The Big Picture | November 2005

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New Home Sales Data: Don't rely On It Either

Wednesday, November 30, 2005 | 03:01 PM

Here we go again:

Yesterday's New Home Sales data of plus 13% month over month was . . . how shall I politely phrase this . . . somewhat questionable.

It seemed like such an outlier, that I had to dig into the details, especially given all the other non-confirming data we have seen: The same time we learned about that huge New Home Sales, we learned elsewhere that Unsold house inventory is at its highest since April 1986. (Existing Home Sales number about 6 times the number of New Homes).

I'll have more on this tomorrow, but here's the key takeaway:

a) The data appears to be "statistically insignificant," according to the Census Bureau;
b) Strong historical numbers (like plus 13%) tend to be subject to revision, but mostly stay net postive, albeit somewhat moderated;
c) Over the past 10 years, double digit months have been followed by flat to negative data the very next month (Mean Reversion).

The actual data can be found here.

The first item is the margin of error: Its actually higher than the increase for October as well as the revision for September:

“Sales of new one-family houses in October of 2005 were at a seasonally adjusted annual rate of 1,424,000 . . . This is 13% (+/- 17.7%)* above the revised September rate of 1,260,000 and 9.0% (+/-18.2%)* above the October estimate.

There's the key: anytime your margin of error is greater than the estimated increase in New Home sales, confidence levels inthat data are low to non-existent. (A Census Bureau Economist I spoke to agreed with this interpretation).

As significant as that is, let's ignore it for the moment: Looking back over the past 15 years of data, we see that a mean regression has followed nearly all double digit monthly gains. The subsequent month's data was significantly lowered -- flat to negative in nearly every case:
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New Homes Sales

Month, Year	Double Digit Gain	Subsequent Month	Increase / Decrease
June 2003	10.7%	July 2003	(-2.1%)
December 2000	11.7%	January 2001	(-4.8%)
July 2000	11.9%	August 2000	(-4.4%)
November 1998	11.4%	December 1998	(-4.6%)
January 1998	10%	February 1998	(-0.7%)
March 1995	10.2%	April 1995	0.8%.
*February 1994;	10.82%	March 1994	8.89%
April 1993	16.45%	May 1993	(-10.70%)
September 1993;	12.56%	October 1993	(-3.03%)
January 1992	21.15%	February 1992	(-5.47%)

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In nearly all of these months, the subsequent month's data was significantly lowered. The one exception was *February 1994, which was followed by a strong March and April -- but they came on top of January 1994, which has the honor of being the very worst month ever in the history of the Census Construction data: Down -23.77%.

One final factoid: According to the Census Bureau, it takes 6 months to establish a trend for new houses sold. They note this in the fine print:

"These statistics are estimated from sample surveys. They are subject to sampling variability as well as nonsampling error including bias and variance from response, nonreporting, and undercoverage...Changes in seasonally adjusted statistics often show irregular movement. It takes 6 months to establish a trend for new houses sold. Preliminary new home sales figures are subject to revision due to the survey methodology and definitions used. The survey is primarily based on a sample of houses selected from building permits...Explanations of confidence intervals and sampling variability can be found on our web site listed above.

Bottom line:

a) A high margin of statistical error means the October data is unreliable;
b) we should expect to see a revision downwards, but not by a whole lot;
c) The November data should be flat to negative.

Hey, I'm an optimistic guy. I was an X-Files fan -- I want to believe. <sigh> But sometimes, the dope is so bad that's its misleading to call it anything but. I only want to get an accurate read of this planet's economy in order to know how to position capital into various asset classes.

Damn! Now I have to go look at GDP . . .

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Note: Since this nonsensical data issue has become a recurring theme, I have added Data Analysis as a new subtopic . . .

>

Source:
New-Home Sales Surged in October; Cooling Still Seen
JOI PRECIPHS, JAMES R. HAGERTY and KEMBA DUNHAM
Wall Street Journal, November 30, 2005; Page A2
http://online.wsj.com/article/SB113326988930109009.html

NEW RESIDENTIAL SALES IN OCTOBER 2005 (PDF)
Census Bureau, Manufacturing and Construction Division
NOVEMBER 29, 2005 AT 10:00 A.M. EST
http://www.census.gov/const/newressales_200510.pdf
http://www.census.gov/newhomesales

Comparing New Home Sales and Existing Home Sales http://www.census.gov/const/www/existingvsnewsales.html

The “greatest irony” is that he is called the Maestro

Wednesday, November 30, 2005 | 05:33 AM

in Federal Reserve | Fixed Income/Interest Rates | Inflation

PIMCO's Paul McCulley lays out a surprisingly stark ~~bitchslapping~~ smackdown on Easy Al Greenspan. First, he quotes the Maestro:

"In perhaps what must be the greatest irony of economic policymaking, success at stabilization carries its own risks. Monetary policy–in fact, all economic policy–to the extent that it is successful over a prolonged period, will reduce economic variability and, hence, perceived credit risk and interest rate term premiums."

