Friday, August 27, 2010

The Stock Market And The Economy

In the August 16-August 29 Bloomberg BusinessWeek, there is a quote from Jeremy Siegel in which he says, "The stock market's telling us there's some good things happening.  And I don't think it's only what they think Bernanke is going to say.  There is now a very broad consensus that not going to develop into a double-dip."

My comment:

Although I don't agree with this quote, it is interesting for a variety of reasons.  It appears to echo the belief of many at this juncture.

For now, I will not further comment on it; however, I may reference it in future posts...

SPX at 1050.80 as this post is written

Wednesday, August 25, 2010

State Budget Deficits

On Monday The Wall Street Journal had an Op-ed by Steve Malanga titled "How States Hide Their Budget Deficits."

Of particular interest is this excerpt:

"Last week, however, the Securities and Exchange Commission (SEC) filed fraud charges against New Jersey for misrepresenting its financial obligations, particularly its pension obligations, and misleading investors in its bonds. New York—and many other states—had better sit up and take notice."

I have previously written of the topic of state budgets and methods used to "balance" them in the July 21, 2009 post.

There is a lot that can be written about the efforts to conceal the true nature of states' financial conditions.    By "sweeping (financial) problems under the rug" instead of truly solving the deficit problems, it almost seems as if states are inherently betting (in a big way) that current economic hardship is transitory, and that better future economic conditions will "save the day."  In effect, there is little need to solve structural budget/financial problems because a strengthening economy will alleviate or eliminate such issues.

As well, of course, the federal government has provided relief.  As the Op-ed states, "...Washington does little to enforce responsible budgeting. In its fiscal stimulus packages of 2009 and 2010, for instance, the federal government funneled hundreds of billions of dollars to the states without regard for their fiscal practices, treating irresponsibility in New Jersey and New York the same as prudence in, say, Texas and Indiana."

It is not hard to envision a scenario in which the three aforementioned "crutches" states are employing to "make it through" their financial crises are no longer available.  Exceedingly dubious "quick fixes," placing large (inherent) bets on "sunnier" economic days ahead,  and receiving large-scale federal government support are not conditions that can, or should be, relied upon on an ongoing basis.  Of course, these "crutches" should never have been viewed as feasible options in the first place.

SPX at 1051.87 as this post is written

Tuesday, August 24, 2010

Updates On Economic Indicators August 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:

The August Chicago Fed National Activity Index (CFNAI)(pdf) updated as of August 23, 2010:

(click on charts to enlarge images)

The Consumer Metrics Institute Contraction Watch:

The USA TODAY/IHS Global Insight Economic Outlook Index:

An excerpt from August 16, 2010:

“The July 28 update of the USA TODAY/IHS Global Insight Economic Outlook Index shows real GDP growth, at a six-month annualized growth rate, slowing to 2.5% in December. 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 8/13/10 the WLI was at 120.8 and the WLI, Gr. was at -10.0%.  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 2 was at 42.3, as seen below:

An excerpt from the August 2 Press Release:

"The Dow Jones Economic Sentiment Indicator (ESI) has given an upbeat signal on the economy, registering its biggest rise since October and a return to the level of June 2008."


"“The Dow Jones ESI’s rise suggests the prospects of a double dip recession have receded,” Dow Jones Newswires “Money Talks” Columnist Alen Mattich said. “The ESI is still at a very low level, just above where it has in the past signalled a drop into recession. The indicator, however, has been steadily climbing since April 2010 which implies continued economic improvement.”


"The ESI’s back-testing to 1990 shows that the ESI clearly highlighted the risk that the U.S. economy was sliding into recession in 2001 and 2008 and suggests the indicator can help predict economic turning points as much as seven months in advance of other indicators."

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

Here is the latest chart, updated through 8-14-10:

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

As per the August 19 release, the LEI was at 109.8 and the CEI was at 101.4 in July.

An excerpt from the August 19, 2010 Press Release:

“”The indicators point to a slow expansion through the end of the year," says Ken Goldstein, economist at The Conference Board.”

“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 1067.36 as this post is written

Monday, August 23, 2010

Consumer Metrics Institute Data: Red Alert?

This post highlights current readings from the Consumer Metrics Institute.  Previous posts solely concerning the Consumer Metrics Institute can be found on July 27 and March 31; as well CMI data is included in the monthly "Updates On Economic Indicators."

