Monday, February 28, 2011

The Stock Market Bubble - General Comments

In the February 11, 2011 post ("Stock Market Comment") I mentioned, among other comments, that I believed the stock market, as a whole, is currently a bubble.

I would like to elaborate upon my reasoning for such, especially since it is a view (admittedly) held by very few.  What makes this stock market bubble particularly insidious is that by many outward appearances it doesn't appear to be a bubble.  The most deadly bubbles are ones that don't obviously appear as such.

I believe that the subject of bubbles, and determination of such, is a very complex, yet critically important subject.  As such, I have written extensively about them in the context of our present economic situation and their impact on future economic prosperity.

Perhaps adding to this complexity is that there really isn't a concrete definition of what constitutes an asset bubble (or "speculative bubble").

For many of these reasons, "spotting" and identifying bubbles - especially while they are  "in the making" - can prove difficult.  As I commented in my post of December 2, 2009:
"Some bubbles are harder to spot than others.  Bubbles, almost by definition, include irrational behavior, and therefore can be hard to predict both in their formation as well as their ultimate size.  There are many factors that can come into play in order to cause bubbles."
I view the process of identification of bubbles into two components; fundamental analysis and technical analysis.  The fundamental case that the stock market is a bubble ranges from relatively simple to vastly complex;  as such, I will (at least for now) primarily focus on some of the technical analysis (and other price movement) issues that are of a more straightforward nature.
In my next post I will elaborate upon these factors...

A Special Note concerning our economic situation is found here
SPX at 1328.68 as this post is written

Friday, February 25, 2011

Updates On Economic Indicators February 2011

Here is an update on various indicators that are supposed to predict and/or depict economic activity.  (Past updates of these indicators, as well as previous posts discussing the individual indicators, can be found under "Economic Indicators") :

The February Chicago Fed National Activity Index (CFNAI)(pdf) updated as of February 24, 2011:


The Consumer Metrics Institute Contraction Watch:


The USA TODAY/IHS Global Insight Economic Outlook Index:

An excerpt from the January 24 Release, titled “Economic index forecasts stronger growth”  :

“The January update of the USA TODAY/IHS Global Insight Economic Outlook Index shows real GDP growth, at a six-month annualized growth rate, gaining momentum this year. The index forecasts a growth rate of 3.7% in March and April, up from 2.1% in September. Improved consumer and business confidence and the new tax legislation are expected to help fuel growth. But continued high unemployment, a still-weak housing sector and tight credit conditions will keep growth below 4% this year.”


The ECRI WLI (Weekly Leading Index):

As of 2/11/11 the WLI was at 129.5 and the WLI, Gr. was at 4.9%.  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 January 31 was at 46.9, as seen below:

An excerpt from the January 31 Press Release:

"With a gain of just under one point in January, the Dow Jones Economic Sentiment Indicator signaled that the U.S. economy is slowly pulling itself out of the recession. The ESI edged up from 46.1 in December to 46.9 in January, consolidating a positive 2.2 point gain in December.

“Fears of a double dip recession have fallen off the radar, but reporting about the economy is still short of the optimism we ought to be seeing at this stage, were this a normal expansion. This muted sentiment mirrors the lackluster trend in employment growth,” said Dow Jones Newswires “Money Talks” columnist Alen Mattich."


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

Here is the latest chart, depicting 2-19-09 to 2-19-11:


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

As per the February 17 release, the LEI was at 112.3 and the CEI was at 102.1 in January.

An excerpt from the February 17, 2011 Press Release:

"Says Ken Goldstein, economist at The Conference Board:  "The economy gained some momentum in late fall, and the latest data suggest that trend will continue.  The cumulative change in the U.S. LEI over the last six months is a sharp 3.0 percent, signaling continued expansion."

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.

A Special Note concerning our economic situation is found here
SPX at 1306.10 as this post is written

Thursday, February 24, 2011

Walmart Q42011 Results - Comments

I found various notable items in Walmart’s Q4 conference call transcript (pdf) dated February 22, 2011.  I view Walmart’s results as particularly noteworthy given their retail prominence and focus on low prices.  I have previously commented upon their quarterly results.

