The Big Picture | September 2005

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Consumer Spending, Personal Income, Credit Card "Issues"

Friday, September 30, 2005 | 11:16 AM

I spend a lot of time discussing Consumer Spending; Its not because I am a shopaholic (although I do know where you can buy alot of cool stuff at good prices, as well as find decent eats).

I track this stuff 'cause the consumer is responsible for 70% of all the economic activity in the in the United States.

Therefore, if you want to have a clue about how the economy might be doing next year, you have to understand more than a few things about the U.S. Consumer. We most recently visited this issue in "Shopped Out?"

In my book, there are 5 key elements to watch:

1) Income: Do they have a ready supply of spending dough? Is it going up, so they can maintain present spending levels?

2) Debt: Have they spent too much? Can they service the debt they have already run up?

3) Deflation/Inflation: Is inflation eating into their spending power? Is deflation encouraging them to hold off purchases until items get cheaper?

4) Pyschology: Are they in a spending mood? Is there anything weighing on that mood?

5) Spending: Too obvious to even discuss.

The idea is to have 5 quantifiable elements -- objective and measurable -- to guide our expectations for what is likely to happen next year. (No, there are no guarantees -- just higher and lower probability events).

Over the past 24 months, all five of these elements are in the process of decaying.

• Personal Income has slid all year; Today's report shows a continual drop;

• That Personal Income is actually worth somewhat less, given the significant increases in prices (inflation). In particular, oil and gasoline have had a big impact; I expect in the Winter, natural gas will also.

• Speaking of Inflation: Prices paid for commodities have doubvled over the past 4 years; This does not include health care, education, or other services.

• Sentiment continues to weaken. Its not just Gas prices and Iraq and the disappointing response to Katrina -- its a full spectrum of issues.

• Debt: The WSJ reports that "A record 4.81% of credit-card accounts were past due in the second quarter, up from 4.76% in the first quarter." This number (past due credit-card bills) has risen to a record this year." (American Bankers Association). The ABA said that "Delinquency rates rose for nearly all of the eight types of consumer loans the ABA tracks." (The exceptions were Property improvement and Mobile home loans).

• Spending: Dropped a significant 0.5% this month -- thats the biggest drop in nearly 4 years, since November 2001.

I had said a few months ago -- long before Katrina and Rita -- that the potential for a recession was increasing. Its not too hard to imagine the scenarions how this can occur: Interest rates tick up, home refinancing fades, and a big source of spending cash disappears. Its also not to hard to imagine the Fed cutting rates if this scenario comes to pass.

Investors should be aware that Risk levels are on the rise . . .

Sources:
Past Due Credit-Card Bills Reach Record in U.S.
By DEBORAH LAGOMARSINO
DOW JONES NEWSWIRES
September 29, 2005; Page D2
http://online.wsj.com/article/0,,SB112791105549854452,00.html

CREDIT CARD LOAN DELINQUENCIES REACH RECORD HIGH IN SECOND QUARTER 2005
WASHINGTON, Sept. 28
http://www.aba.com/Press+Room/092805DBULL.htm

U.S. August Personal Spending Falls 0.5%; Incomes Drop 0.1%
Carlos Torres
Bloomberg, Sept. 30, 2005
http://quote.bloomberg.com/apps/news?pid=10000006&sid=a8ODacamitqI&refer=home

Why Write ?

Friday, September 30, 2005 | 09:50 AM

in Books | Weblogs

Terrific quote from Daniel Boorstin, who wrote 2 tomes that I really enjoyed -- The Discoverers, and The Creators -- over his years as Chief Librarian at the Library of Congress.

Here's the quote:

"Daniel Boorstin, the former librarian of Congress, used to rise at 5 each morning and write for two hours before going into the office.

"I write to discover what I think," he explained. "After all, the bars aren't open that early."

Mr. Boorstin's morning sessions were even more valuable than he realized. Writing not only clarifies what you already know; it is also an astonishingly effective way to learn something new."

Its so very true. When people ask me why I blog, the answer is that it helps me organize my thoughts, memorialize them, work them out.

In short, to discover what I think.

Source:
Students Discover Economics in Its Natural State
ROBERT H. FRANK
NYT, September 29, 2005
http://www.nytimes.com/2005/09/29/business/29scene.html

Gulf of Mexico Rig Damage

Thursday, September 29, 2005 | 04:43 PM

in Commodities | Investing

Jeff Matthews notes that the rig damage in the Gulf of Mexico is far more extensive than many people believe:

"Rowan Drilling (RDC-NYSE) has its own planes and were thus one of the first on the scene to witness the impact. They say that the rig devastation is quite significant and the pilots reported that in an area where they previously would see about 15 jack-ups there were none visible."

"None visible."

