Thursday, September 30, 2010

Another View Of The U.S. Dollar

I've written numerous posts about the U.S. Dollar, as I am very concerned about its vulnerability to a substantial decline (one that would take it considerably below 70, as discussed in the July 30 post) and the various ill-effects that would accompany such a decline.

Of note, very few people have voiced concerns over the last few months of the U.S. Dollar being vulnerable to a substantial decline.  I find this odd for a number of reasons, especially given Gold's ascent.

Previous posts have included various charts of the U.S. Dollar.  Over the last few days, I have created a new chart that I think is helpful in monitoring the U.S. Dollar situation.  Here is the chart, presented on a daily basis since 2000, Log scale:

click on chart to enlarge image; chart courtesy of

I've drawn the red line as a trendline; as one can see, it also does a decent job of representing a visual "best-fit" line for the period.

The gray dotted line is the 200-day moving average.  As one can see, this has been on an upward, yet volatile, climb since latter-2008.

I plan on posting this chart periodically and noting changes...

SPX at 1144.73 as this post is written

Tuesday, September 28, 2010

MacroMarkets September 2010 Home Price Expectations Survey

On September 21 MacroMarkets released its September Home Price Expectations Survey results.

Here is the Press Release (pdf); the accompanying chart (click on chart to enlarge image) is seen below:

As one can see from the above chart, the expectation is that not only has the residential real estate market hit a “bottom” as far as pricing; but that steady yet mild appreciation will occur through 2014.

The survey detail is interesting.  Gary Shilling remains the most “bearish” of the survey participants with a forecast of an 18.78% cumulative price decline through 2014.

The Median Cumulative Home Price Appreciation for years 2010-2014 is seen as -.17%, -.85%, 3.17%, 6.10% , and 9.7%, respectively.

For a variety of reasons, I continue to believe that even the most "bearish” of forecasts (seen in Gary Shilling's above-referenced forecast)  will prove too optimistic in hindsight.  Although an 18% decline is substantial, from a longer-term historical perspective such a decline is rather tame in light of the wild excesses that occurred over the "bubble" years.

I have written extensively about the residential real estate situation.  For a variety of reasons, it is exceedingly complex.  While at this time many people have an optimistic view regarding future residential real estate prices, in my opinion such a view is unsupported on an “all things considered” basis.  Furthermore, there exists outsized potential for a price decline of severe magnitude, unfortunately.

SPX at 1138.20 as this post is written

Monday, September 27, 2010

Updates On Economic Indicators September 2010

Here is an update on various indicators that are supposed to predict and/or depict economic activity.  These indicators have been discussed in previous blog posts: (click on charts to enlarge images)

The September Chicago Fed National Activity Index (CFNAI)(pdf) updated as of September 27, 2010:

The Consumer Metrics Institute Contraction Watch:

The USA TODAY/IHS Global Insight Economic Outlook Index:

An excerpt from August 31, 2010:

“The August update of the USA TODAY/IHS Global Insight Economic Outlook Index shows real GDP growth, at a six-month annualized growth rate, slowing to 1.3% in November through January. The end of government stimulus spending and inventory buildup combined with continuing high unemployment, a weak housing market, tight credit and high debt are behind the slowdown."

The ECRI WLI (Weekly Leading Index):

As of 9/17/10 the WLI was at 122.2 and the WLI, Gr. was at -8.7%.  A chart of the growth rates of the Weekly Leading and Weekly Coincident Indexes:

The Dow Jones ESI (Economic Sentiment Indicator):

The Indicator as of August 31 was at 43.2, as seen below:

An excerpt from the August 31 Press Release:

"The ESI’s stability during recent months belies some of the recent weakness seen in other sentiment surveys and suggests that the underlying momentum of the U.S. economy, including employment, remains positive,” Dow Jones Newswires “Money Talks” Columnist Alen Mattich said. “However, the ESI remains well below the 50-plus levels that characterize normal expansions. This relative weakness suggests it would take little to push the economy back into recessionary conditions.”

