Friday, January 29, 2010

4Q 2009 Corporate Revenues

I have been looking at the revenue figures posted for a variety of diversified manufacturers and distributors. These are well-respected, S&P500 firms.

One would expect these firms to be posting decent revenue gains, especially as compared to the very weak year-ago period (4Q2008). Additionally, these firms stand to benefit from the prevailing economic climate due to their size, global sales, high accessibility to credit at favorable terms, access to stimulus business, etc. In essence, whatever general economic strength is existent, and then some, should certainly be reflected in their revenues.

Instead of strong or at least a decent 4Q 2009 revenue results, most of these companies are reporting continued percentage sales declines when compared to year-ago results. These declines have ranged in value but are significantly negative, with some being double-digit declines.

This result is not significantly better than the similar comparisons that I have previously commented upon for 3Q2009 results.

This lack of revenue growth is very notable and has many implications. It seems to at least partially belie claims of economic recovery. As well, it would explain why (net) hiring is rather nonexistent.

Of course, there are other implications as well. Among these implications is that the lack of revenue growth weakens any fundamental valuation one may choose to assign to the stocks of these companies.

SPX at 1091.38 as this post is written

Thursday, January 28, 2010

The State of the Union Address - A Few Comments

I found plenty of noteworthy comments in last night's State of the Union Address. Here is the link to the transcript:

Here are a couple of my thoughts:

First, many stimulus initiatives were mentioned. Some of these were new ideas. That stimulus ideas are proliferating should not be a surprise, as many in our country believe they represent a sensible solution to our many economic difficulties. I will comment on many of these initiatives when more details are available and/or they are enacted. For now, I will say that before we, as a nation, enact more stimulus bills, we need to analyze the results of the many stimulus efforts previously and currently enacted. Then, we need to assess the unintended consequences and risks these stimulus efforts hold, of which I have previously mentioned on this blog.

Second, the employment situation was mentioned. This, of course, is not a surprise and is a very popular topic among all politicians - and for very good reason.

President Obama during the speech last night made the following comment:

"But the truth is, these steps won't make up for the seven million jobs that we've lost over the last two years."

I believe that our unemployment problems, both current and ongoing, encompass a population many multiples of seven million. Our unemployment problems will most likely not be solved by any easily enacted solution, unfortunately.

For those unaware, I previously wrote a series of blog posts on unemployment, starting at the July 24, 2009 post.

SPX at 1086.85 as this post is written

Wednesday, January 27, 2010

Roubini Interview Concerning Bubbles

Here is a link to an interview today with Nouriel Roubini in which he discusses bubbles:

I would argue against those who believe that bubbles could start to form or that they are just beginning to form. I strongly believe that there are many bubbles in existence right now, and the implications of such are massive.

Over the last few months I have written quite a few posts on bubbles, and those posts can be found on in the "Bubbles" category listed on the right-hand side of the home page.

SPX at 1090.18 as this post is written

Tuesday, January 26, 2010

Article On Strategic Defaults

I ran across this article from U.S. News & World Report, dated 1/19/10 concerning "strategic defaults":

The article is interesting in that it summarizes various facets of the "strategic default" situation and presents an interesting example of the dynamics that one "underwater" homeowner faces.

I have mentioned "strategic defaults" on numerous occasions. It is a very important "wildcard" in the residential real estate equation.

SPX at 1097.60 as this post is written

Monday, January 25, 2010

Political Volatility

Over the last few years the political scene has become more volatile, swinging from heavily Republican to heavily Democratic. Now, it appears as if the political volatility is increasing yet again, with the recent election of Scott Brown and the unexpected hurdles Ben Bernanke is facing during his reconfirmation. Many incumbents (and political appointees) who until recently seemed to hold "safe" positions may well find themselves open to losing elections.

Many would view this increased volatility as a positive sign the political system is "working." Of course there is credence to this view.

However, from an economics perspective, there are other consequences as well. The implications are potentially vast.

Desperate politicians may well feel an increased need to "do something" to prove that they are mindful of, and acting upon, our economic problems. "Doing something" about our economic problems often entails some type of intervention or other variant of spending money. As we have seen, the size of these interventions is often implied to denote their worthiness, with larger interventions purportedly more beneficial than smaller ones. When one listens to politicians speak of their intervention legislations, it almost seems as if they view large interventions as a "badge of honor."

I have written extensively about interventions, and will continue to do so. They are very much misunderstood. Of particular concern is that as time goes on and our financial problems grow in size, there has been a growing insensitivity to the ever-increasing size of the interventions. Whereas just a couple of years ago a $150 Billion intervention would seem large, now that same size of intervention would be considered small.

While I have previously written that interventions would continue, it is important to understand what factors are driving the trend.

SPX at 1102.00 as this post is written

Wednesday, January 20, 2010

The Global Economic Situation

On this blog, I have maintained a focus on the U.S. economy. I have done so for a variety of reasons, many of which are explained in this June 21 2009 post.