This quote is actually one of a series of statements from the departing Fed Chair essentially claiming that we get Bubbles because Greenie did his job so damned well.

McCulley is having none of this; He deftly uses Al's own words against him:

"Ah, “the eventual exhaustion of the forces of boom!” Roll enough games without a fingertip ball and you don’t have to worry about overhooking it, as your arm ain’t got the strength. But you do have to worry about underhooking it into the gutter. For, if (1) the “greatest irony” of successful Fed-driven macroeconomic stabilization – notably achieving secular “price stability” – is excessive reduction of risk premiums, otherwise known as bubbles, and if (2) the only strategy available for addressing such bubbles is to wait for their “eventual exhaustion,” then (3) the “greatest irony” is not as Mr. Greenspan declares, but rather that he is called the Maestro."

As if that wasn't enough, McCulley notes that new Fed Chair Ben Bernanke does not see "the wisdom of relying exclusively on the hands-off-then-mop-up strategy" of Bubble management. Indeed, Helicopter Ben has already stated:

"When this moral hazard is present, credit flows rapidly into inelastically supplied assets, such as real estate. Rapid appreciation is the result, until the inevitable albeit belated regulatory crackdown stops the flow of credit and leads to an asset-price crash. Bubbles of this type may be identifiable to some extent after they have begun, but the right policy is to do the financial deregulation correctly – that is, in a way that does not allow speculative misuse of the safety net – in the first place. Or failing that, to intervene and fix the problem when it is recognized.”

One suspects that McCulley -- Managing Director of the largest Bond Fund company in the world -- approves of Bernanke as Fed Chair . . .

Source:
Reflexive Disintermediation: Say What? Learning To Live With It (pdf)
Paul McCulley
PIMco, Fed Focus| November 2005
http://www.pimco.com/LeftNav/Late+Breaking+Commentary/FF/2005/FF+November+2005.htm

Bloomberg TV (7:05 AM, 11/30/05)

Tuesday, November 29, 2005 | 09:02 PM

in Media

Bloomberg_logo_rect

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A quick heads up: If you are in front of a TV set while you are getting dressed or over breakfast on Wednesday morning, I'll be on Bloomberg TV (US) for a quick chat on Holiday Retail shopping season.

I expect the conversation will follow the recent Visa and NRF hype discussions . . .

Napster versus Apple

Tuesday, November 29, 2005 | 06:18 PM

in Music

Absolutely brilliant television commercial for Napster, out of the UK
(why don't we have TV adverts like this in the USA?)

click for video

Warning: brief nudity:

Great Britain: It must be interesting to live in a country where a tushie shot doesn't send the entire nation into apoplectic seizures

Get the Whole Thing via adrants

Grateful Dead Bans Sharing, Commits Musical Suicide

Tuesday, November 29, 2005 | 04:59 PM

in Intellectual Property | Music

A Tuesday Tunes post: How astonishing is this: A band that built its entire reputation and fan base on freely recorded and shared live shows has now pulled the plug:

"Grateful Dead fans, perhaps rock's most dedicated bunch, are taking a stand against the band they love. Until recently, Deadheads could download countless live recordings of the band for free from third-party sites, including the popular Live Music Archive (archive.org), which once hosted nearly 3,000 Grateful Dead shows. All of the downloads were pulled last week at the request of Grateful Dead Merchandising (GDM), the group that handles official products for the band and is overseen by its surviving members.

Deadheads have answered in protest. In an online petition, fans have pledged to boycott GDM -- including CDs and concert tickets -- until the decision is reversed. (The band itself broke up in the wake of leader Jerry Garcia's 1995 death, but in recent years guitarist Bob Weir, bassist Phil Lesh and drummers Mickey Hart and Bill Kreutzmann have toured simply as "the Dead.")

GDM recently began selling live music downloads through its online store. The sudden lockdown could be a simple non-compete strike, or it could foreshadow a long-rumored deal with iTunes that will make the entire Grateful Dead live vault available for purchase.

Fans were incensed that the policy change applies not only to official soundboards but audience recordings as well. Throughout their four-decade career, the Grateful Dead actively encouraged fans to trade live recordings and even designated a special "taper's section" at the concerts. In return, Deadheads largely respected the band's wishes that the concert recordings weren't sold for profit.

An official statement from the Grateful Dead camp is expected in the next few days. In the meantime, longtime band publicist and spokesperson, Dennis McNally, told Rolling Stone that he thinks "David Gans' comments were dead -- you'll pardon the expression -- on."
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Perhaps now that 1) Jerry is Dead; b) the free swapping of live recordings have ended; iii) most of the drugs have worn off -- we can all now admit that, excepting a few good songs, the Grateful Dead pretty much sucked . . .

UPDATE: November 30, 2005 8:46am

The NYT reports:

Dissent has been building rapidly, however, as the band's fans - known as Deadheads - have discovered the recordings are, at least for the time being, not available. Already, fans have started an online petition, at www.petitiononline.com/gdm/petition.html, threatening to boycott the band's recordings and merchandise if the decision is not reversed. In particular, fans have expressed outrage that the shift covers not only the semiofficial "soundboard" recordings made by technicians at the band's performances, but also recordings made by audience members.