Here are the excerpts, all found on pages 34-35, that I find most notable:
"The first quarter of fiscal 2012 is under way....Rising gas prices and still high unemployment levels weigh on the minds of our customers. These issues affect discretionary spending and figure into our assessment for guidance."
"The use of government assistance programs continues to rise, and is up about 50 basis points over this time last year. Close to 80 percent of our payment mix is still made up of some form of cash, including debit cards. Credit as a form of payment has dropped from last year and is now less than 14 percent of our payment tender."
"During the fourth quarter, inflation in dairy, meat and produce were somewhat offset by deflation in snacks, beverages and dry grocery. Weather issues have affected crop availability in produce, and we expect to see continued inflation in fresh food categories."
"We continue to work with our suppliers to reduce inflationary pressure where possible and only pass on price increases when they cannot be avoided."
"Last year, our 13-week comp for the first quarter declined 1.4 percent. We expect Walmart U.S. comp sales for the first quarter running from January 29, 2011 through April 29, 2011 to range from negative two percent to flat."

A Special Note concerning our economic situation is found here
SPX at 1307.40 as this post is written

Wednesday, February 23, 2011

The Changing Dynamics Underlying Profit Margins

In past posts I have written of the challenges businesses face in pricing, given today's economic environment.  One aspect that I mentioned in the December 16 post was how PPI (Producer Price Index) growth was significantly outpacing that of CPI.

Since that December 16 post, the PPI-CPI growth rate issue has been exacerbated.  Doug Short, on his blog, over the recent past has posted a few interesting charts illustrating this concept from a long-term historical viewpoint.

Below is a chart from his February 21 post, titled "Profit Margin Squeeze and Inflation Risk." It shows data from the Philadelphia Federal Reserve regarding Prices Paid vs. Prices Received, with Inflation (CPI) and Recession periods shown:

(click on chart to enlarge image)

I believe that what this chart depicts is notable in a variety of ways.  As shown, we are experiencing a unique situation on a variety of fronts, and are already at historical peaks in both the index levels and 12-month MA as shown.

I believe this data and its implications for businesses and the economy at large is of great concern, and as such monitoring such deserves rapt attention.  This is especially so given the vulnerability of the U.S. Dollar to a substantial decline, a topic that I have written extensively about.

A Special Note concerning our economic situation is found here

SPX at 1315.44 as this post is written

Tuesday, February 22, 2011

Bill Gates On Health Care, Technology

The February 7 - February 13 2011 Bloomberg BusinessWeek had an interview of Bill Gates by Charlie Rose ("Charlie Rose talks to Bill Gates").

There are two excerpts, seen below, that I found especially interesting, although I don't necessarily agree with what Gates says.

Rose's questions are in bold.  For now I will simply post them and may comment upon them further in the future:
What do you conclude about U.S. spending on health care vs. the rest of the world?
We spend 17.8 percent of our GDP on health care. And the next highest is at 12 percent. You have some, like Britain, who are down at 9 percent. That is just mind-blowing. And our outcomes aren't better. The incentive system exists to have all sorts of ways of spending money on 70-year-olds and 80-year-olds—spend $100,000 on this, spend a half-million dollars on that. You're taking resources away from the young. Anything you can invent, we have no metric that would hold us back. So, innovation is inventing ways of taking resources away from the young, whether that's education or anything else.
Technology has been good to the U.S. Are we losing our momentum?
We'd have to keep making a lot of mistakes for several decades before we'd lose that edge. It's great that other countries are more innovative. When my child gets sick, I won't look at the pill and say, "Oh, my gosh, it's made in China." If they invent something that can save my child's life, I'll say, "Hallelujah." But the U.S. lead is very strong. Our universities, our funding of research, it's pretty amazing. Smart people still want to come to this country. Do we make it as easy for them as we ought to? I don't think so. But we have time to renew our excellence in how we educate, the excellence of our immigration system, in how we invest in young people.

A Special Note concerning our economic situation is found here
SPX at 1343.01 as this post is written

Monday, February 21, 2011

Why Did Economists Not Foresee The Financial Crisis?

One of the critical issues that has arisen from the Financial Crisis and its aftermath was why didn't economists foresee the Crisis?

While I believe there are many reasons for this, some complex, it is interesting to read of reasons issued by one of today's foremost economists, Raghuram Rajan, in his February 5 2011 blog post.

While his entire blog post on the issue is worthwhile, the following excerpt is key:
"I would argue that three factors largely explain our collective failure:  specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world."

I have collected a variety of economic forecasts and opinions during the period preceding and during the Financial Crisis on a page titled "Predictions."

A Special Note concerning our economic situation is found here
SPX at 1343.01 as this post is written

Friday, February 18, 2011

Alan Greenspan - On "The Stock Market As A Stimulus"

Alan Greenspan gave an interview to The Wall Street Journal on January 7.  I found various parts to be of interest, and in many instances I disagree (partially or fully) with what he says.  I wrote a February 3 blog post on his comments in the interview concerning the primary purpose of a central bank.