The ESI is determined using an economic sentiment analysis algorithm to review news coverage in 15 daily newspapers across the U.S."

The Aruoba-Diebold-Scotti Business Conditions (ADS) Index:

Here is the latest chart, updated through 9-18-10:

The Conference Board Leading (LEI) and Coincident (CEI) Economic Indexes:

As per the September 23 release, the LEI was at 110.2 and the CEI was at 101.3 in August.

An excerpt from the August 23, 2010 Press Release:

“Says Ken Goldstein, economist at The Conference Board:  "While the recession officially ended in June 2009, the recent pace of growth has been disappointingly slow, fueling concern that the economic recovery could fade and the U.S. could slide back into recession.  However, latest data from the U.S. LEI suggests little change in economic conditions over the next few months.  Expect more of the same - a weak economy with little forward momentum through 2010 and early 2011."

“New Financial Conditions Index”

I wrote a post concerning this index on 3/10/10.  There is currently no updated value available.

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

SPX at 1148.67 as this post is written

Friday, September 24, 2010

Disturbing Charts (Update 2), Part II

As a continuation of the last post, here are three other charts that I find disturbing in nature.

These charts raise a lot of questions.  Many of these questions I have discussed in the blog, as I believe they are very significant in nature.  Additionally, these charts should highlight the “atypical” nature of our economic situation from a long-term historical perspective.

Here is a St. Louis Fed chart depicting the Median Duration of Unemployment (last updated 9-3-10):

(click on charts to enlarge images)

These next two charts are from the Minneapolis Federal Reserve.  These charts really provide a perspective on the length and extent of this downturn.  The first depicts our Unemployment situation (last updated 9-3-10):

This depicts Output (last updated 8-27-10):

I will update these charts on an intermittent basis as they deserve close monitoring.

SPX at 1129.01 as this post is written

Thursday, September 23, 2010

Disturbing Charts (Update 2), Part I

In the next two posts, I am going to display various charts that I find disturbing.   These charts would be disturbing at any point in the economic cycle; that they depict such a tenuous situation now – 15 months after the official (as per the 9-20-10 NBER announcement) June 2009 end of the recession – is especially notable.

Many more such charts exist, unfortunately.  I regularly discuss many troubling characteristics of our economy in this blog.

As well, I find many aspects of the financial markets to be problematical.  These aspects are frequently discussed.

All of these charts are from The Federal Reserve, and represent the most recently updated data.  I especially find these charts valuable as they depict our current situation in a longer-term historical context.

Charts in this post are from the St. Louis Federal Reserve.  Here are the charts:

(click on charts to enlarge images)

Housing starts (last updated 9-21-10):

The Federal Deficit (last updated 3-8-10):

Federal Net Outlays (last updated 3-8-10):

State & Local Personal Income Tax Receipts  (% Change from Year Ago)(last updated 7-30-10):

Total Loans and Leases of Commercial Banks (% Change from Year Ago)(last updated 9-20-10):

Bank Credit – All Commercial Banks (Percent Change from Year Ago)(last updated 9-20-10):

M1 Money Multiplier (last updated 9-16-10):

Now, onto Part II – unemployment and output…

SPX at 1134.28 as this post is written

Tuesday, September 21, 2010

Total Household Net Worth As A Percent Of GDP 2Q 2010

The following chart is from the CalculatedRisk Blog of September 18, 2010.  It depicts Total Household Net Worth as a Percent of GDP.  The underlying data is from The Federal Reserve Flow of Funds 2Q 2010 report:

(click on chart to enlarge image)

As seen in the above-referenced CalculatedRisk blog post:

"According to the Fed, household net worth is now off $12.3 Trillion from the peak in 2007, but up $4.7 trillion from the trough in Q1 2009."

