Wednesday, June 29, 2011

Financial Stocks - Notable Price Action

I think that the relatively poor "price action" of various financial stocks is notable.  It is one of many current indications that overall stock market health is not as strong as a casual glance at the major indices would indicate.

Below is a chart featuring the XLF (the financial ETF) on a daily basis since 2007.  As well, the S&P500 is plotted above it, with GS and JPM shown below it.  The blue line on each indicates the 200dma:

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


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1296.67 as this post is written

Tuesday, June 28, 2011

Analyst And Strategist S&P500 Earnings Estimates For 2011 & 2012

On June 27 The Wall Street Journal published an article titled "Stocks Fall.  Optimism Stands Tall."

As seen in this article:
Analysts expect the S&P 500 companies to earn $99.86 a share in aggregate this year, up 2.3% from their April 1 estimate, according to FactSet. Strategists expect $95.24, according to John Butters, senior earnings analyst at FactSet. The median gap between the two groups is now 5.6%, the biggest disparity in at least three years, he says.
For 2012, the divergence is even wider: $112 a share for analysts, compared with $105 for strategists.
Yesterday a Bloomberg article concerning S&P500 sales and profits also indicated that 2011 earnings are forecast in the $99/share range, as seen in this excerpt:
Revenue gains may push S&P 500 profits to $99.08 a share this year, up 17 percent from 2010, after rising 37 percent a year earlier, the biggest two-year expansion since 1995, analyst estimates compiled by Bloomberg show.

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.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1280.10 as this post is written

Monday, June 27, 2011

Updates On Economic Indicators June 2011

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 June Chicago Fed National Activity Index (CFNAI)(pdf) updated as of June 23, 2011:


The Consumer Metrics Institute Contraction Watch:


The USA TODAY/IHS Global Insight Economic Outlook Index:

An excerpt from the June 22 Press Release, titled “Index forecasts stronger growth this fall” :
The June update of the USA TODAY/IHS Global Insight Economic Outlook Index shows real GDP growth, at a six-month annualized growth rate, remaining below 3% through the summer and then gaining strength in October and November with 3.3%-3.4% growth rates. Temporary automotive supply disruptions resulting from the Japan earthquake plus high energy and food prices are the main reasons for the slowdown. A return to stronger growth is expected in the fall as automotive supply levels return to normal, businesses increase equipment spending, export growth remains strong and employment slowly improves. The weak housing market and concerns about European debt remain drags on the recovery.

The ECRI WLI (Weekly Leading Index):

As of 6/17/11 the WLI was at 127.0 and the WLI, Gr. was at 2.9%.  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 May 31 was at 46.7, as seen below:

An excerpt from the May 31 Press release:
The depiction of the economy in U.S. newspapers continued to be more negative than positive in May, lengthening a long-term trend held since November 2007. In May, the Dow Jones Economic Sentiment Indicator hit 46.6, unchanged since April and more than 3 points away from the positive side of the 100-point scale.

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

Here is the latest chart, depicting 6-18-09 to 6-18-11:


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

As per the June 17 release, the LEI was at 114.7 and the CEI was at 102.9 in May.

An excerpt from the June 17 Press Release:
Says Ataman Ozyildirim, economist at The Conference Board: “The U.S. LEI rebounded in May and resumed its upward trend with a majority of the components supporting this gain. The Coincident Economic Index, a monthly measure of current economic conditions, continued to increase slowly but steadily. Overall, despite short-term volatility, the composite indexes still point to expanding economic activity in the coming months.”
Says Ken Goldstein, economist at The Conference Board: “Modest economic growth is being buffeted by some strong headwinds, including high gas and food prices and a soft housing market. The economy will likely continue to grow through the summer and fall, however it will be choppy.”

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.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1268.45 as this post is written

Friday, June 24, 2011

Ben Bernanke's June 22 Press Conference - Notable Aspects

On Wednesday June 22 Ben Bernanke gave his scheduled Press Conference.  Overall, I found his remarks less notable than that of his April 27 Press Conference, which I commented upon in the April 28 post titled "Ben Bernanke's April 27 Press Conference - My Comments."

