Tuesday, April 3, 2012

Today's links

1-- Stocks Will Be Bipolar This April & May, Trim Tabs

Excerpt: Why has the stock market risen the first part of each of the past three years? The answer is simple. The Fed has front loaded money printing each year, QE1 in 2010, QE2 in 2011 and Operation Twist this year.

Last year, the US economy grew at its fastest pace during the first part of the year and then growth slowed dramatically. This year, while the US economy is growing at a slower pace than it did to start last year, government numbers are showing faster growth, even though the economy is not.

During the first quarter of 2011, using income tax collections, we were reporting stronger employment and income numbers then at that time were the Bureau of Labor Statistics and the Bureau of Economic Analysis. Lo and behold recently the BLS and the BEA revised upwards their start of 2011 numbers to roughly equal ours. This year we are reporting lower numbers than the BLS and BEA and fully expect the government to revise lower its estimate of current growth, but those revisions won’t be released until after the November elections.

So far this year stocks are up more than each of the last two years. Perhaps that is why we are seeing a bigger drop in corporate buying and a bigger increase in corporate selling this March and in the prior two March’s.

Since the August 2011 market bottom, corporate buying has been the sole source of new cash for stocks. That is why after this Aprils inflows are spent on equities, and if corporate selling keeps growing I fully expect the stock market to give up all of its first quarter gains, if not more, over the next few months

2--Rosenberg recaps the record quarter, zero hedge

Excerpt: My how things have changed. Today, "dividend paying stocks" are all the focus of attention — not to mention fund flows. Indeed, what is still so fascinating is how the private client sector simply refuses to drink from the Fed liquidity spiked punch bowl, having been burnt by two central bank-induced bubbles separated less than a decade apart. Investors continue to use stock price appreciation as an opportunity to rebalance and diversify rather than chase performance — pulling $15.6 billion from U.S. equity mutual funds so far this year while taxable bond funds have seen net inflows amounting to $59 billion.

The lack of any real significant back-up in bond yields suggests that the asset allocators have been idle as well.

It would then seem as though this is a market being driven by traders. Then again, it has been a very tradable rally, just as the post-QE1 and post-QE2 jumps were. Ditto for the current post-LTRO rally. But liquidity is not an antidote for fundamentals. And a market that lacks breadth, participation and volume is not generally one you can rely on for sustained strength, notwithstanding the terrific first quarter that risky assets delivered. We lived through this exactly a year ago....

In Chicago, it was the warmest March ever and second balmiest March on record in New York City. For the latter, it was 9 degrees above normal and would have lined up in the top 10 for any April!). That the employment, housing and spending data weren't even stronger than what they showed — likely little better than a 2% pace for Q1 real GDP — is the real story beneath the story. The fact that the 10-year note yield stopped at 2.4% and has since rallied 20 basis points instead of making the expected technical challenge of 2.65% suggests that the bond market crowd may be figuring out what this means for the Q2 landscape as the weather skew to the data subsides.


Yes, yes, U.S. personal spending jumped an above-expected 0.8% in February, above the 0.6% increase that was generally expected and the largest monthly gain since August 2009 when the shoots were green. But if truth be told, this as we would say in market parlance, was a "low multiple" increase. The reason? Personal incomes were soft and that is what counts most — income fundamentals remain dismal. Not only did income come in soft at +0.2% (half what was expected) but not even enough to cover the cost of living, but January and February were both revised lower. Real disposable income also declined 0.1% — the third decrease in the past four months and on a per capita basis is down 0.4% YoY, a far cry from the +2% trend of a year ago. The economy is building momentum. Right.

3--32 straight months of expansion, credit writedowns

Excerpt: The Institute for Supply Management (ISM), the US purchasing managers’ index (PMI) for March increased to 53.4 from 52.4 in February, beating expectations of 53. It’s the 32nd consecutive month that the index has been at least 50.

The ISM notes,

A PMI in excess of 42.6 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates growth for the 34th consecutive month in the overall economy, as well as expansion in the manufacturing sector for the 32nd consecutive month. Holcomb stated, “The past relationship between the PMI and the overall economy indicates that the average PMI for January through March (53.3 percent) corresponds to a 3.6 percent increase in real gross domestic product (GDP). In addition, if the PMI for March (53.4 percent) is annualized, it corresponds to a 3.7 percent increase in real GDP annually.”

4--Euro-Region Unemployment Surges to Highest in More Than 14 Years, Bloomberg

Excerpt: European unemployment increased to the highest in more than 14 years in February as companies from Spain to Italy eliminated jobs to weather the region’s crisis.

