Confidence in estimate for probability of recession

Now that my move to New York City is beginning to wind down, I can refocus on some thoughts that have been percolating in the background. Some people insist that the U.S. economy is already in a recession, but my reading of the data does not concur. I will stick to my recent forecast that there is a 65% chance of the U.S. economy falling into recession in the coming months, but I would like to put some confidence intervals around that forecast. 65% is my "90% confidence interval" forecast, which means that I have a very high level of confidence that my forecast is correct. Traditionally, one provides 90% and 50% confidence intervals. I haven't quantified it before, but my 50% confidence interval is that there is a 35% chance of a recession in the coming months. That 35% chance is my core belief, but I do recognize that there is a huge amount of uncertainty.

More simply, I will say that there is a 35% to 65% chance that the U.S. economy will fall into a recession in the coming months and I lean towards 35%.

The recent economic data has been fairly flat and mixed, but still not "falling off a clifff" as one would expect if the economy had entered a recession back in Novemeber or December or January as some have insisted.

As of Tuesday, May 27, 2008, Reuters quotes Greenspan as saying:

I still believe there is a greater than 50 percent probability of recession. (But) that probability has receded a little and I think the probability of a severe recession has come down markedly.

Actually, the original source is the Financial Times article entitled "Greenspan warns of 'greater than 50% probability' of US recession." FT informs us than Greenspan is actually "puzzled" by the reletive strength of the economy:

He admitted he was puzzled by recent economic data that suggest the economy stopped deteriorating around March. "A recession is characterised by significant discontinuities in the data," he said. "It started off that way - there was a period of sharp discontinuity from December to March. But then it stopped."

Mr Greenspan believes there is a "tug of war" taking place in the economy, with financial sector stress pulling one way and strong corporate liquidity pulling the other. Corporate liquidity is being eroded, but only gradually.

"No one knows how this tug of war will end - specifically, whether the financial crisis will end before it drags down the real economy."

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls modestly and remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell modestly (-0.25% vs. -0.06% last week) but the six-month smoothed growth rate rose moderately (to -6.6 vs. -7.2 last week), which is still well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "The fact that WLI growth has recovered to its best reading since before Christmas is notable, but falls short of any recovery signal for the business cycle. Its uptick is fairly recent, and is not driven by a majority of index components."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there is a lot of stimulus as well as potential problems in the pipeline.

I will keep my personal assessment of the chance of recession at 65% based on the fact that we are seeing some hints of moderation mixed in with all of the gloomy news. I will keep my assessment above 50% because we are not seeing persistently clear signs of an upturn, but I will keep it below 80% because we still are not seeing any hint of the steep declines in employment and income typically associated with full-blown recessions. The economy still has a moderate chance of avoiding an outright recession, but only if the data continues to moderate and/or improve at an increasing pace.

I am somewhat optimistic that the U.S. economy will escape a full-blown recession, but I do have to recognize what the data itself is signalling to me, as well as ECRI's assessment and recession "call."

I would note that less than half of the most recent 24 weeks of WLI data (10 out of 24) are higher than the current level. That means that even if the WLI remains flat, within three months the very negative readings on the smoothed growth index will have risen to 0.0. Alas, that is more an artifact of how the smoothed growth rate is calculated than an indicator of economic strength. But, that rise cannot occur if the so-called recession "worsens." The smoothed growth rate rising to 0.0 presumes that the economy does not weaken further.

Incidentally, the Intrade Prediction Market rates the probability of a U.S. recession in 2008 at only 40%, but that is because their "contract" is written with rules that are based on the traditional rule of thumb that a recession begins with two consecutive quarters of negative real GDP growth, and the rules require the final estimate, which comes out two months after the initial or "advance" estimate. Although it is possible that Q1 could be revised to be negative when the final estimate comes out at the end of June, it is somewhat unlikely, so the earliest that this contract could payoff would be at the end of December when the final estimate for Q3 comes out and even then only if both Q2 and Q3 negative. If Q2 comes in slightly positive and Q3 comes in negative, contract holders would have to wait until the end of March next year for the final estimate for Q4. The fact that this contract is at 40% says that people expect Q1 to hold positive for its final estimate and that the economy will strengthen in the second half of the year even if Q2 comes in negative.

The bottom line is that the economy remains at "the edge" of a recession.

-- Jack Krupansky

Getting settled in NYC

Wow, I am actually here and actually started to get settled in my new apartment in New York City. I flew in Wednesday evening, made a trip to Bed Bath & Beyond and Duane Reade to get enough stuff for my apartment that I could spend the night. Today I opened a local bank account (at Capital One Bank, which was North Fork Bank), got my phone and Internet cable modem installed, bought and installed a new air conditioner, read almost all of my accumulated email, did a little billable work, attended a bi-weekly meeting of the local Cafe Philo philosophy discussion group, and even found a spare minute to write this blog post. Friday I may get my New York State ID, and Monday I may go down to Atlantic City for the day on the casino bus.

So, I may be close to the end of hemhoragging cash. Maybe a couple hundred dollars of minor expenses, such as keeping my old phone number on voice mail for a couple of months, a final payment or two for MSN dial-up Internet access as I transition to RCN cable access, and a few other odd expenses I am simply forgetting or things I need to do to make the apartment more liveable. And my budget for RCN for unlimited phone and cable Internet access did not include the taxes. And I need to put New York City and State income taxes in my budget as well.

With everything going so smoothly, I went and incurred an unanticipated $15 charge by running one of my credit cards slightly over the credit limit. I caught my mistake in my spreadsheet even before the credit card company is aware of the overlimit problem. All it took was a restaurant tip does not yet show on the pending charge for the restaurant. I rsuhed and made an extra payment myself online, but it will not post until Tuesday (Monday is a holiday), possibly after the tip hits my account. I called up the credit card company and after unsuccessfully attempting to get a tiny $100 increase in my credit limit, I went ahead and agreed to pay them a $15 fee to make an "emergency" payment of $100 that would post today and maybe hit my account before that incoming restaurant tip posts to my account. What a pain. Later on Friday I will call them again and ask to speak to a superviser to request that the $15 fee be waived. They actually told me that if I had simply let the account go over-limit, they would likely be willing to waive the $35 over-limit fee since I already had a payment scheduled, but I do not want my account to show that I actually did go over-limit. What a pain. The main reason I was using this account even though it was near its limit is that it pays 2% cash-back. But, they won't let you credit any of your accumulated cash-back against your balance and pending charges. How silly is that.

One pleasant surprise today was that I received a USPS Priority Mail package that I had mailed to myself on Tuesday. It contained my swiss army knife and a couple of other items that I did not want to carry on the plane and neglected to pack in the last box I shipped via UPS. Maybe I was better off forgetting to pack my knife since otherwise it would still be in transit somewhere in some fly-over state.

-- Jack Krupansky

Budget for life in NYC

I am almost there. I am still hemorrhaging cash as I complete my move to NYC, but very soon that process will be over and then I will have to finalize and stick to a rather strict and limited budget. Most of my moving expenses are already "baked into the cake", with all of my possessions en route via UPS and my plane ticket ready for departure tomorrow morning. I have set aside cash in my brokerage account to cover all of the credit card payments. I'll spend $2.50 to take the bus to Sea-Tac airport, $7 to take the train from JFK to the city, spend some money at Bed Bath & Beyond and Duane Reade for some stuff for the apartment, spend a little on some new clothes and shoes, get my New York State ID, buy a new phone, and maybe have to buy a new air conditioner. At that point I should be "set" and ready to get back on a budget track. I also have to budget keeping my old voicemail for a month or two and paying final utilities for my old apartment.

I already did work out a budget a month ago, but I will have to revisit it and validate my assumptions.

