Slouching Towards Bethlehem: Double Dip or Banana Split?
by ilene - September 21st, 2010 3:17 pm
Jesse’s introduction to Rick’s, at Consumer Metrics Institute, "Double Dip or Banana Split:"
Slouching Towards Bethlehem: Double Dip or Banana Split?
Courtesy of JESSE’S CAFÉ AMÉRICAIN
"If the 2010 contraction we are now monitoring in consumer demand for discretionary durable goods scales to the full economy as faithfully as the "Great Recession" did, the second dip will, at minimum, be 33% more painful than the first dip and will extend at least half again as long."
This is the case for trouble dead ahead, a worse decline in consumer activity and therefore GDP than the first, and the likelihood of further quantitative easing from the US Federal Reserve to patch over the inability of the political process to reform the financial system and balance the real economy because of their myriad conflicts of interest. These policy errors favoring a small minority will most likely result in a stagflation of the most pernicious and corrosive kind, high unemployment and a rising price of essentials, that may ultimately test the fabric of society. Obsession and sociopathy are not generally ruled or limited by the equilibrium of common sense and ordinary appetite, so I would not expect the powerful minority to draw back from the brink of this crisis voluntarily: a classic scenario for exogenous change. I would enjoy the moral irony of all this if I was watching from the distant future.
The good want power, but to weep barren tears.
The powerful want goodness: worse need for them.
The wise want love, and those who love want wisdom;
And all best things are thus confused to ill.Shelley, Prometheus Unbound
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DiggFed Z1: From Bad To Getting Worse
by ilene - September 18th, 2010 4:38 am
Fed Z1: From Bad To Getting Worse
Courtesy of Karl Denninger at The Market Ticker
There’s a lot of mind-numbing figures and facts in here, but a few things stick out like a sore thumb.
Let’s first start with the graphs, which I have updated.
Hmmm….. there’s a bit of a hook in there at the back end. Where’s that coming from?
Oh, that’s not so good. Business credit is going up again a bit, and of course The Federal Government is pumping new credit like mad – but is no longer simply trying to compensate for de-leveraging, they’re exceeding that.
This is decidedly negative – in fact, it has the potential to lead to an economic death-spiral if the government doesn’t cut this crap out in time.
Some of the other nasties in here are truly stunning. One of them is the ugly on Households – they lost a net $1.5 trillion in one quarter on their net wealth.
The 900lb Gorilla in the room is found in real estate. While we don’t have current numbers on that and won’t (the update is primarily equities) the ugly on the housing side is breathtaking. From a peak in 2005 of $13.1 trillion in equity in residential real estate, that value has now diminished by approximately half to $6.67 trillion!
Yet outstanding household debt has in fact increased from $11.7 trillion to $13.5 trillion today.
Folks, those who claim that we have "de-levered" are lying.
Not only has the consumer not de-levered but business is actually gearing up – putting the lie to any claim that they have "record cash." Well, yes, but they also have record debt, and instead of decreasing leverage levels they’re adding to them.
In short don’t believe the BS about "de-leveraging has occurred and we’re in good shape." We most certainly have not de-levered, we most certainly are not in good shape, and the Federal borrowing is what, for the time being, has prevented reality from sticking it’s head under the corner of the tent.
This cannot and will not continue on an indefinite basis.
The Last Half
by ilene - September 11th, 2010 11:37 pm
The Last Half
Courtesy of John Mauldin at Thoughts from the Frontline
The Last Half
But It’s More Than the Deficit
Not Everyone Can Run a Surplus
Pity the Greeks
The Competitive Currency Devaluation Raceway
Amsterdam, Malta, Zurich, Mallorca, Denmark, and London
There are a number of economic forces in play in today’s world, not all of them working in the same direction, which makes choosing policies particularly difficult. Today we finish what we started last week, the last half of the last chapter I have to write to get a rough draft of my forthcoming book, The End Game. (Right now, though, it appears this will actually be the third chapter.) We will start with a few paragraphs to help you remember where we were (or you can go to www.investorsinsight.com to read the first part of the chapter).
But first, I recorded two Conversations yesterday, with the CEOs of two biotech firms that are working on some of the most exciting new technologies I have come across. I found them very informative, and we will post them as soon as we get them transcribed.
