The Big Picture | March 2007

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Income Gap Continues to Widen

Saturday, March 31, 2007 | 03:00 PM

in Economy | Psychology/Sentiment | Wages & Income

To regular readers of TBP, this is very old news - but the significant play it has gotten recently is not.

We started discussing this in 2005 -- see The Disconnect and Economic Classes. I called it The Middle Class Squeeze; Dan Gross termed it the Cramdown. See also Middle Class Squeeze Continues and The Bifurcated Economy

But the phenomena is very real, and it is likely to continue as a factor imapcting sentiment as well as retail sales.
>

Source:
Income Gap Is Widening, Data Shows
DAVID CAY JOHNSTON
NYTimes, March 29, 2007
http://www.nytimes.com/2007/03/29/business/29tax.html

The Armageddon Gang

Saturday, March 31, 2007 | 08:54 AM

in Books | Economy | Investing | Markets | Psychology/Sentiment

Interesting article in Time magazine, The Armageddon Gang, looking at the uber Bearish crowd.

The piece starts out pretty skeptically, but eventually, acknowledges risks and issues usually ignored in family publications. Frequent BP guest Mike Panzner gets a lot of ink:

"There are those who fret that current troubles in real estate will lead to an economic slowdown, maybe a recession. Then there's Peter Schiff. "Our standard of living is going to decline," the Connecticut stockbroker confidently declares. "There's no way around it, and it has just started. . . "

Schiff owns Euro Pacific Capital, a smallish firm that specializes in moving clients' money into nondollar assets like foreign stocks and bonds. Over the past couple of years, he has become a regular, hectoring presence on cable-TV business shows--on CNBC they call him "Dr. Doom." Now he has a book out, ominously titled Crash Proof: How to Profit from the Coming Economic Collapse.

It isn't the only such cheery tome on shelves these days. In Financial Armageddon: Protecting Your Future from Four Impending Catastrophes, trader Michael Panzner warns of an economic meltdown that will lead to Zimbabwe-style hyperinflation and possible martial law . . .

We have heard such pronouncements of impending doom before, of course . . . When I bring this record up with Panzner, he has a ready retort. "History didn't begin in the postwar period," he says. "History didn't begin 20 years ago." Living memory includes the Great Depression, begun in 1929 and stopped only by global war; stocks didn't fully recover until 1954. The scary scenarios painted by Panzner and his ilk are not outside the realm of historical experience. What's more, they're all grounded in the incontrovertible truth that much of our economic growth of the past 25 years--and almost all the growth of the past five--has been funded by debt."

What makes Mike's book more interesting than the typical doom and gloom tome is his politics: The four impending catastrophes he discusses are pulled equally from the playbook of the Left (Massive debt, unregulated derivatives) as well as the Right (Unfunded Pensions, Social Security and Medicare entitlement programs).

Remind me to introduce Mike to Larry Kudlow next week -- despite the less than sunny views in the book (which is the antithesis of Larry's perspectives), the concern with government guarantees and entitlement programs are right up Kudlow's alley . . .

Source:
The Armageddon Gang
JUSTIN FOX
Time, Friday, Mar. 30, 2007
http://www.time.com/time/magazine/article/0,9171,1604936,00.html

Friday Night Jazz: Duke Ellington

Friday, March 30, 2007 | 06:30 PM

in Digital Media | Friday Night Jazz | Music

An excellent WSJ article on Duke Ellington (by Nat Hentoff, former Village Voice music critic) has me all excited about a new box set: The Duke Box.

Here's Hentoff's comments:

"I now have a sense of what heaven could be like. For those of us for whom Duke Ellington is rejuvenatingly contemporary, Storyville -- the legendary Danish label, a cornucopia of ageless jazz -- has released "The Duke Box," available on Amazon.com and in record stores. The 1940s Ellington orchestra (his most exhilarating) is heard entirely in "live" performances -- in dance halls (where, as Duke told me, the dancers became part of the music), nightclubs, concert halls, and on radio remotes from around the country.

In the 40-page booklet -- with photographs by Herman Leonard and William Gottlieb, masters of decisive jazz moments -- Dan Morgenstern notes that the sound of Ellington "live" is more vividly realistic than "the dead (non-resonant) studios of that time." (Those studio recordings also do remain essential because Duke insisted on no more than two or three takes a song for maximum immediacy.) But, as I can attest from having been at some of the dance halls and concerts, Ellington and his wondrously distinctive sidemen were most memorably heard in person."

The WSJ was kind enough to move the entire article over to free WSJ as a courtesy to the weekend linkfest (Thanks, Dave!).

