JPM Churning; Bias to the Downside?

Attached you will see a 5-year chart of the politically most favored large financial company, JPMorgan Chase. Click to enlarge.

Strangely, the "feed" into Yahoo continues to list Chase Manhattan at the top left.

The stock is churning, having gone nowhere for 4 months while the averages have moved up. This is despite very wide spreads between cost of funds and lending rates and rates available to JPM for the purchase of Treasuries.

On a multi-year basis, the stock is churning as well. It is essentially unchanged from 5 years ago, even though its competitive position is vastly enhanced. The nominal dividend is expected to be increased substantially, its CEO is being considered for Treasury Secretary, and all should be looking rosy.

Yet the untrained eye can see a series of lower highs the past couple of years.

I would watch JPM as an extremely important indicator of the health of the financial system and the direction of the market. Financials have led the averages up, down and up again the past 6 years.

In addition to the chart and JPM's failure to respond to ideal financial conditions the past several months, my quite-alterable caution relates to Northern Trust (NTRS), a simpler large financial that quickly repaid the TARP funds that were probably forced on it but whose stock has taken a nosedive after flirting with strength. I watch NTRS as a canary in the coal mine of large financial companies. It is simpler, without all the extraneous derivative stuff that makes JPM and its cohorts completely unanalyzable. (I also watch UMB Financial = UMBF, a well-regarded regional bank holding company which stock has almost completely sat out the moonshot in the financials but which actually looks as though it may be a "buy" now or soon.)

Back to JPM. Not shown, but off a huge move from the bottom in fall 2002 to the peak in 2004, JPM chart looked much like the current one. It then penetrated a rising 200 day moving average to the downside and went flat to down for a year and a half, and the stock market underwent a year-long sideways consolidation for a year before resuming its seemingly inexorable uptrend.

Combining technical with fundamental analysis and earnings estimate outperformance, yours truly likes few stocks, uppermost amongst them McDonald's and Ross Stores now that each has corrected from their highs, but they probably are not predictive of much. On the other hand, I have no interest in JPM as a stock from either the short or long side, but I do feel that all investors should watch it carefully.

An unrelated market note: The jobs number Friday smells like one that will be revised lower. ADP's real-time data and other data such as that from TrimTabs (a recommended read), the ISM, etc. point to it being an upside outlier. Nonetheless, the truly vast amount of money-printing out of the Fed has to go somewhere; I just give earnings due to money-printing a very, very low P/E ratio and the resultant economic activity fueled by those earnings no staying power: that's NO real staying power in my opinion. So to me this remains the mid-1930s or 1970s show: dealing with tough times the wrong old-fashioned way: currency debasement. (It's time to suck it up, America/Mr. President, and recover the right old-fashioned way, with hard work and thrift, not with more and more government subsidies.)

With JPM as a critical implementer of this misguided policy.

Copyright (C) Long Lake LLC 2009

TrimTabs Begged to Differ and Feels Vindicated

Courtesy of Zero Hedge:

TrimTabs Investment Research estimates that the U.S. economy lost 488,000 jobs in July, considerably more than the consensus estimate of a loss of 305,000 jobs. In addition, TrimTabs expects the Bureau of Labor Statistics to revise its job loss estimates sharply higher for the first half of 2009 based on the latest unemployment insurance survey results.

“While Wall Street is convinced the recession is over, the economy continues to shed jobs at an alarming rate,” said Charles Biderman, CEO of TrimTabs.

TrimTabs’ employment estimates are based on analysis of daily income tax deposits to the U.S. Treasury from all salaried U.S. employees. Historically, TrimTabs’ employment estimates have been more accurate than those of the BLS.

“The personal income report the Bureau of Economic Analysis released Tuesday contained huge downward revisions to wage and salary growth,” said Biderman. “Now that the BEA is using unemployment insurance reports from the first quarter to estimate current wage and salary growth, its data confirms what we have been reporting for months.”

The BEA’s estimates of wages and salary growth changed from year-over-year declines of 0.8% in April and 1.1% in May to year-over-year declines of 4.0% in April and 4.2% in May. Also, the BEA reported that wages and salaries dropped even more sharply in June, falling 4.7% year-over-year.

“Two months ago, we asked BEA economists how they reconciled the huge declines in real-time tax deposits with their report of a modest decline in wages and salaries,” said Biderman. “They could not answer our question. We know now that by ignoring real-time data, the BEA was providing an inaccurate view of the economy’s health.”

