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HomeLet’s Listen to The Economist’s Zanny Minton Beddoes
Posted by Larry Doyle on October 19th, 2009 4:04 PM |
I always appreciate meeting, literally and figuratively, new people along our global economic landscape. Today I meet Zanny Minton Beddoes, editor of The Economist. Ms. Beddoes provides clear insights and perspectives on the challenges before us as we collectively navigate the economic landscape. The greatest challenge before the ‘wizards in Washington’ is when and how to exit the massive fiscal and monetary supports currently utilized to prop the economy and markets.
I hope you find Ms. Beddoes’ comments helpful in framing this critical question. I did.
LD
Can We Add Some Inflation to Some Deflation and Claim Overall Prices Are Stable?
Posted by Larry Doyle on October 15th, 2009 11:03 AM |
Inflation? Deflation? What is it going to be? As we continue to navigate the economic landscape, that question – perhaps more than any other – is of paramount concern. As I assess the economy and the markets, I envision the following:
> Ongoing deflationary pressures in real estate. Foreclosures hit a record level based on a report this morning.
> A likely increase in deflationary pressures from wages as unemployment continues to increase, hours worked do not pick up, and average hourly earnings are stagnant. How are corporations reporting earnings? Not from growth in top line revenue, but from cutting costs, including headcount.
I firmly believe these two overriding forces most concern the Fed and the threat that the deflationary forces could grow if not counteracted. How does the Fed counteract these pressures? Keep the liquidity pump running via a 0-.25% Fed Funds rate and now increased speculation of perhaps more quantitative easing in the form of purchasing more mortgage-backed securities.
What has been the result of all this liquidity running into the system? A significant decline in the value of our dollar. What does that create? Inflation. That’s good, right? A little inflation will provide some pricing power which supports our equity market. Not so fast. The inflation is not directly addressing the deflationary pressures in real estate and likely deflationary pressure in wages. The inflation is being generated primarily in commodities. What does that mean? Prices for food, gas, oil, and other raw material inputs will increase. As those prices increase, the cost of living in America will increase. Regrettably, that increase in cost of living will not be offset by an increase in wages.
Daily Finance provides a preview of the coming rise in food prices in writing, Sticker Shock at the Supermarket: Food Prices Poised to Rise:
If there’s any silver lining to a recession — albeit a thin one — it’s that consumer prices typically go down. Make no mistake, deflation is a sign of a sick economy, but at least the net effect of cheaper prices for the basic necessities — food, clothing and shelter — helps folks get by when they are struggling to make ends meet.
But consumers should brace themselves for things to change, especially at the supermarket. As the global and U.S. economies emerge from the downturn, economists predict that there is going to be some sticker shock at the checkout line. Food prices, they say, are heading higher and when you combine that with an unemployment rate that’s expected to linger near a three-decade high for at least another year, it’s even more unwelcome news.
The U.S. Department of Agriculture expects overall food prices to rise as much as 4 percent in the U.S. by the end of 2010. Yet, some economists think they could climb by as much as 5 percent. Even using the government’s more conservative numbers, the price for eggs is forecast to rise 3 percent and beef is seen increasing 2 percent. Lamb, seafood and fish? All three categories are expected to jump as much as 5 percent.A 5 percent boost in your grocery bill may not seem terribly devastating, but consider this: If you spend $300 a week on groceries now, you’ll need to squeeze a raise of about a thousand dollars a year out of your boss (don’t forget withholding tax) just to keep up with higher chicken, beef, pork and dairy prices. Good luck accomplishing that little feat with a 9.8 percent unemployment rate and companies looking into every nook and cranny in order to cut costs.
Why again are these prices poised to increase?
the weak U.S. dollar means we will be exporting more of our homegrown food overseas, causing prices to rise at home.
The consumer will continue to get squeezed, but the wizards in Washington will be able to pronounce that the overall level of inflation is stable. Really?
-3 + 3 = 0 is not the same as 0 + 0 = 0 !!!
