Friday, December 28, 2012
As John Waggoner states in a USAToday.com piece, the housing market is by far the biggest economic stimulator out there. With mortgage rates hovering just north of 3%, buyers have a great incentive to take a leap of confidence and buy. Record-high rents, brought about by the understandable reluctance of consumers to buy into a falling market, are another push as demand is far outweighing supply.
Of course, it's not just about signing up for a mortgage. Even houses in pristine condition require some sprucing up, if only to reflect the buyer's individual taste in curtains, furniture and updated appliances. Come spring, buyers need lawn and gardening tools, and winter demands, at the very least, a snow blower. That is why Lowe's and Home Depot have seen share prices climb steadily since summer (although the Longshoreman's Strike, if it occurs, could cause prices to ease).
The Schiller Home Price Index, arguably the most often-watched housing indicator, and a significant data point reflecting prices nationally as well as in 20 metropolitan cities, recently registered 4.30, a level not seen since June 2010. While the southwest, particularly Phoenix and San Diego, enjoyed the highest rebound, New York and Chicago reflected lower annual prices, understandably, since those two markets did not fall nearly as far during the downturn.
Steadily improving employment, if the figures are to be believed, should contribute to the rebound.
Now all we need do is hope that the Fiscal Cliff is nothing more than a bad dream, and that we will wake up on January 2 with the mortgage deduction still intact. Fingers crossed.
Friday, September 7, 2012
Today's release is disappointing: while new unemployment claims are down, businesses still are not hiring. Our own fiscal house is not in order, and we all know what's happening in Europe. China's slowdown scares us. Conditions most likely will not improve until the beginning of the year, and some say that even 2013 could be tough.
We aim to give credit where credit is due, but the drop in the unemployment rate from 8.3 to 8.1 is misleading. The labor force dropped by over 4 percentage points, from 63.7 to 63.5 - the lowest participation rate since 1981. In absolute numbers, that means that the number of employed workers dropped by 119,000.
Companies clearly lack confidence, and only when it is restored will they be willing to invest. Capital equipment is one type of investment; hiring is another. This far into a recovery should signal significant gains in jobs. It's not happening, and while there is much blame to be shared, Washington's policies are up there.
Investors are driving up the stock market in search of yield, since with QE3 threatened, they won't find it in bonds. High-quality, dividend-paying stocks are a good choice, and the market is reflecting it. If the economy goes into another recession (have we really come out of this one?), stocks of companies producing basic goods (food, energy) will hold their own.
Now if we can just get a few more million people back to work...
Friday, May 11, 2012
While, granted, JPM was hedging risk on its own capital (rather than on bank deposits), it was doing so using derivatives on complex credit investments, similar to what banks were doing in 2008 that caused the meltdown. Shareholders still are picking up the tab. Despite Dodd-Frank and The Volcker Rule, there seems to be an absence of adequate risk monitoring. We appear not to have learned our lesson, despite the lingering fallout that has resulted in the ongoing Great Recession. Who's watching the banks?
Monday, April 9, 2012
Yes, the numbers say the jobs picture is improving. But, investors recognize that it takes many, many more than 120,000 new non-farm payrolls to do so, especially when nearly twice that number had been anticipated. The disappointing news, coupled with the market's being closed on Good Friday, meant we had the weekend to lament the obvious: until more people are working, the Great Recession is not over.
Coupled with a sluggish outlook for corporate earnings - companies have slashed costs about as much as they can; real "organic" growth in revenue is anemic - and low first quarter GDP, investors are concerned. They register that concern by fleeing "risk assets" (READ: stocks) and opting for the safety of bonds. The 10-year Treasury note dropped its interest rate slightly, meaning it doesn't have to pay quite so much to attract buyers.
Obviously, one poor month of employment data does not a trend make, just like robust employment numbers the previous month did not. But, the next few months may be bumpy, and some analysts are expecting a 3%-5% decline. That may represent a good buying opportunity, as we now are close to February's closing level on the S&P 500.
Thursday, March 15, 2012
Wednesday, March 14, 2012
Retail sales were up from a revised 0.6% to 1.1%. Sounds great. But, that includes higher prices for gasoline, and no one with a pulse thinks higher gas prices are cause for celebration. Gasoline sales were up a full 3.3%, clothing and building materials were up 1.8% and 1.4%, respectively.
A strong increase in clothing and building materials bodes well for a strengthening economy. Although I hate to be perceived as a modern-day Cassandra, furniture sales were down -1.2%, and general merchandise was down -0.1%. These last two data points don't inspire confidence that we're out of the woods. Coupled with rocketing gas prices and a still crippled employment market, things may not be as rosy as they seem.
I'll be the first to herald a strong economy - we're long overdue. But until real unemployment drops significantly, I'm less than sanguine.
Friday, February 24, 2012
He just published "Exile on Wall Street", which chronicles his career as arguably one of the country's top bank analysts and perhaps one of the few who understands that his fealty must be to the clients who invest, rather than to the companies he was employed by who were most interested in seeking profits. It is a great read - especially for his honesty and willingness to admit when he was wrong (rarely) and not to gloat when he is right (frequently). His mantra: bank executives must be held accountable. When fat compensation packages accrue to management who've managed to drive the share price down, thereby hurting its investors, something is wrong. Very wrong. He names several.