C Jam Blues (which sounds an awful lot like Duke's Place)

Satin Doll

Caravan

Source:
Ellington's Band Is Heavenly In These 'Live' '40s Recordings
NAT HENTOFF
WSJ, March 28, 2007; Page D11
http://online.wsj.com/article/SB117504091320151076.html

free WSJ

Biased?

Friday, March 30, 2007 | 02:30 PM

in Data Analysis | Economy | Investing | Psychology/Sentiment

I am frequently accused of having a negative or bearish bias.

Its a rhetorical ad hominem device used by those who will not (or cannot) address the substantive issues. They prefer the personal attack, the name calling rather then discuss the merits. Its an effective technique if you aren't on guard for it.

I am biased -- by the facts. To quote The Daily Show's Rob Corddry: "How does one report the facts in an unbiased way when the facts themselves are biased?"

I have used this space to highlight positive developments on many occassions: We've been very upfront in suggesting that Oil prices -- even at $75 per barrel -- are not that expensive (it merely seems that way after 25 years of below inflation prices increases), and that gasoline is a relative bargain. For the newbies to the site, we tipped energy in December 2003; Gold and Japan in 2004.

Pre-blog, back in October 2002, I flipped Bullish. And, I heard the same accusations of being a Perma-Bull. We recommended a lot of tech and telecom -- Apple at $15 pre-split, MicroMuse (since bought by IBM ~$10) at $1.50 -- and many specific names in banking, and they were, for the most part, home runs.

~~~

Yes, I am biased; no I make no pretensions to be objective -- other than common sense, pragmatism, and what my life experience has taught me.

I believe what my interpretation of the facts show, what my models lead me to believe. I have an opinion, a perspective, a point of view.

Just as there is a difference between "Objective" and Ideological;" so too there is a difference between objective and neutral.

Final Q4 GDP: Goldilocks has left the building

Friday, March 30, 2007 | 06:45 AM

in Data Analysis | Economy | Markets

Markets rallied yesterday morning on the Final GDP data, revised to 2.5% - up from 2.2% Preliminary report (2/28) but down from the initial Advance (1/31) read of 3.5%. But the indices gave up those gains and then some as the day wore on. A little "window dressing" into quarter's end closed the markets in the green by day's end.

Was the GDP "improvement" really all that good? A quick look at the details suggests otherwise.

The 0.3% improvement was two parts inventory build (primarily autos), one part GDP deflator "adjustment." Pretax corporate profits decreased 0.3% in the fourth quarter of 2006, the first quarterly decline since the third quarter 2005.

CapEx spending remains punk, as corporate management is cutting back on all manners of spending to avoid eating into profits -- short term thinking at its finest. Nonresidential investment fell 3.1% for Q4, worse than the initially reported decline of 2.4%. But the big miss was Equipment and software spending -- down 4.8% (vs initial -3.2%). This is consistent with the series of weak durable-goods reports we hav sen the past few months.

Signs of economic strength? Hardly.

Reuters:

"The (GDP) headline number looks better, but the gut of the report is a little worse," said Robert Brusca, chief economist for Fact and Opinion Economics in New York. "Going forward, we still don't know, but you should be disturbed by the lack of capital spending."

Business investment spending fell at a 3.1 per cent annual rate in the fourth quarter rather than the 2.4 per cent decline the government estimated a month ago. That contrasted with a 10 per cent third-quarter jump.

Spending on new-home building plummeted by 19.8 per cent – even steeper than the 19.1 per cent fall estimated a month ago – after an 18.7 per cent drop in the third quarter.

It was the fifth quarter in a row that residential spending has fallen and the steepest since a 21.7 per cent plunge in the first quarter of 1991 when the economy was on the brink of recession."

The overall trend of GDP, corporate profits, durable goods and CapEX spending is downward. Housing, Autos, and Manufacturing are already in a recession (I have a car coming off lease May 1st, and I plan on waiting some time to see what sort of incentives the auto industry will be throwing my way as inventory continues to build). I don't see how these issues get any better any time soon.

Goldilocks has left the building . . .

Source:
U.S. GDP growth hobbled by stocks of unsold goods
Rising inventories, give year-end lift but spending curb suggests slowdown
Glenn Somerville
Reuters Mar 30, 2007 04:30 AM
http://www.thestar.com/Business/article/197577

Media Appearance: Kudlow & Company (3/29/07)

Thursday, March 29, 2007 | 04:30 PM

in Media

Its a TV two-fer today:

Back in the studio tonite with ~~Larry~~ uber-Bull Bob Pisani, from 5:10 - 5:30 pm (I'm remote from NY).

Recall the last time I was on with Bob Pisani (he as a guest), he was astoundingly Bullish -- about a week before the February 27 correction began. (I am now referring to those highs as the Bob Pisani top!)

Also in the studio are Michael Cuggino and the very bearish Gary Shilling.

Since this was scheduled, DELL was halted and news re;eased; It reopened about ~$1 lower: I assume this will be viewed as very company specific, and not spill over to the general tech market. Dell has long since lost its status as a tech bellwhether.

That said, some of the Tech Bears (Hickey, Fleckenstein, et. al.) have argued that much of the "E" in the P/E ratio is pretty ginned up. We now know they were right -- at least as far as Dell is concerned.

Tonite will definitely be fun!

Media Appearance: Bloomberg TV (03/29/07)

Thursday, March 29, 2007 | 10:45 AM

in Media

Bloomberg_logo_rect

This morning I'm on Bloomberg TV, from 11:00am to noon, on the show Open Exchange with Michelle Safo. We will be discussing the Markets, Fed speak, the slowing economy, various sectors, and whatever else comes up.