Jeff picked this up from Petrie Parkman, whom he called "The best energy industry research firm I know." Oil research veteran Tom Petrie runs it. The above quote is from their morning research notes regarding Rowan Companies, a large operator of jack-up drilling rigs in the Gulf of Mexico.

Jeff further observes:

"While Rowan was flying planes over the area where there were no rigs “visible,” the stock market had already decided the impact of Hurricane Rita was not too severe, based largely, I gather, on the fact that Fox and CNN TV reporters in rain gear were able to walk around parking lots in Galveston shortly after the storm passed and could see no visible damage to the infrastructure miles out in the Gulf of Mexico."

Go read the full discussion.

2Q GDP Unchanged (someone please explain how)

Thursday, September 29, 2005 | 09:34 AM

in Economy

I already made it clear that I have strong reservations about the revised 1st Quarter GDP (as well as other data).

Today, we see 2Q GDP revisions came in unchanged from the original 3.3%.

Question: We know what aspects get measured, and what they were upon the initial and revised release. Let's compare :

· U.S. exports rose by 10.7%, instead of the earlier reported 13.2% increase. (Source: Department of Commerce.

· 2Q Corporate profits (after taxes) rose 5.3% to $975 billion -- a smaller gain than the previously reported 6.9% rise. (DoC).

· Businesses inventories fell by $1.7 billion -- far less than the originally expected inventories raise of by $2.6 billion. (DoC).

· "Personal consumption was somewhat stronger due to higher spending on utilities, like electricity." (WSJ)

All these factors imply that GDP slowed significantly more than originally expected. Yet its unchanged, according to the Department of Commerce.

So by what accounting sleight of hand can inflation go up more than expected, while profits, exports, and business inventories go up less than expected?

Inflation. Remember, GDP tries to measure actual output, not price increases. The secret must be buried somewhere in the inflation data. If prices edged higher in the quarter than originally believed -- while data from exports, inventories and profits came in below prior expectations -- how can GDP remain unchanged?

I suspect its in one of the PCE price gauges -- I'm tracking someone down in the Commerce Department to see if that also excludes food and energy in this measure.

If so, that would explain the steady GDP data in the face of all these other negative factors . . .

<spacer>

UPDATE I: September 29, 2005 10:29 am
Commerce tells me that GDP is not calculated ex-food and energy. Further, each individual component has its own price deflator.

Again, the emphasis is on measuring output, not price.

This requires more digging . . .

UPDATE II: September 30, 2005 6:29 am

I contacted John Williams of Shadow Government Statistics, He notes that "The small increase in the deflator was matched almost by a small upward revision to the nominal numbers. The lack of real growth change was a function of rounding and an artifact of the way the real numbers are put together. Real GDP components haven't totaled to the aggregate numbers in years, hence the "residual" factor. Try dividing the nominal GDP by the published deflator and you don't come within $5 billion of the real number."

Interesting stuff.

Source:
GDP Growth in 2nd Quarter Is Unrevised at 3.3%
By JEFF BATER and ELIZABETH PRICE
DOW JONES NEWSWIRES, September 29, 2005 8:42 a.m.
http://online.wsj.com/article/0,,SB112799612439255633,00.html

News Release: Gross Domestic Product and Corporate Profit http://www.bea.gov/bea/newsrelarchive/2005/gdp205f.htm

“Final” Estimates of GDP
THURSDAY, September 29, 2005
GDP GREW 3.3 PERCENT IN SECOND QUARTER; PROFITS ROSE
http://www.bea.gov/bea/newsrelarchive/2005/gdp205f_fax.pdf

Tax Cuts Stimulate the Economy

Thursday, September 29, 2005 | 09:30 AM

in Economy | Politics

I'm agnostic/utilitarian: I'll use whatever tool works -- but still, this cracked me up:

When even the comics at Yahoo! know that Supply Side economic theory is "flawed," you gotta wonder about the Politicians who haven't figured it out yet.

NYT shines some sunlight on the worst of Wall Street

Wednesday, September 28, 2005 | 01:47 PM

in Financial Press

The NYT has been all over Wall Street lately: criticizing its product offerings (SPACs), mocking its hedge fund managers (too arrogant), trashing a well known mutual fund manager (excessively piggish).

If the NYT reports are accurate, we are not a pretty lot. While its tough to objectively label someone as too arrogant or piggish -- these are such visceral emotional issues -- the Times does not paint a pretty picture.

Consider these three tales:

• 'Super Mario' Has a Super Headache
Mario Gabelli is revealed as an overpaid fund manager, and gets trashed as a greedy majority shareholder who treats his minority shareholders exceedingly poorly.

Litigation to follow . . .

