The Big Picture | Blog Spotlight

Blog Spotlight: naked capitalism

Tuesday, February 19, 2008 | 06:00 PM

Its been quite a while since our last edition of Blog Spotlight: Tonite, I am pleased to present Yves Smith's naked capitalism.

Yves is a refugee from a big Wall Street iBank, and has put serious time into a well known consulting firm. I have been particularly impressed with Yves coverage of the monoline insurers (Ambac (ABK), MBIA, FGIC). As you will see, her thoughtful post below reflects both his sharp wit, worldly banking experience and insight into this sector.

This is part of our ongoing short list of excellent but somewhat overlooked blogs that deserves a greater audience. I hope you find it as illuminating as I have . . .

Monoline Death Watch: Is There Really a Plan Here?

Posted by Yves Smith at 8:55 AM, Feb 19, 2008

Ever since Eliot Spitzer threatened the troubled monoline insurers that he'd break them up, everyone has acted as if that's a viable option.

But this talk of a split reminds me of movies about Hollywood, where someone buttonholes a producer with his pet idea:

"See, it's like Flashdance, except you reverse it: the girl is a Hispanic ballerina who started stripping to pay her student loans...."

Like the film proposal, the break up notion is still at the high concept stage, little more than, "let's separate the muni operations from the rest."

And while admittedly Ambac has had only the long weekend to work on its plan, the update as of Monday evening via the Wall Street Journal suggested that the group is flailing around.

Continue reading "Blog Spotlight: naked capitalism"

Look Who's Blogging: Paul Krugman

Friday, September 21, 2007 | 10:45 AM

in Blog Spotlight | Currency | Digital Media | Financial Press | Weblogs

Last year, I noted that the Times had started blogging (MSM Blogging Review: NYT Starts Blogging, too). A few months later, we discussed that the Times' offerings had ballooned to over 30 blogs (Its Official: The NYT Has Gone Blog Crazy!).

This week, the NYTimes introduced one more blog: Paul Krugman's.

I did not see any announcement, and only found it via my traffic log's referrals. We received a nice mention in this post: Is This the Wile E. Coyote Moment?

I actually have a funny Paul Krugman story, which I mentioned here when it happened in 2004 (So Paul Krugman and I are chatting . . .)

Not paying attention to my surroundings as usual, I literally plowed into him as I was leaving a studio and he was coming in. Papers went flying everywhere. That capped a week of embarrassing celebrity interaction: First Greg Mankiw, then Paul Krugman, and most amusing and embarrassing, my major faux pas with Nobel prize winner Robert Engle.

If you haven't seen that Nobel Prize story, its an absolute must read: A funny thing happened to me on the way to the studio tonight . . . Its absolutely one of those strange truth is funnier than fiction stories/

>
Oh, and welcome to the blogosphere, Paul!

Knights of the round table: mapping out the markets

Thursday, June 28, 2007 | 10:55 AM

Prieur du Plessis put together an excellent roundtable discussion about the global economy, markets, equities, inflation, bonds, housing, gold, energy, etc.

I participated in this, along with John Mauldin of Millennium Wave Investments; Martin Barnes of BCA Research, and David Fuller of Stockcube Research.

That represents quite a few points on the globe: Prieur is located in South Africa, John in Texas, Martin is a Scot working in Canada, David in London, and myself in New York.

The full discussion can be found here.

Source:
Knights of the round table: mapping out the markets
Prieur du Plessis
June 28, 2007
http://tinyurl.com/ytojna

Blogger's Take: Q4 Earnings

Thursday, January 18, 2007 | 07:00 PM

in Blog Spotlight | Earnings

Welcome back to Blogger's Take: Each week, we ask a timely and relevant question, and post a paragrpah or three from our pool of bloggers.

Today's question is on Earnings: What might we expect from this Earnings season -- good, bad, or indifferent? Is this a particularly important Q, or is this merely another Quarter? Should we be looking for anything special?

Here's the answers:

Discussions on earnings are always challenging, in that time frame plays an important role. In the longer term we have discussed the importance of currently record high profit margins have had on robust earnings growth. The evolution of earnings over the long term will depend a great deal on how profit margins evolve. Over the short term, another issue springs to mind. For instance, how the source of potential earnings growth is going to shift from once-hot sectors like energy to other sectors. Tom Petruno in the Los Angeles Times discusses this mix shift, and Pui-Wing Tam in the Wall Street Journal focuses on heightened earnings expectations for the technology sector in 2007. If other sectors are not able to pick up the slack from the once-highflying energy sector, disappointing headline earnings numbers may be waiting. The bottom line seems to be that investors need to look behind the headline numbers to the sources of earnings in the New Year. Then again, isn’t that always the case?

-Abnormal Returns

* * *

A good economy and in particular falling oil prices should help push earnings higher. I expect the earnings season to be a good one, but not one that has any undue significance. I think investors at the moment are going to pay more attention to inflation indicators, consumer sentiment, and real estate price trends.

Rob May
Businesspundit.com

* * *

Do earnings for the Q4, 2006 matter to the market? I think we are fairly late in the stock market cycle. If this is correct I tend to take that to mean that a good earnings season won°òt really help the market do any better than it has been going for the last few months, meaning a good season won't accelerate gains. I do think that a bad earnings season has the ability to trigger a normal 10% market correction.

If you read Barry’s site regularly you are in touch with the length of time since the last 10% correction and the last 2% single day decline. The market will have both of these at some point again (even if we can't time it correctly) and earnings perceived as weak could be the catalyst.

Roger Nusbaum
http://randomroger.blogspot.com/

* * *

I’m afraid I have some bad news to report—the profit party is coming to an end. Now I realize some of you may have missed it. Actually, if you’re a worker, I’m pretty darn sure you missed it. But damn, what a party. Since the third quarter of 2001, the economy has grown by 31% (in nominal terms). Not bad. But corporate profits? Hold your hat. Up 132%. Now that’s growth! Corporate profits now represent the largest share of the economy in over 50 years.

