Week In Review: A Matter Of Time Before The US Economic Engine Gets Cranked Up Again

An associate who is not at all in the market sent me this link related to Nouriel Roubini. I mean really; that guy is getting more TV time this month than President Obama. Financial Entertainment TV ought to be ashamed. The people want to hear the President.

I responded by advising my friend that macro-economics and equity markets are not highly correlated, and that in the Great Depression, following the market crash, from June 1, 1932 through Nov 9, 1938, there were four Bull phases averaging +98.6% each and the Dow 30 index (^DJI) soared from 4.40 to 13.79, and the following year there was another up-move of +29.8% between April 8 and Oct 25, 1939.

So, while we all respect Roubini for being one of many of us who sounded the alarm early - he didn’t do anything that Rithholtz or I did for instance - I now tune him out. Americans understand the economic situation, and are now looking forward.

I could say that I suppose Roubini is looking forward to the consulting fees and book publisher advances he picked up in Davos. But, I’ll keep this positive because the glass is half full, as I see it.

Besides, while the S&P 500 index (^GSPC) plunged -8.6% this month, my accounts were up: the Controlled Risk accounts grew +1.2% and the Growth accounts grew +2.9%. We averaged about 70% cash, and never use leverage.

We also don’t have time to read Roubini. We know that markets discount the future, and once the President’s A-Team is able to clean up the Humungous Bank & Broker (HB&B) Credit Default Swap (CDS) debacle, banks will trust one another, lending will recommence, and the American economic engine will get cranked up again.

It’s just a matter of time.

What will fuel that engine will be the trillions of cash held presently by the private sector, the trillions of cash that will be switched out of bonds that pay a pathetic yield, and the trillions of cash that will be injected by governments around the world to stem the economic crisis that started with the Lehman Brothers collapse when the US monetary authorities refused to take the hit for the CDS problems caused by Citigroup, Bank of America and JP Morgan.

Trillions upon trillions. Economic history, including the Great Depression, will never have recorded such a massive assault on the ills of the financial system as the world is about to encounter. Moreover, there will be new banking and securities laws and regulations enacted -not only in America, but everywhere - to provide the checks and balances needed to prevent bankers from ever screwing the people like they have in the past ten years.

The next war to be fought in the world will be over conflict of interest among parties who are supposed to be on the same side, but in truth have never been. The people now see that and they are disgusted. The next generation will pay for the losses caused by HB&B, and I doubt they will permit legislators any more than a few months’ honeymoon. If it appears to be business as usual in Washington and New York, where the problems started, I do believe - even if most of you don’t - that there will be a revolt.

It can’t be acceptable for the people to lose - directly and through their pensions - nine percent of their equity in just 21 trading days, and also to stand by watching about 1.7 million American jobs lost in three months, mostly because of these bankers.

So, honeymoon or divorce - it’s the President’s call.

If you want to read an economist who can actually teach you something, here are the notes of Anne Picker of Econoday. Every week, she writes a truly informative, concise, and objective weekly report that I recommend and summarize in these pages.

Weekly International Economic Report .

In my summaries here, I leave the links in because the individual Econoday Reports contain terrific charts and other information, and after the report is published, the link leads to the updated report.

Here are the key US economic reports this coming week on the calendar as well as the Econoday analysis from last week’s reports.

US Economic Calendar.

US Existing Home Sales for December. After the data release, Econoday reported, “In perhaps the best housing report of the great housing slump, existing home sales jumped 6.5 percent in December to a 4.740 million unit annual rate — a gain that indicates lower mortgage rates are now boosting home sales. The jump cut nicely into supply on the market, now at 3.676 million homes and down nearly 12 percent from November and making for 9.3 months of supply at the current sales rate, down steeply from November’s 11.2 months… Lower mortgage rates is one factor helping sales as are, unfortunately, falling home prices. The median price fell 2.7 percent in the month to $175,600 with the year-on-year rate showing accelerating erosion at -15.3 percent — a rate that the report says is probably the largest since the 1930s. Falling home prices point to rising foreclosures and even greater stress on the banking system… Other notes in the data include a slight downward revision to November, to 4.450 million from 4.490 million, and a year-on-year sales rate that is down only 3.5 percent, a big improvement from the double-digit contraction of November. December sales showed big improvement in the West with solid improvement in the South and Midwest and slight decline in the East… Though declining home prices are definitely a concern, money moved into the stock market and out of the Treasury market in immediate reaction to the results. Today’s report, which may jolt what had been a very depressed outlook on the housing market, will lift expectations for improvement in Thursday’s data on new home sales.”