What a world.
LD
Bill Gross Making Sense on Cents
Posted by Larry Doyle on October 14th, 2009 12:56 PM |
Looking beyond the liquidity provided by the Treasury and Federal Reserve to refloat our equity markets, what will be the drivers of our economy and markets going forward? While Uncle Sam may think he can leave rates at 0-.25% for an extended period, at some point even ‘extended’ runs out. Will the Uncle Sam economy have adapted and implemented the structural changes necessary to move on to a new phase of growth and prosperity?
I am very concerned and reiterate that our markets are masking significant embedded issues in our economy and overall fiscal health.
As much as I found Pimco to be challenging when trading with them, and question their integrity in handling their outstanding Auction-Rate Securities issuance, I respect their views on the markets and economy. In fact, I think Bill Gross and Mohamed El-Erian consistently provide a lot of “sense on cents.” What does Mr. Gross have to say about our economic landscape lately? He writes:
What is critical to recognize is that both California and the U.S., as well as numerous global lookalikes such as the U.K., Spain, and Eastern European invalids, are in a poor position to compete in a global economy where capitalism is morphing from its decades-long emphasis on finance and levered risk taking to a more conservative, regulated, production-oriented system advantaged by countries focusing on thrift and deferred gratification. The term “capitalism” itself speaks to “capital” – the accumulation of it and the eventual efficient employment of it – for growth in profits and real wages alike.
Regrettably, more and more capital here at home is being directed toward the servicing of our massive deficit. Additionally, taxes will surely increase to do the same. Over and above those two definites, I believe strongly that capital will increasingly look for opportunities outside our nation given the pressure on our greenback.
Gross touches upon an issue which I strongly believe is a MASSIVE drag on our current economy and our future well being, that is our secondary schools which rank 18th overall in the developed world. Gross writes:
What California once had and is losing rapidly is its “capital”: unquestionably in its ongoing double-digit billion dollar deficits, but also in its crown jewel educational system that led to Silicon Valley miracles such as Hewlett Packard, Apple, Google, and countless other new age innovators. In addition, its human capital is beginning to exit as more people move out of the state than in. While the United States as a whole has yet to suffer that emigration indignity, the same cannot be said for foreign-born and U.S.-educated scientists and engineers who now choose to return to their homelands to seek opportunity. Lady Liberty’s extended hand offering sanctuary to other nations’ “tired, poor and huddled masses” may be limited to just that. The invigorated wind up elsewhere.
Do the powers that be in Washington and in the state houses possess the necessary discipline to right our ship and set sail on smoother seas? If so, they will have to display a set of values and practices which are entirely inconsistent with how our government operates. While I remain bullish on those who want to educate themselves, practice discipline, and save for better days, I am bearish on people who think Washington or other entities can provide those necessary values. Gross is also cautious in concluding:
Now that our financial system has been stabilized, one wonders whether California’s “Governator” and indeed the Obama Administration has the capital, the vision, and indeed the discipline of its citizenry to turn things around. Our future doggie bags can hold steak bones or doo-doo of an increasingly familiar smell. For now investors should be holding their noses, their risk orientation, as well as their blue bags, until proven otherwise. Specifically that continues to dictate a focus on high quality bonds and steady dividend paying stocks that can survive, if not thrive, in our journey to a “new normal” economy of slower growth, muted profit gains, and potential capital destruction via default, abrogation of property rights, and dollar devaluation.
If we think a return to business as usual is the proper path, we will merely go in circles and end up right back in this same spot….if not worse.
I welcome comments from those who share or differ with these assessments.
LD
Retail Sales Stronger Than Expected? But What About The Revisions?
Posted by Larry Doyle on October 14th, 2009 9:54 AM |
When the going gets tough…the tough American consumer goes shopping, right? Do the virtues of thrift and frugality truly stand a chance in America? Let’s review the recently released Retail Sales report and navigate this leg of our economic landscape.
