 500 Index has risen since March. The yield comparison is based on a Moody’s Investors Service index of Baa-rated debt. Smyth and colleagues Bill Ryder and Ken Liu had a similar chart in a report yesterday.

Since December, the yield gap has fallen to 2.9 percentage points from a peak of 6.2 points, according to data compiled by Bloomberg. This spread is near its lowest level since January 2008, when the S&P 500 was about 22 percent higher.

“‘Animal spirits’ are returning to Wall Street even if they are still suppressed on Main Street,” the report said. Spreads have narrowed so much that stocks have more room to rise than bonds, especially as earnings increase, it added.

Smyth isn’t the only strategist whose focus has shifted to shares. “Equities no longer look expensive relative to corporate bonds,” Andrew Garthwaite, a global strategist at Credit Suisse AG, wrote in a Sept. 18 report. He downgraded credit, or bonds, based on relative value.
While I am much less than bullish (actually bearish) on equities than those quoted in the article, it is suspicious how far high yield has rebounded in 2009 as compared to equities. While those BBB bonds (as detailed in the article) are now up more than 20% YTD, high yield corporate bonds are now up almost 50%.

Source: Barclays


NY Times details:

Steep investment losses have caused painful cutbacks at some of the nation’s best-known universities over the most recent fiscal year and have prompted questions about whether their endowments are taking too much risk.

But as the schools, one by one, disclose their numbers, the managers of these endowments are indicating their continued support for a diversified portfolio chock full of alternative investments like hedge funds, private equity and real estate — the very things that have caused so much trouble.

This portfolio strategy is sometimes called the Swensen model, after David F. Swensen, who heads the Yale endowment. On Tuesday, Yale disclosed the details of its year, reporting an investment loss of 24.6 percent, compared with an average drop of 17.2 percent for large funds, according to the Wilshire Trust Universe Comparison Service.

Mebane Faber (of World Beta) sums it up best, by not saying much at all:

Draw your own conclusions on endowment performance last year, fiscal year ending June 30th. Below are facts.

Here are those facts in chart form...

In their defense...
Preferring to emphasize their long-term results, the chiefs of many big endowments, including Harvard, Yale and M.I.T., have indicated they are sticking with their models. Notably, Mr. Swensen did not lay out Yale’s asset allocation for the coming year in his statement — something he has done in years past.
If they are perpetual, long term is what matters... but is there any entity that actually is perpetual?

Source: World Beta

Wednesday, September 23, 2009

Crude Inventories Up, Price Down

WSJ details:

Crude oil futures prices sold off sharply early Wednesday, dropping below $69 a barrel after U.S. weekly data showed rising inventories and a sharp drop in demand. Light, sweet crude oil for November delivery had been down about $1.25 a barrel ahead of the data release Wednesday, under pressure from strength in the dollar.

But crude dropped swiftly through the $70 and $69 levels after the Energy Information Administration reported a 2.8-million-barrel rise in crude oil inventories for the week ended Sept. 18. Analysts surveyed by Dow Jones Newswires had expected crude stocks to drop by 1.5 million barrels.

And the importance of stocks and the price (both figures below are YoY changes)...

Source: EIA

Staycation Phenomenon

Wikipedia details the staycation phenomenon:

A staycation (also spelled stay-cation, stacation, or staykation) is a neologism for a period of time in which an individual or family stays at home and relaxes at home or takes day trips from their home to area attractions. Staycations have achieved high popularity in the US during the financial crisis of 2007–2009 in which unemployment levels and gas prices are high. Staycations also became a popular phenomenon in the UK in 2009 as a weak pound made overseas holidays significantly more expensive.

The term was added to the 2009 version of the Merriam-Webster's Collegiate Dictionary.

And here is is in chart form...

Source: BEA

FHFA Home Price Index

Missed this yesterday. Peter Boockvar (via The Big Picture) details (bold mine):

The July FHFA Home Price Index rose 0.3% month over month, 0.2% less than expected and June was revised lower to a gain of 0.1%, down from the initial report of up 0.5%. Year over year prices are down 4.2% and are (only) 10.5% below its April 2007 high. According to the FHFA, their index is back to the March ‘05 level.