Here is a chart of CMI's Daily Growth Index: (click on chart images to enlarge)

As one can see, the Daily Growth Index is rapidly approaching the low of the 2008 reading; perhaps more importantly there seems to be no signs of abatement in its downward trajectory.  Also of great importance is the rift between its reading and that of Quarterly GDP.

The second chart is CMI's Contraction Watch:

Here again, the readings are rather draconian, even when compared to the 2008 event.

Lastly, here is a chart from Doug Short's blog of 8-22-10.  It shows CMI's Growth Index vs. the S&P500 and GDP.  As one can see, if one believes in the efficacy of CMI's Daily Growth Index both the S&P500 and GDP seem destined for rather sharp downward trajectories:

Of course, before one can draw solid conclusions from CMI's data, one has to have a solid understanding of the methodologies used.  This is difficult with CMI's data as it is proprietary, and as such, it is much akin to other "black box" mechanisms where computations aren't disclosed.

As well, as CMI stated in their August 20 commentary, "Remember that our data only reflects consumer demand for discretionary durable goods."

However, from an "all-things-considered" basis, it would appear as if CMI's readings present the most negative forecasts among popularly published indicators.

As I stated in the July 27 post, "It should be very interesting to see how the CMI’s readings evolve as compared to actual economic activity…"

SPX at 1071.69 as this post is written

Friday, August 20, 2010

Food Stamps As Of August 2010

This post is an update to a post of April 12 concerning food stamps.  The program is officially called “Supplemental Nutrition Assistance Program,” or SNAP.  As stated on the SNAP website, "As of Oct. 1, 2008, Supplemental Nutrition Assistance Program (SNAP) is the new name for the federal Food Stamp Program."

The data was last updated August 3, 2010, reflecting May 2010 levels.

Here is a table showing various statistics with regard to National Level participation and costs going back to FY2007.  As seen in this table, the number of people participating as of May 2010 is 40,801,392, up 18.6% from year-ago levels.  As a reference point, the figure as of May 2007 was 26,409,288.

As I wrote in the April 12 post, "Of course, what is particularly disconcerting is not only the extent of participation in these programs, but the fact that this is yet another notable statistic that is getting worse well after the purported end of the recession."

SPX at 1066.48 as this post is written

Thursday, August 19, 2010

Identifying The Housing Bubble

The Boston Federal Reserve recently came out with a report dated August 12 titled "Reasonable People Did Disagree:  Optimism and Pessimism About the U.S. Housing Market Before the Crash." (pdf)

A sentence from the abstract is particularly interesting: "We conclude by arguing that economic theory provides little guidance as to what should be the “correct” level of asset prices —including housing prices."

My comments:

This is the latest effort from The Federal Reserve which questions whether asset bubbles,  in this case the Housing Bubble, can be accurately identified as they form.

While one may argue as to whether economic theory can accurately spot asset bubbles, there definitely is a chronic need to do so - as well as to take proper remedial action.  As I wrote in an April 8 post, "Our societal inability to spot and prevent asset bubbles is problematical."  We simply can't afford to go through numerous asset bubble booms and busts.   This issue is especially critical now given that there are numerous large asset bubbles currently in existence on a global basis.

SPX at 1079.47 as this post is written

Wednesday, August 18, 2010

The Corporate Bond Bubble

On August 13 The Wall Street Journal had an article titled "J&J Sets a Yield Low."

From the story: "The health-care products firm sold 10-year bonds with an interest rate of 2.95%, or a risk premium of 0.43 percentage point over comparable Treasurys."

The story provides an overview of the strong market environment for both corporate and junk bonds.

My view is that the entire corporate bond market is in a bubble.  This bubble is related to the bubble in U.S. Treasuries which I have previously commented upon.

SPX at 1092.54 as this post is written

Monday, August 16, 2010

S&P500 Stock Market Forecasts

The August 16-August 29 2010 Bloomberg BusinessWeek had an article on stock forecasts titled "The Market's Economic Disconnect."

Here is an excerpt:

"The fastest annual earnings increase in 22 years will push the S&P index up 20 percent in the last six months of 2010 to 1,242, according to the average projection of 12 firms compiled Aug. 3 by Bloomberg. Cash at S&P 500 companies has risen six straight quarters to $836.8 billion as executives have fired workers and reduced capital spending, according to S&P. Earnings at the same companies will increase 35 percent in 2010, the biggest annual gain since 1988, according to more than 8,000 analyst estimates compiled by Bloomberg."

