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.

Quantitative easing, it’s reality, kind of

Posted by Ray on August 11, 2010 under Main | Read the First Comment

When I wrote last week that the Fed would do QE 2 and the trade of the century, granted that was over the top, was leveraged bull 20+ year ETF’s I received some flack, a lot actually. First, let’s talk about the economy and what is going on there. Second, let’s talk about the treasury, gold barbell trade that seems wild and crazy. To clarify something, no, I am not drunk as one commenter asked.

The economy, oh, how this recovery summer is not such a recovery after all. Perhaps Geithner’s op-ed in the Times should have read, “Sorry, we screwed up any chances of a recovery” instead of “Welcome to The Recovery.” Any improvement we have seen within the economy has been purely statistical or for the very wealthy, period. Yes, Saks and Macy’s are indeed having good years, but look at Walmart, not such a blockbuster year. If you strip away the stimulus spending and government transfers you have poor GDP readings, period. I cannot see how anyone would or could really dispute that, but I am sure there are some that will try.

The truest test of any economy is unemployment and I was saying, before it was popular by a certain ‘New Normal’ guy, that unemployment was a leading indicator, not a lagging indicator. Our employment situation is poor at best considering that we are having more and more people leaving the workforce because they are giving up. Imagine just giving up all hope of finding work, not that you don’t want a job, but you just can’t find one, but since you have given up our government says you do not count anymore, nice. Anyhow, if we include all those people who dropped out of the workforce we are up to 10.2-10.5% official unemployment. As far as the U-6 we are still around the 17% area, but I am willing to bet it is much, much higher and who knows, exactly, how many people simple have been unemployed so long they just don’t count anywhere anymore. Regardless, our unemployment issue is the truest test of our economic situation and has indicated for well over a year that the economy is in poor condition.

As far as the other economic data points and indicators, well, show me one that points to an actual positive improvement please. Hint, there is not one that points to a significant improvement in the economic condition in recent months. In fact it is so bad that the Fed is turning to a form of QE which they know will do nothing to boost the economy, but it will look like they are doing something. It is so bad you had Ben Bernanke testify in front of Congress and say; “I don’t know what is going to happen,” basically when he said ‘unusual uncertainty.’ You have the Fed Presidents talking about recessions, QE, Japan scenarios and a host of other issues, but don’t worry because CNBC says no double dip. You know what, they are right. There will not be a double dip because we never made it out of the first depression.

We got the Fed doing this reinvesting of interest and repayment of principal now, to the tune of about $300B or so, into treasuries. What is that going to do for the economy? Nothing. Ben is trying to force banks to lend by doing a bull flattener to the yield curve, good luck Ben. What he doesn’t realize yet is people do not want to borrow. In fact, people want to pay off their debts instead, go figure. Ben cannot boost demand and QE will not do anything at all besides make bond investors very happy. It is a dog and pony show to make everyone feel good and like the Fed has some ammo left, they don’t and the game is over for them. All more QE will do is damage the dollar at some point in the future, that is a certainty. Consumer demand will return only after the deleveraging period is done and that could take 10 more years, who knows. It will be a tough ride, that is for sure.

Now, for those who thought I was nuts for going long a leveraged 20+ treasury ETF and gold, well, you don’t have to say, my account says it for me. UBT was about $85 a share when the article came out and it closed today at about $90.50 and gold was at about $116.50 and it is at $117.73 (I am using GLD as a proxy). I do not believe the trade is done, I wouldn’t enter it here, but I am not exiting it either, especially after CSCO missed their revenue estimates tonight. This was not a crazy trade, it was the most obvious trade in the world. Easy money like this does not happen very often so I am not sure why anyone would think this was ‘high risk’ or abnormal. You can hold leveraged ETF’s, if they go in your favor, over a period of days, just not long-term.

Everyone knew the Fed was going to do something, anything, because the Fed is staunchly independent and not influenced by politics, yeah right. Come on, the Fed knew it had to do something to show it was helping the economy, but not too much because we have an election coming up. What could be safer than maintaining the balance sheet, but reinvesting loose change into treasuries to bring down long-term treasury rates? It does not raise any eyebrows, everyone knew they would do this and it does help borrowers, but it doesn’t help the real economy. Regardless, this was telegraphed and sets up the Fed for real money printing and QE after November.

In the meantime, I plan on locking in profits on my UBT soon and rolling into TLT on weakness. I fully expect that we see the 30 treasury move towards the 3% area, maybe 2.5% as Ben wrote about in the past. That makes longer duration treasuries very attractive still and inflation is not an issue now. However, inflation will be at some time in the future and QE will damage the dollar, hence the gold hedge. I think gold goes back to its high and make a run towards $1,300 an ounce, maybe higher is full blown QE kicks in this fall. Equities are not attractive, in my view, unless they pay an outsized dividend and have a strong balance sheet. Stocks like AAPL, no thanks, they do not work in this environment unless they pull a new killer product out of their back pocket every other month. Good luck.