This measure only includes those single family mortgages that are backed by Fannie Mae and Freddie Mac (i.e. conforming loans), but is well diversified geographically (includes all 50 states). The Case-Shiller HPI index in contrast includes jumbo loans and also doesn’t include data from 13 states. Its 20 city index is down 33% from the all time high. The Case-Shiller index is value-weighted, “meaning that price trends for more expensive homes have greater influence on estimated price changes than other homes.”

FHFA’s index “weights price trends equally for all properties.” Thus, take today’s info in conjunction with others to get a more complete picture on pricing trends.
Not surprising that the areas showing the strongest rebound are those areas that had already seen a significant correction to the downside (i.e. Pacific, South Atlantic, and Mountain were those areas with the largest year over declines).

Month over Month by Region

More broadly, prices within the FHFA index have appeared to stabilize...

Historical Index

But, the improvement we've seen in lower to middle-income homes backed by conforming loans doesn't mean all markets have improved. As Calculated Risk warned backed in June (bold mine):
The FHFA index is based on GSE (government sponsored entity) loans (i.e. Fannie Mae and Freddie Mac conforming loans), and as the most recent data showed, a higher percentage of the problem loans were non-GSE private label loans. Also, the FHFA misses many larger loans in general, and high end prices have held up better so far - but that will change when people realize there are few move-up buyers.
In other words, the problem areas had been concentrated within the lower-end subprime / Alt-A funded home purchases (not these homes within the FHFA index) and now the problems are drifting to higher-end homes which aren't getting the benefit of first time buyers (i.e. for high-end homes move up buyers can be throught of as the equivalent) and/or a tax credit.

We're not out of the woods just yet...

Source: FHFA

Eurozone Industrials Continue to Bounce off Lows

The Good

Forbes details:

Euro zone industrial new orders rose more than expected month-on-month in July on demand for durable consumer goods, reinforcing expectations that the single currency area will exit recession in the third quarter.

Industrial orders in the 16-country area rose 2.6 percent against June, the European Union's statistics office said on Wednesday. They were 24.3 percent lower than a year earlier.

"This reinforces hopes and expectations that the euro zone will return to growth in the third quarter," said Howard Archer, economist at IHS Global Insight.

Economists polled by Reuters had expected a 2.0 percent monthly increase and a 25.0 percent year-on-year fall.

The Perspective

Source: Eurostat

Tuesday, September 22, 2009

Evaluating Equities

While the days of buy and hold may be over, below is a simplified way to think about forecasting equity returns over the long haul that I've found useful. I'll walk through the methodology, show some supporting charts, then detail my expectations for the equity asset class over the mid-to-long term. I'd love to hear all of your thoughts.

Equity Returns: In Theory
The earnings of a company are what you own as an investor and earnings are paid out to investors through dividends. Another way to say this is that the value of a company is the present value of all future dividends. Thus, equity returns = dividend (or corporate earnings) growth + the dividend yield (what isn't returned to an investor in the form of a dividend now, is reinvested, and grows at that same growth rate as earnings).

Quick and Dirty Estimation of Earnings Growth
A quick and dirty way that has been used to forecast future equity returns is to use nominal GDP growth as a substitute for earnings growth because in theory, earnings growth should be roughly equal to the growth of the economy. The reason why this is quick and dirty is because it is just that... quick and dirty. So dirty in fact, that it is wrong. Over the past 60 years, earnings (and thus dividend) growth of S&P 500 companies hasn't kept up with that of the broader economy (AND has recently taken a massive dive). Want an even quicker and dirtier method? Assume 6% (see here).

Historical Data
Below is a chart showing just that, the growth of the economy and that of both earnings and dividends.

Click for Giant Chart...

In theory, since the growth rate of dividends and earnings have been lower than that of nominal GDP, the S&P 500 should have underperformed the nominal growth rate of equities ex dividends. However, as the chart below shows, just the opposite has occurred as investors have flocked to the asset class (think 401k's and baby boomers) driving up the price to earnings ratio (i.e. the price individuals are willing to pay for each $1 of earnings) since 1949.

