Wednesday, June 30, 2010

Small Business Finally to Get Help?

To follow up on this morning's ADP release, here are some more details as to why this time (yet again) is different (i.e. worse).

Unlike during the 2001 recession when small business employment "hung in there" with less of a downturn than mid and larger firms (my guess is this was due to those individuals being laid off from larger firms, starting their own smaller firms) and led the recovery, small businesses have shed almost as many jobs as mid-sized firms and almost double large size firms.

Which is why it is nice to FINALLY see legislation targeting this area. Per the NY Times:

Senate Democratic leaders introduced their long-awaited small-business jobs bill on Tuesday — and in an indication of how urgently legislators viewed the matter, the Senate voted to begin debating the measure even before its details were finalized.

The bill, crafted jointly by the Senate’s finance and small-business committees, makes many temporary, and some permanent, changes to popular Small Business Administration programs that provide government guarantees for loans to small firms, including higher loan limits and higher guarantees.

Source: ADP

ADP Employment Shows Weakness

The WSJ details:

Private-sector jobs in the U.S. increased by 13,000 last month, according to a national employment report published by payroll giant Automatic Data Processing Inc. and consultancy Macroeconomic Advisers.

Economists had expected ADP to report a jobs gain of 60,000 for June. The estimated change in employment for May was revised to a gain of 57,000 from an increase of 55,000 first reported.

The ADP survey tallies only private-sector jobs, while the Bureau of Labor Statistics' nonfarm payroll data, to be released Friday, include government workers.

The Census Department had hired hundreds of thousands of temporary workers for the census but began to lay off many of them in June.

As a result, said economists surveyed by Dow Jones Newswires, the BLS will probably report June total payrolls dropped by 110,000, following a jump of 431,000 in May. Among those economists forecasting private-sector jobs within the BLS data, the median projection is for a gain of 110,000.

Source: ADP

Tuesday, June 29, 2010

Consumer Confidence Crushed

The AP details:

Americans, worried about jobs and the sluggish economic recovery, had another relapse in confidence, causing a widely watched barometer to tumble in June.

The Conference Board, a private research group based in New York, said Tuesday that its Consumer Confidence Index dropped almost 10 points to 52.9, down from the revised 62.7 in May. Economists surveyed by Thomson Reuters had been expecting the reading to dip slightly to 62.8.

June's reading marked the biggest drop since February, when the index fell 10 points. The index had risen for three straight months since then.

Both components of the index — one that measures how consumers feel now about the economy, the other that assesses their outlook over the next six months — dropped. The Present Situation Index decreased to 25.5 in June from 29.8 in May. The Expectations Index declined to 71.2 from 84.6.

Source: Conference Board

The Chinese (Reporting) Bubble

It looks like construction isn't the only inflated item coming out of China. Bloomberg details:

The Conference Board revised its leading economic index for China to show the smallest gain in five months in April, in a release that contributed to the biggest sell-off in Chinese stocks in more than a month.

The gauge of the economy’s outlook compiled by the New York-based research group rose 0.3 percent, less than the 1.7 percent gain it reported June 15. The Conference Board said in an e-mailed statement that the previous reading contained a calculation error for floor space on which construction began.
Blame needs to go to the Conference Board, but the lack of transparency coming out of China didn't help.

Source: Conference Board

Japanese Recovery Fading?

Bloomberg details:

Japan’s industrial production and household spending slipped in May and the unemployment rate unexpectedly increased, in signs that the recovery of the world’s second-largest economy may slow.

The figures underscore Japan’s reliance on exports to propel its rebound, and follow calls by the U.S. for Japanese policy makers to stimulate domestic demand. For Prime Minister Naoto Kan, facing a mid-term election in less than two weeks, the figures may pose a warning that it’s too soon to tighten fiscal policy to shrink the nation’s debt.

The jobless rate reached 5.2 percent in May, the third straight monthly increase and the highest level since December, the statistics bureau said in Tokyo. Household spending retreated 0.7 percent from May 2009, the office also said, a day after another report showed retail sales slowed last month.
The chart of unemployment by age group also shows the structural issue facing Japan as a slowing economy and aging population makes it more difficult for younger workers to break into the workforce.

Source: Stats.Go.JP

Monday, June 28, 2010

Texas Manufacturing Contracts in June

BizJournals details:

The manufacturing sector for the 11th Federal Reserve District declined in June, a month after the Federal Reserve Bank of Dallas reported a three-year high in activity. The 11th district includes Texas, northern Louisiana and southern New Mexico.

The June report from the Federal Reserve Bank of Dallas said the production index – an indicator of manufacturing conditions – dropped sharply in June, and that all other factory activity indices also declined.

Source: Dallas Fed

After-Tax Income Distribution

The CBO (via Greg Mankiw):

Growth in after-tax income has been uneven across the income distribution, with upper-income groups seeing more rapid growth than lower-income groups. Much of that increase reflects the pattern of before-tax income growth.
This is rather striking... only the top 5% highest earners (and mainly the top 1% earners) have seen their after-tax real income grow at a faster pace than real GDP per capita.


