Where are we?

Posted by Ray on May 12, 2011 under Main | Be the First to Comment

It has been almost 3 years since the collapse of the banking sector and the governments of the world have spent trillions to not only save the banks, but to stimulate the economy as well. We have been told for the better part of 2 years that we are recovering, and we are to a certain extent, but the headlines remain exactly the same over the last few years. They say something similar to: the recovery is on the way, is the recovery in jeopardy, the recovery is in full swing and so forth. Well, we are either recovering or we are not and it is difficult to believe the news when the headlines and underlying story remains the same, a weak recovery.

I view the economic data as severely mixed 3 years into this thing that we are in. Some data is good, but it is largely inconsistent with one month being great and the next being so-so. What has remained constant is the employment situation which is a leading indicator for this recovery. The labor markets stink, to be blunt, and we have only a few good reports to talk about. Unfortunately even those good reports are not enough and do not even keep up with the population growth. We need some 350K jobs created every month to see a real impact on the employment situation. It is clear that we are far away from a number above 300K in the employment report given that we are still seeing initial claims coming in above 400K a week, a few sub-400K claims reports are not encouraging given we are 3 years along and in a “recovery” mode in the economy.

I fear that many companies have learned that you can grow a business with less people. This is apparent with many firms having stellar earnings along with sky high profit margins. If a company can make more or the same with less overhead they know that there is no point in hiring extra bodies until they absolutely have too. That is not good news for the employment situation by anyone’s model and it is unlikely to improve anytime soon.

On top of the unemployment headwind we are now back to $4 a gallon gas. Very few people realize the impact of high gas prices on the cost of living until they go shopping. We are still very much in an oil driven economy and as the cost of oil rises so do the prices on everything from toothpaste to ice cream since some products are made out of oil and all products are shipped by burning oil. This is not news, but it is important to emphasis the importance of energy in our economy since higher prices lead to lower consumption and creates a negative feed loop on everything from jobs to retail sales. Obviously other commodities also play a role and all commodity prices are very high which does not help anything.

So, where are we? I think stagflation is the word we should use. We have a stagnant economy with jobs but rising commodity prices, which is also considered inflation. We are 3 years into this thing and we have been getting beaten over the head with the term “recovery” so much that I believe we have forgotten what a recovery really looks like. I can assure you that this recovery is not normal and for many Americans there is no recovery at all. I remain convinced that we have largely been through a statistical recovery and there has been little improvement in the real, American, economy. Overseas or emerging market economies are booming and largely responsible for US company’s great earnings, but since most of our manufacturing was outsourced this boom is leaving many Americans out in the cold. This also explains why our manufacturing economy, 12% of our GDP, has been doing so well, growth is coming from abroad, not from inside the US economy.

I realize this may not be news for many people but it might be as the permabulls need to understand what is going on. Yes, there is a recovery, but not for most Americans. More importantly this bull market we have is not real. Sure, stocks have done extremely well, but this growth is coming from everywhere else but the US and all the growth is driven by very cheap money. Once external growth slows or the cheap money comes to an end there will be a price to pay when it ends. The question to ask is when will it all end? I do not know, no one knows, but my guess is the tightening in China is a clue that we are much closer to the end than the middle. In fact, even in the US the cheap money may stop in June, unlikely, but possible as QE2 ends.

I had turned bullish a few months ago and stated that once the liquidity from the Fed ends we will have to pay the piper in the form of a correction. I believe that statement to still be true, but I do not believe the Fed will stop its QE programs for very long. Nothing is normal in our economy when we have had the US government spend trillions and the Fed expanded its balance sheet the way it did plus do 2 rounds of QE… that is not normal. But this abnormal behavior saved stocks so keep the bet going until June, but I believe when the VIX is under 18 one should be a buyer and at 15 everyone needs to own the VIX in some way. Since everything remains abnormal be cautious, buy protection through the VIX, buy commodities on the dips and look for dividend yield in stocks.