But all that’s coming to an end. A year ago, fourth-quarter profit growth was pegged at 15%. Not anymore. For the first time in 19 quarters, the operating earnings growth of the S&P 500 will come in below 10%. But promise me you won’t tell anyone on Planet Wall Street. The Dow recently hit at a new all-time high (again) and I wouldn’t want anything frightening it (facts, reality, etc.).

The picture is even bleaker than the surface is telling us. For example, insurance companies are experiencing out-sized gains this year to thanks to a light-hurricane season combined heavy losses last year from Katrina.

Lower energy prices are taking a toll on energy stocks. That sector is expected to report an earnings decline of 5.8%. The outlook is particular rough for the tech sector. Tech stocks are looking at their second straight quarter of lower earnings. Plus, we’ve seen profit warnings from once-shining stars like Advanced Micro Devices (AMD), Xilinx (XLNX) and Texas Instruments (TXN). Poor Intel (INTC). That stock is basically where it was ten years ago (way back when Andy Grove was Time’s “Man of the Year”).

But all is not lost. Earnings growth may merely be leveling off instead of plunging into the abyss. Consider that one-fourth of the S&P 500’s profits come from outside the U.S. That’s a big change from years past. Also, there are bright spots here and there. For example, Guess (GES) just raised its fourth-quarter earnings forecast about 40% higher.

The good earnings are out there. You just have to look a little harder to find them.

-Eddy Elfenbein
Crossingwallstreet.com
* * *

Blog Spotlight: Capital Chronicle

Thursday, December 14, 2006 | 07:00 PM

in Blog Spotlight

Another edition of our new series: Blog Spotlight.

We put together a short list of excellent but somewhat overlooked blog that deserves a greater audience. Expect to see a post from a different featured blogger here every Tuesday and Thursday evening, around 7pm.

Next up in our Blogger Spotlight: RJH Adams (known as Rawdon) of Capital Chronicle. Rawdon was raised in a tiny emerging economy, and his professional life began as a dogsbody at the UK's economics and finance ministry, HM Treasury. He subsequently moved to the finance functions of multinationals Xerox (UK) and General Electric (France) learning from the inside what making quarterly numbers really involves. In 2000 he left and co-founded an investment vehicle. He lives in the French Alps splitting most of his time between raising three small occasionally charming children and reading about economic development and investment."

Today's focus commentary:

*On the first day of Christmas My True Love gave to me a Highly Coupled Economy*

Will China’s domestic demand play its proscribed role in the soft-landing “decoupling” scenario when/if American consumption demand falls along with GDP output in the next slowdown?

Much of the Chinese economic public relations image rests upon only seven of its cities whose combined population is 306 million souls*. Six of these cities are highly urban and have grown thanks to massive infrastructure and/or capital intensive investments. With nearly 40% of industry state-run that is not unexpected; and at least in urban centers it can be said that a form of consumption demand exists.

Nonetheless, aggregate domestic distribution of goods has fallen since 1998; and the internal consumption market is, unsurprisingly, extremely fragmented. In rural China – 50% of the population - incomes are falling and are about 30% of the national average (which is $1,500 annually or $5,900 on a purchasing power parity basis). There are just too many farmers for what fertile land is available.

The famed Chinese gross export sector – 40% of GDP – also has an unexpected characteristic: 90% of it arises from the efforts of foreign owned firms, revealing a striking lack of presence of Chinese enterprises and thus a greater independence of action from central government.

Exhibit 1: Foreign share of Chinese exports, 1998 - 2006

(Image courtesy of La Caixa bank)

If, therefore, “decoupling” means weathering the storm of a moderate American recession China could limit the damage thanks to its massive public spending outlays. Although one impetus behind these is ending with the preparations for the 2008 Olympics they are still a formidable mitigating factor to declines in private consumption, private investment and net exports.

However, if “decoupling” means being able to laugh off a significant US hit and go on contentedly thanks to a diversified and balanced economy it becomes a different game.

The US is China’s single largest export destination: a significant American downturn will deliver a body blow to domestic Chinese urban employment and - by extension – incomes and private consumption.

Economic sustenance via government spending becomes a timing issue in this event, until domestic private consumption recovers once the US starts buying again. That does not look particularly problematic until the existing issues of Chinese over-investment and over-production in several key sectors/industries are taken account of. Some of these are already over-staffed and building inventory (steel comes to mind), and that cannot continue indefinitely.

China may be a great new market (and so it's been said for over 400
years) but investment–led internal demand hand in hand with great dependence on exports has limits. The balance of probability says these will be exposed in the event of a significant US downturn.

As for decoupling, they may actually be considering proposing.

*Shanghai, Beijing, Tientsin, Guandong, Zhejiang, Jiangsu and Shangdong

Sources:

World Bank; UN Development Programme; La Caixa bank's monthly report for November 2006

Blogger's Take: Slowing Growth, or Inflation?

Wednesday, December 13, 2006 | 07:00 PM

in Blog Spotlight

Today's' topic for the Blogger's take is this: Given the concerns raised by the Fed, what is really the bigger threat to the economy: Slowing Growth or Inflation?

Does the risk of a decellerating macro environment present a bad option (My pal Kudlow thinks we see 2% GDP all next year, whch certainly ain't recessionary). Others think a mid-cycle slow down will lead to a re-acceleration of inflation.

Which presents the greater threat to the economy? The blogger's take:

I think slowing growth would do more to harm the economy right now. Investors around the world put their money where they can get the best return, and frequently that means they invest in the United States. Slowing growth limits the opportunities to attract capital, and filters through the economy in a negative way.