The good news is that I will no longer have to struggle to budget two annual trips to New York City with sky-high hotel rates. There is plenty of stuff to do for free or cheaply in New York City, and Atlantic City is just a cheap casino bus ride away. I can even go to Washington, D.C. reasonably economically. I prefer the Amtak train, but the bus is fine with me as well. I look forward to being able to travel to Boston and Washington, D.C. without having to go near an airport.

-- Jack Krupansky

Congress to look into role of investment funds in rising energy and commodities prices

For a couple of years now it has been abundantly clear that money from investment funds, hedge funds, and financial institutions has been the root cause of the huge run-up in energy and commodities prices, but nobody seemed to notice or care. Now, all of a sudden, it is becoming a bigger deal, and now even Congress is getting ready to pile on. An article on MarketWatch by Laura Mandaro entitled "Financial speculators on congressional hot seat - Lawmakers to query role of investment money in commodity spikes" informs us that the Senate Committee on Homeland Security and Governmental Affairs will be holding a hearing on Tuesday to look into research about how "Pension funds and other institutional investors are driving commodity prices to the moon by allocating massive amounts of money to energy and agricultural investments and sidestepping regulatory limits on big speculative bets." Bingo! They finally hit one of the key factors: "sidestepping regulatory limits on big speculative bets." In particular:

A fund that wants to buy a huge position in a commodity can enter into a so-called swaps contract with an investment bank, which can then buy futures. These swap arrangements skirt the limits that the fund, as a speculative or noncommercial trader, would typically face on buying futures. The investment bank can use an exemption from such limits because it's hedging these swaps.

 

The swaps loophole has allowed funds to allocate billions of dollars to a particular commodity, regardless of weekly or monthly fluctuations in price, according to Lapolla.

 

Tuesday's testimony could lend support to congressional efforts to curb such speculation.

Normally, entities who are neither producers or direct consumers of commodities are "noncommercial traders", but this swaps ruse is allowing these speculators to speculate as if they were in fact commercial consumers of commodities (such as gasoline refiners, transportation companies, food companies, etc.)

And this is only the tip of the iceberg. Whether Congress digs a lot deeper remains to be seen. And whether Congress actually acts on the results of its investigations is an even larger uncertainty. Still, it is quite heartening to hear that Congress is even aware that there is a problem. And it is just as heartening to see that the financial media is finally picking up on a scandal that has been occurring right under their noses for several years now.

Even if Congress does not "act", the cleansing effect of a little "sunshine" may at least begin to moderate at least some of the most heinous speculative misbehavior of the major financial institutions on Wall Street.

-- Jack Krupansky

Microsoft and Yahoo now making some sense

The so-called "renewed" talks between Microsoft and Yahoo are a lot more sensible. Rather than pursuing a full-blown takeover, Microsoft is seeking some sort of arrangement that will provide Microsoft with access to Yahoo's customer base to display ads for Microsoft advertising customers. The terms and details are anybody's guess. Some sort of "partnership" between the two companies makes a lot more sense than the large-scale disruption of a full takeover. Although Microsoft says that it reserves the right to pursue a full takeover in the future, it also stated that in the near-term it does not intend to pursue a takeover. Overall, this announcement is very good news, especially for Microsoft shareholders, even if mindless traders initially gave a negative knee-jerk reaction.

From the chatter about a proposed or hypothetical deal, it sounds somewhat similar to the proposed deal between Yahoo and Google, but the question then becomes how Microsoft would make its proposal more attractive than that of Google, since Google can charge a premium for ads. Maybe... maybe Microsoft would be willing to shift some or all of its online content to Yahoo content and then split the resulting ad revenue with Yahoo. Microsoft might also "offer" to host content on its growing "cloud" infrastructure, an investment whose expense is straining Yahoo's limited finances but is a key investment for Microsoft and makes more sense at the scale envisioned by Microsoft. In other words, Yahoo could leverage off of Microsoft's data center investments. That is speculation on my part, but it would make sense and allow Yahoo to focus on content and services while Microsoft focuses on software and infrastructure and a larger-scale advertising business.

See: Microsoft Issues Statement Regarding Yahoo! - May 18, 2008 - Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business:

"In light of developments since the withdrawal of the Microsoft proposal to acquire Yahoo! Inc., Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business.  Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo!  Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties. 

"There of course can be no assurance that any transaction will result from these discussions."

-- Jack Krupansky

Housing starts and permits bounce back

The New Residential Construction report for April showed that housing construction bounced back a bit in April, with permits up 4.9% and starts up 8.2%, but this may simply be an exaggerated seasonal move. In other words, there usually is an increase in housing construction as the weather warms up from deep Winter, and the gloom in February and March may simply have shifted a greater than usual amount of housing activity from March to April. I would want to see at least three consecutive months of improvement before suggesting that new housing construction has seen its bottom. Still, the April numbers are not very consistent with a deepening recession.

-- Jack Krupansky

Wall Street professionals are not your friends

Harry Newton writes a great column every day and I half-agree with something he wrote yesterday about Wall Street:

Wall Street is a product sale machine. It sells you whatever it can sell and make a commission on. It does so without any regard for the long-term riskiness of what it's selling or its appropriateness for you. Hence the obligation to figure what they're selling you is 100% yours. When in doubt -- i.e. when you simply don't understand or have any concerns about the downside -- your job is to say NO.

Please print out the above paragraph. Laminate it and read it every time you speak to your broker or financial adviser.

But, he has a mistake in there that needs to be corrected... delete the language "When in doubt -- i.e. when you simply don't understand or have any concerns about the downside --." And in fact delete the sentence "Hence the obligation to figure what they're selling you is 100% yours." It is a complete waste of your time to evaluate anything that Wall Street is actively "selling" you. As Nancy Reagan advised with drugs, "Just say No!", and that is what sensible investors are obligated to do with Wall Street. Just say no to anything that Wall Street is ever "selling" to retail investors. The short advice should be that if Wall Street is selling, do not buy. Broker? Financial adviser? If you still have a full-service "broker" or "financial adviser", then that in itself is a matter of concern. Fire them immediately and move your money and investments to a discount broker or several discount brokers. I like Fidelity and happen to use Muriel Siebert as well. Your only "obligation" is to have the discipline to refrain from asking them for "advice." Sure, your so-called "broker" or "financial adviser" can get you access to so-called "research" and maybe to IPO's, but these days that "research" is complete crap and even discount brokers have better access to IPO's.

The bottom line is that there is no longer any need to "speak" to any "broker" or any "financial adviser." In the old Wall Street parlance (I love this stuff!): If a broker or financial adviser calls, hang up on him! So, the quoted section from above can be correctly rewritten as:

Wall Street is a product sale machine. It sells you whatever it can sell and make a commission on. It does so without any regard for the long-term riskiness of what it's selling or its appropriateness for you. Your job is to say NO. Do not listen to a word of whatever they have to say. Just say NO! And if they will not give you the opportunity to say NO, simply hang up on them. And if you are too polite [and a wimp] to sternly say NO, simply say "There seems to be a problem with the connection... you are breaking up... [loudly] HELLO?! HELLO?!... I still can't hear you... could you call back later?" and then hang up. Then take advantage of caller ID.

Please print out the above paragraph. Laminate it and read it every time any broker or financial adviser calls and asks to "speak" (i.e., sell) to you. They are not your friends. They are not here to "help" you.

So, now, I would like Harry to please inform us why he is still talking to any full-service broker/financial adviser. Or to flip that over, what argument he has to offer to convince us that we should get a full-service broker/financial adviser at this time. Besides, we have... him to offer us investment insight! What other advice do we need? Answer: a good accountant who is always there to tell you the tax consequences of a transaction and to simply ask "Are you SURE you really want to do this?"

