bizzXceleration: Performance, Value and Profit

Well in case you hadn't noticed today was a bit bad in the markets, led down by the financials as the realities of the dreaded credighetti monster re-surfacing, with more bad news from LEH, FNM and FRE. The latter were down 22% and 25% respectively. As were Financials (-3.6%) and Consumer Discretionary (-1.7%) in general. Not surprising in light of our thinking but the really interesting headlines were on Lowe's, which closed up slightly (.16%) on better than expected earnings. Consider the following headlines (from Marketwatch, AP) and especially the emphasized line:

Housing malaise eats into Lowe's net Lowe's Cos. said Monday that its second-quarter profit fell 7.9%, hurt by the housing market downturn, which cut into demand for cabinets, countertops and other big-ticket purchases.  Results, however, exceeded analysts' estimates, thanks to strength in seasonal sales as homeowners restored lawns and outdoor landscaping after last year's drought in much of the country. The No. 2 home-improvement retailer also benefited from the U.S. government's stimulus checks, which aided its comparable sales by as much as 1.5 percentage points, more than it projected. It also gained unit market share at its fastest pace in eight quarters as many independent operators closed shops, Chief Executive Robert Niblock said on a conference call with analysts.Despite better-than-expected results, Lowe's third-quarter profit forecast missed analysts' estimates as the retailer expected a continued challenging housing market into 2009, especially in regions such as California, Florida and the Gulf Coast. It also said it is evaluating the number of stores it plans to open for next year in light of the current sales environment. It said it will announce the final number next month. Sales rose 2.4% to $14.5 billion as the company opened in more locations. Same-store sales, or sales at stores open at least a year, dropped 5.3%.

• Lowe's beats 2Q estimates, despite profit drop

 Along with a lowered outlook you'd think that would hardly be a reason to bid up the stock. As usual what we think is going on is that the lack of grasp on the nature, timing, structure and lags in the business cycle completely escape everyone in general. For example the new meme is that while the world is headed in the tank the US is potentially headed back up. BtW - that differential explains the dollar bounce along with interest rate gaps...watch out. But other than that one line nobody gave the most important retail statistic much attention.

Let us offer up another stat that will be completely ignored - no coverage whatsoever. Real weekly wages were updated by the BLS after the CPI release. Guess what...they were down -3.1%. In fact for the last six months the figures are: -1.4, -.8, -.9, -.7, -1.1,-2.5 and -3.1% ! Remember our "Tipping Point" discussion - well it certainly looks like it's here IOHO. We're going to spend the rest of this post digging thru some big picture economic data to try and read ourselves into a more realistic, data-grounded context. Hopefully in such a way that you can reach your own conclusions. 

GDP vs Consumption

Let's start with a comparison of GDP and Consumption (PCE) back to 1980. Take a gander at this little chart which shows the YOY% change in the two. If there's any doubt about this being cyclic speak now. We'll draw your attention to the teeny little tail where both, but especially consumption, have dropped below the trendline. Now ask yourselves - what recent data you've seen, or read here, would indicate that's going to turn around ? We think the more relevant question is what will the downturn look like - '01, '91 or earlier ?

Recession vs Growth Recession

You might recall that the Fed's current published forecast calls for growth thru 2010 of less than 2% - in fact they're counting on it to reduce inflationary pressures. When the economy grows at less than its' full employment potential think of that as a "growth recession". More importantly translate that out of geekspeak and into pain indicators. That means lost jobs, lowered spending, bad earnings pressures, you name it. Just to put that in context we ran back to 1960 or so and ranked downturns as Recessions (<0%), Week Growth Recessions (0-1%) and Growth Recessions (1-2%). And ended up with this fascinating chart. Note: if you believe our measures we almost experienced a growth recession at the end of '06 but were saved by the oil price drop and saw one again this last couple of quarters. But we are, in fact, now in a growth recession !!

If you'd really like to dig a little more into what's going on we put together some more economic cycle charts running back to 1960 where possible so you can see how the economy (GDP), Consumption and Investment relate and what links to what in the lag structure. We also - and this is especially important - look at the key drivers of future consumption demand. Which are growth in employment and real wages. Like we said at the start that news is getting worse fast. See what it means and keep reading (and of course click to enlarge the charts). 

BtW - the most interesting and potentially useful chart on Wages, Employment and future demand is the last one :) ! 

Continue reading "LT Business Cycle De-construction: Time to Pay the Piper" »

Posted by dblwyo at 03:23 PM | Permalink | Comments (0)

After the break you'll find the week's collection of readings on the general worldwide outlook, plus some specifics on Dubai and China, trade and currencies, particularly the role of exports in keeping the US up and the rise in the dollar and a particularly interesting discussion of long-running trade imbalances. That may be all besides the point. Make no mistake about the world's in the process of a tectonic shift in the underlying geo-political structure. The rise of inflation with the accompanying pressures on food and energy prices were an initial trigger. The collapse of the Doha round into domestic agricultural protectionism was a major warning shot. One we might have worked around in time. Russia's unprovoked invasion of Georgia puts it in the position of controlling Europe's energy supplies as well as mediating access to Central Asia and, to some extent, the Middle East. All the assumptions we've all made about how the world will work in terms of stability, security, globalization and worldwide growth are now up for grabs. (Marching thru Georgia: the World Just Changed and We Can't Get Off) We'll try and pursue that line of inquiry at some future date - particularly in conjunction with a discussion of worldwide Oil markets - but do keep it in mind. Especially since the markets and the prognosticators aren't...yet.

Meanwhile we'll focus back on the worldwide economic news - which is almost uniformly bad. BtW - in the readings you'll find the URL's for the Economists free on-line tables for economic and financial information. A worthwhile resources. In the meantime let's consider the state of play of some key worldwide economies, largely courtesy of the Northern Trust econ team who continues to do such thorough and excellent work.

Europe and Japan

 The most recent economic numbers from Japan and Europe are not encouraging, to say the least. As you can both had pretty severe QtQ dives with the latest reports after holding up more than well thru the end of last year and the first quarter of this. Unfortunately the expectations are for rapidly deteriorating conditions in the future. Below you'll find the OECD's outlook for the G-7 which are "set to slow more sharply in the months ahead." That looks pretty sharp so far to us. In fact Friday the WSJ had a major front-page story on the "Global Economic Picture Darkens (WSJ)", which tells you how seriously this is beginning to be taken. Too bad nobody was paying attention back in Jan. or thereabouts when some pre-positioning was possible, instead of ex-post scrambling. Live and learn I guess.

