Wednesday, November 30, 2011

Very positive Chicago PMI report

Another bright spot on the economic front was the Chicago PMI report for November which showed the Chicago Business Barometer rebounding to a 7-month high, production strengthened, new orders surged to a 6-month high, and order backlogs rose to the highest level since July. And all of these readings are above the 50 breakeven level, with new orders up at the 70.2 level. Granted, you can't magically apply this one report to the entire country, but it does go a fair distance towards disproving the notion that "the economy is in the toilet."

Challenger: Fewer layoffs in November than a year ago

The monthly Challenger, Gray & Christmas, Inc. Job Cuts report showed a slight decline in job cuts in November from October, but the number of job cuts was down –13% from a year ago. That's good news. This includes government job cuts. Overall, Challenger reports more announced job cuts to-date than in all of last year. These are "announced" cuts, so it is always uncertain when those people may actually lose their jobs or in some cases the cuts can take effect through retirement and attrition.
Job cuts at the state and local level have been significant, but appear to be showing. Instead, Challenger now expects increased cutting by the federal government, including the postal service. The U.S. Air Force announced 13,500 job cuts last month. The winding down of the wars in Iraq and Afghanistan will also likely result in further cuts. Federal budget spending cuts will only increase cuts at the federal level. The financial sector could also continue to see job cuts due to the financial turmoil in Europe.
Challenger also expects higher retail hiring due to better-than-expected Black Friday and Cyber Monday retail sales.

The stock market rally continues

It was quite impressive to see the early stock market gains hold up through the day and then even see a further gain right into the close, with the Dow Industrials now back above the psychological 12,000 level. I still believe that much of the early gains were due to short covering, but the durability of the rally suggests that indeed a majority of market participants have now adopted a "risk on" bias. This is indeed what one would expect to see in a trading range after a significant decline had left the market in an "oversold" position and the bias reverses. I suspect that this time the rally on the bias reversal was probably more extreme since there were probably a lot more short positions out there due to the seriousness of the concerns about both the uncertainty of the U.S. economic outlook for next year and the European debt situation. The rally also got a boost from some decent economic news.
All of that said, how long this rally continues is a big open question due to ongoing uncertainties. The first main checkpoint will be the close of the week on Friday as well as how much of the gains remain after the close on Monday. That will tell us a bit more about the depth of this rally. Maybe it will continue through the end of the year or into January, but unless the economic outlook for next year brightens considerably we will likely be stuck in a trading range, with the 12,250, 12,500, and the 12,750 levels of the Dow providing "convenient" turning points for traders and short-term speculators looking for excuses for "taking profits" and bouncing around the trading range for another lap.

A lot of the pop will simply be short covering

Oh, yeah, and I forgot to mention the obvious (to me): A huge chunk of any initial pop at the stock market open will be short covering. Although Monday's gain may have frightened off a lot of the weaker shorts, adventurous traders and short-term speculators may be trying to engineer a "short squeeze" to force a lot of the harder-core shorts to throw in the towel and buy to close their short positions before they lose too much more money.
That said, it will remain unclear whether those guys will indeed flip their bias from "risk off" to "risk on" or simply wait a few minutes or hours (or days) for the pop to hit "buying exhaustion" and then re-open their short positions. Or, they may decide to "read the writing on the wall" and go "risk on" at least to ride the wave for a little while and then flip back to "risk off" after the current rally runs out of steam.
There really is a chance that we could be on an upswing of this trading range, but sometimes that can be an illusion.

Stock market set for a pop, but then what?

A decent ADP employment report (yes, the private sector is still hiring) as well as news of a global central bank move to boost bank liquidity should cause the stock market to pop on the open, but I'm not so sure what will happen after that. It will be completely dependent on whether the traders and short-term speculators take a "risk on" or "risk off" bias (bullish vs. bearish.) They could go either way, building on the initial rally and gains from Monday and Tuesday, or selling into the rally. In truth, some will do one and some will do the other, so it will be a matter of which side has the greater numbers and how it nets out. There could be some volatility as the two groups battle it out, pushing the market up and then down several times before the majority net bias is "discovered" by the market.
The ADP employment report is a positive economic report. ADP says that the "increase in November was the largest monthly gain since last December and nearly twice the average monthly gain since May when employment decelerated sharply."
The "globally coordinated central-bank response" is simply yet another small step in the drawn-out process of resolving the European debt crisis. It is a good step, but not definitive per se. I still believe that "the fix is in" and that it is more a matter of letting all of the political drama and theater play out before the pieces gradually get put into place. In some cases sovereign debt holders (including banks) will have to accept a "haircut" and in other cases the ECB may simply buy up a hefty chunk of sovereign debt. In all cases a hefty dose of "austerity" is required, which may mean recession, but that would simply be a side effect of cleaning up enough of the debt mess to move forward. None of this will satisfy the critics, but satisfying critics need never be the goal anyway. There will be no "grand" or "ultimate" resolution of European debt, simply enough of a fix to enable Europe to muddle on, as it always has and always will.

Tuesday, November 29, 2011

A nowhere day for the stock market

The good news is that there was not a huge amount of profit-taking in the stock market today after the big gains on Monday. That is good news, sort of, but doesn't assure us that we won't see significant profit-taking in the days to come. The Dow was up nicely a few times during the day, but there was clearly a fair amount of "sell into any rally" sentiment to bring the market back down to earth. NASDAQ actually saw a modest decline on profit-taking in the hot technology names that are also hot candidates for short-sellers. In other words, there is a lot of hot money in the hands of traders and short-term speculators who did not interpret the gain on Monday as "happy days are here again" – or maybe they did, but in a negative sense.
I expect that the consolidation phase after Monday's gain will last at least a couple more days.

Made my 23rd payment to pay down the public debt of the U.S. government

I just made my 23rd monthly payment to pay down the public debt of the U.S. government. It wasn't a large payment, just another $25, but it is a matter of principle, albeit mostly symbolic. It may take me another 51 billion years to pay it all down all by myself at this rate (and assuming the deficit went to zero immediately), but, as I said, it is a matter of principle and a sense of personal responsibility. It is our debt, not somebody else's.
According to the U.S. Treasury web site, the total public debt outstanding was $15,051,673,595,197.90, as of November 28, 2011, an increase of about $111 billion over 39 days or $2.9 billion a day. This is an annualized run rate of $1.042 trillion, our effective annual deficit at this point.
Here is what I wrote back in January 2010 when I made my first donation/gift/contribution/payment:
Everybody is whining and complaining about the ballooning debt of the U.S. government, but who is actually doing anything about it? Well, for starters, ME! Yes, that's right, I, Jack Krupansky, just did something to reduce the U.S. government debt. Really. No kidding. I actually paid down a small slice of this debt. Granted, it was a rather small slice, but a slice nonetheless. Okay, sure, it was only $20, but the point is that at least I am one of the very few people willing to stand up and DO something about the problem, rather than be one of the whiners and complainers who refuse to acknowledge that it is their debt and their problem, not just the fault of mindless politicians in Washington, D.C. After all, every politician ultimately answers to voters and most of the so-called wasteful spending of the U.S. government is simply politicians responding to the demands of their constituents (voters.) Maybe my one small contribution to paying down the debt won't really make any difference to any of those whiners and complainers, but for me it is a matter of principle. I consciously choose action rather than the inaction and lack of responsibility of the whiners and complainers.
If you have any sense of principle, you too can pay down a slice of the U.S. government debt yourself at You can pay via credit card or debit transfer from a bank account.
So do the right thing and show all those whiners and complainers (including so-called "tax protesters") how mindless and spineless they really are. PAY DOWN THE DEBT! And that has to start at the grass roots with us individuals before politicians will ever pick up the lead.
For the record, the only real way out of the deficit is not to merely cut expenditures or raise taxes or some combination of the two, but through economic growth, which includes a healthy amount of immigration in addition to unemployed workers going back to work and young people entering the work force. Sure, we need to manage the federal budget more carefully as well and make difficult choices about the size of government and tax rates, but the big focus has to be on achieving sustainable economic growth. In truth, nobody, including all of the Nobel laureate economists, knows what that sustainable rate really is or how to get there. We'll stumble our way in that general direction. That's the way we do things in America.
Another note: A significant part of the deficit is businesses writing off losses from the financial crisis and recession as tax deductions. That may continue for awhile longer, but will gradually wind down and tax receipts from businesses will begin to pick up in the coming years.
A final note: I may suspend my payment program next month since my current contract work ended six weeks ago. I do have the cash to continue my payment program, but technically, on principle, the loss of primary income is supposed to mean that a person should cut all inessential expenses until there has been a resumption of their primary income. In any case, my public debt payment program will continue in any month that I have enough primary income to pay my rent and basic living expenses. But, I don't expect that to be the case in December, and I expect to be living off savings for some number of months, so my U.S. public debt payment program is now effectively suspended until I line up new work.

