"What the hell happened!!"

So markets were off around 3% today and folks are scratching their heads, their ass and anything else they can scratch to figure out what the hell happened. And all I can say is "duh." I hope I am spelling this right.

Now the leading candidate for markets falling today - other than options expiring - is consumer sentiment. It seems to have fallen off a cliff.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=atiU89eI_SqA&pos=2

Indeed the results were well - and I mean WELL - below even the most pessimistic expectations of 62 economists surveyed by Bloomberg. So what gives? Well, what gives first is that economists being surveyed by Bloomberg seem to be largely out of touch with the man or woman on the street. Now I was not surveyed and I made no estimate but I find a big drop off in confidence to be well expected.

So let's explore the very secret reasons that economists cannot find out why folks would be a bit economically depressed. Please do not tell the economists about these as it will spoil the surprise. Let's begin with a survey of this weeks economic data. Fortunately for me and you, the kind folks at Calculated Risk have once again done a dandy job of putting it together for us:

http://www.calculatedriskblog.com/2010/07/quick-summary-of-week.html

Unless I counted wrong, of the 14 major data points out this week none were evenly mildly positive and many were down right ugly. And this summary does not even include the fact that the FDIC closed six more banks yesterday, bringing us up to 96 year-to-date.

This week's data aside, let's consider the failure to extend unemployment benefits. This immediately cut off funds to roughly 1.3 million folks and in relatively short order will cut off around three million, with more to come in months ahead. Now I assume this three million impacts the spending ways of around 10 million folks since the average family size is just over three, so you have roughly ten million people, approaching 3% of our population, that are curtailing spending. Given that consumer spending is 70% of our GDP, knocking out 3% of that group cannot be a good thing for GDP. I am no economist but the math seems relatively easy to me. At a minimum, one can see how this might just put a bit of a damper on consumer sentiment.

Okay, let's forget for a moment the millions being cut off from benefits. There are still tens of millions in the unemployed ranks, we are not creating jobs fast enough to even support population growth, two thirds of a a million folks last month alone gave up even looking for a job and for those still trying to find a job, good luck. Even those with jobs are increasingly part time or seeing their work hours shortened. Yep, there are plenty of big confidence builders here. I keep scratching.

Let's talk about credit issues. One of the drivers for today's market problems was the results from financial companies showing quite clearly that credit continues to be frozen and lending by big boys is quite selective. It also seems the big banks are having to repurchase a bit of the junk they previously off-loaded on us taxpayers, and this is not helping results either.


http://www.calculatedriskblog.com/2010/07/mortgage-repurchase-growing-writedown.html

Now it is not a surprise that lending is down as a full 25% of folks these days have credit scores that will not get them a credit card, and with so many under water on their mortgages, they are not coming up for credit air any time soon. And these are not all irresponsible idiots. I know one couple, where both work, he served at least two terms in Iraq, they have four kids, they are both college graduates (she has a Masters), they have a modest house and do not waste money. Yet they can barely pay the mortgage, have a poor credit score and are struggling. I know this situation is repeated all over the country. Yes, there are the usuals that folks like to point to as losers we should not support, but there are plenty of folks doing what society has told them to do and it is still not working. Perhaps this is affecting consumer confidence scores?

In my book, most economists are ignoring fundamentals and out of touch with the regular guy on the street. Only time will tell but, unfortunately, time is running out for a lot of people in this economy. No surprises to me with the confidence numbers. The surprise is that economists did not see it coming. Then again, perhaps I just need to scratch something else and forget about economists.

Disclosures: none.

Craig for President!

I am tired of complaining about our presidents so, damn it, why not put my hat in the ring. So, I have to come clean on a few items. First, I have been known to view porn on line and otherwise (don't tell my wife about the stash in the basement). I have been to strip clubs - though none in the last year. I have embarked upon the enhancements of marijuana, though probably less than ten times in my life. I smoked cigarettes (a closet smoker) for 5-7 years, at most a half a pack a day. I party hard and drink too much on a regular basis. And I sometimes go two days without changing my underwear. I am, I fear, a regular American male.

So why am I throwing my hat in the ring? Because I am disgusted with what we have had to date in the past few decades. While I liked Bill while he was there I have since understood his failings so I am not partisan in my disgust. Bill does not have disgust from me, he just is not in my book to emulate. And for the last two idiots, well I do not need to comment - I hope.

On the current Administration, I seriously regret my vote for Obama but I am not really sure I would be any better off with voting for McCain. There were certainly other candidates that in hindsight should have made it, but they did not. And so, my hat is in the ring.