• A Noted Poison Pen Starts a Hedge Fund Hiring Showdown
Daniel S. Loeb runs the $3.6 billion hedge fund Third Point, and the NYT rakes him over the coals. Since I don't know the man, I cannot attest to how accurate/fair the Times piece is; they seem to go out of their way to paint him as a pompous ass.

Citadel comes in for the wrecking ball also, with the NYT pointing out their unusual managment fee fluctuate, running as high as 6% (the typical hedge fund management fee is 2%).

• Crave Huge Risk? This Investment May Be for You
SPACs: The latest Wall Street product are expensive and risky -- but the tradeoff is that most are unlikely to succeed.

My experience is that Wall Street is filled with both heroes and goats, with pigs and weasels. While the Times is focusing on the seamy underside as of late, I know too many Wall Streeters who are conscientious, charitable, humble fellows.

Indeed, several firms dedicated a day of trading profits to Katrina victims (Cantor, Jeffries & Co, Rob Fraim, etc.). And of course, Todd Harrison's Investing Rock Stars Guitar is a terrific charitable venture.

I guess for every Bull there's a Bear, and for each of them there's a pig . . .

Confidence at 2 Year Lows

Wednesday, September 28, 2005 | 11:26 AM

in Economy

Wsj_economy09272005184148 Confirming similar readings as the University of Michigan survey, the Conference Board's Consumer confidence index slid to a two-year low in September. The WSJ noted that "consumer-confidence index fell to 86.6 in September, down sharply from 105.5 in August. That marked the largest decline in confidence since October 1990, when consumer spending was contracting in inflation-adjusted terms. The level of confidence was the lowest since October 2003. The index was equal to 100 in 1985."

Round up the usual suspects:
Getting the blame for the plummeting confidence readings were soaring energy prices, new-home sales below expected numbers (as prices rose), and a job market best described as weak but improving. Those who said jobs were "hard to get" ticked up to 25.4% from 23.1% in August.

Surprisingly, the confidence drop cut across all economic strata: Low end Consumers have been squeezed by gasoline prices; Middle class spenders have been increasingly dependent on rising home values or falling mortgage rates as a source of ready spending cash; Even luxury retail sales -- typically far less sensitive to energy-prices -- suffered in September. Michael Niemira, The International Council of Shopping Center's chief economist, said "There are lots of worries and few positive signs out there."

The WSJ Ubiq-cerpt:™

"Taken together, the reports point to potential troubles for consumers, who have been squeezed by soaring gasoline prices and who depend increasingly on rising home values to fund their purchases. Household spending has proved resilient to shocks in the past, though it remains unclear whether that will be the case this time.

The Conference Board said its consumer-confidence index fell to 86.6 in September, down sharply from 105.5 in August. That marked the largest decline in confidence since October 1990, when consumer spending was contracting in inflation-adjusted terms. The level of confidence was the lowest since October 2003. The index was equal to 100 in 1985.

The private research group attributed the drop to rising gasoline prices and Hurricane Katrina, which battered the Gulf Coast in late August. A softer job market also seemed to be a factor. The percentage of individuals saying jobs were "hard to get" increased to 25.4% from 23.1% in August. It was the highest percentage in that category since last December.

"Fuel prices remain high, though they have retreated in recent days, and when combined with a weaker job-market outlook, will likely curb both confidence and spending for the short run," Lynn Franco, director of the Conference Board's Consumer Research Center, said. "As rebuilding efforts take hold and job growth gains momentum, consumers' confidence should rebound and return to more positive levels by year end or early 2006."

The housing market is an important wild card for consumers. Last year, households supplemented their spending power by borrowing nearly $600 billion against the value of their homes, according to research by Federal Reserve Chairman Alan Greenspan. A housing slowdown could sap that source of spending. (See related article.1)

The Commerce Department's report on August sales of new single-family homes hinted at a slowdown, though the evidence is far from conclusive. Sales of new homes decreased 9.9% to a seasonally adjusted annual rate of 1.237 million, after rising 5.3% the month before."

Correlation & Tendencies:
Confidence is a tricky issue to use as an indicator: On the one hand, it tends to lag, follwoing rather than anticipating events. Further, we're always better off watching what people DO rather than what they SAY.

Still, we cannot completely ignore these drops, as there is a tendency -- not a 100% correlation, mind you -- but a tendency for lower confidence to beget reduced spending. That's why all the other indicators I follow are so important to my understanding of what is most likely to occur next.

Source:
Consumer Confidence Weakens To an Almost Two-Year Nadir
Energy Prices, Job Market Weigh on American Minds; Sales of New Homes Drop
RAFAEL GERENA-MORALES
THE WALL STREET JOURNAL, September 28, 2005; Page A2
http://online.wsj.com/article/0,,SB112782716724653222,00.html

How to Destroy the US Economy in 1 Easy Step

Wednesday, September 28, 2005 | 09:29 AM

in Politics | Science | Technology | Web/Tech

The fastest way to economic destruction is the debasement of the engine of growth. In this country, that's Science and Technology.

