The Big Picture

« June 2006 | Main | August 2006 »

What Happens After Double Tops in the Transports?

Monday, July 31, 2006 | 01:46 PM

in Economy | Energy | Investing | Markets | Technical Analysis

Let's take a look today at a pair of charts via Birinyi Research to help answer that question.

The Dow Transports have recently formed a double top:

Source: Birinyi Research -- Chart of the Day

What happens after the Transport double tops? Birinyi looks into that question, using these critieria:

• First peak is a new 52-week high
• Correction between first and second peak is at least 5%
• Duration between first and second peak is less than 120 days
• Second peak is within 2% (Plus or Minus) of first peak

How does the overall market respond following double tops in the Transports? Below is a composite chart depicting the performance of the Dow Transports and the S&P 500 following the second peak of a double top in the Transports.

>
click for larger graph

Source: Birinyi Research -- Chart of the Day

The subsequent SPX sell off averages 5% within 50 ~~days~~ percent of the total move (median length: 240 days) -- while the Transports can be expected to lose considerably more on average. Trannies saw declines ranging from 5.9% to 45.9%.

As the chart details, the two indices have similar patterns, although the S&P 500 declines by a lesser extent than the Transports, and the S&P 500 tends to bottom ahead of the Transports.

Volume Confirms Price

Monday, July 31, 2006 | 11:14 AM

in RR&A

NOTE: This Trading alert was originally posted at Ritholtz Research & Analytics on Fri 7/31/2006 11:27 aM EDT; An email went out to subscribers alerting them shortly there after.

This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location on the blog.

It’s an old Wall Street saying, and its one of the few that’s true: Volume Confirms Price

Why is that? Because volume reveals what the level of institutional involvement is. And Institutional participation is important for several reasons:

1. Mutual funds, Trusts, and hedge funds account for more than 50% of the trading volume on NYSE;
2. Institutions make buys or sells over longer periods of time, averaging into their positions. That is what accounts for persistency of trends;
3. Monthly contributions via 401k and other vehicles constantly force them to put money to work;

A market surge on high volume tells us more than just the price action does alone. As individuals, you get to legally front run the big boys. When we see them buying with both fists, it usually lasts more than a few days. Big volume moves tells us that institutions have conviction – a level of certainty.

Without their active involvement, rallies simply don’t go very far.

Friday’s rally is a perfect example – it was actually on lighter volume than the prior two days. In fact, most of Friday’s rally occurred between 10 and 11:30. That’s not exactly what one calls inspiring. The rally lacked the sort of institutional conviction that leads to lasting improvement in prices.

This doesn’t mean that we ignore the price action. It looks like July has become a round trip – Price levels are back at just about where they were in July 1. That implies a lot of wasted energy on the part of the Bulls.

However, we always respect the price action (even if its short term in nature), and will reverse ourselves when we see the requisite proof that a credible rally – meaning more than a bounce of a week or two – is in the offing. That can happen in at least two ways:

Last week, I mentioned that one of the ways markets create reversals and buying opportunities is by becoming deeply oversold. Another way is simply time: After enough time elapses, markets work off their overbought conditions. Time also improves charts, as downtrends get broken via sideways activity. This could very well lead to a brief summer rally – somewhere in August perhaps?

Our longer term Marco-economic expectations are playing out according to script. We remain negative later this year – despite the recent improvement in price action.

Watch these four asset classes – gold, U.S. dollar, oil/nat. gas, and stock markets – all moving up together. That is very unusual at this stage of the economic/market cycle. They should decouple at some time in the not too distant future.

The Cognitive Bias of Ed Yardeni

Monday, July 31, 2006 | 06:45 AM

in Economy | Employment | Financial Press

One of the more astonishing things I've come across recently was an utterly disingenuous article in Sunday's Times: Navigating the Fog in Jobs Data.

The article is a discussion with (former Prudential) Strategist Dr. Ed Yardeni. It seems that he has been consistently over-estimating the BLS new job creation each month. As a group, Economists have been consistently over-estimating job creation this entire post-recession cycle; taking the "Under" on NFP has been the winning bet over the past few years. But the conclusion Yardeni reaches -- which is not only repeated by the paper, but practically endorsed -- is that since this cannot possibly be the case, something must therefore be wrong with the BLS Data.

I practically choked when I read the short column. The author opens with:

"When the numbers stop making sense, maybe it is time to stop believing them.

