RSS Feed
Twitter
Facebook
Email
HomeWhen Will Our Economy Return to Normal?
Posted by Larry Doyle on February 8th, 2010 8:18 AM |
The question most asked in economic circles is, “How and when will our economy return to normal?” My response is always, “What is normal?”
I find it most impactful to explain to people looking to gain a greater understanding of our economy and our markets that the normal economy of the late ’90s through 2007 was driven by the shadow banking system. This shadow banking system provided upwards of 40-45% of the total credit employed by our economy.
The shadow banking system incorporated the credit origination, securitization, and distribution businesses of Wall Street investment banks as opposed to the traditional lines of credit provided by commercial banking activities.
The crisis on Wall Street 2008 brought this shadow banking system to a virtual standstill. While it has begun to resuscitate itself, it remains a mere shadow (no pun intended) of its former self. What is the result? (more…)
Markets Fading the 4th Qtr GDP Report
Posted by Larry Doyle on January 29th, 2010 2:55 PM |
The 4th quarter GDP report came in this morning at a surprisingly strong 5.7%. However, like many other things in this Uncle Sam economy, not everything is as it appears. For that very reason, I wanted to wait to write about this report until I monitored the market’s reaction. Let’s navigate.
The question for the economy, and in turn the markets, is to what degree the supposed growth embedded in the 4th quarter GDP is sustainable. To determine that, people need to appreciate the fact that this 5.7% GDP figure was driven to a large extent (60%) by a slowing in the drawdown of inventories. Are you scratching your head wondering what that means? Let’s just reduce it to the fact that drawing down inventories is not exactly a driver of growth at all. (more…)
“Nobody Has Ever Seen This Market”
Posted by Larry Doyle on November 12th, 2009 8:22 AM |
“I’ve seen this market before” is a very commonly used phrase by Wall Street professionals to compare and contrast different periods.
For example, when the Treasury yield curve is steepening or flattening, many market pros will project what will happen in different segments of the market based on discounting cash flows under the steepening or flattening scenario. Similarly, when credit spreads are in a widening or tightening trend, market pros will project how higher or lower rated investments will typically behave.
These projections are all based upon prior experience. The pros are utilizing a combination of market fundamentals along with investor sentiment to make forecasts. They will overlay their current forecasts against similar trends during prior cycles. Not that markets are ever perfectly symmetrical, but ‘having seen a market before’ is often a strong indicator of current and future price action.
Against this backdrop and given the challenging nature of the current market price action, I would challenge any market analyst or pundit who would utilize a similar approach today.
The simple fact is, ‘nobody has ever seen this market before.’ Why? Because this market has never transpired previously. Certainly, we have seen bull markets. We have seen low interest rate markets. We have seen accomodative Fed policy. We have seen bubbles. All that said, we have never seen a market in which global cross currents combined with ongoing fiscal stimulus have impacted markets to this extent.
In fact, I think one could make the case that the market is doing better as large parts of our domestic economy and the global economy are actually doing worse. While traditional schools of thought would view that correlation as perverse, the economic strains are compelling global governments to keep stimulus programs in place.
What is the result? A rallying market with increasing potential that the market develops into a blowoff. The irrationally positive nature of a blowoff is akin to a wholesale dumping of securities in a selloff.
Keep your head and stick to disciplined investing. Respect the price action, but do not get overly enamored with those analysts telling you what will happen . . . because ‘nobody has ever seen this market.’
LD
October 31, 2009 Market Review: Cinderella’s Ball?
Posted by Larry Doyle on October 31st, 2009 8:34 AM |
HAPPY HALLOWEEN!! Is the clock getting ready to strike twelve? Is it time to get home? Is the magical ball that has enchanted many market participants about to end? How so? As quantitative easing programs around the world end and global governments start to increase interest rates, will we experience a double dip in the global economy?
Or, are the Uncle Sam economy and numerous global economies blazing new trails and redefining the economic landscape?
