Stimulus Anyone?

The pressures are certainly mounting for more stimulus well beyond the just passed unemployment benefits extension. And here is where the immovable object runs up against the irresistible force; Obama and crowd certainly will be pushing for more stimulus, especially with a mid-term election in the offing and Republicans can be well expected to push for more austerity. Their line will be that government debt is too massive and we need to pull back spending. There are very plausible arguments for both sides of the spectrum and, personally, I am not convinced either is right or wrong.

Certainly, if you believe me or a growing majority of folks that we are teetering on the edge of a double-dip recession, then there is certainly a strong Keynesian push to print dollars and avoid this situation. Nonetheless, there is a plausible argument that doing so simply builds government debt to increasingly dangerous levels and only serve to kick the can down the road. With GDP adjustments announced this week it is pretty apparent that the trillions in stimulus to date has done nothing really to stimulate the economy and the supposed growth this year has all been stimulus dollars, so the latter argument - on the stimulus being a waste of time - built a bit of street cred this week.

This all goes back to what PIMCO calls the new normal and what I have for nearly two years been calling the new reality. It actually is not new at all. It has been around all the time. We have, however, as an economy been ignoring it and trying to avoid it. But it is there and not going away. It is simply an economy where people live within their means. Now, unfortunately, due to a decade or so of folks living well beyond their means, living within means no longer makes the cut. Now, due to excessive debt, homes under water, unemployment and the like, we are compelled to live below our means so we can save and pay off debt. And it appears - despite government pushes to the contrary, that this is happening - finally!

Obviously, this on the ground austerity is not good for the markets, company profits or the government as it will surely mean a new recession with a very slow long climb out. In other words, if this happens, we may actually be on the way to a sustainable recovery. Go figure.

Disclosures: None.

Brief Post

I was not planning on posting tonight. I am still recovering from vacation, had meetings all day and have not had time to do the level of reading I like to do before posting. Nonetheless, I saw this piece of data well worth passing on. This article notes that a projected 20% of households in this past recession lost 25% or more of their income. If this holds it is significant.


http://www.nytimes.com/2010/07/27/opinion/27herbert.html?_r=1

Not a promising stat.

Disclosures: None.

I Can Relax Now

I was a bit worried. A couple of months ago I predicted the second dip in this recession would come this fall. Then June happened. Markets were down substantially, worries arose about sovereigns in Europe, housing was facing head winds and so forth and so on. I feared that I predicted the second leg down as too late in the year. Then came July.

July has reinvigorated the markets. Don't ask me why but they are invigorated. Actually, go ahead and ask me why. It is relatively simple. There is a massive amount of money on the sidelines waiting to come into the markets, especially in institutions, like pension funds, mutual funds and the like. They need very little excuse to dive into the pool and they have raised their equity allocations several percent over the past couple of months, which is many billions of dollars flooding into equities. And so the July spike was, in retrospect, not that surprising. So we look to the fall . . .

I still stand by my dire fall prediction. Most stimulus is ending or has already ended here and in other countries, the political will to incur the cost of more stimulus is gone (here and in other countries), housing is still problematic, manufacturing is still problematic - and so forth and so on. I am really not seeing any significant bright spots in the data. Look at this link from Calculated Risk in case you disagree, it is not pretty:

http://www.calculatedriskblog.com/2010/07/2nd-half-slowdown-update.html

I suspect now that the S&P has crossed its 200 day moving average the spark is still there to carry us through August. It is traditionally a low volume month so I do not expect anything serious to happen, but watch out come September and/or October. I have been wrong many times but this is a prediction I feel a bit more confident about and I cannot fully explain why. Fundamentals have sucked wind for a long time so pointing to them does not explain it all. It is mostly the lost steam of government stimulus in conjunction with people coming into the new (old) reality, also referred to as back to normal by some commentators.

The point being quite simply that for a good decade or two we have lived rather substantially beyond our means, especially here in the U.S., but also in the UK and EU and other countries. We have been a consumpti0n machine, be it real estate, electronics, clothes or whatever, we have consumed it like there is no tomorrow. We have not said no to ourselves or our kids. Commercial retail space has exploded to where the U.S. has roughly 50% more than any other country. Real estate prices went through the roof due to speculation and anyone who could fog a mirror being able to finance a purchase. There was no end to our consumption orgy - that is until the recession of 2008.