A day of consolidation for the stock market

After the big gain yesterday, the big question for today is whether the market might open with a little pop but then quickly reverse into "profit-taking" as traders and short-term speculators "sell into any rally" for a loss for the day, or whether the market will open weakly or with a modest gain and then gradually build into another gain for the day.
Another factor to watch for is that whenever the market opens with a "gap" or big jump up (or down) as we saw on Monday, the "pros" say that eventually the market must "fill the gap" or decline back to near the bottom of that gap before a healthy advance higher can be sustained. That is not some law of physics or anything sensible, but it is a guide for how a lot of traders behave. It is one of their rituals, something to do when the market itself is not forcing a trend on their trading.
Ultimately, what happens today in the stock market is far less significant for true long-term investors than how the market sits a week from now after the short-term folks have pushed and shoved the market back and forth in unsustainable moves and then we will see where the net longer term money flows point the real trend, although even that will only be an intermediate trend and not necessarily a true long-term trend.
News about Italy and American Airlines are sideshows that shouldn't impact the overall market in a significant manner although any news can be used as an excuse by traders to add some momentum to their bias.

Fitch lowered U.S. soverign long-term outlook rating to Negative

Although ratings agency Fitch lowered its long-term outlook rating for U.S. sovereign debt to Negative from Stable, there's really no surprise there. Basically this was in response to the failure of the joint congressional deficit committee to come to a deficit reduction deal. In other words, because the U.S. still does not have a credible plan for deficit reduction. For the short-term, Fitch did reaffirm the U.S. Treasury security rating of AAA, but Fitch explicitly indicated that a downgrade was slightly more likely than not over the next two years ("The Negative Outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon.") Fitch says they will update their outlook and ratings in 2012, but does not expect any resolution of the deficit issue until late 2013.
Meanwhile, for investors, this is more of a sideshow than an urgent current concern.
I would note that the release from Fitch failed to mention to impact of the expiration of the Bush tax cuts at the end of 2012. That really is quite a big deal, so I am baffled why they did not include it. As things stand, unless either party gets overwhelming control of Congress next year (which is unlikely), the cuts will automatically expire and lead to a sharp increase in tax revenue in 2013, for a total estimated impact of $4.7 trillion over ten years, on top of the automatic across the board $1.2 million spending cuts over ten years that start in 2013. Combined, that really does put a substantial dent in the deficit, which is why I say that investors need not worry about this "sideshow."

Monday, November 28, 2011

Stock market holds on to its early gains

The stock market managed to hold on to all of its early gains, which is a lot better than losing them, but it is disappointing that the market did not manage to build on those early gains. The bulk of the gains had occurred when the initial trades had executed by 9:34 AM. The market was a little higher late in the morning, but then drifted down into the afternoon as cynics took that early selling exhaustion as an excuse to sell into the rally. Although the Dow was off the morning peak by 110 points just 14 minutes before the close, it managed to regain 70 of those points by the close. This suggests that the intraday decline was probably short-selling by day-traders who were forced to close out their shorts near the close as the bulk of the market gains held up throughout the day.
I still think a lot of the initial pop was due to short-covering, but that is common when the market turns up after a significant decline.
The key issue is to see how the market closes a week from today, after all the initial retail sales hype has burned off and market participants get back to trying to forecast where the economy and businesses will be in nine months, not simply reacting to the news du jour.

Emerging optimism in the stock market

That was a nice pop at the open for the stock market, fueled by optimism for retail sales after Black Friday and some optimistic chatter from Europe, and has been sustained through the morning, but most of it was probably nothing more than short-covering. The open question is whether traders and short-term speculators are simply biding their time and waiting for "buying exhaustion" to hit before re-opening their short positions, or whether a majority of them have indeed reversed their bias from "risk off" to "risk on" and are now in the process of swinging the trading range back up after its recent descent. Flip a coin on that one.
Overall, the market is still in a lazy trading range, with significant economic uncertainty beyond the next few months.
Despite the decent retail sales news, Monday may still qualify for a "dead-cat bounce" since the market really was in a short-term oversold condition in which such bounces are common. We'll have to see how much of the morning's gains are still with us in a week.

Sunday, November 27, 2011

Will the stock market finally bounce on Monday?

After such a long, unbroken series of daily declines, the stock market is overdue for at least the proverbial "dead-cat bounce", not to mention that the decent retail sales numbers from Black Friday could actually give the market a sound economic fundamental reason for bouncing. So, a bounce of some sort looks reasonably likely. The open question is how much "sell into any rally" sentiment is still out there. So, after any opening bounce we will have to see how that tapers off and either turns into a decline or becomes the foundation for a rise throughout the day. Whether a one-day rally can be turned into something more durable remains to be seen.
One good piece of economic news is not sufficient to build a sustainable, long-term market rally, but it is a start, a good start, and a necessary start.
Regardless of what the market does in the near term, the retail sales data does at least confirm that the economy really is a long stronger than a lot of the critics complain.

Friday, November 25, 2011

A wasted day for the stock market

I'm not sure why they bother to keep the stock market open on a Friday after a holiday. Most of the major players take the whole long weekend off anyway, if not the entire week, so whatever happens in the markets on such a Friday doesn't really reflect the true market anyway. Still, it is good to have a slow day once in a while to let people catch up without all the mad frenzy that frequently fills the markets.
People are busy trying to judge how well Holiday spending will be going, but with too little data to come to a reliable conclusion. By Monday we'll have a "read" on how retail shopping is going today (and last night) and tomorrow. I saw a very long line (hundreds) for Toys"R"Us in Times Square last night (Thanksgiving Day) around 9 PM. There was a line at BestBuy at the same time.
To me, the critical issue is not holiday shopping per se, but the underlying economic and business fundamentals in the retail sector that are supporting this short retail shopping period, such as number of temporary jobs created, for how long, for what compensation and benefits, as well as any net change in non-seasonal retail jobs. And most significantly, how robust a "tail" is left on the retail sector going into the new year. In other words, do we just have a sharp binge and then the retail contracts dramatically, or will the retail sector actually show some ongoing life through the winter and into the spring. That will be a key factor in whether we lapse back into a new recession.