Some bullet points I hope to hit:

• Inflation remains elevated, as the economy slows: Demi-stagflation

• Where's the leadership? Last week's rally saw Utilities and Telecoms, hardly the sectors you want to see pulling the train.

• eBay, Disney, GE, Mosaic are some of the stocks we will discuss.

If you are not near a TV, you can stream it here:
http://www.bloomberg.com/tvradio/tv/

Should be fun. . .

Q4 '06 GDP: 2.5%

Thursday, March 29, 2007 | 10:00 AM

in Data Analysis | Economy

Q4 GDP (Final) for 2006 came in at 2.5%. This was revised to above the previously downwardly revised report but above the downwardly revised consensus expectations of 2.2% (Got that?)

Markets rallied on the news that 4 - 6 months ago, GDP was bad, but not quite as bad as previously believed. (So much for the market as a forward looking discounter).

A quick lesson in Commerce data reporting for the newbies out there: We get 3 GDP reports (on I believe the last Thursday) of each month following a quarter's end: Advance (1/31), Preliminary (2/28) and Final (3/29).

Q4 GDP took a particularly tortured route: the Initial report was surprisingly high, and the individual components clearly conflicted with data already released (we noted this number was a fantasy here). The next revision surprised people to the down side, as it took ~a third off og GDP.

Our original guestimate was for 2 - 2.5%, and this number is consistent with that.

Peter Bookvar notes: "An upward revision to inventories, a better trade deficit, and Govt spending" as the main factors in the upward revision. Personal spending was left unchanged, and CapEx spending (equipment, software and residential construction) went down. This bodes poorly for further growth, as we have long been told that Business CapEx was ready to take over when the consumer finally falters. That is looking increasingly unlikely.

The WSJ noted:

"Profits are being squeezed by receding demand and rising labor costs. Retail sales were flat in February after inching 0.1% higher in January. Business sales fell 0.7% in January and had gone up 1.9% in the previous 12 months. The Labor Department reported recently that unit labor costs swelled by 6.6% in the final quarter of 2006, up from 1.1% in the third quarter. Labor costs rose an average 3.2% in 2006, which had been the sharpest annual increase since 2000 . . .

The biggest component of GDP is consumer spending. Fourth-quarter spending by consumers rose an unrevised 4.2%, which was above the third quarter's 2.8% advance. Consumer spending accounts for the lion's share of economic activity -- about 70%. It contributed 2.93 percentage points to GDP in the fourth quarter."

Here's a quick chart:

Chart courtesy of Barron's

Source:
Fourth-Quarter GDP Revised Up
To 2.5% on Inventory Investment
By JEFF BATER
March 29, 2007 9:41 a.m.
http://online.wsj.com/article/SB117517137375453111.html

Globalization & Inflation

Thursday, March 29, 2007 | 06:54 AM

in Economy | Federal Reserve | Inflation | Trading

As noted yesterday, Traders were none too happy with BB's testimony, setting them straight on the errors of their ways last week.

The always astute Bill King points out that this should not have been a surprise. Bill notes that a speech the Chairman made earlier in the month at Stanford, Bernanke explicitely noted concerns about Globalization and his inflation worries:

"On the other hand, not all aspects of globalization and trade reduce inflation. For example, globalization has been associated with strong growth in some large emerging-market economies, notably China and India, and this growth likely has contributed to recent increases in the prices of energy and other commodities. During 2003-05, for example, China alone accounted for nearly one-third of the growth in both global real gross domestic product (GDP) and oil consumption.

It is difficult to assess the exact extent to which increased demand by developing countries has contributed to the run-ups in commodity prices in recent years, as these prices are also affected by supply conditions and other factors. However, one study estimated that, if the share of world trade and world GDP enjoyed by non-industrial countries had remained at its 2000 levels, then by 2005 real oil prices would have been as much as 40 percent lower, and real metals prices 10 percent lower, than they actually were (Pain, Koske, and Sollie, 2006).

Accordingly, in the past several years, the effect of growth in developing economies on commodity prices has been a source of upward pressure on inflation in the United States and other industrial economies.

When the offsetting effects of globalization on the prices of manufactured imports and on energy and commodity prices are considered together, there seems to be little basis for concluding that globalization overall has significantly reduced inflation in the United States in recent years; indeed, the opposite may be true. (emphasis added)

--Chairman Ben S. Bernanke, March 2, 2007

Now, I am cherry picking a few paragraphs out of a 4324 word speech. And the Fed Chairman, like all economists, is two-handed.

However, a careful read of his full speech, along with some intelligent context, makes it clear that the Fed remains quite concerned about Inflation on the one hand, and slowing economy on the other. Pick a hand, and draw your own conclusions.

We>

Source:
Globalization and Monetary Policy
Remarks by Chairman Ben S. Bernanke
At the Fourth Economic Summit, Stanford Institute for Economic Policy Research, Stanford, California
March 2, 2007
http://federalreserve.gov/boarddocs/speeches/2007/20070302/default.htm

The CD Is Dead! Long live the CD!

Wednesday, March 28, 2007 | 05:30 PM

in Digital Media | Music | Retail

Dan Gross has an interesting column on Slate: The CD Is Dead! Long live the CD!