-Rob May, Businesspundit.com

~~~

As the Fed stays on pause here it is natural to debate the trade-off between inflation and economic activity. While important in the short run, the bigger question is what should the Fed focus on in the long run? On that question the answer is quite clear. Inflation.

If we think for a moment behind what drives real economic activity, absent a horrible policy mistake, monetary policy is not all that important. However the ability to maintain inflation within a reasonable range and keep inflationary expectations from entering into real economic decision-making is important. In addition, that goal remains within the policy reach of the Fed.

We would point you to a Federal Reserve paper and an interview with the author by James Picerno of the Capital Spectator. In it they explore the determinants of behind stock market booms on a global basis. The paper finds that low inflation, kept under control, was by far and away the key factor underlying stock market booms. Enough said.

-Abnormal Returns

~~~

I find it amazing that people think that a blunt instrument like interest rates can cure rising energy prices or utility bills.
CPI is a lagging indicator.
Wages are a lagging indicator.
Energy demand is relatively inelastic.
The Fed being enormously wrong at major turns is legendary. I think the question is not how fast they hike next year but when the downturn gets going how fast they start cutting.

We are not going to have either growth or inflation as I see it.

-Mike Shedlock, Mish's Global Economic Trend Analysis

~~~
Slowing growth is more important, by far. Through its history, the Fed has basically perfected the art of killing off growth. Stopping inflation? Eh…not so much. In fact, I would say that slowing growth is itself an inflation threat. Personally, I’d like to see the Federal Reserve much less federal, and far more reserved. Monetary policy is always and everywhere a human phenomenon.

As a general rule, $13 trillion economies don’t start or stop on a dime. Since 1990, when one quarter of GDP growth is above trend (3%), there’s a 60% chance that the following quarter will also be above trend. Conversely, when growth falls below trend, there’s a 64% chance that the following quarter will also be below trend.

In other words, once you’re stuck in slow growth, it’s hard to break out. During the last recession, we had 11 straight below-trend quarters. We finally broke out, but now the outlook is looking shaky. The last two quarters, and three of the last four, have been below trend.

Inflation, on the other hand, is—and has been—well contained. The 12-month core CPI has bounced between 1% and 3% for ten straight years. Not once has it left that range. And it’s been over 15 years since it hit 4%, which was during a period of below-trend growth. That’s not a coincidence.

-Eddy Elfenbein, Crossing Wall Street
~~~

Piscataqua Research has a new report out on the consumer crunch. It is an important read. The gist of it: they estimate that in 2006, consumers used new debt to provide 90% of their cash flow for investing (mostly residential property), and debt service. In other words, it’s Minsky’s definition of a Ponzi finance scheme. They go on to suggest that in 2007 new liquidity will be nigh impossible, and will lead to a large drop in both consumption and household investment. Perhaps more signs of the times, is this bomb from Best Buy this morning. Canary in coal mine Dell cuts 30% of monitor panels orders. Nucor reports a slowdown. Which pretty much leaves Pig Man Goldman Sachs and their bonus Boyz to carry (pun intended) the economy. Or have they slashed, burned and gamed enough already?

Significant new consumer liquidity is impossible for two reasons. Nearly three-fourths of the total, or $7.75 trillion in US mortgage financing took place in 2004-2006. I would argue that the 2004 mortgage vintage of $2.773 trillion now has collateral at levels roughly where it started, or soon will be. Any collateral appreciation that remains is dissolving, especially in light of the developments in the subprime market, which I expect to spread to the Alt A markets. I don’t see the prime market as immune at all either, especially if a contagion breaks out in the financial sphere. The 2005 vintage of $3.027 trillion is break even at best on appreciation, and really down more like 10% as a rule. And 2006 vintage mortgages of an estimated $2.5 trillion, are almost all showing depreciation

-Russ Winter, Winter (Economic & Market) Watch

~~~

Good stuff, thanks guys.

Blog Spotlight: Winter (Economic & Market) Watch

Thursday, December 07, 2006 | 07:00 PM

in Blog Spotlight

Another edition of our new series: Blog Spotlight.

We put together a short list of excellent but somewhat overlooked blog that deserves a greater audience. Expect to see a post from a different featured blogger here every Thursday evening, around 7pm.

Next up in our Blogger Spotlight: Russ Winter's Economic & Market) Watch. A brief background: Russ was a broker for major firms in the Pacific NW for fifteen years in the late 70s and 80s. Moved on to land development, and vintage apartment ownership. He is now semi-retired and a cashed out bear, hunkered down in the Portland, Oregon area, watching the world go around.

This week's topic: Understanding Consumer Ponzi Finance

Ponzi’ finance units must increase outstanding debt in order to meet its financial obligations.”
-Hyman Minsky

Credit Suisse on a monthly basis puts out one of the most data filled reports in the biz on mortgage and consumer finance. A careful reading of the latest issue, enables one to piece together the nature of the American asset Bubble consumer financing Ponzi scheme. A look at the following chart on housing cash out refinancings, clearly illustrates Joe Soccer Mom’s (JSM) largely unrestrained ability (so far), to effectively service their old debts and continue spending, with new debt. That’s true even with the kind of extremely low levels of cash in the bank, that I pointed out in my blog on demand deposits, earlier this week.

Continue reading "Blog Spotlight: Winter (Economic & Market) Watch"

Blogger's Take: The US Buck

Wednesday, December 06, 2006 | 07:00 PM

in Blog Spotlight

Given all the brouhaha about the US sawbuck, today's' topic for the Blogger's take is: What does the falling dollar mean to the US market and economy?

It’s been 11 years since the last canaries employed in British mines were made redundant. Similarly, it's been six months that the dollar has been de facto redundant in an analogous financial market role.

Global liquidity continues to drive equities in jaw-dropping style with investors largely ignoring the anxious tweet-tweet of the USD. The US economy might indeed make a faultless soft landing. Yet the future is not as riskless as equities imply; and the dollar is prudently reflecting its own loss of that religion.

-Rawdon, Capital Chronicle

~~~

Young adults may want to seriously consider how they might look in a giant mouse costume. After the dollar's slide in the last two months and with its bleak prognosis going forward, some of the best career opportunities in the U.S. will likely be found greeting visitors at Disneyland - guten tag, ni hao.

