Thursday, January 31, 2013

Today's links

1---The only chart you need on the GDP report, WA Post

q4_gdp

The GDP report for the fourth quarter of 2012 is, on its face, disappointing. The economy shrunk, at an 0.1 percent annual rate, the first such contraction since the recession’s nadir in 2009. But commentators are surprisingly upbeat about it. Spending and investment are still looking good, but sharp contractions in business inventory and federal defense spending sunk the overall number. Paul Ashworth at Capital Economics called it “The best-looking contraction in U.S. GDP you’ll ever see.”

2---Bull market or prelude to a bust? MSN Money

The markets are nearing levels not seen since 2007 -- but let's not forget the crash that followed those highs. Conditions now look eerily similar.....
 
Risks remain
People are ignoring the very real fiscal policy risks the U.S. faces over the next few weeks; yes, the debt-ceiling debate was postponed until May, but the "sequester" budget cuts and the need for a new federal spending plan hit much sooner.
We're also seeing rising resistance of inflation hawks at the Federal Reserve, the European Central Bank and elsewhere to the rich world's experiment with extreme monetary policy easing (which is growing increasingly ineffectual).
People believe Europe has been fixed. (It hasn't, and Germany is falling into recession.)
People believe 2% inflation will end Japan's multidecade malaise. (It won't.)
People believe tapped-out U.S. consumers and the nervous corporate sector will spend and invest despite the uncertainty, stagnant wages and new taxes. (They won't.)
People believe both earnings growth and growth of the gross domestic product will reaccelerate later this year, yet I see clear signs of lost ...

The CBOE Market Volatility Index ($VIX -0.07%), a commonly used gauge of market unease, is finally showing signs of caution. A more obscure gauge of this in the options market, the Credit Suisse Fear Barometer, has been showing the same for weeks. Maybe the fog of irrationality and lingering good vibes from the fiscal cliff deal are ending. Whatever the cause, options traders are starting to worry about downside risk again -- and are paying up for protection from downside losses.
  •  Despite impressions to the contrary, fourth-quarter earnings season is turning into a dud. As of Jan. 25, with 47% of the S&P 500 reporting, earnings are tracking 6% below the $25.51 consensus estimate on Jan. 4. Of those companies that have reported, they've collectively missed the consensus estimate for their share of total S&P 500 earnings by 13%. Because of this, the 53% of companies left to report had better be bringing good numbers, or we could be looking at an outright drop in earnings per share versus last year.
  • So while we face the prospect of negative EPS growth this quarter, bottom-up Wall Street analysts (a traditionally bullish bunch) are looking for earnings growth to reaccelerate to a mind-numbing 23% rate by the fourth quarter of 2013.
    That just won't happen. Nor is GDP growth going to reaccelerate to more than 3% later this year, as many economists believe.

    Weak earnings. Weak economy. Fiscal austerity and political uncertainty. Higher taxes. Narrowing market participation. Weakness in industrial metals.
    And yet, extreme bullish sentiment and one of the least volatile rallies in the past 40 years.
    By all indications, the current surge is a blow-off top, just like the one we had in 2007.

    3---Bernanke Still Pouring Shots Of QE To Markets Already Drunk On Liquidity, Forbes

    ....the holdings of cash and marketable securities of the top 100 companies in the S&P 500 (SPY) and Nasdaq composite recently reached $1.1 trillion. The top five companies alone – Apple (AAPL), General Electric (GE), Microsoft (MSFT), Google (GOOG), and Cisco Systems (CSCO) – accounted for $426 billion in cash hoards.
    We are now seeing signs that those balances are beginning to migrate into the economy. In today’s GDP report, investment in equipment and software advanced by 12.4% on an annual basis in the most recent quarter.

    Similarly, money and confidence in the U.S. financial system is increasing. At the Center for Financial Stability, we specifically measure the banking system and broader money supplyexisting in the private sector. This is critical. For instance, money created by the Fed or total reserves held by banks at the Fed represent a mere 8% of the broader money supply in the U.S. economy, so it is no wonder that the economy barely responded to monetary policy actions over the last few years....

    The broadest measure of money available today (CFS Divisia M4) gained 6.9% in December 2012 on a year-over-year basis. This represents the most rapid expansion in broad money in the economy since 2008. So, the financial system and the economy are on the mend.....