Wednesday, November 23, 2011

Macroeconomic Advisers now forecasting Q4 GDP growth of only +2.8%

Although the economic data today was reasonably decent (relative to concerns of a possible recession), it still wasn't as strong as a normal healthy quarter. In fact, Macroeconomic Advisers (MA) just adjusted their Q4 GDP forecast to be annualized real growth of only +2.8% compared to their recent forecast of +3.2%. GDP growth of 2.8% is at the lower bound of the "healthy" range for a growing economy. That's not a bad thing, but not great and does leave the U.S. economy vulnerable should any significant economic shock occur (like a big meltdown of Europe.)

Semi-decent economic news

The economic news was fairly decent this morning.

Unemployment initial claims were up slightly but still holding below the 400K recession threshold. Continuing claims rose, which is not good news.

Personal incoming and spending continued to rise, even after discounted by inflation, although the spending increase was rather modest.

Orders for durable goods declined moderately, but were up moderately separate from transportation goods.

Consumer sentiment rose as well.

So, there is still no sign of any impending recession.

Still, a lot of this data tells us where we were and not so much where we will be going over the next year, which is what the stock market is supposed to be "predicting."

That said, the U.S. economy is clearly currently much stronger than a lot of critics are claiming. Yes, there is still a lot of underlying weakness and anxieties about debt, but this is still all "par for the course" in America which never has been and likely never will be the kind of finely-tuned watch that critics assert that is has to be.

Tuesday, November 22, 2011

Market just isn't ready for any big rally just yet

It may take a little more agonizing about the economic outlook before the stock market is ready for a healthy bounce. The holiday-shortened week also limits any major market moves to the upside as people wonder what bad things may transpire over the long weekend.
The Market will be open on Friday, but a lot of market participants simply skip it and take off an extra day or two or even all week.
The decline on Monday may have been due in part to people dumping short-term long positions simply so they could take the rest of the week and weekend off without worrying about how any market moves may affect them.

Q3 GDP revised lower

The revision of Q3 GDP down to +2.0% from +2.5% isn't going to go over well with traders, but this is the view in the rearview mirror and says nothing about the current quarter (Q4) or beyond. Macroeconomic Advisers (MA) is still forecasting GDP growth of +3.2% in Q4. For the record, they had been forecasting +2.2% of Q3 GDP, which isn't that far off from the official number we got today.

Bouncing along in the trading range

It is certainly possible that we could see a bounce in the stock market after Monday's sell-off, but it is also very possible that any initial bounce could be short-lived and evaporate as quickly as it appears. The basic question is whether or when we reach "selling exhaustion", the point where everybody who was going to sell in the short-term has already done so. Plus you have nervous short sellers who see the downward momentum evaporate and then begin to close out their short positions to lock in their profits, causing the bounce to accelerate. That's when you see upward momentum build for a bounce as the short-term trading bias reverses to "risk on", at least for a little while.
In any case, the stock market is still locked within a sloppy trading range with both limited upside and limited downside until the economic and fiscal outlooks become a little more clear.

Monday, November 21, 2011

RIP deficit supercommittee

As widely expected, the joint congressional deficit supercommittee threw in the towel and admitted that they could not reach a deal, opening the door to the automatic across the board $1.2 trillion in spending cuts starting in 2013. That's fine with me and will be a much-needed strong dose of medicine for what ails the federal budget. There will be plenty or more work to do on the federal budget in the coming months and years, but these automatic cuts are a great next step.
Although there is some chatter about reducing or redirecting some or all of the automatic cuts, there simply aren't the votes for such actions. In fact, President Obama has now publically stated that he will veto any such attempts to prevent the automatic cuts.
Some are criticizing Obama for not being involved in the supercommittee negotiations, but I would suggest that it was not his job and that he already did his job during the negotiations that set up the supercommittee back at the end of July.
Besides, I think Obama is making the wise political decision to distance himself a little from Congress to focus on his own reelection. It is now up to the American people to decide how to vote for Congress next year to refocus them as voters see fit.

Stock market is still locked in the same old trading range

Yes, the proximate "cause" of the market decline is the impending and presumed failure of the joint congressional deficit super-committee, but that's simply the superficial excuse for traders and short-term speculators to take advantage of the profit potential of a wider trading range. This could be a one-day event, or maybe not, but the $1.2 trillion automatic spending cuts that will be triggering if there is no deal will more than make up for any spending and tax accord that the Democrats and Republicans were likely to come up with anyway.
For long-term investors today is nothing more than a buying opportunity.

Sunday, November 20, 2011

How will lack of a deficit deal impact the markets

AFAICT, it looks as if the failure to reach a deal on how to cut the federal deficit will be mostly a moot point for the markets. Sure, there are probably traders and speculators more than willing to use any negative news as an excuse to push the market down, but according to Bloomberg, Moody's Analytics' economist Mark Zandi said "I don't think there'd be much of a reaction" by markets to a supercommittee failure to agree on a plan. He said "It's all relative to expectations" and investor expectations with regard to the committee "have been and are still very, very low."
We could even see a modest rally in relief that the uncertainty of the outcome of the supercommittee's deliberations is finally resolved.
OTOH, lingering uncertainty about any contagion from the European debt crisis and uncertinty about the economic outlook in the U.S. could be a continuing drag on the stock market, although one would think that much of that uncertainty should already have been priced into the market.
One other lingering uncertainty for 2012 is whether certain existing tax cuts, unemployment aid, and the payroll tax cut will simply expire at the end of this year or whether Congress may agree to extend them again for 2012. If not extended, the economy could take a hit of some degree for 2012. These are different from the Bush tax cuts which automatically expire at the end of next year (end of 2012.)

No debt deal is still a win

Even if the joint congressional debt/deficit super-committee fails to arrive at some grand deal by tomorrow, as now seems likely, this is still a "win" for everybody but Congress and the two political parties since we will still automatically see $1.2 trillion in across the board spending cuts in 2013.
And, the Bush tax cuts automatically expire at the end of 2012 within any "action" required by Congress, equivalent to another $800 billion over ten years. Between the two, plus incremental economic growth as the recession recovery gradually build steam, plus winding down of Iraq and Afghanistan, plus winding down of corporate tax deductions for losses during the financial crisis, and the result is that two years from now the federal budget deficit won't look anywhere near as bad as it does today in hindsight.

Saturday, November 19, 2011

Price of gasoline remains in free fall

I'm still not sure exactly what's going on with the price of crude oil vs. the price of gasoline. Crude marched strongly up above $100, although it finally took a breather at the end of the week. Meanwhile, gasoline has been in free fall, now down to $3.37, ten cents below a month ago. Usually higher crude drives gasoline higher. Who knows, maybe final, actual demand really is down and falling, but I am suspicious. There is some chatter about an over-supply of crude at the Cushing terminal and reversing a pipeline to feed more to refiners, but all of that would simply point to the "march" of crude up towards $100 being misguided speculation or outright market manipulation rather than any "real" demand for barrels of physical oil sitting in tanks or pipelines here in the U.S.
In any case, the good news is that lower gasoline prices "at the pump" are a positive "stimulus" to the economy, leaving more cash in the pockets of consumers and even businesses, although diesel fuel prices have been trending higher, suggesting that demand for business transportation may be stronger and driving some nascent economic strength even if consumers are a little skittish. Or maybe consumers are finally taking charge and "just saying no" when they feel that gasoline is too expensive.

Friday, November 18, 2011

Leading economic indicators up nicely in October

The Conference Board Leading Economic Indicators (LEI, but actually they call it Leading Economic Index) rose by 0.9% in October. That' good news and a positive indicator for the next couple of months. Their economist says that "The LEI is pointing to continued growth this winter, possibly even gaining a little momentum by spring."
Yes, Europe is still hanging, twisting slowly in the wind out there, but it has been for a while, so it's nothing new and likely mostly factored into most planning already, and likely factored into the economic activity that the LEI measures. In fact, probably overly-factored into most plans.