As reported here, TrimTabs also saw no improvement in wages and salaries in July; if anything they saw further deterioration.

We are now exactly 5 months from the stock market bottom. The S&P 500 is up an astounding 50%. Yet profit estimates for the current quarter are down from those then-current and unemployment is higher.
And in case any American has not figured it out, either China is in a bubble that likely is pulling the U. S. financial market upward; or China is growing internally and sucking more and more of the world's resources into it for its own use. Either way, the growth news out of China absent big increases in our imports from it is NOT good news for American stock or bond markets.

Back in the U. S., the financial firms continue to be recapitalized on the backs of savers, and companies in general are keeping their profit margins up or rising by continuing to let go of labor. Today's negative ISM report in services, and the revisions to the wages and salaries data described above, make a rationalist wonder why so many people are risking so much money on speculations as risky as stocks when they in general pay such low dividends.

Copyright (C) Long Lake LLC 2009

More Gloomy Data from TrimTabs

From TrimTabs (subscription required), some recent data based on their proprietary real-time data collection:

We extend our discussion of wage deflation this week by pointing out the discrepancy between wages and salaries reported by the Bureau of Economic Analysis (BEA) and wages and salaries reported by the Bureau of Labor Statistics (BLS). According to the BEA, wages and salaries declined 1.1% y-o-y in May. But an analysis using BLS data on average hourly wages and average weekly hours worked shows wages and salaries fell 2.8% y-o-y in May.

Since wages and salaries are declining more rapidly than the BEA is reporting, the 6.9% savings rate in May reported by the BEA is inaccurate. When the BLS revises its estimates for wages and hours worked in the coming months, we believe the savings rate will drop considerably.

Bottom Line

Forecasts of positive economic growth by Q4 2009 are wishful thinking. Our real-time indicators show declines in wages and salaries are accelerating. Adjusting for the “Making Work Pay” tax credit, wages plunged 6.2% y-o-y in the past four weeks, worse than the 4.8% y-o-y decline in May and the 5.8% y-o-y decline in June. Also, the labor market is struggling. Online job postings fell in the past two weeks, while continuing unemployment claims hit a new record. Until the bleeding in the employment market stops, the economy will face a major headwind from collapsing incomes.

This Week’s Summary

Income – Declines in Income Tax Withholdings Accelerate in Past 3½ Months. Withholdings Plunge Adjusted 6.2% Y-o-Y in Past Four Weeks Despite Additional Withholding Day This Year. The latest week included an additional withholding day this year relative to last year. Specifically, July 4 was on Saturday this year and on Friday last year. Even with the boost from this additional withholding day, withholdings fell an adjusted 6.2% y-o-y in the past four weeks. “Other” taxes plunged 32.7% y-o-y in the past four weeks after falling 35.6% y-o-y in Q2 2009. Corporate income taxes fell 32.2% y-o-y in the past four weeks after dropping 36.7% y-o-y in Q2 2009. Incomes are dropping much faster than government statistics are measuring.

Hope they are wrong!

But hope's not a great investment strategy.

Copyright (C) Long Lake LLC 2009

TrimTabs Begs to Differ

Courtesy of Zero Hedge, there is some ugly economic commentary from TrimTabs, which focuses on real-time economic data. Here is one bit of commentary from TrimTabs that unfortunately does not support a Green Shoots thesis:

1. Adjusted for the Making Work Pay "stimulus" tax credit, income tax withholdings fell 7.9% in the past 2 weeks and 6.0% in the past 4 weeks, each in comparison with one year earlier.

2. "Other income tax not withheld"- self-employment and capital gains income, for example, is down 33.7% year on year in June after falling 33.4% year on year in May.

3. Corporate tax payments fell 35.5% year on year in June. Corporate tax refunds have equaled 65% of corporate tax receipts this year.

TrimTabs also points out that the Bureau of Economic Analysis, which recently reported that wages and salaries fell about 1% in the last reporting period, extrapolates and interpolates old data to arrive at that estimate. Using real-time data, TrimTabs reports more like a 4% decline in wages and salaries.