Here are Ben Bernanke's comments I found most notable, although I don't necessarily agree with them.  These comments are excerpted from the transcript (preliminary) (pdf), with Bernanke's responses as indicated to the various questions:

from page 6:
Greg Ip: Mr. Chairman, the Committee lowered not just this year's central tendency forecast but also 2012.  And, yet, the statement of the Committee attributes most of the revision forecast to temporary factors.  So I was wondering if you could explain what seems to be persisting in terms of holding the recovery back.  I did see the statement says in part to factors that are likely to be temporary.  Are there more permanent factors that are producing a worse outlook than three months ago?
Chairman Bernanke: Well, as you -- as you point out, what we say is that the temporary factors are in part the reason for the slowdown.  In other words, part of the slowdown is temporary, and part of it may be longer lasting.  We do believe that growth is going to pick up going into 2012 but at a somewhat slower pace from -- than we had anticipated in April.  We don't have a precise read on why this slower pace of growth is persisting.  One way to think about it is that maybe some of the headwinds that have been concerning us like, you know, weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, some of these headwinds may be stronger and more persistent than we thought.  And I think it's an appropriate balance to attribute the slowdown partly to these identifiable temporary factors but to acknowledge a possibility that some of the slowdown is due to factors which are longer lived and which will be still operative by next year.  You note that, in 2013, we have growth at about the same rate that we anticipated in April.

from page 6:

Bernanke, in response to a question from Steve Liesman about further easing:
With respect to additional asset purchases, we haven't taken any action, obviously, today.  We'll be reviewing the outlook going forward.  It will be a Committee decision.  I think the point I would make, though, in terms of where we are today versus where we were, say, in August of last year when I began to talk about asset purchases is that at that time inflation was very low and falling.  Many objective indicators suggested that deflation was a nontrivial risk.  And I think that the securities purchases have been very successful in eliminating deflation risk.  I don't think people appreciate necessarily that deflation can be a very pernicious situation where -- could have very longlasting effects on economic growth.
In addition, growth in payrolls has actually picked up.  In the four months before the Jackson Hole speech in August, there was about an 80,000 per-month payroll increase.  So far in 2011, including the weak payroll report in May, the average is closer to 180,000.  So there has been improvement in the labor market, albeit not as strong as we would like.  As of last August, we were essentially missing significantly in both -- on both sides of our mandate.  Inflation was too low and falling, and unemployment looked like it might be even beginning to rise again.  In that case, the case for monetary action was pretty clear in my mind.  I think we are in a different position today, certainly not where we'd like to be but closer to the dual mandate objectives than we were at that time.  So, again, the situation is different today than last August; but we'll continue to monitor the economy and act as needed.

from page 20:

Bernanke's response to a question about the timing of the growth rate of employment:
In terms of the unemployment rate, though, given that growth is not much above the long-run potential rate of growth -- and we have in our projections an estimate of 2.5 to 2.8 percent.  We haven't really done much better than that -- it takes growth faster than potential to bring down unemployment.  And since we're not getting that, we project unemployment to come down very painfully slowly.  At some point, if growth picks up as we anticipate, job numbers will start getting better.  We're still some years away from full employment in the sense of 5 ½ percent, say; and that's, of course, very frustrating because it means that many people will be out of work for a very extended time.  And that can have significant long-term consequences that concern me very much.

