by ilene - August 14th, 2010 6:53 pm
Courtesy of Mish
In the wake of anemic retail sales in July, treasuries could have been expected to rally and they did.
Yield Curve as of 2008-08-13
Curve Watchers Anonymous notes that the biggest treasury gains (drops in yield), occurred on the longest durations. This is a normal yield curve reaction.
This is in contrast to the pattern we have been seeing for weeks, with the middle of the curve reacting the strongest.
Here is a chart over time from Front Running the Fed – Who Knew?
Once again the 7-year treasury is in the sweet spot.
click on chart for sharper image
Yield Curve May 2009 Thru Present
click on chart for sharper image
The 30-year long bond has finally broken through that shelf at the 4% mark. There is plenty of room for further rallies is the economic data remains weak. There is no reason to expect anything other than weakness, thus no reason to be short treasuries here.
by ilene - July 17th, 2010 6:29 pm
Courtesy of The Pragmatic Capitalist
There was a heavy economic data schedule in the back half of this week.
On Thursday we got Industrial Production (IP) and Capacity Utilization (Cap-U) for June, along with Philly Fed Business Conditions and Empire State manufacturing surveys for July. The Empire State survey dropped to around 5 from near 20 in June, and Philly Fed dropped to 5.1 from 8, both of these well below expectations. Although IP and Cap-U have been steadily improving during the prior year, both stalled in June. Given the correlation between IP and the Philly Fed survey, shown below with Industrial Production lagged 6 months, we expect headwinds for the manufacturing-led recovery in coming months.
It’s hard to imagine another plunge in Industrial Production like the one in 2008. Production is already back to levels first seen in 2000, a full decade with no advance in production, and inventories have already gone through the correction process (as evidenced by the sales/inventory ratio). But it seems obvious that recent growth rates are unsustainable, particularly in the absence of a real pickup in final sales.
This morning, consumer price data was released. The Consumer Price Index is rolling over, falling for 3 months in a row, and is now at roughly the same level as it was two years ago. The year-over-year growth rate looks to be heading back towards zero.
Maybe the 10yr at 3% isn’t so rich after all.
Friday morning also brought fresh weekly ECRI leading index data. The debate about a “double-dip” recession has been deafening, but according to this index, we seem to already be in back-to-back recessions that are worse than the 1980/1982 experience.
(ECRI Weekly Leading Indicator)
The ECRI data series only includes just over 40 years of data, the blink of an economic eye, but the recent behavior of this leading index is disconcerting.
We’re still early in earnings season, but several big banks reported earnings before the market open on Friday. Citigroup posted earnings of $2.7 billion (which contained $1.5 billion of loan loss reserve release, and around a $1 billion of positive asset markups) and Bank of America came in at $3.1 billion (including about a $1.1 billion pretax gain from asset sales, a $1.2 billion pretax gain related to Merrill Lynch structured notes, and…
by ilene - May 4th, 2010 11:07 pm
Lagging GDP Confirms Consumer Slowdown
The Information that was Missing from Last Friday’s GDP Report
The April 30th GDP report issued by the Bureau of Economic Analysis ("BEA") of the U. S. Department of Commerce was a freeze-frame quarterly snapshot of a highly dynamic economy — an economy that another source indicates was in significant transition while the snapshot was being taken.
Compared to the 4th quarter of 2009, the annualized growth rate of the GDP had dropped by 43%. Depending on your point of view this could be interpreted either as a glass that is "half-full" or a glass that is "half-empty":
1) The "half-full" reading would mean that the GDP numbers confirm that the recovery had at least moderated to a historically normal growth rate. In this scenario the good news would have been that "the economy is still growing," albeit at a historically normal rate. The bad news would have been that a normal growth rate would only warrant normal P/E ratios in the equity
2) The "half-empty" reading would have meant that the near halving of the GDP’s growth rate confirmed that (at the factory level) the economy had finally begun to "roll over". If so, the BEA’s announcement portends even lower readings in the quarters to follow.
What was clearly missing in the "half-full/half-empty" debate was a feel for whether the level seen in the snapshot’s glass was stable or still dropping. At the Consumer Metrics Institute our measurements of the web-based consumer "demand" side economy support the "half-empty" reading of the new GDP data. The new GDP numbers (which are subject to at least two revisions) agree with where our "Daily Growth Index" was on November 24th, 2009, 18 weeks prior to the end of 2010′s first calendar quarter — and when that index was in precipitous decline.
