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By DoctoRx January 30th, 2013 The BEA is out with its Q4 first estimate of GDP (LINK). I look forward to a detailed analysis from Dr. Rick Davis when he has had time to prepare one.
Here are some brief comments. First, the BEA’s introductory summary:
Real gross domestic product — the output of goods and services produced by labor and property
located in the United States — decreased at an annual rate of 0.1 percent in the fourth quarter of 2012
(that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the
Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.
Consistent with the much-maligned view of ECRI, this estimate had a negative sign attached to it of 0.1%. Minimal, but negative.
This is below consensus. One of the positives, personal income, had some one-time factors boosting it due to fiscal cliff issues:
Current-dollar personal income increased $256.2 billion (7.9 percent) in the fourth quarter,
compared with an increase of $72.7 billion (2.2 percent) in the third. The acceleration in personal
income primarily reflected a sharp acceleration in personal dividend income, an upturn in personal
interest income, and an acceleration in wage and salary disbursements. The sharp acceleration in
personal dividend income reflected accelerated and special dividends that were paid by many companies
in the fourth quarter in anticipation of changes in individual income tax rates. The upturn in personal
interest income primarily reflected an upturn in interest rates for Treasury Inflation Protected Securities.
The acceleration in wages and salaries reflected the pattern of monthly Bureau of Labor Statistics
employment, hours, and earnings data for the fourth quarter, as well as a judgmental estimate of
accelerated compensation in the form of bonus payments and other irregular pay in the fourth quarter.
Consistent with the prior post about Boeing, the stock market has shrugged this one off.
Little matters anymore, it appears, except Fed action. Thus, the worse the data, the longer the Fed will print, so stock prices can never drop: a perfect equilibrium, n’est ce pas?
As Japanese investors have found out, that paradigm works until it does not.
We now have a certifiably dangerous stock market: arguably over-valued but subject to rising competition from bonds and real estate.
By DoctoRx January 30th, 2013 Boeing is out with Q4 earnings this AM. It offered guidance for earnings for 2013, assuming the problems with the 787 Dreamliner are resolved in a reasonable time frame. Projected revenues for 2013 are $83.5 B, well below published analysts’ estimates of $87.9 B (note typo in LINK). Projected earnings of $5.10 are below consensus of $5.16. (I am giving the midpoint of Boeing’s ranges for its guidance.) Boeing did “beat” on earnings for Q4, though sales were in line. No pro cares about “beats” anymore, because almost every major company “beats”. After all, the company earning $1.83 in Q4 of 2011, so it’s a long way down yoy.
Yet even though revelations that are not positive for Boeing about its next-generation 787 are coming out frequently (LINK to the latest from Reuters), thus increasing both “headline” and financial risk to the company, the stock just holds in there.
This is today’s market.
In what I view as an historically normal market, reasonable downward price adjustment would usually have occurred based on the Dreamliner fiasco and today’s downbeat sales forecast, which (I repeat) includes projected sales of numerous 787′s. Yet BA just keeps hanging in there.
Boeing was a hot IPO in the late 1920s. Given its cyclicality, operational and headline risk, underfunded pension plan, lack of share shrinkage via buybacks, and that it likely is not a takeover candidate, I’d expect it would be more fairly valued at a 4% dividend yield rather than today’s 2.60%.
That the stock keeps on hanging in there raises the question of whether Mr. Market has swung from depression in 2009 (when he marked stock prices down due to a minor flu epidemic) into a manic phase.
By DoctoRx January 29th, 2013 Mr Soros , interviewed on CNBC (LINK):
Soros said that the U.S. needs to reestablish growth to help shrink its debt pile and that the Federal Reserve‘s policy of buying U.S. debt, is the right one since it doesn’t add to the net amount of debt outstanding. “It’s about as close to a free lunch as you can get,” he said.
Nonsense; there is no free lunch, or close to a free lunch, in finance. If the Fed were not buying bonds, then bond prices would be lower, interest rates would be higher, and would have been that way for some time. Thus the government would not have been able to afford its cumulative debt load and would have had to have either raised tax revenues or cut spending.