-Tim Iacono, The Mess That Greenspan Made

~~~

Economists, investors and analysts alike have been calling for a structural adjustment in the dollar. The most common assumption is that the deficits (budget, trade and current account) will eventually produce a lower dollar. The most recent decline in the dollar, especially against the Euro, therefore looks to many as supporting this thesis. It has become rare to find a dollar bull and even harder to find arguments supporting a stronger dollar. We would caution those looking for a lower dollar to at least look at the contrary case.

That being said the potential for a dollar adjustment lends support to the argument for investors to maintain globally diversified portfolios. That includes having positions in a range of non-dollar currencies as a hedge against a dollar decline. The ETF revolution has made investing in currencies, and foreign equities even easier and cheaper. Indeed one could argue that holding currency positions is in a sense a “natural hedge.”

Consumption, for each of us, now includes a significant import component. Holding non-dollar positions can therefore help preserve buying power.

We don’t know for certain whether the dollar will continue to lose ground against the world’s major currencies. What we are certain of is that having a portion of your portfolio overseas, and unhedged, remains the easiest way to maintain real purchasing power.

-Abnormal Returns

~~~

The dollar decline matters. It is generally a negative; the benefits to US based multinationals notwithstanding. I am not in the camp that thinks the dollar will collapse causing some sort of economic Armageddon. As many others have rightly pointed out the dollar is too entwined in the global economy in terms of things bought and sold in US dollars and the ever growing reserve of dollars held around the world.

That being said there is a fairly clear visibility to the dollar sharing its role as world reserve currency with other currencies, like maybe the euro or a euro equivalent from Asia that we might see in our lifetime. Last spring both Norway and Iran explored trading oil in euros. We have heard about many countries either diversifying the reserves announcing plans to diversify in the future or dropping hints about diversification. Any action along these lines will be done in such a way as to try to minimize market dislocations. Dubai and UAE can just sell dollars without moving the market, China would not really be able to sell without hurting its own interests but could buy fewer dollars in the years ahead especially since they have allowed some appreciation in yuan and seem poised to allow more in the future.

I have been writing about this scenario on my blog for a while. I view this as happening over a period of several years with the result being a generally lower dollar than we are used to and generally higher rates than we have become accustomed in the years since the tech bubble burst. This would not be panic but merely discomfort.

-Roger Nusbaum, Random Roger

~~~

The US dollar is approaching support and once again bearish sentiment is rising.

A Recent cover of the Economist highlights this renewed bearish sentiment. Magazine covers in general and Economist covers in particular have a nasty habit of marking major turning points. Remember that it was "The Incredible Shrinking Dollar" cover of Newsweek that marked the bottom of the US dollar in 2005 to within a week or so.

We also see big specs plowing heavily into both the British pound and the Euro, and an unwinding of those trades (which I think will happen) would be supportive of the dollar. On the other hand, we still see a carry trade in the Yen and Swiss Frank which has negative implication for both the US$ and US equities if and when that trade unwinds.

Of course the real situation is that all of these fiat currencies are eventually doomed as compared to gold. In the meantime the odds of more rate hikes by both the UK and Europe are probably overdone and it is interest rates differentials that matter most. If the expectation is for more hikes and Europe and the UK and cuts in the US, and that expectation does not happen, look for the US$ to rally. It may rally anyway based on current sentiment. To put my neck on the line I suspect the US$ will hold the 80 level (or perhaps do a headfake below then reverse). Longer term, the US$ is indeed toast but that can be quite a ways off from here.

-Mike Shedlock, Global Economic Analysis

~~~

Europe looks set to raise rates Thursday, but ironically, this now may little effect, as the bogus “conundrum” is in full effect. In other words any uptick in rates simply is used to set that currency up as a target of carry, from the low interest currencies like the Yen and Swiss Franc. This has gotten so pervasive, that I even wonder what the effect will be, when and if, the Fed signals (as I expect) on Dec. 12, that the market has it all wrong about rate cuts. Same question needs to be asked, if the BOJ moves in a coordinated attack on Dec. 19th. Although Riskloves have been warned, there is a fair chance that the effect will once again be nominal.

I’ve been increasingly asked how the end game of this lunacy plays out. One prospect I’ve theorized on is the collapse of the carry trades. The problem with that one is that it seems the increase in the Swiss Franc and the Yen needs to be quite large, a la 1998. A rally in the Euro against the Yen and Swiss actually benefits the Riskloves, and that is what’s happened of late.

This allows Riskloves to stem any losses they experience shorting yen against the USD. In other words, the Yen needs to increase substantially against all the liquidity recipient currencies, not just slightly against the USD.

Although the carry trade will surely blow up, I’m not sure if it’s the horse before the cart. As or more likely will be that some fusionable material blows this Rube Goldberg machine up. There is a whole universe of Ponzi finance units as candidates for it. This is something that could happen at any moment, and out of the blue, like an earthquake. The other scenario is a series of smaller quakes as unsustainable credit spreads on the dark matter just start blowing steadily out when Joe Soccer Mom’s debt servicing checks fail to arrive in the mail (see yesterday’s blog). That’s more a gravity theory, and recognizes the obvious– that shit actually happens when debtors have no savings, and lose jobs. I really don’t see the wait as too long on that score either. In fact the Boyz are already late adjusting credit spreads on that one, and have catching up to do. If you are a bear, that would be the preferred outcome, as there is lots of gradual mileage to play on the downside. May not be so lucky though. Could just happen in the middle of the night, as one huge thud.