The Wall Street Journal provides a snapshot of the surprisingly strong headline number, but dare I say the WSJ does not provide a full comprehensive review. That’s ok, though, because the equity market futures are driving higher on the headline so why should we dig deeper and spoil the fun? Well, I’d be neglecting my mission here at Sense on Cents. Let’s navigate.
Highlights
The consumer pulled back sharply in September-but it was mostly due to the post-“clunkers” drop in auto sales. Otherwise, the numbers were surprisingly healthy for the most part. Overall retail sales in September dropped 1.5 percent after a 2.2 percent spike the month before. The September drop in sales was not as severe as the market forecast for a 2.1 percent fall. The decline was led by a 10.4 percent plunge in auto sales after a 7.8 percent boost in August. Excluding motor vehicles, retail sales advanced 0.5 percent, following a 1.0 percent jump in August. The consensus had expected a 0.3 percent rise for September.
In typical fashion, the focus on the current month’s outperformance is not properly measured in the context of the previous month’s downward revision. If The WSJ wanted to provide real integrity in its reporting, it would provide an equal weighting to the revision in conjunction with the actual report. In doing so, we witness that this month’s so called outperformance is almost uniformly balanced by last month’s downward revision. We witness a similar dynamic at work in Retail Sales excluding auto sales, as well.
By incorporating the revisions, retail sales over the last two months show a marginally positive trend, but hardly the ‘surprisingly healthy’ review provided by The WSJ and other market mavens.
Checking on the other volatile component, gasoline sales provided lift, gaining 1.1 percent in the latest month.
Is this an indication of increased consumer confidence and thus the willingness to travel more, or merely a function of increased prices for gas . . . or perhaps a combination of the two? To tout it as a pure positive is disingenuous.
Nonetheless, excluding motor vehicles and gasoline, retail sales rose 0.4 percent, following a 0.6 percent gain the previous month. Although core components were mixed, they were mostly positive and reflected sizeable gains. Apparently, the consumers that have jobs are a little more optimistic and are willing to spend.
Again, not a clear cut overwhelmingly positive trendline, despite what The WSJ may want to report. I still maintain we are, at best, a third of the way into our marathon towards a newly defined Uncle Sam economy. As such, it is still prudent to assess where we are in the grand scheme. To that end:
Overall retail sales on a year-ago basis in September improved marginally to down 5.7 percent, from down 5.8 percent in August. Excluding motor vehicles, the year-on-year rate increased to minus 4.9 percent in September from down 6.3 percent the previous month.
Enjoy the ride higher in equities, but don’t get overly caught up in the euphoria. Analysts may neglect to properly measure revisions, but we do it at our peril if we want to properly navigate the economic landscape.
LD
What Will Happen to the American Dream?
Posted by Larry Doyle on October 12th, 2009 2:41 PM |
The pursuit of a better life and greater opportunities have driven successive generations since the founding of our nation. Will that dream live on? Will future generations have a chance to live a better life than the current generation or recent generations?
Is the mere talk of this pursuit of the American dream mere poppycock? Do we think we can regain our economic stature and, once again, experience true economic prosperity merely because we want to have it happen?
Many feel that success is a function of a few basic principles combined with a little bit of luck. Is it truly luck, as some may maintain? No, I think not. I have always thought of luck as nothing more than where ‘preparation meets opportunity.’
In writing on this topic, I am not so hardened to think that families can easily or fluidly pursue opportunities which would entail picking up roots and moving. That said, demographic shifts will certainly be an ongoing theme as our economy and our country adapt to the new dynamics within the ‘Uncle Sam’ economy.
While we could debate at length the merits, or lack thereof, of bank bailouts and government support across a wide array of businesses and industries, I believe a great and unmentioned cost of a number of government programs is the masking of significant structural problems embedded in both the financial and moral balance sheets of individuals, families, corporations, and the government itself. (more…)
October 10, 2009: Month to Date Market Review
Posted by Larry Doyle on October 10th, 2009 10:12 AM |
We are reaching a point in our new “Uncle Sam” economy where rhetoric from Wall Street, Washington, and global financial centers seems to be having greater impact than true market and economic fundamentals. Why? Our financial and political ‘wizards’ are working overtime to reconnect the great ‘disconnect’ between Wall Street and Main Street. While we receive glimmers of hope in certain economic statistics, the dark clouds in employment and housing remain daunting.