Our indexes capture consumer activities in the "demand" side of the economy by mining consumer internet tracking data on a daily basis. This consumer "demand" flows downstream economically to the "supply" side factories over the following 18 weeks:
A look at our "Daily Growth Index" also shows that towards the end of November 2009 the "demand" side economic activity was dropping so quickly that a two week change in the sampling period would make a huge difference in the numbers being reported. If the sampling period had…
by ilene - April 1st, 2010 12:08 pm
Courtesy of The Pragmatic Capitalist
Few firms have been as bullish about the recovery as JP Morgan. And unfortunately for the bears, few firms have had it more spot on at every twist and turn. Their bullishness is only picking up momentum. Strategists at America’s second largest bank say the economy is much stronger than many presume and the recovery is about to become self sustaining:
“We believe that the global economy is making an important transition to self sustaining growth as the first quarter comes to an end. As part of this shift, GDP growth is re-accelerating following a modest downshift at the turn of the year. However, it is the significant broadening in G-3 demand, rather than the pickup in top-line growth, that will be the key marker for this transition.
We are becoming more bullish on economic growth, both in terms of how fast economies will grow and in terms of confidence that it will actually happen. Activity data across much of the world have surprised on the upside in recent weeks. Most important is that they
are showing greater breadth across regions, sectors, and types of spending.”
JP Morgan says the risks to economic growth lie to the upside as the recovery broadens, jobs growth improves and confidence accelerates. Based on this, they believe the equity rally should continue into April. They foresee a strong earnings season supporting prices:
“The equity rally should extend into next month, on stronger economic data and the start of the 1Q reporting season, from which we expect good news. The 4Q US reporting season posted a 7% upside surprise: The final operating S&P 500 EPS was 7% above the expectation at the start of the reporting season. Quarterly earnings surprises tend to exhibit strong serial correlation, repeating 82% of the time. This points to another positive surprise in the 1Q reporting season.”
by ilene - March 25th, 2010 3:28 pm
This is fascinating data that Phil brought to my attention. Richard Davis, President of the Consumer Metrics Institute, measures real-time consumer transactions as an objective indicator of consumer demand and associated economic health.
As Richard explains,
We simply report what consumers have been doing on a day by day basis by mining on-line U.S. consumer tracking data for purchases of discretionary durable goods. We only look for discretionary durable goods transactions because we believe the discretionary durable goods segment of the consumer economy is the most volatile and stimulative portion of the economy. Consequently, we are not capturing grocery or gasoline purchases; but we are, for example, collecting automotive and housing purchases. We divide the captured transactions daily into the following sectors of the consumer economy: automotive, entertainment, financial, health, household, housing, recreation, retail, technology and travel.
Additionally, we are aware that our sampling process may have some biases built into it because it uses the internet as the collection tool. For that reason, our consumers may have a different socioeconomic profile than the average American consumer. We are also collecting only U.S. originated transactions conducted in English. That said, however, we feel that our data does fairly represent the most variable parts of the consumer economy.
Because conclusions are only as accurate as the data from which they are drawn (but may be far less accurate), this approach is particularly intriguing. It is refreshingly free of government processing and alterations, such as confusing seasonal adjustments. Richard also wrote, concerning what his data is saying to him now:
We are not professional doom-sayers. We were incredibly upbeat one year ago — when most economic indicators were preaching doom and gloom. Since August, however, consumers have been pulling in their spending, and our numbers have slowly turned upside down. From our perspective on the demand side of the economy, a contraction is already here, having started officially in the middle of January. The only question now is whether the 2010 contraction will revisit 2006 or 2008? Our daily updates will ultimately tell the story.
For more, keep reading. - - Ilene
The 2010 Contraction Being Tracked by the Consumer Metrics Institute Traces Unique Pattern
Courtesy of Richard Davis at Consumer Metrics Institute
by ilene - March 23rd, 2010 12:31 pm
Courtesy of The Pragmatic Capitalist
More signs of economic stability this morning, though signs of real sustainable growth remain in doubt. Existing home sales were in-line with expectations at 5M. This was flat compared to last month and in-line with the overall trend of the last year. Demand for existing homes remains surprisingly tepid despite the soon expiring tax credit for new buyers. Supply in the housing market continues to build and increased to 8.6 months vs January’s reading of 7.8. While the stability is a good sign, the increasing supply is a negative. The sustainability of the housing recovery is in very real jeopardy.