The Bureau of Labor Statistics reported far fewer net new jobs in May and June than Wall Street expected. If it happens again when July data are issued on Friday, Edward E. Yardeni, chief investment strategist at Oak Associates, will assume that there is something wrong with the report, not the economy. (emphasis added)

That's denial, plain and simple. Let's continue:

A Bloomberg News poll of economists estimates that 145,000 jobs were added in July. Mr. Yardeni, who said that he had overestimated the figures announced in the two previous reports, is aiming high again.

“I’m going to take a chance on making a third mistake and go with 180,000 to 200,000,” he said.

Most evidence aside from the government report suggests that jobs are plentiful, Mr. Yardeni said in explaining his prediction. If fewer people are getting hired than economists expect, he is inclined to attribute it to too few prospective workers, not too little work. (emphasis added)

Its not my job to factcheck/proofread the NYT business section -- but isn't somebody's job? There's so many things wrong with that statement I do not know where to begin. And as a pundit, I'm as wrong as anyone, so I prefer to point out flawed methodologies and/or statistical errors; I really don't like to point fingers and say "Hey! This guy/gal is wrong." People who live in glass houses, and all that.

But in this case, I am going to have to make an exception: What the hell is Yardeni smoking?

Let's review: Why might we think these numbers make so little sense to begin with? We know (at least those of us who have been paying attention) that the economy has been unusually Real Estate dependent this cycle. We have seen a vastly disproportionate amount of new job creation come from the Real Estate complex (including agentsm, mortgage brokers, etc.) We also know that the Housing market has cooled dramatically -- those of us paying attention also saw the beginnings of this as long ago as August 2005.

Further, we know that by just about every historical measure, this has been the weakest job creating recovery cycle in the post WWII era. We have previously noted that the unemployment rate is down due to NiLFs: Not In Labor Force. Barron's described it as "the incredibly shrinking labor force, a phenomenon that's largely responsible for the deceptively modest unemployment rate." The labor participation rate touched is near 15-year lows.

Using other measures that include these slackers, unemployment is actually much higher than the reported 4.6%: The well respected Liscio report noted the actual number could be much higher of a jobless rate. If one includes the so-called marginally attached workers and part-timers who really want to be working full time, the unemployment rate weighs in at a formidable 9.4%.

Jobs that we are creating by and large have been paying less and offering weaker benefits than the jobs they have replaced. (This is a factor in the negative savings rate, but let's save that discussion for another time). One notable exception to the weaker pay has been the home construction industry. These jobs have been relatively high paying. The sector has been a major source of new job creation, from real estate agents to mortgage brokers to Loews and Home Depot.

It should come as no surprise that as the entire sector has cooled, so too has the jobs creation associated with it. We now have the biggest inventory of new and existing homes for sale we have seen in nearly a decade. Realtors have said that home sales are now a 'buyer's market'. New home builders are witnessing the rise of a Ghost Housing Market, where specualtors walk away from their down payments, rather than close on a property which has declined significantly in price.

Let's look at what Mr. Market is saying about the sector: In the face of slowing sales and building inventory, the homebuilders have gotten shellacked. The chart shows they gave up nearly 50% of their value over the past year:

>
ISE Homebuilder Index, May 2005 - July 2006

Source: StockCharts
>

The strongest engine of Job creation (Housing) was created by ultra low interest rates; As mortgage rates have risen back towards their historical average, that engine has gone into an expected cyclical decline. The market correctly anticipated this, as the chart above reveals.

Although the numbers disagree with Yardeni's forecasts, the conclusion may not be that the numbers make no sense; perhaps it simply means that Yardeni's forecast -- like those of so many other economists -- is failing to comport with economic reality:

“If I’m wrong, I’m going to start to wonder if we’ve run out of able-bodied people to hire rather than worry about whether the economy is slowing,” he said. “In this economy, we need more skilled workers and knowledge workers, and they’re getting harder to find.” This is true “even in China and India,” he added. “It’s not just a U.S. phenomenon.”

This confuses two different issues: The lack of highly qualified technical workers with the low new job creation. I assume no one is suggesting that we are short 9.3 million qualified technical workers -- thats the shortfall Liscio report noted.

Lets continue:

Mr. Yardeni supported his case with several pieces of evidence, including the unemployment rate, which has remained at 4.6 percent despite the tepid announced job creation, and responses to confidence surveys indicating that consumers consider jobs to be plentiful.