Are the ‘Washington wizards’ (Bernanke, Geithner, Summers) providing hints of support for our greenback while truly hoping for a manageable decline? I believe they are, and I believe this financial engineering is a very dangerous game.
I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents.
ECONOMIC DATA
> Non-manufacturing Institute of Supply Management: this report rose above 50 (an indication of growth) with a positive development in new orders (this is clearly good), but with no signs of improvement in employment and pricing power by manufacturers.
> Redbook: indications of slight improvement in same store sales although next week’s Retail Sales report will likely look exceptionally weak as it incorporates an end to the ‘Cash for Clunkers’ program. Overall signs point to what is expected to be a weak holiday retail season.
> Jobless Claims: overall claims declined, which presents a sign of stability within employment. That said, it is hard to be optimistic on the employment front on the heels of the employment report released on October 2nd (embedded within the Equity section of this commentary).
> Trade Deficit: this deficit surprisingly narrowed, with a slight increase in exports combined with a slight decrease in imports. All other things being equal, this report would be positive for our dollar but the noise surrounding our currency is overwhelming the focus within this one month reading.
I would typically lead my review with focus on the equity and bond markets, but those sectors are actually following developments in the currency and commodity markets so let’s shift our focus accordingly.
How did the markets handle the Fed-speak, the data, and technical flows? Let’s continue navigating. The figures I provide are the weekly close and the month-to-date returns on a percentage basis.
U.S. DOLLAR
$/Yen: 89.78 vs. 89.68
Euro/Dollar: 1.4709 vs. 1.4635
U.S. Dollar Index: 76.35 vs. 76.72
Commentary: the overall U.S. Dollar Index has declined by approximately .5% this month, but the volatility and focus on movements in this space have been tremendous. Precipitated by an increase in rates by the Australian Central Bank midweek, the U.S. Dollar Index plunged below 76 which represents multi-year lows. The dollar weakness led to a move higher in global equities as traders, investors, and speculators were emboldened to enter into more ‘positive dollar carry trades.’
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. ECB President Jean-Claude Trichet voiced his concerns on this topic. Rest assured, the Asian nations feel the same way although they are careful in their comments. Adding further fuel to dollar weakness was speculation that the trading of oil and a basket of other commodities, which are currently transacted in U.S. dollars, would shift trading away from being dollar-based. On that note, let’s review the action in commodities.
COMMODITIES
Oil: $72.29/barrel vs. $70.39
Gold: $1050.1/oz. vs. $1008.2 !!!! THE BIG WINNER !!!!
DJ-UBS Commodity Index: 129.177 vs. 127.683
Commentary: I view this segment of the market to be the STRONGEST indicator of the global economic pulse. Additionally, the price action in commodities is likely a strong indication of the ‘positive carry’ trade put on by hedge funds and other traders.
The overall commodity index has moved higher by approximately 1.2% on the month, but the movements within specific commodities is gaining the real focus. Gold specifically has soared by over 4% this month. Why? Market speculation about a potential further slide in the greenback would be inflationary. Oil and other commodities also benefited from the story I referenced above. The conundrum I find in this space revolves around overall levels of international trade. Are these commodities moving higher truly because of an increase in demand or merely because of speculative investing and trading? Where do we go to get a pulse on that? The Baltic Dry Index. How is our friendly indicator of global shipping activity doing?
The Baltic Dry Index continues to move marginally lower. Can global equities in general and commodities specifically increase in value if the major indicator of global trade, that being the BDI (Baltic Dry Index), is in a downtrend? I think not for the long haul, but for a period of time a cheap funding vehicle, that is the U.S. dollar, can override market fundamentals.