    Bond valuations remain troublesome. Distortions across the yield curve represent an equal and offsetting reaction to direct purchases by the Federal Reserve in the US Treasury (TLT) and mortgage-backed securities (MBS) markets (MBB). A more rapid drop in the unemployment rate, a modest move higher of inflation on a sustained basis, or question surrounding the credit quality of sovereign assets could readily reverse valuations that are already stretched and pulled to extremes.
    Prospects
    This week, the Federal Reserve is likely to re-embrace its plan to purchase $45 billion per month in longer-term Treasury securities in future months. It is too soon to alter the recently altered policy course. So, events will likely support equity markets in coming weeks at the expense of overvalued bonds. However, extreme risks will remain over the longer term due to cumulative effects of direct central bank asset purchases over the last five years

    4---(Archive) Bankers Are Still Wrecking Housing Market Fundamentals, Firedog Lake

    Banks Are Manipulating Inventory
    Given the grim reality of too many houses at crazy high prices, how come we’re seeing a spate of good housing news stories? Well, those stories reported supply had shrunk so much, prices were rising. One of the most comprehensive was by Nick Tiramos for the Wall Street Journal, detailing that shrunken inventory was leading to some bidding wars in several markets. Local pieces, this Arizona Republic story, continued the theme. Both articles noted that the bidding wars didn’t mean prices had recovered much compared to the bubble years. Nonetheless, if the decreased inventory is for real, the optimism’s justified, right?

    Too bad the inventory decrease seems artificial, the result of bank manipulation. Take Phoenix: RealtyTrac identifies 6,611 “bank-owned” properties there. An Arizona realty website lists only 275 for sale. Similarly, Yahoo real estate claims there’s over 8,000 foreclosure properties in Phoenix, but Realtor.com lists less than 4,000 homes of any type. AZHomeonline.net lists a bit over 4,000, plus 312 foreclosures and shortsales. So are the foreclosures in Phoenix on the order of 300 or 6,600? Makes a wee bit of difference when the non-”distressed” market is about 4,000, don’t you think?
    (To Tiramos’s credit, his piece acknowledges the good news may not last because of the bank owned backlog; the more cheerleading articles don’t.)

    Phoenix isn’t the only place where banks are holding properties off the market. In Portland, Oregon, banks aren’t selling 80% of the homes they own, The Oregonian reports. All the bank owned inventory statewide represents more than a year and half’s supply of houses all by itself, according to a RealtyTrac executive quoted in the piece. If the housing inventory is that distorted in Oregon, what’s it like in the hardest hit states?

    By holding off inventory, the banks provide temporary support to prices, but for how long? The inventory will make its way to market–there’s just too many houses held in reserve for the banks to manage and maintain the properties in a market-price optimizing way. Moreover, this artificial control of inventory means foreclosures do not help a market to bottom; foreclosing cannot “clear” the market.


    5---December Income Surge Sets Up January Collapse, WSJ

    What December bringeth, January will taketh away.
    Personal income jumped as expected last month, although the size of the gain, 2.6%, was much bigger than economists had expected. But the windfall was all about the tax code, not a sign of economic strength.
    Companies paid out dividends and bonuses in December to beat the higher tax rates that kicked in 2013. The one-time nature of the income swing was illustrated by the fact that households decided to stash away rather than spend the bonuses and dividends. The saving rate jumped to 6.5% last month while consumer spending increased just 0.2%, as forecast.
    Expect a big drop in income in January thanks to the absence of the bonuses and dividends that would normally have been paid. Additionally, disposable income is taking a hit because of the end of the payroll tax holiday.
    How will consumer respond to falling incomes?
    Those who can will tap into the savings socked away in December. But many others will have to rein in their spending. Weekly retail sales already look weak. The big test of spending resilience–or retrenchment–will be Friday’s report of vehicle sales.
    Economists expect sales ran at an annual rate of 15.2 million this month, not much different than the 15.3 million sold in December. A bigger drop may indicate consumers are responding to fiscal tightening by rethinking their spending plans.
    That’s bad news for an economy as dependent on consumer demand as the U.S. is.
    What could help January income would be a solid gain in hiring this month. Additional people earning paychecks would mitigate the drag from smaller paychecks for existing workers

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