Europe's Big Three

 The European big three, or continental big three (Germany, France, Italy) were the driving engines for those abysmal overall numbers and judging from the outlooks the rest of the continent is following. Associated with the OECD clipping are headlines for the UK, France, Japan, India, Hong Kong, and China. Guess what - you won't like any of them. After all our domestic sturm und drang it would appear that the rest of the world is deteriorating much faster than we are. But the re-coupling thesis will start running painfully in reverse when exports start drying up as these charts tell us will happen.

European Inflation

 As it happens we may enjoy another slight advantage. While our CPI numbers were also as bad as they've been the future outlook is for inflation to start dropping as energy prices come down. In contrast Europe appears to have a more structural inflation problem setting in. Which courtesy of the 1rst Guards Tank Regiment just got a whole lot worse. Europe, along with the rest of the world, appears to be moving into the worst combination of rising inflation and slowing growth. We'll have to see how that all plays out for them. But irrespective of the geo-politics none of this was good news.

Oil, Dollar and Emerging Markets 

Just to end on a cheerful note - NOT. Sorry just kidding. We're going to leave you with a single ginormous chart that shows the dollar, oil prices and the Russian and Brazilian markets. Not coincidently oil prices are down with the growing consequences of a worldwide slowdown. At the same time the downdraft in the dollar with our slowing economy and the growing European ones is reversing. That and the expectations of fewer oil imports, a smaller interest rate differential and so on and so on. The rest of the chart couples in the Russian and Brazilian stock markets. With oil down Russia would be in trouble anyway. Add in Georgia and you'd expect them to do terribly - and they are. But this isn't solely a Russian phenomenon as the Brazilian chart makes clear. Bear in mind Brazil is a commodity export driven economy and when the world imports fewere commodities, well....was it only 2-3 weeks ago that Brazil was the one emerging market you should keep investing in ? 

Continue reading "Time They are a'Changin: Worldwide Downturn to Cold War 2" »

Posted by dblwyo at 04:15 PM | Permalink | Comments (0)

After the break you'll find this week's collection of readings in three categories: General Economy, Housing, and Credit Conditions. We've sampled some of the first group's headlines to kickstart our explorations of the tipping point and the consequences for market outlooks. But the bottom line is this - there is a widespread consensus developing that there's no second half recovery and '09 is looking worse. There's also a bit of better reporting on some of the data, and some not. In Housing what's started to dawn on folks is that the sub-prime mess is moving into Alt-A and Prime, or as the Great Tanta has it, "we're all sub-prime now". The number of homeowners under-water and the new wave of defaults lead to CR's discussion of strategic themes for Housing for '09 - which is a must read. And all that naturally leads us to tightening credit conditions, more bank writeoffs and even the best banks (JPM of all people) hiding more surprise write-offs and losses in obscure reports. Read away - we urge you. In the meantime we want to take a deeper dive into some of today's data to set the stage - having already covered Retail Sales (Dismal Headlines, Worse Realities: Retail Sales and Economic Outlook).

 But just for fun let's quote you two different headlines on Industrial Production - both reporting on the same data and both given entirely opposite impressions.

Industrial Output Growth Slows U.S. industrial production slowed in July, pulled back by a drop in output at utilities as the weather turned fairer. Industrial production increased 0.2%, following a revised 0.4% climb in June, the Federal Reserve said Friday. Previously, June output was seen rising 0.5%.

Industrial output up 0.2 percent in July Industrial output rose in July at a slightly better pace than expected as a further rebound in the auto industry offset a big plunge in output at the nation's utilities.

Fascinatingly the markets are up today, led by Financials of all things. Will wonders and delusions never cease ? This despite the fact that, other than WMT earnings, all the economic news was unremittingly bad: foreclosures are up 55%, new house prices dropped -7.3%, continuing jobless claims accelerated and new claims were unexpectedly high and consumer inflation jumped 0.8% MtM, a 17-year high ! None of that sounds like the outlook is sanguine in the sense of good. Anyway, as threatened, we're going to revisit the outlook and consequences for corporate earnings and what it means for the market. Tracking which posts get the most attention, equally strangely if not more so, the diagnosis of a schizoid market attracted more attention then the careful dissection of the profits outlook (Talkin Profits: Economic Outlook, Earnings, Business Performance ?) and what the rapidly deteriorating economic outlook means. To put a point on it if we are indeed crossing a tipping point and starting into a consumer-driven downturn, as is now being widely recognized, ignoring profits and the current market valuations is dangerous to your financial health. On the grounds that perhaps we haven't made it entirely clear why you really care we're going to build a longish post walking thru various aspects of profits, earnings, PE's and the outlook. Just as one example most of the downturn so far in the S&P is due to Financials. If the economy turns over, as we expect, none of that is priced in.

Economy vs Markets

Just to set the stage let's start by considering the long-run relationship between the economy and the Markets. The meme is that markets are forward-looking though the WSJ noted that hasn't been true recently - as in the last decade ! Actually it's never been true. This multi-part chart shows the YoY% changes in GDP and the SP500 on top and the % growth in both since 1951. To our eyes the markets are still far ahead of where the state of the economy would justify their current levels.

Earnings Outlooks

Hopefully the prior post put enough evidence on the table about the structural relationships between the economy and profits that we can take it as given. And the translation between Profits and Earnings will also be taken as understood. That being the case the fundamental valuation equation we like is Graham-Dodd's: PE = (8.5 + 2*Growth)* 4.4/AAA-Yield. We'll dig into that a little later but taking it as a starting point the question becomes what are earnings expectations. And, much more importantly, do they make sense in view of our economic outlook. Take a look at the following chart which reproduces S&P's bottoms-up collection of analysts earnings prognostications and take a careful look at a) the revisions by sector and b) whether or not you believe the outlooks. And to put another point on it the two sectors that are up today and driving the market are Financials and Consumer Discretionary - with the big debate about a bottom in Financials raging onward (Riding the Storm - NOT: Breakdowns, Culture & Malfeasance in Finance).

 Now if you're readers of this blog and these two sets of earnings estimates hang together for you you can probably stop reading. But if thinking that the Financials (in read) and the Discretionary and Technology outlooks (in yellow) have some questions that should be asked below we walk thru some valuable issues of PE and valuation that should be reflected. And aren't IOHO.

Continue reading "Profits, Earnings, PEs and Outlooks: Why You Should Reall....lly Care" »

Posted by dblwyo at 10:54 AM | Permalink | Comments (0)

After the break we provide a couple of excerpts from our accumulating weekly readings on the economic news - and can we just say reality is slowly creeping in. We tried to make that point with the prior post and translate the implications of a rapidly slowing economy into the earnings outlook. Since that argument didn't fly very well we'll pick it up again later and concentrate on today's headlines. Not un-representative of which would be:Retail Sales Drop for First Time in 5 Months. Or these:Economic Slide to Extend Into 2009: Blue Chip, Economy Seen Slowing More Sharply: Philly Fed.