Well, it has taken some time

Posted by Ray on August 24, 2010 under Economy, Main, Markets | Be the First to Comment

I have been writing about the decaying economic data for some time now and have taken some heat for being a pessimist or a permabear, but now it appears that I was correct. It is also striking that almost a year ago I called this current economic funk we are in a Depression. I said one of the reasons why we do not recognize a modern Depression is because there is no need for soup lines and the like. In today’s world everything is automated with food stamps, 40M Americans are currently on food stamps a huge YoY increase, we have unemployment benefits (99 weeks currently), the HAMP (loan modifications), energy assistance, public housing and a slew of other safety nets available to those in absolute need.

Since we have all of those programs our growing economic troubles can remain out of sight and mind. We can be told things are improving because the data says it is. Never mind the fact that unemployment is “only” at 9.5% because people are so discouraged that they left the workforce. To me the most telling sign is the food stamp data which is just unbelievably high with almost 12% of Americans in need of public assistance just to feed themselves, think about that for a minute. That kind of takes the wind out of my sails about being right about the current economic climate. I never wanted to be right, but the data was never strong nor did it point to a sustainable recovery, which was merely a statistical recovery to begin with.

I have been silent for a few weeks because I have not felt so hot and I was letting the data set in. I think it is clear now that the recovery was not really a recovery and when the stimulus stops we are in deep trouble. As Rosenberg said, when businesses are dependent upon government spending for growth we got serious problems, I am paraphrasing the statement, but it is close enough. He was right all along and the permabulls have a rude awakening coming their way in the near future. Whether it is the Hindenburg Omen or just a slew of bad data, which will get worse, stocks are way overpriced, period. We will or the market will correct this error for us by forcing a multiple compression and it will either happen all at once or over a period of days, but it is coming.

My last call was to look into leveraged ETF’s for long dated treasuries, UBT or TMF, and gold, GLD or physical. This trade was profitable, UBT, which I own, was about $86 and it is now $102.43 and GLD was about $116, it is currently $120. Those were good trades that required guts in the face of deflationary forces and the fact that you were looking at a leveraged ETF, which are very dangerous, but they worked. I suspect that it will continue to work, but I would not, besides gold, buy the pair trade here. The Fed told us what they were going to do, monetize some debt on the longer end of the curve, and I suspect they will continue in the near future, we might now Friday for sure, but if they do more QE look for a $1-2T figure.

Ben Bernanke wants to flatten the yield curve to force lending by banks, but it will not work. It is a good theory for Ben, but the reality is banks do not want to lend and consumers do not want to borrow. QE will also not do anything to boost money velocity and I am not sure why anyone would possibly think it would. Banks will merely do what they did before the credit crisis and take on more risk so they can play a different yield curve other than treasuries. As we know, that did not work the last time so why anyone would think it will work now is beyond me, but I am sure that banks will take more risk to boost profits. After all, they are too big to fail.

The outlook for the markets is not good as Ireland just got downgraded and I think we will see some weak data at 8:30 tomorrow as well. Unemployment claims, a leading indicator according to, well, me and PIMCO, are rising and another week +500K will be devastating. Also, the employment report survey was out the very week we saw that 500K print, not good news for the unemployment figure out a week from this Friday. The Philly Fed, Richmond Fed and the Empire Report’s were not very good and I think we will see close to 50 on the ISM survey out next week, perhaps lower than 50 so be ready. All the data is pointing to very, very weak near-term economic pain ahead, there is little doubt about that.

I realize that balance sheets are rich with cash right now, but that means nothing as companies are merely hoarding cash at this point. It is, the cash on hand, good for corporate bonds though, which I still love. The outlook from CEO’s is also becoming more mixed, John Chambers from Cisco was not optimistic, this should scare you because this guy is always optimistic. Basically, much like in 2000, CEO’s merely did not foresee a slowdown in the immediate future, which is very surprising and takes down the credibility of many corporate leaders, in my opinion.

Because of all of this I am more bearish now than I have ever been in the past. I am positioned for a correction and pulled most longs off the table. I am in longer duration treasuries along with my UBT play, long gold, silver, corporate bonds (no high yield to speak of), some international holdings (frontier markets), a few biotechs, and inverse ETF’s. My long holdings are all dividend paying stocks with very low P/E’s and strong balance sheets. Blind belief that the market is going to head higher is insane and, frankly, we have just seen an insane rise in equity prices to begin with. That time is now over and the bears will come back to take control. I find it difficult to believe no one saw this coming, I have written about it and many others as well. The data never lies, ever, but the people reading the data usually have a reason to spin it in their favor.

