Job Postings on the Up and Up

Indeed (via Infectious Greed):

Our July Industry Employment Trends show year-over-year job posting growth in 1 out of 12 industries. Transportation and Manufacturing, often viewed as early indicators of economic improvement, enjoyed the strongest job posting gains.

Transportation has been a top performer in recent months, and became the first industry to show greater than 100% year-over-year job posting growth. The most active markets for this industry, as measured by job seeker clicks, were Houston, Atlanta, and New York.

The number of Manufacturing job postings exceeded 100,000 for the first time since we launched Industry Employment Trends in February 2009. Jobs for Maintenance Technicians and Production Supervisors received the highest number of job seeker clicks.

Healthcare job postings declined 2% year-over-year, but the industry continues to have the most jobs available.

Source: Indeed

Hedge Funds Snap Back in July

Source: Barclay Hedge

Yield Wins in the Long Run

WSJ (hat tip Abnormal Returns):

Bonds continue to trounce stocks, sending mixed signals to investors and raising the question: Are stocks too cheap or are bonds too expensive?

After consistently lagging behind bond performance this year, stocks appear historically cheap compared with bonds, offering investors reason to favor stocks, particularly if they are optimistic about the economic outlook.

EconomPic has detailed this quite a bit over the past few months:

• On the Relationship Between Earnings and Yield
• Got Yield
• Things that Make you Go Hmmm....

Back to the WSJ detailing how things have played out:

So far this year, the stock market's total return is slightly negative, while normally staid investment-grade corporate bond returns are up nearly 8%, according to Bank of America Merrill Lynch indexes. Even risk-free Treasury returns are up 6%.

This equity-like performance of high quality bonds can not continue. At some point the level of yield... wins. With the current yield to worst of the "Barclays Agg" index at less than 2.6%, investors expecting anything more than 2.6% over the next 4-5 years (i.e. the duration of the index) will be disappointed.



As for risk assets... as I detailed in my post Investing in a Low Return Environment my guess is that while high real returns are possible, there is a lot of risk out there.

And THAT'S the problem with investing these days (and not just with bonds). With risk-free rates hovering near zero, an investor must take a much larger amount of risk to achieve any level of absolute return. This concept is even more meaningful for an investment in risk assets, such as equities and commodities, as the downside risks of those asset classes are MUCH higher than even the worst case rising rate scenario on an investment in the BarCap Agg.

Source: Barclays Capital

Services Industry Expands in July

ISM details:

• "Our business conditions continue to dramatically outpace last year's." (Information)
• "Although unemployment remains high, consumer attitude has improved and translates into higher activity levels for us." (Arts, Entertainment & Recreation)
• "Capital funding remains tight." (Accommodation & Food Services)
• "Concerning forecasts and the instability in markets are continuing our focus on cautiousness." (Retail Trade)
• "We continue to see signs of improvement and a slow jobless recovery.
• We are also seeing a one-time windfall of business as a result of the disaster in the Gulf." (Management of Companies & Support Services)

Source: ISM

ADP Report: Employment Rebound Remains Tepid

ADP details:

Nonfarm private employment increased 42,000 from June to July 2010 on a seasonally adjusted basis, according to the ADP National Employment Report. The estimated change of employment from May to June was revised up slightly, from the previously reported increase of 13,000 to an increase of 19,000.

July’s rise in private employment was the sixth consecutive monthly gain. However, over those six months increases have averaged a modest 37,000, with no evidence of acceleration.

July’s ADP Report estimates nonfarm private employment in the service-providing sector rose by 63,000. Employment in the goods-producing sector declined 21,000 during July while employment in the manufacturing sector decreased 6,000, the first decrease in six months.

Large businesses, defined as those with 500 or more workers, saw employment remain flat and employment among medium-size businesses, defined as those with between 50 and 499 workers increased by 21,000. Employment among small-size businesses, defined as those with fewer than 50 workers, increased by 21,000 in July.

As a reminder, the economy needs ~150-200,000 new jobs per month just to keep up with population growth.

Source: ADP

European Consumption Stagnant

Bloomberg details:

European retail sales were unchanged in June as households reduced spending in Germany and France.

Sales in the 16-nation euro area showed no increase from May, when they rose 0.4 percent, the European Union’s statistics office in Luxembourg said today. That matched the median forecast of 19 economists in a Bloomberg News survey. From a year earlier, June retail sales gained 0.4 percent after rising 0.6 percent in May.