What do I offer? I am a life long Democrat who no longer likes pretty much anything Democrats are pushing. Make no mistake, I am not favoring Republican fodder either. Both seem to be at extremes and I am all about balance.

My take is that we made some major mistakes - both under W and Obama - supporting the financial bastards that got us here. Many should have been dismantled. Instead, we saved them and are continuing to support them with virtually no interest loans. They are now stockpiling money, making record profits and flipping the bird at taxpayers.

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=a2jo3RK2_Aps

So my platform is simple. Right now I have no platform other than a basic economic platform, but I have two years to work on broadening my horizons before the next Presidential election, so let's run with my basic platform.

First, we investigate and take down financial companies that brought us to where we are. They are not bastions of free enterprise - they are corrupters of it. They need to be investigaed and talken out if they stepped over the line. Otherwise, crime, fraud and other related issues have moral support.

Second, we need a balance between austerity and stimulus. If you need more details, read my blog.

Third, we need to, as a society, realize that the future will not be like the past. We are reverting to mean, to a new normal that is the real normnal, and this will be painful.

Fourth, cutting off unemployment extended benefits is a bad move on many fronts.

Okay, Given this picture who would want to be the Pres., go figure!

Survey Question of the Day

So what does it mean when mortgage interest rates are at an all time low but purchase mortgage applications are nonetheless at their lowest in 14 years? I could make this multiple-choice but I don't think that is necessary.

http://www.calculatedriskblog.com/2010/07/mba-mortgage-purchase-applications_14.html

I initially left the post at what is said above but cannot resist adding a couple of other tidbits. First, retail sales are continuing to stuggle.

http://seekingalpha.com/article/214439-forward-economic-outlook-rapidly-deteriorating?source=dashboard_macro-view

This should not be at all surprising, given the following:

- unemployment is not showing any significant improvement (even with the baked numbers the government puts out) and with unemployment benefits ending for millions of Americans there are a lot fewer pockets to be spending;
- home piggy banks are still not there and will likely not be for some time;
- over 25% of folks have terrible credit scores (up from 15% a few years ago), 599 or under, and that prevents them from even getting a credit card or increasing limits, so they have no choice but to curtail spending; and
- people have actually started saving again and paying down debt, which is inconsistent with retail sales increasing.

On the last point, I find this rather promising. It will take many years to get individual debt levels back to normal (and I will not even talk about government debt here), but it looks like normal spending levels - i.e. us living within our means - is getting there pretty quickly. We spent the better part of the past two decades living beyond our means and I view us presently as simply reverting to mean. Accordingly, those economists with rather rosy growth projections do not appeal to me. Even if they are correct, the growth will be built on debt (private or government) and it is not a wise thing to do. We cannot afford to go back there. I truly think individuals in this country, by choice or otherwise, realize our spending ways need to be behind us despite the government doing what it can to spur us on to more spending. So for an economy that is about 70% consumer spending, I suspect we will not see any major increases in GDP for a few years (and I hope we do not).


Disclosures: None.

Brief Note

I have seen the Intel results and must admit they are quite impressive - a record qauarter in this economy. I am not sure what to make of it. I suspect companies are updating computers to be more efficient and productive, i.e. to do more with less employees. And companies have the money. Do not make any mistake, companies in the U.S. and elsewhere, by-and-large, are absolutely flush with cash. They have been hoarding it in part as they do not see many better uses for it than to stash it for better times. I suspect that they are spending a bit of this hoard to improve efficiency/productivity. As I noted, efficiencies from computers can free up companies to let some employees go. I have no proof of this - it is just my best guess of what is happening. Either way, the Intel results are impressive and I suspect they will spill over to some other computer related companies. The real question is whether they apply to the broader economy.

Now yesterday Alcoa came out with results that beat expectations. The stock was up 1.2% today, which, curiously, was less than the overall market was up. So you beat market expectations and Bloomberg attributes the market bounce to you in large part, yet your stock does poorer than the overall market. What gives? I suspect what gives is that the expectations for Alcoa in terms of quarterly profit per share has shifted a good bit the past 90 days. 90 days ago the average earnings expectation was 23 cents a share (compared to over 60 cents a share in actual results before the economic troubles). In the last 90 days, however, the expectations have come down rather significantly. 60 days ago the average expectation shrank to 19 cents a share, 30 days ago it shrank to 17 cents a share, and more recently went to 12 cents a share. Alcoa reported 13 cents a share and low and behold, beat expectations.

