Words from the (Investment) Wise for the Week That Was (January 11-17, 2010)
"Words from the Wise" this week comes to you in a somewhat shorter format as I do not have access to all my normal research resources while spending a few days with the gnomes in Geneva (also see my post "Blogging gone AWOL - to Switzerland"). Although the commentary is not as comprehensive as usual, a full dose of excerpts from interesting news items and quotes from market commentators is included.
With investors' hopes of an economic recovery that might have gotten ahead of reality, the Dow Jones Industrial Index experienced its largest one-day drop (-0.9%) of the year in a sell-off on Friday - unnerved by China starting to rein in liquidity and cautious earnings guidance - causing the benchmark US indices to register a fourth down-week over an eight-week period. Not surprisingly, the CBOE Volatility (VIX) Index, also referred to as the "fear gauge" of US stocks, gained 1.2% over the week.
Providing "entertainment" of a dubious kind and reminding one of the 1933 Pecora Commission, the Financial Crisis Inquiry Commission on Wednesday started interrogating four of Wall Street's top executives in Washington and promised to use wide-ranging powers to establish the causes of the financial crisis and pursue any wrongdoing.
Meanwhile, Christina Romer, who heads the president's Council of Economic Advisers, said (via MoneyNews) the payment of big year-end bonuses for bailed-out financial institutions would be "ridiculous" and "offensive" and "is going to offend the American people. It offends me".
Similarly, according to The Canadian Press, President Barack Obama said with reference to his proposed plans to impose a levy on big financial institutions to recoup some of the costs of the financial crisis: "If the big financial firms can afford massive bonuses, they can afford to pay back the American people."
Source: Steve Sack, Comics.com
The past week's performance of the major asset classes is summarized in the chart below - a set of numbers indicating a degree of risk aversion has crept back into financial markets. Steps by the People's Bank of China to tighten liquidity by increasing the bank reserve requirement ratio and raising inter-bank interest rates negatively impacted oil and other commodities, causing the first decline in five weeks.
A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below.
The MSCI World Index and the MSCI Emerging Markets Index declined by 0.2% and 0.6% respectively during the past week. Among mature markets, Japan (+1.7%) bucked the trend and added a seventh consecutive week of gains - coinciding with a weaker yen over the period. (Also see my post "What to expect from Japan's new finance minister".) Among emerging countries, Russia (+7.2%) performed solidly, while China (+0.9%) also eked out a gain after having to balance adverse monetary developments in that country with impressive trade data early in the week.
Notwithstanding the huge rally since the March lows, only the Chile Stock Market General Index - again a solid performer on the expectation of a positive election result - has been able to reclaim its 2007 pre-crisis peak and is now trading 8.1% higher. Mexico could be the next country to eliminate the bear market losses.
As far as the US indices are concerned, Wall Street managed to hit 16-month highs on Monday and then again on Thursday, but reversed course on Friday as traders closed positions before the Martin Luther King long weekend, pulling indices into the red.
Seven of the ten economic sectors (as measured by the SPDR exchange-traded funds [ETFs]) closed lower for the week, with the defensive sectors outperforming the cyclical ones. Health Care (+1.4%), Consumer Staples (+0.8%) and Utilities (+0.6%) returned gains, whereas all the other sectors were under the water. Small caps, in particular, led the way down on Friday.
Top performers among stock markets this week were Estonia (+15.6%), Venezuela (+9.6%), Lithuania (+8.7%), Kazakhstan (+7.2%) and Kenya (+5.7%). At the bottom end of the performance rankings, countries included Greece (-7.9%), Jamaica (-6.7%), Cyprus (-6.5%), Luxembourg (-4.9%) and Portugal (-1.2%). "Greece on Thursday announced an ambitious three-year plan to curb its runaway budget deficit but failed to convince skeptical markets that its targets for growth and fiscal reform were feasible," reported the Financial Times.
Of the 96 stock markets I keep on my radar screen, 53% recorded gains (last week 79%), 41% (15%) showed losses and 6% (6%) remained unchanged. The performance map below tells the past week's rather bullish story
Emerginvest world markets heat map
John Nyaradi (Wall Street Sector Selector) reports that as far as ETFs are concerned the winners for the week included iShares MSCI Japan (EWJ) (+4.8%), Claymore/Delta Global Shipping (SEA) (+3.6%), Vanguard Extended Duration Treasury (EDV) (+3.3%) and iShares MSCI Austria (EWO) (+2.7%).
At the bottom end of the performance rankings, ETFs included Claymore/MAC Global Solar Energy (TAN) (-8.7%), PowerShares WilderHill Clean Energy (PBW) (-7.2%), Claymore/AlphaShares China Real Estate (TAO) (-6.6%) and United States Oil (USO) (-5.7%).
