The Big Picture | August 2006

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POP Urls

Thursday, August 31, 2006 | 06:25 PM

Nice aggregator of several different services: POPUrls

Digg, del.icio.us, reddit, flickr, newsvine,
metafilter, tailrank, youtube, Google News, Yahoo News, netscape, iFilm, shoutwire, slashdot, wired, odeo, fark, nowpublic, furl, heavy, videosift, etc.

Bond Rally Looks Crowded and Tiring

Thursday, August 31, 2006 | 03:15 PM

in Fixed Income/Interest Rates | Investing | Markets | Psychology/Sentiment | Technical Analysis

The Bond rally is moving towards breathless coverage on CNBC. Mike Panzner informs us that 10 days ago, Bloomberg reported:

"Hedge-fund managers and other large speculators placed a record amount of bets the 10-year U.S. Treasury note will gain, according to weekly data from the U.S. Commodity Futures Trading Commission. Bets on a decline in two-year notes also rose to a record.

Speculative long positions, or bets prices will increase, outnumbered short positions in 10-year-note futures by 312,492 contracts on the Chicago Board of Trade in the week ended Aug. 15. Net-short positions in two-year-note futures rose to 92,942 contracts, the Washington-based commission said in its Commitments of Traders report."

Similarly, Mark Hulbert noted in a MarketWatch article that "the majority of bond market timing newsletters tracked by the the Hulbert Financial Digest think that" the treasury bond market will rally.

Meanwhile, the chart of the 10-year note yield reveals a market that is testing key near-term support and is near multi-year oversold extremes, suggesting that bond prices, which move in the opposite direction to yields, are vulnerable to at least a near term correction.

10 year Yield, (Six Years) with 14 day RSI

RSI range 0-100, with 30 and 70 (red lines bottom) as overbought/oversold measures

Regardless of fundamental factors such as the recent Fed pause and signs that the economy may be slowing down, which are likely already somewhat factored into prices, the combination of exuberant optimism, excessive speculation, and a negative technical picture usually means only one thing: prices are headed for a fall.

Panzner states: "Sounds like it's time to take some money off the table if you are long U.S. bonds."

A counter trend rally is not unthinkable here -- especially if NFP tomorrow is too strong or average hourly earnings is too hot -- either of which could take the Fed off "Pause."

UPDATE: August 31, 2006 6:05 pm

Richard Suttmeier notes this his call for U.S. Treasury yields: the low yields for the remainder of the year will be set today or tomorrow. He writes at Real Money:

Momentum is excessively overbought for bonds, and the U.S. Treasury coupon curve straddles the 200-day simple moving averages at 4.777 on the two-year, 4.740 on the five-year, 4.796 on the 10-year and 4.891 on the 30-year. This lines up with weekly resistances at 4.796 on the two-year, 4.688 on the five-year, 4.750 on the 10-year and 4.898 on the 30-year. This morning's low yields have been 4.796, 4.703, 4.740 and 4.896, respectively.

A close this week cheaper than my quarterly pivot at 4.734 on the five-year indicates that my bearish call on bonds could be on the money.

Treasury yields have been declining since July 5 with the yield on the 30-year approached its 200-day simple moving average (SMA) at 4.89 this morning, down from 5.29 on July 5. This has made my measure of daily momentum even more overbought today then a year ago when the 30-year yield began to rise from 4.25 to above 5.25 into May 2006. I see this risk again, as the Federal Reserve may not be done raising rates, and even if they are, inflation remains an issue. If the economy goes into a soft landing, deficits should rise indicating increased Treasury supply. The 30-Year will begin quarterly issuance in February, and inflationary expectations are too high to justify sub-5% long-term yields.

Sources:
Too many bond bulls
Commentary: Don't bet that 'this time is different' and rally will continue
Mark Hulbert
MarketWatch, 12:01 AM ET Aug 29, 2006
http://tinyurl.com/ej4sa

Futures Traders Put Record Bets on 10-Year Note Gain
Dave Liedtka
Bloomberg, 2006-08-18 16:36

About Those Earnings (part II)

Thursday, August 31, 2006 | 10:27 AM

in Earnings | Economy | Investing

Earlier this week, I noted that the Bullish camp likes to trot out the headline earnings data as proof of ongoing economic strength. In About Those Earnings, we specifically noted "One of the main Bullish arguments has been that very strong Earnings are not signalling a major slowdown." After all, 14 consecutive quarters of year-over-year double digit growth is no Bearish signal.

I describe this growth as "lumpy." It is highly concentrated by sector and cap size, and is not evenly distributed:

"Energy companies have recorded 50% growth in net income, while financials grew by 19%. Exclude those two groups, and net income is down 1.1%, in part due to significant dropoffs in basic materials (down 12%), consumer goods (off 11%), health care (37% lower) and technology (down 4%), and a 13% decline in telecommunications."

In a healthier environment, we should expect to see earnings growth broaden out across many more sectors in the economy. Instead, the growth is narrowing. The biggest gains are in a few sectors, and primarily in companies in big cap firms (like the S&P500 members).