from page 21:
Akihiro Okada: Mr. Chairman, I am Akihiro Okada with Yomiuri Shimbun, a Japanese newspaper. During the Japanese lost decade in the 1990s, you strongly criticized Japan’s radical policies. Recently Barry Summers suggested in his column that the U.S. is in the middle of its own lost decade.  Based on those points with QE2 ending, what do you think of Japan's experience and the reality facing the U.S.?  Are there any history lessons that we should be reminded about?  Thank you.
Chairman Bernanke: Well, I'm a little bit more sympathetic to central bankers now than I was ten years ago.  I think it's very important to understand that in my comments, both in my comment in the published comment a decade ago as well as in my speech in 2002 about deflation, my main point was that a determined  central bank can always do something about deflation.  After all, inflation is a monetary phenomenon, a central bank can always create money, so on.  I also argued -- and I think it's well understood that deflation, persistent deflation can be a very debilitating factor in -- in growth and employment in an economy.  So we acted on that advice here in the United States, as I just described, in August, September of last year.  We could infer from, say, TIPS prices and inflation index bond prices, that investors saw something on the order of one-third chance of outright deflation going forward.  So there was a significant risk there.  The securities purchases that we did were intended in part to end that risk of deflation.  And I think it's widely agreed that we succeeded in ending that deflation risk.  I think also that our policies were constructive on the employment side.  This, I realize, is a bit more controversial.  But we did take actions as needed, even though we were to zero lower bound of interest rates, to address deflation. So that was the thrust of my remarks ten years ago.  And we've been consistent with that -- with that approach.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1283.50 as this post is written

Thursday, June 23, 2011

MacroMarkets June 2011 Home Price Expectations Survey

On June 22 MacroMarkets released its June 2011 Home Price Expectations Survey (pdf) results.  This Survey is now done on a quarterly basis.

The accompanying chart is seen below:

(click on chart image to enlarge)

As one can see from the above chart, the average expectation is that not only has the residential real estate market (nearly) hit a “bottom” as far as pricing; but that steady yet mild appreciation will occur through 2015.

The survey detail (pdf) is interesting.  Of the 100+ survey respondents, 18 (of the displayed responses) foresee a cumulative price decrease through 2015; and of those 18, only three, Gary Shilling, John Brynjolfsson, and Anthony Sanders foresee a double-digit percentage cumulative price drop.  Gary Shilling remains the most “bearish” of the survey participants with a forecast of a 19.68% cumulative price decline through 2015.

The Median Cumulative Home Price Appreciation for years 2011-2015 is seen as -3.10%, -2.22%, -.15%, 2.94%, and 6.72% respectively.

For a variety of reasons, I continue to believe that even the most “bearish” of these forecasts (as seen in Gary Shilling’s above-referenced forecast)  will prove too optimistic in hindsight.  Although a 19.68% 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 many people continue to 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, (even) from these price levels there exists outsized potential for a price decline of severe magnitude, unfortunately.  I discussed this downside, based upon historical price activity, in the October 24, 2010 post.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1292.89 as this post is written

Wednesday, June 22, 2011

McKinsey Economic Conditions Snapshot - Notable Aspects

Recently McKinsey released their "Economic Conditions Snapshot, June 2011"

As stated in the survey:
Over the past three months, executives around the world have grown more pessimistic about their nations’ economies: compared with three months ago, a smaller share say their economies improved over the past six months, and slightly more expect worsening conditions over the rest of 2011, according to our most recent survey.
The aspect that I found most interesting had to do with the North America executives' responses to the question "How do you expect your country's economy to be 6 months from now?"

Only 2% indicated "Substantially worse."

Of the other four response categories, the majority indicated "Moderately better" (44%), or "The same" (35%); while 4% indicated "Substantially better."  15% indicated "Moderately worse."

I find these responses to be one more indication confirming that consensus expectations regarding future economic conditions are for that of low growth with (very) little chance of substantial economic weakness.

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.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1294.28 as this post is written

Monday, June 20, 2011

CEO & CFO Surveys 2Q 2011

On June 14 the Business Roundtable’s CEO Economic Outlook Surveywas released for the 2nd quarter.  The June Duke/CFO Magazine Global Business Outlook Survey was released on June 8.  Both contain a variety of statistics regarding how executives view business and economic conditions.

In the CEO survey, of particular interest is the CEO Economic Outlook Index, which decreased to 109.9 from 113 in the 1st quarter.  Also stated in the report, "In terms of the overall U.S. economy, member CEOs estimate real GDP will grow by 2.8 percent in 2011, a slight decrease from the 2.9 percent projected in the first quarter of 2011."

As well, "“Fully 87% of our CEOs anticipate higher sales,” said Ivan G. Seidenberg, Chairman of Business Roundtable and Chairman and CEO of Verizon Communications. “As a result, more than half of our CEOs plan to increase both capital spending and U.S. hiring.  This continues a positive trend for our companies’ activity heading into the second half of 2011.”"