European consumers may remain reluctant to boost spending as companies continue to cut wage costs and eliminate jobs to shore up earnings. Unemployment held at 10 percent in June, the highest in almost 12 years.

While developed Europe consumption continues to stagnate, Eastern Europe has bounced back surprisingly well (albeit off of rather extreme lows).



Source: Eurostat

The Changing Auto Sector

In looking at auto sales by major manufacturer, the results were rather striking as Hyundai Kia's growth led to total sales which have outpaced Nissan (and is now only a thin margin from Chrysler), while Ford surged past Toyota.



Source: Autoblog / Yahoo Finance

IBM Borrows on the Cheap

Bloomberg details:

International Business Machines Corp. raised $1.5 billion at the lowest interest rate on record as the credit rally that began in June extended into August on investor confidence the economy won’t slip back into recession.

The 1 percent, 3-year notes from IBM, the world’s biggest computer-services company, have the lowest coupon of the more than 3,400 securities in the Barclays Capital U.S. Corporate Index of investment-grade company debt. Dearborn, Michigan-based Ford Motor Co.’s credit rating was lifted two steps by Standard & Poor’s.

Source: Barclays Capital

Personal Savings on the Rise

Peter Boockvar (via The Big Picture) with the details:

The Savings Rate is now approaching the 50 year average of 6.9% and will very likely head above that over the next few years as the pendulum swings in the other direction as it got as low as .8% in Apr ‘05. One hand, higher savings will put a crimp on consumer spending which of course makes up a majority of US GDP but on the other, higher savings is the fuel for investment which helps to finance businesses everywhere that are getting crowded out in their borrowing by the enormous needs of the US gov’t and some European ones.

Source: BEA

Personal Income... A Matter of Wages

Marketwatch details:

The savings rate among U.S. households rose to the highest level in a year in June as income and spending were flat, the Commerce Department estimated Tuesday.

Income was unchanged in June, failing to show growth for the first month since July 2009. Consumer spending was also flat.

The June report was slightly weaker than expected and included downward revisions to figures from April and May.

Economists had been looking for June income to rise by 0.2%, with spending pegged to increase 0.1% in a MarketWatch survey.

Consumer spending, adjusted for inflation, rose 0.1%.

Taxes paid and unemployment benefits are no longer the huge positives for personal income they have been since the downturn began in December 2007 (growing and shrinking respectively). Now, it is all about wages which have been rather stagnant.



Source: BEA

Is the German Economy Booming? No...

The Globe and Mail reports:

While the rest of Europe is just beginning to crawl out of crisis and into the first tentative rays of growth and recovery, Germany is positively booming. Export sales are up dramatically, spurred especially by Chinese sales; consumer spending has returned sharply; banks and housing markets are unscathed – and, most significantly, while the rest of the continent and the United States experienced harsh job losses, Germany has actually seen unemployment fall this year to 7 per cent, below Spain’s boom-time level.

How? By bailing out workers with a unique plan that has short-term implications that aren't all that different than what is done in the U.S.:

In a system known as kurzarbeit, or “short-time work,” the German government pays up to two-thirds of the salary of employees who would otherwise be laid off, as long as they remain employed. The employer is expected to cover any hours actually worked and to keep up their pension and benefit payments.

Similar to U.S. unemployment benefits when you think about it... workers only receive government aid if they are not working (though they are not counted as unemployed even if they are working 2 days a week), but with unique long term differences.

The good? Corporations have an incentive to keep people on the payroll even if they are not needed; should the economy rebound, these individuals will be there.

The bad? Corporations have an incentive to keep people on the payroll even if they are not needed (i.e. the same thing); over the long run this may pose a structural headwind to future growth as it will prevent new companies from emerging post-recession; one of the sole benefits of recessions historically has been the new ventures that emerge (excess workers for entrepreneurs + no opportunity cost for unemployed workers = ripe recipe for new companies).

As for the quote that the German economy is "positively booming" (note German Q2 GDP has not yet been released).



Not so much when compared to the U.S., even though the U.S. recession started first.

Source: BEA

ISM Manufacturing Growth Slows

ISM respondents report:

• "Business in July was strong, the best month since October 2008." (Fabricated Metal Products)
• "Slow economy has killed sales for new equipment orders." (Machinery)
• "Quoting activity and sales are slow, and backlog is dropping." (Computer & Electronic Products)
• "Business continues to be sluggish and has fallen slightly as the economic ills continue." (Nonmetallic Mineral Products)
• "Retailers are still unwilling to gamble on inventory." (Printing & Related Support Activities)

Source: ISM

Real GDP per Capita at September 2005 Level

Even after the "recovery", real GDP per capita is still 3% below the level seen December 2007 or roughly the level of real GDP per capita in Q3 2005.