Adam (a reader) with a key point:
I think the more important conversation, though, is about equality of opportunity, not equality of results. That doesn't lend itself to simple data analysis unfortunately.
Source: CBO

Good to Be Government

The obvious argument for the trend shown below is that government workers provide needed services to the public, thus were able to keep their jobs during the downturn.

Good to be government none-the-less.

Source: BEA

Sunday, June 27, 2010

The Impact of a Tax Hike

In John Mauldin's latest missive The Risk of Recession, he claims a double dip is likely... especially if taxes are increased via an expiring Bush tax cut. While my expectation is that higher taxes are inevitable (and needed), I don't expect a double dip (if we end up going the austerity route... all bets off).

One of the reasons for our difference of opinion is due to a misinterpretation of research I believe he made regarding the impact of a tax hike on economic growth. To John:

I am on record as saying I think there is a 50-50 chance we slip back into recession in 2011, as I think the economy will soften in the latter half of the year and a large tax increase in 2011 (from the expiring Bush tax cuts) will tip us into recession.

This was not based on data, but rather on research which shows that tax cuts or tax increases have as much as a 3-times multiplier effect on the economy. If you cut taxes by 1% of GDP then you get as much as a 3% boost in the economy. The reverse is true for tax increases. Christina Romer, Obama's head of the Council of Economic Advisors, did the research along with her husband, so this is not a Republican conclusion.

If the economy is growing at less than 2% by the end of the year, then a tax increase of more than 1% of GDP could and probably would be the tipping point. Add in an almost equal amount of state and local tax increases (and spending cuts) and you have the recipe for a full-blown recession - at least the way I see it.
Christina Romer's research does hypothesize that a 1% increase in the tax rate causes a 3% decline in economic output, but not in the way he implies. Her conclusion (the report can be found here) showed that:
  • The 3% impact occurred over 3 years (see the chart below), not 1 year; the impact in year 1 was estimated at 1%
  • The decrease ignored the other side of a tax hike... the impact of the additional revenue
Estimated Impact of a 1% Tax Hike (figure 4 - page 57)

Using John's example... if the economy is growing by a bit less than 2% at year end, then the US economy will likely not have a recession based on Christina Romer's research (2% growth > the 1% impact in year 1) all else equal. If the additional revenue from the 1% tax hike is used to pay for something with a high multiplier (i.e. extension of unemployment benefits or state aid to eliminate the need to cut jobs), in theory the hike could actually cause a net increase in GDP (unlikely, but throwing it out there).

More important (and why I think we need higher taxes), is that we are approaching a point where an increase in taxes won't necessarily pay for anything new, but will be needed to simply pay for what was already spent. Outside of an unexpected economic rebound, to balance our budget we will need to:
  • Cut services and public jobs
  • Increase taxes
  • Do both
In an ideal world, the United States will be able to hold off from any of the above options until the economy is back on track. We may even have a small window where we can 'spend vs. cut' or 'cut taxes vs. hike' in an attempt to boost the economy, but in my opinion these just delay the inevitable and make the outlook even worse.

Friday, June 25, 2010

Picks of the 'US is Now a Soccer Nation' Week (6/25/10)

Economic Data
Does Germany Benefit from Austerity?
GDP Revised Down to 2.7%
Durable Goods Mixed... Reverse of April
Staycation... Slow Retreat
On the Relative Strength Within Europe
Chinese Currency "Soars"

Investments / Asset Classes
P/E Ratio: Deflators and the LONG Term
Corporate Profits Continue to Bounce Back
Zombie Nation
Today was a Good Day
Get Low, Get Low, Get Low, Get Low
Existing Home Sales Disappoint
New Homes Sales.... Looooookkkkkk Ouuuuttttt Beeeellllooowww

Hey... Whacha Doin?
South America World Cup Dominance

And your video of the week (sure to give any U.S. soccer fan the shivers), The World's Reaction to Landon Donovan's Game Winning Goal (or at least America's Reaction):

Today Was a Good Day...

Just in time for the weekend...

Corporate Profits Continue to Bounce Back

Credit Writedowns details:

Corporate profits were revised higher to 8.0% from 5.5%, which is the same as in Q4. Corporate income taxes also rose and the increased government revenue is one the reasons why the size of the monthly Treasury auctions have been reduced slightly. On an after tax basis, corporate profits rose by 5% rather than the early estimate of 2.1%.

Source: BEA

GDP Revised Down to 2.7%

Marketwatch details the revision from 3.2% --> 3.0% --> 2.7% Q1 GDP:

U.S. real gross domestic product for the first quarter was revised down to an increase of 2.7% annualized from the earlier estimate of a 3.0% rise, the Commerce Department said Friday. Economists surveyed by MarketWatch expected first-quarter growth to be unrevised at up 3.0%. The revision to first-quarter GDP was largely due to weaker consumer spending and a widening trade deficit.
Breakdown of Q1 GDP

Revisions from Preliminary to Final Q1 GDP

Source: BEA

Thursday, June 24, 2010

Zombie Nation

Professor Pinch (hat tip Abnormal Returns) discusses the remarkable performance of high yield corporate issuers:

According to Fitch, the high yield default rate went from 13.7% with 151 defaulters last year, to a forecasted 1% default rate for this year.
His theory why:
My theory is interest expenses have taken such a dramatic cliff-dive it has only served to help high yield companies in managing interest costs and as a result their weighted average cost of capital.
In other words, low interest rates are allowing zombie corporations to stick around (i.e. their business models may be dead, the economic environment may be dead, but low financing costs allow them to remain "alive"). But why would someone invest in a company that just a living dead entity. Bloomberg details:
“High yield is the place to be,” said Manny Labrinos, a money manager at Nuveen Investment Management who oversees $1.8 billion of fixed-income assets. “Sub-par growth is somewhat of a Goldilocks scenario because it means rates stay low and people are still going to reach for yield.”
Investors are willing to take the risk due to the perceived relative value of high yield issuers. The below shows the yield to worst "YTW" of the high yield index vs. the five year treasury yield (the durations of the two are similar, thus the comparison).

This second chart is the ratio between the two. What it shows is the years to yield "YTY" (this type of metric is typically used to value muni bonds) to see how many years of treasury interest high yield bonds are currently yielding (or the more simple explanation, the ratio between the two).

With a yield to worst of 9% vs. just 1.9% for a 5 year treasury bond (or 4.8x more than similar duration Treasuries) we can see the appeal of the investment, but can they remain "alive".

Source: Barclays Capital

Get Low, Get Low, Get Low, Get Low

Thanks to Lil Jon for the headline of the post... Peter Boockvar via The Big Picture details:

Outside of the late ‘08, early ‘09 panic into US Treasuries where the 10 yr yield got to 2.06%, the 10 yr bond yield is now at the lowest level since at least 1962 (as far back as Bloomberg goes) at 3.07%, breaking the June ‘03 level of 3.11% less than 2 weeks before Greenspan cut the fed funds rate to 1%.
Add high quality spread to the equation and we get an even lower figure. The aggregate bond index (i.e. the Barclays Capital Aggregate made up mainly of Treasuries, Corporates, and Agency MBS), which EconomPic detailed a few weeks back:
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).
Hit a new 2.94% low as of yesterday's close.

Source: Barclays Capital

Durable Goods Mixed... Reverse of April

The AP reports:

Factory orders for big-ticket manufactured declined in May as demand for commercial aircraft dropped off. But excluding transportation, orders rose as manufacturing continued to help drive the recovery.

Demand for durable goods fell 1.1 percent last month, the Commerce Department said Thursday. It was the first decline in six months, following April's strong 3 percent increase.

But without the volatile transportation sector, orders climbed 0.9 percent. The increase was driven by a 5.6 percent uptick in orders for machinery.
As detailed above, the drop in transportation (led by a 30% drop in non-defense aircraft) led the decline after a 200% spike in April.

Source: Census

Staycation... Slow Retreat

EconomPic first highlighted the "staycation" phenomenon last year (i.e. choosing to vacation at home). Since that time, tourism has rebounded within the U.S. albeit to a much lower level than pre-crisis.

Note these figures were only recently released through Q1. I'm interested in what happens this summer... will travelers bounce back following a hiatus in vacation travels over the past few years, will recent market volatility / continued employment issues keep travelers at bay, and/or will a strong dollar prevent foreigners from visiting / push high-end travelers (i.e. those that have bounced back with regards to consumption) to travel abroad instead of keeping the $$ in the U.S.

Source: BEA

Wednesday, June 23, 2010

New Homes Sales.... Looooookkkkkk Ouuuuttttt Beeeeellllooooowwwwww

When EconomPic posted last month's new home sales data, we titled the post New Home Sales Jump... Test Comes Next Month. So how'd we do?

Not so good... a 32.7% drop to a new record low.

Smoothed over Six Months

Source: Census

On the Relative Strength Within Europe

Eurostat details:

Based on first preliminary estimates for 2009, Gross Domestic Product (GDP) per inhabitant expressed in Purchasing Power Standards (PPS) varied from 41% to 268% of the EU27 average across the Member States.

In Finland, France, Spain, Italy, Cyprus and Greece, GDP per inhabitant was within 10% of the EU27 average. Ireland, the Netherlands, Austria, Sweden, Denmark, the United Kingdom, Germany and Belgium were between 15% and 35% above the average, while the highest level of GDP per inhabitant in the EU27 was recorded in Luxembourg.

Source: Eurostat

Tuesday, June 22, 2010

Hey... Whacha Doin?

The BLS released its annual "whacha doin?" survey (i.e. time spent in primary activities for the civilian population survey). The below details what the average person is up to on an average day by age group.

The average member of the U.S. population (drumroll please):

  • Works 3.5 hours...
  • Sleeps 8.5 hours [~90% of the 'personal care" time]...
  • Shops 3/4 hour...
  • "Leisures" 5 1/4 hours...
Per day!

Must be nice...

Source: BLS

Existing Home Sales Disappoint

Existing home sales data disappointed, as predicted by Tom Lawler yesterday via Calculated Risk:

When I add everything I have up, and make estimates for areas where I couldn’t
find any reliable data, I come up with an estimated seasonally adjusted annual rate for existing home sales that is much smaller than I would have expected a few weeks ago – something in the range of 5.83 to 5.84 million, which would translate into an unadjusted YOY sales gain of around 20.5 to 20.6%, and would be a boatload under consensus.