Referring to the modern robber barons, or "banksters", and Obama's proposed bank tax to recoup bailout costs, the quote du jour this week comes from long-timer Richard Russell, writer of the Dow Theory Letters. He said: "Obama is fighting two wars, the war in Afghanistan and the war in Iraq. Now he's got a third war going, the war on Wall Street. He's joining the populist fury over Wall Street and its bonuses. It's 'payback time', and Obama proposes a $90 billion tax on Wall Street's banks.
"The Prez utters the words the crowd loves to hear, 'We want our money back, and we're going to get it.' Obama's words dovetails with Democrats' worries that they would be blamed for the recession and the debts. Blame it on Wall Street, and get even with those greedy devils; maybe tax the greedy devils out of existence or at least tax their stinkin' bonuses away. As Obama's assistant Rahm Emanuel put it, 'Its a shame to let a good crisis go to waste.'
"The $90 billion Obama will extract from Wall Street won't even begin to shrink the monster deficit the Fed has run up. Let the next administration (probably Republicans) deal with that problem."
How the lie of the land has changed! The Financial Times yesterday headlined an article: "Obama is right to clobber Wall Street".
Next, a quick textual analysis of my week's reading. This is a way of visualizing word frequencies at a glance. As to be expected with the banking shenanigans moving to center stage, "banks" commanded poll position.
The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based in Cape Town when not traveling) are given in the table below. With the exception of the Shanghai Composite Index (discussed above), the indices in the table are all trading above their 50-day moving averages, with all the indices also comfortably above their respective key 200-day moving averages.
As far as the S&P 500 Index is concerned, an upward sloping trend line extends from the August lows. A break below this line's support level of 1,080 (and the December low of 1,092) could signal a deeper pullback.
Last week I discussed a long-term chart of the S&P 500. Let's now also consider monthly data, going back to 1998, for the 10-year Treasury Note. As shown below, the MACD oscillator provided a sell signal about seven months ago and Treasuries are still classified as being in a primary bear market.
This raises the question of when rising long-term rates start ruining the equity party. "For me, a sustained move above 4% by ten-year Treasuries will be equivalent to a yellow caution light for equity investors. Above 5%, stock markets could be in dangerous territory, as we saw in the last cycle," commented David Fuller (Fullermoney). "I will continue to view US Treasury 10-year yields as a lead indicator. Currently, they are still in a 'sweet spot'. However, when they move higher I will monitor stock market indices, particularly for Wall Street, even more closely for signs of fatigue in the form of inconsistencies, not least a loss of upward momentum."
Looking beyond the low-growth economies of mature countries, Jeremy Grantham of GMO said (via Fortune): "I think there is a nascent bubble in emerging markets. Over the next three to five years, emerging markets are likely to sell at a handsome premium P/E because of the respect for their higher GDP growth."
To which money man Bill Gross, head honcho of Pimco, added (according to Fortune): "If you're looking for growth, you should venture outside the US. Brazil, China and other Asia equities are the cherry on top of the melting sundae. It's not only their internal economies; they're in better shape from the standpoint of reserves and balances. Ten years ago Brazil was a basket case and beggar. Now it has hundreds of billions of dollar reserves."
Back to the US stock markets, John Hussman (Hussman Funds) is treading carefully with the current stock market make-up, saying: "There's no denying that the beliefs of investors have been far more important, in the intermediate term, than economic realities, which are revealed more slowly and sporadically. Yet despite the high level of bullishness here, the market has gained only a few percent beyond its September highs. Most of what we are seeing now is a tendency to make marginal new highs, back off slightly, and then recover that ground enough to register another marginal new high.
"As I've noted frequently, when market conditions are characterized by unfavorable valuations, overbought conditions, over-bullish sentiment, and upward yield pressures, the market's tendency is exactly that - to make continued marginal new highs for some period of time, followed by abrupt and often steep losses virtually out of nowhere."
As we embark on the earnings season, the S&P 500 as a whole is expected to grow by 62.1% in Q4 2009 versus Q4 2008. As shown in the graph below, courtesy of Bespoke, the bulk of the growth is expected to come from the Materials and Financial sectors - the only two sectors with Q4 growth expectations that are higher than the S&P 500. Technology and Consumer Discretionary are the other two sectors expected to see growth. On the other hand, "Energy and Industrials are both expected to see earnings decline by more than 20% in the fourth quarter, while Telecom is not far behind at -19.2%. Health Care, Consumer Staples, and Utilities are all expected to see a drop of about 5%," said Bespoke.
Source: Bespoke, January 12, 2010.