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 1079.25 as this post is written

Sunday, August 15, 2010

The August 2010 Wall Street Journal Economic Forecast Survey

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

Perhaps the most interesting (and perhaps provocative item) was the following:

""It is irresponsible nonsense to claim that tax cuts 'pay for themselves,' " said Nicholas Perna of Perna Associates."

As well, there a variety of interesting questions asked of the economists.  These questions are seen in the Q&A section of the detail.

The current average forecasts among economists polled include the following:

Ten-Year Treasury Yield:
for 12/31/2010: 3.22%
for 12/31/2011: 4.08%

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

Unemployment Rate:
for 12/1/2010: 9.4%
for 12/1/2011: 8.6%

Crude Oil  ($ per bbl):
for 12/31/2010: $78.48
for 12/31/2011: $81.96

full-year 2010 : 2.9%
full-year 2011 : 2.9%

As compared to last month’s survey, there were some 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 the many of the consensus estimates and much of the commentary in these forecast surveys.

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SPX at 1079.25 as this post is written

Friday, August 13, 2010

Additional Quantitative Easing - Comments

Monday's (August 9) Barron's had an article titled "Time to Print, Print, Print."

The article provides an overview of the concept of Quantitative Easing (QE) in the context of our current economic situation.

I don't agree with many of its conclusions and insinuations, however.  In particular, the article seems overly positive on the idea of Quantitative Easing and its supposed positive effects, without providing significant discussion of its risks.

Quantitative Easing is an especially important concept now as I believe additional large-scale QE will continue to occur.  There are an array of risks embedded in such QE efforts.  Perhaps chief among these risks is the risk that excess "money-printing" poses to the currency.  The Barron's article does acknowledge this by saying "Promiscuous growth in the money supply, of course, can both fan inflation and debase the currency."  Although there has been virtually no commentary on the vulnerability of the US Dollar to substantial declines, I believe that such vulnerability does exist, as I discussed in the July 30 post.

Another large risk to QE efforts is that should QE prove successful in driving down interest rates, such a policy foments asset bubbles.  This is especially notable as many believe the housing bubble is but one example of an asset bubble that was caused by ultra-low interest rate policies.  My numerous posts concerning asset bubbles can be found under the "Asset Bubbles" label.  Asset Bubbles, and their future resolution, are an epic problem.

Most people fail to acknowledge the current existence of asset bubbles.  The Barron's article seems to imply that no bubbles exist when it says "Damn the risks of triggering a bit of inflation and some modest investment bubbles."

I will likely comment more upon the idea of QE once it is further implemented.

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SPX at 1083.61 as this post is written

Wednesday, August 11, 2010

Employment-Population Ratio - Chart And Comments

Yesterday, The Wall Street Journal had an Op-ed titled "Unemployment: What Would Reagan Do?"

I found the article interesting as it provides a good explanation of the Civilian Employment-Population Ratio and its history.  An excerpt:

"Since America has about 238 million noninstitutionalized civilian adults of working age, this decrease means that we have nearly 12 million fewer jobs today than we would have if the employment-population rate were still at its 2007 level of 63%.

No other recession in the past 60 years saw such rapid job destruction in either absolute or percentage terms. In the 1979-82 recession, unemployment topped out at a higher rate, 10.8%, but the employment-population ratio declined by only three percentage points, to 57% from 60%."

Below is the long-term chart of this ratio, as found on the St. Louis Federal Reserve site:

(click on chart to enlarge image)

Although this Civilian Employment-Population Ratio is not a statistic that gets a lot of mention, it is nonetheless an important statistic and concept.

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SPX at 1121.06 as this post is written

Tuesday, August 10, 2010

Profiting From Deflation?

Deflation has been a popular topic lately.

Some have recently expressed that deflation can be a scenario from which one can remain unimpacted, or will profit from.   Examples include a August 7-8 Wall Street Journal article titled "How to Beat Deflation-And Even Profit From It." A recent article by Robert Prechter Jr. in the August 9 Barron's concluded by saying "If you shed market and institutional risk, you can sail through deflationary times unscathed."

I have previously written of deflation, in the context of whether it would be a "benefit," in a September 8, 2009 post.

Of course, the extent of deflation plays a major role in determining its impacts...