Talk about your boneheaded marketing moves . . .
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UPDATE December 1, 2005, 6:54am

The NYT observes that

Downloads of the Dead are Not Dead Yet
http://www.nytimes.com/2005/12/01/arts/music/01dead.html

Source:
Deadheads Boycott Dead
Fans object to band's live recordings being pulled from Web
BENJY EISEN
Rolling Stone, Nov 29, 2005
http://www.rollingstone.com/news/story/_/id/8898045/thegratefuldead?
pageid=rs.News&pageregion=double1&rnd=1133300955290&has-player=true&version=6.0.12.1059

Deadheads Outraged Over Web Crackdown
JEFF LEEDS
NYT, November 30, 2005
http://www.nytimes.com/2005/11/30/arts/music/30dead.html

How Media Can Connect with Their Customers, according to U2

Tuesday, November 29, 2005 | 11:55 AM

in Media | Music

There was a terrific article in Monday's NYT (Media Age Business Tips From U2) on U2 the corporation, and the lessons the band holds for other forms of Media:

"On the surface, the formula U2 used to send 20,000 fans into sing-along rapture at Madison Square Garden last Tuesday night was as old as rock 'n' roll: four blokes, three instruments, a bunch of good songs. Add fans, cue monstrous sound system, light fuse and back away.

But that does not explain why, 25 years in, four million people will attend 130 sold-out shows this year and next that will gross over $300 million and how their most recent album, "How to Dismantle an Atomic Bomb," has already sold eight million copies.

For that, you have to look at U2 less as a band than as a multimillion-dollar, multinational media company, one of the smarter ones around."

Interesting take. The author breaks down what U2 does right into a few bullet points:

Meet The Consumers Where They Live

Apologize, Then Move On

Embrace Technology

Don't Embarrass Your Fans

Be Careful How You Sell Out

Embrace Politicians, Not Politics

It's Called Show Business For A Reason

Seize The Moment, But Don't Steal It

Aim High

For anyone in the Media business (Newspapers, Magazines, Internet, TV, Music, Film) the entire piece is well worth reading. (You can see some snaps I took at last Tuesday's concert here).

Source:
Media Age Business Tips From U2
David Carr
NYT, November 28, 2005
http://www.nytimes.com/2005/11/28/business/28carr.html

Read it here first: Real-Estate Boom Soon May Sputter As an Engine of Retail Sales

Tuesday, November 29, 2005 | 08:54 AM

in Financial Press | Real Estate | Retail

A key part of my Bearish thesis for 2006 has been that as interest rates tick up, the Real Estate cylinder in the economic engine will fade.

Yesterday's WSJ had a good article on that exact subject:

"As home sales start to slow and the inventory of unsold homes rises, some economists are warning that home-price appreciation will slow or prices will possibly even decline next year. And that, they say, will lead to a slowdown in consumer spending that could start as soon as the holiday season ends.

Leading the worrywarts are economists at Goldman Sachs Group Inc. For several years, they have been closely watching what the firm dubs MEW, which stands for mortgage-equity withdrawal. It is the cash people extract from their homes by drawing on home-equity loans, "cash out" mortgage refinancing, or capital-gains earnings from real-estate sales...

Jan Hatzius, a Goldman Sachs economist, estimates Americans will withdraw $834 billion from residential real estate this year. That will fall next year, he says, to $758 billion and to $645 billion in 2007. "As households' cash flow goes down," Mr. Hatzius says, "spending weakens." That, in turn, will reduce economic growth.

Equity withdrawal isn't the only way that housing is supporting the economy. According to Moody's Economy.com, the real-estate industry is responsible for creating 1.1 million of the two million net jobs that the nation added in the five years that ended in October. Those jobs include positions for land surveyors, general contractors, loan officers and building-material retail workers."

Note that the ugly part of the accompanying chart (via Goldman Sachs) are projections, and not actual declines:

MEW= Moprtgage Equity Withdrawals

A few other data points on this:

A study (supposedly co-authored by Fed Chair Alan Greenspan) estimated that "Americans withdrew $600 billion in equity from their homes in 2004, or 7% of their disposable income." Greenie's study estimated "consumers spend about 51% of the cash they extract." Goldman's estimates were that consumers spend ~68% of the cash they extract through home-equity loans and refinancing (most of the rest is used to pay down credit-card debt or invest).

WSJ: "In other words, Goldman believes that consumer spending is even more closely tied to home equity than does the Fed. If Goldman is correct, that means the housing slowdown will have a bigger negative impact on spending and the economy than commonly thought."