A weaker-than-expected number of new jobs on Friday may stir concern about economic sluggishness and provide a lift for defensive sectors of the stock market such as health care, utilities, financial services and consumer staples, Mr. Yardeni said. Shares in industries where earnings are tied more closely to economic swings may rise if the job creation figure is surprisingly high.

Either way, he encouraged investors not to read too much into the jobs report, which has often required subsequent revision. Whatever it says on Friday may not be the last word.

“If the number is weaker than expected, pay no attention to it,” he said. “It’s probably wrong and likely to be revised up. Revisions tend to rise in an economic expansion.”

This is more than cognitive bias -- this is denial, plain and simple.

I have been a critic of various data assembly methods, hedonics, birth death adjustments, and many other numerical sleights of hand. I have rationally explained the differences between the Household and Establishment surveys. All it takes is a little elbow grease and cognitive functions.

I suggest others do the same.

NOTE: For a markedly different approach, compare the above story with a column in the Times a few months ago by Dan Gross: When Sweet Statistics Clash With a Sour Mood. Instead of rationalizing, there is a genuine attempt to make sense of the statistics in context of what we know -- rather than merely hope -- to be true.

Source:
Navigating the Fog in Jobs Data
Market Week
CONRAD DE AENLLE
NYTimes, July 30, 2006
http://www.nytimes.com/2006/07/30/business/yourmoney/30mark.html

Linkfest

Sunday, July 30, 2006 | 05:59 PM

in Weblogs

What a week! This was the best 5 day performance for the Dow Jones Industrial Average -- up 3.2% since last Friday -- in nearly 2 years. The S&P 500 gained 3.1%, while the bloodied but unbowed Nasdaq Composite finished with gains of 3.7% -- more than half of which came on Friday. Barron's Mike Santoli called it a "none-and-done" rally.

What set the rally off was the stinky GDP numbers; With Economic growth slowing and prices rising (in particular Employment Costs) is complicating the Fed's task -- Hey, let's throw a party! seemed to be the Wall Street reaction.

No matter: If its Saturday, then you know what that means: Linkfest time!

• Santoli redux: Barron's The Trader column notes sentiment had gotten negative enough for a rally to take hold: "Standard investor surveys have had elevated readings of investors pleading bearishness. There is a rather crowded short position among large speculators (hedge funds) in Nasdaq 100 futures (which no doubt started to hurt Friday). Domestic stock mutual funds have had four straight weeks of net outflows, coming after $8 billion left all equity mutual funds in June...Meanwhile, the dollar ratio of selling to buying among corporate insiders hit 6-to-1 last week, according to Thomson Financial." Before the week began however, Mark Hulbert did not see the same signs of excessive gloom; He thought the sunshine crowd is far too chipper for this to be a legitimate contrary signal.

• There's always some fly in the soup: On Monday, I wanted: VOLUME. That would have confirmed the prior week's one day wonder. It was disappointing to see Volume rather unconvincing this week; Friday's big move was actually on fewer traded shares than the prior two days -- but hey, these are the dog days of Summer.

• Tough week to be short. In the spirit of full disclosure, I entered the week mostly in cash (Why Some Rallies Must Go On Without Us), and put some tentative shorts out Thursday while we were well in the green. When I saw the aforementioned volume at the close, I scaled into more index shorts right at the bell.

• Yes, its true: With Costs rising, companies are moving to increase prices. Shockingly, I remain unconvinced that a slowing economy/rising inflation is somehow good for stocks. These are, however, "Strong Opinions, Weakly Held."

• Everyone's now a Dow Theorist? The weak Dow Transports had wannabe Dow theorists coming out of the woodwork last week. Listen, you can be or believe whatever you want, but its probably best not to rotate through different schools of thought only when they support your current viewpoint. Incidentally, here's what a real Dow Theorist sounds like.

• Lots of good Real Estate related stuff; You already saw the data; Let's leap into some fascinating corners:
-Realtors now say: Home sales are a 'buyer's market'

-Housing is local, not national -- even as parts of the country flounder, some regions are "booming"

-Coming this fall: More stringent rules on Option ARMs and Interest-only Loans

-The rise of the Ghost Housing Market;

- What is the key to selling your home in this challenging environment? Get your home appraised before selling -- and then price it right.
• Companies are barely moving after reporting good earnings, but getting shellacked after misses. Does this mean good news may already built in? See 1. Earnings 2. Reaction 3. Guidance

• Battle of the Economists: Merrill's Rosenberg sees only a 40% chance of a recession by May 2007. NYU's Professor Roubini says the U.S. is on Its Way to a Recession by Year End. Pimco's Bill Gross takes a third option, saying Recession/no recession is a faux decision.