The jobless rate in the 17-nation euro region rose to 10.8 percent from 10.7 percent in January, the European Union’s statistics office in Luxembourg said today. That’s the highest since June 1997, before the euro was introduced, and in line with the median forecast of 33 economists in a Bloomberg News survey. At 23.6 percent, Spain had the highest jobless rate among member states.

European companies are under pressure to cut costs and eliminate jobs after tougher austerity measures eroded consumer demand and pushed economies from Greece to Ireland into recession. While leaders have stepped up efforts to contain the region’s fiscal crisis, confidence in the economic outlook declined in March and manufacturing contracted.

In the 27-nation EU, the jobless rate rose to 10.2 percent in February from 10.1 percent in the previous month, today’s report showed. About 17.13 million people in the euro area were unemployed in February, up 162,000 from the previous month.

5--Gallup unemployment comes back to earth, Daily Kos

Excerpt: Remember last month when Gallup's daily 30-day rolling average tracking poll shot up for unemployment. Hitting a (recent) high of 9.1% on 3/3 and 3/7. Remember how this was used as justification for the right-wing conspiracy theory that the BLS was somehow cooking the numbers. What BLS's motivation for doing this was never precisely clear to me. It supposedly had something to do with the election, but it always struck that if that were the case they jumped the gun by starting so far in advance of the election. The scheme was bound to fall apart before election day. ...

Since 3/7, in less than 3 weeks, Gallup's unemployment number has steadily trended downward until today it sits at 8.5% and will likely continue its trend downward in the coming days. So is an economy as large as the USA's really that volatile for in the space of 2.5 months the unemployment rate to shoot up 0.8% only to subsequently come right back down almost to where it started? Unlikely, more likely it just proves that the BLS's work to seasonally adjust the numbers is actually very valuable and is in no way cooking the books.

6--Worst over for Treasuries?, Bloomberg

Excerpt: President Barack Obama needs the support of the bond market to help finance a budget deficit projected to exceed $1 trillion for the fourth year as he runs for re-election in November.

While the amount of marketable debt outstanding has more than doubled to $10.2 trillion from $4.34 trillion in mid-2007 as the U.S. sold bonds to pay for spending programs designed to pull the economy out of the worst financial crisis since the Great Depression, interest expense equaled 3 percent of the economy in fiscal 2011 ended Sept. 30. That’s down from 4 percent in 1999, when the U.S. ran budget surpluses.

Bond Losses

Bernanke helped spark last quarter’s selloff when the central bank upgraded its assessment of the economy at its March 13 policy meeting. Losses in long-term bonds were the most since they tumbled 8 percent in the fourth quarter of 2010, according to Bank of America Merrill Lynch indexes, and compare with a 3.22 percent return for company debt and a 12.6 percent gain in the Standard & Poor’s 500, including reinvested interest.

Traders immediately reduced bets the central bank would favor more bond purchases and moved forward the date that they anticipated the Fed would raise interest rates to 2013 from late 2014.

“At this point in the policy cycle it is common for market participants to get ahead of themselves,” said Vincent Reinhart, chief U.S. economist at primary dealer Morgan Stanley and a former senior Fed official, in an interview on March 28. “The market’s got a rosier view of the outlook.”

Reinhart forecasts 10-year yields will end the year at 2.25 percent, and there’s a better than even chance of QE3 after the Fed already bought $2.3 trillion of bonds from December 2008 to June to avert deflation and spur growth. It’s now replacing $400 billion of shorter-term maturity Treasuries in its holdings with longer-term debt in a policy traders call Operation Twist...

Spring Slowdown’

“We’re going to have some Spring slowdown in housing, some Spring slowdown in employment, and the first opportunity they get to juice the system they will,” Steven Ricchiuto, chief economist in New York at primary dealer Mizuho Securities USA, said in a March 28 telephone interview in reference to Fed policy makers

7--Debunking the Housing Recovery Story, The Big Picture

Excerpt: This morning, let’s discuss Shadow Inventory. This is important, as we have heard from Housing Bulls as part of their recovery thesis that the decrease in inventory of homes for sale is a net positive.

I would argue that the massive supply of homes in the Shadow Inventory make this judgment premature. There are numerous definitions floating around, but I prefer to start with the following: Ordinary Inventory are homes that are listed for sale with either MLS or privately (FSBO) or are in some public way known to potential buyers as for sale. These are what are counted in the official inventory.