But its not just me (or the perma-bears, pessimists or eeyores) who have noted this. The latest data to recognize this comes from the Commerce Department. The WSJ observed that the latest release on Corporate Profits admits:

"A slowing economy put the brakes on torrid growth of corporate profits in the second quarter, and rising labor costs could increasingly limit earnings growth in the months ahead.

The Commerce Department said pretax corporate profits in April, May and June collectively rose 3.2% from the previous quarter, much slower than the 12.6% jump in the first quarter or the 10% jump in the fourth quarter of 2005. Nonetheless, profits in the second quarter were 20.5% higher than a year ago and accounted for 12.2% of gross domestic product in the second quarter, the highest level in 40 years."

So while year over year growth remains strong, it has begun to slow sequentially.

Source:
Corporate Profit Growth Slows in Step With Economy
CHRISTOPHER CONKEY
August 31, 2006; Page A3
http://online.wsj.com/article/SB115694086605749436.html

Housing by the Numbers

Thursday, August 31, 2006 | 07:22 AM

in Data Analysis | Real Estate

What a difference a year makes:

Housing by the numbers

Housing Stat	Year Over Year Change
Builders’ sentiment	-52.2%
New-home sales	-21.6%
Purchase-mortgage applications	-20.9%
Building permits	-20.8%
Housing starts	-13.3%
Existing-home sales	-11.2%
Existing-home inventories	+39.9%
New-home inventories	+22.4%

This is one of those (rare) occasions where I will simply shut up and let the data speak for itself . . .

Hat tip: Nouriel Roubini, RGE

Sources:
Existing-home sales plunge to a two-year low
Inventories of unsold homes rise to 13-year high
Rex Nutting
MarketWatch, 2:12 PM ET Aug 23, 2006
http://tinyurl.com/pttf9

Eight Market Spins About Housing by Perma-Bull Spin-Doctors
Nouriel Roubini
RGE, Aug 26, 2006
http://www.rgemonitor.com/blog/roubini/143257

Donate a Duck to Help Special Olympics

Wednesday, August 30, 2006 | 05:00 PM

in Weblogs

The Million Dollar Duck Race has become an annual event in Manhattan to raise money for the Special Olympics.

Every $5 donation to Special Olympics New York adopts one of these racing ducks in your name and gives you a chance to win one million dollars, American Airlines tickets, a digital camera, or other fabulous prizes. More importantly, your donation will help Special Olympics New York provide year-round sports training and Olympic-style competition to children and adults with intellectual disabilities.

It is on Thursday, September 14th at the South Street Seaport.

Todd Harrison is helping to raise money for this event; You can sign up or just make donation here

The Fed is Wrong on Core Inflation

Wednesday, August 30, 2006 | 10:22 AM

in Federal Reserve | Inflation

The release of Fed Minutes showed greater unaminity than was previously hinted at. That was the excuse for the intraday reversal yesterday.

A sharp-eyed observer noted:

"Volume had been barely pacing Monday. Until 2:00 p.m. when it started to crank. As a matter of fact, there was a boatload shoved thru as the clock struck 2 and for the next ~30 minutes. Local lore is attributing this jump in volume and in price to the good news of the FOMC minutes. The only question that remains is what kind of a speed reader could actually scan and digest the above-referenced 7 pages, 276 lines, 34 paragraphs and 3,336 words and start to act on it before the red headline ink was even dry. (emphasis added)

I'll say. The ramp started the instant the Fed minutes hit -- certainly not enough time for any mortal to have read and comprehended that much data. This looked like it was simply a large macro-player pushing indices around in a very thin tape.

This is not me "talking my book." As I said in early August, I am contructive on the market for the next few weeks, but not much more beyond that.

The more interesting Fed related story the past few days was out of merry ole England, by way of Jackson Hole. Its seems that Charles Bean, the Bank of England's chief economist, is aghast at the absurd focus on the Core Rate of inflation by the U.S. Central Bank.

Dan Gross has the details:

"The US Federal Reserve is wrong to focus on core measures of inflation that exclude energy prices, Charles Bean, chief economist at the Bank of England, has suggested.

It should focus instead on headline inflation, which is much higher, he argued. Including energy and food costs, US consumer price inflation is running at an annual rate of 4.1 per cent, against 2.7 per cent for core inflation.

Mr Bean told the Fed's annual Jackson Hole symposium at the weekend that energy prices were rising for the same reason the price of many manufactured goods were falling: the rise of China and other emerging market economies. Since both price trends had a common cause, he said it makes little sense to focus "on measures of core inflation that strip out energy prices while not stripping out falling goods prices as well."

Mr. Bean did not mention the Fed by name but his implication was clear. Fed officials, including chairman Ben Bernanke, typically talk about measures of core inflation excluding volatile food and energy prices, which they say better predict future headline inflation.

Central bankers in Europe take a sharply different approach. Both the Bank of England and the European Central Bank put greater emphasis on talk of headline inflation, which includes the immediate "first round" effect of rising energy prices.

I find it rather discouraging that so obvious a statement needed to be publicly pointed out by an overseas observer, albeit a well placed one.

Inflation (ex-inflation) has now risen to the level of a national embarrassment.