I was chatting with a couple of Wall Street professionals a couple of days ago and it is simply mind-numbing how little they really have to offer us, compared to, say, a simple Internet Web page.

Investors should be thinking about Wall Street the way tourists should think of... West Beruit. So many of these "professionals" really are the economic equivalent of terrorists, gangs, thugs, parasites, and the (negative) analogies go on and on.

I have "words" to say about simple banks as well, but at least they are not actively going around and engaging in the economic equivalent of mugging people. Unless, of course, you are behind on a payment...

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls slightly and remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell slightly (-0.06% vs. +1.31% last week) but the six-month smoothed growth rate rose moderately sharply (to -7.2 vs. -8.0 last week), which is still well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "While the WLI slipped slightly, its growth rate has come off its lows in recent weeks, reflecting improved financial market sentiment. Still, the WLI is not yet pointing to a business cycle recovery."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there is a lot of stimulus as well as potential problems in the pipeline.

I will keep my personal assessment of the chance of recession at 65% based on the fact that we are seeing some hints of moderation mixed in with all of the gloomy news. I will keep my assessment above 50% because we are not seeing persistently clear signs of an upturn, but I will keep it below 80% because we still are not seeing any hint of the steep declines in employment and income typically associated with full-blown recessions. The economy still has a moderate chance of avoiding an outright recession, but only if the data continues to moderate and/or improve at an increasing pace.

I would have been tempted to inch down towards 50%, but 1) industrial production was down, 2) mortgage applications were down, and 3) unemployment initial claims were up.

I am somewhat optimistic that the U.S. economy will escape a full-blown recession, but I do have to recognize what the data itself is signalling to me, as well as ECRI's assessment and recession "call."

I would note that less than half of the most recent 24 weeks of WLI data (10 out of 24) are higher than the current level. That means that even if the WLI remains flat, within three months the very negative readings on the smoothed growth index will have risen to 0.0. Alas, that is more an artifact of how the smoothed growth rate is calculated than an indicator of economic strength. But, that rise cannot occur if the so-called recession "worsens." The smoothed growth rate rising to 0.0 presumes that the economy does not weaken further.

Incidentally, the Intrade Prediction Market rates the probability of a U.S. recession in 2008 at only 33%, but that is because their "contract" is written with rules that are based on the traditional rule of thumb that a recession begins with two consecutive quarters of negative real GDP growth, and the rules require the final estimate, which comes out two months after the initial or "advance" estimate. Although it is possible that Q1 could be revised to be negative when the final estimate comes out at the end of June, it is somewhat unlikely, so the earliest that this contract could payoff would be at the end of December when the final estimate for Q3 comes out and even then only if both Q2 and Q3 negative. If Q2 comes in slightly positive and Q3 comes in negative, contract holders would have to wait until the end of March next year for the final estimate for Q4. The fact that this contract is at 33% says that people expect Q1 to hold positive for its final estimate and that the economy will strengthen in the second half of the year even if Q2 comes in negative.

The bottom line is that the economy remains at "the edge" of a recession.

-- Jack Krupansky

What is Carl Icahn up to with Yahoo?

It may take me a while longer to figure out exactly what Carl Icahn is really up to with Yahoo. Given Yahoo's current price, I simply do not see any significant upside for any supposed new deal with Microsoft. I think Microsoft now realizes that Yahoo was not a great deal at $33 and not even at $31. Maybe Yahoo would be a good deal at $25 or $20 or even $15, but that would not represent upside for Icahn. Maybe he is simply using the "hint" of a new deal with Microsoft as a ploy for some other combination with Yahoo. Maybe he intends to completely overhaul upper management and then dismember Yahoo and sell its pieces for more than the current whole. Or, maybe he is imply angling for a little old-fashioned greenmail. Or, whatever. But, I do not think a restart of the old Microsoft deal is in the cards at anything close to $33 per share.

In short, I still do not know what Icahn is up to, but a simple reboot of the abandoned Microsoft deal is the loweest probability option at this stage.

-- Jack Krupansky

Will GE sell its appliance division?

Huh... I am used to expressing my opinion about companies, but I am not used to seeing them follow my advice. A month ago I recommended that GE should restructure to focus on industrial infrastructure and energy production  technology and sell off their low-margin consumer appliances operation. Today I read an article in the New York Times by Andrew Sorkin and Michael de la Merced entitled "G.E. May Sell Appliance Division" that tells us that "General Electric is planning to sell its appliance division." Good move, if I don't say so myself.

The amount of money they get from the sale of the appliance division pales in significance compared to the reduction in distractions to management.

Now, in addition to my previous recommendation that GE shed its its finance and entertainment businesses, I will add to that list that GE should also spin off its healthcare business. Sure, healthcare is a booming market, but it deserves a board and executives focused on healthcare, and GE simply does not need healthcare distracting it from industrial and energy infrastructure. GE should be focusing on needs such as powering, lighting, heating, and cooling medical facilities much more efficiently and reliably.

Now, let's see if GE continues to follow my advice.

FWIW, I am not a GE shareholder.

-- Jack Krupansky

Wall Street's role in rising energy prices

It has been extremely clear for quite some time (several years) that neither demand by end consumers nor supply by producers has been responsible for the steep rise in energy prices, but the media, even the financial media, has been quite slow to pick up on this. It was good to see an improvement on this front with an article on MarketWatch by David Weidner entitled "Wall Street's crude ways - Commentary: How traders and hedge funds fuel runaway energy costs" which gives more than the usual amount of color to the issue, telling us that:

A boom in speculation and trading by investment banks and hedge funds has put our energy markets on steroids. Contract volume in the futures markets has risen by a third in just the last year. Oil closed at a record high of $125.96 a barrel on the New York Mercantile Exchange on Friday. That's double the price two years ago, a difference clearly caused by market manipulation.

We are not talking about individual mom and pop speculators or rogue traders or even maverick "financiers" such as George Soros, but about large-scale trading operations at many large hedge funds and many major financial institutions. Quite literally, everybody is doing it. Speculation per se is not bad, but when it becomes so pervasive and overwhelms "normal" trading by real producers and real consumers, then the markets cease to function normally.

It will be quite interesting to see whether the government investigations lead anywhere. It will be also interesting to see if the general media picks up on the scandal and turns it into the kind of headline story that gets the presidential hopefuls into the act.

-- Jack Krupansky

Who is the largest exporter of oil to the U.S.?

Saudi Arabia is the largest exporter of crude oil and petroleum products to the U.S., right? Nope. They are number 2. Canada is #1. Mexico is #3. Then Nigeria, Venezuela, and then Iraq. After that, the rest of the exporters each provide us with less than 20% of what Canada provides. As per the Department of Energy Energy Information Administration (EIA), the top 15 exporters of petroleum (both crude oil and refined products) for March were:

1. CANADA exported 2.30 million barrels per day to the U.S. or  21.7% of U.S. imports
2. SAUDI ARABIA exported 1.54 or 14.5%
3. MEXICO exported 1.35 or 12.7%
4. NIGERIA exported 1.16 or 10.9%
5. VENEZUELA exported 1.02 or 9.6%
6. IRAQ exported 0.77 or 7.3%
7. ALGERIA exported 0.43 or 4.0%
8. RUSSIA exported 0.39 or 3.7%
9. ANGOLA exported 0.38 or 3.6%
10. VIRGIN ISLANDS exported 0.29 or 2.7%
11. ECUADOR exported 0.24 or 2.2%
12. UNITED KINGDOM exported 0.22 or 2.1%
13. BRAZIL exported 0.19 or 1.8%
14. KUWAIT exported 0.18 or 1.7%
15. COLOMBIA exported 0.15 or 1.4%

Exporters in North and South America accounted for over half or 52.2% of U.S. imports.

Top 15 exporters from the Middle East accounted for only 23.5% of U.S. imports.