I do not have much to add to my conclusion of last week and repeat it: "It goes without saying that the strong rally since March is bound to be followed by a correction at some stage. But rather than pre-empting (and more often than not getting it wrong as a result of short-term noise), I will be guided by the longer-term charts and the yield curve to identify a major top. Meanwhile, I am watching valuations carefully, and specifically how the Q4 earnings reports stack up. (See my post "Earnings into focus".)
"Although I am treading with caution after the 74% rally in the mature markets and 108% in emerging markets, I am not ignoring good old stock-picking, and specifically those companies with strong balance sheets that will be growing their dividends over time with a reasonable degree of certainty."
For more discussion on the economy and financial markets, see my recent posts "Lessons from Bernstein, Rosenberg and Farrell", "El Erian: Markets not facing reality of slow economy", "Mark Mobius on emerging market valuations", "Earnings into focus", "Picture du Jour: Dow rally in perspective", "Wealthtrack - making money in 2010 in stocks, bonds and foreign markets", "Doug Casey: 'Stock market set to crash'" and "Picture du Jour: Weak hands are heavily long the greenback". (And do make a point of listening to Donald Coxe's webcast of January 15, which can be accessed from the sidebar of the Investment Postcards site.)
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"Global business sentiment has remained largely unchanged since the summer, consistent with a global economic recovery that is holding its own but is not gaining significant traction. Confidence is generally stronger in South America and among business services firms and weakest in North America and among those that work in real estate," according to the results of the latest Survey of Business Confidence of the World by Moody's Economy.com. Businesses are most upbeat when responding to broad questions about current conditions and expectations through mid-2010, but remain cautious when responding to specific questions about sales, pricing, inventories and hiring.
Source: Moody's Economy.com
Meanwhile, sovereign debt default looms, according to George Magnus, senior economic adviser at UBS Investment Bank. He said (as reported by the Financial Times): "Concerted fiscal restraint could trigger another recession, but the lack of it could end up in bigger default risks. Even Japan, now into its third ageing decade, may be vulnerable, while some eurozone countries, though sheltered from currency turbulence, may yet falter in their deflation commitments and compromise the integrity of the single currency as we know it. The UK still lacks a credible debt management strategy, and the US cannot take investor goodwill for granted."
Interestingly, the Financial Times says mounting fears about government debt has now caused the cost of insuring against the risk of debt default by European nations to exceed that for top investment-grade companies for the first time. "It now costs investors more to protect themselves against the combined risk of default of 15 developed European nations, including Germany, France and the UK, than it does for the collective risk of Europe's top 125 investment-grade companies, according to indices compiled by data provider Markit."
A snapshot of the week's US economic reports is provided below. (Click on the dates to see Northern Trust's assessment of the various data releases.)
• Inflation - "Don't worry, be happy", for now
• December industrial production - mixed news from the nation's factories
• December retail sales - mixed news, focus on details necessary
• Ballooning Treasury deficits - it takes both outlays and receipts to tango
• Total continuing claims matter the most
• Recent Fed rhetoric and highlights from the Beige Book
• Trade deficit widens in November, volume of trade maintains upward trend
• Inflation expectations approach pre-crisis range
The latest Beige Book, published on Wednesday in preparation of the next Federal Open Market Committee (FOMC) meeting on January 26-27, indicates a modestly improving economy.
Regarding the benign CPI numbers, Asha Bangalore (Northern Trust) said: "The Fed continues to be a sweet spot with regard to inflation and can continue to focus on economic growth for several more months. Although the Fed has begun examining the ways in which inflation emerges at the December Federal Open Market Committee (FOMC) meeting, the more vigorous debate and concern about inflation is topic for several months ahead."
"The Federal Reserve is unlikely to raise interest rates before next year," Richard Clarida, global strategic adviser for money manager Pimco, told Bloomberg (via MoneyNews). "The Fed has never hiked until they have seen a sustained decline in unemployment. By the Fed's own forecast, that is at least a year away. I don't think the Fed's going to do anything with rates until 2011 or perhaps very late in 2010."