Source:
BoE chief economist hits at US inflation measure
By Krishna Guhain Jackson Hole
Published: August 28 2006 03:00 | Last updated: August 28 2006 03:00
http://www.ft.com/cms/s/0dea0906-3631-11db-b249-0000779e2340.html
http://www.danielgross.net/archives/2006/08/27-week/index.html#a001090

Payroll Employment: The Home Game

Wednesday, August 30, 2006 | 07:15 AM

in Data Analysis | Economy | Employment | Web/Tech

Here's a fun thing to do between now and Friday's NFP data: You can play Payroll Employment: The Home Game:

"Every month billions of dollars change hands based upon the monthly report on the employment situation. This report is released the first Friday of each month.

With such an exciting opportunity, traders are tempted to participate in stocks, bonds, or a direct "bet" on the number.

Here is where you can practice online for the employment report."

The game (found here), allows you to bet on 'True' job growth as well as 'Actual' BLS change (hedonically adjusted and massaged though it may be).

To me, the most interesting aspect of the Payroll Employment Game are the Technical Notes. They lay out a very specific mind set that governs how real traders and investors position themselves around the monthly NFP report:

"The key points the Employment Game is designed to make are the nature of the information contained in the job report and the risks inherent in acting on a mistaken belief that the BLS job growth estimate for the current month represents an absolutely exact and true measure of the economy.

We do not intend to be critical of BLS in general nor of the Establishment Survey in particular. We believe the Establishment Survey is an excellent survey conducted, analyzed, and reported by dedicated and skillful scientists. Moreover, we believe the Establishment Survey provides an estimate of the change in seasonally adjusted jobs from one month to the next which is as accurate as it is possible to be in measuring anything at all involving actual humans in that time frame. Nor does the BLS misrepresent their work. They go to great lengths to explain what they do, why, and how and to explain how to interpret the results. As the old guy said: 'The fault, dear Brutus, is not in our stars, but in ourselves...' "

I agree. The only factor I found wanting was the lack of the BLS Birth-Death adjustment.

However, given the inherent difficulty in counting 140 million employed persons in the US, and then estimating the monthly change in that data, rather than making a specific numerical estimate, I find myself very comfortable sticking with the cowardly binary choice of "Over" or "Under."

But I do like the idea of making this into a playable and educational game.

Spiral Frog

Tuesday, August 29, 2006 | 03:40 PM

in Music | Web/Tech

Heres' a new business model for Tuneful Tuesday: Free, advertising supported music downloads. Think of a cross between typical P2P and Myspace, and you get SPIRALFROG (formerly Musicloads).

I spoke with Robin Kent, the CEO of Spiral Frog and former head of Universal McCann advertising agency, about the advantages of this model:

- Legal (No RIAA litigation against fans)

- Free (commercial advertising supported)

- Clean (i.e, no spyware, virus, malware or spoof downloads)

- Desirable target audience to advertisers (described as Marketers’ Dream)

- Cooperation from the labels

The thinking behind this is as follows: For every one legal download, there are 40 illegal (i.e., free) ones. Let's put up a site where we can capture some of the free downloadable music market, deriving revenue via advertising method (perhaps a 3rd party such as Google or Yahoo?). The target demographic market is the 13-34 year old age group.

They are not so much competing directly versus ITMS as they are versus Limewire and Kazaa.

There are three questions that come to mind anytime I see a new music site:

- Is it iPod compatible?

- How intrusive are the commercials?

- How restrictive is the DRM?

The answers to these often determine how succesful the site will become. In SpiralFrog's case, the answers are no, not sure yet, and somewhat.

When SpiralFrog launches in December, they will have a few challenges; Here are the issues that may arise once the site launches:

iPod Compatibility: No iPod compatibility? That means from day one, they are forsaking 75% of the marketplace. Indeed, Spiral Frog is not Mac compatible (not initially, anyway). That's a tough way to begin a new product, eliminating a huge swath of the market from consideration. Its tough to compete with cheap, easy to use, advertisement free, modestly workable DRM.

SpiralFrog responds to this by saying they are not competing with ITMS, but rather, are supplemental to what Apple offers. If you only want a 30 second clip before you buy a song, then you can go to iTunes. However, a full version of a song, along with additonal band info and a "MySpace" like community around each band could be a compelling proposition of the under 30 set.

Microsoft Zune: Not compatible with Microsoft's upcoming player Zune either; See above.

Free versus Cheap: Will "free" be the key to breaking Apples grip on legal downloadable music software and devices? That's a long shot -- most iPod owners have an extensive collection of music from beyond the iTunes Music Store. Their own CDs are a primary source, along with CDs of friends as the next source, and then P2P comes third. (If you want to say P2P trumps CDs for younger users, I won't argue with you).

I doubt they will cut into any of Apple's sales, but no cost, legal and virus free might give P2P sites a run for their money.

Restrictive DRM: 1 PCs and 2 portable devices per user. Kinda skimpy rights offering.

The Short Attention Span Generation: Each song takes 90 seconds to download, and while that is along time, the company hopes to keep viewers entertained with Concert information, videos, band discographies, photos, lyrics, etc. -- all the trappings of a serious music site. There are also plans for colloborative filtering -- as in "If you like this band, then you will like that band."