The godless central planning communists in China must be laughing their arses off at the attempts here in the to introduce non-science into the scientific curricula in the United States.

This is a sure path to economic ruin.

In the marketplace of ideas, the strongest arguments should (theoretically) triumph. Therefore, to help dispel the self destructive campaign of dumbing down our scientific future, here is the Index to Creationist Claims.

Its an incredibly detailed point by point refutation of all the failings, false statements and inaccuracies of the personal religous belief system of Creationism and Intelligent Design.

UPDATE September 20, 2005 7:31pm

Here's a 2nd resource: Things Creationists Hate

>

Sources:
Index to Creationist Claims
http://www.talkorigins.org/indexcc/list.html

Things Creationists Hate
http://www.skepticreport.com/creationism/thingscreationistshate.htm

Read it here first: Wealth Concentration in America is Rising

Wednesday, September 28, 2005 | 08:27 AM

in Finance

As we discussed last week (The Disconnect and Economic Classes), the middle class is starting to ~~disappear~~ mean revert, while the group we described as the "ultra-wealthy" are expanding.

Here's an excerpt from Sunday's NYT:

"Twenty years ago, there were 14 American billionaires on the Forbes 400. Today, the list includes 374 (known) billionaires. In 1985, the combined wealth of the Forbes 400 was $238 billion, adjusted for inflation. Today, the 400 richest people in America are together worth $1.13 trillion. To put that number in perspective, $1.13 trillion is more than the gross domestic product of Canada. And it is more than the G.D.P. of Switzerland, Poland, Norway and Greece - combined.

The median household income of Americans has been stuck at around $44,000 for five years now. The poverty rate is up. Members of the Forbes 400, meanwhile, are richer than Croesus, and every hour they are getting richer."

As previously mentioned, I find the significance of this to be the waning middle class -- a group that increasingly appears to be a mostly post-war phenomena.

The author of the Times piece takes a different perspective, lamenting that there is not much change amongst the top of the Ultras:

"A few days ago, I read through the newest Forbes 400 list of the richest people in America, hoping to find many names I'd never heard of. They're not there. Through no fault of its own, the list no longer reflects a dynamic and elastic economy; instead, it reflects a growing concentration of wealth and economic power. Warren E. Buffett, Paul G. Allen, Kirk Kerkorian, John W. Kluge, Carl C. Icahn, Michael R. Bloomberg, Ronald O. Perelman, Leona Helmsley, Henry R. Kravis, the Waltons, the Pritzkers, the Newhouses, the Lauders - the same old names, one after another.

It's hard to say when the Forbes 400 list started to stagnate, but 1999 may have been a turning point. That was the year when Bill Gates's estimated net worth hit $100 billion. So quickly had his fortune grown that over the previous 12 months, according to Forbes's calculations, Mr. Gates had made himself another $1 billion every eight days. Mr. Gates, who has held the No. 1 position on the list continuously since 1994, is an extreme example of accumulated and self-generating wealth, but he's part of a trend."

What a shame that this accellerating economic shift isn't more entertaining . . .

Source:
Don't Blink. You'll Miss the 258th-Richest American
NINA MUNK
NYT, September 25, 2005
http://www.nytimes.com/2005/09/25/business/yourmoney/25trail.html

How accurate is Labor Dept. Data?

Tuesday, September 27, 2005 | 11:15 AM

in Economy

Fascinating criticism of a recent Department of Labor's 2004 National Compensation Survey of wages and income (by career) by 2 airline pilots.

It calls into question the methodology and underlying presumptions of the Labor Dept. and by extension, the BLS:

We're Earning More? You Could've Fooled Us
September 26, 2005; Page A19

Your article "Wage Winners and Losers: Most Paychecks Fell in 2004 but U.S. Survey Finds Pilots, Doctors Came Out Ahead" (Marketplace, Sept. 13) did a grave disservice to the thousands of pilots who have sacrificed billions in salary concessions and billions in lost pensions, not to mention the thousands of pilots currently furloughed and those who have lost their jobs and benefits completely.

The Air Line Pilots Association has serious questions concerning the Bureau of Labor Statistics data and how the study was conducted. These questions remain unresolved despite repeated calls to the agency. As we told your reporter: "We're unclear how the government could have come up with numbers that show an increase. This study flies in the face of the reality that pilots are working more hours while taking substantial pay cuts, losing some or all of their pensions and paying more for health care."

