Thursday, February 13, 2014 - The Popsicle Economy

The Popsicle Economy

by Sinclair Noe

DOW + 63 = 16,027
SPX + 10 = 1829
NAS + 39 = 4240
10 YR YLD - .02 = 2.73%
OIL - .02 = 100.35
GOLD + 11.00 = 1303.80
SILV + .25 = 20.59

According to the latest AAII Investor Sentiment Survey, over the last week the number of self-described bulls jumped to over 40% while bears plunged from over 36% to 27%. Did all those people suddenly become timing experts or is this an indication that it’s time to take profits?

The number of Americans who applied to receive unemployment benefits rose last week and the gradual decline in claims since last year appears to have halted. Initial jobless claims climbed by 8,000 to a seasonally adjusted 339,000 in the seven days ended Feb. 8.

RealtyTrac reports monthly foreclosure filings — including default notices, scheduled auctions and bank repossessions — reversed course and increased 8% to 124,419 in January from December. One month does not make a trend, but the foreclosure rebound pattern is not only showing up in judicial states like New Jersey, where foreclosure activity reached a 40-month high in January, but also some non-judicial states like California, where foreclosure starts jumped 57% from a year ago, following 17 consecutive months of annual decreases. As a whole, 57,259 US properties started the foreclosure process for the first time in January, rising 10% from December but still down 12% from last year.

On a monthly basis, retail sales decreased 0.4% from December to January (seasonally adjusted), and sales were up 2.6% from January 2013. Sales in November were revised down from a 0.2% increase to a 0.1% decrease.

In its monthly budget report, the Treasury Department said that the deficit for January was $10.4 billion. For the period from October through January (the first four months of this budget year), it totaled $184 billion. That is down $106 billion from the same period a year ago and puts the country on track for a further improvement in the budget deficit.

The Congressional Budget Office is projecting that the deficit for the current budget year will decline to $514 billion. That would be the smallest imbalance in six years. The deficit last year was $680 billion. The CBO's deficit projection for this year would represent a drop of 24% over the 2013 deficit. The CBO's latest forecast issued earlier this month projected that the deficit will decline to $478 billion in 2015 before starting to rise again in 2016 and keep heading higher for the rest of the decade.

As we know, Congress agreed to approve a suspension of the federal debt limit through March 2015. If it sounds like a bipartisan agreement, that doesn’t really describe what happened; more like a game of chicken taken to extremes, and hope for avoiding another head on collision. Ted Cruz’s best efforts notwithstanding, the United States will not dabble in first-time debt defaulting until next year, at the earliest.

Dallas Federal Reserve Bank President Richard Fisher made a speech the other night and blamed Congress for the sluggish economy. Fisher said: “For far too long, the greatest obstacle to our nation’s prosperity, has resided in this building right here: the Congress of the United States.”

Fisher said Congress has repeatedly failed to develop a tax or fiscal policy that would boost the economy. He pointed out an editorial in the Financial Times this week that concluded – ”Fiscal policy is still not an ally of U.S. growth,” and then added, “Fiscal policy is not only not an ally of U.S. growth, it is its enemy.”

This week when Janet Yellen testified before House lawmakers we learned more about how she's thinking about the labor market. In her prepared remarks she pointed to concerns including the long-term jobless as well as part-time workers who would like more work. And during her testimony, she indicated she believes the increase in unemployment since the financial crisis is cyclical, related to the business cycle and related to demand.

The reason that's important is if you think it's cyclical, then you think monetary policy can help. That's opposed to structural unemployment which is longer-term and due to fundamental shifts in an economy, which would require fiscal and regulatory policy response.

Another key aspect of the labor market story is the decline in the labor force participation to a 35-year low. Yellen told lawmakers while a significant part of this decline is structural due to demographics, she said some of it may be cyclical. The difference between unemployment and being out of the labor force is not just statistical: if you are unemployed you are job ready, if you're out of the labor force it takes a big effort to get back in the labor force.

America’s real job creators are consumers, whose rising wages generate jobs and growth. If average people don’t have decent wages there can be no real recovery and no sustained growth. If the Fed and/or Congress wants to see economic growth, it starts with jobs.

Comcast is acquiring Time Warner Cable. It's a $45 billion deal that would combine America's top two cable TV companies for a total of about 30 million subscribers, who are already among the least-happy customers in all of Corporate America. When it comes to customer satisfaction cable companies rank very low, and Comcast and Time Warner rank among the worst. The history of mergers suggests customer service might only get worse for these two companies. Coupling companies typically struggle to knit together their massive systems, and customers get lost in the process. When Comcast bought AT&T Broadband for $50 billion in 2002, customer billing problems led to such a backlash that the company ultimately launched a "Think Customer First" training program.