I've written before about banks and how those at the helm seem not to be accountable for the errors they made and the financial losses they have caused. We the people are paying the piper.
Mike Mayo calls them out with truth and humor.
Wednesday, February 15, 2012
Things like building materials, autos and furniture were hardest hit, dropping to barely a tenth of their combined December levels. Some try to suggest that retails sales are up, if you subtract gas, autos and building materials - which seems to be a crazy way of looking at it. After all, gas prices have risen steadily for several months, and most of America drives daily. Subtracting gas prices from overall retail sales is hardly representative of any economy, healthy or not.
Food sales shot up to the highest level in months. But it may not mean necessarily that people are buying more. Rather, a more reasonable explanation could be that prices are higher, as nearly anyone who enters a grocery store - even Costco and Sam's Club - will attest.
What the data signals is that we're still slogging our way out of this recession, and will be doing so for the foreseeable future. Until people get back to work, don't expect much to change.
Tuesday, January 31, 2012
Bull or Bear? The 2012 Market Forecast
We are hard pressed to find anyone who isn’t a bit more optimistic about the state of affairs this year than last. There are positive signs that the economy is beginning to pull out of the mud: corporate purchasing agents are buying slightly more products and services, so manufacturing is creeping up. The consumer seems more confident, or at least says so, since consumer sentiment just notched its highest level in a year. Even housing is beginning to move out of its mud hole. While it is much too soon to say we’re out of danger, at least we can peek out from the mud and begin to see some signs of life.
With better news comes a panoply of outlooks, ranging from dire, to muddling through to, in a few cases, daringly optimistic.
This year’s 2012 Market Forecast, sponsored by the New York Society of Security Analysts (NYSSA) an event I attend annually, was another sell out, as investors and those who work with them gathered to glean the wisdom of the sage. Vinny Catalano, who heads Blue Marble Research, put together an impressive panel of analysts, strategists and prognosticators, all of whom shared their wisdom, thoughts and, yes, a few fears, on what lies in store in this all-important election year.
Before embarking on it, however, let’s see how well a similar panel did for 2011. Readers of this column may remember some of the forecasts from last year:
2011 Forecast vs. 2011 Actual
Corporate Profits: $95 (forecast) vs. $98 (actual)
Real unemployment rate: 15% (forecast) vs. Still 15% (actual)
Commodity prices: higher (forecast) vs. most prices lower (actual)
Wikileaks: will be defanged (forecast) vs. appears to be (actual)
S & P Index: 1400 (forecast) vs. 1258 – didn’t move at all (actual)
The S&P index was a huge disappointment in 2011. Corporate earnings performed, but the price/earnings multiple did not – rather than a projected 15, it was below 13. (Remember, the multiple reflects investors’ optimism regarding future earnings growth. A lower multiple suggests that investors are not very optimistic, and last year’s market close confirmed it).
Even though the tone of this year’s conference was cautiously optimistic, there are different concerns, mainly, the Euro zone debt crisis and its spillover effects on us. And, for that matter, on China. Remember last year, when China was all the rage? This year, China presents cause for concern. According to Peter Bookvar, equity strategist at Miller Tabak 7 Co., LLC, “China’s cooling growth is compounded by the slowdown in Europe, since Europe is China’s biggest trading partner.” That’s as good a reason as any to be cautious – China is the largest holder of US debt, so we want them to continue to do well, at least while we are running such huge deficits.
Will Europe default? While the Euro zone fall apart? “No”, said Mujtaba Rahman, an analyst with Eurasia Group’s Europe practice. “But there are big issues between Germany and the rest of Europe. If you look at Europe’s history, the current situation is unprecedented. If there is no resolution on policy, it will continue to ‘muddle through’”.
Glen Reynolds, who runs CreditSights, Inc., commented that both banks and consumer balance sheets are stronger now, and that while corporations have the ability to spend, banks still are not lending, despite their capacity to do so. Why? “There is little corporate demand. Much of the lending we saw early in 2011 was for refinancing, rather than origination. At current capacity utilization levels, there is not yet a need for expansion”. He also commented that if Europe weakens further, US banks, as counterparties, could too. Let’s hope not.
The best news appears to be the inflation outlook – in the range of 2%-3%, according to Phil Orlando, Equity Market Strategist for Federated. He also predicts $102 for corporate earnings, and while higher than last year, the multiple is lower. (The corporate earnings figure derives from adding all earnings for all 500 companies in the index and then applying a divisor to the equation.)
By way of explanation, in previous years, the S&P index could be estimated by applying perhaps a 14 multiple to the earnings, or a 1428 year-end level, in this example (102 x 14 = 1428). Now, however, he suggests that 13 may be a more realistic multiple for 2012, or a 1326 level for the S&P by year-end (102 x 13 = 1326). The lower multiple again suggests that investors are less optimistic about future earnings. So, from today’s 1292, that represents a mere 2% gain. Not exactly robust, but in this economy, we’ll take it.