Real GDP per Capita (Blue) - Percent from Peak (Red)


Source: BEA

Brakes Put on the Chinese Economy

Bloomberg details:

China’s manufacturing grew at the slowest pace in 17 months in July as the government clamped down on property speculation and investment in energy-intensive and polluting factories.

The Purchasing Managers’ Index fell to 51.2 from 52.1 in June, the Federation of Logistics and Purchasing said on its website yesterday. A reading above 50 shows an expansion.

A deeper Chinese slowdown could weaken a global recovery already constrained by the debt burdens and unemployment of advanced economies. While growth is cooling, China’s full-year expansion may be as much as 9.5 percent, up from 9.1 percent in 2009, State Council researcher Zhang Liqun said yesterday.

“The Chinese economy is slowing down mainly due to the ongoing property tightening measures,” said Lu Ting, a Hong Kong-based economist at Bank of America-Merrill Lynch. “Beijing will surely ramp up spending on public housing and other public works to stabilize growth.”

Source: Rebel Traders

EconomPics of the Week (7/30/10)

Economic Data

U.S.
Great Recession was Worse than Thought
GDP Growth Slows... Spike in Business Investment
Q1 GDP Revised Up One Full Point
Leading Indicators... More Fed Please
Durable Goods Off
Consumers Getting Realistic
Chicago Fed Details a Slowing Economy

Non-U.S.
Japanese Exports Halfway There
Signs of Life in Europe
The British are Coming... Back

Asset Class Performance

End of the World Trade Unwind
Earnings Season has Been Strong
Home Prices Jumped in May... Test Comes Next Month
Got Yield?
Europe's Pecking Order
Existing Home Sales Under Pressure

And your video of the week Spoon with 'Jonathon Fisk' (who happens to be opening for Arcade Fire at next week's show at MSG, which I will be attending):

Great Recession was Worse than Thought

I detailed that Q1 GDP was revised up one full point... great news right?

Not when past quarters have been revised down. Per Calculated Risk:

The recession was worse in 2008 than originally estimated.Q1 2010 was revised up, but Q3 and Q4 2009 were revised down. So the recovery is a little weaker than originally estimated.

On a cumulative basis over this time frame, the current level of GDP is 0.8% smaller than previously estimated.



Source: Calculated Risk

Q1 GDP Revised Up One Full Point

Changes to Q1 were extremely broad since the numbers went "final" a month back, GDP jumped a full point from 3.7% to 2.7% due to a large jump in non-residential investment and a huge spike in inventory build (the question is who will be buying) offset by a rather large drop in service consumption.

Click for larger image

Source: BEA

GDP Growth Slows... Spike in Business Investment

Bloomberg details:

Growth in the U.S. slowed to a 2.4 percent annual rate in the second quarter, less than forecast, reflecting a larger trade deficit and cooler consumer spending.

The increase in gross domestic product compared with a median forecast of 2.6 percent of economists surveyed by Bloomberg News and follows an upwardly revised 3.7 percent pace in the first quarter that showed a jump in inventories, according to figures from the Commerce Department today in Washington. Business investment climbed at the fastest rate since 1997.

Click for Larger Image

Source: BEA

End of the World Trade Unwind

High beta trades have done extraordinarily well in July as apparently the world wasn't ending.



What happens now will be interesting... that toe that I dipped in last month is getting ready to dry off for a bit.

Source: Yahoo

Earnings Season has Been Strong

Bespoke Investment Group (hat tip Abnormal Returns):

S&P 500 stocks have been beating earnings estimates at a much higher rate. Through yesterday, 78.8% of S&P 500 companies had beaten expectations. Interestingly, the high beat rate for the S&P 500 hasn't translated into better stock performance.

Source: S&P

Durable Goods Off

ABC News details:

New orders for long-lasting U.S. manufactured goods unexpectedly fell for a second straight month in June, posting their largest decline since August, according to a government report on Wednesday that was further evidence economic growth cooled in the second quarter.

The Commerce Department said durable goods orders fell 1.0 percent after a revised 0.8 percent drop in May.

Analysts polled by Reuters had forecast orders increasing 1.0 percent in June from May's previously reported 0.6 percent fall. But non-defense aircraft orders tumbled 25.6 percent in June after falling 30.2 percent the prior month. Overall orders were also pulled down by bookings for computers and electronic products, which saw their largest decline since October.

