Friday, July 24, 2009

Thursday Night Market Update: How Long Can Wage Weakness Be Ignored?

Per TrimTabs (subscription) tonight (July 23), the Treasury Department of the United States-- hardly a "bear" reporter--reports a worsening of a marvelous proxy for wages, namely wage withholdings. Click on picture to enlarge.

This is consistent with UPS, which said Thursday that July's business was not improved over June's. This after two full years of Fed easing!

Starting with Volcker's easing in 1980 (to elect his patron Jimmy Carter) and then in 1982 (after keeping tight money long enough to ruin Reagan in the 1982 midterm election), the macro financial game of leverage was easy. All the authorities had to do was just keep money flowing as long-term rates dropped and the underlying real economy weakened out of sight of the populace. This game began to end after the 2001 recession and has changed this cycle. Sweden has gone to negative interest rates for savers. The true lack of economic vigor--the "hollowing out of America"--is plain for all to see. Thus the increasingly jobless recoveries after the 1990-91 and then the 2001 recessions, and the horrible jobs performance in this decade's expansion and then the current economic downturn.

The sea of liquidity has pushed "investors" into all sorts of speculative "investments". The idea that Ford Motor Co. ("F") has a stock market value of $20 Billion with a tangible net worth of
negative $18 B, no prospect of operating profits any time soon, intense competition from the government-sponsored GM and Chrysler as well as the non-unionized Japanese and other transplants and imports, is ridiculous.

The flailing and failing "evil empire" known as Microsoft has collapsing sales and earnings, yet the stock has soared in the low-quality rally of the past several months. MSFT has about $210 billion of stock "value" embedded in its price over and above its cash and other tangible book value. It sells for more than 4X sales per share, 10X tangible book, and is in decline. Rather than paying a nominal dividend, it should rather be paying out 7%; should spin off its money-losing new ventures for whatever value the market will give it, and go into a semi-run-off mode.
But that would not suit management's interests, so it will not do that.

Meanwhile, and each document a sustained increase in "wrong track" sentiment from the populace, increasing fear of rising Federal deficits, some worsening in the views of the economy: these in the face of a stock market that has put the bears on the run.

Probably the worse stock news is that "sensible" consumer-oriented stocks that pay rising dividends, have rising earnings and reasonable P/E's and will certainly be around 10 years from now, MCD and WMT, and that were last year's only 2 Dow winners, are acting very poorly. Anyone who believes in the general stock market because of the "golden cross" of the 50 day moving average above the 200 day ma should look at the chart of MCD in that regard: so far, the golden cross has been a sell signal, not a buy signal; this despite a far better financial performance than the stock market's constituent companies.

Meanwhile, Bloomberg has reported that Swiss gold vaults are full to overflowing; gold may be over-owned, at least temporarily. Yours truly monetizes his "GLD" gold holdings by selling covered calls and is short puts. Income first, prospective capital gains last is the watchword for the future, so EBR believes.

On a global basis, the US economy and stock market are laggards this year. Let's see how our market responds should the gamblers who are gunning the Chinese stock market take a breather. Assuming TrimTabs is presenting the Treasury facts accurately, the risks are to the downside, as Nouriel Roubini has been saying. "Green shoots" may already have withered.

A gambler in the US might just want to buy "TLT", which is an ETF that provides ownership of the long T-bond. Talk about an out-of-favor asset, down 25% in price since December 2008!

Copyright (C) Long Lake LLC 2009

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