Equity Forecast
Forecasts should never be thought of as an exact science, but rather a framework based upon assumptions that can / will change frequently. That said, using the quick and dirty method as a starting point, I'd go with 2.5% long-term GDP growth (in real terms) with 2% inflation to get nominal economic growth at 4.5% (low, yes). Add to that the 2.5% current dividend yield and we get a 7% long-term return for equities as an asset class. BUT, based on the data I presented above, I'd reduce this by roughly 1% as dividends have underperformed nominal GDP to get a 6.0-6.5% outlook over the long-term. Less fees associated with transacting (hat tip MAB) and I'll reduce this to 5.5%-6.0% for the broader investment community.

Of course there are scenarios that could play out over both the near-term (continued P/E compression from strong flows into the asset class) and long-term (economic growth reverting back to the long-term mean faster than I suspect) that would mean higher returns, but there are also plenty of surprises that may happen to the downside (one specifically being the possibility of the P / E ratio trending lower in coming years).


Source: Irrational Exuberance / BEA

Market Down Big... Market Up Big... Market Typical Continues to Go Up

While this may not be as catchy as the Pub Power signal detailed last week, what I'll dub as the "5 and 5" and "1 and 1" is rather interesting.

What is it?

I noticed that at the end of August, the year over year change in the S&P index was more than 21% down, but the 6 month change was more than 25% up. The bearish case is that things have come too far, too fast, whereas the bullish case is that we still have ground to make up.

Lets see what history has to show us. First I took a look at S&P 500 data from 1950 onward. Since that date, whenever the S&P was down more than 5% over the previous 12 months at month end, BUT 6 month returns were up more than 5% (we'll call this "5 and 5"), we have seen a continued rally in the S&P 500 in each of the 11 months (all within five periods - 1958, 1962-3, 1970, 1975, and 1988).

Digging Deeper

Each of the red points in the chart below represent those periods shown above (i.e. the "5 and 5"), but now we go back 100 years to 1909. The blue dots are similar, but represent the forward 12 month change in the S&P 500 when equities dropped more than 1% over 12 months, but have gained more than 1% over the more recent 6 month period (i.e. the 1 and 1").

Historical data seems to indicate that now may in fact be a time to buy as the average 12 month change in the index following a "1 and 1" is a robust 13.1% and a "5 and 5" is an uber-strong 16.7%.


The only time we saw a massive (i.e. greater than 20%) loss during a 12 month period following a "5 and 5" was in May 1930, a period in which the market had first rebounded from the initial market crash of what would be the Great Depression. By the Summer of 1932, the S&P was more than 80% lower.

And as an anonymous reader comments:

Buying at these levels is basically gambling (unless you can find some out of favour sectors that haven't run). I am bullish long term but you cant just keep going up parabolic. Reality has to set in eventually. Whether we consolidate from here, correct meaningfully, or go sideways is anyones guess.

Traders Narrative with an alternative view showing what typically happens when the market is more than 20% above it's 200 day moving average.

Source: Irrational Exuberance

Monday, September 21, 2009

Leading Indicators Show Continued Strength

The Conference Board details:

LEI for the U.S. increased for the fifth consecutive month in August. Supplier deliveries, the interest rate spread and stock prices made large positive contributions to the index this month, more than offsetting the substantial negative contribution from real money supply. The six month change in the index has picked up to 4.4 percent (about an 8.9 percent annual rate) in the period through August, up sharply from -2.4 percent (a -4.7 percent annual rate) for the previous six months. In addition, the strengths among the leading indicators have been widespread in recent months.
It is interesting to see that the money supply is no longer a "wind at the sail" (i.e. it is decreasing).

Source: Conference Board

Income for the Masses Not Keeping Up... For 40 Years

A few weeks ago I detailed the divergence in household incomes showing the top 5% of earrners gained mightily over the past 40 years relative to lower level incomes. But in comparing all those income brackets to the growth of the broader economy (on a per capita basis), even those top 5% earners' didn't keep up with the pace.

So over the past 40 years, the only individuals that have seen their incomes increase at / or greater than the level of GDP were those earning more than those in the top 5% (think top 1%).

Source: Census

Friday, September 18, 2009

EconomPics of the Week (9/18/09)

Asset Classes

"Pub Power" Signals a Buy for Equities
Housing Starts Relatively Flat

Economic Data

Government Intervention
The Greatest Story Never Told
Consumers and Businesses Rebuilding Balance Sheets
The Auto Rebound... Now What?