More analysts raise forecasts for Q4 growth

In addition to Macroeconomic Advisers (MA), which I mentioned yesterday, several additional economic analysts have also raised estimates for Q4 GDP growth. JPMorgan & Chase is forecasting +3%. Morgan Stanley is forecasting +3.5%. State Street Global Markets is forecasting +3.3%. Deutsche Bank Securities is forecasting +3%, but says they wouldn't be surprised if Q4 GDP comes in at +4%.

Thursday, November 17, 2011

Macroeconomic Advisers ups its Q4 GDP forecast to 3.2% growth

Macroeconomic Advisers (MA) has upped its forecast for Q4 annualized real GDP growth to +3.2%. Just two days ago (11/15) they were forecasting +3.1% growth.

Stocks drifting aimlessly downwards, but still in a trading range

The usual cast of characters are getting blamed for the market decline, but the simple truth is that stocks are merely drifting downwards aimlessly in a fairly wide trading range, which is what tends to happen when there is not a strong bias either up or down. Right now there is a weak downwards bias due to the various anxieties, primarily the uncertainty of the economic outlook for the next few months. At some point within the next few days we'll likely see a reversal and a bounce, typically after the gloomy talk has sucked in an excess of short-term short-sellers who are in for a fast buck but don't have a deep commitment to longer-term positions. In and out means down and up, which is a trading range.
There is an additional short-term downwards bias due to some companies who saw some business weakness in Q3, over the summer and early fall. That short-term bad news psychologically affects short-term traders, but it will take a month or more for longer-term investors to either accept or reject that downwards bias.
Despite the media attention, the November 23rd deadline for the joint congressional debt super-committee will essentially be a non-event since across-the-board cuts will go into effect even if they reach no agreement. The details of what of how or why the budget gets adjusted will be essentially moot. The fact that we have a deficit adjustment mechanism in place is all that really counts. OTOH, if the committee does agree to a "Go Big" deal, that could have a much more positive impact on the market, but even then there will not be a large impact on the economy over the next year, so once again it will be relatively moot. It's a great "talking point" for traders, but not such a big deal for investors (as long as something gets done.)

Unemployment initial claims declined, again

The good economic news this morning is that unemployment initial claims declined again, below the 400,000 recession threshold for a second week in a row. And, the 4-week moving average is now finally back below 400,000 as well, albeit barely. This continues the recent trend, but it remains to be seen whether the declines continue and strengthen. And, we need to see the moving average move well under the recession threshold, not just hovering near it. Also, just because the rate of unemployment growth slows does not automatically mean that employment growth will strengthen significantly any time soon. Still, this latest data is promising and doesn't hint at any emerging new recession.

What did Fitch really say that spooked the market?

Although the U.S. stock market was allegedly "spooked" by a report from Fitch, the report really wasn't that unusual and simply said that if the debt crisis in Europe were to spread to the non-PIIGS European countries, then U.S. banks could be impacted. That's kind of obvious, I think. This was simply yet another instance where traders and short-term speculators reach out and latch on to any piece of news that helps to justify their market bias, regardless of whether it is truly relevant or already priced-in.
Specifically, Fitch said:
Eurozone Contagion Threatens Outlook for U.S. Banks
Though U.S. banks have manageable direct exposures to the stressed European markets (Greece, Ireland, Italy, Portugal and Spain), further contagion poses a serious risk, according to Fitch Ratings in a new report. Fitch believes that unless the Eurozone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen.
So, in short, no need to get excited. As I've said before, "the fix is in" even if the politicians need to play out an extended drama to satisfy their domestic (and international) critics.

Wednesday, November 16, 2011

Flirting with the Dow 12,000 psychological level

Technically, there is nothing magical about the Dow Industrials 12,000 level, but to traders it is "psychologically" important. They will alternate between trying to break down below it or to break out above it. It's all simply a game, with nothing related to economic or business fundamentals at stake. And if one day the market struggles mightily to move an inch in one direction relative to a psychological level, just a day or two later traders can reverse and trivially turn that move back into a comparable if not larger move in the opposite direction.
So, if the Dow closes below 12,000 it is ultimately not a big deal to long-term investors. It is all in the name of volatility and increased trading volume that earns Wall Street a hefty chunk of its profits on transaction fees.

Price of gasoline and crude oil continue to diverge

The retail price of gasoline and the price of crude oil continue to diverge, with crude rising to $100 and gasoline down to $3.40. These two price trends have been diverging for almost a month now, suggesting that the rising price of oil is more of a speculative move than the result of actual demand for oil products.
The open question is which will occur first: a) speculators exhaust the near-term upside for crude, or b) expensive crude eventually forces gasoline to become more expensive even if it happens to reduce demand for gasoline which will in turn reduce demand for crude.
It will be interesting to see how supply and demand and price balance out through the coming Thanksgiving holiday travel period.

Decent economic data today

The economy data was reasonably decent this morning, with low inflation, a jump in industrial production, and a rise in the housing market index. Not bad.

Same old same old

Today seems like it will be mostly a slow day with a lot of the "same old same old" with traders twitching to and fro on each sound-bite from Europe. None of that will be a good indication of a durable trend for the long term.
The industrial Production report might provide a little insight into how the economy is currently doing.

Tuesday, November 15, 2011

Macroeconomic Advisers forecasting 3.1% GDP growth for Q4

As of today (11/15), Macroeconomic Advisers (MA) is now forecasting annualized real GDP growth of +3.1% for Q4. Just a week ago they expected Q4 GDP growth of +2.6%. They are also forecasting revised Q3 GDP growth of 2.2%.
GDP tends to be fairly volatile from quarter to quarter, so even a solid 3.1% growth in Q4 does not indicate what we could expect in Q1 of 2012 or beyond.
Still, a forecast of 3.1% GDP growth in Q4 is a very good thing.

Markets still in a holding pattern awaiting clarity in the economic outlook

The stock market and other financial markets are still in a holding pattern or trading range, waiting for some indication that a trend (up or down) may or may not be about emerge as the debt and deficit issues in both Europe and the U.S. as well as the economic outlook in the U.S. continue to evolve with no great clarity. Until such a clear indication emerges, the markets will stay in a trading range, sometimes trending up or down over a relatively short period of time (days, weeks, or even a few months) and then eventually reversing and trending in the opposite direction. Rinse and repeat. Up and down in a relative narrow range, maybe up 5% to 10% and maybe down 5% to 10%, over a two to six month period.