While not good news, to me this is just noise. Looking at the chart below, which shows the month over month change and three month change by durable good type, we can see that most sectors that fell, fell from sectors that have rebounded over the past three months (transportation equipment, capital goods, machinery, and the overall index).



My take? Things were never really as strong as market participants hoped and they aren't as weak as some may now think...

Source: Census

Consumers Getting Realistic

The Conference Board details:

Says Lynn Franco, Director of The Conference Board Consumer Research Center: “Consumer confidence faded further in July as consumers continue to grow increasingly more pessimistic about the short-term outlook. Concerns about business conditions and the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves. Given consumers’ heightened level of anxiety, along with their pessimistic income outlook and lackluster job growth, retailers are very likely to face a challenging back-to-school season.”

Source: Conference Board

Home Prices Jumped in May... Test Comes Next Month

Reuters details the jump in May, but the test comes in June post-tax credit:

U.S. single-family home prices rose more than expected in May, still reflecting robust spring sales spurred by homebuyer tax credits, Standard & Poor's/Case Shiller home price indexes showed on Tuesday.

The 20-city composite price index rose 0.5 percent on a seasonally adjusted basis in May after an upwardly revised 0.6 percent gain in April, topping the 0.2 percent rise forecast in a Reuters poll.

This was the second straight monthly rise after declines in the prior two months.

Month over Month


Six Month Change


Source: S&P

Update per reader Mike Hardy:

Case-Shiller is a 3-month average, posted with a 2-month delay.

So this should read "home prices in March April and May showed some gains", and that should be placed in the context of the tax credits, and any more current data available which shows what is happening now, as it will easily predict what the C-S index looks like in October, when the C-S release includes June/July/August - post-tax-credit collapse...

See you in August?

Got Yield?

A month back I detailed that the aggregate bond index (i.e. the Barclays Capital Aggregate made up mainly of Treasuries, Corporates, and Agency MBS) hit an all-time low yield of 2.94%. One month later that looks lofty as the yield to worst hit 2.71%.

Aggregate Bond Index YTW by Sub-Sector



Source: Barclays Capital

Chicago Fed Details a Slowing Economy

Chicago Fed details:

The index’s three-month moving average, CFNAI-MA3, decreased to –0.05 in June from +0.31 in May. The CFNAI-MA3 suggests that growth in national economic activity returned veryclose to its historical trend in June after reaching its highest level since March 2006 in May. With regard to inflation, it indicates subdued inflationary pressure from economic activityover the coming year.

Production-related indicators made a contribution of –0.11 to the index in June, down from +0.61 in May. Industrial production edged up 0.1 percent in June after increasing 1.3 percent in May; manufacturing production declined 0.4 percent in June after increasing 1.0 percent in the previous month.

Source: Chicago Fed

Japanese Exports Halfway There

Bloomberg details:

Japan’s exports rose faster than economists estimated, sustaining a boost to the economic recovery that may diminish as the yen strengthens.

Shipments abroad advanced 27.7 percent in June from a year earlier, the Finance Ministry said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg was for 23.5 percent. From a month earlier, exports fell 1.8 percent.

An increase shows that the global economy continues to recover, but (as always) the increase needs to be put in perspective. Current export levels are still only about halfway back to the level seen prior to the global economic crisis.



The question is what happens going forward? Bloomberg details that following a strong rally in the yen in recent months, officials are concerned:

Japan’s currency climbed to a seven-month high against the dollar this month, prompting officials including Trade Minister Masayuki Naoshima to warn that its appreciation may hurt the recovery. The higher local currency threatens to erode the value of earnings of exporters such as Toyota Motor Corp.

“The yen has appreciated too much,” Koji Miyahara, chairman of shipping company Nippon Yusen K.K., said last week. “I’m hoping the yen will depreciate to a range of 95 to 100 to the dollar as soon as possible.”

Currency can do wonders on a relative basis, but not when every nation intends to follow the same path. And this points to what I view as a huge problem... China, broader Europe, Japan, and the U.S. (to name a few) view exports as the key for future growth and a weaker relative currency as a huge driver of those exports.

But one nations increase in net exports (by simple math) is another nations net import. So... which nation will take all of these exports? I personally don't see many takers.

Source: Customs.GO

Europe's Pecking Order

Interesting stuff in the stress test results, outside of the results themselves. An example... the valuation haircuts used in the stress test on sovereign debt holdings. The absolute magnitude isn't nearly as interesting (to me) as the relative magnitude (i.e. Italy vs. the United Kingdom).