Recap

Posted by Ray on July 7, 2010 under Economy, Main | Be the First to Comment

Today was interesting to say the least, a massive rally on the back of no real news, I guess stress tests that really don’t stress banks balance sheets were the primary driver along with a technical bounce, but other than that all the other news was negative. Let’s review the bullish news that moves the markets 3%. Dallas Fed President Fisher calls out Congress and the President by saying they are inhibiting growth by creating confusion, no surprise there. Delinquencies on homes are stabilizing at extremely high levels, CNBC.com. Reis Inc. released a report showing that retail shopping center vacancies are rivaling all-time highs at 10.9% and rents are dropping, they should recovery by 2016, somehow that must be bullish. Lindsay Lohan is going to jail, I guess, for 90 days, now that really is bullish for whoever makes the drugs to sober people up.

I guess on the heels of all that bullish news it is little wonder that the market rallied so hard today. The only other piece of news that would have sent us to 11,000 for sure is if we declared war on Iran, based on this track record.  We blew through several layers of resistance on the SPY, which I am short and yes today did hurt, thank you for asking, and we could reach as high as $107.12 on the SPY, but overall it is still in a bearish trend, sorry. The volume was nothing to write home about today either and, frankly, yesterday’s mammoth reversal speaks volumes about the condition of this market, it is structurally unsound. However, we have some pretty big news coming up Thursday morning, retail sales and initial claims data will dominate the headlines.

First, if you watched CNBC this morning and caught El-Erain from PIMCO he said something you might have heard before. He said; “Unemployment is no longer a lagging indicator, but a leading indicator.” Any idea where you would have read that? I have been saying that for months now and many have said some pretty nasty things to me about making that claim. What El-Erain and PIMCO have figured out and the people who have no clue that a “V” shaped recovery does not exist have not figured out is that in a post credit collapse world unemployment is not a symptom of the cancer, but part of the actual cancer itself. If the credit collapse occurred because people could not pay their bills it would stand to reason that the more people who are unemployed the worse the problem will get. Perhaps this is why mortgage modifications are failing and defaults are picking up on credit products, depending on how a default is actually measured nowadays. It is just nice to have a high profile person repeat what you have been saying even though he has no clue who I am.

As for the initial claims tomorrow, my guess is that they will be ugly, again, as in +450,000, but less than the 472,000 from the week before because of the July 4^th holiday. Employers tend not to fire people before the holidays, but they will be elevated in my opinion. If, for some reason, initial claims are above 470,000 that will be horrible news and my guess is that will merit a reversal of fortunes in the markets. It is just amazing that we are coming up on 3 years into this thing and we are still seeing initial claims coming in at well over 400K a week. I know the President likes to make the claim that when he came into office over 750,000 people were filing for initial claims a week, but that was for only a few weeks during the peak of the crisis and, frankly, the fact that we have stabilized at 450K a week is nothing to really brag about, sorry.

To make matters worse the emergency extension of unemployment benefits were not passed before Congress went home for the holiday. That left almost 2M people without unemployment benefits and, in my opinion, that will have an impact on retail sales. How much of an impact? I do not know, but more than most people think. The other major thing people have to remember about retail sales is that many retailers closed a ton of underperforming stores so you are looking at retail sales numbers from the top performing stores they have to offer. No longer can we say that these figures include the dogs of the industry which means the figures you see can actually be much weaker, or stronger, than they initially appear. Regardless, credit is still contracting, unemployment is still sky high and that means retail sales are probably not going to be as strong as most people think, but analysts knew this and started heavily revising estimates lower. Not to mention that retailers have zero pricing power so even if sales are good their margins are going to be miniscule.

There is little to be bullish about out there as all the data has been bad and should not be read any differently than being bad. The ISM was bad, the employment report was bad, the housing data is horrible, the political picture is uncertain and the charts are certainly bearish, just look at the RUT. I am not saying don’t own stocks, but be careful what you own, strong balance sheets and dividends are key. Anyone outright bullish on this market is either selling you a fund or is simply out of their mind. Patience is key and there is no need to jump into any stock for any reason as we are in for a bumpy ride. I don’t even think earnings season will do much for us, sure 2Q10 earnings will be good, but the outlook will be not so bullish.

CNBC just doesn’t understand the markets

Posted by Ray on June 29, 2010 under Main | Be the First to Comment

At 9:50 AM Erin Burnett and Mark Haines were talking about what was driving the selloff in equities today. Erin Burnett says; “If it is the LEI number in China driving the markets, which is a number that was only created in May and just revised down, that shows how pathetic the global markets are.” Well, I hate to be one of those bloggers that the Fed says not to listen to, but the reason we are selling off is because of a failed sanitizing ECB bond offering and the banks in Europe are in trouble. Combine that with horrible housing data, high unemployment, record deficits, bond yields reaching new lows, deflationary forces, slower economic growth, ECRI numbers rolling over and the technical’s of the market being bearish I think you can see why equities are selling off.