Additionally, from a practical perspective, from a time standpoint it would be prohibitive to attempt to comment on all global economic affairs that I consider relevant.

Although I focus on the U.S. economic condition, this is not meant to imply that the U.S. is the only country that faces an array of difficult economic challenges. Much to the contrary - many countries currently face economic issues that are exceedingly problematical.

It is very troubling that so many countries, especially those with large economies, are concurrently experiencing such difficulties. Such a common and unified adverse condition will not bode well assuming severe economic weakness reappears.

Attaining Sustainable Prosperity is a global challenge.

SPX at 1140.78 as this post is written

Tuesday, January 19, 2010

My Thoughts On Our Current Economic Situation

I would like to provide an overall update as to my thoughts on our current economic situation.

My blog post of September 1, 2009 summarizes my current thoughts well.

Many of my concerns and reasons for such an outlook have been expressed in this blog.

Of course, over the last few months there have been signs of economic recovery - or at least a lessening of economic weakness. However, I believe that these signs represent the type of intermittent economic strength that is often seen during periods of prolonged economic weakness.

SPX at 1141.69 as this post is written

Friday, January 15, 2010

The January Wall Street Journal Economic Forecast Survey

Here is the link to the latest (January) Wall Street Journal Economic Forecast Survey:

As seen in the survey details, there hasn't been much change in expectations concerning full-year 2010 GDP or the Unemployment Rate for many months. The average expectation is for a full-year GDP of 3.0% and Unemployment Rate for December 2010 of 9.5%.

Also, the economists put a 16% chance "that the economy will enter another recession in 2010."

SPX at 1148.46 as this post is written

Wednesday, January 13, 2010

The US Dollar - A Few Comments

On December 17, I commented on the US Dollar, especially in the context of the US Dollar carry trade.

Today, I would like to make a few overall comments about the US Dollar. Here is a weekly chart of the US Dollar from 2000, with the MACD and CCI indicators shown above the price plot:

Chart courtesy of

I have also included a few trendlines shown in blue and red. As one can see, at the present price of 77.02, the USD is near the bottom of the price range of the last 10 years.

Many people, especially those of the "hard money" and "Austrian" philosophies, have long held that many of the actions we (as a nation) have been taking to combat our current period of economic weakness would unduly pressure the dollar. These actions have included very low interest rates, truly outsized interventions (including "money printing") and deficit spending.

So far, as can be seen on the chart, the US Dollar has "held in there", most likely for a variety of reasons.

It should be very interesting to watch the US Dollar from here. Although there appears to be few, if any, signs that a severe US Dollar decline is impending, as stated above many of the actions we have been taking (and will most likely continue to take) are certainly cause for concern when viewed in context of US Dollar strength.

The strength of the US Dollar is of paramount importance, because (of course) perhaps the fastest and most assured way of getting into severe economic trouble is to have rapid currency depreciation.

SPX at 1136.22 as this post is written

Tuesday, January 12, 2010

Three Unemployment Charts

Occasionally, I have posted charts concerning unemployment. With Friday's unemployment release, here are three charts that I find noteworthy:

First, from the St. Louis Fed site, the Median Duration of Unemployment.

Second, from the CalculatedRisk blog of 1/8/10, Unemployed Over 26 Weeks:

Third, again from the CalculatedRisk blog of 1/8/10 - I like this chart as it presents a relative depiction of Post WWII recession job losses. As one can see, our current period of economic weakness’s job losses are outsized both in duration and severity:

As depicted by these charts, our unemployment problem is severe. Unfortunately, there does not appear to be any "easy" solutions.

A few months ago I wrote a series of blog posts titled "Why Aren't Companies Hiring?"

SPX at 1141.18 as this post is written

Monday, January 11, 2010

Updates On Economic Indicators

Here are some indicators that are supposed to predict and/or depict economic activity. These indicators have been discussed in previous blog posts:

The ECRI WLI (Weekly Leading Index) was at 131.5 for the week ended January 1. From the story in the link below: "'With the WLI climbing to a one-and-a-half-year high, the U.S. economy is firmly set to strengthen in the coming months,' said Lakshman Achuthan, Managing Director at ECRI."

Fortune's Big Picture Index was at 17.59 as of December 18. This is at a level that is very near to the low of the data series; furthermore, as one can see, its gauge depicting "recession v. recovery" seems to strongly indicate "recession."

The Dow Jones ESI (Economic Sentiment Indicator) is shown to be at 38.7 as of December 31, having risen steadily throughout 2009.

Here is the latest chart depicting the Aruoba-Diebold-Scotti Business Conditions (ADS) Index. I wrote a blog post concerning this index on October 27:

Lastly, although I have not discussed the Conference Board LEI (Leading Economic Indicator), I find the chart included in this press release to be interesting. Here one can see the LEI at 104.9 for November. As seen in the December 17 Press Release (link found below), the LEI is now slightly higher than the latest peak of July 2007.

The CEI (Coincident Economic Index) is at 100.1. There is a sizable difference between the LEI and the CEI.