Source: Stress Test

The British are Coming... Back

Bloomberg details:

The British economy grew at the fastest pace in four years in the second quarter and German business confidence surged to a three-year high this month, indicating Europe’s recovery may be stronger than forecast.

U.K. gross domestic product rose 1.1 percent in the three months through June, almost twice as fast as the 0.6 percent gain predicted by economists in a Bloomberg News survey, the Office for National Statistics said in London today.

Source: Stats.UK

Leading Indicators... More Fed Please

Bloomberg details:

The index of U.S. leading indicators fell 0.2 percent in June, the second decline in three months, signaling the world’s largest economy will cool.

The decrease in the New York-based Conference Board’s gauge of the prospects for the economy in the next three to six months compares with the median estimate for a 0.3 percent decline in a Bloomberg News survey of economists and follows a 0.5 percent gain in May.

Federal Reserve Chairman Ben S. Bernanke yesterday repeated his forecast for a “moderate” pace of growth even as he said the outlook remains “unusually uncertain.” Recent reports on housing, retail sales and the labor market have pointed to weakness in the economy as the second half begins.

Stripping out interest rate spread and money supply (i.e. Fed controlled items), we have three straight months of decline for all other items.



Add caution on the fiscal front (i.e. state austerity measures) and I'm thinking we need some more monetary stimulus pronto...

Source: Conference Board

Existing Home Sales Under Pressure

CNN Money details:

The National Association of Realtors reported that existing home sales fell last month to a seasonally adjusted annual rate of 5.37 million units, down from 5.66 million in May. Sales year-over-year were up 9.8%.

Analysts had expected existing home sales to fall to an annual rate of 5.09 million units, according to consensus estimates from Briefing.com.

June sales still reflect the impact of a popular $8,000 tax credit, which is due to expire in September after Congress extended the June 30 closing deadline.

Looking at the details we see the pace in the year over year increase has slowed (with no growth in the west).



The breakdown of sales by price range is also interesting. We see relative strength in the Northeast and it looks like much of the rebound has occurred in the upper tier markets, which most likely has participants that still have access to credit (I should also note that some of this is due to the decline in distressed sales).



Source: Realtor

Signs of Life in Europe

Marketwatch details:

The European Union statistics agency Eurostat said May industrial orders across the euro zone rose 3.8% compared to April and rose 22.7% compared to May 2009.

Economists had forecast a flat monthly reading and a 20% year-on-year rise. The agency, however, revised down the April rise to a 0.6% monthly increase and a 21.9% year-on-year rise.

The PMI figures, meanwhile, are among the most closely-watched data in the euro zone. The rise in the July data reflected an increase in the preliminary euro-zone manufacturing PMI to 58.3 in July from 57.2 in June, and a rise in the preliminary services PMI to 56.0 from 55.5.

Source: Eurostat

EconomPics of the (Traveling) Week

The lack of posting (with the potential for some delayed posting) will continue through Wednesday as I am traveling (not work related for once).

Asset Classes
On the Relationship Between Earnings and Yield
More on Contango

Economic Data
Producer Prices Moderating
Empire State Manufacturing Slumps
Industrial Production Blips Higher
Chinese Economic Growth Slows... to 11.1%
Retail Sales: Small Purchases Up. Large Purchases Down
Budget Deficit: Going for Broke
Trade Imbalance Back
Small Businesses - Still Feeling the Pain
UK CPI in Check

More on Contango

FT Alphaville with a great post "Is ‘cash for commodity’ the biggest trade in town?" explaining why commodity curves are in contango (demand from passive indexers) and the benefit to producers (a cheap source of financing). I have been sitting on the below post explaining how this translates into an investment in a passive commodity strategy (hint... not good) so I thought the time was right to finally post it.

Wikipedia explains roll yield, so I don't have to:

The roll yield is the yield that a futures investor captures when their futures contract converges (or rolls up) to the spot price in a backwardated futures market. The spot price can stay constant, but the investor will still earn returns from buying discounted futures contracts, which continuously roll up to the constant spot price.

Note that in case of a market in contango, the roll yield is negative - since the price of the futures contract trades higher than the spot price, and rolls down to converge towards the spot price.

Said another way, backwardation means the futures price is below the current spot price (i.e. the curve is downward sloping), thus the investor gaining exposure via futures will outperform the underlying spot market (all else equal). Contango means the exact opposite situation (this was explained recently regarding the VIX ETN VXX in the EconomPic post When ETNs Attack). In addition, as explained by FT Alphaville, this negative drag is the "subsidized financing" received by commodity producers "selling" their commodities in the futures market.