 Fortunately, or not, we consider the MSM reporting to be improving but still not quite there yet. Sadly for our market positions the markets got it right the first half of the day but schizophrenia returned in the second, as they recovered. But if Mr. Market is listening let us correct your mis-apprehensions. They are indeed out to get you and here's the proof.

As always  if you'll click on a chart  you'll get an enlarged version in a seperate window.

Retail Sales

 The headlines have it that Retail sales dropped after an upward revision for last month, not mentioning the downward revision for May :). More interestingly our preferred YoY change was 2.9%, 5.8% x-Autos. Which sounds good until you look at the chart and realize it's downtrending. MUCH more important though is real retail sales which was -1.9%, negative for the eight month in a row and at an increasing rate. Let's zoom in and get a little more granular so you can see the more recent data.

Real Retail Zoom-In

I'm afraid the headlines and MSM reporting still hasn't absorbed the power of YoY reporting or of looking at the inflation-adjusted data but at least they're improving a little. When you get more granular, as in this chart, you can that we turned negative in Dec07. In other words when energy prices started going crazy people did the rational thing. CalculatedRisk's continued emphasis, supported by minor analysts like Marty Feldstein, that we most likely enterred a recession in then is looking better and better. 

 Real Sales Energy-Adjusted

Thought if you just looked at retail sales x-Autos you'd think things weren't really that bad. As a big picture sidebar observation we urge you to recall our comments from a while back that the GDP numbers and component breakdowns tell us that indeed we crossed, or are crossing the tipping point into a more serious downturn. (Tipping Points, Blindsides, Ouches: Tough Times Getting Tougher) An observation obviously NOT absorbed into the markets as yet. Where you can see this is by netting out gas station sales - a statistic you can get nowhere else since it's a painful manipulation of the data, at least so far.

 When you do that it turns out real retail sales turned negative in Oct07 ! And of course that's the same month when real (estimated) gasoline sales jumped and have kept climbing. In other words real retail sales has been negative for 10 months. And the rate of decrease is increasing. Tipping points indeed. And nobody is factoring that into their pricing, valuations or business planning that we can tell. There are some very unpleasant surprises lurking in the wood work for a lot of people as the normal cyclic lags start to work themselves into view.

Just put another big picture point on it what we've seen is the air going out of the leveraged financial bubble over the last three quarters. In other words the consequences of the credit bubble bursting and destroying the Housing market and sucking out the "vital bodily fluids" from the markets. What we have not seen is the consequences of a downturn in the business cycle. But IOHO we're about to. (News Alert: Vicious Credit, Economy, Market Cycle Spotted, Markets Drivers 2 (Buyouts): the Carry to Cash Economy, Market Drivers: Liquidity, Liquidity(Buyouts) and Buyouts (Buybacks)

Continue reading "Dismal Headlines, Worse Realities: Retail Sales and Economic Outlook" »

Posted by dblwyo at 05:00 PM | Permalink | Comments (0)

We interrupt our regularly scheduled posting to warn you that our early storm warning system has detected more early signs of bad credit weather. Over the weekend our alert news monitors found a new wave of back-on-balance sheet adjustments, Fannie Mae issued worse than expected news, both GSE's (FNM, FRE) announced that they would be restricting new mortgage loans and guarantees. And (H/T CalculatedRisk) Fannie's conference call tells us that the books closed in June but there were significant deteriorations in July MORE THAN THEY ANTICIPATED when putting together their books. As you can see from the early warning reserve dashboard Fannie has both upped its' reserves and doesn't begin to cover its' risks. Making a huge Treasury equity investment increasingly likely, indeed mandatory to keep them from sliding into major default (dare one say the BK-word ?) and at least threatening to follow Merrill in throwing existing stockholders to the wolves of insolvency.

What's It All Mean: the Vicious Circle Grinds On 

 

Continue reading "News Alert: Vicious Credit, Economy, Market Cycle Spotted" »

Posted by dblwyo at 11:28 AM | Permalink | Comments (0)

What comes around, goes around. It certainly doesn't stay in Paris...or London, Tokyo or Peking. Long Way to Tipperary is an old WW1 marching song the doughboys sang recognizing how far they had to travel. Both to fight and visiting foreign shores...and different cultures. It turns out that they don't have to go visit this time because our troubles have partly birthed a whole slew of new ones abroad and they will soon be coming to visit. Return of the prodigal downturn, perhaps ? The only "good news" in all this is the schaden - Freudian one that the news from abroad is much worse than here.

Serious indications of worldwide slowdown are showing up in all the major world economies, their inflation problems are much worse than ours and may be increasing. Ours look to be dampening down as the Fed anticipated. A small sliver of silver-lining is that the slowdown is destroying oil and energy demand which is driving base oil prices down and sucking out the speculative component. And with foreign economies weakening the dollar is stabilizing and even strengthening.

After the break you'll find recent news from the UK, the Euro zone and Germany (particularly bad since it was the "engine"), Japan, Italy which is nearing a recession all of a sudden, China, India, Korea and Sinapore. NONE of which is good. You'll also find a report on the intermediate to longish-term oil price outlook from Chatham House in the UK which sees oil returing toward $200/barrel because of significant under-investment in production. Wow, deja vu' all over again.

A major caveat here - you need to read the prior post and this one in conjunction. This one builds up the int'l outlook presuming you've got a good grasp on where we're at domestically and how domestic weakness is at risk from foreign weaknesses and visa versa. 

Continue reading "It's a Long Way to Tipperary: the Foreign Economic News" »

Posted by dblwyo at 11:32 PM | Permalink | Comments (0)

An even better quote might be "kill them all, God will know his own" from Jehovah's Army. The proximate trigger was the near universal mis-reporting of Pending Home Sales this last week, which was seriously down YoY and included foreclosures and short-sales. What you got was the Realtor's Association spinning. Fortunately I don't have to go on because Barry Ritholz did in a lovely and well-established rant:Who Doesn't Understand the Pending Home Sales Index?

Having run the red flag of crossing a tipping point this last week we were entirely, almost shockingly, and very pleasantly surprised to find that Paul Kasriel and his team at Northern Trust walked thru everything in the Aug01 and used charts and discussions nearly identical to ours. In the readings excerpts below we've cherry-picked some critical excerpts but if you read a limited set of economic analysis and wonder where the world is going we urge you to read the July outlook and the week-in-review. We've seen nothing better. There are several other readings of course but THE strategically important one is Larry Summers, which you won't like but is honest, accurate and worth thinking about IOHO. We'll leave you to it and will devote the rest of the intro to some key NT charts that make the points almost exactly. 