The rich, professionals, the middle class, the working class, the poor, unemployed youth, and the rest

A lot of protesters, pundits, and progressive liberals are making a big stink about "The 1%" vs. "The 99%" or "The rich" and "The Rest of Us", but the simple truth is that we are a society of shades of gray rather than simple black and white. I see our socio-economic system broken down into "strata" of the rich, professionals, the middle class, the working class, the poor, unemployed youth, and "the rest."
At the top of the heap we do have the "super rich" who either don't work or if they do work it is despite the fact that they don't need to work to survive and thrive perfectly well without income from work.
Then we have the professionals, the elite workers who certainly take down hefty paychecks, but only because they work for it and have a significant investment in professional training. This includes executives, managers, doctors, lawyers, scientists, professors, accountants, engineers, elite sales people, etc. They commonly have a graduate degree of some sort, or at least a professionally-oriented undergraduate degree, although in rare cases exceptional individuals can do the "Horatio Alger" thing. Even today, we have college dropouts that created monster successes such as YouTube and FaceBook, not to mention Microsoft and Apple.
Then we have the Middle Class. Technically many of the professionals are part of the middle class as well, at least from the perspective of raw income level, but the bulk of the Middle Class are the workers who have an undergraduate college degree but not necessarily one that is strictly professional in nature. They may have only a liberal arts degree or a degree from a community college. They have jobs that have some degree of complexity and frequently require creative problem solving or significant people skills. They are typically, but not necessarily white collar, office workers. This would include many teachers, supervisors, lab technicians, sales people, etc. Some teachers may have the advanced degrees or experience to qualify for the professional class, but that less typical.
Then we have the Working Class. Although some may have college degrees, that would be atypical. More typical is a high school education, possibly some vocational training, possibly a degree from a community college. Their work tends to be more structured and well-defined and much lower in complexity or complex in a very narrow technical sense such as a mechanic or manufacturing worker. I would put most soldiers in the working class, although some (e.g., senior officers and pilots) qualify as professionals as well.
In recent decades we have had a significant blurring of middle class and working class, if not a virtual merger of the two, but I think that was a mistake (distinction in education level, task complexity, and people skills) and accounts for a lot of the anxiety over the "decimation of the middle class." In particular, a lot of non-degreed manufacturing workers (among others) were considered middle class when in truth they were simply at the high-end of the working class. Now, especially over the past decade, we have seen that trend reverse so that we are getting a much cleaner delineation between the middle and working classes.
Then we have the poor. They are "chronically unemployed", either never having a job or alternating between short spurts of temporary employment and longer periods of unemployment. Limited education is a factor, but social problems tend to be the underlying cause of their poverty. They may truly want jobs but simply aren't able to surmount their social problems. Their main "hope" for employment is to gain assistance and perseverance at dealing with those social problems.
We also have a relatively new category of unemployed youth. They have the education, the degrees, to possibly even start out as entry-level professionals, but due to economic weakness and high unemployment they simply aren't "needed." Technically, one could assign each of them to the unemployed of the other relevant categories as if they could find work, but they are special in some sense, namely that they never had a chance and it is not for a lack of education or hard work or trying.
Finally we have "the rest", people for whom employment is not an option, including those in prison or jails, those in mental institutions, the disabled, the mentally ill, etc.
This is my overall model of our socio-economic system. I think it provides a more enlightening and productive framework than the 1% vs. 99% "model" which seems more focused on class warfare than enlightenment and productivity.
I'll reserve a discussion of "inequality" for another post.

What next for Occupy Wall Street?

Now that they have been "evicted" from Zucotti Park, the Occupy Wall Street crowd are at a turning point and will have to decide what their new focus will be. I'm sure that they will not be "going away", but I doubt that they can succeed at "occupying" any other space in Manhattan. If they try occupying a public park in NYC they will quickly run afoul of the new "no smoking" ordinance, not to mention the camping prohibition. I'm sure they will have lots of "pop-up" protests in the coming weeks and months. My guess is that they will try to "shut down" street intersections or business locations on occasion. Social media will facilitate such "flash mobs", but also make it just as easy for the police to keep tabs on them. But New Yorkers are used to occasional disturbances and closures from street fairs and parades to conventions and fires and accidents, so it is hard to imagine what the protesters could do to "phase" New York. And they have the problem of finding something to do that will attract the sympathy and support of the vast majority of the general public without annoying them and turning them off in the process.
If the "occupy" movement reverts to simply a "protest" movement, I'm not sure what they will accomplish. Sure, they will exercise their rights to peaceable assembly and free speech and make their grievances know, but is that really all they want, a permanent protest movement?
So, the open question is whether the occupy movement is about to fizzle out or morph into something else that is not known at this time.
I did walk by and through the "camp" on Saturday and it seemed to have less people than the previous Saturday, although it was now dark (5:30 PM) due to the time change, so maybe there is a natural waxing and waning of the camp size as the day progresses. Still, I would say that OWS was NOT "growing" in NYC. I think it had peaked and people were starting to lose some of their passion and commitment (and tolerance for the weather.) Not the hard-core who stayed until the police dragged them away earlier this morning, but the "hangers-on" and "tourist" protesters/activists and other "supporters" whose commitment was tentative at best. Sympathetic, yes, but deeply committed, not so much.
To me, the critical issue was whether or not the movement was poised to attract participation from the vast majority of the general public, and it seemed to me that the answer was a fairly resounding "no." Sympathy, maybe, commitment, nope.
That said, we will have to see how the movement decides to remake themselves in the coming days, simply as a protest movement or something else, and whether that something else draws in the participation of the vast majority of the general public. That's the essential question, whether to remain a "niche annoyance" or to "go mainstream." Personally, I don't think they have any chance of succeeding at the latter, but know knows what they may turn themselves into.
Meanwhile, back at The Mother Ship in Vancouver, BC, "Culture Jammers HQ",, the puppet masters of the "Occupy" movement, have issued "Tactical Briefing #18" to provide guidance and inspiration to the "Occupy" movement, but that was issued before Zucotti Park was "cleared." It will be interesting to read what the movement's puppet masters come up with next. Their "tactical briefing" advises us:
We declare "victory" and throw a party... We dance like we've never danced before and invite the world to join us. Then we clean up, scale back and most of us go indoors while the die-hards hold the camps. We use the winter to brainstorm, network, build momentum so that we may emerge rejuvenated with fresh tactics, philosophies, and a myriad projects ready to rumble next Spring.

Retail sales up in October

A bit of positive economic news in an otherwise gloomy environment is that retail sales were up modestly in October, a good start to Q4. But, that is so-called "coincident" data that tells us where we are right now (technically, it is "lagging", but just by a little), and doesn't tell us anything about where the economy will be headed in three to six months or more in the future. Typically, the stock market is trying to guess where things are headed nine months from now, although if a slump is expected in the interim, it all gets complicated, confused, and quite volatile. Still, good news is good to have.

Monday, November 14, 2011

Is the San Francisco Fed forecasting a recession?

Neither the Federal Reserve Board in Washington, nor any of the regional Federal Reserve banks is officially forecasting a recession any time in the next year, but an economic research "letter" published by three Fed economists (two from the San Francisco Fed and one from the Kansas City Fed) was published on Monday which in fact says that "forecasts suggest that the probability of a U.S. recession has remained elevated and may have increased over the past year", and in particular that "the odds are greater than 50% that we will experience a recession sometime early in 2012."
My reading of their chart shows a peak of about 54% right at the beginning of the year and at or above 50% from about October 2011 through March 2012. That early recession risk is driven in large part by the international (European) risks. Based on only domestic risks their chart shows a peak risk of about 27% from February 2012 through August 2012.
They do offer some good news, namely that "if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013."
All in all, I would say that they are not "clearly" forecasting a recession, but simply giving people cover for saying that we have elevated risks for a recession. But, given the risk above 50%, their results indicate that a recession is more likely than not, assuming that contagion from Europe does in fact drag down the U.S. economy significantly.

Italy succeeds in auctioning 5-year notes

Despite the euro chatter, Italy managed to auction 5-year notes today. Granted, the yield was a lofty 6.29%, but that is simply feedback from the market as to the risk in Italy until they get their fiscal deficit under better control. On the bright sight, the cover ratio was 1.47%, meaning there was no shortage of demand for even Italy's debt.
The Italian/European debt "passion play" will remain full of drama for some time to come, but I am not persuaded that it is as bad as a lot of the diehard euro critics/skeptics are asserting.
The European debt issue will continue to have some impact on the U.S., but is more of a sideshow relative to the U.S.'s own debt/deficit issue and the outlook for the U.S. domestic economy itself. Even if the U.S. financial markets were to completely ignore Europe, there would continue to be enough anxiety to keep the U.S. financial markets on edge and highly volatile.
But for true, long-term investors like me (and Warren Buffett!), the anxiety and volatility is not enough to shake our long-term buy-and-hold mentality.