How much of an impact does this have? Let's take a look at the impact via the excess roll yield of the S&P GSCI Commodity Index futures vs. spot.



As can be seen above, the futures market has consistently underperformed the spot market since mid-2004. By how much?



A lot...

Producer Prices Moderating

The decline in month over month PPI



Has fed into moderation of the year to year final goods figure

Source: BLS

Empire State Manufacturing Slumps

This is just one month of data, but this is an ugly report for those expecting a strong recovery. Of note... employment (slowing growth in number, decline in hours worked) and inventory (the inventory rebuild that drove the last 3 quarters growth appears to be over).

Source: NY Fed

Industrial Production Blips Higher

BusinessWeek details:

Industrial production in the U.S. unexpectedly rose in June as higher temperatures across the nation led to increased utility use.

Factories, which led the economy out of the worst recession since the 1930s, are facing less pressure to boost production to rebuild inventories as consumer spending cools. Manufacturers will instead be able to count on gains in business investment that have spurred sales and earnings at companies such as Intel Corp.

“I don’t think the industrial sector just fell off a cliff,” Paul Ashworth, senior U.S. economist at Capital Economics Ltd. in Toronto, said before the report. “We’ve seen some pretty big gains over the last few months so I would characterize it more as giving back some of those gains. There’s still a lot to support for the industrial sector.”

Looking at the longer term trend, the relative outperformer has actually been due to the surprise strength of the consumer (i.e. consumer goods). The area I am focusing on is business equipment, which has in fact rebounded sharply from what were massive lows. An increase in consumption going forward will likely need to come from an improved job market and investing in new equipment should be a sign that businesses view the economy in an improved light.

Source: Federal Reserve

Chinese Economic Growth Slows... to 11.1%

Bloomberg reports that Chinese economic growth "eased" to 11.1% in the first half (must be nice) and inflation cooled. In other news, everything in China is absolutely perfect (in every way):

China’s economic growth eased to 11.1 percent in the first half after the government succeeded in tempering credit expansion, investment spending and property speculation.

The pace compares with an 11.9 percent gain in January-March from a year earlier. Inflation cooled to 2.9 percent in June, the statistics bureau also reported in Beijing today. Industrial output rose a less-than-estimated 13.7 percent.

The figures signal a diminishing risk of economic overheating, and give Premier Wen Jiabao more room to scale back restrictions on bank lending in coming months. A deeper downturn in the nation forecast to account for one third of global growth this year would compound risks for a world recovery already clouded by European budget cuts and limited American job gains.

And some details backing that "slow" growth.



Source: Conference Board

Retail Sales: Small Purchases Up. Large Purchases Down.

The WSJ details:

U.S. retail sales tumbled a second straight time in June, falling more than expected in a sign consumer spending is slowing and draining steam from an economy saddled with high joblessness. Sales decreased 0.5%, the Commerce Department said Wednesday. Economists surveyed by Dow Jones Newswires had forecast a 0.3% decline.

The report was mixed, with some merchants reporting increases and others recording decreases. Excluding auto and gas sales, retail sales rose 0.1%. The bigger-than-expected drop in the headline number followed an upwardly revised 1.1% drop in May. Originally, May sales were estimated falling 1.2%.

Retail sales is a pivotal indicator of consumer spending, which makes up much of economic activity in the U.S. The second decline in a row dealt a blow to an economy with an unemployment rate of 9.5%, and will increase concerns about the recovery.

Looking at the components of the release, we see an interesting bifurcation...

Down were:

• Autos (data which was already available comparing the strength in June to May)
• Gas (a function of the decline in the price of oil)
• Furniture / building materials (crash in new home sales)
• Sporting Goods (no clue)

Up were "smaller" consumer goods purchases:

• Electronics (iPhone?)
• Clothing
• Health stores
• Restaurants (a good sign?)

Source: Census

On the Relationship Between Earnings and Yield

Trader's Narrative (hat tip Abnormal Returns) has an interesting piece from Wayne Waley (CTA) about the relationship between S&P earnings and interest rates. His conclusion following an analysis of data since 1970:

During periods of extremely low interest rates, stocks can reasonably be expected to sell in a P/E range somewhat higher than the historic 10-20 range. It is difficult for me to envision the P/E’s going to single digits during this bear market cycle (as has been the case in many previous inflationary bear markets) - unless the single digit P/E’s come far down the road when interest rates are much higher (above 5%).