I read these commodity tea leaves as sign of inflationary expectations in these ‘inputs’ while we encounter deflationary pressures in wages and real estate. What a world.
EQUITIES
DJIA: 9865, +1.6%
Nasdaq: 2139, +0.8%
S&P 500: 1071, +1.3%
MSCI Emerging Mkt Index: 946, +3.6%
DJ Global ex U.S.: 197.6, +1.5%
Commentary: equities regained momentum after last week’s selloff. Recall how just one week ago, we faced a remarkably weak and disappointing Unemployment Report which culminated a week in which equities had given up approximately 2%. Well, we not only recaptured that decline but rallied further by another 1-2%. This past week accounted for the strongest advancement in equities since early July. Are we poised for a breakout past 10,000 on the Dow? Well, we need to remain focused on what is driving the market . . . and that is the weak greenback.
Indications of economic strength in Australia compelled the Australian Central Bank to raise rates which drove the Aussie higher and the dollar to new lows. In the process, the ‘dollar carry trade’ gained momentum propelling global equities higher.
The initial earnings reports released continue to show no real signs of improvement in top line revenue generated by increased sales while the bottom lines have improved given ongoing cost cutting progams. If a company cuts ALL its costs, will its stock still go higher? Rising stock values ultimately need to be driven by ‘growth.’
BONDS/INTEREST RATES
2yr Treasury: .97%, an increase of 2 basis points or .01%
10yr Treasury: 3.39%, an increase of 9 basis points
The yield curve steepened (longer maturities underperformed shorter maturities) under the weight of another Treasury refunding (3yr, 10yr, and 30yr). The 30yr auction on Thursday was disappointing which precipitated the selloff. The bond market has been trading in sync with equities for the last few months. That price action is an anomaly as typically bonds will trade in an inverse relationship with equities. Comments by Bernanke in the latter part of the week about an eventual and timely increase in rates by the Fed did take the wind out of the bond market’s sails.
COY (High Yield ETF): 6.64, +3.8%
FMY (Mortgage ETF): 17.85, +0.3%
ITE (Government ETF): 57.77, -0.3%
NXR (Municipal ETF): 14.46, +0.1%
Commentary: while interest rates did move marginally higher over the week, overall they remain at remarkably low levels. The high-yield market remains on fire as that sector is benefiting from a lot of hedge funds allocating capital via the ‘dollar carry trade’ referenced previously.
Summary/Conclusion
The game continues. The disconnect between the overall domestic economy and the price action in the markets presents what one noted investor described as ‘the greatest experiment’ in modern finance. To the extent that people are putting money to work, I would focus on buying quality and utilizing ‘dollar cost averaging’ techniques.
Thanks for your support. If you like what you see here, please subscribe via e-mail, Twitter, Facebook, or an RSS feed.
Thoughts, comments, questions always appreciated.
Have a great day and weekend.
LD
What Are Credit Suisse Clients Doing and Saying?
Posted by Larry Doyle on October 9th, 2009 11:30 AM |
High five to a good friend for sharing with us tremendous insights just released by Credit Suisse. While individuals can and should develop opinions on the economy and markets, the global flow of capital from investors (obviously central banks now count as investors given massive quantitative easing programs) will determine overall market levels. Let’s navigate and assess how Credit Suisse’s client base has positioned themselves and decipher what it all means.
Credit Suisse research analysts report the following:
We are close to finishing our marketing trip in the US and Continental Europe—and take a look at the main issues our clients are focused on at the moment.
1. Caveated bullishness: Hedge funds appear optimistic (focusing on Q3 earnings as the next catalyst). Long-only funds seem cautious, while retail investors are buying bonds rather than equity. We feel there is enough scepticism to leave us bullish.
LD’s comment: CS means bullish on equities.
2. Many asset allocators still prefer credit (bonds) to equity, so there is switching potential.
LD’s comment: Asset allocators are money managers, investment advisors, et al. This comment translates into the fact that money which has been allocated to the bond market could move into equities causing a move higher in equities and a move down in bonds.