My comments:

As I wrote in the previous (June 17) post on this topic:

"As one can see, the first outsized peak was in 2000, and attained after the stock market bull market / stock market bubbles and economic strength.  The second outsized peak was in 2007, right near the peak of the housing bubble as well as near the stock market peak.

As seen on the chart, the Total Household Net Worth is making an upturn, but is significantly below the prior 2007 peak.

I could extensively write about various interpretations that can be made from this chart.  One way this chart can be interpreted is a gauge of “what’s in it for me?” as far as the aggregated wealth citizens are gleaning from economic activity, as measured compared to GDP."

SPX at 1141.45 as this post is written

Monday, September 20, 2010

Real Median Household Income & Poverty Measures

As seen in the recently (September 16) released "Income, Poverty, and Health Insurance Coverage in the United States, 2009" (pdf) from the U.S. Census Bureau, Real Median Household Income was $49,777 in 2009, as seen on page 6.  On page 14, the Poverty Rate is seen at 14.3%, encompassing 43.6 million people.

As seen on the chart on page 6, Real Median Household Income has experienced anemic growth for decades.  In 1967 it was roughly $40,000 in real terms.

As for the Poverty figures, this measure has been widely criticized.  However, even if one uses the as-stated figures, it is obviously substantial.

SPX at 1125.59 as this post is written

Friday, September 17, 2010

S&P500 Earnings Forecasts For 2010 And 2011

As many are aware, Standard & Poors publishes earnings estimates on a quarterly basis.  My previous post concerning their estimates can be found at this May 30 post)

Currently, their estimates for 2010 add to the following:
-From a “bottom up” perspective, operating earnings of $82.87/share
-From a “top down” perspective, operating earnings of $78.29/share
-From a “top down” perspective, “as reported” earnings of $71.03/share

Currently, their estimates for 2011 add to the following:
-From a “bottom up” perspective, operating earnings of $94.12/share
-From a “top down” perspective, operating earnings of $86.23/share
-From a “top down” perspective, “as reported” earnings of $84.90/share

As I commented in the December 20, 2009 post, coming into 2010 the overall consensus on S&P500 earnings for the year seemed to be in the $75 range.

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

SPX at 1125.69 as this post is written

Thursday, September 16, 2010

Thoughts On The Stock Market

The stock market appears to be at an important juncture.

As seen in the below chart, by Ron Walker ( there is the much-discussed potential Head and Shoulders formation that looms large:

(click on chart to enlarge)(chart courtesy of

As well, the VIX is just above 20.  As I have commented upon previously, over the last 10 years the 20 level on the VIX has been one of great importance:

(click on chart to enlarge) (chart courtesy of

While both of these conditions, as well as an obviously weakening economy, may seem to foreshadow a stock market that is vulnerable to decline, I maintain my stance written of in a June 2 post:

"While I have written extensively about how I believe the stock market will face an exceedingly large decline in the future, for now I think (based upon a variety of factors) that a near-term stock market advance is likely. This is not to say that I think "all is well" with the economy or the markets - anything but. In essence, I think we will see a little more "sunshine" but if one looks out to the (economic/financial) horizon "the sky is black," unfortunately."

Even though a rally from here may well prove strong, one should not become complacent.  As I also mentioned in that June 2 article:

"I believe that we are building to a variety of major market events."

SPX at 1125.07 as this post is written

Wednesday, September 15, 2010

Geithner Interview: 1930s Comparison

On Friday, September 10 Timothy Geithner was interviewed by The Wall Street Journal. During this interview, he said:

"[The] typical error most countries make coming out of a financial crisis is they shift too quickly to premature restraint. You saw that in the United States in the 30s, you saw that in Japan in the 90s. It is very important for us to avoid that mistake. If the government does nothing going forward, then the impact of policy in Washington will shift from supporting economic growth to hurting economic growth."