Capacity Utilization vs. Unemployment
New Orders Up Relative to Hiring = Economic Rebound
Expect a Slow Motion Recovery

Philly Manufacturing Strong
Retail Sales in Perspective
Production and Capacity Utilization Up
Consumer Prices (August)
Empire Manufacturing Breakdown
Retail Numbers Strong.... That is if You Ignore the YoY Change

UK Inflation Stickier than Expected
Japanese vs. European Production

And again... your video of the week (Time to Pretend by MGMT):

New Orders Up Relative to Hiring = Economic Rebound

Reader GreenAB responds to my post on the Philadelphia Manufacturing survey:

Same odd picture like in the Empire Manufacturing Survey; New orders coming in nicely, but companies are not hiring, but even a slight increase in firing.
My reply:
In looking at the data, it looks like this has been a pretty typical pattern, especially coming out of recessions. New orders come back, but hiring is delayed until the economic rebound has been proven (hence why unemployment is a lagging indicator).
Here is what I was referring to...

Below are dates of the most recent recessions. Note when they ended and compare those dates to the chart below, which shows the difference between New Orders and Hiring per the Philly survey (I apologize in advance for the broad 10 year gaps... I'll work to tag the chart itself with those dates this weekend):
  • Recession of 1969-70
  • 1973 oil crisis; 1973–1974 stock market crash
  • 1980 recession
  • Early 1980's recession (Jul 1981–Nov 1982 )
  • Early 1990's recession (Jul 1990–Mar 1991 )
  • Early 2000's recession (Mar–Nov 2001 )
  • Current Recession

While I am not predicting smooth sailing (i.e. a massive economic rebound) ahead, it looks like the worst of this recession is behind us.

Source: Philly Fed

The Greatest Story Never Told

The title may be a bit much, but it has a nice Friday morning punch to it. In response to my post on the decline in household and business debt (and spike in federal debt), reader mab details:

Look at the Flow of Funds net lending and net borrowing. As your chart shows, absent the Government, borrowing was hugely negative. But even more telling is that absent the Fed, lending was negative by over a TRILLION!
And here is a chart of that net lending...

And while I would love to rant about this, I couldn't do a better job than mab.
The TARP was used to fill huge black holes in bank balance sheets - we new that going in. But the notion that banks would ever use the money to lend to tapped out households or to small businesses was a ruse. What's worse, now there is even less incentive for banks/creditors to restructure mortgage debts.

I'd like to know how much of the TARP and AIG pass through bailouts are being used to speculate on existing paper assets. If people only understood the size and scope of this historic rif-off.

The biggest swindle in history. The greatest story never told.
Source: Federal Reserve

Thursday, September 17, 2009

Consumers and Businesses Rebuilding Balance Sheets

The Fed released the latest Flow of Funds statement, which contains a lot of interesting information (Calculated Risk put the "jump" in wealth in perspective). I'll focus my efforts on the shift we are seeing away from consumer and business borrowing (rebuilding their balance sheets) to that of government borrowing, which is more than picking up the slack. Per Bloomberg:

Consumer debt fell at a 1.7 percent annual pace, the fourth consecutive decline. Mortgage borrowing dropped at a 1.4 percent pace from April through June, while other forms of consumer credit fell at a 6.5 percent rate, the Fed’s report showed.

Total borrowing by consumers, businesses and government agencies increased at an annual rate of 4.9 percent last quarter, led by a 28 percent surge in federal government debt, even as household and business debt fell.

Source: Federal Reserve

Philly Manufacturing Strong

The Philadelphia Fed details:

The region’s manufacturing sector is showing signs of growth, according to firms polled for this month’s Business Outlook Survey. Indexes for general activity, new orders, and shipments all registered positive readings for the second consecutive month. Indexes for employment, work hours, and the prices received for manufactured goods remained negative, suggesting continued weakness.

Source: Philly Fed

Housing Starts Relatively Flat

Marketwatch reports some slightly misleading data:

New construction of U.S. houses increased in August, the Commerce Department estimated Thursday. Starts rose 1.5% in August to a seasonally adjusted 598,000 annualized units roughly in line with the 600,000 pace expected by economists surveyed by MarketWatch. This is the highest level of starts since last November. Starts of new single-family homes fell 3.0% to 479,000 in August, for the first decline in six months. Starts of large apartment units jumped 25.3% to 119,000.
Did large apartments jump 25.3%? Sure, but that is off a near all-time low (the all time low was in April) and is still 49.8% below levels from August 2008.