Market treads water waiting for... whatever comes next

As of this moment, the stock market is basically treading water and going nowhere (no major decline.) That's a good thing. Despite the reasonably good news about Italy, there is still a lot of uncertainty and general unease about "what happens next" – for Italy, Europe, and the U.S. economy as well. This is also good because it is "real" and not poisoned with a fantasy bias either up or down. Markets should be based on reality and not imagined hope or irrational fear.
This is a typical market behavior – make a big move based mostly on psychology, adjust a little, and then wait for some real, hard data to guide further adjustment.
The good news is that despite the anxiety over Europe the market is not continuing on a steep decline. That really says that people really do believe that "the fix is in" and the the EU will bail out its sovereign debt, albeit with appropriate haircuts.

Italian sovereign debt now trading more like a real market

Despite a lot of the fear, anxiety, and gloom about European debt, the good news about higher yields on Italian sovereign debt is that now that debt is actually finally starting to trade like a real market where participants are actually pricing in perceived risk, whereas previously there was the "moral hazard" of an implied guarantee on 100% of the par value of that debt. Before the EU deal with Greece was arranged, people still assumed that the EU would guarantee all sovereign debt of EU members at 100% of face value, but now that the EU is essentially valuing Greek debt at a 50% discount, which was basically negotiated with the big European banks, the so-called "bond vigilantes" are jockeying to determine what "haircut" the EU will apply to Italy's sovereign debt. This is a really good thing. Properly pricing risk is essential to a healthy market and financial system.
If there is one paramount lesson from the current European Debt episode it is that moral hazard is still a very real and significant concern and can be ignored only at the peril of all concerned.
Personally, I don't see a 7% yield on Italy's debt to be outrageous or unwarranted or a true "crisis." Hey, if that's the value the market puts on it, so be it. If Italy doesn't like it, then they should stop issuing debt and buy it back. This is and should be all about the market providing an economic feedback signal to a debt issuer.
The other pragmatic factor here is that a lot of the rise in yield is really due to European banks dumping Italian debt to clean up their books and balance sheet in anticipation of whatever haircut the EU might force on them. That's as it should be. Yes, it causes some significant anxiety, but that's as it should be. And that's a whole lot better than where we were in recent years where the moral hazard of 100% bailout was masking true economic signals. Economic signals are everything when it comes to finance.

Sunday, November 13, 2011

Will the economists save Greece and Italy (and Europe)?

I was personally quite heartened to see seasoned economists put in charge of both Greece and Italy. Granted that is no guaranteed silver bullet solution, but at least it is a solid step in the right direction. Both countries, and Europe in general, still have lot of difficult decisions to make about their fiscal policies (and the EU's united monetary policy), but the willingness to give sane economic policies a shot is a very welcome development.
Sure, euro critics/skeptics will continue to remind us that they consider this a mere band-aid that will buy the EU a few months or maybe even just a few weeks or even days and that the euro is doomed, but that's what we should expect them to say, no matter what positive developments occur.
Now, whether the markets continue to respond positively as they did on Thursday remains an open question. It could easily go either way. Thursday's pop could already have discounted any amount of positive news, or maybe not. After the big decline on Wednesday, the partial recovery on Thursday may simply have been a classic "dead-cat bounce" and simply have been due to short-sellers locking in a profit ahead of a long weekend when anything can (and did) happen. Another risk is that a lot of professional speculators may still have a "sell into any rally" bias which weakens the market as it moves higher. That means that even if stock futures are higher, any initial pop at the open could be eroded as the day progresses. But if there is any true underlying bullish sentiment, the market could (maybe) move up through any superficial cynicism.
I don't mean to be cynical about the market outlook for the coming week, but simply to highlight the downside risks despite any superficial good news. There is still plenty of room for excessive volatility.
But getting back to the headline question, I do actually expect that the economists will save Greece and Italy, and Europe as well. Maybe not in a single week but over time.

Blogging schedule for my finance blog

I want to start blogging more on my finance blog and I am thinking that having a schedule might make sense in terms of reaching people who are paying attention to the financial markets during the day. Here's my tentative initial plan:
  1. Late evening post (8 PM to 12 AM.) Not so much for the night birds, but to have something for the early birds the next day. A more thoughtful contemplation of what transpired during the day and response to late news.
  2. Early morning post (6 AM to 8:30 AM.) Not quite early enough for the hard-core early birds, but something early in the day for normal people.
  3. Late morning post (10:30 AM to noon.) Response to news of the morning.
  4. Mid-afternoon post (2 PM to 3:30 PM.) Response to news of the day. Before the stock market closes
Whether I manage to do all of that remains to be seen, but at least I have a plan to work from.

Gasoline and crude oil price trends have diverged

Hmmmm... I'm not exactly sure what to make of this, but I noticed that gasoline prices have recently been trending down even as the price of crude oil has been trending up. This has been happening for about a month now. Usually they trend in the same direction other than for a short intervals when the trend is changing. The rise in the price of crude is most likely due to anxiety over Iran and its over-touted "nuclear ambitions", while the decline in gasoline is either due to an actual decline in real, final demand or an excess in supply or due to speculators shifting their bullish bets to cash or elsewhere. I suppose it is also possible that the turmoil at MF Global is confusing the markets.
In any case, the decline in the price of gasoline is good news for consumers and consumer spending going into the holiday season.
The concern is whether the recent rise in the price of crude from $75 to almost $100 may ultimately show up as higher gasoline prices over the next month or whether it is just a short-term speculative pop that may reverse just as quickly as it appeared.

Saturday, November 12, 2011

What are the largest banks in the U.S.?

Here's the most recent list of the Top 10 largest banks in the U.S., as of June 30, 2011, courtesy of the Federal Reserve:
  • 5. U.S. Bank (U S BK NA/U S BC, CINCINNATI, OH)
I'm note sure why FIA is separated from Bank of America, but I suspect it may be their credit card operations.
I am amused that Citigroup is listed as being in Las Vegas. Makes sense. Others may not be as amused as me.
And here is the list of the next ten to round out the Top 20 Largest banks in the U.S.:
I have no idea why Citibank SD is listed separately, but I suspect it may be their credit card operations. Ditto for Chase Bank.
TD Bank is actually a Canadian bank ("T" for Toronto, the "D" is for Dominion.) I have a local checking account with them. TD had bought CommerceBank which was based in New Jersey and with branches in New York where I opened an account.
Interesting that only two out of the Top 20 are based in New York and only one of the Top 10. And Wells Fargo is based in South Dakota. Yeah, right. These legal shenanigans are annoying.
It's also a real pain trying to get the exact name of a bank. In most cases they publically use a trade name rather than their actual legal name. And with so many subsidiaries and parent and holding companies it is quite a... shell game. Again, lots of legal shenanigans.
Most of my money is in two smaller banks, one in Texas, and one in Ohio. I also have a fair amount of money in, which is aactually held "on deposit" in Compass Bank or BBVA or BBVA Compass or BBVA Compass Bancshares ("BBVA Compass is a trade name of Compass Bank, a member of the BBVA Group.", according to their web site) which is at #29 on the Federal Reserve list and based in Birmingham, AL. I hope they weren't holding too many of Jefferson County's bankrupt bonds. But, not to worry, as long as you have FDIC protection.