Based on this conclusion, he believes stocks are trading at a low end of the range. There is an obvious flaw in his analysis, one that even Wayne points out in his devil's advocate 'argument that a bear would make':

If you go back to the 1950s or 1930’s you can find cases where the above interest rate/earnings relationship fails.

Actually, if you go to any point before 1970 (going back to 1910)... there were no other extended periods with a strong relationship between the two.

Earnings vs. Rates (in this case the 10 year interest rate rather than the blend)

Ten Year Rolling Correlation Between Earnings Yield and Ten Year Treasury Rates

Two questions I personally want answered:

1. What happened in 1970 that would have caused the relationship between the two (initial thoughts include demographics [i.e. baby boomers], the growth of retail investing, and the increased debt added throughout the financial system)?
2. Whatever the answer to #1, will that/those relationship(s) remain in an economy that faces deleveraging and a rebalancing within the global economy?
   

Source: Irrational Exuberance

Budget Deficit: Going for Broke

The Good = An Improvement

BusinessWeek details:

The U.S. government posted a smaller budget deficit in June compared with the same month last year as the economic recovery brought in more tax revenue.

The excess of spending over receipts fell to $68.4 billion last month from $94.3 billion in June 2009, according to a Treasury Department report issued today in Washington. It was the 21st consecutive shortfall. For the fiscal year to date, the budget deficit totaled $1 trillion compared with $1.42 trillion during the prior year to date.

The Bad = The Levels

Treasury receipts in the first 9 months of fiscal year 2010 equaled $1.6 trillion. Just about the same level as in 2001, when spending was 54% of current levels.



Source: Treasury

Trade Imbalance Back

Marketwatch details:

The U.S. trade deficit widened to the highest level in 18 months in May as imports and exports alike bounced back after declines in April, government data showed Tuesday. The deficit, the difference between the nation's exports and imports, reached $42.3 billion in May from $40.3 billion in April, the Commerce Department said.

It marked the largest trade gap since November 2008. The one-month worsening in the deficit is the biggest since February. The widening of the deficit confounded expectations. Analysts surveyed by MarketWatch had expected the May gap to narrow to $38.8 billion.

The larger-than-expected trade gap may cause economists to reduce their forecasts for second-quarter gross domestic product. A worsening trade gap is a drag on growth.

For more detail on the "why" of this increase, Michael Pettis has a great post explaining it here. The high level summary:

I have little doubt that as the US trade deficit rises, a lot of finger-wagging analysts will excoriate US households for resuming their spendthrift ways, but of course the decline in US savings and the increase in the US trade deficit will have nothing to do with any change in consumer psychology or cultural behavior. It will be the automatic and necessary consequence of the capital tug-of-war taking place abroad.

Source: Census

Small Businesses - Still Feeling the Pain

The WSJ details:

The National Federation of Independent Businesses said its Small Business Optimism Index dropped 3.2 points to 89.0 last month, more than erasing the modest 1.6-point gain it saw in May. The report, which was compiled by NFIB Chief Economist William Dunkelberg, described the decline as “a very disappointing outcome.”

In past periods following a recession, the NFIB index typically has risen back above 100 within a quarter or two of the trough in economic activity as measured by the National Bureau of Economic Research.

That hasn’t been the case during this recovery. The index hasn’t broken above 93 in any month since January 2008 when the economy was in the early stages of recession, even though the NBER is expected to eventually date the beginning of the recovery in the third quarter of last year.

In 23 of those past 30 months, readings have come in below 90, an unprecedented result in the survey’s history, the NFIB said.

Source: NFIB

UK CPI in Check

UK inflation was an area of my focus due to the large depreciation of the Pound, importance of the banking sector in the overall economy, and quantitative easing pursued. Even after all of that... inflationary pressures seem to have stalled (for the time being at least). Daily Markets details:

U.K. annual inflation slowed in June on fuel prices, suggesting that the central bank will keep the interest rate at the current level well into 2011.

Annual inflation slowed to 3.2% in June from 3.4% in May, data from the Office for National Statistics showed Tuesday. Inflation slowed for the second straight month. Still, the figure is above the central bank’s 2% target. Economists were expecting the annual rate to slow to 3.1%.

Falling petrol and diesel prices are by far the main drivers to the downward pressure to consumer price annual inflation between May and June, the ONS said. At the same time, the main upward pressures to inflation were the sharp rises in air fares and increases in insurance premiums. Clothing and footwear prices recorded the biggest drop for June.

