Tuesday, May 31, 2011

Gas Rules Everything Around Me

Let me quickly explain what the chart below shows...

Since 1995 (the furthest back you can easily obtain real consumption by category), nominal gasoline purchases as a percent of personal consumption has increased by 44% (gasoline was 2.8% of all personal consumption, now it is 4.0%), while it has decreased by 33% in real terms (we now consume about 5% more gas in real terms, while overall consumption is up more than 58%).

In other words, we are spending a LOT more of our paychecks on gasoline, which in turn is becoming a much smaller portion of our real consumption. It would be rather interesting to know where the U.S. economy would be if all this consumption was freed for other goods / services (i.e. the benefit for the nation of investing in alternative energy).

Source: BEA

Chicago PMI Misses

The WSJ reports that decline in the Chicago PMI (Purchasing Managers' Index) was the largest one month drop since October 2008 (i.e. Lehman). While significant, a level above 50 does indicate expansion... in this case very mediocre expansion.

Source: Chicago PMI

Thursday, May 26, 2011

Are Equities Ahead of Themselves?

The april durable goods report disappointed (i.e missed estimates and down in absolute terms) yesterday. Per the WSJ:
Durable goods orders were down 3.6% in April, compared with expectations of a 2.2% decline. Last month’s gain was revised up to 4.4% from 4.1%.

This is one more piece of evidence lining up on the side of those seeing a slowdown in the second quarter (and maybe beyond). The upward revisions to March’s numbers do ease the sting a touch, but this could bring down some second-quarter GDP forecasts.
I am less concerned with the figure as Japan weighed heavily (and the down month followed a very strong March), but I am concerned that equities are pricing in VERY strong forward expectations. The chart below attempts to segregate durable good results with companies within the industrials sector (industrials aren't a perfect fit, but pretty good). More specific, the chart compares the rolling two-year change in durable goods (new orders) with the industrials equity sector going back to data from 2005.

Part of the reason for the strong performance has been VERY strong earnings driven less by top line revenue growth, but more by widened profit margins from squeezing out costs (i.e. increased productivity through the laying off of workers) and cheap financing for corporates (see below for the huge supply of bonds at the ten year and in portion of the yield curve).

Investment Grade Corporate Bond Universe

Unless durable goods figures spike to the upside in coming months / years, this sector seems awfully ahead of itself.

to Source: Yahoo Finance / Census

Q1 GDP Unchanged at 1.8%

More trade, less consumption, more investment = net unchanged (below trend) 1.8% annualized growth.

Source: BEA

Tuesday, May 24, 2011

"No Sign of Recovery" in Commercial Real Estate

Calculated Risk details (via Bloomberg):

The Moody’s/REAL Commercial Property Price Index dropped 4.2 percent from February and is now 47 percent below the peak of October 2007, Moody’s said in a statement ...So-called trophy properties in New York, Washington, Boston, Chicago, Los Angeles and San Francisco are helping those markets avoid the drag caused by distressed asset sales nationwide, Moody’s reported.

The overall index shows “no sign of recovery,” Moody’s said.
The Moody's / REAL Commercial Property Index is in nominal terms (despite the "real" name), but still hit a post-bubble low. In real terms? 21% down since the series began back in December 2000 and 50% below August 2007 levels....

Source: MIT / BLS

Thursday, May 19, 2011

LinkedIn IPO: Is This Time Different?

I'll quickly state that in my view the answer to the title is a resounding "no". It will be interesting to see how far this can move in either direction over the short run.