Of course, my regional tracking – which until the last few months has easily produced a better-than-consensus estimate, of late has been low to the downside. More troubling (to me, at least), I’ve had trouble “reconciling” to the NAR data even after getting state/local realtor sales data not available until the day of the existing home sales report (or later in some cases!).

Nevertheless, the “raw” data I’ve seen so far suggests that existing home sales in May will come in well under “consensus” – for reasons that are unclear, and until recently to my surprise.
Actual figures came in below even Tom's low ball estimate at 5.66 million annualized, just about the level seen back in October '02.

Source: Realtor

Does Germany Benefit from Austerity?

Germany's control over the monetary and fiscal policies of nations across Europe may become a growing theme as German incentives are all kinds of twisted... a weak Europe actually benefits Germany (at the possible expense of the broader EU). Any weakness creates a de facto monetary easing policy for the German nation. Not only does it decrease their borrowing costs in a flight to quality, but the benefit of a cheap Euro resulting accrues almost solely to the German economy via exports as other European nations cannot compete with German productivity at a tied exchange rate.

As the WSJ detailed last week:

The benefit is being felt by countries such as Germany, whose economy depends more on trade than others in the region. So while Europe's near-term growth outlook brightens, the growing gap between the haves and have-nots will likely keep Greece, Spain and others under pressure as they face fiscal austerity.

Despite the euro's roughly 15% depreciation against the U.S. dollar over the past six months, it is unlikely that Greece and Spain will be able to export their way to faster growth, given that their economies aren't very tied to global trade. That leaves painful spending cuts and years of stagnation as their only hope of gaining ground against their more productive peers to the north.

Such a solution implies years of subpar growth as those economies revamp their labor markets and budgets, and could fuel tensions in Europe over whether Germany's export-dependent growth model is destructive for the region.

And news coming out of Germany this morning shows the impact this export boom may have on broader German business. The FT (hat tip Dead Cats Bouncing) details:

German businesses have shrugged off Europe’s debt crisis with corporate optimism in the continent’s largest economy rising to its highest level for more than two years.

The Munich-based Ifo institute reported that its business climate index had risen from 101.5 in May to 101.8 this month – the highest level since May 2008.

The unexpected rise – almost certainly boosted by a weaker euro – highlights the robustness of the export-led upswing underway in Germany. It will help calm fears that Europe’s economic recovery will be blown off course by fiscal austerity programmes and weaknesses in the continent’s banking system. “The economic recovery is continuing,” said Hans-Werner Sinn, Ifo’s president.

Germany is under international pressure to support its economic recovery and to take steps that boost domestic demand and thus lift prospects across the 16-country eurozone. The Ifo index’s increase is unlikely to deflect much of the criticism, however, especially as it is not yet clear how long the upswing will last.

So, while many are questioning why Germany is playing the austerity card on their European neighbors (as well as themselves) make no mistake... along with a past that dictates austerity over deficit spending, a weaker Europe resulting from austerity may be immensely beneficial to the German economy.

Source: Ifo

Monday, June 21, 2010

South America World Cup Dominance

I knew the South American teams were playing well, but had no idea this well... The Miami Herald details (bold mine):

Coming into this World Cup, there was much talk about how the winter weather might benefit European teams, and how African teams would be inspired by the fervent support of the continent, the comfort of native cuisine and the familiar sound of the deafening vuvuzelas.

But 10 days into the tournament, European heavyweights are bickering and struggling, most African teams are facing elimination, and it is the fun-loving, fancy-passing South Americans who are dominating with a 7-0-2 record (now 8-0-2 following Chile's 1-0 win) and a 17-4 (now 18-4) scoring edge after Brazil's 3-1 victory against Ivory Coast on Sunday night at Soccer City.
More broadly comparing the two regions of the world...

To my European readers I give you this... it could be worse. You could be host continent and 1-7-4 in the tournament.

Source: ESPN

Chinese Currency "Soars"

Kidding about the "soars", but the removal of the peg to the dollar was still the big news to come out over the weekend. Bloomberg details:

The yuan rose the most since a July 2005 revaluation and forwards jumped after China’s central bank ended a two-year peg before a Group of 20 summit this week.

The currency advanced 0.42 percent to 6.7976 per dollar as of 5:30 p.m. in Hong Kong, the biggest gain since July 2005, according to data compiled by Bloomberg. The 12-month non- deliverable yuan forward rose 1.1 percent to 6.6425, implying traders are betting on a 2.3 percent appreciation.

A stronger yuan will help curb inflation in the world’s third-largest economy and shift investment toward service industries from export-manufacturing, the People’s Bank of China said yesterday. The move may also deflect criticism from President Barack Obama and other G-20 leaders, who say China relies on an undervalued currency to promote overseas sales.

“It will be a very gradual appreciation but it could be front-loaded,” said Nizam Idris, a Singapore-based currency strategist at UBS AG, the world’s second-largest foreign- exchange trader. “The yuan will appreciate about 4 percent this year and 5 percent next year.”
Below we see the move... minimal (i.e. the "largest in 20 months" was only 0.4%) to say the least, but in the right direction (if in fact it is anything more than political maneuvering).

