Jul 29, 2012

Promise of Help Drives Markets

We've been discussing the probability of a run-up in the equity markets when the Fed launches another round of quantitative easing.  Portfolio managers are so afraid of missing a rally that the mere mention of central bank intervention can send markets soaring.  The back half of last week experienced such a rush after ECB chief Mario Draghi vowed to support the Euro.  Markets viewed these comments as a guarantee of further easing.  In reality, everyone knows that Draghi and crew will support the Euro until the end, so this comment shouldn't have come as any surprise.  The market has been selling off and the negative sentiment is near levels where we have experienced market bounces over the past four years. In other words, the pump has been primed for a positive response to any bit of easing news. 

All eyes will be on the Fed this week, with expectations running high the committee will at least hint at future intervention.  We fully expect some type of Fed action before the election, and will use the resulting market surge to pull back on equity positions and play some defense heading into 2013.  My suggestion is not to hold on too long because I get the sense most of Wall Street has the same plan. 

One of the conundrums facing the Fed is how to get banks to lend more.  Some are suggesting eliminating the dividend on overnight balances, thus making it less profitable for bankers to hold cash.  Given the stumbling economy and weak jobs picture, I'm not sure encouraging banks to be more aggressive lenders is particularly sage advice right now. 

Speaking of banks, our old friend Ed Yardini was caught saying that "banks are the Achilles heel of capitalism."   Doesn't Ed know that we aren't supposed to state the obvious?

Almost lost in the week's craziness was the GDP report, which came in at 1.5% for the 2nd quarter.  Revisions have been downward since 2008, so expect the final number to be closer to 1.0%.  Remember that inflation is backed out of this measure, and given that the inflation rate has been understated, we could have just experienced a 0% growth rate in the 2nd quarter.

Second quarter earnings have also been limping in, with only 64% of companies beating EPS estimates and less than 50% beating sales estimates.  Sales growth has been punk, and actually running negative for the quarter.  This doesn't bode well for corporate hiring nor the employment picture.

Four years ago I wrote about the spectacular opening ceremonies for the Beijing Olympics. It is with great disappointment that I must write about the London Games' Opening Ceremonies.  With the exception of Mr. Bean farting, I have to say the production was the worst I can remember since the Soviet Union drove tanks down the middle of Moscow in the US boycotted 1980 games.  Yowsa!  That was a snoozer. 

Have a great day


Jul 22, 2012

Waiting for Ben

Big Ben, Gentle Ben, Uncle Ben, Helicopter Ben, the Bernanke Put.  Ben Bernanke has many nicknames, but after this week's Senate grilling, the chairman might be forever remembered as Benevolent Ben.  After Senators criticized him for not doing more to help the economy in spite of expanding the Fed's balance sheet to a record $2.7 trillion, the Chairman decided to take one for the team, exhorting the Senate to "do your job".  Ben is right-he has exhausted the Fed's ability to prop up anything, much less the economy, while the politicians have dithered away the time by arguing about trivial matters.  Meanwhile, Rome burns as the Fiscal Cliff looms large heading into 2013.  As I've written in the past the impact of the Obamacare tax increases, the expiration of the Bush tax cuts, the expiration of the payroll tax cut, and the spending cuts created by last summer's budget battle all hit while we are celebrating the entrance of 2013.  I've seen estimates of up to 2.5% of GDP, although most estimate the impact closer to 1.7%, still enough to cause a recession. 

What to expect as we head towards a recession?  How about a third quarter market rally?  Makes sense, right?  The market peaked in late 2007 right in front of the biggest recession of us remember.  Why not another spike up?  I'd say its almost a given that the Fed will make one more injection before the election in an effort to stimulate a wealth effect.  There will be howls of partisanship if  he does so, and watch out for his chances of getting renominated should he make a pre-election injection and Mr. Romney still wins the election. 