In related news, KB Homes reported a larger than expected loss, but said they are seeing some stability in the housing market. Overall, however, it remains too early to call this a recovery:
“The operating environment for the homebuilding industry is better today than last year at this time,” said Jeffrey Mezger, president and chief executive officer. “Encouraging data in recent months suggest that a number of housing markets may be stabilizing or starting to rebound, though we do not yet see, in many respects, a sustained nationwide recovery. While the pace is likely to be uneven in the months ahead, we currently expect housing market conditions to follow a generally positive trajectory throughout this year and into 2011.”
Retail sales were again strong this morning according to Rebook and ICSC. Part of this is due to seasonal strength and the early Easter pulling sales up a week early, but the consumer has definitely been more eager to spend some money in recent months. Whether or not this is a good thing remains debatable, but the market seems to like it for now as stocks remain buoyant following the news.
by ilene - March 12th, 2010 11:46 am
Courtesy of Michael Panzner at Financial Armageddon
Although I’m not an economist, I spend a lot of time trying to figure out which way the economic winds are blowing. For a country as large, diverse, and globally connected as the United States, it can be quite challenging deciding which trends and data points are relevant at any given point in time, and which are extraneous, untimely, incomplete, or misleading. It doesn’t help, of course, that many so-called experts in Washington and on Wall Street (along with their enablers in the media) are happy to dissemble and distort instead of presenting the pertinent numbers along with a straightforward interpretation of what they mean. But even when the data is unencumbered by spin, it helps to understand its shortcomings and limitations. Below are four reports that provide some additional color on the statistics that many analysts are keying in on nowadays.
"Economic Data Can Be Misleading" (Financial Times)
Headline-grabbing data releases might be painting a rosy picture of the US economy at the moment – but it would be wise to keep an eye on what other, less-scrutinised surveys are showing, says Rob Carnell, chief international economist at ING.
For example, the Institute for Supply Management’s manufacturing index still works as a bellwether for the US economy – but only for a section of it, he says. “Nearly half of US private sector employees work for small firms of 50 people or less, or are self-employed – and you can bet that most national surveys save time and effort by sampling mainly large companies.”
“Right now, the ISM index is consistent with GDP growth rates of about 4.5 per cent. The headline survey from the National Federation of Independent Businesses, whose members typically have less than 50 workers, is consistent with a contraction of about 1 per cent.”
Neither is actually “wrong”, Mr Carnell says. “We just have to be aware that they are describing different parts of the US economy, and that the aggregate picture is somewhere in between.”
Relying too heavily on one survey carries risks, he said. “Strategists who assumed the rise in the ISM in 2002 and 2003 would result in a surge in Treasury yields to 8 per cent got it badly wrong,” he notes. “Size really does
by ilene - October 14th, 2009 3:27 pm
Courtesy of The Pragmatic Capitalist
Steve Schwarzman, CEO of Blackstone said Wednesday he was seeing “more than green shoots” for the economic rebound. He sees the deal market coming back to life and a return to the good old days of leveraged loans, toxic assets and IPO’s where you sell your company to the public at the most insane valuation of all time (sarcasm intended). Despite this his optimism remained somewhat muted:
“We do not expect the U.S. economy to slip back into recession but we do believe that weak consumer spending and continued constraints on bank lending will dampen the U.S. economic recovery in 2010 and 2011.”
On the earnings front, JP Morgan confirmed what we have believed for a long time – the banks are juicing. The company trounced analysts expectations by 30 cents and reported a 79% jump in revenues. JP Morgan actually lost money on the lending side of their business as well as their card services segment (the consumer is still very weak), but they made up for it in their trading and investment banking where they are helping to shower the market with secondary offerings and trading this Fed induced liquidity rally to new highs. A look under the hood questions the sustainability of these earnings. After all, banks are in the business of lending money:
Consumer Lending reported a net loss of $1.0 billion, compared with a net loss of $659 million in the prior year and $955 million in the prior quarter. Compared with the prior quarter, results decreased by $81 million, reflecting a decrease in mortgage production revenue, an increase in the provision for credit losses and lower loan balances, largely offset by higher MSR risk management results and wider loan spreads.