As of this post, LinkedIn is valued at $11 billion. I have either lost my ability to "get it" (quite possible) or LinkedIn is simply for suckers that are buying for speculative (i.e. have no interest in understanding what they are actually buying) purposes. My initial questions:

  1. Was my assumption that the majority of people signed up to LinkedIn because they felt they "had to" or "why not" vs. they want to regular use the site incorrect?
  2. Does this imply Facebook is perhaps the largest company in the world by market value? After all, in my Google search they have 5x LinkedIn's users and 130x the page views (i.e. people actually use the site).
  3. Why can't Facebook simply add a broader "professional business" feature for those interested in connecting?
  4. Do I have absolutely no sense of the value of niche social networking?
  5. Is Monster Worldwide (an online employment company with 4x LinkedIn's 2010 revenues and priced at a 6x lower valuation) actually cheap?
  6. When can trading at almot 50x revenue (revenues were $243 million in 2010) be justified by "this time is different"?
  7. Should the CEO be happy that the investment banking consortium raised $352 million for the company or upset that it "could have" (if priced at current levels) raised more than $850 million for the same issuance?
  8. When can I buy puts and/or sell calls on LinkedIn?
Interesting analysis of what is fair LinkedIn value is over at Musings on Markets.

Update: LinkedIn closed its first day of trading with a $9 billion market cap. Still WAY too high IMO.

Leading Indicators Turn Negative in April

Bloomberg details:

The index of U.S. leading indicators fell in April after nine months of gains, depressed by a pickup in jobless claims that reflects temporary setbacks including auto-plant shutdowns.

The Conference Board’s gauge of the outlook for the next three to six months decreased 0.3 percent after a revised 0.7 percent gain in March, the New York-based group said today. Economists forecast a 0.1 percent increase, according to the median estimate in a Bloomberg News survey.
The chart below shows the broader concern of what will happen to the US economy when the Fed is no longer as accommodating as they have been with monetary easing (low interest rates + QE + QEII). Excluding those levers they can pull, leading indicators were down 0.65 month to month.

Source: Conference Board

Wednesday, May 18, 2011

Japan's Nominal Economy Approaching 20 Year Low

Bloomberg details:

Japan’s economy shrank more than estimated in the first quarter after the March 11 earthquake and tsunami disrupted production and prompted consumers to cut back spending, sending the nation to its third recession in a decade.

Gross domestic product contracted an annualized 3.7 percent in the three months through March, following a revised 3 percent drop in the previous quarter, the Cabinet Office said today in Tokyo. The median forecast of 23 economists surveyed by Bloomberg News was for a 1.9 percent drop.

The March disaster hit an economy already weighed down by years of deflation and subdued consumer spending.
While real GDP was down 3.7% in the quarter (annualized basis), nominal GDP was down an even higher 5.2% due to continued deflation. The chart below shows that nominal GDP is now at an almost 20 year low, hitting the lowest point since June 1991.

For a country indebted with an increasing amount of nominal debt, it makes you wonder how they will ever be able to get out of this situation.

Source: ESRI

Monday, May 9, 2011

Secret Sauce Continues to Grip It and Rip It

The secret sauce was first revealed back in July 2008 when I had about 50 readers (and had no idea how to make charts "pretty").

What is the secret sauce? An alternative to the "sell in May, go away"; sell the S&P 500 at the end of May and then invest in the Long Government / Credit bond index (rather than sit in cash). The "strategy" (I wouldn't necessarily call it that) takes advantage of data (mining) that shows the Long G/C has outperformed the equity market for the May through October time frame. The result is better annualized performance (14.1% vs. 10.7%) with less volatility (12.1% vs. 15.8% standard deviation).

Growth of $1 (log chart shown last year here).

Rolling Ten Year Performance

Source: Barclays Capital, S&P

Friday, May 6, 2011

Cash is King

Scott Grannis of Calafia Beach Pundit points to the recent surge in the money supply as defined by M1, which consists of very liquid money (i.e. cash, checking, etc...) and notes that something seems different this time.

As this next chart shows, the growth rate of currency since mid-2010 is no longer correlating to dollar strength. In fact, currency demand has surged as the dollar has fallen. If currency demand were rising because the dollar is considered to be a safe haven during a time of crisis, why is the value of the dollar falling, and even hitting new all-time lows?
He shows the relationship in the following chart.