Canada and Mexico constitute a full third or 34.4% of U.S. petroleum imports.

Total U.S. petroleum imports from the Top 15 exporters were 10.6 million barrels per day, which is down from the 2007 average of 11.3 million barrels per day and down from 11.7 million barrels per day in March 2007.

-- Jack Krupansky

Recession Watch: March real GDP rises modestly from the sharp February decline

Monthly real GDP, one of the five primary economic indicators that the NBER Business Cycle Dating Committee uses to judge recession start and end dates, rose modestly in March from a steep decline in February. The government does not publish GDP data at a monthly level, but the NBER BCDC says that they refer to sources such as Macroeconomic Advisers (MA) and their MGDP data series. As as Macroeconomic Advisers put the report for March:

Monthly GDP rose 0.3% in March.  This followed a 1.0% decline in February that was revised up from a 1.2% decline in last month's report.  The moderate increase in monthly GDP in March can largely be accounted for by positive contributions from personal consumption expenditures and domestic spending on capital goods.  A large positive contribution from net exports was essentially offset by a large negative contribution from inventory investment.  The level of monthly GDP in March was 0.5% below the first-quarter average at an annual rate.  Our latest tracking forecast of 2.6% growth of GDP in Q2 assumes average monthly increases of 0.4% per month from April to June.

This report is dated yesterday and has that 2.6% forecast that I reported yesterday, while a new report today from MA uses a 2.2% number. I'll track down the discrepency when I get some free time.

For comparison purposes, last month MA told us:

Monthly GDP declined 1.2% in February.  This was the second largest one-month decline in the nearly 16-year history of the index; it declined 1.6% in September 2001.  The sharp drop in monthly GDP in February was led by a sharp decline in nonfarm inventory investment.  Also subtracting from monthly GDP were declines in net exports, capital goods, and construction.  Averaged over January and February, monthly GDP was 0.8% above the fourth-quarter average at an annual rate.  Our latest tracking forecast of a 0.4% increase of GDP in the first quarter assumes a 0.3% increase in monthly GDP in March.

If the NBER BCDC is the definitive expert on marking of recessions, MA is the definitive expert on measuring real GDP at the monthly level with their MGDP data series.

-- Jack Krupansky

Revised: Macroeconomic Advisers says Q2 GDP tracking at +2.2% growth

Yesterday I reported that Macroeconomic Advisers (MA) was forecasting that Q2 real GDP growth was "tracking" to come in at +2.6%, but today that report from Tuesday is not listed and a new report is listed that says Q2 real GDP growth is tracking to come in at +2.2%. Meanwhile, John Berry over on Bloomberg is using a +2.5% number for real GDP growth in Q2, which I have seen in the media several times before. All three numbers are from MA, but since I do not have a subscription to their service I do not have the details as to which is "right", but here is the literal report title from MA:

Q2-2008 Current Quarter GDP Tracking 2.2 percent

Nonetheless, two-point-anything is a lot better than a sharp stick in your eye.

Clearly the U.S. economy is in fact in a "slowdown" and clearly there are a lot of people and businesses and investors feeling a lot of pain, but the evidence for a true, full-blown, outright recession simple is not there at this point in time. That is not to say that a recession might not be possible in the future or that significant negative events might not occur in the near future, but the simple fact is that the overall U.S. economy (which does include oil companies and commodities producers) is in fact continuing to grow.

-- Jack Krupansky

Industrial production continues its slump

The Industrial Production report for April registered a moderate decline in production, continuing to suggest that the economy is near the edge of a recession. A significant portion of the -0.7% decline (but not all of it) in April was due to strikes in the auto industry, as the report puts it:

... factory output in April was held down by a large drop in the index for motor vehicles and parts; strikes and strike-related parts shortages resulted in suspended production at many facilities.

Industrial production peaked in January, but is still not in recession territory as it is still up (+0.2%) over a year ago.

There was good news on the tech front:

In contrast, the output of computer and electronic products moved up more than 1 percent for the third consecutive month.

The IP (Industrial Production) report is a key input to the NBER Business Cycle Dating Committee as they deliberate on whether and when we enter a recession. This report points the accumulated evidence a little closer to recession, but does not by itself make a strong case for recession. Clearly there is a slump, a slowdown, but it will take a few more months before it can be determined whether it is a relatively mild transitionary period or the preamble for a pronounced recession.

-- Jack Krupansky

Q2 GDP tracking at +2.6% growth, Q1 likely to be revised upwards to +1.1%

I do not have access to the detailed reports, but Macroeconomic Advisers (MA) is now forecasting that Q2 real GDP growth is "tracking" to come in at +2.6% and that Q1 real GDP growth is tracking to be revised up to +1.1%. Not bad for a so-called "recession." Data from MA is one of the important sources used by the NBER Business Cycle Dating Committee to mark the start and end months for recessions.

Clearly the U.S. economy is in fact in a "slowdown" and clearly there are a lot of people and businesses and investors feeling a lot of pain, but the evidence for a true, full-blown, outright recession simple is not there at this point in time. That is not to say that a recession might not be possible in the future or that significant negative events might not occur in the near future, but the simple fact is that the overall U.S. economy (which does include oil companies and commodities producers) is in fact continuing to grow.

-- Jack Krupansky

Moving to NYC

My decision has been made and the deal is done. Yesterday I signed a lease for a studio apartment in New York City. Rent is $1695 and I only had to fork out one extra month of security (two months total) due to my bankruptcy on my credit report. Since it was before the middle of the month my lease starts on May 19th.

The place is somewhat "funky", but works for me. It does not have a kitchen sink (only in New York!), but it does have a door onto the rooftop terrace, so it is probably a net good deal for me. It also has plenty of natural lighting, with a window and door (to the roof) on one wall and another window on the opposite wall, so I can get a cross-flow of air as an alternative to using the air conditioning as much as I might need to for a "normal" city apartment. The building is mostly surrounded by taller buildings, so it gets decent shade for much of the day. And since it is facing the interior, street noise is somewhat muted. The floor is linoleum tile, which is fine with me. A lot of NYC apartments have hardwood floors.

It is on the 10th floor of an older building. It does have an elevator, but also has a really nice wide stairway and I like to walk a lot anyway. When I had my apartment in Tudor City I used to walk up eleven floors all of the time.

The manager has a full-time office in the building, which assures better service for issues that might arise. I dealt directly with the manager (with my broker), who makes all of the management and operating decisions, which is much better than a lot of situations, especially for the typical "walk-up" apartment building you find in the city.

I went through a broker, Century 21, so I had to pay a fee of 15% of the annual rent (typical in Manhattan). Ouch. Yeah, that is a lot of money, but it gave me access to an apartment that I might not otherwise have been able to find on my own or as quickly. Total time from initial meeting with the broker to walking away with a signed lease was just under seven hours. I did look at a couple other apartments and a lot of other listings, but I was able to focus my priorities and the initial listing was a great match to begin with. I did find this listing on Craigslist.

I think I was lucky to get this apartment. People were calling while I was sitting in the manager's office filing my application and still calling when I was signing the lease and the manager had the card for someone ready to file an application if I backed out. Finding an apartment in a doorman building in midtown east in Manhattan with a terrace for less than $1700 is quite a good deal.

Electricity is the only utility that I have to pay. The apartment has an electric range, but I don't cook. It has steam heat. It does have an air conditioning unit left by the last tenant which is in so-so condition, so the good news is that the apartment is wired and set up for A/C, but I may have to buy a new window A/C unit depending on what shape the old unit is in, especially in the middle of the summer.

Now I need to decide what to do about telephone and broadband Internet access. Since I need broadband for my work, I may go with cable-based phone service from either Time-Warner or RCN. I do not watch TV, so I do not need normal "cable" access, but the package price may still be a decent deal, especially since traditional phone service is so pricey these days.