"What we are witnessing is not so much the imminent death of CDs but the death of the old methods of selling CDs. It's still possible to make money in the CD business—any business with more than $7 billion in retail sales should allow someone, somewhere, to make a profit. The incumbents are getting killed, but upstarts are thriving, using different methods." (emphasis added)

Yeah, TBP got a mention in it -- our prior discussion of how Amazon's music best sellers are under $10.

But my favorite line it in comes towards the end of the column: "Is the CD dying as a commercial product? Sure. But it's got a lot of dying left to do."

Source:
The CD Is Dead! Long live the CD!
Daniel Gross
Slate, Tuesday, March 27, 2007, at 4:01 PM ET
http://www.slate.com/id/2162771/

Bernanke Testimony

Wednesday, March 28, 2007 | 10:49 AM

in Economy | Federal Reserve | Inflation | Real Estate

Ben Bernanke is testifying on "The economic outlook" before the Joint Economic Committee, U.S. Congress (Text of speech here).

As we noted last week in FOMC Statement, Revised for Reality, the Fed is vey much aware of the box they are in.

Here's the highlights from BB's testimony:

• Economic growth in the United States has slowed in recent quarters to an annual rate of roughly 2 percent.

• The principal source of the slowdown in economic growth has been the substantial correction in the housing market.

• The near-term prospects for the housing market remain uncertain; Developments in subprime mortgage markets raise some additional questions about the housing sector.

• Turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, and the implications of these developments for the housing market as a whole are less clear.

• Business spending has also slowed recently. Expenditures on capital equipment declined in the fourth quarter of 2006 and early this year.

• The weakness in housing and in some parts of manufacturing does not appear to have spilled over to any significant extent to other sectors of the economy.

• Outside the United States, economic activity in our major trading partners has continued to grow briskly.

• Although core inflation seems likely to moderate gradually over time, the risks to this forecast are to the upside.

Lastly, the risks to this forecast:

"This forecast is subject to a number of risks. To the downside, the correction in the housing market could turn out to be more severe than we currently expect, perhaps exacerbated by problems in the subprime sector. Moreover, we could yet see greater spillover from the weakness in housing to employment and consumer spending than has occurred thus far. The possibility that the recent weakness in business investment will persist is an additional downside risk. To the upside, consumer spending--which has proved quite resilient despite the housing downturn and increases in energy prices--might continue to grow at a brisk pace, stimulating a more-rapid economic expansion than we currently anticipate."

This testimony makes clear (to me at least) drew precisely the wrong conclusion from the FOMC statement last week. Bernanke is now correcting that error via this speech.

Thanks for coming by! We'll see y'all agin real soon!

Update II March 28, 2007 2:40 pm

Bloomberg is even more stark:

Bernanke Keeps `Inflation Bias,' Sees Growth Risks
Craig Torres and Scott Lanman
Bloomberg, March 28 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=arfy3wF82Hk4&

Update March 28, 2007 11:09 am

WSJ has an update:

"Federal Reserve Chairman Ben Bernanke said Wednesday that despite risks to both growth and inflation, the current stance of policy remains the right one to foster sustainable U.S. economic growth and a gradual easing of price pressures.
[Ben Bernanke]

That suggests that despite recent signs of subpar economic growth, the Fed isn't inclined to lower rates anytime soon, especially with underlying inflation, in Mr. Bernanke's words, "uncomfortably high."

"To date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing of core inflation," Mr. Bernanke said in prepared testimony to the Joint Economic Committee of Congress.

-Bernanke Expects Sustainable Growth

Source:
The economic outlook
Before the Joint Economic Committee, U.S. Congress
Testimony of Chairman Ben S. Bernanke
March 28, 2007
http://www.federalreserve.gov/boarddocs/testimony/2007/20070328/

Bernanke Expects Sustainable Growth
Doesn't See Subprime Turmoil Spreading
BRIAN BLACKSTONE
March 28, 2007 10:53 a.m.
http://online.wsj.com/article/SB117509212720351831.html

The Return of Geopolitical Risk

Wednesday, March 28, 2007 | 07:10 AM

One of the more intriguing things about the market period we are living in has been the way Markets have shaken off all manners of risk. I couldn't tell if it was a sign of strength (resiliency) or weakness (evidence of complacency).

All manner of risky activity has been shrugged off as if it didn't matter.

We even noted on Monday that Oil and Gas had ticked up in price, with premium (high test) selling for more than $3 and Oil tickiling $64. That obviously didn't concern Mr. Market last week, nor did the Fed's evident concern with the decaying economy and creeping Real Estate problems.

Now, it appears that glimmers of recognition of all that risk is returning, courtesy of Iran's capture of 15 British sailors and marines. Last night, Oil spiked $5, "rumors that Iran fired on U.S. Navy warships." Other rumors of an immiment Iran attack by the Brits aided by the U.S. were reported.

With a little luck, this situation gets resolved with no shots fired, but I suspect that may not suit the unpopular President of Iran, Mahmoud Ahmadinejad -- nothing rallies the populace around an unpopular president like an attack on the nation from abroad.

Oil has backed off from those lofty prices, but it remains over our previously noted resistance level of $64.

Bloomberg is reporting that:

"Oil rose for a seventh day in New York, climbing close to $65 a barrel, on concern a dispute over Iran's capture of British servicemen would escalate, disrupting supplies from the Middle East.