Speaking of the election, the national polls have it at a dead heat, with Mr. Obama carrying a slight, but statistically insignificant lead.  The President, who once adamantly admonished those who dared to engage in name smearing tactics, is now setting a record for spending on such messages.  Why the reversal?  The President really has nothing else to run on.  His economic record is horrible, and even worse his prescriptions for fixing the economy border on insanity (fortunately many of those have been blocked by Congress).  Just last week he showed his true nature by saying that if you started a successful business, you really weren't responsible for doing so, that government truly deserves the credit.  This is one scary individual, and while I'm not a huge Romney fan, my fear of another four years under Obama would allow me to vote for a sea slug if he were opposing the incumbent. 

I don't think it's a secret that the economy is ebbing and flowing-right now it's weak.  Retail sales, which if you recall were strong in the early part of the year due to better than expected weather, fell by 0.5% in June, the third straight month of declines.  Unemployment claims have also begun rising again, an ominous sign as we head into 2013. 

Yahoo (YHOO) announced their sixth CEO in the past five years as they lured Marissa Mayer from Google (GOOG).  YHOO reported a 4% drop in earnings the day after Ms. Mayer's hiring.  She definitely has her work cut out for her as YHOO continues to struggle monetizing their traffic. 

The country's largest pension fund, CALPERS, announced that their return for the fiscal year ended June 30 was a paltry 1%, a far cry from their stated goal of 7.5%.  Pension liabilities are at the crux of the latest slew of bankruptcies among California cities.  An independent analysis pegs the national pension crisis at a $4.7 trillion underfunding.  Ouch! 

Drought conditions continue in the Midwest during what some are calling the driest year in the US on record.  Corn and soybean prices are both hitting new highs as crops continue to wilt.  This should be a good year for the Global Warming crowd. 

Bond yields in Spain continue to rise as the economy, once thought to hold a 2% growth rate for 2013, is now expected to decline by 0.5%.  The country is now seeking assistance in making debt payments.  Should Spain fall, the fallout will be dramatic and much worse than the impact of Greece, whose economy is a fraction of the size of Spain's. 

Sorry for all the bad news.  Remember, if the Fed steps in this fall, ride the market for a bit and then get really defensive.  Without any government action to address the fiscal cliff, expect a truly poor market in 2013, with few places to hide. 

Have a great week


Jul 15, 2012

Visa, MasterCard Settle with Retailers

Visa (V) and MasterCard (MA) settled a long running lawsuit brought by retailers against the card giants which permits merchants to charge more to customers who pay with credit cards.  The net effect of the deal should allow retailers to charge more for products when consumers use credit cards for payment, raising prices and helping margins.  The prior agreement maintained a preferred pricing, whereby retailers were prohibited from raising prices on credit users, although they could discount for those paying with cash.  The deal requires up to $1.2 billion in fee relief plus an additional $6 billion in cash to settle the price-fixing charges.   Bank card issuers such as JP Morgan (JPM), Wells Fargo (WFC) and Bank of America (BAC) will contribute to the settlement.  The suit has been ongoing for almost eight years.
The head of Perigrine Financial, Russell Wasendorf Sr., admitted to embezzling more than $100 million from clients over a 20 year period.  Wasendorf had attempted suicide last week, but survived.  In his suicide note he outlined his deception, which included doctoring statements and fooling regulators for two decades. 
Vallejo.  Stockton. Mammoth Lakes.  San Bernardino.  Stanton?  It appears that the tiny Orange County city of Stanton might be the next in an ever growing list of municipalities to file bankruptcy.  “It’s easy math.  We have a deficit of $2 million a year and there’s only $8 million left” said Terri Marsh, a city official.  The list of California cities with looming financial problems is growing, and with the assumption of Redevelopment Agency liabilities, more cities are beginning to teeter.  

One year later the market is in roughly the same spot as it was before beginning a 16% correction.  Economically the world is marginally different today than it was twelve months ago, with the biggest changes being Europe is now at the doorstep of a recession, China and the other BRIC countries are rapidly slowing, and another round of central bank easing has begun.  The US still faces monstrous fiscal problems with little chance officials will address them.  

