Better than Expected Hurricanes

Getting back to normal life after traveling involves reading snail mail and E-mail.
In the E-mail box from a scheduled travel day was a missive from our government. Because the stock market rose the day it was released, this data was likely "better than expected". It was, however, ugly. A Category 4 hurricane that was expected to be a Cat 5 one is still a bad one.

On May 1, the Commerce Department reported that manufacturers' shipments in March 2009 were $360 B. This was an astounding 18% below the level of one year earlier.

Worse, orders were down an even worse 22.5% year on year.

These numbers are not preliminary or advance numbers. Pending some final revisions, these are the numbers. These are Depression-type numbers. Every industry group and subgroup except defense and some medical and food sectors were down.

If you read the report, the text completely ignores the year on year declines, focusing only on the almost irrelevant sequential month to month declines (or advances). This innovation in economic reporting is of a piece with the fraudulent Big Finance "earnings" and with the Street focus on "operating" earnings rather than earnings provided under Generally Accepted Accounting Principles.

Personal income is being kept up by all sorts of government stratagems such as tax cuts, large cost of living increases and a $25o giveaway to Social Security recipients, and immense subsidies on mortgage rates to encourage refis.

In the meantime, John Mauldin published a newsletter from Jim Welsh of "The Financial Commentator". Mr. Welsh made the interesting point that between 2000 and 2008, credit card companies increased the number of cards issued to small businesses from 5 million to 29 million, and credit card debt of small businesses increased from $70 B to $290 B. Further astounding numbers. For those of us who have felt bad that some small businesses have been suddenly cut off from credit though they have been sound, this is sobering news. It would seem that if you are running a business and need money periodically, it would be safer to pay a bank for an irrevocable line of credit rather than rely on the kindness of a credit card company.

In other bearish news, TrimTabs continues to pound the table that any green shoots are largely withering based on its analysis of income tax receipts and employment trends, and it also passes on very high ratios of insider stock sales to buys, with very little insider buying.

EBR continues to believe that, understanding that the U. S. is the military hyperpower of the world that prints the world's reserve currency, the approach taken to the depredations of Big Finance is exactly that of Japan, and so it takes seriously the deflationary, long-term stock market decline possibility that Japan has gone through for 20 years. EBR mused on this in an early post, "Land of the Setting Sun", and events since then have largely been consistent with the views expressed therein.

Long term, because the creditor countries of Asia trust gold, and economic power flows over time to creditor countries (previously Britain and then the U. S.!), EBR likes the gold story. Short term, this blog has been consistently cautious on gold as a trade, and remains so. Gold likely won't make anyone rich, but if Government does not confiscate it, it probably deserves a significant place in many portfolios. At some point, so may investment quality tangibles such as art, given the place of money-printing going on in the developed countries, but objectively, prices are in a downtrend; catching falling knives is risky.

And so it goes . . . how hard to believe it is 10 years plus 2 months since the NASDAQ peaked over 5000. Adjusted for inflation and essentially no dividends, the 10-year negative return on the NASDAQ vastly exceeds any 10-year return on the general stock market any time in the 20th Century. In other words, the long-term magnitude of that bubble far exceeded that of the stock market bubble in 1929, especially when one recalls the cataclysm of 1931-33.

We are living in completely unprecedented financial times. Humility regarding any particular future outcome would appear to be a virtue now more than ever.

Copyright (C) Long Lake LLC 2009

News Flow Remains Poor, so Why Shouldn't Stocks Soar?

Chrysler is going under, almost 30 years after the Feds bailed the company out with a now modest loan guarantee.  Its impending bankruptcy is a testament to two major factors:

dysfunctional management-labor relations that pervaded the Big Three; and the over-financialization of auto purchasing, wherein auto companies became finance companies with unprofitable manufacturing facades.

In other negative news, the Commerce Department reported today that private wage and salary disbursements dropped $33 B in March on top of $29 B in February; these are seasonally adjusted annual rates.  This $62 B (annualized) two-month drop in wages and salary is a 1% drop.

There is massive human and physical overcapacity in the United States and in many other places.

With secure income on financial assets hard to find, riskier assets such as stocks and high-yield bonds have attracted positive cash flows.  

In the meantime, the $5.2 million salary hedge fund genius ($26 million annualized salary given his reported 1 day of "work" per week) Larry Summers continues to advise President Obama that a further massive wealth transfer from taxpayers to large financial institutions is necessary via PPIP, the $750 billion "placeholder" in the first Obama budget, direct Fed purchase of Treasury debt, etc.