This is to my mind the toughest part of any advertising dependent site. Some of the most successful new technologies of recent years have had as part of their appeal a way for the user to control information/content themselves, and avoid the annoying and intrusive advertising. Think RSS, iPod, Satellite Radio, and TiVo.

On the other hand, Google is the most successful of all internet companies. Their advertising is discrete and unobtrusive. So an advertising model could possibly ~~work~~ be tolerated -- assuming its not pernicious popups or "watch to play" commercials. Marketers don't think “pre-roll” ads that run before or perhaps during the downloading process are effective. That's one of reasons YouTube was a monster hit, while iFilm was not. The "watch-to-play" pre rolls was one of the major differences.

~~~

I will reserve final judgement until I see what SpiralFrog looks like in December, but the concept is certainly intriguing.

Sources:
Universal Music backs free download website
Holden Frith
August 29, 2006
http://www.timesonline.co.uk/article/0,,26909-2332877,00.html

Universal Offers Free Music
C. Medford
Red HerringAugust 29, 2006
http://www.redherring.com/Article.aspx?a=18226&hed=Universal
+Offers+Free+Music&sector=Industries&subsector=EntertainmentAndMedia

Everyone's Going Crazy About the Frog
Mark Mulligan
Jupiter Research, August 29, 2006, 07:15 AM
http://weblogs.jupiterresearch.com/analysts/mulligan/archives/016945.html

Universal backs free music offer
Tuesday, 29 August 2006, 11:05 GMT 12:05 UK
http://news.bbc.co.uk/2/hi/business/5294842.stm

SpiralFrog, Universal in free music download deal
Tue Aug 29, 2006 12:30 PM BST
http://today.reuters.co.uk/news/articlenews.aspx?type=technologyNews&storyID
=2006-08-29T113016Z_01_WEN4632_RTRIDST_0_TECH-SPIRALFROG-DC.XM

Universal to try ad driven music downloads through SpiralFrog - still with DRM
Marshall Kirkpatrick
Tech Crunch, August 29 2006
http://www.techcrunch.com/2006/08/29/universal-music-group-
to-try-ad-driven-music-downloads-through-sprialfrog/

Consumer Confidence and Commodity Weakness Heralding An Economic Slowdown

Tuesday, August 29, 2006 | 12:15 PM

in Data Analysis | Economy | Psychology/Sentiment | Technical Analysis

The data keeps coming, and its getting harder for the perma-bulls to rationalize the information. Earlier in the month, University of Michigan Consumer Confidence plummeted the lowest level since last October; the blame went to "Terrorism fears and higher gasoline prices;"

Since that August 18 report, gas prices have dropped significantly.

This morning, it was the Conference Board's turn to release their data -- and their confidence index dropped the most since last September post-Hurricane Katrina. Blame for the drop this time went to "Weak Housing and the War in Iraq, and Employment."

I have a different theory: Consumer Confidence is weak due to no real wage gains for more than 2 years; It is not Housing per se, but rather, the inability to extract equity via HELOCs that are to blame for the poor confidence showing.

Even the reconstituted Leading Economic Indicators have continued to weaken:
>

LEIs, Year-over-Year percentage change, 3 years

Indeed, when we look at the prime driver of this cycle's inflation -- commodity demand -- is starting to cool off. Spurred by weakness in oil, the Reuters/Jeffries CRB index is testing key 5-year uptrend.

5 Year Chart -- Commodities

Source: Michael Panzner, Collins Stewart

One possible interpretation of that is the commodities market is anticipating cooling demand -- from the decrease in New Home construction, the slowing of the broader US economy, even a lessening of US purchases of goods made in China.

This is a chart worth watching over the short term as it could be the canary in the coal mine . . .

Sources:
Consumer Confidence Tumbles
MICHAEL S. DERBY
WSJ, August 29, 2006 10:18 a.m.
http://online.wsj.com/article/SB115685764716348336.html

U.S. Economy: Consumer Confidence Declines to Nine-Month Low
Bob Willis
Bloomberg, Aug. 29, 2006
http://www.bloomberg.com/apps/news?pid=20601087&sid
=acbsyoix71Ro&refer=home

Bears, Contrarians and the Crowd

Tuesday, August 29, 2006 | 06:48 AM

in Apprenticed Investor | Investing | Markets | Psychology/Sentiment | Technical Analysis

Welcome to Lake Wobegon, where all the women are strong, all the men are good-looking, and all the children are above average.
--Garrison Keillor

These days, everyone wants to be a contrarian.

That absurd statement leads us to taking a look at Contrary Sentiment (and other indicators). This highly misunderstood aspect of Technical Analysis can be a source of confusion to long term investors and short term traders alike.

First off, s consider how many people like to think of themselves as not part of the crowd. Surveys show that 80% of people with automobile licenses consider themselves to be "above average drivers."

Like the improbable children of Lake Wobegon, this is not statistically possible.

But it reveals something of Human nature: People like to consider themselves separate from -- or better yet, superior to -- the crowd. At the same time, our experience has been that most people unknowingly act with the crowd.

It is an inherent biological trait, one that has developed over millions of years. There is safety in numbers. In all of those Mutual of Omaha Wild Kingdom episodes I watched as a kid, it was always the gazelle on the outskirts of the herd that got taken by the lions.

The safety and success of going with the flow can be summed up by John Maynard Keynes: "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally." There is much truth to that.

While many people like to think of themselves as contrarians, the reality is that in the markets, the crowd is what moves the indices. Consider how many Wall Street cliches are a recognition of the power of the masses:

-Don't fight the tape
-The trend is your friend
- Never catch the falling knife
- A rising tide lifts all boats

Each of these aphorisms distilled to its essence are alluding to the power of crowds. Both directly and indirectly, the masses of buyers (or sellers) are what move markets. People forget the simple truism that markets go higher when there are more buyers than sellers, and lower whent there are more sellers than buyers.

Which brings us to today's look at sentiment. One of the things I keep hearing is that there are "too many Bears for the market to go down." That statement is true when Bearish sentiment reaches a true extreme; it can also be true for very short term counter trend rallies.

But just because sentiment is negative or positive does not mean markets automatically must go in the opposite direction. Helene Meisler looked at some past periods where negative sentiment was pretty consistent -- and martkets went down anyway. Specifically, she looked at the Investor's Intelligence readings from the early 1970s, specifically 1973-74:

"From March 1974, the DJIA traded between 846 and 800, roughly a 5% range. In that same time frame, the percentage of bearish newsletter advisers rose steadily from a low of 27% to 60%. The DJIA finally broke 800 in July 1974 year; by then, the bears were already at 60%. They climbed further to a peak of 69.6%.

In other words, the bears were right. And look at how they stayed bearish for the whole decline. The current reading for the percentage of bears is quite high at 34.7%, although it is well off its peak reading of a few weeks ago. But note that it has been in this mid-30s range since mid-June.

When folks ask me, as they often do, where sentiment is now, I must report that it is bearish. It has been bearish and it has not changed. Yet all those bears haven't helped the market rally longer than a handful of days at a time.

Perhaps there are too many bears out there. Perhaps all these bears will lead to a lasting rally one day, but all those bears didn't help the market in 1974 and so far it hasn't helped the market since June.

When I see the number of stocks making new highs increase and volume increase along with it, I will be happy to jump into the bull camp. But for now I continue to be part of the bear consensus."

That the crowd has become negative as the economy is cooling and inflation is still present may not be a great contrary indicator; Perhaps it generates a pop lasting a few weeks. But as we have seen in history, the crowd is typically correct -- until they reach great extremes.

There are all too many pseudo-contrarians who do not understand how (and when) these sentiment indicators work; I saw one that claimed the Housing posts on this blog were a buy signal for the Homebuilders.

Compare that with the "Home Sweet Home" on the cover of Time magazine in June 2005 as a sell signal for the home builders.

Investor's Intelligence Bearish Percentage and DJIA, 1973-74

Investor's Intelligence Bearish Percentage 2003-present

As Helene's charts above show, we are nowhere near extreme levels of sentiment that have in the past, reliably produced major reversals or even counter trend rallies.

Sources:
Confessions of a Consensus Bear
Helene Meisler
RealMoney.com, 8/25/2006 9:00 AM EDT
http://www.thestreet.com/p/rmoney/technicalanalysis/10305752.html

Home Sweet Home
Time magazine, June 13, 2005
http://www.time.com/time/covers/0,16641,1101050613,00.html

Read It Here First: NYT on Inflation, Personal Income and Corporate Profits

Monday, August 28, 2006 | 06:45 PM

in Earnings | Economy | Employment | Inflation

Today's NYT has an article on Inflation, Wages, Income and Corporate Profits.

We first started running a chart depicting the same issue way back in May 2004, and have featured it several times since.

>
Selected Component Shares of National Income
click for larger graphic

Graphic via St. Louis Fed

Here is a quick excerpt:

In the first quarter of 2006, wages and salaries represented 45 percent of gross domestic product, down from almost 50 percent in the first quarter of 2001 and a record 53.6 percent in the first quarter of 1970, according to the Commerce Department. Each percentage point now equals about $132 billion.

Total employee compensation — wages plus benefits — has fared a little better. Its share was briefly lower than its current level of 56.1 percent in the mid-1990’s and otherwise has not been so low since 1966.

Over the last year, the value of employee benefits has risen only 3.4 percent, while inflation has exceeded 4 percent, according to the Labor Department.

In 2004, the top 1 percent of earners — a group that includes many chief executives — received 11.2 percent of all wage income, up from 8.7 percent a decade earlier and less than 6 percent three decades ago, according to Emmanuel Saez and Thomas Piketty, economists who analyzed the tax data."

Here's some of our prior discussions during the last few years:

• Disposable Personal Income as a % of GDP

• GDP Up, Wages Stagnant

• Expansion Leaving Workers, Income Behind

• The Disconnect and Economic Classes

• Atypical Business Cycle Recovery

• Income Lag? Blame China

• Wages and Consumer Spending (Not a Pretty Picture)

Sources:
Real Wages Fail to Match a Rise in Productivity
STEVEN GREENHOUSE and DAVID LEONHARDT
NYT, August 28, 2006
http://www.nytimes.com/2006/08/28/business/28wages.html

The Seasonal Cycle and the Business Cycle
St Louis Fed
July 2006
http://research.stlouisfed.org/publications/net/20060701/net_20060720.pdf

About Those Earnings . . .

Monday, August 28, 2006 | 09:15 AM

in Corporate Management | Data Analysis | Earnings | Energy

One of the main Bullish arguments has been that very strong Earnings are not signalling a major slowdown.