Speaking of Central Banks, Helicopter Ben will be testifying to the Senate on Tuesday.  With the economy slowing, an election looming, and hawkish statements dominating the most recent Fed minutes, expect a ton of grandstanding from the committee members.  Typically the members will bombastically make statements, which they then try to contort into a question for the Chairman.  He has been adept at not falling into the elected officials’ feeble traps, but don’t expect that to keep them from spewing their typical vitriol. 

Five weeks to college football season.  Are you ready?

Have a great day


Jul 8, 2012

Here Comes Another Recession-Are You Ready?

US economic data continued its slow decline, dragged down by a lack of central bank stimulus, weak export markets, sagging confidence, and continued uncertainty about the regulatory environment.  Its been more than a half decade since the housing market swooned and almost exactly a half decade since Bear Stearns began its precipitous fall off the map, yet the news from Washington (or lack of news) and the corresponding leadership gap is beginning to drive us towards a second recession.  I've discussed a second recession coming in 2013 for the past 22 months; we are less than six months from that formidable date and it appears the recession will be here right on cue. 

Why haven't we repaired our economy since the last recession?  Blame our political leadership.  They have leaned on and relied upon the Fed to do their jobs for them since the crisis began.  The Fed, while all its failings and inability to see the magnitude of the tidal wave coming has been well-documented, has been the sole contributor to keeping this house of cards going.  Politicians have sat on their hands, except when they've had them outstretched to collect campaign contributions or bribes, the entire time.  Of course, I don't want to be completely ignorant of the contributions of DC.  I almost neglected to remind you that they did manage to pass an entirely new entitlement program in spite of the fact that two of the three existing entitlement programs are already underfunded and driving the country into a European type abyss.  I guess that makes sense when the President openly admires European style government and waxes on about his desire to make the US more like Europe.  While he hasn't done much while in office, he can take credit for driving the US to look more like Europe:  high unemployment, stagnant economy, huge social programs, and soaring debt.  As my father used to say "be careful what you wish for, you may actually get it." 

Job growth came in at a disappointing 80K last week, well below consensus. Manufacturing employment, which has been a bright spot due to export demand, has flattened.  Housing, in select markets, continues to show a firming trend as mortgage rates have fallen to record lows, with 30 year fixed trading at 3.62%.  The rub in the housing market, of course, remains the high number of owners who are underwater on their mortgages.  The other issue is the banks, which are proving to be quite difficult when it comes to refinancing activity.  The purchasing manager's index came in under 50, which suggests a contraction.  As Operation Twist ends and the effects of the late 2011 LTRO wear off, we're left with a moribund economy in the US and weak or declining growth in almost every significant global economy.

Policy makers continue to be concerned as evidenced by rate cuts in Europe, China, and the UK last week.  The Fed would love to join the party, however, two things are holding them back.  The first is the upcoming elections, which will force the Fed to wait until the economy is really bad before acting lest they be charged with aiding the incumbent.  The second is the upcoming Jackson Hole summit, where Chairman Bernanke has been known to pre-announce policy changes.  It has been rumored that the good chairman now has a stake in the Wyoming enclave, so is waiting to make any announcements there so as to ensure a large gathering of hotel room renting journalists.

Consumers are certainly reacting to the slowdown in the economy, as evidenced by June's retail sales comps, which came in at 0.1% vs. expectations of 0.5%. Retailers have been expressing concerns about a weak back to school season, one of the most important on the retailing calendar.

Here's a shocker:  California actually passed a budget on time.  Of course, the whole budget is a complete sham as it relies on a theoretical $9 billion to be raised in new taxes to be voted upon in November.  Should the measure fail, the budget will need to be restructured or services in the state will be cut.  In an effort to increase voter angst and, let's be honest, to blackmail voters, Governor Brown has vowed to take the cuts from the school districts first as opposed to less popular programs.