In the CFO Survey, "Optimism among chief financial officers in the U.S. has fallen, but spending plans indicate continued moderate growth over the next year."

Also, with regard to hiring, "U.S. companies expect domestic employment to increase by 0.7 percent over the next year.This rate of growth is down from last quarter and implies that, over the next year, the U.S. economy will average fewer than 100,000 new jobs created each month."

As well, "Nearly 10 percent of firms say they would like to hire, but cannot find employees with the right skills, and 16 percent say they would like to hire more but are resource constrained. Only twelve percent of firms say they are overstaffed for current demand."

The CFO survey contains the Optimism Index chart, showing U.S. Optimism (with regard to the economy) at 57, as seen below:

It should be interesting to see how well the CEOs and CFOs predict business and economic conditions going forward.   I discussed various aspects of this, and the importance of these predictions, in the July 9 2010 post titled "The Business Environment".

(past posts on CEO and CFO Surveys can be found under the “CFO and CEO Confidence” 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.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1271.50 as this post is written

Sunday, June 19, 2011

S&P500 Price Projections – Livingston Survey June 2011

The June 9, 2011  Livingston Survey (pdf) contains, among its various forecasts, a S&P500 forecast.  It shows the following price forecast for the dates shown:

June 30, 2011   1340
Dec. 30, 2011   1380
June 29, 2012  1413.5
Dec. 31, 2012    1463.5

These figures represent the median value across the 35 forecasters on the survey’s panel.

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.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1271.50 as this post is written

Friday, June 17, 2011

"The Reinhart & Rogoff Book" - General Comments

This Time Is Different (2009) by Carmen Reinhart and Kenneth Rogoff is a widely-quoted and referenced book.  Often it is referred to as "the Reinhart and Rogoff book."

I find the book to be interesting and unique, although I don't agree with some of its contents.  From an overall standpoint, perhaps the greatest misgiving I have with regard to the book is the (strong) implication that previous economic episodes are highly relevant to that of today.

With regard to our (putative) current post-financial crisis period, there are a few quotes in the book that are particularly relevant.  The first is found in Chapter 14, page 230, when it says "...the recessions surrounding financial crises are unusually long compared to normal recessions, which typically last less than a year."  Another quote is seen in Chapter 14, page 235, "It is important to recognize that standard measures of the depth and duration of recessions are not particularly suitable for capturing the epic decline in output that often accompanies deep financial crises.  One factor is the depth of the decline, and another is that growth is sometimes quite modest in the aftermath as the financial system resets."

I find that many have interpreted the above quotes (and similar findings of the book) with regard to our current economic situation in a rather disconcerting fashion.  Many have interpreted these findings to conclude that since this is the aftermath of a "financial crisis" recovery and growth will be tepid; as such, the lack of recovery / growth that we are now experience is nothing to be unduly concerned about as it is "normal" from a long-term historical standpoint.

I think this viewpoint is a very dangerous one to adopt because it certainly can lull one into a "false sense of security" or otherwise  can breed complacency.

I am of the belief, stated frequently in this blog, that our current economic situation is unique, i.e. not comparable to those in the past.  As such, I am not adopting the aforementioned "don't be worried, this is normal" mindset as we continually witness various facets of economic weakness and notably odd manifestations of such.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1267.64 as this post is written

Thursday, June 16, 2011

The S&P500 Since 2007

In the October 27, 2010 blog post ("Market Overview - Part V:  Stock Market") I showed two charts of the S&P500.

As we are now approaching various important technical levels of the S&P500, I have updated one of the charts, as seen below:

chart courtesy of; annotations by the author

click on chart to enlarge

As one can see from the chart, one interpretation that can be made is that of a (completed) "Cup & Handle" chart formation as denoted by the green line.  I have added a red line to now denote the 1220 area.  I think it would be significant if the S&P500 falls below this 1220 level now, as the 1220 level is technically significant in many different ways.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1265.42 as this post is written

Wednesday, June 15, 2011

NYSE Summation Index - Notable Aspects

I am currently finding a variety of charts and market indicators to be of great interest as they depict internal stock market dynamics that are either less-than-robust or disconcerting / alarming.