US Leading Economic Indicators for December. After the release of data, Econoday reported, “Boosted by swelling money supply related to government stimulus, the Conference Board’s index of leading economic indicators showed its first gain since June, up 0.3 percent in December. But without money supply, indications are in fact very negative with the report warning that the results point to “intense recession” through the spring. Factors pointing to economic decline include falling building permits, a falling factory workweek, faster vendor deliveries and rising unemployment claims. The report’s coincident indicator is showing the degree of current trouble, with a 0.5 percent decline following a 0.3 percent decline in November.”

US Consumer Confidence for January. After the data was released, Econoday reported, “Consumer spirits continue to sink to new depths, reflecting employment contraction and pointing to continued contraction in retail sales. The Conference Board’s readings are all at record lows or near record lows, at an index of 37.7 in January vs. 38.6 in December (38.0 first reported). The January index is a record low in more than 40 years of data. Weakness is centered in the present situation where the component edged further lower to 29.9. But expectations, at 43.0 for a 1.2 point decline, are also weak and show no sign that consumers think the worst is over… If there is a positive in the report it’s that the current assessment of the jobs market isn’t deteriorating, suggesting that monthly contraction in payrolls, however severe, may have at least steadied. Those saying that jobs are currently hard to get slipped slightly to 41.1 percent while those saying jobs are plentiful rose slightly to 7.2 percent. But whatever improvement there is in these readings is more than offset by greater deterioration in the assessment of current business conditions where nearly half are now pessimists… Buying plans were mixed showing improvement in autos but declines in homes and appliances. One-year inflation expectations remain high but are improving, at 5.6 percent. Markets showed little initial reaction to the results.”

US Durable Goods Orders data for December. After the data was released, Econoday reported, “Durable goods orders in December fell again and it’s worse than the headline number suggests. Durable goods orders declined another 2.6 percent in December, following a 3.7 percent decrease in November. The contraction in December was worse than the market forecast for a 2.0 percent fall. Excluding the transportation component, new orders slipped 3.6 percent, after falling 1.7 percent the prior month. The consensus had projected a 2.7 percent drop for the latest month. The really bad news is that the contraction in orders is quite widespread. All major industries posted declines except for electrical equipment and transportation. And transportation would have been quite negative other than for a spike in defense aircraft. It is clear that the recession in manufacturing is deepening, reflecting a near stoppage in the auto industry and weakness elsewhere… The drop in November - as in October - was led by computers & electronics and by primary metals, which fell 7.2 percent and 6.9 percent, respectively. Fabricated metals and machinery also declined by 3.6 percent and 5.0 percent, respectively… On the positive side, electrical equipment posted a 9.4 percent rebound while transportation squeezed out a 0.6 percent bump up in new orders. But the transportation rise was due to a 16.4 percent jump in defense aircraft-motor vehicles and nondefense aircraft dropped 5.2 percent and 43.6 percent, respectively… Year-on-year, new orders for durable goods fell further to down 21.1 percent in December from down 15.7 percent in November… Overall, today’s numbers show a deeper contraction in the manufacturing sector. Equities are likely to react negatively while bond yields could slip. But earnings are still a key focus and could have greater impact on the markets.”

US Jobless Claims for the week ending Jan 24. Econoday reported: “In a report free of special factors and pointing clearly to severe contraction in the labor market, initial jobless claims rose 3,000 in the Jan. 24 week to 588,000. The prior week was revised slightly lower to 585,000. The four-week average jumped 24,500 to 542,500… Continuing claims show special weakness and indicate that the unemployed are not finding work. Continuing claims for the Jan. 17 week, the most recent data available, jumped 159,000 to a record 4.776 million. A comparison with mid-December shows a 404,000 gain for continuing claims… Following this data, economists will begin issuing expectations for the January employment report which is not likely to show any improvement from the severely depressed readings of recent months. Markets showed no significant reaction to this morning’s data.”