Capt. Duane E. Woerth
President
Air Line Pilots Association
Washington

On behalf of the Allied Pilots Association representing the 13,000 pilots of American Airlines, I was surprised to read in your Sept. 13 edition that pilot pay has supposedly increased 15.6% from 2003. You also quoted Department of Labor statistics that indicate pilots work an average of 20.5 hours per week. In April 2003, our pilots agreed to a 23% across-the-board pay cut to help American Airlines remain solvent. Since the Sept. 11, 2001, terrorist attacks, nearly 3,000 of our pilots have taken a 100% pay cut as a result of being furloughed.

As for how much our pilots work, Federal Aviation Administration regulations limit airline pilots to 1,000 actual flying hours per year. To amass that much flying time, our pilots typically spend between 2,500 and 2,800 hours away from home, with many of those hours devoted to essential pre- and post-flight duties.

Our experience at American Airlines, the nation's largest scheduled passenger carrier, is that our pilots are working harder than ever and for substantially less income than they were at the beginning of 2003. A quick scan of the airline industry will tell you we are, by no means, alone in this regard.

Capt. Ralph Hunter
President
Allied Pilots Association
Fort Worth, Texas

Pilots making more money, given all the bankruptcies and layoffs? Hardly makes any sense to me. They raise some interesting points -- and should make you wonder what sort of unwarranted assumptions are built into the Labor Department models . . .

The graphic detailing the salary gains from the original WSJ article is below.

click for larger graphic

Source:
We're Earning More? You Could've Fooled Us
September 26, 2005; Page A19
http://online.wsj.com/article/0,,SB112768744339751528,00.html

Wage Winners and Losers
Most Paychecks Fell in 2004 But U.S. Survey Finds Pilots, Doctors Came Out Ahead
By JESSICA E. VASCELLARO
THE WALL STREET JOURNAL, September 13, 2005; Page B1
http://online.wsj.com/article/0,,SB112657650869238922,00.html

Fiona Apple CD almost here (but should we care?)

Tuesday, September 27, 2005 | 07:40 AM

in Music

Here's an example of P2P filling an economic niche not being satisfied by the Labels. The New Fiona Apple CD (previously discussed here and here and here).

As I wrote before, I was impressed with this innovative new work, and was willing to purchase it on CD. Apparently, the music was too quirky for Sony's taste, and they brought in a new producer. The reworked CD, to be released next week, lost some of its edge, and I prefer the original. (I'm curious as to what the artist actually thinks about both versions).

My question is simply this: Why not simply release both verisons?

From the Times, here's our Ubiq-cerpt:™

"According to Ms. Apple, things were going well until executives at Sony began asking her to submit individual songs for their approval. Only then would they determine how much more recording money she would receive. Sony had already sunk nearly $800,000 into recording the original version of "Extraordinary Machine."

"They basically wanted me to audition my songs," Ms. Apple said, visibly offended...

Unhappy with what she termed an "unlivable" arrangement, Ms. Apple threatened to abandon the project.

When the Brion-produced version of "Extraordinary Machine" showed up on the Internet earlier this year, Ms. Apple, upset that her unfinished work was available, thought Sony would scrap the album. "Who is going to give me money to make songs that are already out there?" she recalled thinking at the time.

Little did Ms. Apple know that a group of fans was pleading with Sony to release her album, which they thought had been shelved. Both Sony and Ms. Apple say it was not. On the Web site www.freefiona.com they railed against the "corporate giant" standing between them and their beloved.

"Please give us Fiona and we'll give you money back," read one poem posted on the site. Hundreds of foam apples were sent to the company, and in January a dedicated band of protesters, led by the Free Fiona founder Dave Muscato, stood outside the Madison Avenue offices of Sony BMG chanting, "We want Fiona."

She is quick to credit her freefiona fans with her comeback. "It's good to know that if you organize you can make change, because that's certainly not what I was doing," Ms. Apple said, "I was walking away."

There is a hard core group of fans who love to buy up all the variations of their favorites. Is it a long tail phenomena to offer even more niche versions of well known, big selling bands?

As mentioned, I'd like to buy the original version. Note that the Beatles have turned releasing alternate takes into a cottage industry (See Anthologies One, Two, and Three). There's several Rolling Stones variations (Blues or Jazz) and we've even see an older Dave Mathews Band CD that was released as an alternate take on a leaked internet CD.

I suggest that Sony release the original Extraordinary Machine on disc . . .

>

Source:
Re-emerging After a Strange Silence
By LOLA OGUNNAIKE
NYT, September 26, 2005
http://www.nytimes.com/2005/09/26/arts/music/26appl.html

ex-Inflation, There is No Inflation

Monday, September 26, 2005 | 03:23 PM

in Commodities | Economy | Fixed Income/Interest Rates

If that title has you confused, than you are probably not a fan of the CPI ex- food and energy, occasionally referred to as the core inflation rate. That’s the measure some Economists have been using to track the rate of inflation. It’s a foolish game played by those whose grasp on economic reality is tenuous at best.