Oil surged $5 in seven minutes late yesterday on speculation the U.K. would mount a rescue attempt, and rose today by more than $2 a barrel. U.S. stockpiles of gasoline were already falling before the standoff between Britain and Iran, and analysts expect the Department of Energy to report today they fell again last week, the seventh straight decline...

Almost a quarter of the world's oil flows through the Strait of Hormuz, a narrow waterway between Iran and Oman at the mouth of the Persian Gulf. Relations between Iran, which sits on the world's second-largest proven reserves, and western governments are already frayed because of the country's nuclear program."

I have no idea where Oil will go, but if this situation escalates further, the direction will be higher. Mike Panzner charts a potential move in Oil up to $77:

We may or may not see that type of a move. However,it is increasingly obvious (to me at least) that Obliviousness may no longer be a rewarding investment posture.

Sources:
Oil Rises a Seventh Day, Climbs Near $65 on U.K.-Iran Standoff
Grant Smith
Bloomberg, March 28 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=aTlE415EaKJM&r

Case Shiller Housing Composite Flips Negative

Tuesday, March 27, 2007 | 11:30 AM

in Data Analysis | Real Estate

For first time in over a decade, the Case Shiller Housing Composite flipped negative; I'm sure this is utterly meaningless, and is nothing to worry about whatsoever:

"January data released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices in the United States, shows home price composites plummeting into negative terrain.

“The annual declines in the composites are a good indicator of the dire state of the U.S. residential real estate market,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC. “ The 10-City and 20-city Composites are both showing negative annual returns, a striking difference from the 15.1% and 14.7% returns they reported this time last year. The dismal growth in the 10-City composite is now at rates not seen since January 1994.”

S&P/Case-Shiller Home Price Indices

Unless the actual data matters to you, and you are uninterested in becoming a serial bottom caller in Housing.

But other than that, nothing to worry about here . . .

Source:
The New Year Begins With Negative Returns According To The S&P Case-Shiller Home Price Indices
Mar 27, 2007 09:00 AM EST PDF
http://www2.standardandpoors.com/spf/pdf/index/032707_homeprice.pdf

S&P/Case-Shiller Home Price Indices

S&P/Case-Shiller Home Price FAQ

What is the Fed Really Thinking?

Tuesday, March 27, 2007 | 07:09 AM

in Economy | Federal Reserve | Financial Press | Inflation | Markets

Last week's rally was ignited by a simple change of phrasing in the FOMC statement. Market took that to mean not only that increases are off the table, but -- Hallelujah! -- a rate cut is in the offing.

Not so fast.

Whenever the Fed says or does something that is subsequently misinterpreted, they have a few back door methods to correct the error. Two in particular were used fairly regularly. Call it the Fed edit/correction methodology.

When John Berry was at the Washington Post, he could be discretely contacted. He's now the Fed columnist at Bloomberg, and while I'm sure he maintains his FOMC contacts, we haven't seen him "break news" like his WaPo days. He primarily does analysis, and he is very insightful as to what the the Fed is thinking. That's quite valuable, but its not the same as "getting the call."

These days, that takes place with the WSJ's Greg Ip. And in a page one article, he lays out what the news is from on high:

"When the Federal Reserve last week altered its post-meeting policy statement to soften the suggestion that it might raise interest rates, Wall Street was confused.

Was the Fed signaling that a rate increase was less likely because the outlook for the economy had darkened? Or was it simply reflecting the reality that interest rates are on hold for now?

The answer to both questions is, yes."

With no one quoted, and no speech is cited, one has to assume this is straight from the horse's mouth. The WSJ doesn't print factual statements about the Fed on the front page without knowing this is precisely what they are thinking. That's simply not how they roll.

So we can assume that Mr. Ip. is repeating what he was told by very senior Fed Sources. Consider the specifics of the following:

"The Fed is seeing increased risks to its forecast that the nation's economy will grow moderately this year. Those risks include the surprisingly weak level of business investment and the hard-to-predict outcome of the current troubles at the riskier end of the mortgage market.

The Fed changed its statement last week to get the flexibility to cut interest rates in coming months if those risks grow. But it is unlikely to use that flexibility anytime soon, because the risks aren't big enough and inflation remains uncomfortably high. (emphasis added)

I'll bet you that the last underlined sentence came verbatim from the Fed. If it was not emailed, than it was spoken slowly and repeated. And the surprisingly weak CapEx chart? Yeah, you can assume that has the Fed nervous.

Here's another classic insider line (and the word "Housekeeping" is classic bureaucracy speak):

"Housekeeping" played a part, as well. For several months, some officials saw the Fed's previous policy statement, which had indicated rates could rise but not fall, as increasingly inconsistent with their own expectations of unchanged rates for the foreseeable future.

We are only to the middle of the article, and we get the conclusion:

The new statement reflects a Fed on hold. It contains no explicit reference to the direction of rates, saying only that "future policy adjustments will depend" on growth and inflation, but reiterates enough inflation concern to indicate lower rates aren't on the table.

The rest of the piece is worth a read, but after this point its just a standard article. All of the prior paragraphs can be considered dictation from the Sermon on the Mount.