Net revenue was $7.5 billion, an increase of $3.4 billion, or 85%, from the prior year. Investment banking fees were up 4% to $1.7 billion, consisting of equity underwriting fees of $681 million (up 31%), debt underwriting fees of $593 million (up 19%) and advisory fees of $384 million (down 33%). Fixed Income Markets revenue was $5.0 billion, up by $4.2 billion, reflecting strong results across most products and gains of approximately $400 million on legacy leveraged lending and mortgage-related positions, compared with markdowns of $3.6 billion in the prior
by ilene - October 8th, 2009 2:04 pm
Courtesy of The Pragmatic Capitalist
Earnings aren’t the only thing driving the market higher this morning – better than expected economic data is also giving a lift to stocks. Jobless claims came in at 521K which was better than the 540K analysts expected. Continuing claims also declined to 6.04MM – this is a good sign for future hiring.
The more important news of the day was chain store sales which rhymed with the ICSC data that showed improvement in recent reports. Overall, the sales remain sluggish, but were better than anticipated. Target reported a 1.7% decline, Nordstrom reported a 2.4% decline, Neiman Marcus reported a 17% decline, Kohls reported a 5.5% increase, JC Penney reported a 1.4% decline and CostCo reported a 3% increase. All in all, the numbers are decent, but comps to last year were very easy. Econoday reports:
Chain stores posted very strong results in September pointing to a significant month-to-month increase for the non-auto non-gas category of next Wednesday’s retail sales report from the Commerce Department. This year’s shift of the Labor Day weekend deeper into September helped the month’s results with year-ago comparisons especially helped by last year’s hurricanes, Ike and Gustav, not to mention the turmoil following the Lehman Brothers collapse. Chains did report weakness in home furnishings, perhaps a hint of trouble for the building materials component. Still, today’s reports are very positive though strength in non-auto non-gas sales is not likely to offset the post-clunker plunge in vehicle sales. But vehicles aside, the consumer, despite weak confidence and job troubles, is showing some spark.
Are we on the verge of a consumer rebound? Michael P. Niemira thinks so:
“Let the retail recovery begin,” said Michael P. Niemira, chief economist at International Council of Shopping Centers. “This is the start of a better performance and better fundamentals.”
Unfortunately, one month a trend does not make. The recent data on consumer credit and auto sales tells a drastically different story….
by ilene - September 5th, 2009 12:20 pm
Courtesy of John Mauldin at Thoughts From The Frontline
The Elements of Deflation
The Failure of Economics
The Super Trend Puzzle
Final Demand and Income
Unemployment Was NOT a Green Shoot
As every school child knows, water is formed by the two elements of hydrogen and oxygen in a very simple formula we all know as H2O. Today we start a series that starts with the question, What are the elements that comprise deflation? Far from being simple, the "equation" for deflation is as complex as that of DNA. And sadly, while the genome project has helped us with great insights into how DNA works, economic analysis is still back in the 1950s when it comes to decoding deflation. Notwithstanding the paucity of understanding we can glean from the dismal science, in this week’s letter we will start thinking about the most fundamentally important question of the day: is inflation, or deflation, in our future?
But quickly, I want to thank the many people who wrote very kind words about last week’s letter. Many thought it was one of the better letters I have done in a long time. If you did not read it, you can read it here. And of course, you can go there and sign up to get this letter sent to you each week for free. Why not become of my 1 million (plus and growing) closest friends?
The Failure of Economics
Among the economists and writers I regularly read, there are some who, if they agree with me, I go back and check my assumptions – I must have been wrong. Paul Krugman is one of those thinkers. I admit to his brilliance, but his left-leaning philosophy does not particularly square with mine, and I find that most of the time I disagree.
That being said, I strongly encourage you to read his essay in the New York Times Magazine, which comes out this weekend. It is worth the high price of the Times to read it, if you can’t get it online. It is a very hard critique and analysis of the failure of current macro and financial economic thought, which didn’t even come close to predicting the current financial malaise. Indeed, as he points out, most schools of thought said the state we…