Let me begin by noting that Alcoa has for several months been one of my biggest short holdings, and it has done quite well for me as it was a big loser in the DOW this year to date, so I have a financial interest in Alcoa. Nonetheless, it is not a big dollar position for me so I will not lose sleep over it. Still, it was curious to see the market bouce on the Alcoa results without Alcoa itself not bouncing so much - go figure.

Disclosures: As noted above, I have short postions on Alcoa.

Head Fake???

My last post was about the market seeming to take off Tuesday with the air leaving that balloon quickly and the market ending up only slightly. I mentioned my expectation that there is a massive amount of cash on the side-lines waiting to enter the stock market and only waiting for an excuse to do so. While the market was up pretty well Tuesday morning it did not have legs, went into red territory for a while and only closed up due to a brief late-day rally. Today, the market had legs and those legs were able to carry the day. So what, do you ask, caused the bounce?

As I said there was a lot of money looking for a bottom - or at least an excuse to expect one - and there was news today that a report that actually comes out tomorrow will show good retail sales:

http://noir.bloomberg.com/apps/news?pid=20601087&sid=a2bxxRzucFoU&pos=1

Now this was not the actual report but I have little doubt that the retail industry one day in advance would say sales are likely to be up nicely in the report without knowing that to be the case. If not, tomorrow will be a bad day for the market.

In any event, I prefer to focus on fundamentals, not daily reports, and whether the increase in retail sales is sustainable. In terms of personal debt levels and increased savings rates, it is not sustainable. Personal debt is still very high and slowly coming down as savings rates are increasing, which is in my book one of the most promising long term developments. Still, it will take many years. So let's look at the employment situation. In a word, it is still "ugly." First you have unemployment benefits to 1.3 million Americans that just ended and hundreds of thousands more in weeks to come. Since these are among the consumers that represent around 70% of our GDP, you will see an impact pretty quickly from this "stimulus" ending. Second, even without the unemployment benefits ending issue, employment otherwise is rather dismal. As noted in the linked article by Abigail Doolittle, the only semblance of positive news in employment figures this past week was due to 652,000 people leaving the labor force. These are by-and-large folks simply giving up, probably because the time lapse for getting a new job is near record levels. Numbers getting better because two thirds of a million people gave up is not good. Now if you focus on the jobs creation - after taking out Census numbers - you will see there was some creation but the numbers are low and we need more than that just to keep up with population growth. In other words, employment is not getting better and people spending money represents roughly 70% of GDP; you do the math on that.

http://seekingalpha.com/article/213251-jobs-and-spending-spiral-down-together

So let's look at something else that has led us out of past recessions - real estate. You know where I am going here - it is still sucking wind. As I usually do on real estate, I refer you to Calculated Risk. This week they have had a dozen or so posts on residential sales, refinancing, commercial real estate, mall vacancy rates and the like. I can summarize them all in a word, "ugly." Just look here for one post:

http://www.calculatedriskblog.com/2010/07/mba-mortgage-purchase-applications.html

Purchase mortgage applications fell off a cliff in May after the tax credit ended and things are getting no better in June.

There are lots of other areas to look at but I think just focusing for now on the two major areas leading past recession rebounds is enough to suggest any market rebound has not got long term legs. And hey, I did not even mention EU issues, China slowing down, government debt, the BP oil spill or personal bankruptcies on the rise.

Disclosures: None.

No Bites

Over the weekend I deliberately did a couple of posts that are pressure points for some folks I know - at least from time-to-time - read my blog. Now I am not saying I made up what I was saying or did not believe in it, as I would not do that here, but I may have been a bit more over the top just to push my friends' buttons. Yet so far, not a rise out of them, at least in terms of comments. Perhaps they are not reading my blabber after all.

HEAD FAKE

Let me start by noting that in some way most of the functionality of this blog has shut itself down - or perhaps I did without knowing. I cannot bold, attach stuff or do any of the regular functions. With that warning, let me address the title of this piece that I had to capitalize as I could not bold it.

The markets, coming off a three day weekend in the U.S., seeing good market climb over seas, were off to the races this morning. I saw the Nasdaq up over 2% at one point and - then - the bottom fell out. We still ended up with a late day rally, but the air left that balloon very quickly. So what is up with this?

Unlike the folks at Bloomberg who seem willing to surmise every hour or so on why the market is reacting as it is, I will resist the temptation to be that precise. I do have a couple of more macro observations to note. First, after a couple of weeks, indeed months, of drops, there is certainly a load of money on the side-lines waiting for a bottom to set in, so a bounce off a nice weekend with no terrible news was not too surprising - especially with over-seas markets leading the climb. Yet there also was no real positive news and what little there was was not to inspiring. So we had a hectic day yet closed up with a nice bounce at the end of the day.