I was wrong on the employment report, but right

Posted by Ray on July 5, 2010 under Economy, Markets | Be the First to Comment

I was wrong on the numbers on the employment report, kind of, take out the temporary hires and birth/death adjustments and I was very much right. Contrary to popular belief, the birth/death adjustments do matter as those adjustments are responsible for underestimating unemployment by 880,000 people last year and, in my opinion, that rate is probably way underestimated at that. Even Dave Rosenberg lambasted the birth/death adjustment as “fantasy” which means I am not alone in my thinking. Regardless, that employment report was clearly not priced into the market and was very bad news.

We had wages drop and the work week shrink which is very deflationary to say the least. I also believe that the full impact of the Gulf oil leak has not made the rolls either yet which means more bad news ahead. There is also the ban on offshore drilling making its way through the court system which could have some profound implications in the Gulf region adding thousands to the if not temporary unemployed at least the medium term unemployed area of the report. The icing on the cake was the initial claims report of Thursday which came in much higher than anticipated at 472,000 which is not good at all.

Mix that in with the ECRI slipping further and I am comfortable with the double dip scenario, if we were ever really out of the recession to begin with. I am hard pressed to believe any of this is priced into the market even after this massive slide we have seen in equity prices. From my point of view the equity markets had some 4% GDP priced in and flawless earnings with endless positive guidance. So far we have seen some firms pre-warn about a slowdown in the economy and their earnings. This means some of this is priced into equities, but not a 1% GDP print or a negative print which is possible at this rate. Housing is telling us that we have serious problems and the slide in all the housing data means that a full fifth of the economy is in negative territory. We also see that hiring in the manufacturing area, which was giving economists a sense of comfort, is slowing down dramatically. Can we all say this together please, inventory rebuild, but that is now over.

There is simply no end demand for products at this point which is not good. I had called this a depression last fall and received tremendous heat for using that term, but make no mistake about it, this is a depression. Unemployment is telling us that it is a depression and we are, as history seems to be repeating itself, looking at acts that mimic what we did pre-1929 crash, Smoot-Hawley, now called Schumer-Graham for the currency manipulator tariff act. None of this is priced into the equity markets which mean we will have much to worry about on the downside. Be sure, there will be sharp rallies, but you should not buy the dips on this one. I sold everything except for biotech, high yielding stocks with strong balance sheets, high grade bonds, treasuries and I own a tiny position in high yield bonds, I sold 80% at the end of 1Q after the stellar performance. I hold large short positions, which is relatively unchanged from the end of 1Q except I rolled put options out until September and began building a position in some leveraged and unleveraged short ETF’s, TZA, SH, SDS, BGZ to name a few, some I will hold and some I trade.

I expect a rally up to the 104-105 area in the SPY which should prove to be a nice entry point into a short position, if you are aggressive and believe growth will be weak as I do. However, I believe tomorrow we open lower since we could not hold $102.50 on Friday in the SPY, but we should reverse up since everyone is so negative. Depending on what happens, everything always depends, I will more than likely cover my shorts tomorrow and play the long side for that rally and reenter my short positions at higher levels. Volatility is your friend, but we are dominated by certain carry trades, news events and other macro items that one needs to monitor so be careful and don’t just trust the charts, look at everything to make your decisions. My target for the S&P is still at least 900, but it can go as low as 860 and retest the March 2009 lows without any problem whatsoever. I am not even sure quantitative easing can fix this problem since treasury yields are heading lower already. We are in a very bad position and there are no more bullets left from the government. This could get very, very bad.

The employment report will be bad, worse than you think

Posted by Ray on July 1, 2010 under Economy, Markets | Be the First to Comment

Everyone is expecting a bad employment report, especially after the ADP report on Wednesday and the initial claims data this morning, but I think it will be worse than most people believe. Estimates are for modest private payroll growth, meaning poor of course, but given the weak data that came in waves this month it is bound to be less robust than we think. I am one of the few who believe there is a very strong possibility of private payroll losses tomorrow, not merely a weak report, but a disastrous report.  I am not referring to the census workers being laid off either.