As with most things economic and market related, the answers are never ‘crystal’ clear nor do they fit like a ‘slipper,’ but let’s do our best to read the October market moves and project our way forward.
ECONOMY
The U.S. economy came out of recession in the 3rd quarter with a positive 3.5% print. While that number surprised to the upside, please review my post “Grossly Distorted Product” or “Christmas in July” to get a pulse on just how weak the American consumer remains. Further confirmation of a subdued American consumer is reflected in the decidedly weak Consumer Confidence report highlighted in my post, “Jobs + Housing = Consumer Confidence.”
Around the globe, non-Japan Asia is generating some real growth. To wit, we have already seen Australia raise interest rates to stem fears of inflation. Who next raised rates? Norway. The U.K remains mired in a recession. Eastern Europe is struggling while Germany is leading the EU. If we know anything about Germany, they have little interest in any hints of inflation.
While there are pockets of strength around the globe, many economies – including the U.S. – remain challenged. What will continue to happen? International trade tensions as weak countries try to generate greater exports via weak currencies.
Let’s review market returns. (more…)
Corporate Titans Master the Obvious
Posted by Larry Doyle on October 30th, 2009 3:25 PM |
Why is the market breaking down today?
A number of analysts are pointing to comments by corporate titans, Wilbur Ross, George Soros, and bank analyst Mike Mayo.
What did Ross, Soros, and Mayo have to say? With all due respect, these corporate titans do not offer any new news. That said, let’s navigate.
1. Wilbur Ross sees a pending crash in commercial real estate.
Really? Is this news? This story has been touted for the last 6 months. The banking system has well over a hundred billion in impending losses on commercial real estate.
In a Bloomberg interview as I write, Carl Icahn concurs with Ross’ assessment. Icahn can’t understand why REITS are currently as highly valued as they are.
2. George Soros also harps on the pending doom on the commercial real estate market. Additionally, he highlighted the fact that the American consumer can not and will not be the engine for global growth. Soros offered that the economy may slip back into recession.
Really? Is this news? George, please tell us something we don’t know.
3. Mike Mayo, highly regarded banking analyst, highlights that Citigroup may very well have $10 billion in unrealized losses yet to take.
That’s all? Really? I think Mayo is likely low by a significant margin.
Recall that the IMF projects global banking losses to total $3.4 trillion and that approximately just slightly more than half of those have been taken to date. Another $1.7 trillion in losses and Citigroup has only got $10 billion to recognize?
The fact is the overall economy remains mired somewhere between intensive care and critical condition despite what the wizards in Washington would have us believe.
Today’s pullback in the market is not an indication of any real change in the economy. The economy is still quite ill. Today’s pullback is an indication that the speculative money in a highly speculative market is sending a signal for “everybody out of the pool.”
LD
“Grossly Distorted Product” or “Christmas in July”
Posted by Larry Doyle on October 30th, 2009 9:10 AM |
What is the real economy doing? While yesterday’s GDP printed a surprisingly strong 3.5%, are we to take that on face value? If we care to most effectively navigate the economic landscape, we should dig a little deeper.
A full 2.2% of the 3.5% rise was directly correlated to Uncle Sam’s support of the auto and residential construction sectors of the economy. Another .6% of the GDP was directly correlated to federal spending. Obviously, the Uncle Sam economy implies a large presence by that jolly old man. However, all that money Sam is pumping is nothing more than borrowing from future generations and pulling demand forward.
What would the economy have done on its own without the government support? Let’s listen to Christina Romer. Recall that Ms. Romer referenced last week that this quarter would provide the peak impact of benefits accruing from Uncle Sam’s economic stimulus. What does she say about this GDP report? The Wall Street Journal references Ms. Romer in writing, Economy Snaps Long Slump:
Without stimulus programs such as “cash for clunkers” and a first-time homebuyer’s credit, “real GDP would have risen little, if at all, this past quarter,” Christina Romer, president of the White House Council of Economic Advisers, said in a statement.