Current Situation and Outlook

The following composite chart shows real consumption, the real business cycle (GDP), employment net of the Birth-Death adjustment and NT's version of my future consumption demand, Employment X Wages. Needless to say you can reach your own conclusions but every single one of these major indicators has turned negative. A key point to bear in mind btw is that when Employment is updated for the B/D adjustments there are going to be some very surprised people.

 Future Drivers

 The next composite chart looks at Residential Investment and Housing Prices, Net Exports and Capex spending (Equipment & Software). No surprise that RI continues a serious downward trend as do house prices. It still hasn't dawned on many commentators how long this is going to run but historically housing prices aren't likely to bottom for a couple more years. One of the readings btw is a report from Zillow that nobody thinks there prices have gone down - this is going to be a VERY sticky market indeed. This could go on for years. Exports have been the only good story but with the dollar stabilizing AND worldwide slowdown the growth in exports will stop increasing, and that was the only thing that kept us out of recession. Finally, and perfectly naturally in business cycle lag structure, capital spending is turning over.

 Conclusions

You really need to "process" what these charts are telling you vs what the flashing headlines are. Consumption is down and headed downer, future consumption demand is dropping, housing will continue bad and investment is going away. And employment net of the B/D assumption shows severe job losses. Now translate that into investment and business performance implications. Anybody selling to consumers is gonna get hurt more, anybody selling to them ditto. Capex, e.g. tech spending, is going to start dropping more. The uptick from currency translation and export demand may not go away but it's going to drop at best. 

That's about as clear as I can make it. 

Continue reading "Take No Prisoners: Real Econ Data vs MSM Reporting" »

Posted by dblwyo at 02:43 PM | Permalink | Comments (0)

We've crossed the one-year anniversary of Cramer's famous "rant that shook the world" and despite the amusement factor we need to ask how it played out ? More importantly how is it going to play out ? Aside from watching Mr. Cool loose it completely a deeper amusement can had by contemplating the gap between the catastrophe created by the financial community and their willingness to blame everyone but themselves and look for rescue from the Fed and the government. A rescue necessitated by the catastrophic risks of the complete collapse of the markets and seizing up of the world economy. While Cramer's Rant first brought these "technical" issue to broader awareness the problems escalated from their and are on-going. The saving grace is that the Fed was finally able to find a set of innovative instruments that got the machinery working again - obviously not something they did overnight but had been thinking about for years. As was the Treasury under Paulson. Hats off to both those institutions and their leadership. Nonetheless they've "only" averted collapse - not done away with the need to rework and manage the credit crisis. For your listening pleasure and a look back check out the vidclip.

The point remains that we are barely thru the early part of this re-pricing of risks, de-leveraging and the resulting destruction of specious financial business models and dealing with the vicious feedback cycle between a slowing economy, loan losses, tight credit and more writeoffs. After the break you'll find a short selection of excerpts that reinforce these points - the most important of which is that months after many of us have been shouting out about it and years after the truly knowledgeable began warning the tsunami is beginning...beginning we say...to be apparent more broadly. Here we're going to walk thru several of the elements you need to keep in mind graphically. We do recommend reviewing Red Sky Mornings, Investor Take Warning: More Finance Industry for a discussion of the Finance Industry and its' broken business models.

Loan Situation 

The place to start is with the level of activity in loans. The chart below shows the most recent Fed banking activity statistics for several loan types. You might want to read it clockwise starting in the UL where total Loans & Leases plus Loans & Investments are shown on the left with the YoY% change in Loans on the right since 1980, giving you a good view of the cyclic relationships. The UR shows Commercial loans just lipping over, Consumer loans not doing badly and Real Estate loans nose-diving. As we'd expect for the latter. The next two charts show all the major types and the aggregate compare since 1980 and 1998. On our reading a bubble we didn't know about in Business Loans is beginning to pop.

Credit Tightening and Money

A natural consequences of banks drawing down their reserves is that they have much less to lend. Which should in turn be reflected in loans but so far not much. Where it is beginning to show up is in the inflation-adjusted monetary base, i.e. the effective money supply that lubricates the whole massive economic engine. As you can see below, and we've discussed before, real growth in Money has been and continues to be negative. And has been declining rather rapidly for some time. The Fed can lower short-term rates all it wants but markets are markets and will tighten as standards are increasingly tightened. What the Fed can do is keep the wheels from falling off but it can't force them to turn.

The middle sub-chart shows real money growth as -3% while the other charts wrap some bigger picture monetary and rate indicators around it. The top shows various spreads with the 3Mo-Treasury spread showing continued fear and weakness, the AA-Bas commercial spread showing quality fears and the 10Yr-FF spread showing a steeping yield curve. The latter is normally a sign of either inflation fears or a growing economy yet the bottom sub-chart shows inflation and TIP spreads. While headline inflation has been painful the worldwide slowdown is likely to do exactly what the Fed anticipates and lower commodity prices. Hence the TIP spread over non-inflation-protected bonds is around 2.5%. Inflation aint' the problem - fear, uncertainty and doubt are. Otherwise known as a metastasizing credit crisis that continues to be ever-present in the markets.

More Rocks in the Pond

The credit crisis was started by problems in sub-prime mortgages and related synthetic debt instruments but it was just a catastrophe waiting to happen. Now we're beginning to see other problems succumb to the same pressures, starting with Alt-A quality mortgage loans as well as Option ARM resets. Lined up behind those private real estate loans are all the commercial real estate loans, then various consumer and business loans and so on. Consider the graphic below which tries to conceptualize what the continued tremors roiling thru the market mean for more asset class rocks to topple into the credit pond and keep it churning.

 As one "rock" toppled it rippled up the entire chain of instruments built by leverage, greed and bad business practices and destroyed the underlying asset base. When the process works in reverse that's de-leveraging. Worse the ripples from one chain's breakdowns immediately spread to other credit markets, even ones that weren't necessarily adjacent in the sense of being technically linked. The Fed's new instruments appear to have prevented these topplings that would turn into a tsunami that drowned all us "innocent" bystanders but hasn't stopped the process. And the reverberations impacted other assets classes, each with their own sub-components, e.g. bonds, equities, etc. We didn't really realize how bad it could be until Bear-Stearns collapsed but now with Merrill and Lehman almost aground on the rocks it's clear what the consequences are.

An Example: Option ARM resets.

Just as one small example consider the next wave when Option ARMs, adjustable rate mortgages where the loanee has the option of deferring part or all of the payment until a cap is reached, are likely to do as they reset. Reset meaning that that rates are going higher so payments will and the expectation is that defaults are going to rise unmercifully. The lefthand shows just resets. And they aren't really going to start hitting until early '09 and then they build and build thru '09, '10, '11 and into early '12. Yet insiders and, now, the financial press are seriously worried about the default levels we're seeing now. The right-hand side shows the increase in payments - and if nothing else - what's that going to do to consumer budgets ? And therefore consumer demand. Recovery, schmovery. Thain was interviewed on CNBC and let slip one telling quote: "if there are not more problems there wont' be any more writedowns and we won't need to raise more capital. but if....". You know the rest.