Nearly all panelists agreed that utilities, consumer staples and health care will be strong performers as we move forward in 2012.
The panelists also commented that 2012 has some unpredictable outcomes: the Supreme Court will hear the health care arguments, and there will be uncertainty in the markets. Also, while the panelists all agree that stocks are cheap, based on their fundamentals (earnings, cash position, debt levels), the 2012 election outcome is critical for fiscal policy and regulatory reform.
And, to paraphrase Pepys, so to the election. Dan Clifton, who heads up the Washington office of Strategas Research Partners, LLC, noted why the South Carolina Republican race is so important. “South Carolina has picked the Republican nominee in every election since 1976”. As we go to press, the election results may be prescient.
No matter who wins, the election’s outcome will give us certainty as to the regulatory landscape and taxes. There is ample debate on both sides of the aisle. Whoever wins, at least we all will know the rules. Then things can move forward. Nearly everyone agrees that the ongoing uncertainty is anathema to a robust economy.
Sam Stovall, Equity Strategist at S&P, weighed in with some election thoughts. He tracked the historical stock performance during election years from 1948 onward, and had these comments:
1) During an election year, the stock market offers an attractive intra-year entry point that is about 8% below the prior year’s closing level (READ: sometime this year, the market will probably drop 8% from the 2011 year-end close of 1258, to somewhere around 1157. That level should be considered a buying opportunity).
2) In all elections since 1948, the January Barometer was accurate in forecasting positive calendar-year performance. As the saw goes, “As goes January, so goes the year.”
3) 85% of the time since 1948, the market has accurately predicted whether the party in power remains. The critical period to watch is from July 31, 2012 through October 31, 2012. If the market is up during that 3-month period, the Democrats are in. If not, look for a change.
This year, we won’t need to wait until January 2013 to know how the year will fare. November is only a little over 9 months away.
Wednesday, January 25, 2012
One novel idea may have merit: making some of the largest financial institutions pay a small fee to help homeowners take advantage of record low interest rates and lower their payments. Heretofore, refi qualifications are so stringent that many applicants cannot qualify.
The President stated, and rightly so, that "A small fee on the largest financial institutions will ensure that it won’t add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust.”
It strikes me as equitable - we all know that banks made a bundle from packaging mortgages with dubious credit ratings that then were sold to institutions and individuals. A housing crisis ensued, with disastrous ramifications. People who then lost their jobs in the downturn could not sell their houses in this real estate market. Not all of these people bit off more than they could chew in terms of houses beyond their means. Many put down the requisite 20% or more, made payments regularly, have FICO scores of 800 or better, but cannot refinance. Those without a job are especially hard hit, and reducing their payments, just until they land, would be a welcome respite. Asking banks, who did much to create the current problem, to help homeowners get back on their feet seems appropriate.
However, the bill has to pass Congress, so don't hold your breath. But, you may want to contact your Congressman.
Bloomberg Business Week has an article that explains the proposal in greater detail. Here's the link:
Tuesday, January 24, 2012
The rationale, and I use the term loosely, is that executives who were not paid well would not stay at the institutions to shepherd them through the payback phase. So, it seems that Patricia Geoghegan, who represented the Office of the Special Master (of the Special Inspector General for the Troubled Asset Relief Program), was pressured by the US Treasury, no less, into granting these fat cats' wishes.
49 different individuals received pay packages of $5 Million or more. During the worst economic downturn since the Great Depression, when real rates of unemployment are from 15% to 19%, depending upon whom you believe, it is astounding that the fear that top executives would quit drove such an egregious decision. Who are they kidding? Where would they go? Even now, most people with jobs are terrified of losing them. And a myriad others would be happy to work for a fraction of what these guys got.
It's easy to understand the OWS movement - who's watching out for the little guys?
Thursday, January 12, 2012
While I'm not a Keynesian, i.e., proponent of government spending to cure recessions, Dr. Stiglitz appears to be as makes some important comparisons between our current Great Recession the Great Depression. He discusses a primary cause of the Depression as centered around the structural changes in an agricultural-based economy at the time. An agricultural revolution (improvements in farming techniques, better seeds, fertilizer and equipment) increased output, drove down prices and required fewer farmers. We all know the disaster that ensued in terms of declining incomes and jobs--our parents who lived through it never let us forget it. Nor should we.
Today's economy has similarities in principal, as we move from a manufacturing to a service economy. About 1/10th of our workforce today is employed in manufacturing, versus 1/3 60 years ago, because of greater productivity (for example the Internet reduced the need for some employees) and globalization (sending lower-paying jobs oversees where labor is cheaper).
World War II got us out of the Depression, which, in fact, was a massive example of government spending. According to Dr. Stiglitz, while we don't need another war, we now need something equivalent to that significant level of government spending because monetary policy is not working. Nor did bailing out the banks, because most of them stopped lending and many used that money for bonuses. The piece also suggests changes in tax policy and suggestions for a productive economy that focus on increasing living standards, rather than creating greater risk and inequality.
Well worth the read, so don't be fooled by Lady Gaga on the cover.