Now lending standards are overly conservative (both for individuals and companies) , 95% of all mortgages end up with a GSE, consumers are starting to save despite a dismal job market, and the only good news for the economy this past year has come from government stimulus, which is ending. Let me add that foreclosures are on the rise and ARMs are resetting at an alarming pace this fall and next year. With over a hundred banks put down by the FDIC this year, it is clear the mortgage stats are not that great. In short, I am not popping any corks just yet.

I personally think this is leading to a new lower level of economic activity. A sustainable level of economic activity to which the markets have still not fully adjusted. And that is what I think will happen this fall. As government stimulus fades away and the fog clears, people will see where we are and what lies ahead more clearly. That, to me, is a good thing. Time to get real folks and the sooner the better. It will be painful but I am not sure there is any other better alternative.

Disclosures: None

Hold the Phone - WE BEAT EXPECTATIONS!!

The S&P "eclipsed" its 200 day moving average with today's advance. I quote "eclipsed" as that is the word ETrade used this afternoon after the market closed. And the market went up for good reason folks. As Bloomberg reports, the just reported new home sales topped the median economist forecast:

http://noir.bloomberg.com/apps/news?pid=20601109&sid=a2Z1DJWhAV1s&pos=14

Now I have admittedly not read all the details from Bloomberg on what the medium forecast was or how far we beat it but all that matters is that we beat it. UPS and AT&T also just happened to "forecast" increased profits. I am not sure what they know that the rest of us don't but they see rosier times ahead and, hey, the new housing sales beat expectations, so let's party!! (You see what's coming, don't you.)

The better than forecast new home sales for June, while apparently beating the median forecast, is notable for another reason; it was the lowest June new home sales figure ever recorded.

http://www.calculatedriskblog.com/2010/07/new-home-sales-worst-june-on-record.html

So, apparently, economists are getting more pessimistic - much more pessimistic. Indeed, individuals are also not too high on today's market, but as noted in the article first posted above, institutional investors are all giddy with the market. They have significantly increased their equity allocation, which one might suspect is spurring the recent market gains. Thus, I leave you with this, the market went up nicely today and according to Bloomberg it was due to a record low June new home sales number (with a painfully significant downward revision to the May numbers) and some companies providing optimistic profit forecasts. Warm and fuzzy, ain't it.

P.S. I just checked and Bloomberg is now attributing the better than expected new home sales numbers in the U.S. for Asian markets rising. Let me repeat, the June new home sales number was the lowest June new home sales number on record, which follows a record low May number after it was significantly revised lower. Now the linked article below suggests that it was the percentage increase from May that was unexpected, but that is largely due to the significant revision lower in May numbers that just took place. I feel like a robot in a B movie saying "This does not compute . . . this does not compute."

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

And by the way, it will take a few months before price indices show it, but apparently housing prices have gone down a good bit after the expiration of the tax credit. Apparently people are unwilling to pay any more and are expecting the sellers to provide the $8000 credit now.

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

Yep, time to pop the cork.

Disclosures: None.

I'm Back

I am back from vacation and do not have a lot to say tonight. I did, however, just read a piece by a S&P 500 optimist complaining about all of us doom and gloomers.

http://seekingalpha.com/article/216369-s-p-500-the-optimist-s-argument-part-i-of-ii?source=dashboard_macro-view

I view myself as an optimist. Compared to a lot of people I know I am quite up-beat. You would not guess this from my blog, but I do view the glass as half full when it is half full. The problem is that I am not willing to ignore reality to support my optimism. If the glass is empty, I am unwilling to say it is half full. I have significantly more money in equities than I am betting against equities so I have no real stake in things going bad. Indeed, the economy doing poorly will negatively affect many of my close relatives and me, so I am not in any way wanting that to happen. Nonetheless, there is nothing in the freakin' glass folks! Ignoring reality will only make things worse.

The above linked post notes - based on math - that the market should climb 16% by year-end. This is based on historical PE norms. It is, however, based on consensus estimates of future earnings. The author does not say who comprises this consensus but one must suspect it is economists. While I consider myself an optimist, I cannot ever hope to compare myself to the optimism of economists. I recently read a post (that I wish I could find) showing economists over-predicting furture earnings on a consistent basis over the past couple of decades. Just go back three years to July of 2007 and see if the consensus on earnings then was correct. Indeed, earnings estimates have been coming down over the past few months, which is about the only reason some companies have been able to beat estimates. Accordingly, any analysis based on economist sentiment is not a reason for optimism from me.