To underpin the fragile economy amid severe fiscal consolidation, the Bank of England had left its key interest rate unchanged at a historic low and maintained the size of the quantitative easing at GBP 200 billion on July 8. The central bank is more likely than not to keep interest rates down at 0.50% into 2011 as recovery remains bumpy and gradual with major fiscal tightening and the Eurozone’s problems posing serious threats to UK growth prospects, said IHS Global Insight’s Howard Archer.

Source: Stats.Gov.UK

EconomPics of the Week (7/9/10)

I’m going to claim a solid week at EconomPic. I liked my posts (especially considering the shortened week / loads of travel) and made some pretty nice $$ / got lucky combining this post and this post.

Asset Classes
Things That Make You Go Hmmm.....
Earnings Jump... Cause for Economic Concern?
Hedge Funds Remain Under Pressure
Equities for the LOOOOONNNNGGGG Run

Economic Data
How is Spending Still Strong?
Consumer Credit Freefall
ISM Services: Slow Growth

Employment
The Employment Depression
The Aussie Miracle Continues
Where are those jobs at?
Bron Bron... a Go Go

And in honor of some good news coming out of Asia and US markets... Descendents with Hope (please tell me I have one reader who grew up listening to these guys):

How is Spending Still Strong?

Since Lehman collapsed in September 2008, consumption has remained surprisingly strong in the face of high unemployment (thus lower wages), lower asset values (less ability to tap home or 401k for spending), and a collapse in consumer credit.

How? The government! Less taxes and higher transfer payments (i.e. unemployment / welfare benefits).

Going forward we'll need a sustained source.

Source: BEA / Federal Reserve

Bron Bron... a Go Go

After seeing one of the most surreal letters imaginable from a boss to a former employee (in this case Cavs owner Dan Gilbert to NBA superstar Lebron James) is it any wonder he left? Here is a sampling (but imagine this hatred in the form of comic sans, which I guess Dan didn't realize was a font meant for 5 year old birthday cards):

This shocking act of disloyalty from our home grown "chosen one" sends the exact opposite lesson of what we would want our children to learn. And "who" we would want them to grow-up to become.

But the good news is that this heartless and callous action can only serve as the antidote to the so-called "curse" on Cleveland, Ohio.

And he somehow got more childish during a follow up phone interview (via ESPN):

"It's not about him leaving. It's the disrespect. It's time for people to hold these athletes accountable for their actions. Is this the way you raise your children? I've been holding this all in for a long time."

Gilbert said James quit on the Cavs during their second-round series against the Boston Celtics, who rallied from a 2-1 deficit to eliminate Cleveland. "He quit," Gilbert said. "Not just in Game 5, but in Games 2, 4 and 6. Watch the tape.

The Boston series was unlike anything in the history of sports for a superstar."

Good luck not needing to overpay any player by 10% on a going forward basis to play for you Dan!

The best thing about this move (outside of getting to watch one of the best players EVER with teammates who can actually play) has been the reaction I've witnessed from a sampling of friends. New Yorkers have called it a shame for the parity of the game (this mainly coming from Yankees fans!) and former Ohio residents calling him a sell-out (but these former Ohio residents did exactly what he did - they moved for new opportunity, a better job, new environment, and [perhaps] to get away from a disasterous boss).

And they are not alone... Dan's "lesson for Cleveland's children" has been ignored by local residents for 90 years (below is a chart of Cleveland's population and Cleveland's population as a percent of total US population).



Why should this be any different for Lebron, a 25 year old who has lived in the same area his entire life and has the chance to do something different?

Source: InfoPlease

Consumer Credit Freefall

BusinessWeek details:

Consumer borrowing in the U.S. dropped in May more than forecast, a sign Americans are less willing to take on debt without an improvement in the labor market.

Borrowing that’s increased twice since the end of 2008 shows consumer spending, which accounts for about 70 percent of the economy, will be restrained as Americans pay down debt. Banks also continue to restrict lending following the collapse of the housing market, Fed officials said after their policy meeting last month.

“The trend in consumer deleveraging is clear as credit has declined 11 of the last 13 months,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said in a note to clients. “Credit card debt continues to be paid down at a heady pace.”

The key in the chart below is the blue line (total). Notice that besides a blip in the early 90's overall levels of consumer debt went one direction for 60+ years and we have never seen both revolving (i.e. credit cards) and non-revolving debt decrease (let alone crash) simultaneously.

Source: Federal Reserve