Sources:
Real-Estate Boom Soon May Sputter As an Engine of Retail Sales
Rafael Gerena-Morales
The Wall Street Journal, November 28, 2005; Page A2
http://online.wsj.com/article/SB113313262641207626.html

Unsold house inventory highest since April 1986
BY TAMI LUHBY
Newsday, November 29, 2005
http://www.newsday.com/business/ny-bzhome294531670nov29,0,5463507.story

Mixed Retail Picture: Visa Edition

Tuesday, November 29, 2005 | 05:48 AM

in Retail

You folks posted alot of good comments yesterday following the discussion on increased Credit Card usage in the mixed retail post. Enough issues were raised that I tracked down some people at Visa to get a breakdown of the specific data regarding card usage over the weekend:

Spending on Friday/Saturday with Visa branded cards was over $7.068 billion dollars; This represents a 15% increase versus 2004.

• $3.84 B was consumer credit;
• $2.82 B was debit/check cards;
• $400M was Visa Commercial/Small Business cards (a form of commercial credit).

That means approximately 54% of the increase in card usage was added consumer debt.

Another interesting data point: E-Commerce was $544 million, a 32% increase from 2004. That number is consistent with the past 5 years of growth online. Note, however, that online purchases are a mere 7.6% of total retail sales.

Also, Travel spending was up 19% to $974 million -- reflecting in large part increased energy costs for airlines and autos.

Note that these are actual sales receipts, and not opinion or expectations of spending. Its is therefore a significant data point.

UPDATE November 29, 2005 10:49am

Here is the Visa data release
Spendtrak_report_twoday_11_2526_05_.pdf

Media Appearance: Kudlow & Company (11/28/05)

Monday, November 28, 2005 | 04:24 PM

in Media

A quick heads up:

I will be on Kudlow & Company tonite at 5:00 pm. Its for at least two segments of the show, discussing Holiday shopping, Energy, the Economy and this rally.

UPDATE Novermber 28, 2005 7:55PM

How surprising was Larry's mixed outlook on the holiday season? He never ceases to amaze -- I thought for sure he was going to lock onto the Bullish data, flawed though it was.

I wish we had more time to go into the Border, Energy, and Tax issues post Allan Hubbard. Once again, the producers were chirping in my ear ("You have 10 seconds!") I don't know how people do entire newscasts with someone feeding them info -- its disconcerting to think and speak AND digest that additional auditory input.

I didn't get to the Visa credit card data, but I will get a post up on it shortly . . .

More To Holiday Sales Than A Few Phone Calls

Monday, November 28, 2005 | 01:11 PM

in Media | Retail

Today's morning missive was picked up by Dow Jones Market Talk:

11/28 11:21A More To Holiday Sales Than A Few Phone Calls

11:21 (Dow Jones) The widely cited National Retail Federation's "Black Friday" report takes some heavy flak from Maxim Group's Barry Ritholtz. "There are few things that make us more annoyed than bad data, lazy thinking or poor analysis," he writes. The NRF, he says, "hit for the inept cycle." For starters, the report is only a survey. "They asked 4,209 consumers how much they were planning on spending" and extrapolated the total from that "all without seeing any actual data whatsoever," he says. "If I were their mathematics or statistics professor, I would give them a grade of 'F'." The real picture, he says, is very mixed.

Coolio!

Don’t Believe the Hype: A Very Mixed Retail Picture

Monday, November 28, 2005 | 12:33 PM

in Retail

There are few things that make us more annoyed than bad data, lazy thinking or poor analysis. This weekend, the National Retail Federation hit for the inept cycle with their breathless reporting of holiday sales. The NRF erroneously trumpeted that the Thanksgiving weekend sales were “blockbuster,” having “surged 22% from a year ago to about $27.9 billion.” Further, they claimed 145 Million Shoppers hit stores and the web, up from 133 Million in ’04.

These are false and unsupported assumptions. The NRF report is an unsavory combination of recklessness and incompetence. Investors who rely on it as investment advice are sternly warned they do so at their own risk.

Here’s what we do know about NRF’s report: They conducted a survey on Black Friday and Saturday. They asked 4,209 consumers how much they were planning on spending. From this opinion survey, they extrapolated the total National spending of 145 million shoppers over both the long holiday weekend and the entire holiday shopping season – all without seeing any actual data whatsoever.

One cannot conclude what actual sales are based upon surveys of what people say they are going to do. At best, you can conclude what people's spending plans are.

If I were their mathematics or statistics professor, I would give them a grade of “F,” strongly urging them to consider a less mathematically rigorous major (English, perhaps).

Here’s what data and actual observation reveals: ShopperTrac showed slightly softer sales on Black Friday, down less than 1% year over year. Note that this is based upon actual purchase data from 45,000 retailers, and not opinion polls.

Further, we note that retailers engaged in much more aggressive discounting when compared with last year’s holiday season. Third, according to Visa, Credit Card usage was up dramatically – about a 14% increase over the holiday weekend when compared with ’04. This implies that consumers are stretching to spend money they do not have.

To be blunt, I cannot tell which is more astonishing: that this inept group of PR flacks would report the data in such a patently misleading fashion, or that some of the Financial Press would get sucked in by the hyped data. CNBC breathlessly repeated, and even the usually reliable WSJ got it wrong, falsely declaring "First Holiday Shopping Weekend, Sets a Blistering Pace." Um, no. At least the NYT was more circumspect, with a column titled: Mall Stores See Trouble in Sales Data.