I truly do want to find the silver lining in this economy. Certainly the news has a lot of tidbits that an optimist could latch on to as a promising developments. This past week has seen many, which has caused a spike in the markets. But I have not seen any reason to ignore the fundamentals, which diverge from historic norms in numerous respects. Debt - private and government - is still at historic extremes (private had come down a bit but only to be replaced by public) and this is the worst fundamental. The other, here in the U.S., is simply the fact that our economy has been super-charged for a couple of decades. Normal, sustainable activity, is where we are reverting and it is not what politicians or optimists are ready to accept. Yet, it is reality, so get used to it. I have no choice but to say the glass is empty, or nearly so. I do have hope for the future, but it will take years to put the past behind us.

Disclosures: None.

Yep, All is Fine And Well

Well, the market ended the week quite well. I am on vacation and have not had time to read enough about it to comment too much on the uptick at week's end. From what I did see the bogus EU bank stress tests came out and, as expected, looked pretty good; indeed, probably a bit too good. Obviously, leaving out sovereign debt rigged the tests from the start. All those sovereigns having ratings down-grades this year have most of their existing debt with these banks. Excluding it is a bit of a joke. Moreover, the minute weeks ago that the governments in the EU started talking about releasing the results, we all knew they had to look good on paper. They sure would not release them - or talk about doing so - otherwise. Nonetheless, at least Bloomberg is listing the wonderful EU bank results as a possible reason - at least one of them - why the markets were up today.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=a_AK4xI5SjK4&pos=1

Bloomberg also cites the possible takeover of Genzyme by Sanofi-Aventis SA as a possible reason for a bounce. Rumors have, however, been somewhat rampant for a couple of weeks on Sanofi-Aventis in the market to buy a U.S. company. I guess more firmness to the rumor might lead to some upbeat feelings but I am not sure I would attribute the market climb in any significant respect to this one bit of news. Still, the media needs an excuse to explain our daily, or weekly, bouncing around, and sometimes they seem to be reaching just a bit. What they tend to ignore, on the other hand, is fundamentals. And one of the key fundamentals at the moment continues to be . . .

Housing

I have posted a good bit on housing and will not repeat all of that now. A point I have not mentioned is the proposed tightening of lending standards by the FHA. Lest you have been asleep for two years, the lender of last and only resort for residential mortgages in this country has been the government (roughly translated into us taxpayers). This includes Fannie, Freddie and FHA, who collectively have been ending up with virtually all of the loans being issued. The FHA has been particularly problematic in its lending standards, allowing folks with very low FICO scores, next to no money down, seller-funded down payments and the like. This unfortunately has been supported with the full faith and credit of our government. Home ownership is the "American dream" so we apparently have to support it. And despite the problems this clearly creates, the government seems hell-bent on still getting people to buy homes they cannot afford.

Yet, let's face it, owning a home you cannot afford is not a dream; it is a nightmare. Sure, if property prices are increasing 10-20% a year and you can sell the house for a nice gain once the heat gets too high, it is not a bad deal. Still, this is not the American dream of home ownership - it is gambling. And it is gambling with taxpayer money. Thus, it is good to see that lending standards are likely (eventually) to improve at the FHA.

http://seekingalpha.com/article/216059-federal-housing-administration-we-are-officially-broke?source=dashboard_macro-view

Another impact of this tightening, if it happens, is that one of the few sources of lending to folks with low credit scores is gone. As I note above, overall that is a good thing, but in terms of home sales, it is not helping things. Whether you like it or not, housing is going to take a while to revert to mean and ending loans to folks who cannot afford them is a good step in getting us there more quickly, though there will be short-to-medium term pain.

Don't get me wrong - I am all in favor of people having a home if they can afford one. But I am also all in favor of renting if you cannot afford to buy. I have spent a lot more years of my adult life renting than owning. There is absolutely nothing wrong with renting and it has many advantages; just ask someone who just lost 25-50% of their home value in the past few years. What the government needs to do is simply let common sense rule. Do not lend to folks who cannot afford what they are buying. It seems the FHA is finally understanding this is what needs to be done and that it is for the ultimate good. And I know this may be hard to buy, but ultimately it is better for the construction industry too. The industry built up furiously in what can best be described as a feeding frenzy in various markets - also known as a bubble. Bubble's can be fun while they last but my take is that we are better off without them. The sooner the industry and everyone else involved get used to a normalized level of sales, the better.

That's all I have today as I am on vacation. Okay, I lied as I do have one more little tidbit - seven more banks bit the dust today, bringing us to 103 this year. Chew on that . . .

Disclosures: None.

"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.