• How much of our belief systems are a result of our personal situation? The answer may be in The Wall Street core-inflation index;

• John Mauldin on The Return of Stagflation (I think its only demi-stagflation)

• If ever I were to go on a murderous, cold-blooded rampage, killing God knows how many, only to be gunned down by the police in the act, someone, somewhere will surely ask "Why did this happen? What could have set him off?" The answer is right here: And so it begins . . .

• I came across a fascinating pair of Federal Reserve related questions: What happens when Wall Street Hates a Fed Chair? and Is the Fed is irrelevant?

• Here's a second paired trade, this time from Wash DC: Congressional Quarterly looks into the Options backdating scandal in Overriding Self-Interest, while in Congress, have we got a deal for you! You cut the Estate tax, and we'll raise the minimum wage.

• From the Irony file: Dan Dorfman -- yes, that Dan Dorfman -- complains that "Stock tips and brokerage buy recommendations just are not working anymore." (If you don't know who he is, then you weren't watching CNBC in the mid-nineties).

Interesting tech related stuff out there:

• Steve Ballmer says this internet thingie is gonna be big!

• Sacre bleu! Parts of French ‘iPod Law’ Struck Down;

• Medical Patent Wars

• Global Warming: Signed, Sealed and Delivered; Why is it that the WSJ Op/Ed page never seems to left facts get in the way? This author totally trashes the way they misrepresented his study.

• P2P player Kazaa drops $100m to go legit; Australia based Sharman Networks, the owner of Kazaa, agreed yesterday to pay the world’s four leading music companies (Universal, SonyBMG, EMI and Warner Music) — more than 100 large to compensate for lost sales.

• This is too funny: The top 10 unintentionally worst company URLs

• The X-box crew is working on Microsoft's iPod challenger, so its no surprise they see 'Hundreds of Millions 'Spent on Zune Portable Music Player

• The New Media Power List

• I may have mentioned this one before, but I keep coming back to it: Metrics 2.0: Data driven Stats.Trends.Insights.Charts

• The wonder of Wikipedia

(Wow -- we actually got through the tech section with no mention of Google)

Some fun stuff:

• How hard is it to Steal a Bike in NYC?

• Yes, we Americans are becoming "too fat for x-rays," say radiology researchers

• How the Smart Money "Tips" (See fairtip.org, tipping.org, and Emilypost.com)

• The Cary Brothers -- who had a cut on the fabulous Garden State soundtrack last year -- stream their new CD here;

• August marks the 40th anniversary of the Beatles' 1966 album Revolver. There's a free ebook on the complete story of the of THE BEATLES' Revolver here (PDF)

• Lucky Louie is another one of HBO's acquired taste comedies. It is a parody of the traditional sitcom, with language filthier than Deadwood and situations that would make Larry David blush. Its the anti-sitcom. I don't dare link to any of the dialogue, but the morbidly curious can Google this precise phrase "Lucky Louie Curb Your Enthusiasm/Office" to read a few minutes of filthy, hysterical banter.

• CEOs That Rock

And that's all she wrote, in the steamy northeast, where temperature and humidity is expected to soar towards the high 90s. I may have to go see some Snakes on a m%$@&^%$$ Plane just to escape the swelter!

What Does Poor IPO Pricing Indicate About Sentiment?

Sunday, July 30, 2006 | 08:34 AM

in Data Analysis | Markets | Psychology/Sentiment

What can we conclude about future market performance based on how successful or not IPOs are?

Mark Hulbert looks at that question in a column in the Sunday NYT. He reviews a study that suggests all the recent IPO postponements/cancellations are "an indication of investor pessimism that may actually turn out to be bullish for the overall stock market."

"Worldwide in June, more companies withdrew or postponed their initial public offerings than in any other month since March 2001, according to Dealogic, a firm based in London that monitors the new-issue market. That March 2001 trough came less than halfway through the 2000-2 bear market, leading many investors to worry that the current gloom in the new-issues market is a harbinger of much lower prices for stocks.