My comment:

I find this comment noteworthy as it is yet another reference to the 1930s.  Ever since the onset of the “Financial Crisis” there has been a continual flow of comparisons of our current economic situation to that of  The Great Depression.

I have written about these comparisons on numerous occasions.  As I said in the July 13, 2009 post, “…although our current period of economic weakness does have similarities to that of The Great Depression, there are notable differences as well.  To believe that both situations are very similar, and by acting accordingly, imperils our economic situation.”

SPX at 1121.1 as this post is written

Tuesday, September 14, 2010

The September 2010 Wall Street Journal Economic Forecast Survey

I found a few items of interest in the September Wall Street Journal Economic Forecast Survey.

Perhaps the most interesting were the questions asked of the economists, including "Why is the U.S. recovery so disappointingly slow?"

Also, similar to recent surveys in which this double-dip question has been asked, the survey said "The economists on average put a 22% chance on another recession, or double-dip, hitting the U.S. economy in the next 12 months."

The current average forecasts among economists polled include the following:

Ten-Year Treasury Yield:
for 12/31/2010: 2.9%
for 12/31/2011: 3.78%

for 12/1/2010: 1.1%
for 12/1/2011: 1.8%

Unemployment Rate:
for 12/1/2010: 9.6%
for 12/1/2011: 8.9%

Crude Oil  ($ per bbl):
for 12/31/2010: $75.49
for 12/31/2011: $79.99

full-year 2010 : 2.5%
full-year 2011 : 2.8%

As compared to last month’s survey, there were various material changes.

(note: I comment upon this survey each month; commentary on past surveys can be found under the “Economic Forecasts” label)

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

SPX at 1121.9 as this post is written

Monday, September 13, 2010

The Importance Of Asset Bubbles

"When you live in a bubble, everyone is delusional..." -

-Nouriel Roubini, May 11 2010 Charlie Rose interview
Many people fail to see any asset bubbles in our current economic environment.  Others see isolated asset bubbles.  As I have previously stated in the April 8 post,  “Our societal inability to spot and prevent asset bubbles is problematical.”

I have written extensively about the existence of asset bubbles.  The topic is of critical importance as their widespread existence precludes the possibility of Sustainable Prosperity.

SPX at 1109.55 as this post is written

Sunday, September 12, 2010

Allan Meltzer Comment On "What Should the Federal Reserve Do Next?"

On September 9 The Wall Street Journal had various people respond to the question of "What Should the Federal Reserve Do Next?"

Among the various responses, I found this excerpt from Allan Meltzer's response to be most interesting:
"In "A History of the Federal Reserve," I concluded that the principal mistakes the Fed has made have resulted from giving excessive attention to current events and forecasts of highly uncertain near-term developments. By focusing on the short-term, the Fed neglects the longer-term consequences of its actions. The transcripts of FOMC show that the members are paying little attention to medium- and longer-term consequences."

SPX at 1109.55 as this post is written

Friday, September 10, 2010

An Interesting Perspective On The Chicago Fed National Activity Index

I have mentioned The Chicago Fed National Activity Index (CFNAI) in a variety of posts, first in a March 30 post and then in the monthly Updates on Economic Indicators.

I view the CFNAI (which is usually expressed via a 3-month moving average denoted CFNAI-3) as being among the most valuable of commonly referenced official (i.e. government produced) indicators.

On September 7, Doug Short posted this annotated chart of the CFNAI-3 from Bob Bronson, along with associated commentary:

(click on chart to enlarge)

I find this interpretation of CFNAI-3 to be very interesting.   I think the main value in it is from a long-term perspective.  Although the regression (red arrow) shows only a gradual decline, the more ominous trend appears to be from (roughly) the post-2000 period.

It should be interesting to see how the CFNAI-3 performs on a going-forward basis...

SPX at 1107.57 as this post is written

Thursday, September 9, 2010

A Brazen Ponzi Scheme

Bloomberg BusinessWeek had a story on September 2 titled "Wayne McLeod:  The Life and Death of a Mini-Madoff."