US GDP estimate for 4Q2008. After the data was released, Econoday reported, “Fourth quarter GDP is showing the economy in a deepening recession-but not quite as bad as some had feared. The Commerce Department’s initial estimate for fourth quarter GDP posted a sizeable 3.8 percent decline and followed a 0.5 percent contraction the prior quarter. The latest number was not as bad as the market forecast for a 5.4 percent fall. The fourth quarter drop was the worst quarterly decrease since a 6.4 percent fall in the first quarter of 1982… Economic contraction has spread throughout the economy. But the fourth quarter decrease was led by sharp declines in residential investment and also business investment in equipment & software. Consumer spending also dropped sharply while nonresidential structures investment dipped slightly. Net exports no longer are contributing to growth as worldwide recession has led to a sharp decline in exports. However, weak domestic demand also pulled down imports. The biggest positive for the quarter was a rise in inventories - but that will weigh on production in coming quarters. So, even the inventory positive is really a negative. Government purchases were a mild positive but slowed sharply from the third quarter… On the inflation front, lower oil prices pulled overall inflation down. The GDP price index slipped an annualized 0.1 percent after gaining 3.9 percent in the third quarter. The market had anticipated a 0.6 percent increase. The headline PCE index was even weaker, dropping an annualized 5.5 percent after a 5.0 percent boost in the third quarter. Apparently, the retrenchment in consumer spending has worked its way to core PCE inflation which rose a modest 0.6 percent after 2.9 percent the previous quarter… Year-on-year growth for real GDP dropped to minus 0.2 percent and is down from up 0.7 percent in the third quarter… Today’s report shows the recession growing deeper and wider. Nearly every major component of the economy is in decline. Normally, such negative news would be pulling stocks down today. But the markets had braced for an even worse number so we are likely to get a little bounce at open from relief that it was not as bad as feared. But looking ahead, momentum is for more negative numbers in 2009.”

US Employment Cost Index for 4Q2008. Econoday reported, “Wage inflation is not a concern. The fourth-quarter employee cost index rose only 0.5 percent vs. three prior quarters of 0.7 percent increases. The year-on-year rate of 2.6 percent is the lowest on record (1982). Increases in both wages and benefits were mild at 0.4 percent and 0.5 percent. Manufacturing jobs showed especially low rates of increase, which is no surprise given the severity of contraction in the sector. Attention is not on wage pressures but on jobs and on the depth of the recession.”

US NAPM-Chicago Purchasing Managers Index for January. After the release of the data, Econoday reported, “The Chicago purchasers report offers an early view of economic conditions in January — and the results point to continuing contraction at a severe rate. The headline index fell nearly 2 points to 33.3 with order readings showing continuing and severe month-to-month contraction. The production index is especially weak while the employment index shows the largest drop of any index. Businesses in the Chicago area continue to draw down inventories. Prices paid shows contraction, but at a slower rate. There was no significant reaction to the results which point to no improvement for next week’s monthly manufacturing and non-manufacturing reports at the national level (ISM reports).”

US University of Michigan Consumer Sentiment for January. After the data was released, Econoday reported, “Economic readings are beginning to flatten, that is are pointing at severe but non-accelerating rates of contraction. The Reuters/University of Michigan consumer sentiment index was little changed in January at severely depressed levels, at 61.2 vs. a mid-month reading of 61.9 and a December reading of 60.1. Both the assessment of expectations and the assessment of current conditions, the two components of the headline index, were little changed. Inflation expectations were mixed with one-year expectations rising 2 tenths to 2.2 percent but five-year expectations easing 1 tenth to 3.0 percent. One-year expectations in the Conference Board’s report on Tuesday also showed a slight uptick, perhaps suggesting that consumers are sensitive to the mild increase underway in gas prices. There was no significant reaction to the results.”