I expect huge losses in construction jobs which will offset any manufacturing gains we have. The housing, initial claims and extended jobless benefit data points are what lead me to believe that we will see a train wreck tomorrow. It is clear that the economic indicators are rolling over, from the ISM to the ECRI all the way to housing, which should not shock anyone. What most people fail to realize, but not economists, is that housing represents some 20% of GDP and the data we saw is telling us that the construction industry must have been shedding jobs, in the residential market, like crazy. This is also why the home buyer tax credit is going to get extended as well, of, and it is also an election year.

Overall, I do not believe a bad employment report is priced into the market and that is certainly not good news for the bulls. I am also curious to see what the birth/death model adjustment is going to add to the mix, while many in bobble head says the B/D adjustment is not a big deal, well, they are wrong. As I have said many times, the B/D model underestimated unemployment by 880,000 jobs last year, that is a big deal so these adjustments do matter, sorry Mr. Liesman. I also believe we will see wages stagnate with the work week getting slightly longer, why hire more people when you can have existing employees work more hours? It is unclear whether or not the unemployment rate will increase, I suspect it will, because the unemployment benefits were not extended by the Senate leaving 1.7M unemployed without a check. In other words, 1.7M people might have all of a sudden decided to look for a job, any job, which will increase the unemployment rate. The rest of the report will reflect what we know, it will merely confirm it for us.

The $60,000 question is whether a really bad employment report is priced into the market or not. I am inclined to believe that nothing is really ever priced in especially if the report is worse than expected. The market is due for a bounce and I actually thought we would get it today, it looked like we were at some points throughout the afternoon, but it did not happen. The market is definitely oversold, but markets can remain oversold or overbought for long periods of time, heck we were overbought for how long and no one complained. The market is in bad shape from a technical perspective and there are enormous headwinds in front of us from a weakening economy to the troubles in Europe. The one thing I am confident about is my 900 price target for the S&P is intact and we are well on the way to that level or lower. One hedge fund manager I spoke to has a Dow target of 3,800 and thinks we will reach new lows on the S&P 500 so next to him I am a raging bull.

If the report is bad it is possible we will trade higher to retest that 1040 – 1048 level which would be an ideal level to consider looking at short positions, depending on conditions at that point and your investment objectives, there are never any sure things. The other unknown about tomorrow is the 3 day weekend that is in front of us. I am fairly confident few will want to be short into the long weekend, but I am equally as confident that few will want to be long either. Many traders may not be around which could mean a low volume indecisive day altogether. However, if I am right and it the report is a negative number I am fairly confident we trade lower, but this market is full of surprises, both up and down.

There is one item that makes me a bit more bearish than usual and that is the way AAPL has been trading. I realize it has been plagued with some rumors or truths, I do not own Apple products, happily, so I do not know what is true or not true, but it certainly has not been able to catch a break lately. This was supposed to be the ‘safe’ stock with $50 per share in cash and THE product to own and it has fallen sharply off of its highs. Everyone loves AAPL and everyone owns AAPL, I am using AAPL as most used GS at the beginning of the year, as the canary in the coal mine. What AAPL is saying is there is a gas leak as the stock has fallen 30 points from its all-time high and it cannot shake off bad news. The weakness in stocks like AAPL are telling me that investors are treading lightly in risk assets, not to mention that they were overvalued, oh the emails I will get for that comment.

The bottom line is that even if I am wrong and the employment report is ‘good’ with a +150K private employment print, unlikely in my opinion, it really isn’t good news, just less bad. With unemployment officially at about 10% and underemployment pushing 16% we have a real structural employment problem in America. It is so bad that Vice President Biden admitted that many of the 8M jobs lost will never come back, this is the same guy who said we would be swimming in hundreds of thousands of jobs every month ‘very soon’ a couple of months ago. This is deflationary and the fact that wages are basically stagnant is deflationary. The credit markets are telling us that deflation is the immediate risk at this point. Retail sales show that there is no end demand, running at a mere 1%, all of this mixed with high unemployment is if not actual deflation disinflation which is very bearish for stocks. We will continue to have a P/E multiple compressions because of this disinflationary force and earnings estimates will come down, a lot. In short, even if we have a good day tomorrow, unless we see some real inflation equity prices are heading lower.