3. Investors’ main dilemma: Why have margins stabilised at such high levels? Most feel the reason is cyclical (leaving limited upside in earnings), but we suspect it could be more structural.
LD’s comment: Margins refer to corporate profit margins. The fact that CS believes that profit margins are being supported by structural developments in companies and the economy is a VERY positive assessment as it indicates a change in the foundation of the global economy which would drive equities higher.
4. Economy: Very few clients are positioning themselves aggressively on a macro view. There is little confidence on final demand given the level of excess household leverage. A third of investors are bearish on US housing (too many, in our view). Clients still see inflation, not deflation, as the main risk.
LD’s comment: investors would appear to be more cautious than optimistic with concerns that there is excess liquidity from central banks which will ultimately lead to inflation.
5. Consensus catalyst for next leg down is severe dollar weakness (LD’s highlight), leading to a US bond funding crisis or government tightening fiscal policy too early. Two areas of worrying consensus: 99% of investors appear to be dollar bears and nearly everyone believes the Fed will be very slow to raise rates.
LD’s comment: if 99% of investors are dollar bears and are positioning themselves that way in one way, shape or form, then the dollar will find support. Why? When too many people are on one side of a boat, that boat tips. If the dollar does rally, then many ‘dollar carry trades’ may enter the ‘pain chamber’ and risk-based assets would likely sell off.
6. Regions: Strong consensus to be long of emerging markets (NJA is felt to have large upside potential if US retail sales recover and the dollar remains weak). Clients are more positive on Europe than they have been for the past two years. Investors have quickly capitulated on a tactically positive call on Japan. Renewed focus on domestic plays in dollar-linked countries (especially the Middle East).
LD’s comment: NJA is non-Japan Asia
7. Sectors: We believe most clients have a bar-bell type strategy. Consensus longs are tech and commodities/gold. We found far too many oil bulls for our liking. There is a huge variance of views on banks. Sectors where there is still doubt: life companies (too opaque), media, telecoms, steel and pharma. There were very few questions on defensives.
8. Style: Clients are looking for quality growth, shifting away from the credit-related plays.
Overall, I view this report as decidedly constructive on the economy and markets, albeit with plenty of reasons for caution.
Thoughts, comments, questions always appreciated.
LD
Dollar Devaluation Is a Dangerous Game
Posted by Larry Doyle on October 8th, 2009 9:24 AM |
Can we ‘devalue’ our way back to our days of economic ‘wine and roses?’
Many debt-laden countries throughout economic history have chosen to implicitly or explicitly pursue a devaluation of their currency as a means of improving their economies. Are the ‘wizards in Washington’ taking this approach? Aside from a few perfunctory comments in defense of the greenback, Washington has been largely silent on the topic of the declining value of the dollar. Many believe Washington very much favors a weaker currency as a means of supporting our economy. I believe this of Washington, as well. Let’s navigate.
Going back to the G20 in London last Spring, the Obama administration has attempted to curry political favor with emerging economies, especially the BRIC nations, by ceding dollar sovereigncy as the preeminent international reserve currency in return for support of global economic stimulus programs. Why does Washington believe a weak currency serves our economic interests? A weak currency generates and supports the following:
1. Promotes inflation as imports decline. Washington would like some inflation, given the massive deflationary pressures presented by falling wages and declines in the value of commercial and residential real estate.
2. Promotes exports for corporations with a multi-national presence.
3. Supports labor by making it more attractive for companies to keep jobs here as opposed to opening factories or sending work overseas.
So, in light of our current economic crisis, why wouldn’t we want a substantially cheaper dollar to maximize these benefits?
Recall that economists always need to keep certain variables static in order to study the impact of a change in another variable or multiple variables. This approach, known as ‘ceteris paribus,’ is not quite as easy as some may think. Why? Variables are NEVER static, or ‘ceteris is NEVER paribus.’ (more…)