One such chart, which I have previously featured, is that of the NYSE Summation Index.  I have put in the S&P500 as an overlay in green, with the NYSE Summation Index's MACD at the bottom of the chart. What I find particularly notable here is the long-term negative MACD divergence as indicated on the chart, in blue:

chart courtesy of; annotations by the author

click on chart to enlarge


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1287.87 as this post is written

The Illinois Tax Increase Aftermath

Previously I have written of the financial difficulties of states. Of particular interest, for a variety of reasons, is the precarious situation in Illinois, of which I wrote of in the January 19 post ("Financial Situation Facing Illinois")

The Wall Street Journal had a June 9 editorial titled "Illinois Tax Firesale" which contained the following excerpts:
"Illinois gained nationwide notoriety in January when Governor Pat Quinn signed into law a 67% hike in the personal income tax rate while lifting the corporate tax rate to 9.5%, the fourth highest in the nation."
"...according to the state's Department of Commerce, Illinois has already shelled out some $230 million in corporate subsidies to keep more than two dozen companies from fleeing the state. And more are on the way."
"The irony is that the recipients of these sweetheart deals are the very enterprises that Mr. Quinn was counting on to pay more taxes. Six months ago the Governor and union economists said the Illinois tax hike wouldn't chase businesses out of the state. Now Mr. Quinn is seducing businesses to stay by chopping their tax liabilities."

Various complex facets arise when taxes are increased during slow or weak economies. I have written of these facets in posts of February 23, 2010 ("Tax Increases And Our Economic Situation – Follow Up") as well as the "America’s Trojan Horse" article.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1287.87 as this post is written

Tuesday, June 14, 2011

The June 2011 Wall Street Journal Economic Forecast Survey

The June Wall Street Journal Economic Forecast Survey was published June 13, 2011.  The headline is "Sluggish Hiring Seen as a Threat to Recovery."

I found various aspects of the survey to be interesting.  One was "On average, the economists put the chances of a double-dip recession in the next year at just 16%, but the recovery continues to face risks."

Also, I found a few questions in the detail (spreadsheet) regarding the impact of QE2 to be notable. One question was (with the percentage of respondents indicated):
The Fed's $600 billion in Treasury purchases were:
Successful (the benefits exceeded the costs)    59%
Unsuccessful (costs exceeded the benefits)  41%
Another question was:
The primary impact of the Fed's $600 billion bond-buying program was to:
Push up asset prices and stimulate financial conditions and economic growth  46%
Push up commodities prices and cause unhelpful inflation worries  25%
It didn't have much impact on anything  19%
Prevent a dangerous bout of deflation      10%
As well, there were a couple of more questions pertaining as to whether the Federal Reserve will institute another round of QE prior to year-end.

The current average forecasts among economists polled include the following:

full-year 2011 : 2.7%
full-year 2012:  3.0%

Unemployment Rate:
December 2011: 8.6%
December 2012: 7.9%

10-Year Treasury Yield:
December 2011: 3.63%
December 2012: 4.33%

December 2011:  3.0%
December 2012:  2.4%

Crude Oil  ($ per bbl):
for 6/30/2011: $100.20
for 12/31/2011: $96.44

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

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.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1271.83 as this post is written

Monday, June 13, 2011

The Changing Nature Of Retail - Economic Implications

On Wednesday, June 8, The Wall Street Journal had a story titled "Faded Malls Leave Cities In the Lurch."

Some notable excerpts:
Sales taxes are a critical source of funding for many cities, typically second in size only to property taxes. They accounted for roughly 23% of all U.S. state and local tax collection in 2008, the latest year available, according to the Census Bureau.
While the number of Americans grew 52% from 1970 to 2010, the amount of store space jumped 126% according to real-estate research firm CoStar Group Inc., which estimates the country has 50 square feet of retail per person.
Now the growth of online shopping, which has accelerated since the recession, is leading many retail chains to slow store openings and invest instead in better websites and mobile-phone applications, reducing the demand for real estate.
My comments:

The changing retail landscape, and the accompanying economic ramifications, is something that lacks full recognition.