Ostensibly, removing the more volatile elements of inflation data points avoids having a single outlying month disrupt data. Some of the more numerically literate of you might note that a simple moving average would do the exact same thing, yet allow any simultaneously rising prices to be revealed for what they are.

For whatever reason, some choose to ignore this approach. Instead, they select the “ex-” methodology of looking at inflation “ex-” inflation. This “ex-” method ignores too many inconvenient facts, i.e., that the CRB Index has been in a strong uptrend since October 2001. Yet despite 4 years of rising prices, the core rate has been remarkably stable. One wonders what the appeal is of such a misleading indicator.

Mind you, this is not the first time the Dismal set has purposefully shifted inflation data downwards. As The Economist reminds us “when oil prices surged in 1973-74, then Fed chairman, Arthur Burns asked the Fed's economists to strip out energy from the consumer-price index (CPI).” This was to get a “less distorted measure of inflation.” Unfortunately, they couldn’t stop with just oil - food prices were stripped out too, followed by used cars, children's toys, jewelry, housing and so on, until around half the CPI basket was excluded because it was supposedly 'distorted' by exogenous forces."

It is no surprise that those who have been overly reliant on the core rate have been unpleasantly shocked recently. The “ex-” group insisted the Fed would pause; after all, why raise rates, if there is no inflation (not once you back out all the inflationary data). Their distress at the most recent hike is directly proportional to their failure to understand the difference between smoothing a data series to reduce volatility, and simply removing inconvenient data that suggests something one does not like. If that reminds you of the recent shenanigans of the Conference Board with their LEIs, than good - you have been paying attention.

Those who live in a seasonally adjusted, hedonically altered, optimized world have to occasionally confront the unpleasant reality of a universe that doesn’t care for their artificial constructs. Ignoring energy - the inflationary data in the CPI - is less than pointless; It shifts the focus away from exactly where it should be: On the part of CPI that has been rapidly increasing in price.

Chart of the Week: Net NYSE Up Thrust Days v Down Thrust Days

Monday, September 26, 2005 | 02:15 PM

in Investing | Technical Analysis

The chart below shows more aggressive downside trading activity on the NYSE. This oscillator tracks thrust sessions has moved below the zero line (red circle). These readings stack the odds against a short term rally.

Net NYSE Up Thrust Days v Down Thrust Days
Up Day: Adv/Dec 2:1 and UpV/DnV 2:1
Down Day: Dec/Adv 2:1 and DnV/UpV 2:1

click for bigger chart

Source: Technimentals

Protracted trading ranges tend to damage the confidence of both bears and bulls alike: Breakouts fail, breakdowns reverse back up. Kevin Lane notes “what happens is you get both sides trading very tentatively, thus drawing out the range even longer. . . internals are starting to support a more bearish case, we would suggest waiting to see more conviction on a move.

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Quote of the Day:

"Every Man with a new idea is a crank until the idea succeeds."
~Mark Twain

Economists Name Least Useful Indicator

Monday, September 26, 2005 | 05:42 AM

in Economy

A Chicago Tribune article on Sunday named the most useful and useless economic indicators. A panel of 15 economists/analysts (including yours truly) participated in the discussion.

There were many indicators deemed helpful, with very little overlap. As the old expression goes, "that's what makes a horse race." The big surprise was the widespread agreement, by a large margin, of which indicator was of the least value.

The envelope please . . . (I'm so excited) . . . And the winner of the economic report deemed most worthless is:

The Conference Board's Leading Economic Indicators

No upsets here, the favorite took the prize! Kudos to the conf bd for producing the LEIs -- now widely acknowledged as the most useless economic indicator in the land!

Via the Chicago Tribune, here's our Ubiq-cerpt:™

"We asked 15 economic analysts to tell us which indicators are most--and least--valuable to everyday investors. One thing they do agree on: Data are dandy, but trends are tops...

Our experts also named a few names on a handful of economic reports that are worth overlooking.

Leading the list of pans was the leading economic indicators, a monthly index published by The Conference Board that compiles 10 other economic reports, including jobless claims, interest-rate spreads, stock prices and building permits. (emphasis added)

Let me be the first to offer my hearty congratulations to the Conference Board for all their efforts. Thanks to your insightful work, you managed to take something with actual utility for investors, and turn it into a worthless, widely-ridiculed, piece of economic flotsam. Nicely done.

Congrats on all your fine work . . .