Commentary: Leading indicators based on money measures such as a sharply upward-sloping yield curve and a rising stock market point to economic growth ahead. Given the steep pace of production cuts this year, inventory restocking is in order. But it is looking more and more as though too many chickens are coming home to roost after a quarter of a century of goosing the economy via the expansion of credit. A near-global zero interest rate policy, something not followed even in the 1930s, has never been seen. Will the traditional leading indicators be correct, and if so, will investors nonetheless suffer the same fate as those who "bought" the end of the recession in 2002?

Copyright (C) Long Lake LLC 2009

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

A Medical Opinion: Financial Pandemic Remains a More Extreme One than Swine Flu

While comparing a disease that has just caused acute and often painful death and that is spreading rapidly with the past almost two years' financial and economic mess is of course comparing two very different beasts, we should keep a sense of proportionality in dealing with disasters.

The world will continue to have epidemics and pandemics. These have not required airplanes to spread. One theory of the decline and fall of the Roman empire in fact draws upon two massive epidemics, both currently diagnosed as smallpox, that weakened the military as well as wiped out various populations.

It appears that based on the early returns, the course of this flu ex-Mexico is ordinary. Will some deaths outside of Mexico be caused by this virus? Almost certainly. But this swine flu pandemic is no SARS. That one was often fatal and almost always very serious; the global health care system acquitted itself wonderfully in limiting the spread of SARS as rapidly as it did.

Please do not adjust your portfolios based on the latest fear or relief regarding the swine flu. The institutions will react faster than any individual. (Do take all reasonable precautions that you should take every flu season all the time. Standard flu is a miserable experience, and vaccination is never close to 100% effective.)

The global economic and financial pandemic continues to roll on. Unlike influenza, there is immense debate amongst academics about what to do about it. Furthermore, much as one may agree or disagree with different points of view and priorities in a big picture way that will inform your policy preferences in the financial sphere, there is no disagreement about the importance of limiting the spread of infectious diseases.

Just in the past 24 hours, news has continued to accumulate about the international ramifications of the economic disaster.

1. Per a Naked Capitalism link, consider Two-Thirds Facing a Pay Cut or Freeze from the Independent in Britain. This is astonishing news:

More than two-thirds of British companies plan to cut or freeze their workers' salaries this year, the British Chambers of Commerce said yesterday, as it warned that private sector employers face a desperate battle to survive the recession.

A BCC survey of 400 companies from across the UK revealed that 58 per cent of firms plan to freeze salaries this year, while a further 12 per cent are expecting to cut pay. The BCC warned that half the firms in the survey were considering making job cuts over the course of the year, or had already planned a redundancy programme.

DoctoRx here: So much for price increases as an inevitable result of money printing.

2. TrimTabs reports:

Companies around the world are treating the rally as a selling opportunity. . .

We do not see any “green shoots” in our macroeconomic data. Tax revenue fell by a record 6.8% in Germany in March, and consumption loans plummeted by 5.8% in France. Therefore, we are cautiously bearish (50% short) to leveraged bearish (200% short) on all the markets we track.

DoctoRx here: EBR has no expertise in foreign markets. But TrimTabs does collect lots of data on overseas economies. That it is so bearish after a big run-up in prices, based on the trends it is seeing, is a negative.

3. The financial situation in Germany is likely horrible, as discussed at length by Ed Harrison at Credit Writedowns in German banks loaded with 816 billion in toxic paper. Here are some main points:

On Friday, the German daily Süddeutsche Zeitung (SZ) leaked a bombshell - a confidential report by Bafin, the Federal Financial Supervisory Authority, found that German banks were sitting on over 800 billion euros in toxic assets. Just three months ago, the reports coming out suggested the problem was only half as large, 400 billion euros. . .

This account should make clear how shaky many of Germany’s financial institutions are. Moreover, it is not altogether obvious which markets are deemed ‘toxic.’ German banks have a lot of residential real estate-related paper. But they also have assets related to the imploding European commercial property market and the Eastern European property markets. I suspect that the problem is even larger than is mentioned here.

If you recall, there was a big dust-up in February over a leaked EU document which suggested there were 16.3 trillion in toxic assets amongst European banks. In my view, the Europeans have their heads in the sand regarding the magnitude of the problem. The banking situation is much worse on the continent than its citizens are lead by government to believe.

In any event, Bafin is now seeking to obtain prosecutions for the damaging leak. Forget about the toxic asset problem, go after those who have brought it into the full light of day.