-Russ Winter, Wall Street Examiner

Blog Spotlight: Mish's Global Economic Trend Analysis

Thursday, November 30, 2006 | 07:00 PM

in Blog Spotlight

Another edition of our new series: Blog Spotlight.

Second up in our Blogger Spotlight: Michael Shedlock and Mish's Global Economic Trend Analysis. Mike is one of the editors of The Survival Report, covering stocks and the economy. He also writes for the Daily Reckoning, and co-edits Whiskey & Gunpowder. He also runs stock boards on the Motley Fool, Silicon Investor, and TheMarketTraders. He is an avid photographer, when not writing about stocks or the economy, with over 80 magazine and book covers to his credit.

A Mortgage Broker's Synopsis

The following post is an email from Michael J. Dorff, a mortgage broker with Trans World Financial about the state of affairs in Orange County California. Monday evening I will have an update from Mike Morgan to share:

Continue reading "Blog Spotlight: Mish's Global Economic Trend Analysis"

Blogger's Take: Holiday Retail Sales

Wednesday, November 29, 2006 | 07:00 PM

in Blog Spotlight | Retail

Given all of the news on Retail sales -- Black Friday, Cyber Monday, same store sales -- I thought this might make for a good topic for Bloggers Take. So what are your thoughts on the holiday shopping season? Is it important? What are your expectations -- Good bad or different ?

A Tale of Two Retails

Is retail weak? On the heels of lowered sales forecasts by Wal-Mart, that question has moved front and center. The chart below shows the lead up to the holiday shopping season in the broad retail ETF (XRT; blue) and in Wal-Mart stock (WMT; red). Because Wal-Mart comprises less than 2% of the XRT fund, this comparison gives us a nice of retail overall vs. Wal-Mart in particular. For comparison, I've added Target (TGT; yellow) and equalized them in price as of 7/5/06 to show relative performance.

What we see is that retail has done well during the market rise since July, 2006. Target has been a particular winner. Overall, it's hard to make a case for general retail weakness. As we've approached the holiday period, however, the performance of Wal-Mart has trailed considerably. This has made a fine pairs trade for a fundamental analyst able to sort out the stronger components of XRT, such as Target, from the Wal-Marts.

Brett Steenbarger, Traderfeed

~~~~

Barry’s question is timely because we cannot recall such an intense media focus on retail sales than we have seen this year. Our sense is that trying to play the holiday season retail sales game is for the vast majority of investors a mug’s game. In short, the signal to noise ratio is far too low to generate any meaningful trade signals. The number of crosscurrents present at this time of year is difficult for even the most experienced retail analysts to follow. For instance, think about how gift cards have changed the retail game over the last few years. Gift card sales have taken on increasing importance for many retailers over the past few years. Changing trends like this happen every year. If you have you done your work on a stock or the sector, great, if not don’t get caught up in the frenzy surrounding what is supposed to be a joyous time of year.

Abnormal Returns

~~~

I expect a strong holiday shopping season. I think that, post-election, consumers feel that something has changed, probably for the better.

While they don't have a good grasp of what will be different, they have a renewed optimism in the future that will help drive holiday spending.

Stocks are up and real estate prices have not fallen as dramatically as expected in most cities. Add that to a strong Q4 for retail and what you have is a good economy with plenty of steam to carry it through early 2007. That said, I think Wall Street tends to overvalue a strong holiday shopping season. If you are contemplating an investment strategy for 2007, I would focus more on interest rates and GDP, and look to international opportunities.

Rob May, Businesspundit.com

~~~

The media as well as bulls on Silicon Investor both went gone gaga over the black Friday numbers reported by NRF while dismissing the numbers from Wal-Mart as "just one store". Well Wal-Mart is not just one store it is the bellweather store for the masses. But to top things off, the much touted sales data presented by the NRS was not really sales data at all but customer surveys that may bear little relationship to reality. This is just sloppy reporting by nearly everyone picking up the story, including Bloomberg.

What I fail to understand is how Bloomberg and other places can fall for this nonsense time and time again. This is the direct equivalent of the Charley Brown / Lucy football scene being played every Thanksgiving in real life.

In the meantime there was little fanfare given to the massive 8.3% collapse in durable goods. Yes, part of that collapse was aircraft, but orders for non-defense capital goods excluding aircraft decreased by 5.1%, after rising 3.2% in September. In addition the index of manufacturing activity slowed to 51.2 in October, from 52.9 in September and 54.5 in August. In the overall picture, consumer credit is declining, housing starts are plunging, manufacturing activity is slowing, auto inventories and home inventories are rising but the story headlines latch on to the biggest "non-event" around, Black Friday.

Mike Shedlock / Mish's Global Economic Trend Analysis

~~~

There is some divergent opinion as to how indebted the consumer actually is. Regardless of the reality here it seems to me that plenty of people will have no hesitaion to take on another $1500 in debt to ensure a "good" holiday season.

In that context the strength of this year's holiday does not mean much for future behavior. What is more of an indicator of future behavior is the availability of credit, which based on my mail, is still healthy.