I am left with the unfortunate conclusion that innumeracy – the mathematical equivalent of illiteracy – is a growing problem in the US. It clearly is so at the NRF.

UPDATE November 28, 2005 1:58 pm

Here's the actual data from the NFR:
Download NRF_Black_Friday_2005_Results.xls

UPDATE November 30, 2005 5:28 am

WSJ Numbers Guy takes a swipe at the NRF data
Shorter URL: http://tinyurl.com/7blxe

UPDATE December 1, 2005 10:28 am

Jeff Macke of Macke Asset Management published on Minyanville the following roundup of same store sales performance in November; There aint a whole lot of firms reproting gains north of 22%:

Download Macke's Retail Roundup.xls

Chart of the Week: Home Equity Cash Outs

Monday, November 28, 2005 | 12:17 PM

in Economy | Real Estate

Our discussion of Credit Card usage leads us review this: Since 2000, American households have spent more than they earned - a shift from the prior 3 decades. Q3 2005 household spending was a record $531 billion more than their after-tax earnings (annualized). Consumer spending was 76% of Q3 GDP - a record high, up from 73% in 2000.

Home Equity Cash Outs; Bank Mortgage assets as a % of total assets

Source: NYT

Residential real estate is a record 204 percent of disposable personal income, compared with 150 percent in 2000.

Random Items:

Cautiously optimistic

Dividends, Buybacks Set New Benchmark for Largess

Media Age Business Tips From U2

Googling For Gold

Sony "DRM" tracks consumer listening habits

Totally Absurd Inventions, America's Goofiest Patents!

Quote of the Day:

“If all the economists in the world were laid end to end they still wouldn’t reach a conclusion.”
- George Bernard Shaw

On Being Short in a Rising Equity Market

Sunday, November 27, 2005 | 03:15 PM

in Trading

I always try to post a "How-To" on Sundays, as the slower pace of the weekend allows for some quiet contemplation. Given the significance of the start of holiday shopping, I almost skipped it -- until I read Hedge fund manager Doug Kass good advice on what to do when you are short in the face of a robust rally:

"(With the possible exception of being a New York Jets football fan this season), few experiences are more painful than being short in a near parabolic rise in the equity market (like we have witnessed recently).

It is easy to rationalize either side of the market. It is harder to implement a strategy that reduces the overall impact of being wrong and attempts to take emotion out of the investment equation.

What follows are some lessons I have learned when I have been short in a rapidly rising equity market, as has been the case over the last few weeks:

1. Avoid averaging up on your shorts.

2. Buy some out-of-the-money calls to protect from further gains to the upside.

3. Cover shorts down to levels that you can sleep with -- even reduce the number of your shorts in your portfolio by making some sacrifical covers.

4. If you have the charter, consider pairing some shorts with longs in the same industry or sector that are statistically cheaper than your short.

5. Go through the exercise of reviewing each and every short anew, and be objective in the process.

6. Work out, take a walk, or do some lifting. It will be refreshing, invigorating and will get your mind off the pressures associated with recent trading mistakes.

7. Finally, go back and reread some of the classic books on investing like Reminiscences of a Stock Operator.

That said, I don't think the short side will be a long-term lease in the House of Pain. Not by any stretch of the imagination.

Good advice from a pro . . .

Source:
On Being Short in a Rising Equity Market
Doug Kass
Street Insight, 11/23/2005 3:36 PM EST
http://www.thestreet.com/i/streetinsight/editorspickssi/10254351.html

Retail Holiday Sales: "Muddy"

Sunday, November 27, 2005 | 10:09 AM

in Retail

A quick note on the start of the holiday shopping season. Three elements are apparent:

1) Data shows a (slightly) softer start to the season;

2) Discounting is everywhere;

3) Credit Card usage is up significantly.

This has not started out significantly better than last year. Indeed, according to ShopperTrak, sales for Black Friday actually fell 0.9 percent over last year, to $8.01 billion. At the same time, Visa reported that credit card use had surged 13.9 percent.

Was the drop due to increased discounting so early? Or, do consumers simply have that much less cash in their pockets -- due primarily to higher energy prices and reduced cash out refis? Perhaps a combination of facotrs explains this.

Of course, a single data point does not make a trend. There is still plenty of time for Retailers to recover, and this may end up a decent season. But so far, initial data is not exactly encouraging that we will see a robust shopping season.

The bottom line is early discounting, weaker shopping and increased reliance on credit cannot be spun positively. Perhaps my more recent optimism -- still on the low side for most of Wall Street -- was misplaced. My earlier expectations that the consumer is nearly shopped out seems to be very much coming to fruition.