Here are the key US economic reports on the calendar this coming week. All eyes will be on Friday’s US Employment Report.

US Economic Calendar.

US Motor Vehicle Sales for January. After the December data release, Econoday reported, “Sales of domestic motor vehicles were extremely weak in December but still edged up to a 7.7 million annual rate from November’s record low of 7.5 million units. Heavy discounting and lower gasoline prices have not helped sales much due to the recession and worries that the automakers might become bankrupt. Overall, the year 2008 was quite ugly for U.S. producers. Year-ago totals were down as follows: General Motors, down 22.7 percent; Ford, down 20.5 percent; and Chrysler, down 30.0 percent… Motor vehicle domestic sales Consensus Forecast for January 09: 7.7 million-unit rate with the Range: 7.3 to 8.1 million-unit rate.”

US Personal Income and Outlays for December. After the release of November data, Econoday reported, “Personal income in November slipped while spending has worsened. Personal income in November dipped 0.2 percent while the wages and salaries component decreased 0.1 percent. The really worrisome part of the report, however, was personal consumption expenditures falling another 0.6 percent after plummeting 1.0 percent in October. But there was good news on the inflation front. The headline PCE price index fell 1.1 percent, following a 0.5 percent decline in October. The core PCE price index was unchanged in both November and October.

(i) Personal income Consensus Forecast for December 08: -0.4 percent with the Range: -1.0 to 0.0%, (ii) Personal consumption expenditures Consensus Forecast for December 08: -0.9 percent with the Range: -1.7 to -0.5%, (iii) Core PCE price index Consensus Forecast for December 08, m/m: -0.9 percent with the Range: -1.7 to -0.5%, and (iv) Core PCE price index Consensus Forecast for December 08, y/y: +1.9 percent with the Range: +1.8 to +2.0%.”

US ISM Manufacturing Index for January. After the December data was released, Econoday reported, “The Institute for Supply Management’s manufacturing index in December showed a worsening in the contraction of the manufacturing sector. The headline index dropped to 32.4 — one of the very lowest readings in 60 years of data and down from 36.2 the month before. Looking ahead, the picture is still gloomy. The new orders index has contracted 13 consecutive months and is at the lowest level on record as is the index for orders backlogs. ISM manufacturing index Consensus Forecast for January 09: 32.6 with the Range: 30.0 to 36.0.”

Note that similar indexes for the major manufacturing nations like Japan, Germany and China show similar plunging data that began in earnest during September, which is directly related to the credit squeeze at the major banks of the world, caused by the Credit Default Swap crisis at Citigroup, Bank of America and JP Morgan, and immediately translated into a massive global shift from equities to government-backed debt such as the US Treasuries, which the charts show went soaring. By the third week of November, I was early in one half of my Trade of the Generation call, selling bonds and buying gold. The gold (and silver) soared because traders knew that trillions of dollars of debt would have to be created (ie, fiat money devaluation) to bail-out the banks. But, bonds continued to soar until mid-January because the economic impact on the economy (particularly as shown by the manufacturing index) has been worse than I had forecast, causing rates to be pushed lower by central bankers. There is also the concern that economic stimuli programs will be wasteful rather than helping consumers and businesses to buy products and manufacturers to be able to make them. In addition to watching the manufacturing and personal income and outlays data, traders are watching the shipping data closely as well.

US Construction Spending data for December. After the November data was released, Econoday reported, “Construction spending declined 0.6 percent in November, after dropping 0.4 percent in October. Weakness in the latest month was led by a sharp 4.2 percent decrease in private residential outlays. But the other two major components actually rose. Private nonresidential spending rose 0.7 percent while public outlays increased 1.4 percent in November. On a year-on-year basis, overall construction outlays were down 3.3 percent in November. Construction spending Consensus Forecast for December 08: -1.2 percent with the Range: -5.0 to +2.0 percent.”