Double Dip Surprise

Posted by Ray on June 27, 2010 under Main | Be the First to Comment

How anyone is really surprised by the possibility of a further decline in economic activity is puzzling to me. Perhaps it is all the distortions in the data that is coming from the government supporting the economy. Maybe it is because their vested interest is to have you invest in their funds. Perhaps they just drank the Kool-Aid. No matter what it is almost a certainty, in terms of forecasting, that the economy will either stagnant here or decline.

The main indicator that has been telling us there were problems for some time now is the initial claims data and the lack of private payroll growth. Sure, we saw a bump up in payrolls with the 5%+ GDP print, thanks to inventory restocking, but 1Q10 GDP shows signs of significant weakness. What has held true is initial claims, first they got better with the big GDP print, but now they are soft with the constant downward revisions to 1Q10 GDP. The ECRI data also points to weakness in the economy as well which correlates with initial claims data. From my lens, employment is not a lagging indicator, I have been pounding the table on this for a year now, it is a leading indicator in a post credit collapse scenario.

Friday’s employment report is now being telegraphed by Bloomberg to be weak, -110K is the forecast, especially since the Census hiring is done and they are now laying off workers. All of this is not surprising if you track initial claims and use it as a leading indicator. To put the monthly initial claims data into perspective 1,850,000 are filing claims for the first time and that means there needs to be about 2M jobs created every month to offset the ones just lost and we also have to contend with population growth as well. To be blunt, full employment is a figment of one’s imagination at this point for at least the next 5-8 years. Unemployment will be our greatest problem for a long, long time and there is little the government can do since end demand is the issue.

There is simply no way the Fed can raise rates for the foreseeable future either since one of their mandates is full employment. Yes, I know they said they would raise rates before employment recovered, but they won’t for political reasons. Obviously, that might change depending on what happens in the future, but for right now there simply is no reason to raise interest rates, at all, from their perspective. Worse is the fact that the Senate did not extend unemployment insurance last week which means a million plus people will lose benefits very soon. After their drunken spending binge to bailout the banks after they created this it is beyond me how they would let a million people just wither and die. There are 6 people for every job opening out there so it is not like these people are actively NOT trying to find work, so enough with that whole theatrical display of utter idiocy. Keep in mind I am a deficit hawk, but there is a difference between government wasting money and government helping those who cannot find work.

The loss of those benefits will have a huge impact on the economy as a whole since that money will not be spent. Retail sales will continue to slide and foreclosures will continue to rise, how many of those million plus people are barely hanging on? I am not sure how so many people can claim that the unemployed are simply freeloaders looking to live the highlife on such a meager government stipend which is what you hear often on other blogs or by the ultra rightwing. Considering that there are so many people looking for work the competition for a job, any job, is extremely high which reduces the odds of a person actually getting a new job anytime soon. Not to mention that unemployment benefits are usually around $300 – $500 a week I find it hard to believe that anyone is living the highlife on such a low amount, but that is the case. I am sure that there are abuses, but this is one of those give me a break moments and I am definitely right of center.

The other reason many believe a double dip is out of the question is that companies have extraordinary amount f cash on their balance sheets. Well, all I have to say is how long has that cash been on their balance sheet and it has not gone to work yet? This is like the temporary employment is a bullish indicator, if it is not happened yet the odds of it happening anytime soon are dwindling. The cash on the balance sheet is also part of the deleveraging cycle as companies pay down debt and hoard cash. Perhaps the main reason that companies have so much cash on hand is they think that business is going to get very tough in the near future. After all, many of our best companies have roots going back beyond the Depression and they know the value of having cash on hand to make it through the storms. Of course, they could spend it all tomorrow, but I ask again, what are they waiting for and why hasn’t it happened yet?

The bottom line is that it is really shocking to see so many smart people caught off guard about a potential double dip recession. All of the signs have been around for a longtime that the thought should have entered their mind at some point in time in recent months. There is a chance that we could avoid it, but I do not see how. I should point out the fact that I never bought the idea that we actually made it out of the first one, other than a statistical recovery that is. Time will tell on this one, but if Friday’s report is worse than expectations we will be well on our way to S&P 900.