Sources:
Behind Early Shopping Frenzy: Big Deals, Worries About Season
ANN ZIMMERMAN, AMY MERRICK and ELLEN BYRON
THE WALL STREET JOURNAL, November 26, 2005; Page A1
http://online.wsj.com/article/SB113292430807906543.html

Initial Reports Are Mixed for Retail's Busiest Day
MICHAEL BARBARO
NYT, November 27, 2005
http://www.nytimes.com/2005/11/27/national/27retail.html

Gold versus Stocks

Sunday, November 27, 2005 | 06:19 AM

in Commodities | Inflation | Investing

The usually terrific Floyd Norris puts forth an interesting but somewhat flawed thesis in Friday's NYT about Gold; it has some odd logical reasoning in it -- that's unusual for Norris, who is typically excellent:

"GOLD is in a bull market, approaching $500 an ounce for the first time since 1987, and there is talk that the move shows renewed fears about inflation. Gold bugs say it may be that people are starting to lose faith in central banks to preserve the value of paper currencies, while others see evidence of growing demand for gold jewelry as Asia grows richer.

But perhaps it shows something else entirely. For the last three years, since the world settled down from the technology stock boom and bust, gold has traded suspiciously like just another American stock. If the stock market goes up, so does gold. And ditto if the stock market goes down." (emphasis added)

I find this description to be incorrect. As the graphic from his column (below) reveals, Gold has been in a robust up trend since even before the reflation process began in 2002 -- mark the beginning of the Gold move to 2001. The argument can be rationally made that the Gold market correctly anticipated the long term impact from high deficits.

Indeed, the very same factors that led to global markets to begin rallying since the pre-war period (March 2003) are many of the same elements which have led to Gold's rally: They are both products of the massive government stimulus which took place following the crash and recession:

interest rates were dropped to half century lows;
deficit spending soared;
Personal income taxes were cut;
corporate dividend taxes were slashed;
Capital gains taxes were cut;
CapEx spending recieved a special accelerated depreciation (ADCS);
Spending for the prosecution of two wars;
Money supply increased dramatically;

Hence, why I called this the kitchen sink economy.

But the key takewaway is not that Gold and Stocks are suddenly in sync -- the same underlying factors have been impacting each of them.

Stocks versus Gold

chart courtesy of NYT

Depending upon which time period you use, Gold has very much outperformed stocks. Equities have gone sideways, and have been rangebound. Recent Market returns really depend on the measuring period you employ. If you take your measure of the markets as just before the War began, that creates a period of strong performance. Measure the market over other periods -- 1 , 2 or 4 years -- and there's not a whole lot of returns to write home about.

Here's Norris' take:

"Since the end of September 2002, as the stock market was hitting bottom, the S. & P. 500 is up 56 percent. But over the same period, the nearby gold future has risen 52 percent. Gold and stocks have not marched in lock step over that period, but neither have they moved very far apart.

The interesting question is why that should be, and whether it will continue. A possible explanation is that this is an era with an excess of capital available for investment. That explains low interest rates and rising prices for many investments, from stocks to gold. Since the end of September 2002, the major stock market indexes in the United States, Britain, Japan and Hong Kong, measured in dollars, are up 56 percent to 67 percent, none of them very far from the change in gold. The real proof of a bull market in gold will come when, or if, it resumes an ascent that is impressive not only when measured in paper currency, but also when measured against alternative investments.

Note that in the chart provided, Gold has gone through distinct periods relative to the SPX: Under-performing (1996-99), Over-performing (1999-2002)and Equal-performing (2003 - ).

My main problem for Floyd's thesis is the end game for reflation: It has already morphed into inflation. This bodes well for Gold, but poorly for stocks.

UPDATE: December 1, 2005 6:58am

Our discussion of Gold (and then some) gets expounded and expanded upon in today's WSJ:

What to Make of Gold's $500 Run
http://online.wsj.com/article/SB113339122119710644.html

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Source:
To See How Gold Is Doing, Check the Rest of the Market
Off the Charts
FLOYD NORRIS
http://www.nytimes.com/2005/11/26/business/26charts.html

10 Factors to Watch this Holiday Shopping Season

Saturday, November 26, 2005 | 04:19 PM

in Retail

Tony Crescenzi came up with this list of net positives for the shopping season; He calls these factors likely to boost holiday sales this year.

I have been negative as to the prospects for the economy next year, but short term positive on the market's year end rally and a decent (but not great) holiday shopping season. I expect this year's sales increase will NOT be more than last year's 6.5% gains -- I expect moderately less, in the 3.5 - 4.5% range. (I've gone over the negatives enough that it would be redundant to do so here).

So this piece can be considered equal time for a more bullish view. (Crescenzi does list other bearish factors).

Here's his list of positives:

1. The economy added 1.6 million jobs in the first 10 months of this year (a figure weighed down by hurricane-related filings following an increase of close to 2.2 million in 2004.

2. Income growth has been running at a pace of faster than 6%, nearly 1% above the long-term average. Given the low savings rate, this should translate into more spending.

3. Housing turnover reached a record high this year, and this tends to correlate strongly with retail sales activity. That said, housing-related spending is likely to be slower next year.

4. The three-month change in equity prices is very strong, and there tends to be strong correlation between equity prices and retail sales activity.