By DoctoRx January 29th, 2013 With the interest rates the U.S. Treasury having to pay rising almost daily now, despite the Fed’s renewed Treasury bond-buying program, the expectations the government has had for its interest expense are looking low now. We shall just have to see whether tax receipts are rising by at least the same amount as interest costs are. If they are not keeping pace, then the government may need to cut the amount of new debt it has to sell fairly rapidly. Otherwise, the “roll” of existing debt can do to the U.S. what is widely discussed as perhaps happening to Japan sooner rather than later. If so, the Fed would be so underwater on its aggregate holdings (i.e. technically insolvent) that there would be an uh-oh set of moments in Washington. If that came to pass, presumably actions would be taken as they were taken in 1979 and at other times.
The preferred outcome for TPTB, though, would be for rates to suddenly plunge, just as only months after threats of hyperinflation abounded in 2011 (silver approaching $50 an ounce, etc.), rates collapsed concomitant with the faux crisis over the debt ceiling.
Economic data continue to be uninspiring, though there are so many cross-currents I don’t want to opine on that topic. More relevant in my ever-present fear of a bear market is the fact that the student debt crisis has begun to be featured in the MSM, per Overdue Student Loans Reach ‘Unsustainable’ 15%, Fair Isaac Says (LINK):
“This situation is simply unsustainable and we’re already suffering the consequences,” Andrew Jennings, chief analytics officer of Fair Issac, said in the statement. “When wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue taking out ever-larger student loans without greatly increasing the risk of default.”
… Continue reading Is the Bond Market Threatening the Deficit Spending Consensus, and Will It Reverse the Inflationary Asset Boom?
By DoctoRx January 27th, 2013 Is the U.S. headed the way of Zimbabwe, with endless central bank monetization of the central government’s debt?
In a non-firewalled op-ed for the Financial Times, World is right to worry about US debt, which is introduced by the Op-ed editors with the sentence “America must face up to its responsibilities, writes Kenneth Rogoff”, we get some plain talk from the co-author of “This Time Is Different: Eight Centuries of Financial Folly”. That book, which was begun long before Lehman Brothers collapsed and thus was unexpectedly timely when published early in 2009, was a study of major financial collapses throughout much of modern and semi-modern times. Herewith, some excerpts:
Many foreign observers look at the US budget shenanigans with confusion and dismay, wondering how a country that seems to have it all can manage its fiscal affairs so chaotically. The root problem is not just a hugely elevated level of public debt, or a patently unsustainable trajectory for old age entitlements…
America must shortly answer a series of fundamental questions…
… if the US were ever forced to surrender the mantle of world policeman to, say, China, foreigners may no longer have quite the same desire for its debt.
Productivity improvements in government services have been glacial compared with many other sectors of the economy. A visit to a primary school classroom in many US cities is the closest thing one can get to time travel…
…there is a wide chasm between those who see union domination of infrastructure as key to ensuring high-paying jobs versus those who want infrastructure built, but at reasonable rates. There is the joke about the visiting Chinese group that asks their New York tour guide how long it will take to finish the Second Avenue subway. On being told two years, the Chinese translator hesitates before conveying the response and asks: “Wait a second, you mean two weeks, right?
Perhaps my favorite:
The idea that one should just ignore all these problems and apply crude Keynesian stimulus is a dangerous one. It matters a great deal how the government taxes and spends, not just how much.
“Crude Keynesian stimulus”? Take that, Dr. Krugman!
… Continue reading Ken Rogoff Attacks ‘Crude Keynesian Stimulus”
By DoctoRx January 26th, 2013 Things have come to a pretty pass. The romances are going flat…
Let’s start with munis. It’s pretty simple. Two Septembers ago, I wrote a post titled Gold on Hold; The New Play May Be in Munis. This was done in the context of recession worries, and was in the context of a well-documented and major shift I had made and wrote about in the spring and early summer from risk-on assets to the twin risk-off assets of gold and Treasurys. Munis yielded more than Treasurys and since that date, a muni bond fund such as NIO has done great, even compared to stocks; and, much more cash has actually been put in investors’ pockets rather than simply a high trading price that stocks have. Trading prices, as we have learned, can change rapidly and drastically against one with no warning.