The article quoted above focuses on the aspect of lower tax revenues as "bricks and mortar" stores are continually pressured from a variety of sources.

The pressure being exhibited on retail stores has other widespread economic ramifications.  Store closings also impacts employment, commercial real estate, and impairs economic development, among other things.  Closed retail stores can also contribute to "urban blight", as closed stores and "ghost malls" often sit for long periods of time.  These closed stores can serve as a haunting reminder that "all is not well" economically.

Needless to say, retail is a very prominent aspect of our economy; its continual changes, especially over the last two decades, have had a very notable impact on the economy.

Various large retailers - those that have massive stores - have recently announced plans to build smaller stores in the future.  It should be interesting to see how these efforts fare.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1270.98 as this post is written

Friday, June 10, 2011

J. Eftin Frenett Quote On Bernanke

From time to time I post quotes from others regarding Ben Bernanke.

Here is one from this week's Barron's (June 4) "Mailbag" section. It is a quote from J. Eftin Frenett. While I don't necessarily agree with (all of) it, I thought it was an interesting perspective and one that deserves contemplation:

To the Editor:
The Federal Reserve's Ben Bernanke is like an engineer who fails to properly define system scope. While the models and simulations appear robust, real-world application leads to seemingly inexplicable failure. What Bernanke has failed to account for are the resources and circumstances out of his control.

The coming crash in U.S. financial markets will be triggered by failures overseas. Investors will suddenly realize that the appropriate risk premium for even top-tier assets is far higher than what they had previously believed.
J. Eftin Frenett
Spencerport, N.Y.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1289 as this post is written

Total Household Net Worth As A Percent Of GDP 1Q 2011

The following chart is from the CalculatedRisk blog post of June 9, 2011, titled "Q1 Flow of Funds:  Household Real Estate assets off $6.6 trillion from peak." It depicts Total Household Net Worth as a Percent of GDP.  The underlying data is from The Federal Reserve Flow of Funds 1Q 2011 report:

(click on chart to enlarge image)

As seen in the above-referenced CalculatedRisk blog post:

The Fed estimated that the value of household real estate fell $339 billion in Q1 to $16.1 trillion in Q1 2011, from just under $16.5 trillion in Q4 2010. The value of household real estate has fallen $6.6 trillion from the peak - and is still falling in 2011.

Household net worth peaked at $65.8 trillion in Q2 2007. Net worth fell to $49.4 trillion in Q1 2009 (a loss of over $16 trillion), and net worth was at $58.1 trillion in Q1 2011 (up $8.7 trillion from the trough).

My comments:

As I have written in previous posts 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."

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1289 as this post is written

Thursday, June 9, 2011

Janet Yellen's Speech of June 2 2011 - Notable Excerpts

On June 2, Janet Yellen, Vice Chair of the Board of Governors of the Federal Reserve System, gave a speech titled "Assessing Potential Financial Imbalances in an Era of Accomodative Monetary Policy" (pdf)

While I don't agree with many of her points and assertions, I nonetheless think the topic is very important.  As such, here are a few excerpts that I think are notable:

page 1 :
Monetary policy in the United States has been highly accommodative now for a number of years.  Since late 2008, the Federal Open Market Committee (FOMC) has kept the target federal funds rate close to zero and has purchased a substantial amount of longer-term Treasury and agency securities.  My reading of the evidence is that those securities purchases have proven effective in easing financial conditions, thereby promoting a stronger pace of economic recovery and checking undesirable disinflationary pressures.  Moreover, I believe that the current accommodative stance of U.S. monetary policy continues to be appropriate because the unemployment rate remains elevated and inflation is expected to remain subdued over the medium run.
page 2:
In the aftermath of the crisis, the primary objective of U.S. monetary policy was to promote financial conditions likely to spur spending on goods and services through a number of channels.  To this end, the Federal Reserve first lowered the federal funds rate and other rates at the short end of the yield curve and, once the zero lower bound was binding, sought to push down yields at the longer end through large-scale purchases of longer-term Treasury and agency securities.  We anticipated that lowering rates on these securities would place downward pressure on a range of private yields as well, in turn supporting home values, equity prices, and other asset prices.  After all, this is the primary mechanism through which monetary policy in its conventional form stimulates the economy.  But a sustained period of very low and stable yields may incent a phenomenon commonly referred to as “reaching for yield,” in which investors seek higher returns by purchasing assets with greater duration or increased credit risk.
page 4:
Misaligned asset prices are notoriously difficult to detect in a timely fashion, and no single metric or set of metrics can consistently and reliably identify stretched valuations.  Nonetheless, it is clearly worthwhile to track a wide range of metrics and to view them in the context of their historical norms.  Current conditions can be evaluated against a baseline of past experience, and then assessed in light of the various institutional and market factors that could conceivably account for deviations from historical ranges.  The Federal Reserve tracks a large number of indicators, and I will highlight a few examples.  Overall, these indicators do not obviously point to significant excesses or imbalances in the United States.
page 8:
Therefore, the risk of a rapid and disorderly deleveraging in the event of a swift change in market sentiment seems to be limited at this point.
page 8:
First, important classes of generally unlevered investors (for example, pension funds) are reportedly finding it difficult in the present low interest rate environment to meet nominal return targets and may be reaching for yield by assuming greater interest-rate and credit risk in their portfolios.
page 10:
If substantial evidence of financial imbalances on a broader scale were to develop, particularly if accompanied by significant use of leverage, I believe that supervision and regulation should constitute our first line of defense.  Indeed, in the wake of the crisis, our supervisory process has been significantly modified to take more explicitly into account possible financial stability implications and effects on the broader economy, a perspective that is frequently described as “macroprudential.”  Our concerns now extend beyond the capacity of individual institutions to protect their capital and balance sheets.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1279.56 as this post is written

Wednesday, June 8, 2011

The Groupon & LinkedIn IPOs - Broader Significance

On March 1 I wrote a post titled "The Stock Market Bubble - Various Aspects."

In that post I highlighted a variety of factors that support my conclusion that the entire stock market is experiencing a bubble.

One of the factors listed was "Extremely rapid valuation increases seen in a variety of private (tech) companies to high valuations, despite any clear indication that fundamentals have changed proportionately."

Since the writing of that post, we have had one very notable IPO, LinkedIn, as well as another pending IPO, Groupon, that serve to illustrate that point.  What is notable in many of the private tech companies' valuations includes the current size of the valuations; the size of the valuation increases; and the rates at which the valuations are increasing.  All three of these aspects are (very much) outsized.

LinkedIn's first day of trading, May 19, likely reminded some of the type of manic price action seen during tech IPOs of the late '90s.  Here is the chart from May 19 in 1-minute increments:

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

As seen in Barron's, May 23, in an article titled "Is LinkedIn Already Tapped Out?" at a price of $93 the Market Capitalization was $8.7 Billion and 2010 Revenue was $243 million, with 2010 Profits of $15 million.  As seen in the article, "Twenty-seven months ago, LinkedIn was issuing options with an exercise price of just $2.32 - less than 1/40th of what investors paid last week."

The Groupon jump in valuation is starkly illustrated by the following, as seen in a Wall Street Journal June 3 article titled "Groupon to Gauge Limits of IPO Mania." From that article: "As of March 31, Groupon's shares traded among institutional investors in private secondary trading at an implied valuation of $5.6 billion, according to Nyppex LLC, an intermediary in the secondary market."

While Groupon has yet to go public, various sources have been predicting a resulting post-IPO Market Capitalization in the $20-$30 Billion range.  One revenue projection indicated 2011 revenue of $2.6 Billion.

I could write extensively about my thoughts concerning the fundamentals of both LinkedIn and Groupon; for now I will highlight one item (among many) that deserves particular attention - that of the outsized Price-To-Sales ratios.