I flew to NYC on a one-way ticket. I still haven't decided when to fly back to Bellevue, WA. I need to make some arrangements for window shades and whatever else I may need to do to make the apartment ready for occupancy. One of my priorities for an apartment was to get a "doorman building" so that a lot of services can be arranged even though I am not at the building.

The location is quite decent (for me), in midtown east, on 50th Street just east of Lexington Avenue. That is a block away from Ess-a-Bagel, the best bagel shop in the world.

The really good news is that the most anxiety-provoking part of the move is done. Sure, plenty of the remaining tasks will be annoying and distracting, but manageable and with minimal uncertainty.

-- Jack Krupansky

Moving to NYC?

Last week, Anonymous left a comment on one of my blogs asking:

So - what did you ever decide about the move to NYC?

Good question, but I did not have an immediate answer. The short answer was that I had decided that the first week in May was when I was going to decide both whether to renew my apartment lease in Bellevue, WA and whether and where to move if I did not renew the lease, including whether I would move to NYC.

Unfortunately, I focused on my bill-paying work last Monday and Tuesday and didn't seriously dive back into looking at apartment listings in Craigslist until Wednesday. I had been checking the listings off and on over the past month or so, but was disappointed that prices didn't seem to be falling due to the weak economy. Sure, there are some apartments in the $1450 to $1550 range (or even below $1200 in Harlem), but they are somewhat... depressing. I was considering a couple of apartments in the $1600 to $1650 range in Tudor City, but the ones I knew about were actually rented by the end of the week. I probably could have picked up one of them, but I was not yet comfortable with paying $1600 in rent. When I lived in NYC back in 2004, I was paying $1275 in Tudor City.

So, by the end of the week I still did not have a new place lined up and the deadline for giving notice not to renew my lease (Sunday) was looming.

Friday afternoon I finally bit the bullet and went ahead and gave notice on my current lease. I felt that I had enough options in New York, or that I could move to Washington, D.C. or Atlantic City if New York didn't work out.

One of the reasons I did not get one of those apartments in Tudor City is that with personal bankruptcy only a little more than two years ago, the apartment co-op board might not approve my application. My broker had a call in to the board to find out, but unfortunately a couple of people snapped up the apartments before the board called back. The only other apartments in Tudor City that the broker had were in the $1800 range. I should call the broker back to at least find out what the board's answer was.

This morning I talked to another broker who had a place listed for $1695 that actually sounded fairly decent. I gave him all the details of my financial situation and he said I should be fine as long as I was willing to prepay rent, and that pre-paying maybe six months or even the whole year would sway a fair number of landlords.

So, I went ahead and made the decision to fly to New York City on Monday and meet with the broker on Tuesday morning.

I decided to fly one way since I have no idea how long my search will take and I will want to fly back to Bellevue ASAP to starting sorting through junk and packing.for my move. I will probably ship all my boxes via UPS.

I checked out prices on Priceline but decided to make a reservation directly with Continental since I did not see any non-stop flights that would get me into NYC at a reasonable hour. I booked a flight leaving Seattle at 11:30 a.m. that arrives in Newark a few minutes before 8:00 p.m. for "only" $460, one way. I could have gotten a round trip on Priceline for $500 to $550 (with stops and connections), but I had no idea when to schedule the return and staying an extra night or two in NYC would erase any savings on the flight. And, Priceline was not showing any non-stop flights. I will book a round trip from New York City to Bellevue, WA as soon as I finalize my new apartment. That could take a single day or two or could take an entire week or even longer.

Then I bit another bullet and used Priceline to reserve a hotel in NYC at least for the first couple of nights. I tried to get a place for $250 for Monday, Tuesday, and Wednesday nights, but had no luck. I checked and it turns out that the rate jumped dramatically from Tuesday to Wednesday. So, I bid again for just Monday and Tuesday nights and did get a place for $250. Unfortunately, Priceline put me in the Wellington Hotel, which it did as well back in November on my last visit. My first night there in November was horrible, with poor heating incredible noise and a rather drab and depressing room that was in desperate need of renovation. Not something worth two and a half stars. A Holiday Inn Express would have been much better. I complained (back in November), but since I had checked in late in the evening they had no other rooms. They did put me in a much better room the second night, but that still did not make up for the disappointing experience of the first night. I tried to call the hotel today to put in a request for a decent room, but they said there was nothing they could do yet since it sometimes takes 24 hours before the Priceline reservation gets into their system. I also called Priceline to complain, but they simply suggested that I go ahead and check in and then call Priceline immediately if there is any problem and then Priceline will directly call the hotel on my behalf. The problem is that since my flight does not arrive in Newark until about 8:00 p.m., even the 8:30 p.m. shuttle bus will not drop me off in New York until about 9:30 p.m., so I will get to the hotel around 10:00 p.m., which almost guarantees that I will get one of the last remaining rooms and make it difficult for even Priceline to fix things up for me. And then, that is kind of late to find a decent restaurant on a Monday evening. I could go to dinner as soon as I get off the bus, but then I would be checking at after 11:00 p.m., which only increases the probability that I will have to hassle with the front desk. I will give the hotel another call tomorrow and see if they can flag me for early check in and somehow verify that my "standard" room is not as defective as the last time I was there.

If I need to stay beyond Wednesday, I may try Priceline again or take the casino bus to Atlantic City and stay down there for a couple of nights. That is a long commute, but it is cheap on the casino bus and a lot cheaper than paying more than $250 in NYC -- as long as I do not dump the savings into a slot machine! And depending on how things are going in NYC, I may also look around for a cheap place to rent in AC as a backup plan. Or, I could even take the bus from AC to DC (Washington, D.C.) and check out some apartments there.

Olympic Trailways runs the CoachUSA bus between Newark Airport and midtown Manhattan. The round trip ticket costs $25 and can be purchased online to avoid hassling with cash and you can get right on the bus. It is nominally a 50 minute ride. They stop at Port Authority, Bryant Park, and Grand Central Terminal.

So, I have my flight, my bus to the city, my hotel for two nights, and my appointment on Tuesday morning with a broker who claims to get "a hundred" new listings every week. I am good to go, so far.

The broker emailed me their "requirements" just to get started. Being self-employed, I need copies of the first two pages of my last two years of income tax returns, a letter on company letterhead from my accountant verifying the income reported on those returns and my forecast income for this year, and a debit card that can charge the last month's rent and one month's rent as deposit since they do not take personal checks or credit cards. And then there might be application fees and credit checks by individual landlords.

AND THEN, brokers in NYC typically charge a 15% fee on rentals. And that is 15% of the annual rent. So, if I manage to rent an apartment for $1750, the broker fee would be... $3,150. Ouch. That's life in the big city. Yes, there are brokers and owners  who do not charge fees, but they are typically managing a single property or small collection of properties, so you would have to bounce around to more owners and brokers to get access to a comparable number of properties. And, in my case, I would have to repeatedly tell my financial story about bankruptcy and part-time self-employment. This broker can figure out which properties to focus on and which to skip. I do want to find a doorman building for security, deliveries, handling mail and package issues, etc. That may add another $100 or $200 to the price for an apartment compared to a non-doorman building. And I would prefer to be in midtown east for convenience, which is a little more pricey.

So, that is where my infamous move to NYC stands. But until I finalize a deal for an actual apartment, I will not have made a final decision.

-- Jack Krupansky

ECRI Weekly Leading Index indicator rises sharply but remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose sharply (+1.28% vs. -0.19% last week) and the six-month smoothed growth rate rose moderately sharply (to -8.0 vs. -8.7 last week), but is still well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "While WLI growth has recovered to a 14-week high, it remains deep in negative territory, suggesting that the outlook is still recessionary."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there is a lot of stimulus as well as potential problems in the pipeline.