For new readers, Conversations with John Mauldin is my one subscription service. While this letter will always be free, we have created a way for you to "listen in" on my conversations (or read the transcripts) with some of my friends, many of whom you will recognize and some whom you will want to know after you hear our conversations. Basically, I call one or two friends every now and then; and just as we do at dinner or at meetings, we talk about the issues of the day, back and forth, with give and take and friendly debate. I think you will find it enlightening and thought-provoking and a real contribution to your education as an investor. Plus, we throw in a series I do with Pat Cox of Breakthrough Technology Alert, where we interview some of the leading up-and-coming biotech companies; and I also do a Conversation with George Friedman of Stratfor 3-4 times a year. Quite a lot for the low price.
I recently recorded a Conversation with Mohamed El-Erian, CEO and co-CIO of PIMCO, who is one of the smartest human beings I know, as well as one of the nicest. As you can see,…
Beware of Greeks Bearing Bonds
by ilene - September 11th, 2010 6:52 pm
This is a fascinating study of Greece and how the largest of part of its bankruptcy may be in its collective conscience. - Ilene
Beware of Greeks Bearing Bonds
Vanity Fair’s Introduction: As Wall Street hangs on the question “Will Greece default?,” the author heads for riot-stricken Athens, and for the mysterious Vatopaidi monastery, which brought down the last government, laying bare the country’s economic insanity. But beyond a $1.2 trillion debt (roughly a quarter-million dollars for each working adult), there is a more frightening deficit. After systematically looting their own treasury, in a breathtaking binge of tax evasion, bribery, and creative accounting spurred on by Goldman Sachs, Greeks are sure of one thing: they can’t trust their fellow Greeks.
After an hour on a plane, two in a taxi, three on a decrepit ferry, and then four more on buses driven madly along the tops of sheer cliffs by Greeks on cell phones, I rolled up to the front door of the vast and remote monastery. The spit of land poking into the Aegean Sea felt like the end of the earth, and just as silent. It was late afternoon, and the monks were either praying or napping, but one remained on duty at the guard booth, to greet visitors. He guided me along with seven Greek pilgrims to an ancient dormitory, beautifully restored, where two more solicitous monks offered ouzo, pastries, and keys to cells. I sensed something missing, and then realized: no one had asked for a credit card. The monastery was not merely efficient but free. One of the monks then said the next event would be the church service: Vespers. The next event, it will emerge, will almost always be a church service. There were 37 different chapels inside the monastery’s walls; finding the service is going to be like finding Waldo, I thought.
“Which church?” I asked the monk.
“Just follow the monks after they rise,” he said. Then he looked me up and down more closely. He wore an impossibly long and wild black beard, long black robes, a monk’s cap, and prayer beads. I wore white running shoes, light khakis, a mauve Brooks Brothers shirt, and carried a plastic laundry bag that said eagles palace hotel in giant letters on the side. “Why have you come?” he asked.
That was
…
The ECRI Weekly Leading Index
by ilene - September 10th, 2010 12:26 pm
The ECRI Weekly Leading Index
Courtesy of Doug Short
The rate of decline from the peak in October 2009 is unprecedented in the Institute’s published data back to 1967. Recently, however, the Institute has disclosed that two earlier decades of data not available to the general public contained comparable declines in WLI growth (in 1951 and 1966) when no recession followed (HT Barry Ritholtz).
The Published Record
The ECRI WLI growth metric has had a respectable (but by no means perfect) record for forecasting recessions. The next chart shows the correlation between the WLI, GDP and recessions.
A significant decline in the WLI has been a leading indicator for six of the seven recessions since the 1960s. It lagged one recession (1981-1982) by nine weeks. The WLI did turn negative 17 times when no recession followed, but 14 of those declines were only slightly negative (-0.1 to -2.4) and most of them reversed after relatively brief periods.
Three of the false negatives were deeper declines. The Crash of 1987 took the Index negative for 68 weeks with a trough of -6.8. The Financial Crisis of 1998, which included the collapse of Long Term Capital Management, took the Index negative for 23 weeks with a trough of -4.5.
The third significant false negative came near the bottom of the bear market of 2000-2002, about nine months after the brief recession of 2001. At the time, the WLI seemed to be signaling a double-dip recession, but the economy and market accelerated in tandem in the spring of 2003, and a recession was avoided.
The Latest WLI Decline
The question, of course, is whether the latest WLI decline is a leading indicator of a recession or a false negative. The published index has never dropped to the current level without the onset of a recession. The deepest decline without a near-term recession was in the…
Meaty With a Chance of Cloud Calls
by ilene - September 8th, 2010 11:17 pm
Meaty With a Chance of Cloud Calls
Courtesy of Joshua M Brown, The Reformed Broker
And the winner is…Cloud! The tech industry sub-sector with perhaps this year’s meatiest move is undoubtedly cloud computing. Names like Riverbed ($RVBD), Akamai ($AKAM) and 3Par ($PAR) have all been putting up insane numbers this year, performance-wise.