~~~

In our adjusted for reality FOMC statement, we noted the Fed is dealing with two difficulties: stubbornly high inflation and a slowing economy. And, we noted the crowd has likely got the subtlety of the FOMC statement wrong. That turned out to be surprisingly prescient.

Greg Ip's column is the first phase of the FOMC editing. Expect a few Fed Governor speeches over the next few weeks to further edit and clarify what they really meant . . .

Source:
Fed Has Trouble Getting Across Nuanced Message
Outlook for Economy Looks Bleaker, but Rates Aren't Likely to Change
GREG IP
WSJ, March 27, 2007; Page A1
http://online.wsj.com/article/SB117496360470949988.html

Gas & Oil

Monday, March 26, 2007 | 05:56 PM

in Commodities | Energy | Inflation

Tanked up this weekend -- and for the first time in a long while, I paid over $3 for a gallon of gas (93 octane premium).

Crude is now ~$63 a barrel.

Of course, energy has nothing whatsoever to do with inflation (ex-inflation), so thats no worry.

Whether this goes any further is still unknown. Since the GSCI weighting change, Oil has been unable to surpass $64. Indeed, as the 6 month chart below shows, Crude Oil has substantial resistance right at that point. So unless something very significant happens -- Iran and Brits? Pakistan falls? Iraq gets even worse? -- we can expect that it will take something very significant to help energy prices blast thru that level.

Note that the longer term (3 year) chart is far bottom, and implies a trading range of $56-64.

CRUDE OIL Daily chart 6 months

CRUDE OIL Weekly Chart, 3 years

New Home Sales: 7 Year Low

Monday, March 26, 2007 | 10:17 AM

in Data Analysis | Real Estate

There was no good news whatsoever in today's New Home Sales Data:

• Sales of new-homes dropped nearly 4% in February.

• This is the lowest reading since June 2000, according to Commerce Department data.

• On a year-over-year basis, sales were down 18.3%.

• Inventories of unsold homes rose 1.5% to 546,000. This represents an 8.1-month supply. Marketwatch notes this is the largest inventory in relation to sales since January 1991.

• On a year-over-year basis, the inventory is up 26.6%.

• The median price rose 2.8% sequentially -- down 0.3% year-over-year basis, to $250,000.

This report is hard to reconcile with last week's Existing Home Sales; One of them is likely wrong, and I suspect the NAR prepared Existing Home Sales is the dud . . .