Roger Nusbaum, Random Roger

~~~

Blog Spotlight: The Mess That Greenspan Made

Thursday, November 16, 2006 | 07:00 PM

in Blog Spotlight

For the next edition of our series Blogger Spotlight: Tim Iacono and The Mess That Greenspan Made. Tim is a software engineer in his mid-forties, living in Southern California. He calls his blog is a "vain attempt to stave off a mid-life crisis, and here's hoping that it's going to work."

This is part of our ongoing short list of excellent but somewhat overlooked blogs that deserves a greater audience. Expect to see a post from a different featured blogger here every Tuesday and Thursday evening, around 7pm.

This is Tightening?

Much has been made of the "tightening" by central banks around the world, particularly the multi-year "baby-step" therapy applied to short-term interest rates here in the U.S.

This treatment was just concluded a few months ago under the watchful eye of Fed Chairman Ben Bernanke - the baby steps weren't the new Fed Chief's idea, but he is saddled with what they have produced.

Having wondered what effect these rising rates have had on the creation of both consumer debt and new money, the construction of a chart showing all three laid together is a task that has sat near the top of the To Do list around here for some time.

It can now be checked off.
Nearly all of this data is available at the Federal Reserve website. The only part for which one has to look elsewhere is the last six months of M3 Money Supply - the central bank stopped divulging this data earlier this year.

The latest M3 data is now available in reconstructed form at Now and Futures and John Williams' Shadow Government Statistics.

The trend is still up - surprise!

Continue reading "Blog Spotlight: The Mess That Greenspan Made"

Blogger's Take: FOMC Minutes

Wednesday, November 15, 2006 | 07:00 PM

in Blog Spotlight

Yet another edition of our new feature: Blogger's Take.

FED OFFICIALS REASONED last month that risks to both economic growth and inflation had diminished slightly, but higher inflation "remained of greatest concern," according to FOMC minutes.

The question at hand: What should the Fed be focused on: Inflation? Slowing Growth? Neither?

Inflation or growth? What matters more to the Fed, better yet which one should matter more? I’ll pick inflation over growth.

My thinking is that recessions are a normal part of the economic cycle. Inflation that is allowed to get out of hand can be ruinous to a country; a normal recession is not ruinous. We see a lot of folks preoccupied with hard landing or not. What is normal is a recession followed by an expansion followed by a recession. Market declines go hand in hand with recessions (actually, they lead by a few months but you get the idea). This process has not been repealed regardless of anyone’s ability to time such things. There are many instances in history where the US stock market has declined by 30% and then it comes back or as is the case now, is coming back from about a 50% hit for the S&P 500. Again perhaps this can be timed or not but this is how it works.

What is not normal is very high inflation. Staving off the consequences of something that is not normal but in fact more damaging makes more sense to me.

-Roger Nusbaum,
Random Roger's Big Picture

* * *

What the Fed should focus on it is pretty clear

1) Plunging PPI, plunging copper, plunging home prices, plunging housing starts, a plunging GDP, and plunging consumer credit. Those items along with the $CRB and oil were the focus of discussion in The PPI, Gold, and Dr. Copper

2) Decreasing credit spreads, insatiable appetite for risk, mergers, IPOs, corporations going into debt just to buy back shares, etc, all of which are fueling a strong stock market even as insiders are bailing hand over fist. In other words the ability to get credit is still far too easy.

Eventually credit spreads will start to widen on their own accord just as housing itself died of simple exhaustion not a massive spike in long term interest rates as everyone expected. In the meantime the risk is corporations will blow all their cash through silly buybacks at a time when they will need the money to weather the next storm (the consumer led recession of 2007).

Unfortunately for the Fed there is no real solution. In fact a credit purge is badly needed and long overdue, so the best thing for them to do is to let the market attempt to resolve the issues instead of fighting it. After all, it was the last refusal to let the markets sort it out that created the housing/debt bubbles. Nonetheless, I suspect the Fed will fight the next downturn and if so gold should soar.

Hmmmm. I suppose the REAL bottom line then is that the Fed should not focus on a single thing but rather focus their efforts on dissolving themselves and letting the market set interest rates rather than micromanaging them to death.

-Mike Shedlock / Mish
Mish's Global Economic Analysis

* * *

The Fed? Do they even matter anymore? Didn't Hank Paulson at Treasury grab hold of the steering wheel a couple months back and relegate Fed Chief Ben Bernanke to the back seat with one of those Playskool steering wheels?

-Tim Iocano
The Mess That Greenspan Made

* * *

The universal challenge for policy makers is to deal with the reality in front of them. As opposed to other policy makers, the Fed is able to measure their progress against market-based measures. One need only look at the recent history of market-based inflation expectations to see that the Fed has done a decent job on this important goal.

Ten-year inflation expectations, as measured by the spread between the 10-year constant maturity treasury and the 10-year constant maturity TIPS (via the St. Louis Fed), show the most recent level at 2.32%. This is nearly equal to the 2.34% average seen since the beginning of 2003. At least by this measure, the Fed has not allowed inflation expectations to run away from them.

This measure is by no means perfect. In addition it would be interesting to see how the Fed is doing by the measure in comparison to other developed markets. Until somebody comes up with a better real-time measure for economic growth, we think it best the Fed focus on inflation and inflation expectations. The temptation to try and micromanage the economy is too big to allow policymakers to swing wildly between two (oftentimes) competing goals.

-Abnormal Returns

* * *

Blog Spotlight: Economist’s View

Thursday, November 09, 2006 | 07:00 PM

in Blog Spotlight

For the next edition of our series, Blog Spotlight, we travel West to Mark Thoma at the University of Oregon for his Economist’s View.

Mark Thoma is a member of the Economics Department at the University of Oregon. He joined the UO faculty in 1987. His research involves the effects that changes in monetary policy have on inflation, output, unemployment, interest rates and other macroeconomic variables, and he has conducted research in other areas, such as the relationship between the political party in power and macroeconomic outcomes. Mark blogs daily at Economist's View.

Today's focus commentary looks at: Worker Security, Social Insurance, and Protectionism

Blogger's Take: The US Elections

Wednesday, November 08, 2006 | 07:00 PM

in Blog Spotlight | Economy | Politics

This is the fifth edition of our new feature: Blogger's Take.

The US Elections are the talk of the globe. A huge victory in the House, and the huge surprise in the Senate made the pundits look foolish.

Today's Question: What does the elections mean -- to the markets, to bonds, to housing, stock sectors, markets, economy, consumer spending, US global reputation?

Here's the Blogger's Take:

"One US oddsmaker put the over/under line for three-day takings of the new Borat! film just opened at $11m. This is the comedy in which Borat praises President Bush’s “war of terror”; and it ended up taking over $26m.

Dems were forecast to gain 15 seats by most professional pundits in the midterms. The Borat result was one unscientific anecdotal reason to believe anti-war sentiment would swing voters harder than these forecasts; and so it has proved with Dems taking the House, as this is written, with over 20 seats gained. The Senate is within 2 seats of Dem hands also and awaits recounts.

The result most desired by the markets is gridlock on the assumption that no great legislative change is good. Unfortunately, that expectation is a pipedream. Divided government has nearly always proved cheap as both sides act as spoilers to the spending plans of the other. Coupled with anti-war sentiment it is probably the Pentagon that will take the brunt of such fiscal restraint, albeit over time. That appears likely to translate into a significant fiscal drag on the winds currently blowing the US economy along.

Of course, Democrats might end up taking both Houses. That sharpens the focus on more than dwindling war funds and simple control of the legislative agenda: it brings into stark relief the potential Dem agenda items of minimum wage hikes, protectionist measures and drug price-controls. The extent of their impact on the slowdown that is approaching (anyway) is more difficult to gauge; but it does not look a positive."

-RJH Adams,
Capital Chronicle