Ripples and Credit Metastasis

As a closing note we leave you with this graphic which tries to trace some of the links between various instruments coming under pressure, bank writeoffs and the resulting tightening of credit. And then link it back into the economic consequences to establish a feedback process. Yes, judging by the readership stats, you've seen and looked at it before. But if Option Arms are just one tiny piece of a piece in the chart below what happens then ?

The final reading is Jim Jubak's most recent column discussing how Merrill's recent stock sale to raise capital destroyed the investment positions of everybody, especially the multitude of small stockholders, except Temesek. He's right but what's he's forgetting is that without capital MER was going to run aground and nobody would get anything. Put the pieces together - more rocks, more ripples, more write-offs, fewer loans, tighter credit, slower economy. Whaddya get ? And where's that leave MER, LEH, and so on and so on.

Continue reading "Cramer's Anniversary: Continuing Credit Metastasis and Economic Outlook" »

Posted by dblwyo at 05:25 AM | Permalink | Comments (1)

Where we intended to go with our next posts was a discussion of the 1rst Anniversary of Cramer's Rant (Aug. 3, 2007 !) followed by a dissection of Oil, Food and the Doha Collapse. Emphasis on was because there was a week's worth of news this morning, one way or another, that covers the ground from Economic Outlook to Credit/Finance to Foreign Markets. Ground even we'd normally take 3-4 posts with long collections for. Now as you've no doubt noticed we favor collecting stuff and putting into some kind of coherent order so you can see the whole chain of logic AND run thru/skim the excerpts to get a sense of things. Normal blog procedure is one article/idea one post, or at best a few charts/ideas ala CalculatedRisk. We're going to stick to our approach despite another event-driven interrupt.

Where this all is important to you is that some of the reporting got the idea that real consumer spending was down - which is immense progress over reporting the nominal spending. We're still hoping to see the YoY% change approach become more common. The thing that everybody has missed so far is that there were major revisions downward to the consumer spending estimates. And those revisions tell us that the downturn, our infamous tipping point argument, has already started and so far almost everybody's missing it. Certainly the markets didn't react at all like they should - which may mean a speculative opportunity for you. Who knows ? :)

After the break you'll literally find a week's collection of excerpts grouped in Economic Outlook, Credit and Finance problems and Foreign Markets. A few points before we dive into some charts: 1) Menzies Chin and Jim Hamilton's dissections of likely revisions to GDP, the impact of oil, etc. are a little technical but the gist is that we may in fact see a negative GDP for Q2. Then 2) real credit problems (as we've been predicting - drum-pounding ? - for months) are really beginning to rear their ugly heads. Which leads to some excerpts on BSC and MER which boil done IOHO to we had no clue then and let the ship run aground in Cayne's case, and we still have no idea what's going on and aren't going to tell you what we do think in any case despite being a lot smarter than Cayne in Thain's case. Finally, just a sample, somebodies are noticing that foreign markets, e.g. Brazil, and currencies, e.g. the Loonie, are really beginning to take it in the shorts. 

Revised Consumer Spending

Like we said there were some significant downward revisions stretching back a ways in nominal and real consumer spending estimates, but the biggest differences started in '07.

 In some ways we'd argue that this chart almost speaks for itself. The top sub-chart shows real consumption monthly since Jan05 with the last dataset and this month's revisions. Notice the accelerating diversion that begins last summer, almost about this time :). More importantly take a very careful look at the differences in the YoY% changes. Originally spending was slowing but not quite as steeply as now and had picked back up a tad. Now it's deeper, faster and not improving (remember this is the data with the stimulus in it !).

Nominal vs Real Consumption

With all that in mind let's go back to our stand comparisons of Nominal vs Real Consumption but keep the major revisions in mind. This charts shows monthly YoY% changes back to Jan03 and quarterly back to Q188.

 Again it sorta speaks for itself, doesn't it ? Nonetheless we've highlighted a coouple of key things to notice in red. On the top monthly chart consider that spending is dropping way below any rates we've seen for quite a while in real terms, though it's not showing up in nominal terms as clearly yet. And on the longer-term chart the faint red line should be really scary:

GROWTH IN REAL CONSUMER SPENDING IS NOW LOWER THAN IT WAS IN '03

Continue reading "Tipping Points, Blindsides, Ouches: Tough Times Getting Tougher" »

Posted by dblwyo at 03:17 PM | Permalink | Comments (0)

The last economics post focused on the domestic US economy and we hope we made it absolutely clear that the single thing holding up US GDP was Trade - and not by a big margin but overwhelmingly. IN fact the first seven components of GDP (Durables, Non-Dur, Services, Capex, ResInvest, Inventories) which collectively define Consumer + Investment spending had an aggregate contribution to US GDP growth of -3%. In other words the only reason it was positive was trade !!!

Which means that if foreign economies slow and/or the dollar quits moving down as much as it has in the last three years that we'll face a significant drop. Well let's turn to a recent Nouriel Roubini interview (via CalculatedRisk) for the world outlook:

 Roubini: Global Recession Watch From Nouriel Roubini: Global Recession Watch: Recoupling rather than Decoupling [T]here is now fresh evidence that at least a dozen major economies and some emerging markets are at risk of a recessionary hard landing. [W]hile we will not experience a global recession we will get close to one as the US will have a severe recession, Japan is entering one, a third of Europe will go into a recession, the rest of Europe will have a severe growth slowdown, the rest of the G-10 advanced countries is sharply slowing down and a few emerging market economies are entering a recession. And if the advanced economies are sharply slowing down or entering a recession the idea that China, India, the other BRICs and emerging markets can happily decouple from these recession or sharply slowing economies is far fetched. This is an important key to the depth of the U.S. recession. As Professor Roubini notes, there are a number of key countries now either in, or flirting with, recession. If the global economy slows enough - causing U.S. exports to decline - we might start to see significant job losses in manufacturing, and then the current recession could be more severe than I currently expect.

 We won't add much to that. It pretty well captures the state of things and reinforces what we've been saying. After the break you'll find some more specific readings on the general trend in various countries that back up the general argument. There are three structural issues that may not bite immediately but are nonetheless significant: Currencies, Oil/Food problems and the collapse of international trade discussions. The latter in particular is the sounding of the war tocsin - not an immediate problem per se - but it tells you that the countries who benefited most from trade liberalization are pulling in their horns in self-destructive and contradictory ways. Which in turn tells us how scared they're running.