But the stock market’s continuing decline in the months after the March 2001 I.P.O. bust was probably an anomaly, says Jay R. Ritter, a finance professor at the University of Florida who specializes in I.P.O. research.

An analysis of initial offerings market since 1980 suggests that, all else being equal over the next 12 months, the market between now and the summer of 2007 is likely to produce above-average returns."

I am compelled to point to a few issues with Prof Ritter's methodology. First, he analyzed the IPO market from 1980 - 2000. That period includes all of the 1982-2000 secular bull market and the 2 years that preceded it. It would be more representative of broader market history if the Prof had reviewed the data going back to 1966. That way, he would have had both a secular bull and bear market.

Secondly, Prof Ritter ignored the period that seems to not support his conclusion. If we are to consider the 2001 period an "anomaly," and disregard the parallel between then and now, than we must also consider whether the 1980 to 2000 period is anomalous as well. At the very least, we have to determine if it is representative of broader market history.

That time period -- the strongest bull market in history -- is suspect to use as the sole basis of comparison. Including a comparable bear period would likely improve the study's results.

All historical comparisons have flaws, but the more parallels you can draw between time periods for as many different variables, the more informative the comparison can be.

>

Undervalued IPOs

graphic courtesy of NYT

Its an interesting idea to use IPO pricing and other data points as the basis for forecasting. A broader historical period might have produced a data set that wecould have more confidence in.

Source:
If Initial Offerings Fall Short, Start Looking for Bulls
MARK HULBERT
NYTimes, July 30, 2006
http://www.nytimes.com/2006/07/30/business/yourmoney/30stra.html

Open Thread

Saturday, July 29, 2006 | 05:55 PM

in Weblogs

As suggested by readers a few weekends ago, why not have an pen thread when there's not much else happening?

I ~~assume~~ know you good folks have something to say.

Well, here's your forum: What are you thinking -- what theme will take over in the coming weeks? Is there more donwside ? Is the Fed nearly finished? How cold will Real Estate get?

What say ye?

The Wall Street core-inflation index

Saturday, July 29, 2006 | 08:25 AM

in Economy | Fixed Income/Interest Rates | Inflation | Psychology/Sentiment

How much of our belief systems are a result of our personal situation?

Barron's Alan Abelson channels David Rosenberg, Merrill Lynch's North American economist in looking at that question, via the Bond market. Rosenberg has raised his odds of a recession in the U.S., in part based on his Wall Street core-inflation index:

"Right now [Rosenberg] puts the odds of a recession at 40% and rising. To his credit, he was early in spotting the beginning of the end of the housing boom. And he isn't blinking the possible consequences of a bust in housing.

On this score, he noted recently that housing accounted for more than a third of overall job growth in the past three years, and that the consumer's ability and willingness to cash in on his growing home equity made the difference between 2% average annual consumer spending growth and the 3.5% that actually occurred. All things considered, he reckons that the drop in housing will shave as much as two percentage points from normal GDP growth of 3.5% over the next four to six quarters.

And he comments: "Something tells us that sub-2% growth, let alone a recession, would come as quite a surprise to the consensus economic community, who still cling to near-3% forecasts for 2007, and the equity analysts who continue to see 11% EPS growth."

Interestingly, among his achievements is his discovery why all the bond portfolio managers he runs into are so darn bearish on the Treasury market. What provided this epiphany was a Wall Street core-inflation index he created, which concentrates on those precious items that Wall Street types can't live without. He reports that, at last check, the Wall Street core-inflation index was running at a 4% annual clip, or double Main Street's comparable inflation index.

That naturally prompted us to inspect with some care the constituent elements in the index. And they are, perhaps in order of importance (although David won't come right out and say so): alcoholic beverages (consumed, he carefully notes, "away from home"); hotels; housekeeping and lawn-care service; jewelry; airfare; pet services; sporting goods; medical care; recreation (unspecified, we might observe); elementary, high-school and college tuition; personal-care, dry-cleaning, legal (even bond people get sued) and financial services.

What this states loud and clear is that the bearish bond-portfolio managers are talking to their checkbooks, and the more they have to fork over for martinis and the other necessities of life, the greater their sensitivity to inflation and the more intense their bearishness on Treasuries."

Bond portfolio managers are bearish -- meaning they see lots of inflation, sending rates higher and bonds lower -- because the items on their personal shopping list keep going up in price.