Construction represents only about 20% of the US economy, but there is a strong multiplier effect, and the jobs are largely well paid ones, so this is an area traders need to focus on. If the economic stimuli programs inject funds for infrastructure spending (roads, bridges, etc) there is a benefit in higher economic productivity as well as the start-up of secondary and tertiary projects, as well as the employment factor, which is immediate in the hiring of architects, civil engineers and the like. This data is only December, and improvements are likely not to show up in the graphs until at least March and through the 2Q2009.

US Pending Home Sales data for December. Prior to the report release, Econoday reported: “The pending home sales index fell 4.0 percent in November pointing to deepening declines for the housing sector. Year-on-year rates are also showing accelerating deterioration, at minus 5.3 percent in November compared with minus 1.0 percent in October. But last week, we saw a pickup in existing home sales. Perhaps recent declines in mortgage rates are helping to offset the damage to home sales from higher unemployment. On the other hand, the bump up in existing sales may have been due to strong seasonal factors in December. Nonetheless, markets will be watching the pending sales index for any signs of improvement in the housing sector… Pending home sales Consensus Forecast for December 08: 82.3 with the Range: 78.2 to 84.0.”

The Fed is pushing mortgage rates down and also encouraging the banks to make easier mortgage loans to legitimate buyers by lowering the credit score requirement. Ultimately, this program will be effective.

US Jobless Claims for the week ending Jan 31. After last week’s data was released, Econoday reported, “Initial jobless claims rose 3,000 in the January 24 week to 588,000, indicating that the labor market is steadily worsening. Continuing claims showed special weakness for the January 17 week, the most recent data available, jumping 159,000 to a record 4.776 million… Jobless Claims Consensus Forecast for 1/31/08: 583,000 with the Range: 480,000 to 620,000.”

There were over 72,000 job cuts by a few companies last week. The situation is dire in the US, as it is in Japan, China and many countries. This data is now closely watched by traders.

US Non-Farm Productivity and Cost data for 4Q2008. Ahead of the data, Econoday reported, “Nonfarm productivity was weak in the third quarter, coming in at an annualized 1.3 percent. Meanwhile, third quarter unit labor costs posted a 2.8 percent gain. The worsening recession has led to a worsening in productivity and costs when compared to year-ago numbers. Year-on-year, productivity was up 2.1 percent in the third quarter while, unit labor costs came in at up 1.4 percent… (i) Nonfarm Productivity Consensus Forecast for initial Q4 08: +1.1 percent annual rate with the Range: -1.0 to +4.0 percent annual rate, and (ii) Unit Labor Costs Consensus Forecast for initial Q4 08: +2.9 percent annual rate with the Range: -2.4 to +5.7 percent annual rate.”

I am surprised that productivity is falling so rapidly when jobs are being cut at this pace. Usually, fewer workers are able to maintain production levels. But I suppose the production levels are plunging and management is having difficulty cutting jobs as fast.

US Factory Orders for December. After the release of the November data, Econoday reported, “Factory orders fell steeply in November, down 5.7 percent (originally 4.6) percent from a downwardly revised 6.0 percent decline in October. The decline was exaggerated by a price-related collapse in new orders for nondurable goods, specifically orders for energy products. Outside of nondurable goods, the decline in the month was a much less steep 3.7 percent (previously down 1.5 percent). But more recently, durable goods orders declined another 2.6 percent in December, following a 3.7 percent decrease in November. With oil prices continuing to weaken, the nondurables component for December also is likely to be negative. Overall, December should be another bleak month for factory orders… Factory orders Consensus Forecast for December 08: -3.0 percent with the Range: -6.8 to -0.8 percent.”

US Jobs Report for January. After the December data was released, Econoday reported, “Nonfarm payroll employment for December was dismal as the number of jobs plummeted 524,000, following a drop of 584,000 in November. Payroll jobs contracted every month in 2008 for a cumulative loss of 2.6 million-the largest yearly drop since the end of World War II. Turning to wages, average hourly earnings rose 0.3 percent in December after gaining 0.4 percent in November. Wage gains were likely being kept a little high by the fact that average hourly earnings are not a fixed-weighted price index but one based on shifting components. During recession, the lower wage earners are typically cut first due to the cyclical sensitivity of low-wage retail trade and due to workers with fewer years experience often being cut first. The civilian unemployment rate surged to 7.2 percent from 6.8 percent in November. December’s number was the highest since 7.3 percent for January 1993… (i) Nonfarm payrolls Consensus Forecast for January 09: -524,000 with the Range: -750,000 to -450,000, and (ii) Unemployment rate Consensus Forecast for January 09: 7.5 percent with the Range: 7.2 to 7.6 percent.”