A BusinessWeek study of 28 mergers between 1997 and 2002 found that customer-satisfaction ratings dropped significantly after the unions, with the effect lasting for years. Cable companies suffered some of the biggest drops in that study. If there's any reason to hope, it's that both companies are suffering from the broader long-term trend of customers dropping cable subscriptions in favor of other alternatives. One of those alternatives is broadband Internet, which both companies also offer. Maybe they can learn from their mistakes. Yeah, that’s not going to happen.

After years of lamenting the factory sector’s diminishing role in the American economy, many American firms are counting on the domestic energy boom, rising overseas labor costs and stronger domestic demand to revive the long-stagnating manufacturing sector. The International Monetary Fund, the iMF, has just published a paper that says a US manufacturing renaissance is probably not gonna happen.

Manufacturing has become an increasingly smaller share of U.S. economy for the better part of a century. At the end of World War II, more than a third of all U.S. workers held manufacturing jobs. That figure fell below 10% in 2008 and manufacturing employment has failed to rebound to prerecession levels, according to Labor Department data.

After the Great Recession, a depreciating dollar, falling natural gas prices and declining unit labor costs boosted U.S. manufacturing production, the IMF economists write. Recent data shows that several durable goods sectors have rebounded strongly after the recession, potentially foreshadowing a strong manufacturing presence in the global marketplace, they said.

In 2010, the manufacturing sector grew by 6.8%, outpacing the nation’s growth in gross domestic product of 2.5% that year. Increasing consumer demand in the U.S. and abroad propelled factory output. Exports grew 11.5% in 2010.

Manufacturing exports could provide “non-negligible growth opportunities” for the American economy, especially as new technology allows energy companies to tap massive domestic deposits of natural gas and oil reserves, IMF economists added. The shale energy boom could add up to 0.3 percentage point a year to growth by 2020.

But a surge in manufacturing — as a share of the U.S. economy — has failed to materialize. Growth in the manufacturing sector trailed the overall economy in 2011 and 2012, according to Commerce Department data released last month. The pace of export growth has tapered off since 2010 and  manufacturing employment increased more slowly than total U.S. payrolls the past two years.

Still, the IMF economists said that the U.S. energy jolt, combined with further dollar depreciation and swelling consumer demand from China, India and other emerging markets could gradually increase U.S. manufacturing output over the longer term.

Despite the boost from energy, the researchers found the U.S. is unlikely to be able to significantly offset the gains made in many emerging markets as companies move their operations where manufacturing is less expensive.

Paul Krugman writes: Bloomberg reports on the soaring prices of trophy apartments in Manhattan. The biggest sale so far was former Citigroup head Sandy Weill’s apartment, which he sold for $88 million to the daughter of a Russian oligarch. But $100 million listings are out there.

For a bit of perspective: the median full-time worker in the United States makes about $40,000 a year. So it would take the typical worker 2,000 years to earn enough to buy the Weill apartment.

Still, people like Weill are exemplars of the free market at work. They work in an industry that delivers clear value to the economy, and has never relied on government bailouts. Oh, wait.

Even if you have a pricey Manhattan apartment, it’s still snowing in New York. More than 700,000 people, including residents of Georgia and South Carolina hit by a heavy blast of ice a day earlier, were without power as the storm made its way up the coast, closing much of Washington and threatening to drop up to 18 inches of snow in some areas.

Friday, November 22, 2013 - Big Round Numbers

Big Round Numbers

by Sinclair Noe

DOW + 54 = 16,064
SPX + 8 = 1804
NAS + 22 = 3991
10 YR YLD - .04 = 7.74%
OIL - .60 = 94.84
GOLD + 1.30 = 1244.70
SILV - .16 = 19.93

Record highs for the Dow Industrials and the S&P 500; we also have Dow Transports confirming the movement of the industrials, and small caps, as represented by the Russell 2000 are looking strong, pricey but strong. This was the 41^st record high close for the Dow Industrials this year.

The S&P 500 is above 1800 and that round number now becomes support. The 1800 level is 17% above the record highs from the Spring of 2000. So, if you just followed the buy and hold, you made 17% over 13 ½ years; which is lousy; and even worse if you dig into the numbers. Adjusted for inflation, the 1800 level is 14% lower than the highs of 2000. Then you should also consider the S&P 500 is a capitalization weighted index, meaning the bigger companies have a bigger impact on the index. Back in 2000 there were 25 companies that accounted for 45% of the value of the 500 stock index; so, really back then it was more like a 25 stock index, and a 475 stock index.

And really, the S&P is a dynamic index; meaning, the companies change. Back in the day, the high flyers were Lucent, MCI Worldcom, AIG, Sun Micro, Dell. This year, we're seeing about 450 of the 500 stocks in the S&P are up; that is a broad based rally.