I find that argument disingenuous. Earnings have been very strong on a year over year basis; but they have also been disproportionately concentrated in a few sectors (Energy, Materials) and partially engineered through dramatic share buybacks.

Marketbeat looked at some details last week, and came up with this:

So, it was a good quarter for earnings, right? Not necessarily, if you look at the entire spectrum of publicly traded companies. Sure, the S&P 500, with more than 97% of companies reported, has posted earnings growth of about 13%, marking yet another quarter of double-digit earnings growth. However, looking further down, the picture isn't quite as positive.

The Wall Street Journal's industry-by-industry quarterly earnings page (available here) shows that, with more than 3,700 companies reporting, net income growth on a year-over-year basis was up 12% in the second quarter, compared to 19% year-over-year growth in the first quarter (with more than 4,100 companies considered).

However, the growth in the first quarter was much broader than in the second, when energy and financials ruled the roost. Energy companies have recorded 50% growth in net income, while financials grew by 19%. Exclude those two groups, and net income is down 1.1%, in part due to significant dropoffs in basic materials (down 12%), consumer goods (off 11%), health care (37% lower) and technology ( down 4%), and a 13% decline in telecommunications.

It didn't look this way in the first quarter. While it is true that energy and financials rocked there too (up 44% and 13%, respectively), when taking those out, net income for the remaining companies rose 17%.

This pattern doesn't hold with the companies in the S&P 500. All of S&P's 10 main sectors are showing income growth on a year-over-year basis in the second quarter, according to Thomson First Call; health care and technology are the laggards, with 9% growth.

"When you look at the S&P 500, bottom line, it's not bad, and across the entire spectrum it's an up quarter," said Vinny Catalano, president of Blue Marble Research. "But when you get into the mid- and small-cap issues, as these data show, you really had a collapse…second-tier issues have deteriorated." (emphasis added).

As we noted a few weeks ago (Rotation Underway: S&P100 to S&P600), the Big Cap stocsk have (finally!) begin to outperform the smaller caps.

The above earnings discussion helps to explain why.

UPDATE: August 28, 2006 12:45

The Capital Spectator makes some interesting observations about earnings:

"Last year, income advanced nearly 23% over 2004, making the year one of the more remarkable 12-month stretches in corporate history. Curiously, the stock market reacted rather sheepishly, with the S&P 500 climbing only 4.9% last year. Perhaps it's not so curious after all. The stock market is widely credited with looking ahead. Sometimes it sees things that don't materialize, but in 2003 and 2004 its powers of prognostication were prescient, or so the S&P's 29% and 11% total return for each of those years, respectively, suggests.

Indeed, earnings continue to impress relative to the past. But the fuel that powers those earnings--rising corporate income--is showing signs of slowing. For this year's first quarter, corporate income slowed considerably relative to the year-earlier quarter, rising by 13%, as the chart above reveals."

Source:
About Those Earnings
David A. Gaffen
WSJ, August 25, 2006 12:02 p.m.
http://online.wsj.com/article/SB115650770612045482.html

White House Medicare Accounting Tricks

Monday, August 28, 2006 | 06:32 AM

in Corporate Management | Politics | Taxes and Policy

From this week's Barron's, comes the latest bit of fiscal dishonesty from the White House:

"THIS SPACE DOESN'T USUALLY INDULGE in advice to the ailing. But we feel compelled by a revelation that came to light last week to do so, even though we lack even the most rudimentary medical training. (If it helps our credibility any here, we might note we're a faithful reader of the New England Journal of Medicine; the pictures aren't much, but some of the text -- at least that part of it we can understand; we can't speak for the rest -- is unfailingly informative.)

Enough of disclaimers. Let's get to the heart of the matter. Our advice is simple: Don't get sick in the last nine of the days of Uncle Sam's fiscal year; and if you're already sick, for gosh sakes, don't get sicker. Especially if you happen to be a geezer, or have the bad luck to be disabled.

This exhortation is not based on any new medical research or even quack notion, and it has absolutely nothing to do with any seasonal blips in the incidence of disease. Instead -- and here's the beauty of it -- it springs from cold, hard logic, derived from last week's disclosure of some smarmy accounting sleight of hand that the Bush administration plans to indulge in so as to make Medicare's deficit look better this waning fiscal year. Just the kind of manipulation, incidentally, that under Sarbanes-Oxley can land a slippery CEO or chief financial officer in the pokey.

The bureaucratic brainstorm was straightforward -- simple-minded is, perhaps, a more appropriate description -- don't pay doctors, hospitals and their army of auxiliaries tending to indisposed old folks and the afflicted disabled for their labors in the last nine days of the current fiscal year. Instead, send them a check for what you owe them, sometime after the first of October, the start of the government's fiscal '07. In essence, those doctors, hospitals et al. are making an involuntary loan of nine days' pay without interest.

That way, point out the gleeful budgeteers and Medicare pooh-bahs, all of whom presumably are glowing with health, Uncle Sam's Medicare tab this fading fiscal year will be $5.2 billion less than it otherwise would have been. Or at least would seem to be $5.2 billion less -- in Washington, as we all know, appearance and reality are not invariably the same phenomena.