SPX at 1144.98 as this post is written

Friday, January 8, 2010

Characteristics Of The Housing Bubble

Given the incredibly outsized intervention efforts in the residential real estate market, I think it is important to examine some dynamics of the real estate bubble.

Here is a chart from the 12/15/09 Contrary Investor commentary that I believe is interesting, as it depicts some underlying residential real estate fundamentals. It shows the equity and mortgage debt situation. The underlying data is from the Federal Reserve Flow of Funds:

As far as real estate prices are concerned, I would like to show two charts, both from the CalculatedRisk blog:

The first chart was posted on 12/21/09 and is the LoanPerformance Price Index from 1976:

Next, a chart posted on 12/29/09 showing the LoanPerformance Index as well as Case-Shiller, from January 2000:

As others have commented, it appears as if the overall intervention efforts are aimed at reflating (or to re-inflate) the housing bubble. Conventional (investment) wisdom has held that reflating a burst bubble is impossible.

However, I think given the tremendously outsized intervention efforts in housing, we are truly in a unique situation. I don't believe there has ever been such a large intervention effort in our country, at least in the last 150 years. Depending upon how one would measure such intervention efforts, it might even be among the largest interventions in world economic history.

A casual observer might assume that such an outsized effort would be destined to be successful. However, (economic) life is not that simple.

From an "all things considered" standpoint, I don't believe the residential real estate bubble has actually burst. It appears to me that it has somewhat deflated. I base this view on a variety of fundamental and technical factors.

Assuming this view is correct - that the residential real estate hasn't popped - the implications are immense. I think it is likely that one of two possibilities will occur from here, and each could happen in a relatively rapid fashion. The first possibility is a "successful" reflation of the residential real estate market, with accompanying economic activity. The second possibility is a collapse of the residential real estate market with accompanying economic repercussions. As to the path real estate will travel from here - my previous writings on interventions, bubbles and real estate indicate my thoughts on the subject.

If a "successful" relation occurs, one is led to wonder as to the characteristics of such a "successful" reflation of the real estate bubble. Among other critical questions is how long would such a reflation last?

I think it very important to note the quality and durability of the economic activity that occurred in the first phase of the bubble, which peaked in 2006. Can one hope for any better outcome during a subsequent reflation?

These issues are critical to the concept of Sustainable Prosperity, of which I have previously frequently commented.

SPX at 1137.37 as this post is written

Thursday, January 7, 2010

More On The Fannie/Freddie Developments Of December 24

Here is a Wall Street Journal editorial on the December 24 developments at Fannie Mae and Freddie Mac. This editorial provides some new perspectives on the matter:

My original comments on these developments was on December 28.

I feel it is critically important to understand the extent of intervention as it pertains to the housing market. Fannie Mae and Freddie Mac continue to play an very large role in these intervention efforts.

SPX at 1135.43 as this post is written

Wednesday, January 6, 2010

Ben Bernanke's January 3rd Speech

I would like to make a couple of comments regarding the speech Ben Bernanke gave on January 3. It was titled "Monetary Policy and The Housing Bubble," and the pdf link can be found here:

I could make a significant amount of comments regarding this speech, as I partly or fully disagree with many of the points presented.

I will, however, briefly comment on a couple aspects of the speech. First, from page 21:

"Although the house price bubble appears obvious in retrospect--all bubbles appear obvious in retrospect--in its earlier stages, economists differed considerably about whether the increase in house prices was sustainable; or, if it was a bubble, whether the bubble was national or confined to a few local markets."

I agree with the general premise that bubbles aren't always obvious. As I said in my December 2 post, "Some bubbles are harder to spot than others." As far as the housing bubble was concerned, in my opinion it was a relatively easy bubble to identify as it occurred, based upon a variety of characteristics.

Second, from page 22:

"That said, having experienced the damage that asset price bubbles can cause, we must be especially vigilant in ensuring that the recent experiences are not repeated. All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs."

I think it can be strongly inferred from this excerpt, as well as other statements that he has recently made, that he doesn't believe there are asset bubbles currently in existence. My analysis indicates otherwise, as I discussed in my December 2 & December 16 posts.

SPX at 1136.43 as this post is written

Tuesday, January 5, 2010

Ponzi Schemes

Occasionally I have written about investment frauds. My last post on this topic was on November 27.

Here is a story from December 28 titled "Ponzi collapses nearly quadrupled in '09":

While I find this article's statistics to be of interest, I do not necessarily agree with some of its commentary.

Of course, there are many types and permutations of investment frauds, of which Ponzi schemes are just one type.

SPX at 1132.99 as this post is written

Monday, January 4, 2010

Consumer Confidence Disparities

Here is a link to the latest (December 29) press release of The Conference Board's Consumer Confidence readings:

I found the large difference between the Expectations Index and Present Situation Index to be notable. The Expectations Index, at 75.6, was the highest in two years. However, the Present Situation Index fell to 18.8 and remains at a 26-year low.

SPX at 1115.1 as this post is written