Why can't economists agree?

Isn't economics really just a lot of numbers and math? So, why can't economists agree on... just about anything? Ah, well, yes, maybe there is a lot of numbers and math, but there are also a lot of assumptions behind that math and a lot of interpretation of the numbers and the mathematical results and subjective values on those interpretations. In fact, it is all such a mess that economists refer to "schools of economic thought", which basic means groups of people who can't with other groups of people. The Wikipedia gives us this list of 27 schools of economic thought (and more!):
  1. Ancient economic thought
  2. Islamic economics
  3. Scholasticism
  4. Mercantilism
  5. Physiocrats
  6. Classical political economy
  7. American (National) School
  8. French liberal school
  9. German historical school
  10. English historical school
  11. French historical school
  12. Utopian economics
  13. Marxian economics
  14. State socialism
  15. Ricardian socialism
  16. Anarchist economics
  17. Distributism
  18. Institutional economics
  19. New institutional economics
  20. Neoclassical economics
  21. Lausanne school
  22. Austrian school
  23. Stockholm school
  24. Keynesian economics
  25. Chicago school
  26. Carnegie school
  27. Neo-Ricardianism
  28. Modern schools
  29. Current heterodox schools
  30. Other 20th century schools
  31. Viewpoints within mainstream economics
  32. Viewpoints outside economics
Even to get agreement between the prominent Chicago, Austrian, and Keynesian schools  would be difficult enough, but we have so many diverse views on so many of the factors that influence how the basic numbers and math of economics are interpreted. Even for seemingly simply issues such as the role of government in commerce.

Friday, November 11, 2011

ECRI Weekly Leading Index rises, again

Despite the fact that just this past Monday ECRI was publically reiterating its late-September call that the U.S. economy is "tipping into recession", their Weekly Leading Index has inched higher, for the fourth week in a row, and their smoothed growth rate has also moved higher for the second week in a row. Granted, a month of improvement does not mark a reliable indication of a change in trend, but we can certainly say that a new recession is still not apparent. That said, I'll stick with my forecast that we will see some modest growth in the fall and maybe some weakness in the winter and spring, but by late summer we'll be back in the black. So, a recession is not here right now, may come in a few months, but will be short and shallow. That's my call, for now, subject to change, on a moment's notice. I'll continue to defer to ECRI, but I'm not going to bet the farm that there will be a steep recession over the next twelve months.
Meanwhile, we're waiting to see how Greece and Italy shake out in the coming months, not to mention the U.S. joint congressional debt super-committee which has a deadline 12 days away. Personally, I think all of these things will get worked out in some fashion, albeit with lots of drama and market volatility in the interim.
Real investors should focus on long-term economic and business fundamentals, not the panicky pronouncements of short-term traders and speculators.

What's endgame for Italy's sovereign debt crisis?

I don't think anyone definitively knows the exact formula for the endgame of Italy's sovereign debt crisis, but I do think "the writing on the wall" is for a bailout of some sort by the European Commission (EC.) How much comes from the European Central Bank (ECB) or the European Financial Stability Facility (EFSF) or individual European countries or the IMF or China or the UK or even the U.S., and what haircut debtholders will be asked to "voluntarily" accept remains to be seen, but the bottom line is that "the fix is in"; some sort of bailout will be arranged. It may not be pretty, it may not be what people really want, and it definitely won't satisfy the "euro critics", but it will happen. Why will it happen? What is the guarantee that it will happen? It's simply the way they do things in Europe. It's the whole point of the European Union. There is simply no compelling reason for Europe not to do it.
Is there a magical "window" when it has to happen and is that purported window "closing"? Not really. The Europeans will take their time and work things out at their own pace, regardless of what any "euro critics" think they have to say about the matter. The big benefit of stretching it out is that it helps to eliminate the "moral hazard" of bailouts. Sure, there is a moral hazard for bailouts, but if investors get the message that relief does not come quickly and without pain (e.g., the haircut), the moral hazard is minimized. Stretching out the process assures that everyone has had a full chance to be heard, that all options have been explored, and then as many people as possible are "on board" with the final approach. Yes, stretching the process out builds anxiety, but it also minimizes anxiety at the end.
So, yes, Italy, et al will continue to quite a drama in the coming weeks and even months, but the ultimate outcome (some sort of bailout) should not be a matter of dispute, even if the details must be haggled over.

Weekly unemployment claims hovering at recession threshold

The weekly unemployment claims numbers were fairly decent yesterday, at least relative to how bad people worry things might be. Initial claims have been hovering near the 400,000 level which is traditionally the threshold for a recession. In recent months initial claims have been modestly to moderately above 400K, but yesterday they came in modestly below 400K at 390K. And, more importantly, the 4-week moving average has finally come down to an even 400K. That's not a sign of a coming boom, but it is not indicating a coming bust either. We are at least moving in the right direction. Still, we really do need to move well below that 400K level for at least a couple of months before we can give an "all clear" signal, on the unemployment initial claims front, even if the unemployment level is still quite elevated.
Just for the record, initial claims are 46K lower than a year ago when people thought the economy was doing fairly well (other than elevated unemployment.) And the 4-week moving average is 44K lower than a year ago. So, we are actually better off than a year ago, at least in terms of stabilizing the economy. How we are going to grow the economy to reduce unemployment is another matter, but mostly simply a matter of time.

Thursday, November 10, 2011

Likely recession in 2012

I hate to admit it, but it is more likely than not that the U.S. will see a recession of some sort in 2012. How long or deep or when it will start are completely unknown, but it is more likely than not that we will see a significant economic decline of four months or longer between now and the end of next year. The Economic Cycle Research Institute (ECRI) has already issued their call and said back at the end of September that the U.S. economy is "tipping into recession" and they are about as good as it gets when it comes to forecasting economic turning points.
Sure, it doesn't currently feel like we are in a recession (unless you are one of the unemployed or underemployed or in their families or looking for a job) right now, but so-called "coincident" (current) indicators such as GDP and employment are not reliable indicators of what is coming or even what is right around the corner.
Personally, I think we have enough momentum to coast through the rest of the year, but I can't say with confidence that we won't see layoffs in December that would signal the start of a recession as happened in December 2007. I don't think that is likely next month, but it is possible. And January and February are a whole other story.
One of the big wildcards is cuts in government spending at both the federal and state and local levels. The actions or inactions of the congressional deficit super-committee could quickly propagate to government contractors and vendors and take us over the tipping point, or not. It remains to be seen, but is clearly a major risk. Federal cuts would be mostly further out but set a tone for businesses and impact their current hiring and state and local cuts may accelerate or decelerate in the coming months, so we have wildcards in the wildcards.
Retailers have been signaling stronger hiring for the holidays, but we don't know how solidly holiday spending will trend, and then these seasonal employees will be let go, reversing these job gains in a relatively weak economy.
To be more specific, I feel that there is a 40% to 70% chance of recession in 2012. That still leaves plenty of room for us to squeak by without a formal recession, but it does mean that recession is more likely than not.
Even if there is a recession, my expectation is that it will be relatively short and shallow. Maybe only four to six months long and maybe only a modest decline in GDP and employment. If it does happen, it will likely start in December through March and end in the June to September timeframe. Sure, things could be worse, but I don't see that as likely at this stage.
If the recession does turn out to be short or expected to be short, the financial markets could look beyond the end of the recession, since typically markets are looking out nine months or so into the future. And maybe that is exactly what the stock market was looking at back in May through July, a recession nine months later in the winter of 2012. And maybe the start of the market bounce last month is the market signaling an economic recovery in July.
Timing the market is always tricky business. Some people will try to do it anyway and maybe success but likely fail. And even if you get one leg right, say the start of a decline, will you get the other leg right as well? How many people correctly pegged the March 2009 market low and reentered the market at that time or within a month or even two? So, for me, since I expect any recession to be minimal, I'll just continue to maintain as "steady as she goes" course and stay in the market. I'll make my annual retirement contributions somewhere in January through April depending on when I get my taxes done.