Source: Exchange-Rates

Sunday, June 20, 2010

P/E Ratio: Deflators and the LONG Term

Doug Kass via The Street (hat tip Abnormal Returns):

There exists numerous price/earning multiple deflators and non traditional headwinds to growth. These factors don't necessarily prevent an extended bull market, but they will most certainly deflate price/earnings multiples and put a cap on the market's upside potential:
  • rising taxes
  • fiscal imbalances in federal, state and local governments;
  • the absence of drivers to replace the prior cycle's strength in residential and nonresidential construction
  • the long tail of the last credit cycle (Greece, Portugal, Spain, etc.)
  • inept and partisan politics
Lets take this concept and look at how it fits in over the LONG term (i.e. based on history, do we seem extended). The chart below shows the CAPE (Professor Shiller's Cyclically Adjusted Price / Earnings Ratio), as well as the twenty year average of the same going back 100 years to 1910 (actually, the 20 year average data goes all the way back to 1890).

Note that in previous cycles we have seen the CAPE move well below 10 at the low, whereas this cycle "only" hit a low of 13 in March '09. Interestingly enough, that 13 CAPE ratio is higher than each of the three 20 year average lows, seen at each low point throughout the last century.

Source: Irrational Exuberance

Friday, June 18, 2010

EconomPics of the "Let's Go Mets" Week

About to head over to Yankee stadium to watch the Mets beat up on the Yanks after winning 7 in a row... wish me luck.

Leading Economic Indicators... "Man Made" Strength
Philly Fed's Weak Economic Report
What Stinkin' Inflation?
Real GDP per Capita Recovery... a Ways to Go
The Global Recovery and Backward Looking Data
China's Lagging, Leading Indicators Spike... Due to a Bubble?

When ETN's Attack: VXX
Back to the Pub Power

Spending: The Will vs. The Wallet
China Holds ~13% of all U.S Debt Held by the Public

And your video of the week? Game 6 of the '86 World Series (one of my first clear sports memories).

When ETN's Attack: VXX

A lot of growing chatter around the VXX ETN (exchange traded note) to play volatility, but heed this warning.

First, what is it? Per Yahoo Finance:

The investment seeks to replicate, net of expenses, the S&P 500 VIX Short-Term Futures Total Return Index. The index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract.
As VIX and More has detailed on multiple occasions:
VXX may be even less effective as a long-term holding. As previously discussed in VXX Calculations, VIX Futures and Time Decay, VXX suffers from negative roll yield when the VIX is in contango (when the front month VIX futures are less expensive than the second month futures), with the result that VXX loses a few cents each day due to rebalancing, just like a tire with a slow leak.

The current contango in the VIX is striking. This morning, when the spot VIX was 24, the one month forward contract was almost 27. If you buy this one month out contract (i.e. what the ETN does) and nothing changes in one month, the contract loses more than 10% (24/27-1 = 11%) of its value.

As long as contango remains steep, you better be damn sure volatility is going higher if you do anything, but short this security.

Source: Bloomberg

Leading Economic Indicators... "Man Made" Strength

Back from a week and a half cross-country tour, thus my excuse for the day late detail of the leading economic indicators. Marketwatch details:

Slower economic growth is expected for the rest of the year, with the index of leading economic indicators rising 0.4% in May, following no growth in April, the Conference Board reported Thursday.

Economists polled by MarketWatch had expected the index to gain 0.7%. While strength among the indicators has remained widespread in recent months, the six-month change in the index has slowed down to 3.9% through May, less than 5.2% for the prior six months.

"Overall, there is no question the underlying rate of increase in the index has slowed in the past couple of months, but it has not rolled over and it remains consistent with continued expansion, albeit at a slower pace," wrote Ian Shepherdson, chief U.S. Economist with High Frequency Economics, in a research note.
Take note of the details below. The drivers of the positive LEI print were due to the easy money policy (interest rate spread and money supply), rather than underlying economic growth.

Thursday, June 17, 2010

Philly Fed's Weak Economic Report

Bloomberg details:

The Federal Reserve Bank of Philadelphia’s general economic index slumped to 8 in June from 21.4 the previous month. Readings above zero signal growth.

Economists forecast the index would fall to 20, according to the median of 58 projections in a Bloomberg News survey. Estimates ranged from 10 to 24.

The figures follow a report from the Labor Department today that showed consumer prices fell in May for a second month. The Labor Department also said jobless claims rose by 12,000 to 472,000 last week.
That employment report is concerning, especially when taken in combination with the Philly Fed report's shift of employment (number of employees / average workweek) to negative territory.

Source: Philadelphia Fed

What Stinkin' Inflation? details a thought EconomPic has relayed for quite some time... that inflation is not the concern:

The CPI data for May provide further affirmation that the Fed will be on hold for some time yet. Inflation pressures are simply not a problem at this juncture. The trend in both total CPI and core CPI is clearly one of disinflation, which is apt to stoke commentary about a possible turn to a deflation environment.