~~~

As I'm writing on Wednesday AM, the index futures are lower on news of the Democratic victory in the House and uncertain outcome in the Senate. But some of those favorites of alternative energy, Ballard Power Systems (BLDP) and Plug Power (PLUG) are up nicely--over 3%.

The emerging zeitgeist for the Democrats is that of energy independence. That will drive the policy toward the Middle East, and it will become an important investment theme. Talk of alternative energy becoming the next big thing has been around for a while. But that wasn't going to happen in an administration dominated by oil guys. With the election results in hand, the means for alternative energy investment may have come closer to the ends. Lots of small players chasing a flood of excited capital: it could be the Internet boom all over again.

-Brett N. Steenbarger, Ph.D.
TraderFeed

~~~

The significance of this election is not about the markets but about possibly taking the country back from the extreme radical right. Whether or not Democrats will be able to force an agenda to stop wasting money in Iraq and bring the troops home remains to be seen. It is also too early to tell if right wing legislation on the Patriot Act, wiretapping, holding prisoners without trial, and torture will be repudiated or not.

As for the stock market, there will undoubtedly be some winners and losers. One possible winner is stem cell research and two possible losers are big oil and big pharmaceuticals. Under the Democrats there is a better chance that drug imports from Canada and other countries will be allowed. If so, it will be good news to senior citizens. Unfortunately money will still be wasted, but probably in different ways.

Other than that, little has changed in regards to the stock market and almost nothing has changed in relation to the treasury market. This economy is simply too over leveraged on debt, consumer spending, and negative savings for this election to matter. Regardless of who won we were headed into the mother of all recessions as I outlined in Global Economic Trainwreck. Batten down the hatches, this recession will hit in 2007.

-Mike Shedlock
Mish's Global Economic Trend Analysis

~~~

Two points come to mind when discussing yesterday’s elections. The first is that despite a dramatic change in composition for both the House and Senate the market’s reaction (positive or negative) can best be described as blasé. Our opinion is that this is due to the information effects provided by the so-called prediction markets, like the Iowa Electronic Markets. Even if the markets got the Senate call wrong, we disagree with Barry that their profile will be reduced in the future.

Prior to Election Day at the IEM the market had a 30% probability that the Democrats would take the Senate. Markets are wrong every day, but that does not diminish their capacity to aggregate opinion (and capital) in the most efficient way. Absent these markets how would we get a handle on the state of hundreds of races spread across the country? The bottom line is that the market collectively yawned this morning because they were able to incorporate prior to Election Day the potential for a Democratic sweep.
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Second, while we are usually big fans of academic research on all manner of financial topics, the research on the role that political affiliation of Congress and the Presidency on the stock market leave us cold. This is due in large part to the fact that the future is largely unknowable. We know what the Democrats plan to due in the first “24 hours” but outside of that the impact of this election will be unknowable for quite some time. We need only look back to the last change in Congressional control or any recent Presidential administration to see that exogenous events can have a major impact on any so-called ‘agenda.’ The point is that investors should try to look forward and not be burdened by political bias, one way or another, when making investment decisions.

-Abnormal Returns

~~~

My view of what will happen to the economy is in an econoblog I did recently for the Wall Street Journal: Econoblog: How Much Do Election Shakeups Affect the Nation's Economy?

-Mark Thoma
Economist’s View

~~~

Yawn.

I know the elections are supposed to mean something profound, but I just don’t see it. As I read it, the American people have delivered clear a mandate against pro-Parkinson’s gay pedophiles. Oh, and Guam has gone Republican. Maybe Parkinson’s plays big out there, it’s hard to say.

In the Senate the swing vote has shifted from Olympia Snowe to Susan Collins. Sorry, folks but that’s not big news to me. It’s not like we’ve elected a bunch of radical Socialists here. OK, except for Vermont but you know what I mean. Check out Madame Speaker’s financial disclose form. She’s frickin loaded. I’m guessing Eugene Debs was never part owner of the Auberge du Soliel Hotel.