The Federal Open Market Committee reported yesterday a downbeat assessment of the economy.  

We know in retrospect that the jobless recovery from the mild 2001 U. S. recession was spurred by a lunatic housing and commercial real estate boom.  That boom that at some point entered bubble territory was a continuation of a bull market in real estate that began in the mid-1990s and that initially was simply a recovery from the bear market in real estate that tied into the S&L mess.  Similarly, the tech bubble in the late 1990s was an excess that grew out of a real boom and real innovation.

Where is the ongoing positive industry trend, even one without innovation, which will underpin and provide a theme for and employment/investment options, a true economic growth cycle?

The answer is obviously none, which is why Econblog Review is skeptical of the prospects for a strong economic recovery.  Printing money only goes so far and then fails.

Currently, the major leadership in the stock market is the financial sector due to your money going straight to the banksters' pockets.  The canary in this coal mine, beyond all the obvious matters, may be Northern Trust (NTRS).  NTRS is perhaps the best-regarded TARP recipient, yet it needed to raise equity at a significant discount to its stock trading range.  Its stock chart had begun looking very promising, and in a typical bull market, you want to buy the leader of the damaged sector that would be poised for a bull market recovery.

If NTRS needed to sell below-market price equity rather than debt, bad news on JPM could follow.  This has been a scripted recovery in the financials created solely by the continuing alliance between Big Finance and Big Government, an unholy alliance which continues to drain America of its money and its spirit.

Copyright (C) Long Lake LLC 2009 

Friday Afternoon Wrap

CR reports that: S&P heads to first quarter ever of negative earnings.

(MarketWatch) - As Wall Street tracks Washington's moves to help the beleaguered banking sector and pass more economic stimulus, nearly 400 of the S&P's 500 companies have weighed in and reported a collective loss -- even excluding financials.

That's not all:

This is the worst, after the sixth quarter of negative growth, it will be the first quarter ever of negative earnings," said Howard Silverblatt, senior index analyst, at Standard & Poor's.

A sixth quarter of negative growth ties the prior record set when Harry Truman was president, and ran from the first quarter of 1951 to the second quarter of 1952.

"And next quarter we're expected a new record of seven quarters of negative growth," Silverblatt said.

As of the close of business Thursday, Silverblatt calculates S&P earnings-per-share, on a reported basis, at a loss of $10.44 for the quarter. If financials were taken out of the equation, that EPS deficit would drop to $2.35.

Comment: When profits vanish, the emphasis placed here on tangible book value becomes paramount. More specifically, cash in the bank and high-grade financial instruments are safer from an investor's standpoint than the book value of plant and equipment. After all, there's no law that a stock cannot sell for prolonged periods of time below tangible book value. In fact, many companies have sold for less than the value of their net working capital, with patents, trademarks, and physical assets net of debt thrown in. Under the "We are Japan" hypothesis, there could be many more years of a grinding down of stock prices before a secular bull market occurs, kickback rallies notwithstanding.

Additionally, the Economic Cycle Research Institute finds that:

Business Cycle Recovery Remains Elusive

Reuters February 13, 2009

(Reuters): A measure of U.S. future economic growth slipped further along with its annualized growth rate in the latest week, indicating a hazy reading of economic recovery, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 106.1 for the week ending Feb. 6, from a revised 106.6 in the previous week.

The index's annualized growth rate fell to minus 24.8 percent from a revised minus 24.5 percent, hitting its four-week low since Jan. 9 when it read negative 25.2 percent.

"With WLI growth falling once again, a business cycle recovery remains elusive," said Lakshman Achuthan, the Managing Director at ECRI.

The index fell to a nine-week low, the lowest reading since Dec. 5, 2008, when it was 105.7.

Comment: The ECRI has a marvelous track record. On an absolute basis, the WLI is about at a 1995 level. The Dow Jones was then much lower than today. In addition, a technical analysis of the WLI going back to 1974 shows that for the first time, a recovery in the economy/bull market in stocks both pushed to a new high in the WLI (in 2007) and then dropped to a low that was below the prior cycle's low (in 2001).

In addition, the Commerce Department reported an unprecedented 9% year on year drop in retail sales yesterday. With some or many money center banks feared to be insolvent, more and more factual news items keep piling up that have not happened since the early 1930s.

In any case, Monday is President's Day. Both America's George the First and Honest Abe faced tougher times than do we.

Copyright (C) Long Lake LLC 2009