This is a fascinating idea, and very consistent with a concept I've had for a long time: I've long wondered how bearish someone can be if they were personally flush. Is the parade of perenially bullish, well-compensated fund managers (or strategists/economists) a projection of their own personal situations?

I've noticed an example of this phenomenon in automobile purchases. (This is a bit of a leap, but hear me out). Ask someone who is considering the purchase of a car about its virtues and vices before they buy it. they will easily tick off all of the upside as well as downsides to that particular vehicle. They likely spent time and effort researching it, and they enjoy showing off that newfound knowledge.

Ask them again a week after their purchase.

For the most part, they will tell you how terrific the car is and how happy they are with their purchase. Given that a week is hardly enough time to really find out what all the warts and design flaws are on an automobile, this is actually more of a self-esteem issue. By saying how much they like the car, they are affirming their purchase decision.

The same "coincidence" exists with stock purchases. Dick Arms is fond of noting that investors get bullish after they buy stocks -- not before. That's why an excess of sentiment in either direction can be a contrary indicator. It suggests that all of the buying (or selling) has already taken place.

Fascinating stuff . . .

Source:
The Missing Imperatives
UP AND DOWN WALL STREET
By ALAN ABELSON
Barron's MONDAY, JULY 31, 2006
http://online.barrons.com/article/SB115412960751921027.html

The Market is Speaking, Are You Listening?

Friday, July 28, 2006 | 11:59 AM

in Investing | Markets | Psychology/Sentiment

One of the great things about Wall Street are the people you get to meet. Yesterday was a case in point.

One Monday, I wrote up a commentary called Why Some Rallies Must Go On Without Us. It explained why there are occasions when the ducks don't line up, and you have to let a rally come and go without participating in it. In addition to going out to RR&A subscribers, it also went out to a few people who share their research with me, and as a courtesy I return the favor.

Ironically, I get an email back from Jeff Saut (of Raymond James) yesterday, telling me he quoted that piece in his verbal comments to institutional clients.

At the time, I was working on a multiple compression/valuation analysis -- Its not how cheap it is, its how much buyers are willing to pay for it -- that relied on commentary of Jeff's!

I try not to get caught up in the Wall Street hall of mirrors, where everyone merely repeats what everyone else said. I do, however, round out my research by reading a few original thinkers and seeing their world views.

Jeff and I chatted about this by phone yesterday. I asked him about a recent missive of his: "The Market is Speaking, Are You Listening?"

It turns out that Jeff will be one of the keynote speaker this year at the upcoming MIM Retreat conference. That concept of listening to Mr. Market will be the topic of his presentation.

I checked out the Minyans in the Mountains speaker list, and its quite a crew: In addition to Saut, the other keynotes are by technician Tom DeMark, Barron's editor Michael Santoli, and Thomson Financial Director of Research, Michael Thompson.