Given the recent steep climb in the stock market, I think it is interesting to highlight his comments on the interaction between The Federal Reserve and the stock market.   While his entire thoughts on the issue are notable, I found his comment at the 16:24 mark to be, for a number of reasons, very provocative:
"...the stock market overall is the only type of stimulus that you can get in the economy which doesn't have any debt associated with it."

I'll likely further comment on this, as well as other recent comments made by Federal Reserve officials on the stock market, in a future post...

A Special Note concerning our economic situation is found here
SPX at 1339.26 as this post is written

Thursday, February 17, 2011

Federal Reserve Economic Projections To 2013 And Beyond - As Of January 2011

The following is from the Minutes of The Federal Open Market Committee of January 25-26, 2011, the Summary of Economic Projections.  As stated:
"In conjunction with the January 25–26, 2011, Federal Open Market Committee (FOMC) meeting, the members of the Board of Governors and the presidents of the Federal Reserve Banks, all of whom participate in the deliberations of the FOMC, submitted projections for growth of real output, the unemployment rate, and inflation for the years 2011 to 2013 and over the longer run."
Among the commentary and detail is this summary table:
Table 1. Economic projections of Federal Reserve Governors and Reserve Bank presidents, January 2011

Variable Central tendency1 Range2
2011 2012 2013 Longer run 2011 2012 2013 Longer run
Change in real GDP 3.4 to 3.9 3.5 to 4.4 3.7 to 4.6 2.5 to 2.8 3.2 to 4.2 3.4 to 4.5 3.0 to 5.0 2.4 to 3.0
November projection 3.0 to 3.6 3.6 to 4.5 3.5 to 4.6 2.5 to 2.8 2.5 to 4.0 2.6 to 4.7 3.0 to 5.0 2.4 to 3.0
Unemployment rate 8.8 to 9.0 7.6 to 8.1 6.8 to 7.2 5.0 to 6.0 8.4 to 9.0 7.2 to 8.4 6.0 to 7.9 5.0 to 6.2
November projection 8.9 to 9.1 7.7 to 8.2 6.9 to 7.4 5.0 to 6.0 8.2 to 9.3 7.0 to 8.7 5.9 to 7.9 5.0 to 6.3
PCE inflation 1.3 to 1.7 1.0 to 1.9 1.2 to 2.0 1.6 to 2.0 1.0 to 2.0 0.7 to 2.2 0.6 to 2.0 1.5 to 2.0
November projection 1.1 to 1.7 1.1 to 1.8 1.2 to 2.0 1.6 to 2.0 0.9 to 2.2 0.6 to 2.2 0.4 to 2.0 1.5 to 2.0
Core PCE inflation3 1.0 to 1.3 1.0 to 1.5 1.2 to 2.0
0.7 to 1.8 0.6 to 2.0 0.6 to 2.0
November projection 0.9 to 1.6 1.0 to 1.6 1.1 to 2.0
0.7 to 2.0 0.6 to 2.0 0.5 to 2.0


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.

A Special Note concerning our economic situation is found here
SPX at 1336.32 as this post is written

Tuesday, February 15, 2011

The February 2011 Wall Street Journal Economic Forecast Survey

The February Wall Street Journal Economic Forecast Survey was published February 14, 2011.  The headline is "Consumer and Business Spending to Spur Expanding U.S. Economy.

I found this excerpt from the article to be notable:
"Since late last summer, the economy appears to have strengthened considerably. The economists put the risk of a return to recession at 12%, down from 22% in September.
The headwinds to expansion appear to be subsiding. A majority of economists—32 of 46 who answered the question—say that rising commodity prices are due to supply-and-demand issues stemming from world-wide growth, not bubbles blown by monetary or fiscal policy."
I also found a variety of topics seen in the Q&A (spreadsheet tab) to be interesting, including questions on the possibilities of state defaults and state bankruptcies.

The current average forecasts among economists polled include the following:

full-year 2011 : 3.5%

Unemployment Rate:
for 6/1/2011: 9.0%
for 12/1/2011: 8.6%

10-Year Treasury Yield:
for 6/30/2011: 3.74%
for 12/31/2011: 4.07%

for 6/1/2011: 2.1%
for 12/1/2011: 2.1%

Crude Oil  ($ per bbl):
for 6/30/2011: $90.68
for 12/31/2011: $91.64

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

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 necessarily agree with many of the consensus estimates and much of the commentary in these forecast surveys.