This Ponzi scheme was particularly brazen as it targeted federal law enforcement personnel.

The story is an interesting one.  I would slightly disagree with one statement in the article, "As primitive as they are, Ponzi schemes are not easy to spot."  I would say that some Ponzi schemes are more obvious than others; as well, I wouldn't classify Ponzi schemes as "primitive."

I have previously written a few posts on investment frauds and Ponzi schemes, as I believe that this is a topic that has important implications for both investors and capital markets.

SPX at 1098.87 as this post is written

Wednesday, September 8, 2010

Christina Romer's September 1 Speech

On September 1, Christina Romer gave a speech titled "Not My Father's Recession:  The Extraordinary Challenges and Policy Responses of the First Twenty Months of the Obama Administration." (pdf)

The main reason I highlight this report is for reference purposes, as I may comment upon it in the future.
As those familiar with this blog know, I vehemently disagree with many of her interpretations and conclusions.

SPX at 1091.84 as this post is written

Tuesday, September 7, 2010

Premium Pricing Strategies And The Economy

(This is my second blog post that solely discusses pricing issues.  My first was on April 23, 2010)

Firms in general have enjoyed the economic "tailwind" of rising sales for decades.  While this can be seen in a variety of measures, one of particular note is that of Retail Sales.  As seen in the following chart (from the CalculatedRisk blog of 8-13-10) Retail Sales have proven robust and (relatively) resilient with latter-2008 being the brief major exception:

(click on chart for larger image)

Despite this "tailwind", problems appear to be increasing especially in the area of pricing.  An August 19 Wall Street Journal article discussed pricing issues at P&G.  One part of the article was particularly noteworthy, discussing P&G's strategy of offering premium products:

"But the long recession and creaking recovery have undermined that strategy. Consumers might be willing to shell out for iPads, but their day-to-day spending reflects an entrenched frugality that often means leaving P&G's relatively expensive products on the shelf. Nearly two-thirds of U.S. consumers said they switched to a cheaper substitute for at least one basic household product, food or beverage in the past year, according to a Sanford Bernstein survey of 834 consumers. More than three-quarters said they believe less expensive products were as good as or better than those they replaced.

In response to the changing U.S. market, the company is doing the once unthinkable—slashing prices..."

P&G's situation does not seem unique, given the existence of widespread discounting and promotions despite resilient overall retail sales figures.  Given this dynamic, one question that arises is whether we are now starting to experience a (downward) revaluation in product differentiation?  In essence, is product differentiation generally losing its ability to attract sales at higher prices?  If so, the implications are immense, especially for those firms that are "Premium Pricers."

This issue is but one of many complex pricing issues now facing companies.  While it is of course difficult to generalize across all firms due to their various characteristics, the following five issues appear to be of primary significance:

First, how will those companies whose focus is offering premium products (and services) fare should the economy materially weaken (as I expect) from here?

Second, if one assumes that product differentiation is generally losing value (i.e. its ability to generate revenues at sufficiently higher prices), can "Premium Pricers" successfully adapt?  How might this be done?

Third, are products and services now considered "staples" (i.e. necessary in nature) changing to more "discretionary" in nature?  How will this impact firms?

Fourth, how will cost structures change should significant economic weakness reassert itself?

Fifth, are Pricing actions now being taken to attract sales (including discounting and promotions) undermining firms' future pricing power?  In other words, to what extent will current pricing actions undermine the future success of firms?

In the July 9 post, I wrote "I believe that many firms will continue to face very challenging conditions..."  This belief is based upon a number of factors.  However, firms' ability to successfully manage Pricing given the overall increasing complexity is a key reason for this belief.   On an "all things considered basis"  many firms do not appear to be successfully adapting to this new Pricing complexity.  This will prove especially problematical in a significantly weaker economic environment.

SPX at 1104.51 as this post is written