There were a few other names that caught my eye: Woody Dorsey of Market Semiotics, Jason Goepfert of Sentiment Trader, Stephanie Pomboy, of MacroMavens, and Bernie Schaeffer of Schaeffer's Investment Research..

~~~

Looks like it will be a good time . . . I'll bet Vail is lovely this time of year.

GDP: 2.5%

Friday, July 28, 2006 | 10:15 AM

in Economy | Federal Reserve

First, the bad news: The U.S. economy stunk the joint up in Q2, slowing sharply as inflation continued to climb.

The good news? You'll have to ask equity traders, who gapped up the market strongly this morning. They apparently see a soft landing coming. The bond market, on the other hand, aggressively bought treasuries, driving the 10 year note below a 5% handle.

Quite frankly, bond traders are more like the adult supervision of markets, while stock jockeys can be likened to hormone addled teenagers. Whenever the markets send conflicting messages, my tendency is to give more weight to the adults than the children. (And I write this as a stock trader).

As previously noted, the Q1 GDP of 5.6% was an aberration, reflecting the one off Q4 '05 growth numbers of 1.7%. By my estimates, between 30-40% of Q1 GDP was attributable to Q4 push forward caused by the hurricanes.

Real GDP

Econoday chart courtesy of Barron's

>ec
Surprisingly this week, numerous Wall Street Economists had raised their GDP estimates, with consensus coming in at 3.2% -- despite slowing retail sales, decreased mortgage apps, and cooling home sales.

The Fed's favorite inflation indicator, the PCE a hot 4.1% (ex food and energy +2.9%).

Consumer spending still accounts for more than two-thirds of GDP, and it was up 2.5%, significantly below Q1's 4.8%.

The WSJ quoted University of Maryland business professor Peter Morici , who said: "Higher interest rates, higher oil prices and mounting debt are burdening consumers. With the housing market cooling, consumers are no longer able to use the equity in their homes to finance ever larger purchases of clothes, electronics and other goods and services."

The Journal also noted that "Residential fixed investment, which includes spending on housing, dropped by 6.3%." This was the largest decline since 2000.

The WSJ's Fed Watcher, Greg Ip, observed "For the Fed, the revisions are, on net, a reason to be more nervous about inflation. A slower growing economy with more inflation suggests the speed at which the economy can grow without exceeding capacity limits may be lower than previously thought."

The Fed’s quandary is now greater than it was: We clearly have inflation pushing through the core rate, while the economy has WSJ's growing much more slowly. The Fed is now likely to do something very different on August 8th compared with their prior actions: They are now likely to either hold rates steady – or raise ¼ but change the statement significantly. Either way, this tightening cycle is now entering a different phase.

Maybe it finally is the 8th inning.

Sources:
U.S. Economy Grew at 2.5% Rate In 2nd Quarter, Commerce Reports
JEFF BATER
WSJ, July 28, 2006 9:22 a.m
http://online.wsj.com/article/SB115408864917920324.html

Revision Shows Weaker Recovery
Greg Ip
WSJ, July 28, 2006 8:55 a.m.
http://online.wsj.com/article/SB115409068555020335.html

There They Go Again: NRF Redux

Friday, July 28, 2006 | 05:20 AM

in Consumer Spending | Data Analysis | Economy | Retail

I nearly spit out my iced coffee when I saw this cross the tape:

"With record temperatures across the nation making headlines, many parents are already preparing their back-to-school shopping lists and thinking ahead to fall. According to the National Retail Federation’s (NRF) 2006 Back-to-School Consumer Intentions and Actions Survey, conducted by BIGresearch, families with school-aged children will be spending more on back-to-school shopping this year than last, with the average family spending $527.08, up from $443.77 in 2005. Total spending is estimated to reach $17.6 billion, up from $13.4 billion last year."

That's right -- the NRF is once again forecasting a big increase in sales based on their survey. For the back to school season, that's a 31% back-to-school spending increase in 2006 versus 2005, and an 18.8% increase per family.

I don't know what they are smoking at the National Retail Federation, but I have a suspicion it was grown in the hills of Northern California.

In case you forgot, for the holiday season in 2005, the NRR trumpeted Thanksgiving weekend sales as “blockbuster;” They received glowing media reports of sales having “surged 22% from a year ago to about $27.9 billion.” In actuality, the gains over the holiday sale season in 2005 were a mere 3.5%.

The track record of the National Retail Federation at forecasting actual sales has been awful. After the debacle that was their '05 holiday season forecasts, the media seems to have wised up to their cheerleading.

The largest part of the problem is their methodology: They poll 9000 or so people, asking them what they intend to buy, and how much they plan on spending. They do not look at any actual retail sales data, reciepts, etc.

Polling is fine for certain things, but it has its limitations. If you want to determine what people think or feel or believe -- that's fine. However, its not a particularly good way to determine future behavior. As we have seen, people are rather poor forecasters of their own future actions. We've seen this repeatedly over the years; the most recent misleading surveys have been in the CEO CapEx and hiring forecast. They tend towards being much more optimistic about ramping up spending and new head count then they subsequently are.

Spending may increase or decrease somewhat, but given that gasoline prices have topped $3 gallon, and is hitting 25-year highs, I doubt very much we will see an 18.8% family spending increase, or a 31% increase in total sales.

Annual Spending, Back to School Season

Sources:
Don’t Believe the Hype: A Very Mixed Retail Picture
Monday, November 28, 2005 http://bigpicture.typepad.com/comments/2005/11/dont_believe_th.html

Gasoline prices top $3 gallon, hit 25-year high
Reuters, Sun Jul 23, 2006 4:21pm ET
http://tinyurl.com/hadsh

Electronics and Apparel to Fuel Back-to-School Spending,
According to Latest NRF Survey
-Total spending expected to reach $17.6 billion-
NRF Press release, July 18, 2006
http://tinyurl.com/qxse9