A Special Note concerning our economic situation is found here
SPX at 1332.32 as this post is written

Monday, February 14, 2011

Milton Friedman "Free to Choose" Videos - The Complete Set

Milton Friedman's entire "Free to Choose" PBS television series of 1980 is listed below:

Volume 1 of 10: "Power of the Market"

Volume 2 of 10:  "The Tyranny Of Control"

Volume 3 of 10:  "Anatomy of a Crisis"

Volume 4 of 10:  "From Cradle to Grave"

Volume 5 of 10:  "Created Equal"

Volume 6 of 10:  "What's Wrong With Our Schools?"

Volume 7 of 10: "Who Protects the Consumer?"

Volume 8 of 10: "Who Protects the Worker?"

Volume 9 of 10:  "How to Cure Inflation"

Volume 10 of 10: "How to Stay Free"

A summary of my thoughts:

The above "Free to Choose" television series is notable in many regards.  First, it is different than the book of the same title, although both contain similar themes.  As such, one can't, and shouldn't, be substituted for another.  The television series is particularly valuable as it shows the emphasis of Milton Friedman's wording in ways the book can't.  Second, the television series is valuable as each episode has Milton's presentation for the first half of the hour, followed by a half-hour moderated debate on the topic among Milton and a distinguished group of others.  Many of those in the debates hold opinions in direct contrast to those espoused by Friedman.  As such, one gets a wide-ranging discussion of the issues from multiple viewpoints.

While I disagree with various of  Milton Friedman's beliefs and conclusions he has either stated in "Free to Choose" or elsewhere, in aggregate I view his work as very valuable.   I do believe that his suggestions are (at the very least) worthy of serious contemplation.

Some may dismiss Milton Friedman's work as (at least partially) irrelevant as he was most active decades ago.   However, if one analyzes the topics of his work, one will notice that his focus was one of tremendous relevance to today's economic situation.  I would say that his work has never had greater relevance.

I plan on referencing certain of his comments and work in future commentary.  I have previously done so in a May 16 2010 blog post.

A Special Note concerning our economic situation is found here
SPX at 1329.15 as this post is written

Friday, February 11, 2011

Stock Market Comment

Starting with my June 2, 2010 post I wrote of my expectation for a near-term stock market advance despite what I viewed as highly problematical future conditions.  I continue to maintain this view, albeit with the dangers discussed in subsequent posts, including that of October 13, 2010 “Comments On The Next Crash."

Although I continue to believe the stock market will go higher, there are many technical and fundamental signs that are disconcerting.  I will be discussing these in detail in the near future.

Another issue of great importance is whether the stock market, as a whole, is currently a bubble.  I believe that it is.  This is admittedly a very unique opinion.  I will discuss my reasoning in a future post.  This "bubble" condition will have immense future ramifications.

For reference purposes, below is a daily chart of the S&P500, from March 2, 2009, near the March 6, 2009 low of 666.79:

(click on chart to enlarge image)(chart courtesy of


A Special Note concerning our economic situation is found here
SPX at 1321.87 as this post is written

Wednesday, February 9, 2011

QE2's Effectiveness

This post is an update to that of December 9, 2010, "Measuring QE2 Effectiveness."

There are many different ways one could use to gauge whether QE2 is successful.  Of great significance, I am not aware of any official statement that specifically states the goals (and metrics of such) of QE2.

However, lowering of interest rates, especially that of the 10-Year Treasury, appears to be a/the primary goal.

Below is a chart of the 10-Year Treasury yield, starting on November 3, 2010, the date of the announcement.  The actual asset purchases began on November 12:

(click on chart to enlarge image)(chart courtesy of

As one can see, the 10-Year Treasury yield has risen substantially over this period, rising from 2.594% on the close of November 2, 2010 to 3.725% as of yesterday's (February 8, 2011) close.

As for the goal of (modestly) increasing inflation, there are no daily CPI values available for this period.  However, if one uses values from the Billion Prices Project (which I discussed in the November 24 post) as a proxy, the index values have increased.  The index was 100.76 on November 3;  100.6679 on November 12;  and 102.0273 on February 7.

I plan on further commenting upon QE2 and its apparent effectiveness in future posts.  (all past posts on Quantitative Easing can be found here)


A Special Note concerning our economic situation is found here
SPX at 1324.57 as this post is written

Monday, February 7, 2011

Recession Measures - Updated

This post is the latest update to a series of blog posts seen on the blog. The original blog post of April 12, 2010, is titled “Recession Measures.” In it, Bill discussed key measures that the NBER uses to determine recoveries, and posted four charts.

Here are those charts, updated in his February 6, 2011 post. The charts are constructed in a fashion different than most – in a “percent of peak” fashion. As defined, “The following graphs are all constructed as a percent of the peak in each indicator. This shows when the indicator has bottomed – and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%.” Periods of recession, as defined by the NBER, are shown as blue bars.

