Archive for October, 2012

News You May Have Missed

Friday, October 26th, 2012

With the election season in full swing, dominating the airwaves, Internet and print media, you may have missed some of the other news from the past week.  Here are a few lowlights:

What Recession?  We recently reported that the unemployment rate miraculously improved to under 8% just before the election.  Now, according to a preliminary report, annual growth in gross domestic product (GDP) is miraculously above 2%.

An unemployment rate under 8% is none too impressive and neither is a growth rate of just above 2%, but we live in times of low expectations – and these benchmarks, if achieved honestly, would indicate that the economy is moving in the right direction.

But have they been achieved honestly?  And are they accurate?

According to, over one third, or 0.71% of the growth was contributed by an increase in “Government Consumption:’

“This was the biggest rise in government spending in 3 years, and only the first contribution by Uncle Sam to its own GDP print since Q2 2010. So in much the same way as the September jobs print soared courtesy of government employee hiring, this same government is now juicing its own numbers to make itself look better.”

Recall that Q2 GDP was revised down from 1.7% to 1.25%.  Revisions to Q3 GDP will be released after the election.

As for the unemployment rate, none other than former GE CEO Jack Welch questioned the employment numbers in a Wall Street Journal op-ed.  Even if you accept the numbers from the U.S. Bureau of Labor Statistics, gains were in “involuntary part-time” help – meaning people who were looking for full-time work are now flipping burgers to make ends meet.

Because the unemployment rate excludes those who have stopped looking for work and includes those who are underemployed in part-time jobs, others put the real unemployment rate at 14.7%.  An analysis by The Wall Street Journal, which factors in historical shifts in the labor market, puts the rate at 9.3%.

Whatever analysis you accept, many Americans are still out of work and economic growth is well below what it should be.

Muni Massacre.  Moody’s Investors Service cut its credit ratings on more than $200 billion worth of municipal bonds through the first nine months of 2012, exceeding the total for 2011 – and “there’s no end in sight.”

Moody’s cites increased risk because of the “difficult economic and industry environments.”  And we thought the economy was improving!

Stimulus spending.  If government spending does, indeed, stimulate the economy, we should now be growing at a record pace.  U.S. debt has reached $16.6 trillion, while total GDP is $15.76 trillion.  In other words, debt exceeds GDP by 2.4%.

Lower Profits, Home Building.  The stock market’s performance continues to be erratic at best, reflecting economic data that one day sounds hopeful and the next day sounds hopeless.

Profits have been generally disappointing, as previously reported, but at least the housing market has been rebounding, as we announced last week.  However, anyone who jumped into homebuilders’ stocks to take advantage of the improving market would have to be disappointed by this week’s performance, as the SPDR S&P Homebuilders ETF dropped 1.2% this week.

The ETF dropped because the National Association of Realtors (NAR) reported that the speed of growth in housing sales decreased last month.

NAR Chief Economist Lawrence Yun said, “Home contract activity remains at an elevated level in contrast with recent years, but currently appears to be bouncing around in a narrow range. This means only minor movement is likely in near-term existing-home sales, but with positive underlying market fundamentals they should continue on an uptrend in 2013.”

Sorry for being such an optimist last week!

Housing Showing Signs of Recovery

Friday, October 19th, 2012

We’re in a business where it’s good to worry; if we didn’t worry, we might take on too much risk, to the detriment of our clients.  But we recognize that not all of the economic news is bad these days.

So we note that housing prices are rising.  At the least, this provides symbolic relief, as it was the bursting of the housing bubble that led to the 2008 financial meltdown.  If housing prices just kept appreciating forever, all of those mortgage-backed securities would have deserved their high ratings and the meltdown could have been avoided.

Standard & Poor announced at the end of September that its Case-Shiller Home Prices Indices showed an annual gain of 1.2% in July, based on a 20-city composite.  Optimism about housing prices has continued into October, helping to boost the stock market this week – even as many companies reported sub-par earnings.

In a webinar on Thursday, the National Association of Home Builders (NAHB) noted that the housing market is gaining strength because of:

  • More home building, due to pent-up demand
  • Rising consumer confidence
  • Increasing builder confidence in all three segments of the industry — remodeling, multifamily and single-family construction
  • Growing rental demand

However, NAHB Chief Economist David Crowe also expressed caution.  He noted that home builders are finding it difficult to obtain production credit, many potential buyers are unable to obtain mortgage loans, many appraisals are inaccurate and there are still many homes either in foreclosure or with mortgages that are at least 90 days delinquent.  There is also limited inventory in many markets.

So will the housing market achieve full recovery in time for next spring’s buying season?  I wouldn’t bet the house on it.  Continued improvement is likely, but full recovery is years away.

U.S. vs. China

Friday, October 19th, 2012

As China has emerged as a world power, it has increasingly been a case of Us (as in U.S.) vs. Them.  Not in military combat, fortunately, but in day-to-day trade battle and all-out currency competition.

So which country currently holds the edge?