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SPX at 1120.20 as this post is written

Monday, August 9, 2010

3 Critical Unemployment Charts - August 2010

As I have commented previously, as in the October 30 post, in my opinion the official methodologies used to measure the various job loss and unemployment statistics do not provide an accurate depiction.

However, even if one chooses to look at the official statistics, the following charts provide an interesting (and disconcerting) long-term perspective of certain aspects of the officially-stated  employment situation.

The first two charts are from the St. Louis Fed site.  Here is the Median Duration of Unemployment:
(click on charts to enlarge images)

Here is the chart for Unemployed 27 Weeks and Over:

Lastly, a chart from the Minneapolis Federal Reserve site.  This shows the employment situation vs. that of previous recessions (as characterized by severity):

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

In July 2009 I wrote a series of five blog posts titled “Why Aren’t Companies Hiring?”, which discusses various aspects of the topic, many of which lack recognition.

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SPX at 1121.64 as this post is written

Friday, August 6, 2010

Economic Security Index - Notes

The recently introduced "Economic Security Index" is notable on many fronts.

Here is a summary from the "About" page:

"The Economic Security Index (ESI), sponsored by the Rockefeller Foundation, measures the share of Americans who experience at least a 25% drop in their available family income whether due to a decline in income or a spike in medical spending or a combination of the two, and who lack an adequate financial safety net to catch them when they fall. A higher ESI therefore indicates greater insecurity, much as a rising unemployment rate signals a faltering economy.

Data are available for the ESI from 1985 through 2007, with projections for the most recent years (a less complete form of the index is available back to the late 1960s).

The ESI looks at actual economic losses, not at who fears or is vulnerable to them. The threat of such losses is real and growing for all Americans."

From the homepage, this summary is provided:
"The Economic Security Index shows that economic insecurity disproportionately affects the less advantaged, but has risen substantially for all Americans."
Here is a chart for 1985-2007 (with 2008-2009 projections):

my comments:

I find this Economic Security Index interesting for a variety of reasons.

There are many implications that can potentially be drawn.

Once I further research this Index, I will write another post(s) about it and its implications.

SPX at 1122.32 as this post is written

Wednesday, August 4, 2010

2Q 2010 Corporate Revenues

For the last few quarters, I have been commenting upon the general lack of revenue growth in corporate results.  I have focused on a variety of diversified manufacturers and distributors, all of them well-respected S&P500 firms.    My last comment on this issue was on May 5.

For the recently released 2Q 2010 financial results, there generally has been decent revenue growth.   Many companies have been posting seemingly strong, double-digit growth, but this has been against weak year-ago results.  As one would expect, revenue growth appears strongest in the Asia region.

It will be interesting to monitor these revenue growth figures going forward.  Revenue growth during our current period of economic weakness is a key issue, and generally lacks recognition, especially compared to earnings growth and whether companies are matching or beating earnings “expectations.”

SPX at 1120.46 as this post is written

Monday, August 2, 2010

Durable Goods New Orders

Many people who are optimistic about economic growth site "New Orders" as a rationale.

For reference purposes, here is a chart of Durable Goods New Orders, through 6-1-10, on a Percent Change From Year Ago basis:

source: St. Louis Fed

Below is the latest ECRI WLI Growth chart.  I find the (loose) resemblance (from 2008) of it to the New Orders chart shown above to be curious.  Of course, the ECRI WLI Growth chart is more current (updated through Friday) and has a recent rapid downward trajectory to it:

source: Doug Short's blog

(click on above images to enlarge charts)

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SPX at 1115.57 as this post is written

Sunday, August 1, 2010

Blinder And Zandi Paper - My Comments

Alan Blinder and Mark Zandi released a paper dated July 27 titled "How The Great Recession Was Brought To An End." (pdf)

From the report, page 1: "In this paper, we use the Moody’s Analytics model of the U.S. economy—adjusted to accommodate some recent financial-market policies—to simulate the macroeconomic effects of the government’s total policy response. We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government’s response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation."

my comments: Needless to say, I don't agree with many aspects of the report's conclusions, focus and methodologies.

Much of my thoughts on intervention efforts, which includes stimulus, can be found under the "intervention" label.

The main reason I highlight this report is for reference purposes.

I think the report will prove highly memorable, an iconic piece of the period.

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SPX at 1101.60 as this post is written