My awakening to the group’s potential back in January came courtesy of a kickass cover story in Barron’s (Sky’s The Limit)- ever since then the cloud computing stocks mentioned (and some that were omitted) have been nothing but fire – in a market that is unchanged year-to-date.
Here’s a peek at the majesty that is Cloud Stock-age thus far in the Twentyten:
Regular readers know that I’ve been hammering away at the cloud theme all year, even hoping for the advent of a Cloud Computing ETF at one point this past spring, albeit in a tongue-in-cheek sort of way (we still haven’t gotten one).
What’s next for the group?
* I have a hard time believing that Cisco has much interest in trailing behind Riverbed in market share for very much longer. Riverbed’s Steelhead product suite speeds up transmission of applications and data from the cloud to the end user, this is a corporate IT Holy Grail as it allows for the efficient decentralization that global entities need. I could see Cisco or one of its rivals making a move for this name as this would give them the number one offering in this crucial space instantly.
* Akamai’s global "private web" video serving solution will probably continue to be the delivery method of choice as Web TV becomes a reality and online streaming continues to be monetized. The wake up call for me on Akamai was when I learned that it was their technology that was the backbone for NBC’s serving of Winter Olympics video to everyone’s mobile devices.
* The bidding war over 3Par (between Dell and H-P) kinda gilds Rackspace’s ($RAX) lilly a bit when you think about it. Rackspace took over an abandoned shopping mall in downtown San Antonio and built an amazingly scaled-up cloud hosting center. Their fanatical reputation for customer service to their cloud hosted customers is the heart of their story, however – anyone can build a server farm.
* Microsoft’s CEO Ballmer said a few months ago that he was "betting…
Which Way Wednesday – Beige Book Edition
by Phil - September 8th, 2010 8:06 am
On June 9th we liked the Beige Book, which confirmed our bottom call.
On July 28th, we did not like the Beige Book and I said to Members in my review of the report: "Housing drives the market and housing and commercial construction are dead. How can commercial construction come back if we have less employees? How can housing come back if fewer people qualify for loans and the population doesn’t grow? How does anyone think that we can address these problems through capitalism (ie. without stimulus)?"
We got the GDP report that Friday (July 30th) and the low expectations there gave us the gap up we were expecting and Alan Greenspan went on Meet the Press that weekend and admitted I was right – both stealing my "Tale of Two Economies" economic outlook and blasting the Republicans, saying the party had "lost their way."
We couldn’t do anything about the Republican’ts but I was able to call a "Toppy Tuesday" on August 3rd and we drifted along that top until the next week, where we caught the action just right as we took our bullish money and ran on Monday and began grabbing downside hedges including the QID play I put up right in that Tuesday’s (8/10) morning post, where I said:
Yesterday we knew that the move up was fake, Fake, FAKE and we acted accordingly in Member Chat. We had a nice QID cover play right in the Morning Alert that was an easy fill as the Nas went higher and higher all day. It was the Aug $16/17 bull call spread at .42, and the $16 puts sold for .29 for net .13 on the $1 spread with a nice 669% upside if the Nasdaq heads sharply down on us. Our stops on the play were a combination of Nas 2,300, Dow 10,700 and Russell 666 and we got the Nasdaq and the Dow over their marks but, once again, 666 proves to be an ominous barrier for the Russell.
That hedge did, of course, return the full 669% as QID finished the expiration period at $17.80 and there was no doubt on the trade as we had a mild drop Tuesday morning, followed by a major drop the next day, where my opening comment was: "Wheeee - I told you this was going to be fun!" It is FUN when you are prepared to ride…
The Last Chapter
by ilene - September 4th, 2010 7:18 pm
The Last Chapter
Courtesy of John Mauldin at Thoughts From The Frontline
The Last Chapter
Let’s Look at the Rules
Six Impossible Things
Killing the Goose
Home and Then Europe
This week you will get a kind of preview as this week’s letter. I am desperately trying to finish the first draft of my book and am one chapter away from having that draft. I have promised my editor (Debra Englander) that she would see a rough draft next week, and the final version will be delivered on the last day of September. More on that process for those interested at the end of the letter. But this week’s letter will be part of what will probably be the 4th or 5th chapter, where we look at the rules of economics.