Consumer prices declined 0.2% in May, slightly lower than the -0.1% decline in April. The consensus expected the index to fall 0.1%. Total CPI is up 2.0% year-over-year versus a 2.2% increase in April.

Core prices, which exclude food and energy, increased 0.1% (consensus +0.1%). The year-over-year core CPI growth rate has fallen to 0.9%, well below the Fed's target level of 2.0% - 2.5%.
Year over Year Change in CPI

Excess Capacity in the System (and the relationship to price levels)

Source: CPI / Federal Reserve

Wednesday, June 16, 2010

Spending: The Will vs. The Wallet

Spending has resumed. So who are those that have done the resumption? Gallup (hat tip The Big Picture) details:

Upper-income Americans' self-reported spending rose 33% to an average of $145 per day in May -- up from $109 per day in April 2010 and May 2009, and the highest monthly average since November 2008.
Who is not participating in the rebound? Everyone else.
Middle- and lower-income Americans' self-reported spending averaged $59 per day in May, the same as in April 2010 and May 2009.
The below chart shows the spending habits by wealth, as well as age group (and yes, there is overlap).

The difference has been labeled by Gallup as 'Frugality Fatigue' among those that CAN afford to spend (but were holding back) and those that couldn't spend (and still cannot). After all... most Americans will always have the "will" to spend (i.e. never count out the U.S. consumer), but many are finding out they no longer have the wallet (or credit) to do so:

Overall consumer spending increased 14% in May, driven entirely by the surge in upper-income spending. As a result, Gallup's May spending results seem consistent with reports from the lower- and middle-income retailers that consumer spending did not continue to improve last month. While spending was up overall in May, the flat spending numbers over the past three months among consumers earning less than $90,000 a year means weak sales for the retailers that serve them.

At the same time, May's spending illustrates that many upper-income consumers have the disposable income to increase their daily spending if they so desire. In a behavioral economics context, these consumers seemed to be holding back on spending prior to May in response to the length and depth of the recession, the financial crisis, and a general feeling of economic uncertainty.

Source: Gallup

Tuesday, June 15, 2010

China Holds ~13% of all U.S Debt Held by the Public

It looks like the media may have finally gotten the China / Treasury purchase story right. The AFP details:

China's holdings of US debt climbed to the highest level this year, the US Treasury said Tuesday even as Beijing stepped up attacks on the United States for its burgeoning debt.

The cash-rich Chinese government raised its US Treasury bond holdings to 900.2 billion dollars in April, its highest level since November 2009, while posting the second consecutive monthly rise, according to a report on international capital flows.

China remained far ahead as the top foreign debt holder, followed by Japan, which held 795.5 billion dollars in April, and third-placed Britain at 239.3 billion dollars, according to the figures.

The monthly gain in April and the previous month came after six straight months in which China appeared to reduce its Treasury holdings, or keep them flat.

While that triggered concerns Beijing was diversifying away from US bonds, some analysts said Beijing was secretly buying bonds via third countries to mask its importance as a creditor -- a role which had attracted considerable scrutiny.
EconomPic reported all along (see February's China Sells Treasuries... or Did They?), China has continuously been buying up Treasuries... as much as $400 billion in net purchases since December 2008 bringing total Treasury holdings between China and the U.K. (a top region used to make their purchases) to almost 10% of all outstanding debt and almost 15% of all outstanding U.S. debt held by the public. Putting the UK's own holdings at ~$100 billion, we have China holding around 13% of the $8.4 trillion in debt held by the public.

For full details as to why China and the United Kingdom have been combined in the chart above, go here.

Source: US Treasury

Real GDP per Capita Recovery... a Ways to Go

St. Louis Fed President James Bullard (via Calculated Risk) relays:

As of the first quarter of 2010, real GDP stands just shy of the 2008 second quarter level, so that growth of about 1.25 percent would be sufficient to allow real GDP to surpass the previous peak. At that point, the U.S. economy would be fully "recovered" from the very sharp downturn of late 2008 and early 2009.
James Bullard believes real GDP should recover this 1.25% by Q3 '10. Unfortunately, real GDP misses a major factor for the individual... the individual. Looking at real GDP on a per capita basis we see real GDP still 2.9% below pre-peak levels. To put this figure in perspective, this is the most real GDP has been below the previous peak (excluding the most recent period) since December 1982.

If the economy were to grow at its 20 year 2.5% real GDP per capita average, we're looking at Q2 '2011 to be "recovered".

Source: BEA

Monday, June 14, 2010

China's Lagging, Leading Indicators Spike... Due to a Bubble?

Bloomberg reports:

A leading indicator for China jumped by the most in 14 months, adding to signs that the world’s third-biggest economy is maintaining momentum as Europe’s debt crisis threatens to undermine the global recovery.

The measure gained 1.7 percent to 147.1 in April, compared with a revised 1.2 percent increase in March, The Conference Board said on its website today.

“China is performing among the best of any economy around the world,” Bill Adams, resident economist for the New York- based research organization, said in Beijing today.
The actual data shows the majority of this "best performing" growth came from a spike in floor space started (aligned with the Chinese construction bubble reported a month ago).