Of course, this oh-so-clever stratagem would mean that next fiscal year's Medicare bill will be $5.2 billion more than it would have been. But, not to worry, those indefatigable financial watchdogs in the Office of Management and Budget and their henchmen in the uppermost reaches of Medicare are on the case. And we have every confidence that next year they'll make up for any untoward increases in costs by ceasing to send checks to doctors, hospitals et al. in August or even July, if necessary.

It's never too early for the prudent sickie to begin to prepare for the worst and do everything in his or her power not to allow his or her condition to grow worse toward the end of the fiscal year. Get used to waiting until the start of the new fiscal year before letting it all hang out.

For it ineluctably follows that the doctors and their cohorts might feel some inhibiting hesitation about putting in an often onerous day's work for the promise of payment later. In the circumstances, who can blame them if they decide en masse to shut down their offices for the summer? And wasn't it the president, himself, after all, on an earlier occasion, who pointed out that government IOUs are just pieces of paper?

We have a modest counterproposal: Why not hold up the paychecks of the people in the upper echelons of the Medicare bureaucracy and at the Office of Management and Budget until the $5.2 billion target is reached? It might take more than a year or two. But, hey, they're dedicated public servants, so we're sure they wouldn't mind lending the government money for such a good cause. And, no matter how long it took, they'd be paid in full -- but fair's fair, without interest."

This sort of nonsense is beyond disappointing -- it is astounding . . .

Source:
The Medicare Scam
UP AND DOWN WALL STREET
ALAN ABELSON
Barron's MONDAY, AUGUST 28, 2006
http://online.barrons.com/article/SB115654804252746089.html

Summer Doldrums Linkfest

Sunday, August 27, 2006 | 05:30 PM

in Web/Tech

The lazy hazy days of summer have given way to the late August doldrums. The heat wave broke, and some nice early fall weather (lo 70s) showed up -- only to slide towards a wet weekend in the Northeast.

So, too, slid the markets: The nice pop last week gave way to a listless sidewinder this week, as the Smart Money headed to the shore or mountains or river -- anywhere but the canyons of lower Manhattan. With the A team gone, 3rd Stringers and Rookies manned the terminals. And it showed, in the lackluster, low volume, directionless trading.

More than once this week I mistakenly thought my PC froze -- the board was that lifeless. Where were the flashing lights, spinning numbers, change in ticks? Alas, that will have to wait until after Labor day. And if you thought volume was anemic last week -- well, just wait until this week. I expect Thursday and Friday will be sub-billion share days on NYSE.

Besides, adrenaline junkies shouldn't be trading anyway. What they should bve doing is looking for links for your weekend reading pleasure:

Why are you so obseessed with Housing? Over the past 18 months, I've been asked that by more people than I can recall. Well, this week, we got the answer to that question:

• Before the new and existing home sales reports were released this week, we looked at How We Got To This Point in the Housing Market;

What's the official data say?

-Existing-Home Sales Down With Softening Prices (Realtor Association)

-Builder Confidence Slides In August (National Home Builder's Assoc.)

-Housing Starts Cool 2.5 Percent In July (National Home Builder's Assoc.)

• Put this in the common sense file: In Housing as in Most Things: What’s Up the Most, Falls the Most

• 2Q home prices for 151 markets

• One of the big mysteries of the housing market is this: If year-over-year sales have fallen 21.6% since July 2005, then why are home prices flat? It has to do with math: Why Don't Big Housing Sales Drop Produce Big Price Drops?

• The National Association of Realtors (NAR) has alot of leeway for local brokers to enter price information about home sales into the NAR database. It turns out that some of them may be lying;

• Whither Housing? To answer that, watch these 10 Economic Indicators (pdf)

• Unsold Manhattan Apartments are at 10-year High; While Foreclosures are up 5% Last Month, 18% From Last Year, they still are far off of record levels.

• The penultimate question: Is a Housing Crisis Approaching?

Many worthwhile Investing stories worth exploring this past week:

• Bulls & Bears: an interesting collection of quotes and statistics about pundits

• The NYPost's Chris Byron goes postal on Nasdaq

• Forbes looks at Naked Shorts: Failed Trades

• THE RISK POOL What’s behind Ireland’s economic miracle—and G.M.’s financial crisis? (hint: Demographics)

• Are there economic reasons for American's Obsesity epidemic?

• Are there any similarities between the Dot-Coms in 2000 and Housing in 2006

• Steve Roach says the Housing slowdown will lead to another Post-Bubble Shakeout

• Lose All The Money In Your Trading Account In 30 Days Or Less - Guaranteed!

• Are Consumer Electronics Caught in a Deflationary Spiral? Bargains Are Near; Just Keep Waiting

• Good news for me: Evidence that lefties earn more

• The Rich are different from you & I (they have more money); But the Ultra-Rich, they are really different -- especially the way they spend their money.

The Federal Reserve made some news this week:

• To be filed under WTF? The Fed argues that Tech -- not their ultra low rates -- is what fed the housing boom

• 8th Inning Fischer says China's economy poised to overtake US

• The Fed has argued the economy could tolerate higher levels of Inflation due to the US's fast growing Productivity. Wat happens when that Productivity begins to slow? (Hint: Inflation);