Just as a final note you might consider this chart on the major foreign markets (China, India, Brazil, Russia, Europe and Japan). Notice that the recent bubbles are disappearing in several of the Emerging Markets though Brazil's holding up. Will that continue if worldwide slowdowns lead to less demands for their commodities ? Similarly Russia's self-inflicted governance problems are beginning to lead to marketplace problems. And Europe and Japan are definitely not un-coupled from the US, though still moving synchronously. Nonetheless consider this.....if we're only seeing the very earliest stages of a worldwide slowdown what's the outlook ?

 UPDATE: just added major excerpt on India's economic outlook, reform and market mis-perceptions. Makes the case in general as well as being a superb survey of India's situation.

Continue reading "Bad Times, Bad Outlook (Update): What's Up with the Int' Economy ?" »

Posted by dblwyo at 10:42 AM | Permalink | Comments (0)

Well least you suspect us of making all this up after the break you'll find the usual collection of

readings on the week's economic news for your skimming pleasure. And in case you haven't noticed we put up four back-to-back posts on the state of the business cycle and the economic outlook. Starting with a quick and dirty post so that it at least had some time before the Markets closed for the week and followed by three others that took a deeper dive at de-constructing things by breaking down GDP across its cyclic behavior and its' major components. Sadly we suspect that a lot of key decision makers won't factor any of this sort of analysis into there actions and will be lurking around in a couple of quarters dealing with the consequences. By way of summarizing where we're at let's try an updated version of a previous graphic on the nature and status of this business cycle:

 There's good news and bad news. The really good news is that the Fed has likely averted the risks of a credit market catastrophic collapse which would have put us on the Red path to doom. On the other hand it should be clear by now that the short, shallow, V-shaped fantasy recovery of Wall St. is fact receding into the distance as we speak. The two are not un-related. All the problems we've seen so far are pretty much the Finance industry dealing with its' own self-inflicted pain. While the economy has been slowing significantly in a lot of fundamental measures we haven't really started into a downturn.  But the whole point of taking extra trouble is that it looks like we may be about to; in other words in the "You Are Here" part of the graphic our position has slid forward and down considerably. The real debate that'll be working itself in our giant politico-economic laboratory is in the triangular region shaded yellow to red for obvious reasons.

Strangely enough all of a sudden we aren't the only people who see the world this way. Not too surprisingly this generation's Dr. Gloom Nouriel Roubini has chimed in. More ominously in a way, though let's all remember Dr. Roubini has yet to miss a bet despite being generally ignored, is the economics team at Goldman-Sachs. Finally my new all time favorite Business News, BNN, has a wonderful interview with Lyle Gramley (an ex senior Fed guy who was part of Volcker's team) who calls it pretty exactly. And oh yeah, Dr. Peter Morici of U of Maryland is linked in below.

• Goldman: "Second Half Slowdown Ahead"  by CalculatedRisk Goldman Sachs put out a research note late today lowering their projections for the second half. "[W]e are on the cusp of a renewed deceleration in growth." I think others will follow and the 2nd half recovery will be cancelled. There is always next year!
• Roubini: $2 Trillion in Debt Losses Barron's: Unfortunately for the rest of us, you have a pretty good track record. How much more misery lies ahead? Roubini: We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. A systemic banking crisis will go on for awhile, with hundreds of banks going belly up. Yes, That's $2 Trillion of Debt-Related Losses, Video is here
• Trading Day : August 1, 2008 : U.S. Jobs/Fed Lookahead [08-01-08 3:20PM] BNN speaks to Lyle Gramley, former Fed governor and senior economic advisor, Stanford Group.

Continue reading "Bad Times, Worse Outlook (Updated): Economy Readings and Reflections" »

Posted by dblwyo at 07:08 PM | Permalink | Comments (0)

Speaking of interrupt driven we were going to continue on with our orderly dissection of various enteprise earnings reports and performance outllooks. Judging by the readership stats more than one person was interested to see that sort of thing. Hopefully this won't be too much of a digression but this morning's headlines on preliminary GDP numbers, markets reactions and mis-interpretations call for it. After the break you'll find some more charts that we recommend for your consideration - translation, really study those suckers 'cause the headlines only got part of it this time and we're starting to cross the tipping point. We'll dig more into this coming weekend hopefully but let's start with a couple of headlines and snippetts for now.

• Economy gains less than expected The economy grew at a faster pace in the spring, but not quite as fast as expected, according to a government reading likely to spur further debate over whether the economy has fallen into a recession.
• Weekly Applications for Jobless Benefits Hit 5-Year High The number of people filing claims for unemployment benefits jumped last week to the highest level in five years, reflecting in large part a new government outreach effort to locate people eligible for benefits. 

 There's a little good news here, some worse/bad news and some missed signals, which are the really important part. Let's start with the smidgeon of good news. The headline got it right but remember this is very noisy weekly data. And for another thing there was a special effort made to make people aware of their benefits which caused a surge. When you do a little de-constructing, herein defined as taking the 4-week MA and looking at the YoY% changes you can see continuing claims continuing to creep up but the big jump is filterred out. Just for the record btw we did a comparison on Initial vs Continuing claims vs Payrolls vs Unemployment and guess what ? On a YoY% basis they're synchronous and follow the same business cycle patterns. You can use one just as readily as the others.

On the other hand, despite the market's being down, we don't think people understand what they saw in today's GDP numbers. The headline was for a 1.9% increase vs an expected 2.3% which isn't good. And Q4 was revised to a -.2% from .6% which tells you what happens as the data get better and more based on real samples than guesses. The real news IOHO is that YoY% was 1.82% and Consumption for Q1 was 1.45% and for Q2 1.34%, YoY using the real data. With the revisions in the data it looks to use as if Consumption slowed more abruptly than anybody knew, we're in the process of crossing the tipping point and nobody's blown any Rubicon-crossing bugles. In other words the number of people who'll have that information is pretty minimal. Check out the charts below and see if we make our case. 

Continue reading "News Interrupt: Real GDP and a Tipping Point ?" »

Posted by dblwyo at 01:30 PM | Permalink | Comments (0)

While the US economy, painful and weak as it's been as poor as the outlook is, has been holding up with the international economy is not only not decoupled, it's moved beyond re-coupling to major problems. After the break you'll find a rather large collection of readings excerpts that span a wide range of complex, convoluted and dissonant issues. Yet ones that are all coupled and mutually interdependent. To the extent we can we'll try and make some sense of it all. Though each of the major areas could, literally, take a book to dissect. Nonetheless you need to factor them into your decision making. The topics covered are the Int'l (Developed and Developing) outlook, the metastasizing problems with the Doha round of WTO negotiations, the Oil situation and the geo-political problems with domestic governance - as exemplified by Russia.