But, the good news (for China) is that this is data from April and we know Chinese exports rebounded in May. The bad news is that the European crisis that "couldn't stop this Chinese momentum" hadn't really gotten into full swing yet.

Source: Conference Board

Back to the Pub Power

I've received a few emails recently about the Pub Power equity buy signal, so here's the update. As I've said all along, the Pub Power equity signal is a catchy, data-mined, equity buy signal (with a decent explanation) that was first detailed / created by EconomPic back in September '09.

More specifically:

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.
The thought was that the relative strength (i.e. demand) of restaurants relative to cooking at home shows the following characteristics:
  • Consumer confidence
  • Exuberance
  • Spending power
  • Wealth
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. At the time the signal pointed to a further run in the Dow (up ~4% since September) and then turned negative in January (down ~5% since that time), which shows that in addition to catchy, it has recently been lucky.

But, what is the signal is telling us now?

Nothing much. The U.S. equity markets are right around fair value, but seem to indicate continued choppiness over the next 12 months. Sounds about right to me...

Scatter Plot


Source: Census

The Global Recovery and Backward Looking Data

The AP details:

Stocks extended their climb to a third day Monday following signs that Europe's economy might not be badly hurt by its debt crisis.

The Dow Jones industrial average rose about 80 points in morning trading after rising 312 points in the past two days.

Major European markets rose following a report that industrial production in the 16 countries that use the euro grew more than expected in April. The euro also rose, climbing back above $1.22 for the first time since June 4.

The production report was encouraging because investors have been concerned that government spending cuts aimed at slashing debt would hurt Europe and slow a global recovery.
Below details what the media (and markets) seem to be excited about. My issue? This is backward looking data. Austerity measures, uprisings, and market sell-offs were broadly announced in May and June. These figures are from April.

Source: Eurostat

Friday, June 11, 2010

EconomPics of the Week (6/11/10)

Economic Data
Retail Sales Fall, But Not as Bad as Reported
Consumer Sentiment Continues to Rise
I'm Outta Here!
Diverging Global Economic Recovery
Wholesales Sales and Inventories Grow
China to the Rescue
Consumer Credit Split

Federal Debt = Monetary Terrorism
Publicizing Debt in Q1
U.S. Public Debt to Surpass GDP by 2012
Trade Deficit Widens to December 2008 Levels

Investing / Other
Betting Does Not Equal Investing
The Too Big to Fail... Fail

And your video of the week... some three year old rockin' with 'While My Guitar Gently Weeps' (never thought I'd say that sentence, but he goes off mid video... for a three year old).

Consumer Sentiment Continues to Rise

Marketwatch details:

U.S. consumer sentiment rose in early June, hitting the highest level since January 2008, according to media reports on Friday of the Reuters/University of Michigan index. The consumer sentiment index increased to 75.5 in June from 73.6 in May. Economists surveyed by MarketWatch had been expecting the sentiment index to hit 74 in June. The index hit a 30-year low of 55.3 in November 2008.

Retail Sales Fall, But Not as Bad as Reported

BusinessWeek details:

Sales at U.S. retailers unexpectedly dropped in May, signaling consumers boosted savings as employment slowed and stocks fell.

Purchases decreased 1.2 percent, the biggest drop since September 2009, following a 0.6 percent April gain that was larger than previously estimated, Commerce Department figures showed today in Washington. Demand plunged at building-material stores, reflecting the end of a government appliance rebate, and sales fell at auto dealers, in contrast to industry figures which showed a gain.
Building materials (which fell back to earth following a spike in April to take advantage of the end of the tax credit) and a 20% decline in the price of oil led the fall in gasoline (these figures are nominal). Subtracting those outliers we still have a decline, which shows weakness. Just not as weak as early reports would indicate.

Source: Census

Federal Debt = Monetary Terrorism

Okay, the title may be an exaggeration, but a recent Gallup Poll (hat tip Naked Capitalism) shows how the concerns over the growing level of federal debt has moved to the forefront and to a similar level by quantity of people (perhaps not level among them) to terrorism. Yves details the opportunity for change this brings:

It would appear the ground has been laid rather effectively for (among other things) an assault on Social Security and Medicare. As we have pointed out before, Social Security is not under any immediate stress, and it would take only some minor tweaks to alleviate the (well off in the future) strains. And contrary to popular perception, the reason Medicare spending will get out of hand is due to projected medical cost escalation, not demographics.

Source: Gallup

Thursday, June 10, 2010

Publicizing Debt in Q1

The Federal Reserve details the latest flow of funds for Q1:

Debt of the domestic nonfinancial sectors is estimated to have expanded at a seasonally adjusted annual rate of 3½ percent in the first quarter of 2010, 2¼ percentage points faster than in the previous quarter. Private debt contracted again in the first quarter, while government debt continued to expand at a rapid rate.

Household debt contracted at an annual rate of 2½ percent in the first quarter, the seventh consecutive quarter of decline. Home mortgage debt fell at an annual rate of 3¾ percent, a significantly faster decline than in the fourth quarter, while consumer credit contracted at an annual rate of 1½ percent.

