RSS Feed
Twitter
Facebook
Email
HomeIt’s the Economy, Stupid!!
Posted by Larry Doyle on October 16th, 2009 9:05 AM |
The American public is becoming increasingly wise to the ways of Wall Street and Washington.
Many Americans were duped by financial practices and products emanating from Wall Street. Where was Washington? I would assess Washington’s involvement and responses in the following fashion:
1. At worst, Washington was complicit given a wide array of failed public policy programs, especially in housing. These public policies were largely ‘greased’ by lobbying dollars and campaign contributions.
2. To a large extent, Washington was negligent in terms of oversight, especially on the financial regulatory front.
3. At best, Washington was naive given a general lack of understanding of markets and finance.
The American public is now responding in appropriate fashion. How so? In increasing numbers, they are choosing not to play the Wall Street game. What game is that? Active trading and investing. While the numbers of pure day traders may have increased, the American population at large is focused elsewhere. Where is that focus? On the economy at large and on their individual pocket books.
Washington’s focus on Wall Street and its selling of the market rebound as reflective of a return towards prosperity is a product that will not fly . . . try as they might. Why?
It’s the economy, stupid! Reports this morning indicate that wages will likely show the greatest decline since 1991. Even in the face of declining wages, consumers’ purchasing power is being further eroded by the continuing decline in the value of the dollar. That decline is inflationary which hurts consumers but it continues to present a very cheap funding vehicle for those who want to use the greenback to employ leverage in the markets. Who has the advantage in that process? The large banks. Do they spread that wealth in terms of increased credit and higher savings rates? Now why would they do that?
The American saver and consumer shouldered the cost of the bank bailouts in 2008. They are now shouldering the cost of the wealth transfer to the banks in 2009. While Washington would like to sell this dynamic differently, the American public gets it.
Washington will continue to sell this dynamic at its peril.
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
Uncle Sam’s New Mousetrap to Stem Foreclosures
Posted by Larry Doyle on October 13th, 2009 2:40 PM |
Despite hundreds of billions of dollars in support of Freddie Mac, Fannie Mae, the Federal Housing Association, and mortgage modifications, our housing market continues to be swamped with an ever increasing wave of foreclosures. The shadow supply of homes overhanging the market is estimated to be in the realm of 15 month’s worth. Last week, I wrote that Washington needed to address this issue in my post “Washington Needs a New Housing Model.”
Thanks to our friends at 12th Street Capital, we learn today that Treasury will release a new plan next week to stem the wave of foreclosures. How might this work? Let’s navigate a release which came from the Mortgage Banker’s Association convention currently ongoing in San Diego. Housing Wire reports, Treasury to Announce New Program to Avoid Foreclosure:
The United States Department of the Treasury is launching, with an official announcement expected next week, a new program to help ailing borrowers escape foreclosure.
The Chief of the Homeowner Preservation Office at the Treasury, Laurie Maggiano, released information on the Home Affordable Foreclosure Alternatives (HAFA) while speaking at the MBA’s 96th Annual Convention going on in San Diego. The official launch is expected in the next week or so.
HAFA already holds the support of Fannie, according to a VP at the agency, Eric Schuppenhauer, who believes the new program allows borrowers in imminent default to “make a graceful exit” from their home. HAFA will keep the stigma associated with foreclosure away from the borrowers, he added, and help keep communities intact.
Maggiano adds that HAFA will offer financial incentives to both servicers and borrowers, and associated secondary investors, in order to facilitate a short sale or deed in lieu of the property.
Borrowers will need to be Home Affordable Modification Program (HAMP)-eligible and Maggiano released some stats for the crowd’s consumption. 2,484,783 homeowners have requested information on HAMP. 757,955 HAMP plans were offered. 487,081 trials are underway.
Other additional [1] incentives to the short sale industry are nearly developed. The IRS will soon offer a 4506EZ form that will enable servicers to pre-fill out the information so that it only requires a borrower’s signature. It also will include softer language so as not put potential participants off.
For those unaware, a “short sale” entails a home being sold for less than the balance of the mortgage. The homeowner is not held responsible or liable for making up the difference between the proceeds generated by the sale and the mortgage balance. That difference is eaten by whomever ‘owns’ or is holding the mortgage. The owner or holder could be the originator if that entity never sold the mortgage. The owner or holder could be a trust on behalf of investors if the loan had been securitized.
What is the motivation to promote short sales rather than allowing the foreclosure process to run its course? Short sales may be short in terms of proceeds although they are not necessarily short in terms of time. That said, short sales typically do expedite the sale of a home. Short sales have typically occurred at a 10-20% discount to the market. Why? The homes have not been prepared for sale, meaning ‘dressed up.’
The monetary incentive provided to mortgage servicers to promote short sales will likely have a similar impact as the monetary incentive provided to modify mortgages. What has that impact been? Not much.
While many of Uncle Sam’s programs have been designed to buy time and allow the market and economy to recover, that approach has proven not to work so far in housing. Will this short sale program work to support housing? I doubt it.
I think what this program will look to achieve is to actually lessen the negative stigma associated with the term foreclosure. If Uncle Sam can say foreclosures are declining, he can then wave the flag as making progress on housing. What he will be doing, however, is merely ‘redefining’ foreclosure or in other words, ‘putting perfume on a pig.’
This program theoretically will negatively impact bank capital as banks will be forced to take a loss sooner rather than later on those mortgages they hold which are involved in short sales.
Aside from that development, real integrity in this process would include:
>> Add short sales to foreclosures as a more robust measure of housing supply stemming from delinquent mortgages.
>> Assess home prices along with rental rates to measure overall cost of housing.
LD
Municipal Bond Fund ‘Swan Dive’
Posted by Larry Doyle on October 13th, 2009 12:08 PM |
Investors have traditionally bought municipal bond funds for income purposes. The tax-exempt status provides real appeal and the default rate on municipals has always been exceptionally low. Against that backdrop, ‘munis’ have always proven to be less volatile than equities and many other sectors of the bond market . . . until now.
If a picture tells a thousand words, this graph of a Nuveen National Municipal Closed End Fund (ticker NXR) is more than a short story. From the Sense on Cents link to The Wall Street Journal‘s Market Data page, we learn:
That cliff-like drop on the right side of the graph represents approximately a 7% decline in the value of this specific fund culminating in a precipitous 5% drop just yesterday. Part of the decline is explained by the fact that yesterday this fund traded “ex-dividend,” meaning that investors who purchased the fund yesterday are not in line to receive the October dividend. That dividend represents a minor part of the overall decline in the value of this fund.
What does the decline truly represent? The fact that bonds in this $185 million fund declined in value. Why would that happen? The municipalities which had issued these bonds are likely having problems refinancing their debt. What does that mean? Those municipalities will be forced to pay higher rates. And what does that mean? Their outstanding bonds, such as those in this national fund, decline in value. Additionally, the higher rates mean the municipalities will remain hard pressed not to cut services and employees.
Keep your brokers and financial planners honest and compel them to fully explore the credit quality of investments (whether bonds or equities) prior to investing. Otherwise, picture yourself as having invested in this fund a month ago and now eating a 7% loss as you take a ‘swan dive’ off the right side of the above graph.
LD