Wednesday, November 09, 2011

Beware of auto yo-yoing

Here's an interesting article on the problem of "auto yo-yoing" where a customer drives away from the dealer thinking the deal was done but then the car gets pulled back when the dealer cannot "finalize" the loan (sell it to a bank.) The story did miss one important angle: the fact that dealers and customers got used to the ultra-lax/non-existent lending "standards" that we all had before the onset of the financial crisis. Back then (2007), dealers actually could "guarantee" that anybody could get a loan because Wall Street was not only buying everything (literally) but even had a strong preference for the most risky loans since they had they highest (non-risk-adjusted) yield. So, I am a little disappointed that the article did not strongly remind dealers (as well as consumers) that the guarantee that was available to them back in 2007 is no longer available today.
This is also an annoying reminder that liberals are right, that business can't be trusted to "do right" by the consumer unless Big Government is standing right there with a stern glare and a big stick. Sigh. Why can't business just "get it right" so we no longer need to tolerate these "See, I told you so!" liberals?

Tuesday, November 08, 2011

Gallup: U.S. Economic Confidence Weak, but Steady Above Recent Lows

Traditionally I have not been a big fan of polls, but I've been reasonably impressed with the wide range of data that Gallup shows on its web site. Maybe it was always really just the media's cherry-picking, selective display, and biased presentation of polling data that I was really objecting to. Going "right to the horse's mouth", I find the raw Gallup data a lot more refreshing and enlightening than what the media typically reports.
One headline on the Gallup web site right now is:
U.S. Economic Confidence Weak, but Steady Above Recent Lows
Which is basically telling us that after a steep decline in July, confidence has stabilized and actually risen a little.
You can check out the daily changes in a wide variety of data with the "Gallup Daily" box and see how volatile confidence really is. Of course, you can't sense the trend from those fluctuations, but you can click on each item and see the data plotted over time, which also gives you a feel for the volatility over time. You can even request a downloaded spreadsheet of the data for your own analysis.

-- Jack Krupansky

How can I become a millionaire?

There were actually a couple of short periods of time back in 2000 when I was technically a "millionaire", at least on paper (plus one time when a broker error made me a millionaire for a weekend!) But, as they say, "easy come, easy go." And back in 2005 I was doing so poorly financially that I actually filed for bankruptcy. Since November 30, 2005 (the day my bankruptcy was discharged) I have gradually been slowly climbing back up the lower rungs of the wealth ladder out of the pit of gloom, primarily through regular retirement contributions but also cutting spending and saving when possible, so that now I actually have a modest amount of "investments." I'm certainly not a millionaire or in the top 1% or even the top 10%, but I'm somewhere in the top 20% now. I won't disclose my exact "wealth", but it's very loosely north of $50,000 and south of $250,000, so lets pretend that it is $100,000 for the sake of argument and to have a nice round number. So, the question of the day is:
How can I become a millionaire?
Seriously. It's a legitimate question. How likely I am to become a millionaire again is an open and essentially unanswerable question, but what options or paths to that end are available is a reasonable question.
Here are the practical paths that I have identified in just a few minutes today:
  1. Buy a winning lottery ticket. Hey, sometimes it actually does payoff, but I won't bet on it.
  2. Marry a wealthy woman. Ditto.
  3. Start a successful business. Ditto, except that it actually still is a (semi-remote) possibility.
  4. Join a hot startup. Ditto, but a little more possible. (Seriously, send me leads on this!)
  5. A short string of wildly-successful option trades. Hey, I actually did this in 1998 and 1999, but... a long story... and not likely to be repeated.
  6. Invest in a hot stock that rises 40% a year for 7 years. Technically possible, but the odds remain long.
  7. Investments that rise 20% a year for 13 years. More doable, but still quite difficult.
  8. Investments that rise 15% a year for 17 years. On the fringe of being practical, but too long to wait.
  9. Investments that rise 10% a year for 24 years. Starting to sound within reach technically, but not within reach time-wise.
  10. Investments that rise 8% a year for 30 years. Great, something I might actually have a shot at achieving, but only if my goal is to leave a million in my will rather than enjoy it during retirement.
  11. Investments that rise 5% a year for 48 years. Ditto. I could reasonably expect to do this, but again not for my personal use.
  12. Investments that rise 4% a year for 59 years. That rate of return is reasonable and achievable for an average investor, but won't achieve the end goal within my expected lifetime.
And then there is inflation, taxes, bad years, etc. And presuming that you have a reasonable income stream while your wealth is growing.
And then there is a bigger pair of questions. Once you have accumulated $1 million:
  1. How do you keep it?
  2. How can you live off of it in a sustainable manner?
It may seem obvious that you save $1 million for retirement and then spend it all in retirement, but that is a risky expectation due to uncertainty about the future. Better to define an allocation of money that you will be spending and money that remains dedicated to further investment. That's a topic for future discussion. Here we're just concerned with getting to $1 million (ASAP) in the first place.
Where do I do from here? The only things I can say with certainty are that I will continue making my retirement contributions and hopefully see some compound returns over the years. I guess I can also safely say that unless I manage to achieve 20% annual returns I won't hit $1 million when I retire in 13 years. That is at least a good starting point for thinking about where I am, what I could achieve, and what my options are.

Monday, November 07, 2011

Q4 GDP expected to be +2.6%

Macroeconomic Advisers, who provides the monthly GDP data that the NBER uses for recession dating, is forecasting Q4 annualized real GDP growth of +2.6% after our recent Q3 growth of +2.4%.
So, no sign of a new recession yet. Nonetheless, ECRI is still sticking with their "tipping into a recession" call.
Who knows, maybe a recession will pop up sometime in 2012, but it certainly doesn't look like a recession either right now or in the next two months.
That said, it is very possible the we are seeing a short little mini-boom with two quarters of modest growth to be followed with a slowdown. Certainly there are plenty of areas of potential future weakness out there, including weakness in Europe, slowing pace of hiring in the private sector, ongoing job and spending reductions at the state and local government levels, and a high probability of a reduction in federal government spending and jobs as well. On the plus side, there is plenty of money out there looking for investment opportunities, but on the down side, there is a dearth of attractive investment opportunities, which means a dearth of job and income-producing opportunities for workers. Kind of does sound like a surefire recipe for a recession.
Maybe these few months are the sunny days before the storm that always fail to predict the severity of the storm. That could very well be.
One of the biggest wildcards out there is that with all the angst about Europe, a lot of U.S. investor money is coming out of euro-denominated investments and back to the U.S. Granted, we have no shortage of money in the U.S. even now, but a lot more money can only further assure that plenty of money will be available to fuel virtually every growth opportunity, regardless of how small or how specialized a niche.
It is also worth noting that we just inked several new free trade agreements recently, which should also give us a small amount of additional lift.
At least superficially, I do have to go with ECRI forecasting an upcoming recession, but the timing and severity remain to be seen. A slowdown, yes, but the severity depends on the policy response and in an election year the Federal Reserve won't want to be seen as acting in a way to promote a recession. Congress may not act due to gridlock, but additional short-term fiscal stimulus is the last thing we need when the goal is long-term sustainable growth.

-- Jack Krupansky