I will keep my personal assessment of the chance of recession at 65% based on the fact that we are seeing some hints of moderation mixed in with all of the gloomy news. I will keep my assessment above 50% because we are not seeing persistently clear signs of an upturn, but I will keep it below 80% because we still are not seeing any hint of the steep declines in employment and income typically associated with full-blown recessions. The economy still has a moderate chance of avoiding an outright recession, but only if the data continues to moderate and/or improve at an increasing pace.

I am somewhat optimistic that the U.S. economy will escape a full-blown recession, but I do have to recognize what the data itself is signalling to me, as well as ECRI's assessment and recession "call."

I would note that less than half of the most recent 24 weeks of WLI data (9 out of 24) are higher than the current level. That means that even if the WLI remains flat, within two months the very negative readings on the smoothed growth index will have risen to 0.0. Alas, that is more an artifact of how the smoothed growth rate is calculated than an indicator of economic strength. But, that rise cannot occur if the so-called recession "worsens." The smoothed growth rate rising to 0.0 presumes that the economy does not weaken further.

Incidentally, the Intrade Prediction Market rates the probability of a U.S. recession in 2008 at only 29%, but that is because their "contract" is written with rules that are based on the traditional rule of thumb that a recession begins with two consecutive quarters of negative real GDP growth, and the rules require the final estimate, which comes out two months after the initial or "advance" estimate. Although it is possible that Q1 could be revised to be negative when the final estimate comes out at the end of June, it is somewhat unlikely, so the earliest that this contract could payoff would be at the end of December when the final estimate for Q3 comes out and even then only if both Q2 and Q3 negative. If Q2 comes in slightly positive and Q3 comes in negative, contract holders would have to wait until the end of March next year for the final estimate for Q4. The fact that this contract is at 29% says that people expect Q1 to hold positive for its final estimate and that the economy will strengthen in the second half of the year even if Q2 comes in negative.

-- Jack Krupansky

Economic signal of high fuel prices: consumers need to downshift on fuel usage

There are three economic signals embedded in higher oil and gasoline prices: 1) the economy is stronger than a lot of people are claiming, 2) there is a huge financial incentive for investment in development of energy alternatives, and 3) if consumers want relief they need to "downshift" and cut their usage of fuels by traveling fewer trips, shortening travel distances, and switching to more efficient transportation. I suspect that fuel prices will come down somewhat in the near future (June), but the economic signal for consumers to downshift will remain very strong from here on out, even as development of "green" energy alternatives progresses. Of course, just because the economic signal for a consumer downshift is there does not mean consumers will pay attention to it. OTOH, there is some evidence that consumers actually are starting to downshift their fuel consumption, notably the fact that gasoline demand in the U.S. grew at a much slower pace than the economy and population grew over the past year. Call it a nascent or developing trend.

It will be interesting to watch the sales trends over the next six months for hybrid vehicles, smaller high-efficiency vehicles, and larger less-efficient vehicles. It will also be interesting to see what kind of line-up comes out of Detroit for next year. With a weak economy, their own sales down, and persistently high fuel prices, eventually they will get and act on the economic signals blaring at them. It may take them another couple of years to fully "get it", but they undoubtedly will eventually respond to changes in their market.

-- Jack Krupansky

ISM Services report shows that economy is not as weak as expected

The ISM Non-Maneufacturing (Services) report for April shows that the economy is not as weak as people had expected. Yes, the economy is weak, but is still growing very modestly. The ISM NMI/PMI index rose moderately, shifting from a very modest contraction in March to a modest expansion in April. This was a relatively positive report, but it still shows that the economy is not very strong, yet.

Production continues to grow, but at a slower and barely positive rate.

New orders continue to grow, but at a slower and barely positive rate.

Backlog of orders is now stable, flipping from contraction in March.

Employment is growing again, flipping positive from contraction in March.

Inventories are contracting again, flipping from expansion in March.

Unfortunately, prices continue to rise, and at a faster pace.

Unfortunately, new export orders are now contracting, flipping from growth in March.

Imports are stable, slowing from a moderate growth pace in March.

In short, this was a positive report, but just barely and was rather mixed.

The so-called recession is having trouble materializing. Meanwhile, the slowdown remains quite entrenched.

-- Jack Krupansky

Clinton sets her sights on energy traders

Finally, a leading politician has acknowledge the open secret of why oil and gasoline prices are so high. It is the energy traders. An article in the Washington Post by  Dan Balz and Peter Slevin entitled "Democrats Step Up Debate on Gas Tax - Both Candidates Focusing on Economy" informs us that:

Going after the oil companies was only part of Clinton's energy message. She accused energy traders of manipulating oil prices and called for the Justice Department and the Federal Trade Commission to investigate. "It is a fact they are manipulating the oil and gas market," she said.

Whether anything will come of this remains to be seen, but at least there is some public and high-profile acknowledgement of the problem.

Technically, I am not so sure that it is market "manipulation" per se, but simply the fact that in-house proprietary trading desks at the major banks, financial institutions, and hedge funds are simply swamping the real market for energy commodities. There is simply way too much financial speculation in commodities in general and energy in particular. I do not know of any illegalities, per se, but the markets are out of control and harming average consumers. Sure, the commodities markets are functioning properly in a technical sense that orders are being processed, just as the markets for mortgage securities and auction-rate securities were working just fine, but there needs to some government hand on the throttle to recognize when consumers are being seriously harmed and that it is time to place limits on financial competition in commodities markets by non-producers and non-consumers. Futures markets were designed to smooth out market conditions for both producers and consumers of commodities with plenty of room for traders and speculators to help add some additional liquidity, but the amount of money being thrown into commodity markets is now interfering with the normal price discovery process.

Exactly what machinations would be discovered remains to be seen, but certainly investigations are clearly called for. In fact, somebody needs to investigate the extent to which changes in Federal Reserve banking regulations a few years ago may have enabled the participation of banks and financial institutions in speculation in commodities in ways that are not in alignment with running a bank.

Put simply, the major banks, financial institutions, and hedge funds are abusing the commodities markets and are clearly harming consumers.

-- Jack Krupansky

Will Yahoo pull a rabbit out of their hat before the stock market opens?

Also some analysts believe that Microsoft's withdrawal of their offer for Yahoo is simply a negotiating tactic (see the article on MarketWatch by Jon Letzing entitled "Microsoft plus Yahoo: Is it really over?"), I am rather skeptical, although the letter to Yahoo seemed to offer a rather explicit list of issues that Microsoft had been concerned about which seemed detailed enough to almost say "please fix these issues and then the deal can be done." Yahoo had an entire month here to agree or counter-propose workable deal terms. The meeting on Saturday was not simply "another meeting", but the true climax of recent meetings. Actually, I am starting to think that Microsoft is rethinking their rationale for doing the deal rather than continue on by themselves. After all, if Yahoo was really so important, would $2 billion or $5 billion really be a deal breaker? I think not. I think the Yahooligans managed to convince Microsoft that they would be too much of a pain in the butt and it actually would be easier for Microsoft to proceed without Yahoo. Although it is always possible that a new deal could be put on the table at some time in the future, it now seems fairly clear from a common sense reading of Microsoft's press release and Ballmer's letter that the plug really has been pulled on the deal, for good. Yahoo in turn issued its own letter which effectively agreed that the proposed "marriage" really was "off." But that is not necessarily the end of the story. Yahoo had been engaged in a variety of strategic discussions in the past couple of months, so faced with the prospect of a breathtaking plunge in stock price on Monday morning, Yahoo could manage to paper together enough of a proposed deal with AOL, News, Google, etc. before the opening bell on Monday to at least give the appearance that they were on the verge of "changing the game" in a dramatic enough manner to give investors a reason to cheer rather than focus on how quickly to drive the stock below $19. I have no evidence or reason to believe that such a deal might really be in the offing, but in this kind of end-game, anything goes and such a face-saving Hail Mary pass could be palatable to Yahoo's board of directors. Although the chance of Yahoo making such a move is slim, the compelling nature of a stock in free-fall could compel the board to go for it, even if such a proposed deal eventually falls through.