My advice is to not read too much into these results. Remember, Sarbanes-Oxley passed the Senate 99-0. Nothing happened yesterday that would have changed that. Actually, nothing will happen for quite a while that will change that. Goldilocks meet Gridlock.

Eddy Elfenbein
-Crossing Wall Street

~~~

The stronger the economy, the less important the election results. The question here is if the election will matter and if so how much it will matter. The few Dems willing to admit they want to let the tax cuts expire say that the market and economy did great under Clinton without those tax cuts. The Republicans say how great the economy did with those tax cuts under Bush. The economy was strong enough ten years ago that we did not need those cuts. When Bush tax cuts were enacted the economy was weak enough that we did need them.
Looking forward, how strong do you think the economy is? The data, as always, is mixed but as the expansion is long in tooth now the data seems to be generally favoring a slowdown of some magnitude which leads me to think that the election has the potential to matter some. Some sectors seem to have more potential to be impacted but that impact is likely to be shorter term in nature. I don’t believe that longer term, politicians are bigger than market forces. Your own investment time horizon will dictate what is more important to you, short term politics or long term investment themes.

One last point, the Dems taking the house has been expected for quite a while and the market rallied into the election. I do no think the market is afraid of the Dems running the house. The senate was less expected and so the final outcome there could result in some sort of short term reaction but shortly thereafter the market will go back to worrying about the economic cycle, Iraq and everything else that used to be on the front burner.

-Roger Nusbaum
Random Roger's Big Picture

~~~

Over the short-term, I expect mildly negative effects, particularly if the Democrats wind up winning the Senate too. Certain industries will be bought and sold based on perceived party friendliness to them, but overall the market will be down slightly due to worries about minimum wage increases, weak international politics, and potential tax increases. By year end, though, Wall Street will have realized that gridlock can be good, and markets will be strong in early '07.

Consumer spending for the '06 holiday season will be up on the assumption that things are changing, even though most consumers won't have any particular expectations of what it is that will change. The US global reputation will improve, possibly leading to more exports and more capital inflows. Wall Street will be happy with corporate profits and improved forecasts of government financials. The upward bump in the economy will temporarily stall falling real estate prices. This could be the catalyst for that soft landing everyone hopes for.

-Rob May
Business Pundit

~~~

If the Democrats are smart, they'll spend a fair amount of time in the
next two years making it clear that:

a) they didn't cause the housing bubble
b) they can't stop it from bursting

It will likely take another year or so, just when things are starting
to heat up for the next general election, for most homeowners to
realize that much of their wealth has again evaporated.

Look for the Dems to try to fix the housing problem over the next two
years.

-Tim Iacono
The Mess That Greenspan Made

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Fantastic job guys -- thank you much!

Blog Spotlight: New Economist

Tuesday, November 07, 2006 | 07:00 PM

in Blog Spotlight

For the next edition of our new series: Blog Spotlight, we travel across the pond to London based New Economist.

The blog offers new economic research, data, events and analysis from a London-based macroeconomist who lives in London and is an economist by training. He's worked over the years for several governments, an investment bank and a think tank.

Today's focus commentary looks at: Equity analyst recommendations and IBES: rewriting history

Equity analyst recommendations and IBES: rewriting history

Just when you though corruption allegations might be abating in equity markets, along comes an explosive new study. A paper to be delivered to the January 2007 American Finance Association annual meeting in Chicago suggests that investment analysts' historical buy recommendations have been manipulated to put them in a better light.

Rewriting History, by Alexander P Ljungqvist (Stern School of Business, NYU), Christopher Malloy (London Business School) and Felicia Marston (University of Virginia) provides evidence that nearly 20,000 records in I/B/E/S, a database of research analyst recommendations owned by Thomson Financial and widely used by investment professionals and academics, were manipulated between September 2002 and May 2004. This took the form of selective, ex post removal of analyst's names from some of their historical recommendations. These were not random; they were concentrated among the worst performing recommendations. Here is the authors' abstract:
Comparing two snapshots of the entire I/B/E/S analyst stock recommendations database, taken in 2002 and 2004 but each covering the same time period 1993-2002, we identify nearly twenty thousand changes of an unusual nature: the selective removal of analyst names from historic recommendations (“anonymizations”).

This practice turns out to be pervasive and non-random: Bolder recommendations are more likely to be anonymized, as are recommendations from more senior analysts, Institutional Investor “all-stars,” and those who remain in the industry beyond 2002. Abnormal stock returns following subsequently anonymized buy recommendations are significantly lower (by up to 11.0% p.a.) than those following buy recommendations that remain untouched, suggesting that particularly embarrassing recommendations are most likely to be anonymized.

Analysts whose track records appear brighter due to anonymizations experience more favorable career outcomes over the 2003-2005 period than their track records and abilities would otherwise warrant.
As the authors note, the period not only coincided with close scrutiny of Wall Street research by regulators, Congress, and the courts, but also saw a substantial downsizing of research departments of major brokerage houses in the US. The manipulation benefited the careers of those whose dud recommendations were anonymised. The paper concludes:
Whether or not analysts were in fact behind these changes, however, their track records undeniably look better than they should, and we show that the analysts concerned apparently benefited in the sense of experiencing more favorable career outcomes than their track records and abilities would otherwise warrant: Anonymizers are more likely to move jobs, to be hired by a large brokerage firm, and to move from a small to a large firm (Hong, Kubik, and Solomon’s (2000) measure of a promotion). Anonymization easily has the largest economic effect in our career outcome models.
These are very disturbing findings, and as the authors note, given the "non-random nature of the results" it is very unlikely they are attributable to chance. While "it is possible that the brokerage firms were in fact the culprits ..the patterns we document seem at odds with this interpretation".

If this is not market manipulation, I don't know what is. Let's hope Eliot Spitzer or the SEC investigate.