Source:
Experts gauge the gauges
Janet Kidd Stewart
Chicago Tribune, September 25, 2005 (Your Money columnist)
http://www.chicagotribune.com/business/chi-0509250321sep25,1,7931852.story

Follow Indicators? Look For Momentum
http://www.courant.com/business/hc-ymindicators0925.artsep25,0,7259824.story
?coll=hc-headlines-business

Ha Ha
Nelson Munz: Economic Analysis & Commentary

Yale Endowment Manager: Index

Sunday, September 25, 2005 | 03:38 PM

in Investing | Markets

Among individual investors, David Swensen isn't a household name. But he is an icon in the world of big institutional money managers such as endowments and pension funds.

Mr. Swensen's fame comes from his oversight of Yale University's $15 billion endowment fund, which, since he was hired 20 years ago, has returned an average of 16% a year, far outpacing the market and other funds run for universities. Before arriving, Mr. Swensen had never overseen an institutional portfolio, and he brought to the job an unconventional approach for dividing up the portfolio among different asset classes. He is now Yale's chief investment officer.

Five years ago, Mr. Swensen set out to write a book that would bring the lessons he learned to individual investors. Instead, he says he found that the option most accessible to individuals -- mutual funds -- often makes it impossible to beat the market. And even when they do find good managers, individuals end up shooting themselves in the foot, he says.

So while Yale relies on actively managed portfolios, Mr. Swensen says individuals should just stick to index funds, especially those run by not-for-profit companies. He also likes exchange-traded funds, which trade on exchanges like stocks, but says "buyer beware."

Excerpts from an interview with Mr. Swensen follow:

WSJ: You had hoped to give small investors a road map for beating the market based on Yale's approach to investing. What happened?

Mr. Swensen: I found when I started down that path that individuals just don't have the same set of investment opportunities available to them that we do here at Yale. In fact, the evidence showed me that the mutual-fund industry has completely failed to provide reasonable active-management returns to individuals.

WSJ: To say that it completely failed -- that's a pretty harsh statement to make.

Mr. Swensen: I think the evidence is there. The crux of the failure is with the for-profit management of funds for individuals. Mutual-fund managers have a fiduciary responsibility to investors. Obviously, if they are operating in a for-profit mode, they have a profit motive. When you put the profit motive up against fiduciary responsibility, that fiduciary responsibility loses and profits win.

continued below . . .

Source:
Yale Manager Blasts Industry
TOM LAURICELLA
THE WALL STREET JOURNAL, September 6, 2005
http://online.wsj.com/article/0,,SB112597100191832366,00.html

Continue reading "Yale Endowment Manager: Index"

Inflation Roundup

Sunday, September 25, 2005 | 11:34 AM

in Commodities | Economy | Fixed Income/Interest Rates

We've been discussing quite a few inflation related issues lately.

Here's an overview:

• Inflation/Shminflation an excerpt from Barron's discussing the impact of oil and Fed tightening;

• The History of Inflation ex-inflation a fascinating look at the last time the "core rate of inflation" became the rage -- in the 1970s.

• CPI versus Core Inflation for nearly a year as prices rose dramtically, the so-called core rate was declining.

• No Confidence . . . one of the dangers of inmlfation is its impact on Consumer Confidence and spending.

• Deficits and Interest rates do large deficits cause inflation?

• Wages & Inflation: 20 years while wages have kept pace with the cost of goods and services over the past 20 years, Housing, Higher Education, and Medical Care are what are squeezing consumers. Over the past 20 years, energy doesn't even make the top 3.

• Anti-Bubble or Anti-Inflation? What is motivating the Fed?

• Core Prices versus Non Energy Earnings Why do those who report CPI ex-energy report SPX earnings with Energy? Isn't that a wee bit inconsistent?

• Fun with Hedonics or: "How I learned to stop worrying about CPI and love inflation." With a title like that, do you really need any more info?

• Juiced Data Where the inflation misunderstanding all began . . .

The Latest - but Not Greatest - Thing: SPACs

Sunday, September 25, 2005 | 08:03 AM

in Investing

What would you think of forming a company to buy those private firms that that have already been looked over and rejected by the best VCs, LBO firms, private capital groups, investment banks or anyone else with 150 million or so to spend?

Probably not a whole lot.

Yet that's essentially the entire idea behind one of the hottest new brokerage products out there: SPACs.

The NYT has a brutal take takedown on them:

WOULD you hand over wads of cash to a money manager you didn't know, to invest in a company he hadn't yet discovered, and would you then also pay a boutique investment bank you had never heard of as much as 10 percent to get in on that deal?

If the answer is yes, then join the latest alternative investment craze: special purpose acquisition companies, or SPAC's.

They are essentially blank-check companies that allow their managers to raise money from the public to later invest in another company - although issuers do not disclose the target because to do so would mandate onerous disclosure requirements. Think of a SPAC (rhymes with smack) as a publicly traded buyout company.

