Thursday, March 26, 2009

Thursday Evening Potpourri

Here are some snippets from articles and blog posts from the past day, with comments.  My takeaway from them is consistent with my conclusion from last night's post, which is that somehow, despite a Dow that is south of 8000, the bulls are feeling frisky.  Let's hope they are correct!

U.S. Economy: GDP Slumps 6.3% Before Possible ‘Turning Point’ 

By Shobhana Chandra

March 26 (Bloomberg) -- The U.S. economy shrank at a 6.3 percent annual pace in the fourth quarter, the worst performance since 1982, in what may be the depths of the recession.

The contraction in gross domestic product was larger than the previously estimated 6.2 percent drop, the Commerce Department said today in Washington. A report from the Labor Department showed the number of people collecting jobless benefit this month climbed to a record 5.56 million.

“We’re at a turning point,” Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut, said in an interview with Bloomberg Radio. “There are some glimmers of hope. By the fourth quarter, maybe even the third quarter, we’ll be pleasantly surprised by the economic data.”

Recent reports show retail sales, residential construction and home sales have improved, indicating last quarter’s slump may give way to smaller declines in growth. A let-up in the recession would set the stage for President Barack Obama’s stimulus plan and Federal Reserve measures to take hold in the second half of the year.

Stocks climbed, extending the biggest monthly rally since 1987, on mounting speculation the economy may be past the worst of the downturn. 

Comment:  Being past the worst of the downturn is both unlikely, per the ECRI weekly leading indicators; and almost irrelevant to the stock market.  For example, see (from where, I forget!):

Both the new and old fourth-quarter GDP readings were the worst since the first quarter of 1982, when the economy, hit by a severe recession, contracted at a 6.4 percent pace.

Comment:  Let us say that the economy will now contract more slowly than the 6.3% annual rate reported for Q4 2008.  Clearly in 1982, a 6.4% represented the bottom, though the economy stayed in recession into 1983.  When did the stock market bottom in 1982?  Was it in the first quarter, when the pace of recession weakened?  No.  Was it in the second quarter?  No.  It was actually halfway through the third quarter, in August 1982, when the Fed loosened their tight money policy to rescue Mexico.  Stocks soared, as did zero coupon bonds.  If one was safely invested in bonds, as I was, there was no rush to get into stocks (though I did rush in immediately, where I stayed for the next 18 years).  

By analogy, there is now no rush to buy stocks even if the pace of the economic decline has seen its worst.

What's going on fundamentally?  Here's a factual but non-cheery data point:

March 26 (Bloomberg) -- JPMorgan Chase & Co. will delay contributions to 401(k) retirement plans for salaried employees until the end of the year and may reduce the payments, according to a person who received a company memo on the changes. . .

U.S. companies are cutting back matching contributions to employee retirement plans to save cash, and the trend is growing, according to a survey by Spectrem Group. The survey of 150 U.S. companies found that 34 percent have reduced or eliminated retirement-plan contributions since January 2008. In the next 12 months, 29 percent intend to scale back or eliminate their match, the survey showed.

At least 148 U.S. employers have stopped or reduced 401(k) matching contributions since June 2008, including General Motors Corp., Eastman Kodak Co., Motorola Inc., Sears Holdings Corp. Hewlett-Packard Co. and Xerox Corp., according to the Pension Rights Center, which is pushing for retirement savings alternatives to the 401(k).

Comment:  So, if you are working for JPMorgan Chase, which allegedly is the strongest of the "big four" mega-financial companies still standing (AIG, Fannie/Freddie not really standing), and you see this A) sign of financial weakness by your employer and B) hit to your retirement, are you going to A) spend more or B) save more?  (No prize for the right answer, in keeping with the New Frugality . . .)

The same not only goes for employees of Hewlett-Packard, which supposedly is doing well, but for employees of almost every company that has not (yet) cut back on its pension contribution.
Somehow it just doesn't seem likely that Americans are, tomorrow or the next day, about to become free spenders again.  Au contraire.


The Nasdaq Composite is the first of the major three U.S. indices to blow the all-clear whistle, it seems. It touched being flat year-to-date today, which is fairly remarkable considering it hit its low not even a month ago. Granted, it never plummeted as far as the Dow and the S&P 500 -- it helps not to have financials in your index -- but its ascent has still been fairly remarkable.