Speaking of California, Sacramento officials voted to proceed with a high speed rail system estimated to cost $64 billion (although some independent estimates peg the number as high as $250 billion) in spite of the state's fiscal status, which is pitiful.  Additionally, the federal government has pulled its pledge to help fund the project.  Studies have shown that once the system is built, there will be almost zero chance for it to be self-funding, which means the system will be nothing more than a taxpayer funded novelty ride.  If I were the people at Disneyland or Knott's, I'd be lobbying against this type of government sponsored competition for entertainment dollars.  The first scheduled stations will be the hotspots of the central valley, the smallest population centers on the route.  

OK, I guess today's note was a bit more acerbic than usual.  I'm not sure why-I'm writing from my laptop next to the pool, enjoying the light sea breeze and 72 degree weather.  Maybe its because football season is around the corner, and I really can't wait for it to get here.

I hope you are well.  Have a great day


Jul 2, 2012

Mid Year Summary-2012

The first half of 2012 was a wild one, with domestic markets soaring in the first quarter, taking a hard dive early in the second quarter, and then closing with one of the strongest June performances in years. Contradicting most estimates, the S&P 500 (chart below) out performed bonds and commodities in the first half of the year, rising 8.6%.  The stock market gains haven't helped consumers as consumer confidence and spending for June fell to their lowest levels of the year.  Unemployment claims have been rising and are back near the highest levels of the year. 

In spite of a weakening economy, US stocks have been routinely assigned the dubious label of "best nag in the glue factory" as other major economies are fading much faster than the US.  Europe is obviously a disaster, but the Chinese are suffering after tight monetary policy and inflation combined with the major slowdown in Europe to slow their economy more than officials had hoped.  Additionally, China's biggest competitive advantage-people-have become more expensive.  Not to buy, but for labor.  China's export machine grew on the backs of low-cost labor.  As capitalism (and access to the internet) spread, workers demanded better wages to afford the better life being promised.  Over the past eight years the government has mandated significant wage increases on manufacturers, deteriorating the country's labor cost advantage, pushing many to move to lower cost markets or in some cases back to the US.  Combined with slow exports to Europe, the weak labor market has put pressure on growth in China.  Factory output in June grew at its slowest rate since November 2011, with the PMI of 50.2 barely in the growth range. 

Obamacare is front stage once again, right where the President doesn't want it to be in an election year.  The President spent all of his political capital in 2010 getting the healthcare act passed, and has spent the past two years pretending it didn't exist.  The Supreme Court ruled the act unconstitutional last week under the commerce clause-which effectively means Congress can't force consumers to participate in health care plans.  This is a key component of the plan.  The bigger headline went to the Court's affirmation of Congress' ability to levy taxes.  Remember that Obama spent a lot of time explaining that taking money from people and adding it to the government coffers wasn't a tax?  The Supreme Court clarified that it indeed is a tax.  More taxes, that should help the unemployment rate. 

As usual, consumers and businesses will lose on the health care ruling.  Businesses now face certain increases in benefit costs, and an estimated 20 million consumers may lose their health care coverage as businesses opt for the cheaper government plan.  Create a new entitlement program we can't afford, tax the hell out of businesses so they can't hire new employees, push 20 million people off private insurance onto the government dole, all to add 10 million uninsured to the ranks of the insured.  That makes sense-in Washington DC and Oz. 

Wal-Mart (WMT) celebrates 50 years of business this week.  The company's stock, which had languished for years, recently has moved to new highs (see chart below).  The catalyst to the stock jump?  Well, fundamentals are certainly solid as higher end consumers trade down to the bargain basement prices at WMT.  Additionally, the jump in the stock price seems to coincide with the Mexican bribery investigation.  Um, whoops.

Amazing as this might sound, college football has finally taken its first step towards sanity.  While every team sport in the world conducts a playoff, college football's top division has refused to comply, instead engaging in a year end menagerie more akin to gymnastics judging than a major team sport.  Finally it appears that we will see the beginning of a playoff system, even though it will only include four teams initially.  How they are chosen, where they will play, and who will choose them is still undecided, but the steps are being made.  The absurdity of the arguments against the playoff are similar to the double-speak used in the famous book Catch 22. Maybe we'll get a true playoff system-my hope is it happens before the Social Security system goes bankrupt!  The clock is ticking. 

Have a great week