4. CNN reports in Spain unemployment tops 17 percent:

Spain's jobless rate rose sharply, to 17.36 percent in the first quarter, with just over 4 million people out of work, the government said Friday. . .

Spain's previous rate of 13.9 percent, issued early this year for the fourth quarter of 2008, already was the highest in the European Union.

When Spain's jobless figure earlier topped 3 million, officials predicted that it would not reach 4 million.

(We will avoid the obvious puns about the pain in Spain . . .)

The economic news is so horrible in so many places that it is hard to keep up and hard to fathom.
The world is not ending, of course, but the real problem is that medical science is a lot more reliable and certain than the "soft science" of economics and the theoretical constructs of Keynesianism.

It still seems that those who trade stocks are making lots of assumptions about a return to a post-World War II normalcy that was abnormally prosperous based on a longer-term economic history of the world.


Copyright (C) Long Lake LLC 2009

Monday Morning Update: Good News Remains Scarce

This blog has since inception considered Tim Geithner to be the bad penny and asked that his nomination as Treasury Sec'y be withdrawn. Thus it is with positive emotions that an important blog from Naked Capitalism was seen this morning, titled Are the Knives Coming Out for Geithner? If you haven't, please read it.

That post by Yves Smith and the lengthy NY Times article that it keys off of, are not in conjunction with an apparent pandemic of swine flu enough to knock the stock market off its stride.

Yesterday, however, Larry Summers was reported on by Bloomberg as follows:

“I expect the economy will continue to decline,” with “sharp declines in employment for quite some time this year,” Summers said yesterday on “Fox News Sunday.”

In conjunction with this downbeat comment from Dr. Summers, TrimTabs reported today via Email that:

- U.S. Economy in Much Worse Shape Than Wall Street Realizes: Income Tax Withholdings Drop 3.1% Y-o-Y in Past Four Weeks, and TrimTabs Online Job Postings Index Falls 4.2% in April.

In addition, the debt monster is back: Bloomberg reports that companies have sold a record $468 B in debt so far this year (presumably this is a record for this far into a calendar year).

The news remains poor, and a veteran market observer comments (courtesy of Zero Hedge and GreenLightAdvisor Views):

Richard Russell of Dow Theory Letters, provides the following note April 20, 2009:
“(1) The market turned up in a V-shaped reversal off the March 9 low. However, almost all bull markets start with a period of accumulation. This entails a sideways move, sometimes taking weeks or even months. Or it may require a non-confirmation of the Averages as per December 1974. At the March low, we saw neither - no indication of accumulation. And that bothers me.

“(2) At the March lows, we did not see the ‘great values’ that usually accompany major bear market bottoms (i.e. P/E’s in the 5-8 area, average dividend yields of 5-6%).

“(3) The market was severely oversold at the March lows, a condition that often sets off a ‘relief’ (‘let off the pressure’) rally. The advance was probably triggered by the severely oversold condition of the market.

“(4) The one thing a money-manager cannot afford to do is be on the sidelines during ‘what could be’ a major rally. Once the market started up from the March 9 low, many money managers leaped in. The big short positions were immediately squeezed. The rise became a momentum advance. Retail buyers moved in, many trying to retrieve some of their brutal losses.

“(5) The rally moved up ‘too fast’ - action more typical of a bear market rally than the slow, plodding rise that is characteristic of the advance in a new bull market.

“(6) Two groups that led the rally were Financials and Consumer Cyclicals. Interestingly, these two groups contained respectively 5 billion and 2.7 billion shares sold short. This suggests strongly that a significant part of the rally was fired up by short-covering in these two groups (thanks Alan Abelson for this information).

“(7) Many investors and analysts turned optimistic after the market had rallied for only a few weeks. At true bear market bottoms, investors remain stubbornly sceptical or bearish for months after the bottom. Remembering 1974, people were actually angry when I turned bullish at the bottom. I was receiving hate letters and subscription cancellations.

“All of the above have kept me skeptical and cautious about this rally.”

To the above list one might add that around now is the time that a traditional honeymoon period ends for a media-favored new President. The Geithner lashing out of the leading Democratic organ, the Times, may signal a less gauzy picture of the new administration reaching the public, which in turn could lead to a less optimistic view of the future.

We shall see what we shall see.


Copyright (C) Long Lake LLC 2009