Over the past 12 months, munis have finally normalized against T-bonds, and then some. The results are astonishing. Per Bloomberg data, the 30-year muni bond (a rare bird, and rarely non-callable, so I don’t know what index they are using or what credit quality their reference bonds have) has fallen a massive 71 basis points to a yield of 2.84%. The 30-year T-bond has only dropped 2 basis points to 3.13%. This puts the muni yield back to its historical relationship to Treasurys. A long-term muni buyer at that yield has all sorts of issues involving credit, liquidity, interest rate risk and tax risks. The 10-year muni has dropped 24 bps to 1.68% while the 10-year T-note has dropped 5 bps to 1.95%. The tax-exempt bond fund MUB has a yield to maturity of about 1.55% after expenses for a duration of 6 years, and while I haven’t contacted the iShares people, yield to maturity for bonds trading above par should be a good deal higher than the yield to call.
Seeing this, I actually was able to sell some zero-coupon long-term muni bonds (retail pricing) yesterday for the first time not to raise cash but to simply lower my exposure. It is nice to receive a decent income from a bond and then sell it for a long-term capital gain.
Right now, many bond investors may want to reconsider the advantages of Treasurys over munis, which look fully priced and then some.
Similarly, the Russell 2000 is close to leaving earth orbit and heading into outer space in its valuation. The iShares tracking ETF for this index, IWM (LINK) has a bubble-era P/E and only a slightly less bubbly price to book. The listed trailing P/E is 25.4, but this understates it an unknown amount. First, the iShares people ignore losses, which are common in this part of the market. They do not measure aggregate profits of their 2000 companies (if they track all 2000 members of the R2K) and then measure the P/E. Instead, they fudge and make the aggregate P/E lower by simply only measuring the P/E of the profitable companies. Second, they round all P/E’s above 60 down to 60. (And there are several of them, to be sure.)
The Russell 2000 now has a much higher P/E even than established growth companies such as GOOG and AAPL.
We now have a first in my experience. The traditional default safe haven for middle-to-upper middle class wage earners and for the wealthy, muni bonds, are risky in various ways. So is the equivalent of the NASDAQ of 15 years ago, the Russell 2000.
It is a new ballgame both for value and for income investors.
(To be continued.)
By DoctoRx January 25th, 2013 I was so busy yesterday, I didn’t get a chance to report that having put funds into the long Japanese yen trade just two days earlier with FXY, I closed the trade out with the tiniest of profits when the U.S. stock market continued to look unstoppable for the nonce, and the correlation between U.S. stocks and a weak yen made the trade pointless. Instead, I went with the themes I’d been talking about that have, per Grantham and GMO, the greatest prospective returns for the rest of this decade. This would include emerging and small country stocks via ETFs, and “high quality” U.S. stocks, defined as I wish. In this case, these would be shares of companies that have languished for a while, perhaps years, but just reported strong quarters and have sound propositions both for growth and value.
The U.S. economy is difficult to read now. First, January has generally been warm. However, all four regional Fed manufacturing surveys have been negative, which “should” predict a below-50 result for various PMIs. Yet the MarkIt U.S. PMI yesterday was up-trending, around 56, and new orders were a bit stronger than that. Note please that these are diffusion surveys, and 56 is not boom-times.
Surveys of consumers are also mixed. ChangeWave Research yesterday reported a great lessening of pessimism about the economy. Bloomberg Consumer Comfort, however, was also out yesterday. This survey averages the results of the past four weeks. Their results have moved down lately; my guess is that the latest week’s results were around the recession level of 40. Consumer Metrics continues to show doldrums-like economic activity, based on their monitoring on online buying activity. Further confusing matters was the improvement in unemployment claims, but there were doubts about the relevance of that for two reasons. One is that California and some other states had not reported; the other is that the not-seasonally adjusted data were actually worse than they were in the corresponding weak the prior year.
In any case, corporate earnings growth so far this earnings season has been nil except for the financials (which have been my favorite sector for some time now that AAPL is a tiny part of the portfolio).
This roaring stock market action in the U.S. is a classic response to easy money and fiscal looseness. The markets are discounting the inflation that is coming as Congress and the President get together to extend the deficit spending even more.
If the market is at all predictive, gold and silver have a good chance of joining the party, with silver outperforming if the global economy in fact expands faster than expected.
By DoctoRx January 22nd, 2013 The bulls are running as fast on the Street as they have ever run in Pamplona. Nowadays, bad news has always been priced in but good news, even hints of good news, has not. Thus it’s the opposite of early 2009. As I think I noted almost four years ago in my blog, a sign that at least an intermediate bottom was in or about to be in that winter came when fears about the ongoing flu season were enough to send stock prices sharply lower (there was a new strain of flu going around but it was already clear that it was no big deal whatsoever). I recall that this marked almost the exact bottom in stock prices. The last weak hand folded and the brave ones bought or just held on.