Why does Ms. Romer provide that sobering view of the economy? Very simply, if the American consumer represents 70% of the economy, then we should largely focus on that consumer. What did we learn about the consumer over the last quarter?
The Financial Times’ John Auther informs us in writing, Short View: GDP Grows, but Pain Remains:
Household disposable incomes actually fell during the quarter, by 3.4 per cent, but consumer spending rose, also by 3.4 per cent. This is not a pattern that can be sustained for long, and it is inconsistent with the need for US families to pay down their debts.
What does that disparity between income and spending represent? An unsustainable economic path. What else does it mean? The U.S. economy just had “Christmas in July.”
Did you get anything in your stocking?
LD
Please subscribe to my work via e-mail, RSS feed, Twitter, or Facebook. Thanks!!
If The Market Declined 15% . . .
Posted by Larry Doyle on October 28th, 2009 9:22 AM |
. . . would you be surprised? What would you do? What if the market declined by 20%? Would you be surprised? What would you do? How about if the market rose by 10% to 20%? Would you be surprised? I would.
The reason I ask these questions is an attempt to address the fundamental question as to what the market is telling us and what American consumers believe.
The equity market has traditionally been a reliable indicator of the future economy. The market provides a discounted valuation of future earnings. Those earnings drive companies and the economy at large.
As the market declines and prospects wane, businesses and consumers react accordingly. On the other side of the coin, as the market improves forecasting an improving economy, businesses and consumers react accordingly . . . until now. What is going on? (more…)
October 24, 2009: Month to Date Market Review
Posted by Larry Doyle on October 24th, 2009 7:32 AM |
Did the market merely take a breather this week or is the ‘little engine that could’ getting tired? Are we distinguishing the winners from the laggards? Are the cracks in our economic foundation repairing or are some just too large to hold back the flow of red ink, i.e. embedded losses? Perhaps we are experiencing all of the above as we continue our journey along the new and varied trails of our economy. Let’s review the major economic statistics for the week, along with the month to date returns across a wide array of market segments.
I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents. If you have any questions, please do not hesitate to ask.
ECONOMIC DATA
I largely discount positive news on the housing front as I view them largely manipulated by Uncle Sam while delinquencies, defaults, and foreclosures move ever higher. This may be an oversight on my part, but so be it.
Aside from that, I believe the most meaningful news this week was the GDP report from the UK. Please see my Friday morning commentary highlighting how the UK remains mired in recession.
Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis:
U.S. DOLLAR
$/Yen: 92.08 versus 89.68, +2.7%
Euro/Dollar: 1.500 versus 1.4635, +2.5%
U.S. Dollar Index: 75.44 versus 76.72, -1.7%
Commentary: the overall U.S. Dollar Index declined marginally this week. The dollar has improved versus the Japanese yen, but remains decidedly weak versus the Euro. The U.S. Dollar Index did break below 75.00 at one point early Friday. The correlation between the U.S. Dollar Index and the equity markets remains quite high. Both markets ended the week close to unchanged. Have too many people bought equities and commodities while having sold the U.S. greenback? I have been asking that question for the last month so no reason to stop now. The biggest impact of the weak dollar is seen in the commodity markets and long term interest rates. Commodities continue to trade with a firm tone while interest rates move higher.
I reiterate my comment from previous weeks: while I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade. On this topic, please read “Brazil Wants A ‘Real’ity Check.”
COMMODITIES
Oil: $79.65/barrel versus $70.39, +13.1% REMAINS VERY FIRM
Gold: $1055/oz. versus $1008.2, +4.6%
DJ-UBS Commodity Index: 137.32 versus 127.683, +7.5%
Commentary: I repeat from last week, unless you grow your own crops or have your own source of energy, you should expect to get increasingly squeezed as prices at the supermarket and gas station are likely to head higher. While Washington will not address this development, these price moves are directly correlated with Washington’s weak dollar policy. The banks and others able to borrow cheap money for trading and investing benefit from the weak dollar. American consumers and savers get stuck with the bill.