But as I've detailed before, as we work off existing inventory, less starts = good.

Source: Census

The Auto Rebound... Now What?

More on yesterday's industrial production jump. The power of government intervention (i.e. Cash for Clunkers). St. Joe News with the details:

Industrial production rose in a fairly broad-based pickup in August, according to the Fed data. The central bank also said production jumped 1 percent in July, twice as much as originally reported. Car manufacturing drove that gain.

Factory output — the single-biggest slice of overall industrial activity — also rose for the second straight month. It posted a 0.6 percent gain in August, following a 1.4 percent rise in July.

Auto production led the way, rising 5.5 percent last month due mainly to the government’s Cash for Clunkers program. That followed a whopping 20.1 percent gain in July.

It will be interesting to see the figures for September.

Source: Federal Reserve

"Pub Power" Signals a Buy for Equities

I love catchy / data-mined equity buy signals with decent explanations. My personal favorite had been the recently renamed Demi-Ashton buy signal (previously known as the boring Middle-Young or MY ratio... yawn). BUT, may I present the latest and greatest... the "Pub Power" signal.

What is the "Pub Power" signal you ask? It is the relative strength of 'food establishment and drinking places' sales vs. grocery sales (as expressed in year over year terms). The relevance? Well, the data seems to suggest that "Pub Power" = Strength in the Dow, one year forward.

But, any good / catchy buy signal needs an interesting explanation, so here goes (and feel free to pile on in the comments section). The relative strength (i.e. demand) of restaurants relative to cooking at home shows the following characteristics:

  • Consumer confidence
  • Exuberance
  • Spending power
  • Wealth
Or something like that... On the other hand, when times are tough, individuals are more likely to eat at home, causing year over year sales at pubs to decline relative to grocery stores.

Here's another look at that data through August 2008 data (thus including the August 2009 Dow).

That's a 16 year average return of a 9% annual Dow return since 1993 (as far back as I could get the retail sales data) when the Pub Power > 0 and -1.7% annual Dow return since 1993 when Pub Power < 0.

Source: Census

Wednesday, September 16, 2009

Retail Sales in Perspective

In response to my post on retail sales, an anonymous reader stated:

July sales are not only down YoY on 2008, they are below July sales in 2006. With any adjustment for inflation, they would be below July 2005.
Actually, it is even worse. Looking at all retails sales (seasonally adjusted), August 2009 sales are below November 2005 sales and inflation adjusted (quick and dirty using headline CPI), below November 2001 sales.

Source: Census

Production and Capacity Utilization Up

Marketwatch reports:

The output of the nation's factories, mines and utilities rose 0.8% in August. Output was also much stronger in July than first estimated, the Federal Reserve said Wednesday. The August increase was just a bit better than expected by economists surveyed by MarketWatch. Analysts had been expecting a 0.7% gain. Capacity utilization - a gauge of slack in the economy -- rose to 69.6% in August from a revised 69.0% in July. There were gains across the board in August. Manufacturing expanded 0.6% in August. Excluding autos and auto parts, manufacturing rose 0.4%.
An economic rebound is definitely under way, how fast and far that rebound is remains to be seen. That said, I am impressed by the strength in output outside of the manufacturing sector. As I detailed yesterday, capacity utilization has historically had a strong relationship with employment.

In addition, the increase in capacity utilization decreases the worry over deflation (though not out of the woods yet). The relationship between capacity utilization and inflation was detailed here and we may be seeing the beginning stages of what may be a reflationary period that the broader investment community had been worried about for some time.

Consumer Prices (August)

Marketwatch reports:

In the past 12 months, the consumer price index has fallen 1.5%, largely because energy prices have dropped 23% over that period.

Core consumer prices - which exclude food and energy prices to get a better look at underlying inflation - rose 0.1% in August. The core CPI is up 1.4% in the past year, the smallest year-over-year gain since February 2004.

Both the CPI and the core CPI came in a tenth of a percentage point higher than estimated by economists surveyed by MarketWatch ahead of the report.