President Obama has been claiming his economic stimuli programs with generate +2.2 million net new jobs in the next year. Interestingly, that is the number of new jobs America needs just to maintain stable economic growth. But the 2008 loss of -2.8 million jobs must also be made back, which means that for each year of his Presidency, there needs to be 3 million net new jobs created to get back to normal.

Speaking of economists who are basking in the glory of having taken their doom and gloom outlook to Financial Entertainment TV, how many of them were able to forecast the present employment crisis in America, which I - certainly no economist - did early last year?

After the March US Unemployment Report showed an increase to +5.1% unemployment, I wrote the following perspective:
http://www.billcara.com/archives/2008/04/caras_commentary_community_cha_…
• Unemployment in the US (and across Europe and elsewhere) will become the next economic crisis. Traders, you need to plan for the effects on your portfolio.
• Something in a Goldman Sachs briefing I received yesterday (see below) pushed me into looking at historical unemployment records and the conclusion I derived can best be defined by the word ‘sea change,’ which I don’t think people are presently contemplating.
• To the point: I believe unemployment in the US will double in three years from the low of April 2007. By April 2010, I anticipate there will be 13.5 million unemployed, or 8.75% of the civilian population. That’s an increase of 6.73 million Americans without work.
• If true, that means more foreclosures on homes and cars, more homes on the market, with much lower prices to come, and older cars on the road, no wage inflation to speak of, and so on. The bottom line is that macro-economics will play an increasing role in how we manage wealth.

I don’t think there were more than 2% of you who believed me when I wrote that piece on April 8, 2008. Now, I’m guessing that maybe 95% of you believe it.

US Consumer Credit data for December. After the release of the November data, Econoday reported, “Consumer credit has been taking a hit in recent months with the latest a record decline of $7.9 billion for November — the third decline in four months. Revolving credit fell $2.8 billion, or 3.4 percent in the month, while non-revolving credit fell $5.2 billion, or 3.9 percent… Consumer credit Consensus Forecast for December 08: -$3.5 billion with the Range: -$12.0 billion to +$1.5 billion”

The country ETF’s (trading in NY in USD) were all UP over the past five trading sessions, except for Russia (RSX -0.37%) and Japan (EWJ -1.52%). Those that were up over +2.0% were: UK (UWU +6.42%), Germany (EWG +3.47%), Brazil (EWZ +2.54%), China (GXC +2.39%), France (EWQ +2.11%) and India (IFN +2.11%).

In the previous week, China (GXC +1.57%), and Brazil (EWZ +1.41%) were strong as well. Had the equity markets not turned down so much on Thursday and Friday - perhaps to appease the Doom & Gloom networking crowd at Davos Switzerland (World Economic Forum), or more likely because of them - the Obama Rally might have gotten underway.

In any case, crowd psychology is presently in control of capital market prices, and the mood is dour at the moment.

There was a one-day market break-out - Wednesday — on high volume with the Humungous Bank & Broker components doing rather well. In fact, the Financials (XLF) had a trend reversal on the Point & Figure chart, with good volume. Unfortunately the week also includes Thursday and Friday.

The S&P 500 break-out of the 850-855 resistance closed the market at 874.09 on Wednesday. Thereafter there were losses of almost -50 S&P points, so that this key index closed the week at 825.88.

Really disheartening to the Bulls was Friday afternoon. Not any kind of rally could be mustered. Without Friday’s losses, only two of ten sectors would have closed down on the week - Basic Materials (XLB -4.32% W/W; down -3.92% on Friday) and Telecom (IYZ -4.05%; down -2.53% on Friday).

I put it down to the Revenge of the Ivy Towers - those nasty US economists who were being honored in Davos this week.

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