The Baltic Dry Index once again moved higher and got back above the 3000 level. Is the improvement in the non-Japan Asian economic bloc for real? Certainly the economies in Europe and North American remain decidedly challenged.
I continue to believe these commodity tea leaves are an indication of inflationary expectations in these ‘inputs,’ while we encounter deflationary pressures in wages and real estate. (more…)
David Einhorn Provides Sense on Cents
Posted by Larry Doyle on October 21st, 2009 11:52 AM |
David Einhorn of Greenlight Capital
In the midst of my ‘navigating the economic landscape,’ I thoroughly enjoy reading the work of intelligent people. While I certainly never agree with all that I read, intelligent people force me to think and review my own opinions and beliefs. That process is always healthy. I also enjoy sharing the insights and perspectives of these people with those who read Sense on Cents. High five to KD of 12th Street Capital for bringing just such an individual to my attention.
David Einhorn runs Greenlight Capital, an investment management firm. He recently delivered an address entitled “Liquor Before Beer…In the Clear.” For those interested in an overview of David’s thoughts, I will clip those points I found most informative. For those with a keen interest in the economy and markets, the linked nine page document is a ‘must read.’ I agree with David’s views and welcome highlighting some of his points. Here are excerpts from David Einhorn’s speech:
1. The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture. For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself to be a “bottom up” investor. Having my eyes open to the big picture doesn’t mean abandoning stock picking, but it does mean managing the long-short exposure ratio more actively, worrying about what may be brewing in certain industries, and when appropriate, buying some just-in-case insurance for foreseeable macro risks even if they are hard to time.
2. As I see it, there are two basic problems in how we have designed our government. The first is that officials favor policies with short-term impact over those in our long-term interest because they need to be popular while they are in office and they want to be reelected. In recent times, opinion tracking polls, the immediate reactions of focus groups, the 24/7 news cycle, the constant campaign, and the moment-to-moment obsession with the Dow Jones Industrial Average have magnified the political pressures to favor short-term solutions.
3. The second weakness in our government is “concentrated benefit versus diffuse harm” also known as the problem of special interests. Decision makers help small groups who care about narrow issues and whose “special interests” invest substantial resources to be better heard through lobbying, public relations and campaign support. The special interests benefit while the associated costs and consequences are spread broadly through the rest of the population.
4. Americans understand that the Washington-Wall Street relationship has rewarded the least deserving people and institutions at the expense of the prudent.
5. The proper way to deal with too-big-to-fail, or too inter-connected to fail, is to make sure that no institution is too big or inter-connected to fail. The test ought to be that no institution should ever be of individual importance such that if we were faced with its demise the government would be forced to intervene. The real solution is to break up anything that fails that test. (more…)
Credit Card Holders Hearing, “I’m Sorry, This Card Does Not Seem To Work”
Posted by Larry Doyle on October 20th, 2009 11:16 AM |
Life is not fair.
While many topics could be placed into that all consuming category, the ongoing developments in the credit card industry certainly get top billing. Why?
High five to MC for once again pointing out the ever increasing and seemingly indiscriminate denial of consumer credit. Am I referring to creditworthy individuals applying for a credit card or other form of consumer credit? No!
I am referring to individuals who at point of purchase are discovering that their credit cards are being denied. These must be one off situations or for those already delinquent, correct? Not necessarily. As MSNBC highlights, Citi Starts Closing Mastercards Without Warning:
Shannon Burdette tried to pay with her Shell Mastercard after filling up her gas tank this weekend but found the card rejected.
Confused, she called the customer service line on the back of the card, issued by Citibank, and was told the account was closed because of something that appeared on her credit report. But when the Sykesville, Md., resident got a copy of her credit report online, the only negative thing she saw was “closed at credit grantor’s request” on the Shell MasterCard account.
“They said there was a routine review,” said Burdette, who maintained that she and her husband, Brian, used the card regularly and always paid the bill on time. (more…)