While he notes that M2 has not shown nearly the same growth as M1, in digging into the data this appears to be the key. The punchline is that M1 does not appear to be rising due to demand for currency (in the flight to quality nature as past periods, such as during the financial crisis), but instead appears to be rising due to the lack of demand for a few components that make up the M2 money supply (and not M1).

These two components are time deposits and money market accounts, which historically have compensated investors with a premium, at the expense of liquidity. In today's low rate environment, investors simply aren't being compensated enough to give up the liquidity.

The chart below shows these four categories (note that savings accounts, which are much more similar to checking accounts these days, is not shown and has risen substantially over this time).

Source: Federal Reserve

What Job Recovery?

While the economy has shown some signs of life, the employment situation continues to disappoint. The chart belows shows the cumulative change in employment per the household survey.

The details of the last year:

People are continuing to drop out of the workforce: the employment "recovery" has seen a 1.1 million drop in the labor force even though the population has grown 1.8 million in size (i.e. 2.9 million more people can work, but are not looking for work).

The number of women and teens working has declined: only men are finding more work than at this time last year.

The decline in unemployment makes up less than 1/2 the size of those that left the workforce: those unemployed declined by 1.4 million, less than half the number that dropped out of the labor force.

Source: BLS

Thursday, May 5, 2011

Commodities Take a Spill

Almost one year to the day of the Flash Crash, commodities took a spill.

The cause? Simple. More sellers than buyers (love that answer). Why? People have been piling in to commodities (a trade you can apply a ton of leverage to) for the past 10 months. As a result, it should be of no surprise that the dollar rallied today as part of the unwind - see more here. For everyone claiming this is a crash, forget about it. Commodities, including silver, are still way up in bubble territory.

Bubble or not, I did dip my toe in and bought a bit of CEF near the close at what turned out to be a 8.5% discount on the theory of an oversold market (hat tip Kid Dynamite).


Monday, May 2, 2011

CWP=D: Part II - Wages and the Fed's Reaction

In Part I of the EconomPic "series" CWP=D (consumption without production equals debt) we took a look at one of the earlier factors that played a role in the high debt and unemployment levels we have today; namely the huge labor supply shock from emerging markets.

In Part II, we'll take a look at the impact of that labor supply shock on the price and quantity of U.S. labor and more importantly, the reaction by the Federal Reserve to that impact.

Part II: Impact of Supply Shock on U.S. Labor

Incremental cheap foreign labor should have:

  • Been disinflationary (or deflationary) for labor and goods that used that labor as an input
  • Caused NAIRU (the natural rate of unemployment) to rise
What Happened?

Well, it took a bit of time (more on that at a later date), but real wages (shown below as personal income less the amount transferred by the government) fell and NAIRU (if the employment to population ratio shown below is a good indicator - I think it is) rose (i.e. employment fell).

Personal Income

Employment-Population Ratio

If you earn less, you should in theory "have" to consume less, but the Federal Reserve having missed the fact that there was a labor supply shock overseas (causing jobs to leave the U.S.), provided a big boost that allowed consumers to spend without earning (i.e. they lowered rates in an attempt to stimulate hiring through an increase in the economy's aggregate demand).

This response is shown in the chart below which details the Fed Funds rate less the 12 month headline CPI going back to the 1960's. Real rates over the past 10 years have now averaged a negative level for the first time since inflation drove real rates negative in the 1970's.

In the past, increased consumption would have flowed through to the supply side of the U.S. economy, pushing corporations to hire U.S. labor to keep pace. This time, a large amount of the increased consumption leaked out of the U.S., which explains why we had a "jobless recovery". This helped mask the initial misallocation of capital as the rising cost of shelter and commodities were offset by "imported deflation" in the form of cheap goods utilizing the cheap labor from abroad.

To be continued...

Source: BEA, BLS, Federal Reserve