My own theory on why these are suddenly so popular on the Street is straight-forward: They are easy to sell, they hit all the right buzz words, and they have very high fee structures.

Here's more from the NYT:

Here's how it works: A couple of investors want to buy companies in China, but they need $30 million to pay for the companies. They hire a firm like EarlyBird Capital, an investment bank in Melville, N.Y., which has been busy raising money from the public for the management teams of SPAC's.

These companies are typically priced at $6 a unit, which generally includes one share of common stock and two warrants with an exercise price around $5. If all goes well, the offering generates about $30 million to the managers who are then entrusted, for 12 to 18 months, to find a company to buy.

The underwriting bank collects an enormous fee - as much as 10 percent for the offering, more than the standard 7 percent for an initial public offering. The SPAC then puts 80 percent to 90 percent of the money in a trust, sets aside a minimal amount of funds - usually less than $1 million - and tries to find a company.

If they find one, and all the shareholders approve the deal, the management gets 20 percent of any profits eventually generated. The shareholders get ownership of a company that they may or may not want to own. If they don't, they can sell their shares.

If in 18 months the managers have not yet found a company, they give back the money, minus the fees and expenses.

So let me se if I understand this idea: I give you my money to invest in sometihng which has a very low probability of success. The most likely apparent outcome occurs, and I get my money back minus 10%? Gee, where do I sign?

Go read the entire column . . .

Source:
Crave Huge Risk? This Investment May Be for You
Jenny Anderson
NYT, September 23, 2005
http://www.nytimes.com/2005/09/23/business/23insider.html

Inflation/Shminflation

Saturday, September 24, 2005 | 09:57 AM

in Commodities | Economy | Fixed Income/Interest Rates | Markets

Barron's agrees with our assessment that, CPI not withstanding, there is actually some inflation out there. Add Oil and Fed tightening, a voila! That's a recipe for a slowdown:

"If we didn't know better, we'd suspect the good governors are actually recognizing, as they've given broad hints they are, that inflation is very much alive and kicking, whatever the absurd government price readings show . . ."

Conditioned by the fiction that the price of energy isn't all that important to the economy anymore and numbed to the effects of rising interest rates by the regularity, predictability and modest size of the increases, investors have grown to shrug off their impact. Yet, rationally, by itself, either would be enough to cause serious economic discomfort. Together, they are really bad news.

Merrill Lynch's David Rosenberg points out in a Friday dispatch that "we're witnessing an event that has happened barely more than 15% of the time in the past five decades: a year that sees the Fed tighten (liquidity pinch), oil prices rise (margin and personal-income squeeze) and the equity market head lower (wealth effect, discount mechanism) -- a triple play.

Such a triple play has occurred only eight times in the past 50 years, and on seven such occasions, gross-domestic-product growth either slowed or stopped dead in the water. The odds, then, of a slowdown in 2006 are 88%, which David says without fear of contradiction, is not "a track record worth betting against." The decline in growth in the wake of triple-play years has averaged 2½%.

"So," David comments, "if past is prescient, we could well be in store for 1%-ish-type growth next year." And, he adds, wryly, "Something tells us that equity valuation, credit spreads and the dollar are not presently priced for such an outcome." Whatever could make him think that?

The Merrill data is attached as a PDF

<spacer>

Sources:
Hello, Columbus
IT'S A BIT EARLY TO CELEBRATE COLUMBUS DAY.
ALAN ABELSON
UP AND DOWN WALL STREET
Barron's MONDAY, SEPTEMBER 26, 2005
http://online.barrons.com/article/SB112751830413150623.html

Thought of the Day: U.S. Economy Out on a Triple Play
David Rosenberg
Merril Lynch Economic Commentary, 22 September 2005
David Rosenberg Merrill.pdf

I'm back (Yeah! Jet Blue)

Saturday, September 24, 2005 | 07:23 AM

I thought 5 flights in 5 days was a pain in the arse -- until I had to fly out of the very same airport where there was just an "incident."

That Jet Blue Flight with the damaged nose wheels, and the passengers watching it on the inflight entertainment system?

Flight 229, 3:20 from Burbank's Bob Hope airport to JFK on Thursday?

No, I wasn't on it -- but I was on the exact same flight on the very next day. Flight 229, 3:20 from Burbank to JFK on Friday.

As you can imagine, the cabin was a bit tense before take off.

The co-pilot comes out of the cockpit before we taxi to the runway. He announces, "our captain has personally inspected the landing gear of this aircraft . . . He says these are the finest looking set of wheels he has ever seen on any aircraft anywhere."

Everybody laughs. The cabin relaxes a bit. We had a blessedly uneventful trip.

Good to be back home.

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Saturday, September 24, 2005 | 05:59 AM