Green shoots everywhere, but they are weeds

Posted by Ray on August 12, 2009 under Main | Be the First to Comment

Oh the media has been working overtime to convince everyone that things are great and there are green shoots everywhere. From a half backed GDP report, which revised 1Q09 down by .9% which you then add in inflated government spending and you magically have good news, to a fully backed jobs report they have managed to turn one bear into a green shoot advocate, Roubini.

In other news mortgage applications plunged again this month thanks to higher interest rates, not sure what to really think about a 5.38% mortgage rate being “high,” but somehow this was spun as sales contract numbers rose, slightly. Contracts really mean nothing as they have a high, relatively high, cancellation rate and I have never based any decisions about the market over this type of data point, it is really a nothing in the big scheme of things. Now if we were talking sales then that is a different story as sales means something. Regardless, mortgage applications dropped which should make yesterdays CNBC story about optimism in the housing market obsolete and defunct as the story was obviously spun to make things look better.

With Roubini now in the camp of the recession will end by December 31^st, 2009 the bulls have declared victory and are dancing in the streets. They even got him to say that asset prices should go higher and the risk of a double dip recession is low, all of which is nonsense. After being misquoted a few times and constantly bashed by most people on CNBC it is clear that he has had enough and decided to side with the path of least resistance.

However, I have to disagree with him on equity prices as I see it the S&P 500 have priced in perfection and has set itself up for a big fall. However, even I admit that the inflation of the money supply is making things unpredictable as much of that money ended up in equities. Even so, I think we are in for a wild ride in the near future.

With mortgage applications down and mortgage rates up I think it is safe to assume that the residential housing market will continue to languish in the near future. That is until the Fed magically lowers rates again through quantitative easing, monetizing our debt, but I am fairly convinced that will not do much to spur sales. People are funny, when they see prices continuing to fall they tend to stop buying to wait for a bottom which creates a paradox for the real estate market as they need buyers to stop prices from falling.

In a nutshell, things are tough and I am willing to bet we are in for much lower equity prices in the near future. While Roubini has been tamed and the media works on spinning the mortgage application data and claim that new contracts are indicative of potential sales, which they are not, to declare the real estate market “stabilized” I will continue with my bearish outlook until things fundamentally change. So far, I have seen the fundamentals weaken, not strengthen and there is simply no compelling reason to buy equities at these prices.

The Growing Unemployment Problem

Posted by Ray on August 6, 2009 under Main | Be the First to Comment

At every turn we keep hearing that unemployment is “less bad” which is probably not exactly comforting for the 500K+ a week that are filing initial unemployment claims. We also keep hearing this nonsense about a “jobless” recovery which is an oxymoron to say the least. Our economy is driven by consumption and when you have large tranches of unemployed combined with lower incomes and dwindling savings consumption is going to take a significant hit.

There is simply no way that I can foresee a jobless recovery and, from my perspective, we have not seen top line growth of revenue from corporations. Even same store sales were terrible with ultra-low expectations. Regardless, the growing silent employment numbers are those who are seeking extended and emergency unemployment claims.

While the media is pointing out the growing ranks of the unemployed by telling you about the 9.5%, soon to be 9.6-9.7%, they are not giving you the full view of the plight of the unemployed. Once your initial unemployment benefits go away you are now eligible, if your state has a  high unemployment rate, extended benefits and thanks to the stimulus, which I am sincere about, you can obtain emergency unemployment benefits.

Each of these areas of the unemployment sector has grown pretty substantially and show little sign of cooling in the near-term. Below you can see just how bad these claims have increased over the last 7 months. This is telling us that people are not finding a job which is just plain scary and I hope the best for them at this time.

It is highly unlikely that this number will turn around anytime soon, unless they find a new way to calculate the numbers. Until these numbers come down we are in for some tough times ahead and it will have an impact on GDP. Although, government spending and jobs will likely boost some aspects of GDP it is simply an artificial boost to the numbers and, in my opinion, one should discount the government’s intervention in GDP growth.

The government is hiring people for the sake of hiring people which means they will be less productive than in other areas of the economy. I view this as a malinvestment and an investment that the taxpayers will ultimately be paying for. The government might as well just give the money away since an unproductive job robs the economy of assets it could otherwise use in another productive manner. This is simply welfare for the working.

Either way, the problem is growing even with “less bad” data and we need to start reevaluating Keynesian economic theory as it was disproven years ago with stagflation and start moving in a more productive manner. If we do not then it is highly likely that we will see a repeat of the 1970’s at best or we could repeat the 1930’s at the worst. Either way our current path is not working and is doing much more damage than good, just look at the dollar for evidence of the damage.

Bank of Japan

Posted by Ray on July 7, 2009 under Main | Be the First to Comment

The BOJ is extending emergency credit to companies, I guess this is a green shoot? The problems are still here and they are global. Japan was in rough shape, but they were still better off than we were before this thing started. Regardless, more intervention from governments will not help. Bloomberg story Below:

Bank of Japan Considers Extending Credit Policies (Update3)

By Masahiro Hidaka and Mayumi Otsuma

July 8 (Bloomberg) — The Bank of Japan may extend its emergency-credit programs as soon as next week as policy makers await evidence that banks are increasing lending to companies.