There is just so little writing time left that I have to focus on that book for a little bit. I am writing this book with co-author Jonathan Tepper of Variant Perception (who is based in London), a young and very gifted Rhodes scholar with a talent for economic analysis and writing. We each write the first draft of a chapter and then go back and forth until the chapter has been much improved. Alas, gentle reader, you will only get my first draft. You will have to wait for the book to get the new, improved version. But this is the last one I have to write. And Jonathan has done all his initial chapters. We are on the home stretch.
But first, my partners at Altegris Investments have written a White Paper entitled "The New Normal: Implications for Hedge Fund Investing." It is a very instructive read. If you are in the US and have already signed up for my Accredited Investor letter, you should already have been sent a link or a copy. If not, and you are an accredited investor (basically net worth of $1.5 million or more) and would like to see the paper, or are interested in learning more about how hedge funds, commodity funds, and other absolute-return strategies might fit into your investment portfolio, I suggest you click on www.accreditedinvestor.ws and fill out the form, and a professional will get back to you. And if you live outside the US and are interested, I have partners around the world who can work with…
WHY AREN’T EQUITIES SELLING OFF MORE SIGNIFICANTLY?
by ilene - September 3rd, 2010 7:23 pm
WHY AREN’T EQUITIES SELLING OFF MORE SIGNIFICANTLY?
Courtesy of The Pragmatic Capitalist
The deterioration in the economy has been clear in recent months, but the equity markets have confounded many investors. Stocks are just 10.6% off their highs and have shown some remarkable resilience, particularly in the last few weeks. There’s a great tug-of-war going on underneath what appears like a potentially frightening macro picture.
A closer look shows that what we’ve primarily seen is deterioration in the macro outlook and not so much in specific corporate outlooks. Despite the persistently weak economy, earnings aren’t falling out of bed. Without a sharp decline in earnings there is unlikely to be a sharp decline in the equity markets (outside of some exogenous event such as a sovereign default).
The most distinct characteristic I can recall from the the 2007/2008 market downturn was the persistent deterioration in earnings. Like dominoes we saw the various industries go down one by one: housing, then banks, then consumer discretionary and on down the line. While the macro picture has deteriorated recently we haven’t seen the same sort of deterioration in earnings that we saw in 2007 and 2008.
In a recent strategy note JP Morgan elaborated on the divergence between the macro outlook and the earnings outlook:
“What matters for equities is earnings and not GDP growth. US GDP growth projections are being cut, but earnings projections have been little affected so far. Investors and analysts are hoping that, to the extent the soft patch in US GDP growth lasts for only a few quarters and does not spillover to the rest of the world, US companies will be able to protect their revenues and profits. Indeed, this is what happened during 2Q, when US companies were able to deliver strong top line and EPS growth even as US GDP grew at only a 1% pace.
It is a prolonged soft patch that poses the greater threat for corporate earnings and equity markets as it raises the specter of deflation and profit margin contraction. Why is deflation bad for corporate profitability? When nominal interest rates are bounded at zero, a fall in expected inflation causes a rise in real interest rates and the cost of capital, hurting corporate profitability. In addition, nominal wage rigidities mean that deflation reduces output prices by more than input prices putting pressure on corporate profitability. Indeed, the
…
Burning Down the House
by ilene - September 2nd, 2010 5:50 pm
Burning Down the House
Courtesy of DEAN BAKER at CEPR
This column was originally published by The Guardian.
The howls of surprised economists were everywhere last week as the government reported on Tuesday that July had the sharpest single-month plunge in existing home sales on record. The next day the Commerce Department reported that new home sales hit a post-war low in July.
All the economists who had told us that the housing market had stabilized and that prices would soon rebound looked really foolish yet again. To understand how lost these professional error-makers really are it is only necessary to know that the Mortgage Bankers Association (MBA) puts out data on mortgage applications every week. The MBA index plummeted beginning in May, immediately after the last day (April 30) for signing a house sale contract that qualified for the homebuyers tax credit.
It typically takes 6-8 weeks between when a contract is signed and a house sale closes. The plunge in applications in May meant that homebuyers were not signing contracts to buy homes. This meant that sales would plummet in July. Economists with a clue were not surprised by the July plunge in home sales.
What should be clear is that the tax credits helped to pull housing demand forward. People who might have bought in the second half of 2010 or even 2011 instead bought their home before the tax credit expired. Now that the credit has expired, there is less demand than ever, leaving the market open for another plunge in prices. The support the tax credit gave to the housing market was only temporary.
It is worth asking what was accomplished by spending tens of billions of dollars to prop up the market for a bit over a year with these tax credits. First, this allowed millions of people to sell their home over this period at a higher price than would…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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