Nonfinancial business debt was flat in the first quarter, after four consecutive quarters of contraction.Bank loans and commercial mortgages continued to decline, while corporate bonds and commercial paper expanded.

State and local government debt expanded at an annual rate of 4¼ percent in the first quarter, about the same pace as in the previous quarter. Federal government debt increased at an annual rate of 18½ percent in the first quarter, significantly faster than in the previous quarter, but below the pace seen in 2009 as a whole.
The financial sector "shed" ~$1.3 trillion in debt (on an annualized basis) in Q1. Is anyone surprised the federal government added almost that same amount?

Trade Deficit Widens to December 2008 Levels

Marketwatch reports:

Trade of goods and services across U.S. borders softened in April and the trade deficit rose to the highest level in more than a year, the Commerce Department estimated Thursday. Imports of goods and services dropped 0.4% to a seasonally adjusted $189.1 billion while exports declined 0.7% to $148.8 billion. The trade deficit (the difference between exports and imports) rose to $40.3 billion in April from a downwardly revised $40 billion in March. It was the largest deficit since December 2008.
While volume was down in April, the below chart shows the rebound we have seen in overall trade since volume bottomed last spring. Of interest... nominal imports have risen more than exports in percentage terms (~2.5% more) reflected in the wider trade deficit (which is also due to imports having a much higher starting balance as of last spring). The bad news is that in real terms the increase in imports has actually been less than exports (~3.5% less). In other words, things we have been importing (i.e. oil) have increased in price more than things we've been exporting.

Source: Census

I'm Outta Here!

CBS News details:

One sign of better economic times is when more people start finding jobs. Another is when they feel confident enough to quit them.

More people quit their jobs in the past three months than were laid off - a sharp reversal after 15 straight months in which layoffs exceeded voluntary departures. The trend suggests the job market is finally thawing.

Some of the quitters are leaving for new jobs. Others have no firm offers. But their newfound confidence about landing work is itself evidence of more hiring and a strengthening economy.

"There is a century's worth of evidence that bears out this view that quits rise and layoffs fall as the job market improves," said Steven Davis, an economist at the University of Chicago.
Before we shout "recovery", we need to review the data. Are layoffs now below quits? Indeed, they are. But the level of quits is still WAY down.

Interesting, none-the-less.

Source: BLS

Wednesday, June 9, 2010

Betting Does Not Equal Investing

According to Dilbert creator Scott Adams (via an interesting WSJ piece 'Betting on the Bad Guys'):

When I heard that BP was destroying a big portion of Earth, with no serious discussion of cutting their dividend, I had two thoughts: 1) I hate them, and 2) This would be an excellent time to buy their stock. And so I did. Although I should have waited a week.

People ask me how it feels to take the side of moral bankruptcy. Answer: Pretty good! Thanks for asking. How's it feel to be a disgruntled victim?
But the danger of buying out of hatred can be seen with how long people have already "hated" BP (details of the hatred launch date):
On April 20, 2010, a semi-submersible exploratory offshore drilling rig in the Gulf of Mexico exploded after a blowout and sank two days later, killing eleven people and causing a massive oil spill threatening the coast of Louisiana, Mississippi, Alabama, Texas, and Florida.
At the point of the initial explosion, the stock hung in there. Once details of the spill became known... down ~15%. Once details of the spill became even more known... down ~20%. Once details became even more known... ~30%, then ~40%, then ~50%.

This of course is due to the complete lack of transparency. While I know for sure that I truly hate BP, does that mean BP is now (at a 50% discount) a good buy? No clue.

It is very possible they are, but I can also see a situation where things get much worse in the gulf and for BP, which brings me to my next point. Buying purely out of hatred is 100% not an investment decision, but rather (as the title of his article says) betting. I personally love betting, but I keep that to non-investment related matters (anyone think the Celtics are winning the series?).

But don't say Scott didn't warn you:
This would be a good time to remind you not to make investment decisions based on the wisdom of cartoonists.
And this:
Again, I remind you to ignore me.
Source: Yahoo

Wholesales Sales and Inventories Grow

The AP reports:

Inventories held by wholesalers rose for a fourth straight month in April while sales rose for a 13th consecutive time. Both gains were encouraging signs that point to a sustained economic recovery.

Wholesale inventories increased 0.4 percent last month after a 0.7 percent gain in March, the Commerce Department said Wednesday.

Sales increased 0.7 percent in April, helped by higher demand for autos, lumber, computers and electrical equipment. The rise followed a 2.4 percent surge in March.

The hope is that a sustained rise in demand will prompt businesses to step up orders and restock depleted shelves. That would give a boost to factories and prompt them to increase hiring.
As EconomPic has detailed, these figures are all in nominal terms (see here). As a result, some of April's figures look "juiced"... most notably lumber which jumped another ~10% in price during the month. More broadly, commodity prices jumped 1.94% in April (per the DJ UBS Commodity Index) hence the reason for some of the strong figures. The strength in electrical, hardware, and computer equipment is a good sign however, but is offset somewhat by machinery.



Going forward, get ready for some poor interpretation when May's figures are released next month... commodities dropped 6.9% during the most recent month, thus expect a poor headline number in nominal terms.

Source: Census