Comment:  The above, from the estimable Paul Kedrosky at his Infectious Greed blog, is one in a series of recently bullish comments from an admitted bear.  Note the language, which implicitly suggests that the author believes that the other major indices (Dow 30 and S&P 500) will follow to breakeven at least.  He could just as properly have said somberly:  "The 'NAZ', that hotbed of speculative froth that only bothers to pay a dividend when, as with Microsoft, everyone and his brother knows that the company is no longer a growth vehicle, struggled back to breakeven on the year, even though broader and more important indices remain mired in negative territory, and all these indices have been horrible performers for investors on any time frame you care to name up to a dozen years."  But he didn't phrase it that way at all. 
Further comment on the comment:  This suggests to me that more and more bears have capitulated, having been worn out by the lengthy bear market, and that they are looking past the bottom.  
Further comment etc.:  How an index getting to neutral in any way sounds an "all-clear whistle" is a confusing concept.  

Next, from Barry Ritholtz's "The Big Picture" blog, is a skewering of the MSM's interpretation of the latest housing data.  Mr. Ritholtz has published some of the most incisive comments on the housing bubble for years.  He begins his post with the following quotes, then comments (all from him in italics).

WSJ: Sales of new homes rose in February for the first time in seven months, the Commerce Department reported Wednesday, another sign that the housing market is thawing

Bloomberg: Purchases of new homes in the U.S. unexpectedly rose in February from a record low as plummeting prices and cheaper mortgage rates lured some buyers. Sales increased 4.7 percent to an annual pace of 337,000 . . .

Marketwatch: The U.S. housing sector continues to see signs of improvement. The latest government data showed new home sales climbed in February for the first time in seven months, sending shares of home-building companies soaring. . .

(Ritholtz now writing):  Note that the month over month data at 4.7% — plus or minus 18.3% — is statistically insignificant. (i.e., meaningless). The reported data does not inform us if sales improved month-over-month or not. It is a range, from down -13.6% to plus 23%. Since “zero” is part of that range, we can draw no conclusion. As the Census Department itself notes, “the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease.”

The data does however, tell us that the year-over-year sales fell 41.1% plus or minus 7.9% gives us a range of -49% to -33.2%. The entire range is negative, therefore we can conclude sales fell year-over-year.

These are facts. This is data. This is how you interpret it. Most of the MSM reports (WSJ, Marketwatch, Bloomberg) were simply wrong. . .

(Ritholtz again (bolding his point)):  Let me remind (Ed:  you) that many of these folks incorrectly misinformed you that Housing wasn’t getting worse in 2006, 2007 and 2008 — just as Home sales and prices went into an historic freefall. Now, these same folks are misinforming you that Housing has turned around and is improving. That is simply unsupported by the data.

Comment from DoctoRx now:  Good for Barry.  The housing stocks peaked in spring 2005.  The market knew bad times were coming.  That it took 4 years from the stock peak for housing starts to finally go low enough to allow inventory to begin to align with demand is horrifying.  It would be a real failure of the free market - except that there is no free market in housing.  Rather, demand is artificially pumped up in a variety of ways.

Finally, a comment on what is happening in America (from a suscription-only site):

Third Willed

Emanuel Derman | Mar 26, 2009

I was reading Yahoo Finance and came across the following Associated Press release:

"Democrats are looking for a way to respond to the public's outrage over taxpayer money being used to bankroll big bonuses for financial executives without alienating an industry whose cooperation is crucial to the nation's economic recovery.The House Financial Services Committee planned to endorse on Thursday a bill that would let Treasury Secretary Timothy Geithner and financial regulators decide whether an institution was spending too much money rewarding its employees.

The measure would exempt institutions that agree to participate in a government-sponsored program aimed at buying up $1 trillion of bad debt, or "toxic assets," sitting on the books of major banks. Geithner proposed the new investment program on Monday."

This is the third-world stuff that dreams are Madoff: the threat that if you are not a GSE (Geithner Sponsored Enterprise) you will not be exempt from arbitrary legislation.

Comment:  The above Derman post states that he is from South Africa; he knows what it's like to live in a third-world regime.

That's enough for now, methinks . . .

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