Personally, I would advise Yahoo's board to "go for it", and pull that rabbit out of their... "hat." But I would say that there may be only a 1 in 3 chance of them doing so.

Personally, as much as I have invested in Microsoft, I would be happier seeing an independent Yahoo go it alone and proving that it is not a "Google and Microsoft only" world. I like having three major choices for search, email, content, etc. Broad choice is a very good thing.

So, good luck Yahooligans!

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls slightly but index remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell slightly (-0.14% vs. +0.09% last week) but the six-month smoothed growth rate rose sharply (to -8.7 vs. -9.8 last week), still well below the flat line, suggesting that the economy will be struggling in the months ahead.

The decline this week was in part due to rising unemployment insurance initial claims and falling mortgage applications. Both are very volatile.

According to ECRI, ""While the WLI has recovered slightly in the last four weeks, it remains close to its March low and in a clear recessionary downswing."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there is a lot of stimulus as well as potential problems in the pipeline.

I will lower my personal assessment of the chance of recession to 65% (from 75%) based on the fact that we are seeing some hints of moderation mixed in with all of the gloomy news. Still, I will keep my assessment above 50% because we are not seeing clear signs of an upturn. The economy still has a moderate chance of avoiding an outright recession, but only if the data continues to moderate and/or improve at an increasing pace.

I am somewhat optimistic that the U.S. economy will escape a full-blown recession, but I do have to recognize what the data itself is signalling to me, as well as ECRI's assessment and recession "call."

I would note that in five weeks, less than half of the most recent 24 weeks of WLI data will be higher than the current level. That means that even if the WLI remains flat, within two months the very negative readings on the smoothed growth index will have risen to 0.0. Alas, that is more an artifact of how the smoothed growth rate is calculated than an indicator of economic strength. But, that rise cannot occur if the so-called recession "worsens." The smoothed growth rate rising to 0.0 presumes that the economy does not weaken further. The WLI is currently higher than eight of the past thirteen weeks. There are some promising signs here, but some mixed signals as well.

Incidentally, the Intrade Prediction Market rates the probability of a U.S. recession in 2008 at only 30%, down from roughly 70% before the Q1 GDP report, but that is because their "contract" is written with rules that are based on the traditional rule of thumb that a recession begins with two consecutive quarters of negative real GDP growth, and the rules require the final estimate, which comes out two months after the initial or "advance" estimate. Although it is possible that Q1 could be revised to be negative when the final estimate comes out at the end of June, it is somewhat unlikely, so the earliest that this contract could payoff would be at the end of December when the final estimate for Q3 comes out and even then only if Q2 is negative. If Q2 comes in slightly positive and Q3 comes in negative, contract holders would have to wait until the end of March next year for the final estimate for Q4. The fact that this contract is at 30% says that people expect Q1 to hold positive for its final estimate and that the economy will strengthen in the second half of the year even if Q2 comes in negative. Here are their actual rules:

This contract will settle (expire) at 100 ($10.00) if the United States economy goes into recession during 2008.

The contract will settle (expire) at 0 ($0.00) if the United States economy DOES NOT go into recession during 2008.

For expiry purposes, a recession is defined as two successive quarters of negative real GDP growth.

Expiry will be based soley on the data reported by the U.S. Department of Commerce (Bureauof Economic Analysis, Table 1.1.1, "Percent Change From Preceding Period in Real Gross Domestic Product") as reported by the BEA.

If the table as reported at that time indicates that any two consecutive quarters between (and including) Q4 of the previous year and Q4 of the year specified in the contract are negative, then the contract will expire at 100. Otherwise, the contract will expire at 0. For example, if Q4 of 2007 and Q1 of 2008 both experience negative growth then the contract for 2008 will expire at 100.

Clarification: (added 26 Sept 2007) The final figures will be used for expiry - not the advance or preliminary numbers.

-- Jack Krupansky

Microsoft unshackles itself from Yahoo... yahoo!

I think the Yahoo acquisition really could have worked out well for all parties (other than Google), but I always saw it as an accelerator for Microsoft rather than a survival requirement for the online and ad-based business space. Microsoft has a boatload of great technology, including online content and content delivery infrastructure, online advertising infrastructure, and the Microsoft Live Search engine is very respectable technology. Sure, Yahoo would have been a feather in Microsoft's cap, but Yahoo was never do-or-die for Microsoft. I was never a great fan of the deal, but I always felt that it made a lot of sense and would be a good deal for Microsoft. And a good deal for me since I own a fair amount of Microsoft stock. But now that Microsoft has officially withdrawn the acquisition offer, I am very relieved. Read the "Press Release: Microsoft Withdraws Proposal to Acquire Yahoo! (May 3, 2008)." I really do believe that Microsoft has all the right building blocks in place and with many more to follow. They do need to be a bit more patient with getting people over to their search engine, but they have the money in the bank to be as patient as necessary. And the Microsoft search technology really is a lot better than many people give it credit for. I think Yahoo has enough market share and technology to continue to limp along and succeed in their own way, but that is actually a good thing for Microsoft as its medium-term goal is to become #2 in the space, which is easier as Yahoo continues limping.

Some people may believe that the "loss" of Yahoo is a really bad thing for Microsoft and "dooms" the company against Google, but I think I lot of people were already feeling that the integration cost was maybe just as big a risk for Microsoft. I think that the stock market will view this as a big positive for Microsoft stock. OTOH, I do not care how the stock market reacts in the coming week or two, since I am more of a long-term investor.

Again, I am quite relieved and even thrilled that Microsoft has unshackled itself from such a potential albatross of a deal. There are plenty of smaller fish in the online sea for Microsoft to feast on. The elimination of the integration distraction alone should send spirits soaring at Microsoft. I wish them all the best in refocusing on how to push their online services infrastructure ahead of Yahoo and into being a more formidable competitor to Google.

I had been particularly bothered by the fact that the deal would have left Microsoft with very little cash or maybe some debt as well. Of course Microsoft does not need as much cash as it has, but to draw it down to near zero did not make a lot of sense to me. In fact, that may have been the argument in favor of refraining from upping the deal price to $37 per share. I could have lived with the extra $5 billion deal price that Microsoft was offering today, but Yahoo was simply being too greedy for me to personally stomach.

The really good news for Microsoft shareholders is that now the company can once again be aggressively buying back stock.

The $64 billion dollar question (almost literally) is whether Microsoft stock could pop back up to the $35 range in the days ahead. I think there is an excellent chance, but the stock market is rather uneven and temperamental these days, so it is also quite possible that "investors" could dump on Microsoft for this latest "failure." I am not placing any bets, but I do intend to keep my current positions in Microsoft Stock.

Imagine the absolute agony now being experienced by Yahoo shareholders who now have over 36 hours to contemplate what wrath traders and speculators will inflict on Yahoo stock at the opening bell on Monday. One word: ouch. Of course, as I said, it is very difficult to predict the markets these days, so the withdrawal of the Microsoft offer could cause some other even better opportunity to pop up for Yahoo and its beleaguered shareholders.

In short, good riddance to the Microsoft-Yahoo "deal."

-- Jack Krupansky

Have commoditiy prices peaked?