What Market Hazards Are Ahead?

Monday, March 26, 2007 | 06:58 AM

in Currency | Earnings | Markets | Real Estate

It invariably happens that after the linkfest goes up, I discover a killer article that would have been perfect. This piece from the L.A. Times' Tom Petruno is just such a column.

Petruno identifies three potential issues the markets may have to surpass in the next few quarters: Consumer Spending, Corporate Earnings, and the Declining Dollar.

Here's a quick look at the big three threats:

• U.S. consumer spending dives. Perhaps the surest ticket to a bear market in stocks would be for Americans to close their wallets — either because they're spent out or because they're nervous about their finances or their job outlook.

This is so obvious that it might well be overlooked as a risk. Investors have no recent experience with a consumer-led recession. The last one was 17 years ago, in 1990. The 2001 recession, by contrast, was led by a plunge in business outlays.

• Corporate earnings shrink. Wall Street is fully expecting a slowdown in profit growth this year with a weaker domestic economy. But an outright decline in earnings might be a shock investors couldn't handle.

Bad news: The margin of safety is dwindling. Total operating earnings of the Standard & Poor's 500 companies are expected to rise a mere 4.3% this quarter from a year earlier, according to analyst estimates tracked by Thomson Financial. That would be less than half the pace of the fourth quarter and the slowest growth in nearly five years.

• The dollar's value tanks. The U.S. economy has been built on foreign money over the last two decades. Massive inflows of capital from overseas have been needed to cover the nation's trade and budget deficits. Other countries' saving underwrites our spending.

What would happen if foreigners lost their appetite for U.S. assets? Granted, that question has been asked so many times since 1990 that Wall Street is downright bored with it. Which means that a dollar crisis would be exactly the kind of thing to catch most investors by surprise. A fast slide in the buck could be a sign that the allure of U.S. investments is fading with foreigners.

That's the overview; the whole column is definitely worth a read . . .

Graphic courtesy of LATimes

Sources:
Hazards ahead as a new quarter starts
Investors seem to have gotten over the mortgage scare, but more challenges loom.
Tom Petruno:
L.A. Times, Market Beat
March 25 2007
http://www.latimes.com/business/la-fi-petruno25mar25,1,624538,full.column?

Spring LinkFest!

Sunday, March 25, 2007 | 05:30 PM

in Weblogs

Now that was a helluva week: Major indices notched their best gains since the Iraq war began four years ago. Thank the Fed, for dropping their language that indicates a willingness to tighten rates. The Russell gained 3.9%, while the Dow tacked on more than 470 points, for a better than +3% gain; The S&P added nearly 50 points (+3.5%), while the Nasdaq grabbed 82 points (+3.5%). The indices have all returned to positive territory on a YTD basis.

But the biggest winners of the week were European stocks (+4.7%), Emerging Markets (+4.6%) -- and Crude oil, which rose 4.5%. The big loser? The US Dollar -- it fell half a percent, and is down 3.5% for the past year. US Treasuries also fared poorly.

The question of the day is simply this: does this mark the end of the correction which began on February 27th, or does something more wicked this way come? Good arguments can be made for both the bull and bear cases.

Perhaps we can garner a hint from our weekly roundup of major news items, in this, the first linkfest of Spring!

INVESTING & TRADING

• The Patient's Improving, For Now: Stocks raced to their biggest one-day gain this year once the Fed statement hit the tape. The broad rally lifted all sectors, with financial stocks leading the way. Cash flow into U.S. mutual funds eventually topped $2.2 billion on the week -- the first time since July 2005, according to Banc of America Securities, that domestic-equity funds hauled in more cash than their overseas counterparts. (Barron's) If no Barron's, go here

• China to Create Huge Fund To Invest Part of Reserves: China will soon create one of the world's largest investment funds, with ramifications for global stock, bond and commodities markets and for how the United States finances its budget deficits. (Associated Press)

• State Street Hedge Fund Research Study (pdf)

• Yet another Exchange trading SNAFU? Nasdaq Composite Surged After Now-Canceled Trades: The Nasdaq Composite Index twice jumped more than 7 points in a few seconds today because now- canceled trades in shares of Donegal Group Inc. sent the stock surging more than 11,000 percent. (Bloomberg)

• After Sell-Off, Chinese Stocks Back at a Record: After a huge sell-off here just a few weeks ago that helped set off a drop in global financial markets, China’s stock market has rebounded and rose to a record Wednesday. Many investors say the sell-off on Feb. 27, when the Shanghai composite index plunged 8.8 percent, was simply a temporary setback in a galloping bull market (NYTimes)

• The blogosphere erupts over Blackstone's IPO filing

• The usually mellow Jim Jubak gets stressed over Why the debt bubble hasn't burst -- yet (MSN)

• Merrill Restricts Research Access to Guard Intellectual Capital Merrill Lynch & Co., the third- biggest U.S. securities firm by market value, is restricting access to its research reports after some stock picks appeared on outside Web sites within seconds of their release. Merrill needs ``to regain control of our distribution channels in order to preserve and protect our hard-earned intellectual capital,'' Candace Browning, New York-based Merrill's global head of research, wrote in a memo to clients today. Like the music industry's battle with file-sharing services, research is "in the throes of being Napsterized.''