5. Well-managed inventory levels will mean fewer drastic markdowns when compared with past years. This will boost nominal sales.

6. Retailers are set to capitalize on the relatively recent surge in the use of gift cards. This means that they will have their inventory levels positioned accordingly. Many of these sales will take place at favorable average ticket prices, recognizing that consumers aren't as price sensitive when using gift cards. This will boost nominal sales.

7. Hurricane-related expenditures will occur concomitantly with holiday shopping and therefore will boost retail sales figures.

8. There is one additional shopping day this year between Thanksgiving and Christmas, and there will be one extra Saturday in which to shop, albeit Christmas Eve.

9. Microsoft's new Xbox 360 will boost interest in its realm and give a boost to sales of electronic goods. Similarly, the digital age is still in the midst of an up-cycle with digital cameras, handheld devices and associated products and peripheral equipment likely to continue to see strong sales. Big-ticket items such as large-screen televisions are also expected to see strong sales and boost nominal retail sales.

10. Well, just because (whoever heard of a top-nine list?).

Nicely done!

Source:
Holiday Spending and the Economy
Tony Crescenzi
RealMoney.com, 11/25/2005 9:09 AM EST
http://www.thestreet.com/p/rmoney/crescenzioncredit/10254334.html

Sell some winners and most of your losers

Saturday, November 26, 2005 | 07:57 AM

in Investing | Trading

On the possibility that the year end rally isn't all that:

"On the wild assumption that those nearly universal bullish forecasts don't prove on the money, you might try something different this year: Sell at least some of your winners and as many of your losers as you can without gushing tears. In short, we're postulating an exit strategy of cut and run. Which may be shamefully deficient as a military solution, but could be just the ticket for a market with considerable potential for wicked whipsaw.

The disquieting overwhelming agreement among Street folk that we're in a rally mode whose only real danger is that of missing out on the fun and profit that lie ahead is not the sole reason for our skepticism. The inevitable speculative excess that such an attitude begets is another tangible cause for unease. Speculation, of course, is always with us. And thank heavens it is, since it's truly a vital investment ingredient, adding spice and whetting appetites. Heck, without speculation, Wall Street would be the epitome of dullness. But it's the classic good thing that you can quickly and easily get too much of.

And whether you feel we've reached that state depends mostly, we reckon, on whether you own a stock that's kicking up its speculative heels or not. What is clear, however, is that there's no shortage of such stocks and their numbers do seem to be steadily rising. Here, we suspect the revived passion for momentum investing, the opportunistic approach of many hedge-fund managers, reminiscent of the day traders in the late 'Nineties, to buy anything that moves, and the hyperventilating habitués of the online chat rooms are major stimulants. . .

Stepping back a ways to get a little broader perspective, it seems to us that we are witnessing the beginnings of the end of the fabled era of easy money. And anyway you slice it, that shapes up as not exactly good news for a lot of businesses that battened rich in that extraordinary era."

Dumping losers is always good advice. Never fall into the trap of subsidizing bad stocks dogs by selling your good ones . . .

Source:
Cut and Run
UP AND DOWN WALL STREET
ALAN ABELSON
Barron's, Monday, November 28, 2005
http://online.barrons.com/article/SB113296420338207002.html

Mixed Confidence

Friday, November 25, 2005 | 07:55 AM

in Psychology/Sentiment | Retail

A quick post before hitting the street (and musuems and outlet shops and Best Buy and . . . )

Two inopposite data points came out this week that are interesting in what thye reveal about both Consumer and Business Confidence, and how each of these groups will be spending in the coming weeks and months.

With gasoline now considerably under $3, we have seen consumer confidence move back up off of very low levels. U Michigan Consumer-sentiment index snapped back smartly to 81.6, from an ugly low of 74.2 in October. Note that the index is still well below July readings of 96.5. Fuel prices will be the key to consumer confidence for the next quarter; If they stay low, consumer confidence will crawl back. High energy costs -- and those December bills arriving after Jan 1 may ding confidence again.

But the present uptick provides signs that the Xmas shopping season will see net gains -- although not as robust as last year, IMO. There's a nice assortment of comments here: Retail Ball: How Analysts Predict Holiday Retail Sales, including yours truly.

At the same time, Business Hiring and Capex Spending remains full of trepidation. In Europe, the situation is described as "fragile."

"Corporate confidence faltered in key areas of Europe this month, underscoring the fragility of economic conditions across the region.

A drop in Germany's bellwether index reflected a darkening view of current business conditions and the outlook for the coming year. On Thursday, the Ifo institute said its business-sentiment index for November fell to 97.8 from 98.8 in October. Last month, a dramatic improvement in the survey data had been hailed as a harbinger of better things in store for euro-zone companies.

In Belgium, the central bank reported a sudden downturn in business confidence to -4.3 in November, after a gradual improvement over the previous three months. The survey is another litmus test of business confidence across the 12-nation euro zone owing to Belgium's heavy dependence on exports."