I am not the only one wondering if commodities prices have peaked or getting close to doing so. Sure, oil and gasoline are hanging near their recent highs, but gold and the other precious metals are well off their peaks. Sure, the summer driving season is coming up, but last year the peak price for gasoline was reached before Memorial Day weekend and gasoline declined through the summer. With consumers "in retreat" due to the weak economy and high energy prices, there is no reason to believe that the recent run-up in oil and gasoline were not 100% speculative and just as likely to fizzle and then reverse as Memorial Day weekend approaches.

As far as people who still believe the myth that the price of gasoline is high due to imagined shortages or increased demand, the latest weekly inventories report from the Energy Information Administration tells us that the supply of gasoline is "in the upper half of the average range" for this time of year. In other words, no sign of a shortage. And the report tells us that demand is "up by 0.4 percent from the same period last year." In other words, demand is up even less than GDP. With growth in demand basically flat, there is esentially no valid argument for higher oil and gasoline prices. I do not blame high energy prices on the big oil companies or "price gouging." Rather, gasoline and other commodities pricess are sky-high almost exclsuively due to rampant speculation by financial institutions and hedge funds, with speculation by smaller players as well.

And this silly argument that a falling dollar is also a main force driving up commodities prices is the epitome of overreaching and rationalization by speculators. Sure, you expect to see some increase in import prices as the currency declines, but you do not normally expect to see commodities to rise by a lot more than the change in foreign exchange rates, especially since not all of our oil is imported. Speculators are using foreign exchange rates as a cover for their own abusive trading. Besides, foreign exchange rates are also being driven primarily by speculative activity. So it is the height of absurdity for speculators to justify price movement in one commodity by their own abusive trading in another market.

Besides, there is an expectation that the dollar may strengthen if the Federal Reserve holds interest rates steady and even raises them later in the year, while the European Central Bank may be forced to lower their rates due to economic weakness in Europe. This could be a double or even triple whammy for the speculators. in the coming months.

Still, speculative bubbles can continue much longer than sensible people might forecast. Nonetheless, there is some expectation that oil and gasoline may peak sometime in the coming few weeks, if they have not already peaked. Whether we will see one last hurrah rally remains an open question.

-- Jack Krupansky

Employment situation still not experiencing a full-blown recession

The employment report for March was not as gloomy as many pundits had hoped. Although the New York Times incorrectly touted the measly 20,000 loss as "powerful evidence that the United States is almost certainly now ensnared in a recession", it simply is not credible to consider a very slim -0.01% change as being "powerful evidence" of anything other than that the U.S. is not deeply "ensnared" in a full-blown recession. The cumulative loss of 260,000 payroll jobs over four months is certainly a slowdown but still amounts to only a -0.2% decline, which is well short of the level of decline typical in a recession, especially after four months. In a real recession we would see declines on the order of 250,000 or higher in individual months. Sure, there was other gloomy news in the report as well, notably a decline in payroll income, but overall the report had far more good news than bad. The simple fact is that household employment is 618,000 jobs higher than a year ago. This is not what one would see in a true, full-blown recession.

There was a lot of chatter about a lot of new jobs being part-time and incomes falling, but it is difficult to separate the wheat from the chaff here. Not all part-time jobs are necessarily bad. It is also true that the economy is still shifting from reducing excess highly-paid jobs (think Wall Street) and creating a larger number of lower-paying job (think services), and that is not necessarily a bad thing either. Yes, there is some bad mixed in with the good, but that does not mean that the net is bad. The economy is certainly rather flat right now, which means that there are roughly equal measures of good and bad, so while it is certainly disheartening to see so many bad numbers, we need to look at them in the overall context.

In short, this employment report was not a major disappointment except to the pundits who continue to try to drum up support for a big recession. There was more good news than bad news in this report, but still enough bad news to conclude that we shouldn't get too excited, yet.

-- Jack Krupansky

Return of the 52-week T-bill

I saw mention in the press of the return of the 1-year T-bill. I did some searching, but could not find a formal announcement of it, but I did see that the 52-week T-bill is on the Tentative Auction Schedule of U.S. Treasury Securities for the auction to be held on May 29, 2008. Unlike the 4-week, 13-week, and 26-week T-bills which are auctioned every week, the 52-week T-bill will be auctioned every four weeks (not exactly monthly).

I personally do not expect to be buying them. They make sense if you need to do a "bond ladder" or if you expect interest rates to decline sharply.

Besides the fact that the U.S. government is going deeper in debt, the restarting of 52-week T-bill auctions simply highlights the fact that despite the U.S. debt burden, there is extremely high demand for U.S. Treasury securities, which belies the suggestion that somehow the financial position of the U.S. is somehow "weak." The "full faith and credit" of the U.S. government is alive and kicking.

In theory, money market funds could hold 52-week T-bills, but there is some liquidation risk in that the value of the T-bill could decline on the secondary market which would cause a loss if the bill is sold prior to maturity. One year is a dog's age in today's credit markets. I suspect that there will be a very lively secondary market in "off-the-run" 52-week T-bills, for people who need to lock in a rate for less than a year but more than six months.

An open question is whether a new point will be added to the Treasury yield curve and if so, when that will occur.

-- Jack Krupansky

More mixed economic data

The economic data on Thursday was modestly negative, but mixed and not indicative of a worsening recession.

Real personal Income was essentially flat and real personal spending was up only slightly in March. Disposable income and spending were up. Real disposable income was flat, but actually down too slightly to show up in the rounded numbers. Real spending was up slightly. These were not great numbers, but more indicative of a slowdown than a full-blown recession. Real disposable income, which is one of the key metrics used to judge the onset of a recession is higher than its level in the Fall or January, so it is not yet indicating that a recession is clearly underway. But, it will feel like a recession to a lot of people since per capita real disposable income is in fact a little below its level in September.

Construction spending declined in March, but actually gained for non-residential construction.

The ISM Manufacturing report was essentially unchanged. The PMI was unchanged and slows a modest contraction in the manufacturing sector. New Orders continued to contract at the same modest rate. Production continued to contract, but showed a little improvement. Employment contracted at a faster rate. One bright spot was that the backlog of orders switched from contraction to modest growth. Also, exports expanded and at a faster rate.

The weekly unemployment claims numbers were a mixed bag, with claims up moderately, but the more-accurate 4-week moving average down modestly. Both numbers remain elevated, but still moderately short of the traditional 400,000 recession level. Continuing claims did finally poke above the psychologically important 3 million level, and the 4-week moving average moved higher.

Overall, it was moderately gloomy data, but the continuing boom in non-residential construction and real disposable income hanging near its peak suggest that the economy still isn't quite ready to move beyond the edge of a recession into outright recession.

-- Jack Krupansky

Awaiting the important economic data

The economic data on Wednesday was mostly about as expected. The Federal Reserve FOMC gave the market the modest rate cut that was expected and Q1 GDP actually came in a little better than expected but in the expected ballpark. The ADP payroll employment report was a little better than expected and actually showed a very modest rise in employment for April. But the really juicy data comes on Thursday, with personal income and spending for March, construction spending for March (both residential and non-residential), the ISM Manufacturing report for April, and the latest weekly view on unemployment insurance claims. And then on Friday we get the employment numbers and unemployment rate for April.

The S&P Case/Shiller housing price report was very gloomy on Tuesday, but that report covered February, two months ago. We have already seen the gloom of February play out in a wide range of economic reports before this week. Also, Case/Shiller only covers the major urban areas, so it does not pick up non-urban housing prices.

There is clearly a fair measure of gloom in all of this, but the overall economic numbers have been actually much better than the outlook being loudly proclaimed by the pundits. It will be quite interesting to see how the numbers shape up on Thursday and Friday.

Meanwhile, oil, gasoline, gold, and other commodities seem to be running out of steam, so we could see inflation come down a bit and other investment sectors perk up as speculators and traders selectively rotate money out of commodities and into other asset classes.

-- Jack Krupansky