Merrill's letter to clients is here: Obituaries for Sell Side Research are Premature

• NYSE Margin Hits All Time Record (But I'm not sure exactly what this means)

• For a Europe remade, a celebration in uncertainty: What began in limited fashion in 1957 as a drive to remove tariff barriers and to free commercial exchange has ended by banishing war from Europe, enriching it beyond measure, and producing what Michnik called "the first revolution that has been absolutely positive." (IHT)

• Watch your online accounts! We've warned about these scams previously, but here's yet another twist: Russian Criminals Targeting U.S. 401ks and Online Traders

• Our own Paul Kedrosky points to this financial SEC Filing from activist fund Chapman Capital, that contained some unusual and colorful language! Moral: Its bad form to file SEC docs telling a 9% S/H to go, um, well, read the SEC filing.

SENTIMENT/PSYCHOLOGY

• Jim Cramer has drawn a surprising amount of media fire over his manipulation comments made in December. Why the belated ire?

One theory: the knives came out ONLY after the market cracked. This is not so much about Cramer as it is about a major shift in sentiment, as the hostility is coming through once the markets looked vulnerable. Fascinating, and truly revealing: Brouhaha over the Booyah: Timing Reveals All.

• Bull or Bear?
-Investors Turn More Bearish on U.S., Merrill Says: Investors in March were the most bearish on U.S. equities in seven months on mounting pessimism about the outlook for earnings growth, a Merrill Lynch & Co. survey showed. Cash levels also reached the highest since August.

-Sentiment trends are encouraging: The stock market is now 3% above its March 5 low, as judged by the Dow Jones Wilshire 5000 index. But few advisers are celebrating. This leads contrarians to suspect that the top has not yet been seen.
• Margin debt relative to market capitalization is the highest since the 1920s.

HOUSING

A ton of very interesting real estate related stories this week, as Subprime and Alt A loans dominated the early week, and Hosuing Starts, Permits and Existing Home Sales the latter:

• The Subprime Loan Machine: The rise and fall of the subprime market has been told as a story of a flood of Wall Street money and the desire of Americans desperate to be part of a housing boom. But it was the little-noticed tool of automated underwriting software that made that boom possible. (NYT)

• Housing starts rebound but permits fall: Housing starts rebounded from a nine-year low in February, according to the latest government reading on the battered home-building industry, but ongoing weakness led builders to pull back on plans for more housing. (CNNMoney)

• Home-Sales Surge May Not Reflect Subprime Woes: The latest data reflect completions of home sales in February that resulted from purchase agreements that were mostly signed in December and early January, when unusually warm weather in the Northeast may have enticed more people to shop for homes. (free WSJ)

• Regulators Scrutinized In Mortgage Meltdown: The well-publicized woes in the business of subprime mortgages -- a surge in foreclosures, turmoil in the stock market -- are raising a big question: Are regulators partly to blame? (free WSJ)

• Caroline Baum seethes: Government Is 'Here to Help' Subprime Borrowers: Congress is making noises about doing something to help homeowners who can't meet their mortgage payments hold on to their slice of the American Dream. . . As a sideshow, our elected representatives will probably spank regulators for not doing more to curb deceptive lending practices and hang executives of subprime lenders out to dry for presiding over the boom-bust cycle. While lawmakers' intentions may be noble, it's a pretty safe bet that, left to their own devices, they will muck things up even more. (Bloomberg)

• Stricter loans seen draining new-home demand: The trouble in the mortgage market could spread beyond the subprime sector with tighter lending standards cutting demand for new homes by as much as 15% and further squeezing home-builder profits, according to an analyst following the industry. (MarketWatch)

• 'Liar loans': Mortgage woes beyond subprime: Subprime mortgages have been generating a lot of attention, and worry, among investors, economists and regulators, but those loans may be only part of the threat posed to the housing market by risky lending. Some experts in the field are now concerned about the so-called Alt. A mortgage loan market, which has grown even faster than the market for subprime mortgage loans to borrowers with less than top credit. (CNNMoney)

• How Exposed Are Banks to Real Estate?



FEDERAL RESERVE

• The March FOMC Statement is here; You can see how that compares to the January statement here. Here's what happens when the FOMC Statement gets