Economic Outlook

First, with regard to the developed world, the problem with a downturn is looking worse for Europe and Japan than anticipated even weeks ago, though one could anticipate it by noting the extent and dependencies of their respective real estate bubbles...something the Economist dissected back in '03. The problems in the Developing world are, IOHO, much worse for several reasons. First off growth is slowing though all things are relative. That is China is slowing to less than 10% and India is experiencing a similar drop. The difficulty lies in the fact that they need that high growth to maintain socio-political stability. Worse they are all experiencing accelerating inflation problems, due partly to price increases in food and energy but mostly due to the inability of their central banks to control inflation because of political constraints. 

Trade

The Doha round negotiatons have been faltering for years - largely on the refusal of the developed world to reduce domestic agricultural subsidies (particularly the EU and France) combined with the refusal of the developing world to open up their commerical and industrial sectors to developed world competition. While early on the US took some major heat that was un-justified on the realities of our relative ag subsidies (in comparison) it was US initiatives that kept the wheels on; capstoned by US efforts to persuade Europe to agree to major subsidy reductions in this last round. Now the talks appear to be foundering on the developing world's refusal to give up their ability to impose major tariff increases on ag imports. The number of Faustian ironies here is nearly over-whelming. It was China's accession to the WTO several years ago that truly jump-started their growth. The developing world is utterly dependent on the int'l trade regime. A key source beyond the domestic politics of inflation fighting for their problems is a combination of food and energy subsidies combined with this last ditch effort to retain their potential barriers to ag imports - which are a very small part of world trade flows. And to top it off their fears of foreign ag product competition have in fact been a major cause of food price inflation. Talk about shooting yourself in the foot - at the level of both knees !! Things really don't look good and we wouldn't anticipate any last minute miracles this time. Which will throw a wrench into the machinery that is their very life blood.

 Currency Wars, Oil and Governance

 Nobody probably needs to be told that the US dollar has dropped in value enormously, largely on the back of the US savings deficit due to over-spending thru the Housing ATM and the resultant demand for funds from abroad. Yet recently the dollar's decline has halted. Whether it'll reverse or not remains to be seen but even so the uplift in earnings from foreign revenues is not likely to see the same currency conversion effects. On the other side of the coin (puns intended) developing countries with inflation problems are experiencing severe pressures on their currencies which will exacerbate their inflation problems and worsen their political stability. In fact they'll need to raise rates and support their currencies.

Which brings us to oil - which priced in dollars has experiened a severe and sudden price jump as we all know. Now that a slowing world economy is leading to demand drops the price of oil has, economics 101, followed suite. Nonetheless the fundamental dilemmas remain (we particularly recommend Jim Hamilton's dissections of the various forces at play). Since low prices during the '90s led to under-investment in existing fields and in exploration and new field development we're likely to remain dancing on the edge of that S=85mil barrels ~ D=87 mil barrels razorblade for years to come. Excacerbated by the fact that new supplies are hiding behind geo-political barriers.

The perfect example of which is the recent spate of difficulties in Russia where a power play at BP's Russian development efforts, aided and abated by govrnmental corruption and power politiking, eliminated much of BP's future reserve potential. Similar challenges are worldwide. In this instance the result is a sudden and drastic drop in the Russian market. A not unnatural result of what the analysts like to call "country risks". Which really boils down to turning yourself into a tough, dangerous and corrupt place to do business. Not good for anybody and dangerous for us all.

SUMMARY 

So in summary heres' where we think we're at:

1. Worldwide demand will drop in both the developed and developing worlds with all the implications for foreign growth that implies.

2. Developing world inflation will further strain growth and increase instabilities.

3. Mistaken politicaly-driven decisions will exacerbate inflation risks particularly for food and energy.

4. The developing world, in key parts, is likely to get to be a tougher place to do business and make money.

Bottomline - after a golden period where everything seemed to be working for everyone not it appears to be reversing with everything hurting everyone. NOT GOOD !! Need we spell out the implications for emerging market investment speculation ??? We'd hope not.

UPDATE:

Trade Talks Collapse as US Feuds With China, India Trade officials said Tuesday that a high-level summit to salvage a global trade pact collapsed, after the United States, China and India failed to compromise on farm import rules. 

Continue reading "Bad Times, Bad Economies (Updated): Int'l Econ, Inflation, Trade, Oil" »

Posted by dblwyo at 12:28 AM | Permalink | Comments (2)

We can all probably agree that the times are bad but how much worse are they likely to get ? What's the current data telling us and what's the outlook for the future ? As part of the answer after the break you'll find our usual assemblage of relevent readings. They cover the Current Situation, the Outlook, Housing & Saving and the Long-term challenges. We'll draw your attention to the fact that in Bernanke's latest testimony he weakened his assessment and outlook somewhat, though the phrasing was very "careful" indeed. Paul Krugman argues that we're facing an "L-shaped" economy where a so-called recovery will be long period of low/slow growth as we try to repair accumulated damaged. Given that we've been in the "Lost Decade" of negative market returns and the upturn in the economy since '01 was built on the back of the Housing ATM and loose credit we'll agree. Which raises the question of how Housing is likely to perform and what will Consumers do. It's beginning to dawn on folks that we've a long way to go with Housing and as the ATM goes bust that Consumers may be forced to reduce their spending and shift to becoming savers. That will be a huge change in demand for the future. Nobelate Edmund Phelps wraps us up with a look at how structural changes create major challenges for future innovation. Finally we'll note that everybody got all excited by a much better than expected uptick in Durable Goods orders but Mike Donnelly over at CEO Economic Update nicely deconstructs the data to point out that it's likely due to an uptick in Auto Industry production and materials replenishment. Go figure !

Housing  

Which leads us to look at a couple of charts. At the end of the week an IMF analyst  published a report that US housing prices were still at least 20% over-valued. Courtesy of BigPicture who put up the four main charts in the report we found the most interesting one to be this simulation showing the likely impact of an over-shoot on a correction. As Barry points out, whether you buy that or not, Housing is still a lot worse than most are admitting and will continue to be so for a longer than they're willing to face. Given the number of competent analysts and firms who are NOW anticpating a further 20% decline in prices in any case the potentials of an overshoot are really....really scary. At least IOHO !

Investment 

 The other major factor is, as we mentioned, what's likely to happen to investment. Which we look at as New Home spending, Commercial Real Estate (structures in the GDP accounts) and Capex. People also got a little excited by better than expected New Home Sales but if you check over at CalculatedRisk (Graphs: June New Home Sales,Graphs: Existing Home Sales) you'll find much less reason to be sanguine. And Mr. Donnelly's points on good orders are well taken. We chart all of these indicators using a 3Mo-average of the YoY% change. And indeed Orders ex-Aircraft are climbing but New Home sales, which don't count cancellations btw, continue to cliff dive and Industrial Production shows continued slowing weakness.