The Dow closes the week up; the seventh straight week of gains; the longest weekly winning streak since the 8 week rally of December 2010 to January 2011. The S&P finishes a seven-week winning run. Investors are pouring more money into US stock mutual funds than they have in 13 years. Morningstar reports stock funds took in $172 billion in the year’s first 10 months, the largest amount since they got $272 billion in all of 2000. Even with most of the cash going to international funds, domestic equity deposits are the highest since 2004. The move marks a reversal from the four years through 2012, when investors put $1 trillion into fixed income as the financial crisis drove many to redeem from stocks. Losses this year in bond portfolios, combined with 25% gains in the S&P, and suddenly everybody is pouring back into stocks. This is called performance chasing, and it is risky business.

Market investors now have about 57% of assets allocated to equities. We've seen high equity valuations before, in 1999, and in 2006-2007. Sentiment among individual investors grew increasingly positive as the S&P 500 set new highs. Bullishness in the American Association of Individual Investors’ weekly survey has averaged 43 percent this quarter, up from 29 percent in August and a long-term average of 39 percent.

Now normally, that kind of bullish optimism would be a contrarian indicator. But that doesn't always mean we're headed for a drop.  In ICI data going back to 1984, annual mutual-fund flows turned positive twice before: in 1989, preceding market gains in eight of the next 10 years, and in 2003, when the S&P kept rallying until October 2007.

And don't forget that December is a historically good month for stocks. With average returns around 1.4%, compared to 0.5% for all other months. June and July have even better average returns than December does. When ranked according to average returns, December is in third place.

Furthermore, there is not much consistency to December's return from year to year. In fact, December on average was one of the worst performing months during several of the decades in the early part of the last century.

Bottom line: stay alert and let the market tell you what it is doing.

The stock market reached several very important big round numbers this week and experts suggested that reaching these round numbers could mean that the stock market will reach other, larger round numbers in the near future. Maybe. Maybe not.

These same experts suggest you ignore the fact that these round numbers have almost no meaning for your own particular individual life and keep your focus on the round numbers themselves, because they are round, and also larger than previous round numbers the market has reached.

Why is this happening, you might be asking, if you are one of the 62% of Americans who think the economy is getting worse. It is partly due to the Federal Reserve pumping cash directly into markets to keep the economy from teetering back into a recession. It is also partly due to the fact that President Obama has been the least effective socialist dictator in history, overseeing record highs in corporate profits while wages stagnate, widening income inequality, in what has been an extremely uneven recovery. 

And most of the gain in stocks seems to go right back to Federal Reserve policy. This week we had Bernanke saying the U.S. economy is getting better and, as per incoming data, the Fed will at some point slowly start to pull back support. But for right now, they aren't pulling back support because the economy is still too weak to stand on its own two feet. And you've got the OECD doing what all forecasters do these days: marking down their estimates for future growth and warning of various headwinds.

Meanwhile, mixed in with all this near-term analysis, many in my world are mulling over Larry Summers' warning that whatever the cycle is doing, the underlying problem is one of structural slog.

Barring new fiscal break-downs, like the failure to come to some kind of an agreement on the budget that expires mid-January, there will be less fiscal drag in 2014 than this year, and that should add to growth.* But don't mistake less fiscal headwinds for tailwinds. The optimistic view is that lousy, austere fiscal policy is sucking about 1.5 points off of real growth this year and will take 0.5 of a point off of next year's growth.

The fact that less growth is reaching the broad middle class and lower wage workers is a constraint on consumption, which remains 70% of the US economy. During the housing bubble years, (dangerously) cheap credit and the wealth effect from inflated home prices offset this drag, but that's behind us. Looking at inflation and average compensation, we see that there is no pressure from wages or prices on inflation and real compensation growth is flat, flat-lining in fact.

Meanwhile, we know that the economy's been growing and that company profits have been high. There's nothing wrong with profits, but there's definitely something wrong when they fail to lead to employment and earnings gains for the broad majority. 

Uneven consumer spending along with fiscal drag/austerity and political dysfunction have contributed to a weaker investment climate, not just in the US but in most economies. You keep hearing about "trillions on the sidelines." Again -- that's also a symptom of high profitability amidst weak demand, along with low inflation. Investors just don't see enough domestic projects with high enough prospective returns to get them back in the biz of investing in structures, equipment, software, at least not at rates that would give us the growth pop we need.

Of course, this begs for a strategy of investment in public goods, but that runs into the austerity buzzsaw. And besides, who needs infrastructure when you can just chase performance up to the next big round numbers in the stock market. We just might get there, or not.