• Copper prices soar amid labor dispute

• Inflation or just rampant collector's speculation? Anger as 2005 Bordeaux wine fetches record prices

• Bernanke's Jackson Hole Speech on Global Economic Integration: Bo-ring!

Three interesting Oil / Energy stories:

• The Oil Sands Rush

• The Contrarian Case for $50 Oil

• Are "Fuel Surcharges" a Scam?

A ton of Science and Technology news this week:

• NASA Finds Direct Proof of Dark Matter (see also this Harvard release)

• Nice problem if you can get it: Google has too much cash!

• Pluto: Planet no more and Rethinking the Solar System

• Why Steve Jobs should buy YouTube

• Amazon is about to jump into downloadable video;

• Using patients’ own “killer” cells to battle cancer;

• Hmmmm, An iPod for TV;

• Ricky Gervais secret Microsoft Office

Oh, the Places You'll Go and the Fun You'll Have! (apologies to Dr. Suess)

• As mentioned just above, two hilarious Microsoft Faux Training videos, featuring The (UK) Office's Ricky Gervais, were yanked from You Tube. As of this morning, you could still catch them on Google Video (parts one and two), but they will likely be gone by Monday. Why? I cannot answer that -- you would think Mister Softee would be more PR savvy by now;

• Compare & Contrast: the new CGI Grand Theft Auto inspired/GTA parody Coke Commercial on YouTube -- I don't think Coke minds its been posted -- the advert has been watched over 300,000 times (across 20 different postings).

• Missed the Pebble Beach Concourse d'Elegance? Here's the full catalog

• Drive a Ferrari 430, and you'll never wipe that sly little grin off your face

• The 9/11 Report: A Graphic Adaptation (as in graphic comic book)

• Six Horrifying Parasites

• The Human-powered rowboat Submarine

• The best Toyota Ad you'll ever see

• Guess what happens when an iPod accidentally falls into an Airplane Toilet? Total Transportation Mayhem!

MUSIC FILM BOOK TV

• Music Makes Your Brain Happy

• The Flaw of Television News, as told by an Army Lieutenant Colonel who doesn't watch TV

• I caught CSNY live at Jones Beach theater this week -- they were one of the last big Boomer acts I hadn't seen. How was the show? I've been a fan of their harmoniesa nd songwriting for years, and the music was great. Amazingly, Neil Young is as full of rage as he was 30 years ago. You can see his concert videos here and stream his entire new album here; The concert playlist is here (scroll down)

• New rock stars use Web videos to win fans (really? go figure!)

• I did see Little Miss Sunshine (trailer) last week -- great cast and terrific writing made it a fun movie. I also caught Miami Vice (trailer) last week -- and while I enjoyed it, I kept wondering what it had to do with the 1980 series of the same name (nothing);
• I just added David Swensen's Unconventional Success to the book queue;

• If you missed it, definitely catch Comedy Central's Roast of William Shatner. George Takei (Mr. Sulu) and Betty White stole the show, despite a dias full of professional comediannes.

• And since he is not here to defend himself, Cody Willard's Whisper To Me (yes, I am one cruel SOB motherf$#@&*r).

Yeah, I know: I went a little long, and a little heavy on the time-wasting videos, but what the hey, its a boring rainy summer weekend. Besides, you may have to go without next week, as I plan on Jet Skiing and ParaSurfing (weather permitting) over the long holiday weekend.

See you in two weeks!

Donchian's 20 Trading Guides

Sunday, August 27, 2006 | 08:55 AM

in Trading

Richard Donchian began his Wall Street career in 1930. Donchian began writing a technical market letter in 1933, and continued for many years (lot of biographical info on Donchian here).

I like going back to successful traders from the early part of last century, as their focus is driven by Human Nature -- not current events or technological advancement. As such, they manage to uncover timeless truths about our unchanging natures -- and how these natures act and react in capital markets.

The following trading guidelines were first published in 1934:

General Guides

1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move.

2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.

3. Limit losses and ride profits, irrespective of all other rules.

4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing.

5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.

6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation.

7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%

8. In taking a position, price orders are allowable. In closing a position, use market orders."

9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules.

10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag.

11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.

Technical Guides

1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected.

2. Reversal or resistance to a move is likely to be encountered:
- 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range
- On approaching highs or lows

3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently.

4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken.

5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places.

6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side.

7. Watch for volume climax, especially after a long move.

8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps.

9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.

Great stuff. Astonishing how advisable these 70 year old rules remain today.

>

Source:
Donchian's Trading Guides
Micaeel Covel
Trend Following,May 26, 2005
http://www.michaelcovel.com/archives/000419.html

Richard Donchian
Ed Seykota's Trading Tribe
1934/2003
http://www.seykota.com/tribe/Resources/Donchian/index.htm

Richard Donchian - Market Master
N.A. & C.J. Costa, Market Masters
2003
http://www.marketmasters.com.au/85.0.html