Continue reading "Bad Times, Not So Bad Economy: Sluggish Slowdown ?" »

Posted by dblwyo at 09:57 AM | Permalink | Comments (1)

Or, instead of Redux, "wow, deja vu' all over again". All of a sudden the news from the world's economies are uniformly bad with, for example, both the BIS and IMF using the phrase "tipping point". The chart set pretty well captures and represents the situation with the top line being China and India, both of whom are facing slowing worldwide demand for their exports, rapidly rising inflation at home and their own unique domestic problems. On the other hand the next pair, Brazil and Russia, tell a different story that captures the whole. Both are suppliers of commodity goods that the rest of the world still wants, though Russia in particular is facing serious domestic problems. One ought to be asking then how long Brazil in particlar will hold up given slowdowns in al its' principle customers but that's not a question being widely asked yet. The final pair is Europe and Japan - and we shouldn't forget that they plus the US are still the dominant players & constituents of the world economy. In other words as both slow there will be a sigfniciant impact on worldwide trade flows which is already showing up in US exports and will likely impact the BRICs as well. Not to mention, ultimately, the Tech Industries.

Two of the excerpts that make particularly relevant points are Goldman-Sachs mea culpa regarding the de-coupling thesis, which they've now completely reversed with the customary "Oops, our bad", and the BIS (Bank for Int'l Settelemetns) suggesting that a severed slowdown may be in the offing as the impact of rising food, energy and commodity prices triggers a major worldwide price decline - deflation in other words. Consider their normal reluctance to speak out that's a little scary. In fact various sources are indicating that instead of de-coupling Europe, for example, is looking at a more serious recession outlook than is the US !

Demand Destruction and Oil

A key cause of all this pain was the sudden jump in oil prices but economics being what it is the reverse is now beginning to happen - at least in the short-run. Dropping demand is leading to less short-term pricing pressure on oil and as a result the speculative premium is beginning to come out along with "normal" price declines. Some of the talking heads are beginning to babble about $120/barrel oil or even double-digit prices. The Point and Figure chart shown here finds a recent pricing reversal and a bear price objective of $112 which is consistent with that.

The catch is that intermediate-term oil demand will still be riding right along the margin of world oil supply. Not least because of problems we've already discussed several times. To wit the exhaustion of old fields, the lack of investment in new exploration and production and the lack of investment in those old fields means that for the next several years prices are still going to remain elevated. As David Leonhardt pointed out (and we excerpted in the last Int'l news) the industry experienced decling prices thru the '90s which led to what now looks like severe under-investment. The catch of course is that when S>>D and prices look to be $20/barrel it was an economically rational choice. And may be again. New (Old ?) Frontiers in the Oil Markets: the Return of Geo-Politics

The final two excerpts kinda bookend the discussion with a review of some recent McKinsey work on the liklihood of continued growth in the developing world along with the rapidly esclation of protectionism as all the world's constituencies look for someone else to blame for their troubles. Not good. 

Continue reading "Economy (Int'l): Re-coupling Redux and Deterioration Accelerations" »

Posted by dblwyo at 11:22 AM | Permalink | Comments (0)

We usually start with the economic news, proceed if there's a sufficiency to the international economy and then use it to  set up the discussion of markets. The prior post (So, What Kind of a Market Is This Anyway ?) reversed that because there was a punditry groundswell along the lines we last heard in March we needed to be "noted". And because we had so much fun with all the gyrations in the markets as things like the imminent bankruptcies of Fannie, Freddy and Lehman Bros. caused a bit of consternation. One of the things that got lost sight of big time was the real state of the economy - back to the "where's my recession dude ?" meme that's been making the talking heads rounds. While the major headline news was lite this last week and the biggest prior was -62K payroll jobs everybody was also excited that Retail Sales was up 1% ! Whoopee indeed...especially with the same anticipated again this coming week. Today's Bloomberg headline probably captures the sense of things: U.S. Retail Sales in June Probably Rose for a Fourth Month on Tax Rebates.

So that gives us an excuse to re-visit a couple of prior charts and remind everyone of the actual facts on the ground. After the break there's another bunch of serious folks excerpts that are also in the reminder camp as well. Dave Leonhardt of the NYT puts it very....very nicely in his recent survey of a few of the major problems when he distinguishes between acute (pain soon to be over) and chronic (pain going to go on for a long....g time) fundamentals. NONE of which is reflected in the current thinking of the analysts, the talking heads, and, sadly, market valuations and outlooks. YET ! Now about those retail sales let's re-vist this simple little chart.

Real Retail Sales

 Now by our standards this is a simple little chart (Seth Godin would still be upset with me but he's not likely to find any our our graphics that suite him :) ). Just for the record you won't actually be able to find a lot of this anywhere as we had to hand-construct some of the data. Retail and Real Retail Sales are standard of course as is Gasoline sales - but we had to do the inflation-adjusting and then back it out of Real Sales. So bear with us. Once you do that it's a very different story - real sales has been dropping for months but x-Gas it's a pronounced drop. And in spite of the rebate checks there wasn't much of an uptick. Instead Gas has absorbed everybody's budget - but notice it's also been slipping !

Money Base and Spreads

One of the other early warning indicators we like to look at is the real adjusted monetary base. Now there's been some talk that the money supply has been going up - though recently it's shifted the other way and been shrinking. But for a long time now what we've actually seen is that the YoY% change in the inflation-adjusted monetary base has been shrinking. That means that banks are really tightening down the lending screws and withdrawing the lubricant that keeps the economy going 'round. No big surprises given the state of the multiple credit markets, the write-downs and the on-coming tsunamis of other bad credits about to hit and start a new wave. NONETHELESS not good news either. In fact it's been negative since last August - gee wonder why ? Despite some short-term improvement that's reversed. Well guess what - yield spreads on 3Mos still indicate that folks are scared. And meanwhile the yield curve (10YR-FF) steepened as inflationary fears drove up longer-term rates. Recently those have come down quite a bit as inflation fears have dampened a bit. But more importantly the recognition of the likely extended slowmotion slowdown is getting more widespread in the credit markets - if not in the equities markets or among the talking heads.

We recommend you at least skim thru the readings and use these as background information to set the context. You might want to also revist the last two High-Frequency Indicator discussions for a fuller discussion of the data.

HF Indicators (Sales, Rates, Money, Inflation, Oil, Dollar): Unscheduled Interruption

Continue reading "And What Kind of Economy ? Reality Reminders" »

Posted by dblwyo at 03:09 PM | Permalink | Comments (0)