Officials may want to decide on the matter months before the programs expire at the end of September to quell any speculation they’re ready to scale back their efforts, said Masaaki Kanno, who worked at Japan’s central bank from 1974 to 1999 and served as a senior adviser on research and statistics. The Bank of Japan’s board next meets July 14-15 in Tokyo.

The debate reflects concern that the world’s second-biggest economy will struggle to emerge from its deepest postwar slump, and is a contrast from the U.S., where the Federal Reserve has already taken steps toward ending emergency-credit measures. BOJ Governor Masaaki Shirakawa this week said many companies are still struggling to borrow, after the bank’s quarterly Tankan survey last week showed access to credit remains constrained.

“Policy makers may conclude the bank had better decide on the extension this month if they need to do so anyway,” said Kanno, who is now chief economist in Tokyo at JPMorgan Chase & Co. “Making such an announcement in July can work as an anchor to prevent premature speculation about an exit policy.”

The Bank of Japan started purchasing commercial paper and corporate bonds this year, after lowering the overnight lending rate to 0.1 percent in December. Policy makers also offered unlimited loans to commercial banks at 0.1 percent in exchange for approved collateral. The three programs are scheduled to expire on Sept. 30.

Tankan Report

The Bank of Japan’s Tankan report showed on July 1 that the nation’s largest companies still consider their access to financing at close to the lowest level on record, and small firms perceived banks as reluctant to lend. Lending growth at Japanese banks slowed in June for a sixth straight month, a report showed today.

The Tankan also showed businesses plan deeper spending cuts than three months ago. Large firms estimate profit will fall 20 percent this year, almost twice the March forecast.

Another report today showed that machinery orders unexpectedly fell 3 percent in May from April, as sliding profits forced companies to cut spending on plant and equipment. The median estimate of 25 economists surveyed by Bloomberg was for a 2 percent increase.

The Nikkei 225 Stock Average dropped 1.9 percent at 10:02 a.m. in Tokyo. The yield on the benchmark 10-year bond fell two basis points to 1.285 percent, the lowest in more than three months.

Policy Makers

Bank of Japan policy makers have said they aren’t confident yet whether a recent rebound in exports and output will be sustained.

“The Tankan results turned out to be worse than expected, and there are no reasons in sight to be optimistic about the economy’s outlook,” said Teizo Taya, a former central-bank board member and now adviser to the Daiwa Institute of Research in Tokyo. “There is no merit for the Bank of Japan to adopt an exit policy too early.”

In the U.S., the Fed last month announced it will let one of its emergency-lending programs expire later this year, and trim two others.

Fed policy makers also said in their June 24 statement that they “currently anticipate that a number of these facilities may not need to be extended beyond February 1.” At the same time, they pledged to extend the terms of the remaining credit programs beyond February “as needed to promote financial stability and economic growth.”

Special Programs

Shirakawa said last month that Japan’s central bank will make a judgment on its special programs “by the end of September in a predictable manner to market participants” based on an assessment of the economy, financial markets and funding conditions for businesses.

“There is some speculation that the BOJ may want to be pro-active and indicate an extension of the programs rather than waiting for either next month or September,” said Marc Chandler, head of currency strategy at Brown Brothers Harriman & Co. in New York. “On balance, the BOJ most likely will have to extend the programs, probably until next March, but look for a decision in August, not next week.”

The Bank of Japan already extended the emergency-credit policies at its February board meeting, one month before the initial expiration date of March 31. That example led some analysts to anticipate the bank will again make its announcement a month before the expiration.

Gains Momentum

That view gained momentum in May after minutes of the BOJ’s April meeting showed one board member said the bank should consider ways to unwind the emergency measures should the economy recover in line with the bank’s forecast.

Board member Atsushi Mizuno said in May that it’s necessary for the bank to have discussions on how to unwind the emergency steps even while the global economy remains fragile.

There may not be much point in waiting, said Naomi Hasegawa, a senior bond strategist in Tokyo at Mitsubishi UFJ Securities Co.

“It’s not conceivable that environments for corporate financing will improve just over the next one month,” Hasegawa said. “Rather, tension in financial markets may rise” if the bank postpones its decision.

An early decision would also allow policy makers to avoid acting in the middle of a potential general-election campaign. Prime Minister Taro Aso, whose support fell below 20 percent in recent polls, has to call the vote by mid-September.

Story here: http://www.bloomberg.com/apps/news?pid=20601087&sid=aLbuNJtGl6ZI

Here is a great video with Peter Schiff

Posted by Ray on July 3, 2009 under Main | Be the First to Comment

I love it, right around 1:40 seconds Peter opens with; “your record of inaccurate forecasts remains intact.” Then goes on to say I hear there is so much talk of green shoots on CNBC I think I am listening to the Gardening Channel.” Just makes me laugh, that’s all. FYI, I invested at about 700 on the S&P and emerging markets in the same time frame, so I am a bull, but know there is short-term pain that needs to be acknowledged. Anyhow, enjoy.