Of course, given inflation and economic growth, even in a bubble-prone economy, it is much more difficult to call stock market tops than bottoms. This post is not a top-calling post.
Internationally, ongoing negative news about (for example) Britain’s economy appears not to affect the bull market in the FTSE, which tends to be unchanged on days with bad news and up on days with either some good news or no news at all.
Britain’s possible third recession in five years in fact appears to be gathering force (LINK):
British factory orders fell unexpectedly in January as export orders fell to the weakest level since December 2011, according to the Confederation of British Industry (CBI).
The CBI survey of 389 manufacturers showed that the total order book balance dropped to -20 this month from -12 in December, confounding expectations of a reading of -11.
This was driven by a sharp drop in export orders, as this balance slumped to a 13-month low of -29 in January from -11 in December.
However, despite the drop in orders, the balance of manufacturers expecting to increase their output over the next three months climbed to +8 in January from 0 in December and -9 in November, with +14 expecting total orders to rise over the next three months.
Manufacturers also expect to increase their headcount over the next three months (+13), as well as investment into the sector.
It appears that as with numerous regional Fed surveys of manufacturers here in the U.S., Britain also is suffused with hopium that magically tomorrow will be better, perhaps much better, than today.
… Continue reading Wall Street Relocates To Pamplona
By DoctoRx January 18th, 2013 An article summary from the U.K.’s Telegraph appeared today that read (LINK):
Money printing has “limited influence” on growth and more radical measures are needed to stimulate the economy, the newest member of the Bank of England’s rate-setting committee has warned.
The title of the article, at least on the front page of the Financial section of the online paper, is similar: ”More targeted measures than QE needed to drive growth”.
I do not want to actually read the article, and besides, I have exhausted my 20 free “reads” per month.
These BofE worthies have read about laissez-faire. They think it’s quaint. They don’t think much of it, though, or so it would appear. They may not care about the thoughts of John Stuart Mill (who was not a pure libertarian by any means; LINK):
… Continue reading DocComment: If At First You Don’t Succeed, Mess With It Some More?
By DoctoRx January 18th, 2013 GMO has now made its famous 7-year asset return forecasts visible on its website; previously they would email them freely to registered recipients. They, primarily Jeremy Grantham, the co-founder, actually have quite a good record, though past performance may not correlate with future performance. LINK.
While there is no way for yours truly to have any idea how they came up with these forecasts, they are decided completely on fundamentals, not technicals. They do make sense to me, though the one uncertain listing involves “U.S. High Quality”. What does that mean? Perhaps more importantly, such a high return from that category turns the efficient market hypothesis totally on its head. How is it possible that the most picked-over stock market in the history of the world could have such undervaluation in the best-known companies versus all the rest of the stocks out there?
… Continue reading Jeremy Grantham Finds U.S. Stocks and Bonds Equally Unattractive, Likes International; One More Move Down Left for Rates?
By DoctoRx January 17th, 2013 Nothing really has gone wrong with the fundamental gold story since it reached its current price in the summer of 2011. This period was, as we remember, one of feigned panic amongst the media that the United States would actually default on its Treasury obligations. The more fundamental story was that a few domestic and international rating agencies had taken one of the ‘A’s from the U.S.’s credit rating. In any case, gold had been rising fairly steadily and kept on doing so, accelerating to slightly about $1900/ounce a few weeks after those news items hit. Then the Fed fooled the markets and did not institute a formal QE 3. Instead, it opted for Operation Twist. Very shortly after gold peaked, when bullish sentiment was so rampant that JPM’s analyst was predicting $2500/ounce by yearend, I wrote a post titled Gold on Hold; The New Play May Be in Munis.
In fact, that title was more prescient than it had a “right” to be. On Friday September 23, GLD closed at $159.80. That is roughly its current price, and is approximately its average price since then. Meanwhile, even though the muni bond market had already experience a strong uptrend, the plain vanilla muni bond ETF “MUB” has returned about 6% in total tax-free dividends, and its price has also risen about 5%. (The more aggressive muni funds that use leverage have done much better than that.)
This trend has now gone too far, in my view. … Continue reading Gold Getting That Old Shiny Look Again
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