March 1, 2010
“Things may come to those who wait, but only the things left by those who hustle.”—Abraham Lincoln
Weekly percentage performance for the major indices
Based on last Friday’s official settlement...
The Euro has been weak since late last year due to concerns about the PIIGS (Portugal, Ireland, Italy, Greece and Spain), as evidenced by the chart below (courtesy Finviz.com). The US Dollar has been the main beneficiary of the weakness in the Euro, even though it was slightly down this week for the first time in six weeks. The Yen has also benefitted from the PIIGS, however, strength in the Dollar and Yen have hurt both emerging markets and select commodities. Energy, specifically oil, has moved to the high end of its trading range over the past few weeks, possibly signifying that supply/demand for oil is moving back in line after falling badly out of place in late 2008.
Last week I posted a chart from Bob Bronson showing the 139 year real total return of the stock market. This chart generated more discussion than any other chart or picture in the past six months, excluding of course the picture of Farrah Fawcett. The net view and consensus by most callers/commenters is that the market is likely to be at similar levels three to four years from now as we see today. That doesn’t mean a flat line market or limited opportunities to make money; it just means investors will need to be nimble without the tailwind of an upward sloping market.
Actual Consensus Prior
Consumer Confidence 46.0 55.0 56.5
Case Shiller Home Price -3.1% -3.1% -5.3%
New Home Sales 309K 354K 348K
Initial Claims 496K 460K 474K
Continuing Claims 4617K 4570K 4611K
Durable Goods Orders 3.0% 1.5% 1.9%
Durable Goods ex-Transports -0.6% 1.0% 2.0%
GDP 2nd Estimate 5.9% 5.7% 5.7%
GDP Deflator 0.4% 0.6% 0.6%
Chicago PMI 62.6 59.7 61.5
U of M Consumer Sentiment 73.6 73.9 73.7
Existing Home Sales 5.05 mil 5.50 mil 5.44 mil
After a number of weeks with a somewhat even mix of good and bad economic data, the preponderance of data this week was weaker than expected. The market took the data in stride, but the trends are a bit concerning. I mentioned this in the fall, but it seems as though the economy is acting like a kid learning to ride a bike, wobbling along while the parent (Fed) holds onto the back of the seat, trying to determine when is the best time to let go. Over the next five or six months we should have enough information to determine whether the economy will sustain its recovery or wobble its way into a double dip recession for 2011.
New home sales fell 11.2% in January, a level roughly 80% below the monthly peak reached in mid 2005. Existing home sales unexpectedly dropped 7.2% in January to a seven month low of 5.05 million units. This is the second largest drop ever, behind December’s 16% drop. Weather undoubtedly played a key role in the slow down.
The second estimate of Q4 GDP actually rose from 5.7% to 5.9%. Much has been made of the corresponding decline in the GDP deflator, but we think the keys to the report were the build up of inventory offset by a decline in consumer spending. The chart below, courtesy Barron’s, shows real GDP since 2000. The gray bars show the quarterly numbers we typically discuss.
There was a huge drop in consumer confidence during February. According to The Big Picture, there have been 20 drops of 10 points or more since 1978, and the market typically ended down, sometimes significantly, over the next 30-60 days. In the chart below, courtesy Briefing.com, the purple line represents the current measure.
Durable goods orders exceeded expectations, however, the core number missed consensus. Strength was noted in transportation (up 15.6%) and defense capital goods (up 19.2%). The chart below, courtesy Michael Panzner, shows durable goods orders in blue and the mix of defense orders in the measure in red.
If You Don’t Know What You’re Talking About, Stay Off TV!
This week I watched Congresswoman Maxine Waters, Dem-CA, demonstrate she is a complete moron during her questioning of Ben Bernanke during the Humphrey Hawkins hearings. Ms. Waters wanted Mr. Bernanke to “guarantee” that the increase in the discount rate wouldn’t cause more foreclosures. While Mr. Bernanke tried to explain to her that the discount rate had very little, if anything to do with mortgage rates, Ms. Waters continued to spew forth without any consideration to the fact that what she was saying made no sense.
I don’t consider Mr. Bernanke to be the jovial type, however, if you look at his responses to Ms. Waters, it is pretty apparent he is smirking.
I wonder if he is beginning to think it would have been a good idea if he hadn’t been confirmed?
Lending Drops the Most since Truman
According to the FDIC, U.S. bank lending fell 7.5% last year. The $587 billion drop marked the biggest yearly decline since the 1940s. FDIC Chairwoman Sheila Bair felt that most of the decrease can be attributed to cutbacks by the biggest banks.
New Advances in Science
Lawrence Livermore National Laboratory in California has now identified with certainty the heaviest element known to science. The new element, Pelosium (PL), has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312.
These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called peons. Pelosium is inert, and has no charge and no magnetism. Nevertheless, it can be detected because it impedes every reaction with which it comes into contact. A tiny amount of Pelosium can cause a reaction that would normally take less than a second, to take from 4 days to 4 years to complete.
Pelosium has a normal half-life of 2 years. It does not decay, but instead undergoes a biennial reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places.
Pelosium mass will increase over time, since each reorganization will promote many morons to become isodopes. This characteristic of moron promotion leads some scientists to believe that Pelosium is formed whenever morons reach a critical concentration. This hypothetical quantity is referred to as critical morass.
When catalyzed with money, Pelosium becomes Senatorium, an element that radiates just as much energy as Pelosium since it has half as many peons but twice as many morons.
Here Comes the Taxes
President Obama is proposing a new Medicare tax on passive income.
I talked about the spending, now we’re seeing the taxes. Hello tax and spend!
Tech Spending a Bright Spot
The team at Gartner came out with their IT spending forecast for 2010. They estimate that overall IT spending will “return to growth of 4.6% in 2010. Currently, most businesses are operating in a quarterly budget approval regime which will remain in place through 1H10.”
They also forecast semiconductor revenue growth of 20% growth in 2010, driven by stronger-than-expected PC unit growth.
Commercial Real Estate Problems
According to Bloomberg, the default rate on commercial mortgages in the U.S. increased from 1.6% in the fourth quarter of 2008 to 3.8% in the same quarter last year. Real Capital Analytics said the rate could hit 5.4% at the end of 2011. "The level of distress continues to rise irrespective of improving economic trends," said Sam Chandan, global chief economist at Real Capital.
According to a recent report by the Congressional Oversight Panel entitled “Commercial Real Estate Losses and the Risk to Financial Stability”:
“Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present “underwater” – that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.
The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010. Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses.”
Real Estate Foreclosure Rates
Industry sources said the percentage of home loans in foreclosure and those behind by one payment was at its highest during the fourth quarter, exceeding 15%. However, the delinquency rate for home loans fell from 9.64% in the third quarter to 9.47% of all outstanding loans as of the end of last year.
Home Prices Still High
The current Fed policy of ultra low rates has made ownership costs on a monthly basis appear cheap. However, the most important ratio - median annual income to housing costs - shows that prices still remains elevated at 363% versus the prior decade ratio of 300-325%. Thanks to The Big Picture for the chart below.
The market action was a bit dull last week in spite of the bad economic news. The market seems to have successfully tested support, and is now approaching its 50 DMA.
I appreciate all the great feedback, reader contributions, the clicks on the ads, and ongoing support for this note. I also appreciate all the referrals for new readers-I added 32 this week alone, all from reader referrals.
Have a great week.
“Don’t worry about people stealing your ideas. If the ideas are any good you’ll have to ram them down people’s throats.”—Howard Aiken, Computer Scientist, 1900-1973