Core prices were held down by a 1.3% decline in new car prices, reflecting the discounts given to buyers that were subsidized by the government's cash-for-clunkers program. It was the largest monthly decline in car prices in 37 years.

Not noted here is the spike in used car prices. As detailed on EconomPic previously, when you take the supply of future used cars away (i.e. by "clunking" them), the price jumps... 25.3% annualized in fact. And used cars are not inconsequential; they make up more than 1/3 the level of new cars.

Now to the charts...

Year over Year CPI

CPI is beginning to level (and turn) in year over year figures. Looking at the breakdown of CPI, we see transportation costs (mainly fuel) being the driver. As high oil prices begin to fall off the year over year baseline, expect headline CPI to begin moving up, even if core prices continue to move down due to economic weakness.

Source: BLS

Tuesday, September 15, 2009

Empire Manufacturing Breakdown

Bloomberg details:

Manufacturing in the New York region grew in September at the fastest pace in almost two years, a sign factories are helping pull the economy out of a recession.

The Federal Reserve Bank of New York’s general economic index increased to 18.9 from 12.1 in August, the bank said today. Last month’s report was the first time since April 2008 that the reading was above zero, the dividing line between expansion and contraction for the Empire State index.

“Manufacturing is coming back and it’s not just in the auto sector,” said Robert Stein, senior economist at First Trust Advisors in Lisle, Illinois. “For the first time in a long time, at the early stages of an economic recovery it’s the old-time industries that are leading. And much of that has to do with the fact we had a huge inventory reduction.”
And here is the chart showing just that.

Now lets look at the details. The chart below shows the components of both the current and future expectations (six months out) of the survey. Expectations are clearly that the worst is now behind us.

I thought it would be interesting to see how accurate the survey was in predicting September's environment. Comparing the current conditions from September to this past March's six month forward outlook (i.e. September), we can get a sense and which areas have outperformed and/or underperformed.

So how'd respondents do? Besides inventories, lots of underpeformance (most notably in pricing and general business conditions).

The good news in all of this... we are an optimistic bunch!

Source: New York Fed

Capacity Utilization vs. Unemployment

August's capacity utilization figure to be released tomorrow is forecast at an improved 69.6% from 68.5%. The importance of that figure is it tends to be a leading indicator of inflation. Per the NY Fed:

The level of capacity utilization in the industrial sector provides information on the overall level of resource utilization in the economy which may in turn provide information on the likely future course of inflation.
More importantly perhaps, capacity utilization has been a rather reliable leading indicator of the future unemployment rate. The below chart shows just that with unemployment rate in blue (left hand side) vs. capacity utiliation in red (reversed on the right hand side).

Though it should be noted that August should include a substantial bump in capacity utilization via the cash for clunkers program. Thus, it will important to look at the breadth of any rebound in utilization.

Expect a Slow Motion Recovery

David Rosenberg of Gluskin Sheff details the need to look beyond the stimulus induced rebound (which has been rather remarkable in its speed) and to focus on the more probable secular environment that we will need to live with:

We are in a post-bubble credit collapse environment. The transition to the next sustainable bull market and economic expansion is likely years away. The most notable “non-confirmation” signpost for this bear market rally in equities is the 3-month Treasury bill yield, which is just 13 basis points away from zero. This could be Japan all over again.

His concern is that all the recent news / market recovery will be taken as a true economic recovery. As such, the fear is the stimulus that has accounted for as much of this growth, will be unwound too soon. Back to David:

The global economy is being held afloat by rampant fiscal stimulus, which is accounting for all of this year's growth rate and 80 pct of next year's. This is very much like the 1930s when the pace of economic activity was in need of major stimulus. The sharp downdraft in the equity market and the steep recession in 1937-38 after the government had the temerity to remove the life support fully eight years after the initial shock is case in point.

Retail Numbers Strong.... That is if You Ignore the Massive YoY Drop

Marketwatch details:

Sales were stronger than the 2.3% expected by economists surveyed by MarketWatch, largely because of widespread sales gains outside of the gas stations and the auto lots.

Sales are down 5.3% compared with a year earlier. The figures are adjusted for seasonal differences, but not for price changes.

Stronger than expected? Yes. Strong. No.

Source: Census