Shadow Inventory includes: Bank owned Real Estate (REOs), distressed homes not yet for sale, including short sales and delinquencies not yet defaulted. Various properties in different stages of Foreclosure are also in the shadow inventory.

This definition still yields a broad range of potential shadow homes that will eventually become part of the total supply. Michael Olenick (at naked capitalism) puts the range of potential shadow inventory from 1.6 million homes(CoreLogic) 8.2-10.3 million (Laurie Goodman, Amherst Securities).

But even those numbers do not represent the complete picture. I include in my definition of shadow inventory the enormous overhang of underwater homes — these are the houses that don’t qualify for a mortgage mod, but whose owners are still making most of their payments. They have minor delinquencies, but are not in default. The owners are frozen — economically immobile — since they cannot move to a different area to take a job.

The problem is the homes are worth anywhere from 5-25% less than their mortgage. A sale will not be possible without lender permission or a large check to make up the shortfall.

About a third of homes (30-40%) in the US have no mortgage — cash purchases or paid off mortgages mean they are owned outright. Of the remaining homes, estimates range from 21% to 29% are worth less than their mortgages. That’s between 12 – 18 million houses as potential supply at higher prices.

The key question for the Housing Recovery case: What happens if and when prices begin to rise? Do these underwater owners relax, feeling better about their positions? Or, do they finally hot the nid when the opportunity presents itself?

The truth is that we simply do not know. But is is reasonable to assume that many of these homes would be put up for sale and become inventory. If only a third do, that is another 4 million homes for sale.

8--Can the US consumer keep spending?, macrobusiness

Excerpt: So, income growth remains lousy at 0.2% for February. Indeed, in real terms it fell 0.1%. For growth, however, the news was better with the personal consumption expenditures jumping 0.8% in the month. No prizes for guessing where the surge came from:

Personal saving — DPI less personal outlays — was $438.7 billion in February, compared with $509.5 billion in January.

The personal saving rate — personal saving as a percentage of disposable income — was 3.7 percent in February, compared with 4.3 percent in January.

Yes, indeed, the savings rate fell significantly to the lowest level since late 2009 (on a three month moving average).

Theories of a new normal suggest that this savings rate will remain higher than it did in the post millennium debt boom. You can see, however, that we’re swiftly approaching the ceiling of the former range (and don’t forget that this is a 3 month moving average, on a month-by-month basis we have already punched into the old range at 3.7% for February).

I find it hard to believe that the US consumer will give up saving again having been through the GFC but higher consumer confidence on improved employment prospects and an inflating stock market may be enough to keep this trend running. Household asset wealth increased in the last quarter of 2011 for the first time in four quarters and will have improved further in the first quarter of 2012 on a rising stock market and at least flattening real estate market.

In the event that this trend continues, you would have to say that the new normal is in fact just some version of the old and that the low household savings rate has returned to what economists like to call an “imbalance”. Something for economists to worry about but not markets, at least until the next shock comes around and the whole thing falls in a heap once more. This is not beyond the realms of possibility.

Still, I find it hard to believe. Even the US consumer has his limits and surely the GFC was a generation defining event? I also reckon that the US housing bounce is temporary so some of the positive wealth effect will wane. If the savings rate rebounds the US will slow in the second half, just as it did in 2010 and 2011.

9--Vital Signs: Americans Are Saving Less, WSJ

Excerpt: Americans are putting less money in their piggybanks. The personal saving rate—the share of income left over after spending and taxes — dropped to 3.7% in February from 4.3% in January, the second straight monthly drop. Saving is falling as consumers step up spending on things like gasoline and cars. The last time saving was so low was August 2009. (chart)

10--Stocks Resume Their Strong Ride, WSJ

Excerpt: Stocks rose to multiyear highs on the first session of the new quarter after a solid reading on domestic manufacturing.

Major indexes started near the flat line but drifted higher on the report over March manufacturing activity. The Dow Jones Industrial Average climbed 52.45 points, or 0.4%, to 13264.49, its highest close since December 2007.

The Dow rose 66 points on Friday to close out the best first-quarter point gain—994.48 points—in its history, and the best first-quarter percentage performance—8.1%—since 1998.

The Standard & Poor's 500-stock index gained 10.57 points, or 0.8%, to 1419.04, its highest finish since May 2008. The Nasdaq Composite rose 28.13 points, or 0.9%, to 3119.70, snapping a four-day losing streak.

"After a massive run, what's better than putting a cherry on top?" said Barry James, president of James Investment Research. "When you've got the market running higher, it likes to keep going higher until something really takes place. From an economic standpoint, there are enough positive markers for people to say that's OK right now."

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