Master of compared the two on many different levels – with some interesting results.  Overall, the U.S. retains its top position as THE world superpower.  But China is closing in.

Some of the figures used are outdated, but consider just a few of the comparisons given:

GDP.  The U.S. gross domestic product (GDP) is nearly twice as large as China’s — $15.29 trillion vs. $7.298 trillion, but U.S. GDP is growing at 1.7% annually vs. 9.28%.

Government spending.  U.S.  government expenditures are a whopping $3.599 trillion for a population of 313 million, while China’s government expenditures are $1.729 trillion for a population of 1.343 billion.  The deficit in the U.S. is 8.6% of GDP compared with 1.1% in China.

Poverty and employment.  The U.S., with a labor force of 153 million, has an unemployment rate of 9% and a poverty level of 15.1%.  China, with a labor force of 795 million, has an unemployment rate of 6.5% and a poverty level of 13.4% (of course, it’s all relative).

Freedom.  For economic freedom, the U.S. ranks 4th, while China ranges 118th.  However, the U.S. ranks first for incarceration, with 730 of every 100,000 people in jail, while Chine ranks 124th with 121 of every 100,000 people in jail.

The results, which we found on, are interesting, but we are very happy to be living in the United States instead of China.

The End of the Road

Friday, October 12th, 2012

The problem with kicking the can down the road is that sooner or later, the road ends.

Evidence of this can be found in recent stock market performance.  Quantitative easing created a mirage, boosting demand for stocks and sending the market soaring close to its highest level ever.

However, the QE boost can’t last forever.  Sooner or later, market fundamentals have to take over.

Unfortunately, the fundamentals aren’t looking too good.  Claims of an improving economy appear to be overblown, as corporate profits are underachieving.  According to Bloomberg, for every public company that expects earnings to exceed expectations for the most recent quarter, 4.3 companies say profits will be below expectations.

That’s the highest degree of pessimist about earnings since February 2009 and it matches the pessimism of October 2001 (just after 9/11).

Major corporations, such as FedEx Corp. (FDX) and Intel have lowered their profit expectations.  FedEx, which is considered to provide a barometer for the economy as a whole, lowered its profit outlook because a weakening economy is prompting customers to switch to a lower cost means of delivery.

The first quarter for FedEx ended Aug. 31, 2012 and on Sept. 18 the company reported earnings of $1.45 per diluted share, compared with $1.46 a year ago.

Intel, which reports earnings on Tuesday, is seeing a drop because of a slowdown in sales of personal computers.  Intel is the world’s larger manufacturer of computer chips for PCs.

Bloomberg reported, “Warnings that estimates are too high by companies from Intel Corp. to Caterpillar (CAT) Inc. came even after analysts lowered predictions for third-quarter income growth by 11 percentage points this year.”

Intel’s pessimism reflects an overall drop in technology stocks and cyclicals as a group.

Apple has led the technology sell off, with its stock breaking its 50 day moving average and approaching its 100 day moving average.

The cyclical sectors benefited most from quantitative easing and led the market higher.  Now they appear to be leading the market lower.

It’s too bad that QE3 provides open-ended easing and will be ongoing for as long as The Fed sees fit.  Otherwise, Chairman Ben Bernanke could hint at QE4 and give the market another boost.  It seems that the anticipation of easing is more important to the market than actual easing.

Unemployment Drops … Just In Time for the Election!

Friday, October 5th, 2012

The unemployment rate has finally dropped below 8% to 7.8%!  Or has it?  Really?

The latest numbers are a head scratcher.  The Bureau of Labor Statistics (that’s BLS, not BS) reported that only 114,000 non-farm payroll jobs were added in September.  That’s well below the 206,000 increase in the working age population.

As we’ve previously reported, the overall unemployment rate has been dropping not because new jobs are being created, but because many people have stopped looking for work or are underemployed in part-time jobs.

Yet the BLS reported that 418,000 people were added to the labor force in September.  So how can the unemployment rate fall when the number of people added to the labor force is nearly four times the number of new jobs created?

Have hundreds of thousands of people suddenly become farmers, in which case they wouldn’t be included in the stat?  That’s not it.

The BLS explains that, “The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) rose from 8.0 million in August to 8.6 million in September.  These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.”

In BLS-speak, people who are underemployed – i.e., all of those new involuntary part-timers — are counted as being fully employed and those who have given up looking are not counted as being unemployed.

Still, a sudden jump of 600,000 part-time jobs in a month is hard to believe, as it is inconsistent with previous months.

Is progress finally being made on the employment front?  Or is it just convenient to the Presidential election that the unemployment rate has finally fallen below 8%?

As one analysis put it, “how do you have a 600k jump in part-time employment in just one month before the beginning of retail season with nobody realizing it until the BLS published today’s report?”

Even if the unemployment rate has indeed dropped to 7.8%, as the BLS reports, keep in mind that the drop is to the commonly reported U3 rate.  The broader U6 rate, which includes those who had stopped looking for work is at 14.7%.