Here are the four charts, updated through the dates shown: (click on images to enlarge)

Real Gross Domestic Product, now 0.14% above the pre-recession peak:


Real Personal Income Less Transfer Payments, still 4.3% below the pre-recession peak:


Industrial Production, still 5.8% below the pre-recession peak:


Payroll Employment, still 5.6% below the pre-recession peak:


A Special Note concerning our economic situation is found here

SPX at 1317.29 as this post is written

Sunday, February 6, 2011

3 Critical Unemployment Charts - February 2011

As I have commented previously, as in the October 6, 2009 post, in my opinion the official methodologies used to measure the various job loss and unemployment statistics do not provide an accurate depiction; they serve to understate the severity of unemployment.

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  unemployment 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)(charts updated as of 2-4-11)


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.

A Special Note concerning our economic situation is found here
SPX at 1310.87 as this post is written

Friday, February 4, 2011

Ben Bernanke's Speech And Q&A On February 3, 2011

I could comment extensively on Ben Bernanke's speech and Q&A at the National Press Club yesterday, as I partially and fully disagree on many of the comments he made.  I find it unfortunate that official transcripts of this and previous Q&A sessions are not available.  (speech video and transcript;  Q&A video and partial transcript)

One aspect that I would like to briefly comment upon is that of the success of QE2.   Quantitative Easing's primary goal is to lower interest rates.  However, during QE1 and (to date) QE2, interest rates have risen, not declined, since the program was begun.  This is highly important and notable, yet doesn't receive proper recognition.  It begs the question as to whether QE1 and QE2 are failed interventions.

Proponents of QE2 claim that it is "working" or is "effective" as the stock market is rising, GDP is rising, or use a variety of other arguments to justify the program.  However, that does nothing to change the fact that interest rates have risen, not declined, under QE2 (and QE1).

This passage from yesterday's speech is notable with regard to the above:
"Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases. All of these developments are what one would expect to see when monetary policy becomes more accommodative, whether through conventional or less conventional means. Interestingly, these developments are also remarkably similar to those that occurred during the earlier episode of policy easing, notably in the months following our March 2009 announcement of a significant expansion in securities purchases. The fact that financial markets responded in very similar ways to each of these policy actions lends credence to the view that these actions had the expected effects on markets and are thereby providing significant support to job creation and the economy."

A Special Note concerning our economic situation is found here
SPX at 1307.10 as this post is written

Thursday, February 3, 2011

Alan Greenspan On The Primary Purpose Of A Central Bank

On January 7, The Wall Street Journal conducted an interview of Alan Greenspan.

I found a few aspects of this interview to be interesting.  Perhaps most notable was the following comment by Greenspan, seen at the 13:58 mark:
"...the primary purpose of a central bank is to protect the value of the currency..."
I will likely reference this quote in a subsequent post(s)...


A Special Note concerning our economic situation is found here
SPX at 1304.03 as this post is written

Tuesday, February 1, 2011

A Look Back - 2008 Economic Forecasts

For a variety of reasons, I believe the economic forecasts previous to and during the "Financial Crisis" of late '08 - early '09 deserve scrutiny.  I have assembled a variety of the more notable forecasts and opinions of the period in a document titled "Predictions."

Additionally, I would like to highlight the August 2008 Wall Street Journal Economic Forecast Survey.  This survey was conducted on August 8-August 11, 2008.  At that point during 2008, there had been a variety of financial and economic problems that had surfaced; however, the stock market, as depicted by the S&P500, closed at 1296.32 on August 8, 2008.  The chart below shows the price action from August 8, 2008-March 10, 2009.  By March 10, the low of 666.79 had been reached two days before, as depicted:

(chart courtesy of on image to enlarge chart)

Here are various excerpts from the aforementioned Wall Street Journal Economic Forecast Survey, dated August 14, 2008:
  • "Economists are deeply divided on whether or not we are in a recession, according to the latest WSJ forecasting survey."  53% said Yes, while 47% said No.
  • GDP, average expectation (among respondents) for year 2008, was seen at 1.2%; for year 2009, 1.9%.
  • Unemployment, average expectation as of December 2008 was seen at 5.9%; for December 2009, 6%.
  • CPI, average expectation, December 2008 was 4.1%; December 2009, 2.4%.
  • Crude Oil, average expectation, for December 31, 2008, was $107.99/bbl; for June 30, 2009, $100.61/bbl.
The above illustrates the difficulties inherent in economic forecasting prior to and during a severe crisis.  It should cast uncertainty on forecasters' ability to predict future crises.
A Special Note concerning our economic situation is found here
SPX at 1286.12 as this post is written