We have seen that Europe -- and the UK in particular -- are about 6 months to a year ahead of us in the Business Cycle.

In Europe, too, we see signs that Consumer are spending far more resiliantly than their Business counterparts: "the euro-zone picture isn't uniformly bleak, and there are signs that morale is rising among some consumers . . . Italy's shoppers are at the forefront of the new optimism, as consumer confidence leapt this week to 108.8, a three-year high, from 105.6 in October. Statisticians said the trigger was a newfound faith in the economy, which emerged after a midyear recession."

I am watching for two things: 1) Will the Business community pick up any optimism at all in temrs of spending and hiring? B) Will the improved sentiment and economy in Italy spill over to the rest of Europe and/or the United States?

Keep watching . . .

Sources:
Falling Gas Prices Help Perk Up Consumers' Mood
JOI PRECIPHS
THE WALL STREET JOURNAL, November 25, 2005; Page A5
http://online.wsj.com/article/SB113275189968705163.html

Business confidence softens
Weak consumer spending dents index in Germany; Belgian gauge also drops
EMILY BARRETT
DOW JONES NEWSWIRES, November 25, 2005; Page A9
http://online.wsj.com/article/SB113287664058906081.html

Retail Ball: How Analysts Predict Holiday Retail Sales
November 25, 2005
http://online.wsj.com/article_print/SB113287664058906081.html

Have the Wealthy Been Made Worse Off By Tax Cuts?

Thursday, November 24, 2005 | 01:16 PM

in Economy | Politics

Very interesting analysis by Robert H. Frank -- in addition to being an economics Prof at Cornell, he is the coauthor a textbook -- "Principles of Microeconomics" -- with new Fed Chair Ben S. Bernanke.

It may be a fool's errand to try to draw any conclusions about the new Fed Chief by what his co-author writes, but its certainly interesting to see his analysis:

"A careful reading of the evidence suggests that even the wealthy have been made worse off, on balance, by recent tax cuts. The private benefits of these cuts have been much smaller, and their indirect costs much larger, than many recipients appear to have anticipated . . ."

For example, deficits have led to cuts in federal financing for basic scientific research, even as the United States' share of global patents granted continues to decline. Such cuts threaten the very basis of our long-term economic prosperity. As Senator Pete Domenici, Republican of New Mexico, said: "We thought we'd keep the high-end jobs, and others would take the low-end jobs. We're now on track to a second-rate economy and a second-rate country."

Large deficits also threaten our public health. Thus, despite the increasing threat from micro-organisms like E. coli 0157, the government inspects beef processing plants at only a quarter the rate it did in the early 1980's. Poor people have died from eating contaminated beef but so have rich people.

Citing revenue shortfalls, the nation postpones maintenance of its streets and highways, even though doing so means having to spend two to five times as much on repairs in the long run. In the short run, bad roads cause thousands of accidents each year, many of them fatal. Poor people die in these accidents but so do rich people. When a pothole destroys a tire and wheel, replacements cost only $63 for a Ford Escort but $1,569 for a Porsche 911.

Deficits have also compromised the nation's security. In 2004, for example, the Bush administration reduced financing for the Energy Department's program to secure loosely guarded nuclear stockpiles in the former Soviet Union by 8 percent. Sam Nunn, the former United States senator, now heads a private foundation whose mission is to raise private donations to expedite this effort. And despite the rational fear that terrorists may try to detonate a nuclear bomb in an American city, most cargo containers continue to enter the nation's ports without inspection."

All the exmaples mustered so far are pretty straight forward and obvious. I have found that the area where most laypeople have some difficulty comprehending the enormity of the problem is trade and budget deficits:

"Large federal budget deficits and low household savings rates have also forced our government to borrow more than $650 billion each year, primarily from China, Japan and South Korea. These loans must be repaid in full, with interest. The resulting financial burden, plus the risks associated with increased international monetary instability, fall disproportionately on the rich.

At the president's behest, Congress has already enacted tax cuts that will result in some $2 trillion in revenue losses by 2010. According to one recent estimate, 52.5 percent of these cuts will have gone to the top 5 percent of earners by the time the enabling legislation is fully phased in. Republicans in Congress are now calling for an additional $69 billion in tax cuts aimed largely at high-income families.

With the economy already at full employment, no one pretends these cuts are needed to stimulate spending. Nor is there any evidence that further cuts would summon outpourings of additional effort and risk taking. Nor, finally, does anyone deny that further cuts would increase the already high costs associated with larger federal budget deficits.

Moralists often urge the wealthy to imagine how easily their lives could have turned out differently, to adopt a more forgiving posture toward those less prosperous. But top earners might also wish to consider evidence that their own families would have been better off, in purely practical terms, had it not been for the tax cuts of recent years.

Fascinating stuff. I wonder what Bernanke's views are on these and other related issues . . .

Source:
Sometimes, a Tax Cut for the Wealthy Can Hurt the Wealthy
Economic Scene
By ROBERT H. FRANK
NYT, November 24, 2005

http://www.nytimes.com/2005/11/24/business/24scene.html