A Bright Star in a Cloudy Sky

Amid the dysfunction of the pending Fiscal Cliff disaster, we can take comfort in seeing the beginning of a housing rebound.  Finally.

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.

The Grinch that Stole Jobs

We all know the upcoming election is about the economy - and specifically, employment, or lack thereof.

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...

The Great and the Mighty

Yesterday's surprising admission from JP Morgan that it incurred a $2 Billion trading loss is stunning, so much so that $5 was lost on every single share.  The media is abuzz about this snafu, not the least of which is that even "safe" banks, in an effort to hedge risk, screw up.  Although $2 Billion, when compared to JPM's total annual revenue of $100 Billion, is a small percentage, to quote the esteemed Senator Everett Dirksen, "a billion here, a billion there, pretty soon you're talking about real money".  And real money it may be, as the losses could increase by another $2 Billion before year-end.

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?

It's All About Jobs

It had to happen - the euphoria about the economy improving paled in the face of a less-than-stellar jobs report.

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.

The Greg and Mike Show

Greg Smith's very public resignation from Goldman Sachs, via an op ed piece in the New York Times, has everyone talking while Goldman does double duty in damage control.

I interviewed Mike Mayo for the Financial Times to get his take (he wrote Exile on Wall Street, a 20-year account of the abuses he witnessed).

His comments are still spot on.

Here is the link to the Financial Times piece:   

http://ftalphaville.ft.com/blog/2012/03/15/925871/mayo-on-greg-smith-and-the-abcs-of-change/

Data Dive

My mother named me Merry  because she wanted me to be happy - and I am.  But not with the retail sales number released yesterday.  We're all eager to see legs under the economic recovery, and none more than me.  But when the market runs up and closes at its highest since the Great Recession began, partly because retail sales are up, looking at the data behind it gives me pause, as it should you, too.

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.

What a Guy!

Last night I attended the New York Hedge Funds Roundtable and heard Mike Mayo speak.  He is a banking analyst who maintains high principles and dares to speak out about companies who do not.

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.