Of course, there are many other private tech companies experiencing similar dynamics.  In aggregate, these huge, fast jumps in valuations - to (very) high valuations - should serve as a "red flag" that there is wildly excessive positive sentiment.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1283.31 as this post is written

Monday, June 6, 2011

3 Critical Unemployment Charts - June 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 6-3-11)


Here is the chart for Unemployed 27 Weeks and Over:


Lastly, a chart from the site, from the June 3 post titled “Employment Summary, Part Time Workers and Unemployed over 26 Weeks.” This shows the employment situation vs. that of previous recessions, as shown:


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.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1300.16 as this post is written

Friday, June 3, 2011

U.S. Dollar Decline – June 2011 Update

U.S. Dollar weakness is a foremost concern of mine.  As such, I have extensively written about it.  I am very concerned that the actions being taken to “improve” our economic situation will dramatically weaken the Dollar.  Should the Dollar substantially decline from here, as I expect, the negative consequences will far outweigh any benefits.  The negative impact of a substantial Dollar decline can’t be overstated, in my opinion.

The following three charts illustrate various technical analysis aspects of the U.S. Dollar, as depicted by the U.S. Dollar Index.

First, a look at the monthly U.S. Dollar from 1983.  This clearly shows a long-term weakness, with the blue line showing technical support (until 2007):

(charts courtesy of; annotations by the author)

(click on chart image to enlarge)


Next, another chart, this one focused on the daily U.S. Dollar since 2000 on a LOG scale.  The red line represents both a trendline as well as a relatively good visual “best-fit” line.  The gray dotted line is the 200-day M.A. (moving average).  As seen on this chart, the U.S. Dollar looks vulnerable to continuing its downward trend that has been interrupted since early 2008:


Lastly, a chart of the Dollar on a weekly LOG scale.  There are some clearly marked  channels here, with a large, prominent triangle featured.  Triangles are thought of as “continuation” patterns.  In this case, it would be a continuation of the Dollar downtrend since 2002:


I will be providing updates on this U.S. Dollar situation regularly as it deserves very close monitoring…


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1312.94 as this post is written

Thursday, June 2, 2011

4 Confidence Charts - June 2011

Here are four charts reflecting confidence survey readings.  These are from the site.

I find these charts valuable as they provide a long-term history of each survey, which is rare.
Each survey chart is plotted in blue, below the S&P500:

(click on each chart to enlarge image)

Conference Board Consumer Confidence, last updated 5-30-11:


University of Michigan Consumer Confidence, last updated 5-27-11:


Bloomberg Consumer Comfort Index (formerly the ABC News Consumer Comfort Index) last updated 5-20-11:


NFIB Small Business Optimism, last updated 5-31-11:


As one can see, these charts continue to show subdued readings, especially when viewed from a long-term perspective.

These charts should be interesting to monitor going forward.  Although I don’t believe that confidence surveys should be overemphasized, they do help to delineate how the economic environment is being perceived.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1314.55 as this post is written

Wednesday, June 1, 2011

Opinions Concerning The Financial Aspects Of Owning A Home

Yesterday, the CalculatedRisk blog posted a chart showing the long-term housing prices for both the Case-Shiller and CoreLogic indices.  Here is the chart:


Given the continual decline in residential real estate prices, I have found an April 12 report from Pew Research Center, titled "Home Sweet Home.  Still." (pdf) to be interesting.

The report contains a variety of statistics on the attitudes of respondents concerning home ownership from a financial perspective.

One of the main findings of the research, as seen in the overview:
The five-year swoon in home prices has done little to shake the confidence of the American public in the investment value of homeownership. Fully eight-in-ten (81%) adults agree that buying a home is the best long-term investment a person can make, according a nationwide Pew Research Center survey of  2,142 adults conducted from March 15 to March 29, 2011.
As well, later in the report there are a variety of survey results concerning respondents' attitudes toward the overall economy and their own financial conditions.  One statistic that I found notable is the following, found on page 12:
Overall, the public remains skeptical about the pace of the economic recovery. Only one-infive (21%) say the economy is recovering, and an additional 29% say the economy is not recovering yet but will soon. Nearly half (47%) say it will be a long time before the economy recovers.

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1345.10 as this post is written