This, more or less, proves that CNBC is a cheerleader devoid of understanding what is really happening in the equity markets and they simply do not know how to do basic research. This is what happens when you parade all bulls on your program and shout down their opposition, who have been far more accurate. The situation in Europe is serious and China’s economy is slowing because of a stronger Euro, how no one is putting this together yet is beyond me, and there is simply less end demand for products. The only area where pricing power really exists is in food stuffs and most other industries have zero pricing power. Why? Simple, there is no demand which is why we have deflation right now!

Besides the reporters being completely inept and derelict in their duties, they fail to see the most basic issues confronting us today. As I said before, initial claims data has been a leading indicator, right now, of what is happening out there, again, how this was not seen is beyond me, and showed that the economy is extremely weak and really never recovered.  It is insane that they keep talking about the Chinese LEI versus the real issues surrounding the equities markets, it is part of it, but it is the other issues I pointed out. How they kept on the bandwagon of the ‘recovery’ story is a wonder that helps mark the death of the old media outlets where bias is tried and true and a pretty face is worth more than actual knowledge of what is going on in the world.

457,000, Again

Posted by Ray on June 24, 2010 under Main | Be the First to Comment

Initial claims came in at -457K this morning, this is not good, and last week’s figures were revised from -472K to 476K, really not good. This has little to do with the oil leak in the Gulf and anyone making that claim disqualifies themselves from the conversation. This has to do with a weak economy, pure and simple. We are entering a double dip recession and as the stimulus is pulled back it is going to get worse, much worse.

Your first warnings came from Best Buy and Fedex, but no one listened to what they had to say. Frankly, the real warnings were always in the weekly claims reports, but everyone dismissed them as a “lagging indicator” which is simply not true in a post credit collapse economy. If we were in a normal inventory recession I would agree that employment is a lagging indicator, but when the economy blows up because people cannot pay their bills, well, employment is a leading indicator. That is where economists missed the mark and failed to adjust their models, those that fail to change will go the way of the dinosaur, it is inevitable that natural selection weeds out the weak and that is what is happening now.

To top off the situation we did the worst thing possible, we tried to cure a debt problem with more debt. You cannot do that, it just doesn’t work. Take a look at Greek bonds, the 10 year is over 10% again, why? They have austerity measures in place. They have access to special funding, etc. yet their bonds are yielding over 10%. That is telling you there is no fix for the problem as the smart money is always, I cannot stress this enough, always in the credit markets. We have treasuries climbing with 2 year yields pushing .64%! Are you kidding me? This is not normal and while I bought when yields hit 1.10% on the 2 year, taking much flak from friends and family I might add, I figured the yield would drop to .77% or so, within the trading range, but they broke out. This is a sign that things are not as they seem and extreme caution is merited. Where treasury yields can go is the big question, certainly zero is not out of the question and negative yields have happened before, watch the credit markets.

Europe is a problem and will continue to be a problem, remember that the EU is China’s biggest market and the EU is responsible for 30% of the S&P 500’s earnings, not an issue for 2Q, but 3Q I would not be long in 3Q. Unemployment in the U.S. will climb higher, I am sad to report, especially as Europe deteriorates and much to Mr. Krugman’s chagrin forcing the EU members to increase their deficits is not a good idea. Their deficits are the problem and making them bigger will not solve their problems. Europe could lead to much higher unemployment in the U.S. and one has to remember that Europe did make the Depression much worse in America in the 1930’s as well, history does repeat itself.

To top it all off we do have the moratorium for drilling in the Gulf, it may get overturned again, but assume it will not. What does that mean? That means at least 10,000 jobs will be lost within the first few weeks. After that it could get worse as it creates a negative feed loop and the loss of one job means others will lose their jobs over time. From my lens the moratorium is insane. The leak is horrible, we all know that, but this is the first oil leak we have had in the region, ever, out of how many wells? Perhaps if the government puts a safety inspector on each rig that may solve the safety concerns, but that idea was rejected. Instead, let’s halt the entire industry and watch them all go to Mexico or Brazil instead so we can lose those jobs for years to come in the best case scenario or forever in the worst case scenario.

Employment is indicating things are mildly better, but merely stabilized at “less bad” which is not good overall. Housing, the release yesterday, solidified that we will have a double dip as housing is about 21% of GDP and we just saw the worst housing data since they started recording the data series. How much more evidence do we need to have? We also created false demand which means we had distorted housing data for the past year. How in the world are we supposed to know how far forward we pulled demand? Months? Years? This is the problem with Keynesian economics especially when it is used wrong, which we certainly did.

The bottom line is this, unemployment is going to grow outside of government rolls, period. Housing is going to go lower meaning GDP is going to be bad in the second half of this year, if not negative. The employment report, due out soon, will show more government jobs which will not be positive for the markets. The ISM surveys are rolling over. The leading indicators are pointing down, hard. Inflation is nil right now. Treasuries are telling you something big is going to happen. Europe is in major trouble. How you can believe the long only permabulls being paraded on the TV is beyond me. They get paid to have your money in their funds whether it goes up or down. I get nothing whether you invest or not. Frankly, the facts at this point are irrefutable.