Now I do not see this having legs despite the market bounce at the end. The drivers of the drop this past month plus are still there. You know them: stimulus ending this year in the U.S. and elsewhere, the EU and U.S. perhaps doing some fiscal tightening, EU debt issues and sovereign downgrades in focus, China's expansion cooling considerably (as it needs to), job creation not even close to keeping us even, real estate (commercial and residential) still sucking wind despite low rates, the oil spill in the Gulf dampening spriits and imposing financially on expectations on various fronts . . . and the list goes on and on. Botttom line, in my macro-opinion, the markets out paced the recovery and are now returning to Earth. So the big question, have they landed yet?

Honestly, economists from what I can tell vastly over estimated corporate profits, growth and the like for the last half of 2010 and 2011, so if I am right, stock appreciation based on such growth is toast. The market has corrected a good bit but I suspect has just a bit to go. It will take something drastic, in my opinion, to take us down or up seriously from here, but I am just guessing here. No one knows. At the end of the day, what I do believe is that the market is correcting to normal.

Expectations of economic growth in this country or others are over-blown. They are based on income predictions that are not realistic. We are in the process of reaching the mean, as in what economic activity in this world can support now and in the long term. I thihk for the stock market the norm is still a bit lower as the market still has built in some growth above what I expect. By year end I expect markets to be down another 10-15%. We will see. This is just my best guestimate and there are plenty of folks out there much smarter than me.

Disclosures: Well I have equity positions and short positions to hedge, so I am all over the board.

Be Careful What You Shoot For . . .

This is a good bit off-campus from my usual fare, but I cannot resist. Let me begin by apologizing to my friends who are card carrying NRA members. I am not a member and do not care to be, but I am also not against it. I have plenty of realtives and friends who have guns for hunting and recreation and I have enjoyed going to the shooting range myself, but I really do not see the need for folks to walk around with concealed guns unless they are police. Daily I read about bar fights, guys or girls at a party having a fight, etc. etc. Moreover, while I consider myself fairly level-minded I am sure there are plenty of less level-minded individuals out there that can qualify to buy and carry a concealed weapon. And so, I am not happy when students can carry concealed weapons on campus. Seriously, college campuses allowing students to be carrying on campus.

http://noir.bloomberg.com/apps/news?pid=20601109&sid=aiL1FpbQYfUU&pos=10

The excuse given in the article is self defense, but that is total bull pucky. I am 50 and have never needed a gun for self defense. I would only need one, or any one would only need one, if other students or (in my case) co-workers could also carry concealed weapons. Sure, someone could always illegally carry a weapon and in that one moment in a million you need a gun to protect yoursef. But I have kids and when they eventually go to college (I pray) I am not about to send them to schools that allow other kids to carry guns to class. This BS is infringing on my rights because I have to fear folks walking around with hidden guns. Truly folks, there is no real need in self-defense or otherwise to carry a concealed gun around in today's world in this country. I am all for people having guns for sport or target practice or even in case of national invasion, but given today's society there are just too many idiots out there for me to feel safer with folks around me carrying concealed weapons.

Now I suspect it is just a matter of time before some A-Hole on campus takes out his concealed weapon and does in some fellow students or professors or something even worse happens leading to a major political push to limit guns more than they were in the past. I truly hope they dial this back before that happens. I am not worried about the folks I know carrying concealed weapons, I am just worried about everyone else. Just think about the ass who was tail-gating you the other day that you flipped the bird to having a gun - or if you were inadvertantly tail-gaiting someone with a gun. I am not extreme and I get plenty pissed driving on a regular basis. Road rage is no strnger to me. I cannot imagine having road rage with guns. Moreover, if folks with concealed guns are allowed to go out and drink I am staying home. Never mind terrorists - our own citizens with guns actually scare me more and I was in NYC for 9/11.

Point being, I lived and worked in NYC for nearly two decades; my car was broken into seven or eight times, my apartment was once stipped to the bone (I mean appliances, couch and everything), and I dealt with road rage on a daily basis. I never needed a gun nor wanted one and was quite glad those around me did not have one (though some in NYC obvoiusly carried illegal guns. I was still better off without one). You may feel better if your son or daughter have a concealed gun on campus to protect themselves, but think about it - would you feel safer if every other student on campus had a gun? Would you feel better if all your neighbors and co-workers had a gun - a concealed gun? If you would, either (a) you know people much better than I do, (b) you truly expect terrorists to invade on a massive scale or (c) you really do not know your neighbors and friends well enough. Either way, I am against concealed guns as I really see no need for it. We are no longer in the wild West.

Disclosures, None.