|Jan 12||08:30 AM||Trade Balance||Nov||-$36.4B||-$31.0B||-$34.6B||-$33.2B|
|Jan 13||10:30 AM||Crude Inventories||1/08||3.70M||NA||NA||1.33M|
|Jan 13||02:00 PM||Fed's Beige Book||-||-||-||-||-|
|Jan 13||02:00 PM||Treasury Budget||Dec||-$91.9B||-$97.0B||-$92.0B||-$120.3B|
|Jan 14||08:30 AM||Initial Claims||01/09||444k||450K||437K||433K|
|Jan 14||08:30 AM||Continuing Claims||1/2||4596K||4725K||4750K||4807K|
|Jan 14||08:30 AM||Retail Sales||Dec||-0.3K||1.0%||0.5%||1.8%|
|Jan 14||08:30 AM||Retail Sales ex - auto||Dec||-0.2%||0.5%||0.3%||1.9%|
|Jan 14||08:30 AM||Export Prices ex - agriculture||Dec||0.5%||NA||NA||0.6%|
|Jan 14||08:30 AM||Import Prices ex - oil||Dec||0.4%||NA||NA||0.4%|
|Jan 14||10:00 AM||Business Inventories||Nov||0.4%||0.5%||0.3%||0.4%|
|Jan 15||08:30 AM||Core CPI||Dec||0.1%||0.1%||0.1%||0.0%|
|Jan 15||08:30 AM||CPI||Dec||0.1%||0.2%||0.2%||0.4%|
|Jan 15||08:30 AM||Empire Manufacturing Survey||Jan||15.92||5.00||12.00||4.50|
|Jan 15||09:15 AM||Capacity Utilization||Dec||72.0%||72.3%||71.8%||71.5%|
|Jan 15||09:15 AM||Industrial Production||Dec||0.6%||1.0%||0.6%||0.6%|
|Jan 15||09:55 AM||Michigan Sentiment||Jan||72.8||71.5||74.0||72.5|
Click the links below for three research reports from Wells Fargo Securities:
US economic data reports for the coming week include the following:
Tuesday, January 19
• Net long-term TIC flows
Wednesday, January 20
• Building permits
• Housing starts
• Core PPI
Thursday, January 21
• Jobless claims
• Leading indicators
• Philadelphia Fed
The performance chart for various financial markets usually obtained from the Wall Street Journal Online is unfortunately not available this week.
Morris King "Mo" Udall, American politician (1922-1998) said: "If you can find something everyone agrees on, it's wrong." (Hat tip: David Fuller.) Let's hope the news items and quotes from market commentators included in the "Words from the Wise" review will assist readers of Investment Postcards in guarding against popular (and often wrong) market views.
That's the way it looks from an icy cold Geneva (from where I will be making my way back to Cape Town on Monday).
Source: RJ Matson, Comics.com
CNN Money: Four pros - investing in the next decade
"The coming 10 years won't necessarily resemble the past 10. Fortune enlisted four investing sages - Rob Arnott, Jeremy Grantham, Bill Gross and Jeremy Siegel - who lay out the opportunities and pitfalls."
Click here for the full article.
Source: CNN Money, January 14, 2010.
Richard Russell (Dow Theory Letters): Pondering a deflation scenario
"I've been pondering over the following strange situation. The Dow is actually lower today than it was ten years ago. What does this really mean? To me, it means that the market over the last ten years has been discounting 'no growth' ahead. When you take an unbiased look at the picture, compared with gold almost everything today is cheaper than it was a few years ago. Since gold is the universal immutable standard around which everything else (including the dollar) fluctuates, this means that the price of literally everything has been going DOWN against the standard which is gold.
"This is deflationary. Of course you can say that a loaf of bread costs more now than it did a year ago, and this is inflationary. True, it's inflationary in terms of dollars, but the dollar is lower in terms of gold. So in terms of gold, everything is deflating.
"This deflationary trend is continuing, and what's more it's continuing against a veritable ocean of central-bank created currencies. Subscribers know that I believe this bear market will end, as most others have, with stocks selling at extreme great values - dividends high, price/earnings low. And you ask, 'How can this possibly occur?'
"This is the question I've asked myself. And the answer I come with is that stocks will be hit by brutal world deflation. That's what the miserable performance of the Dow is telling me. That's what the poor performance of everything else against gold is telling me. I'm not talking about the performance over recent months, but their performance over the years.
"Yes, I know that the conventional wisdom is that we're heading for all-out inflation. This forecast is based on the thesis that the only way to handle America's deadly multi-trillion debts is to inflate them out of existence. But suppose the Fed is unable to engineer inflation? Look how hard they've been trying over the last year to restart inflation. And what's happened to housing, the chief object of the Fed's inflation target? Housing prices have gone nowhere, well maybe they're less weak then they were six months ago. But inflation in home prices? It's just not happening.
"And now political pressure is on the Fed to cut back on stimulus, money-creation and at the same time raise interest rates. This, if it happens, will definitely be deflationary, and it will hit housing and the economy.
"Ever since World War II the Fed has been on the inflation path. Leverage, rising debt, speculation, and higher prices have been the 'law' of the land. Now, I believe we have hit the inflection point; we are just entering the huge deflationary spiral that will unwind six decades of leverage and inflation.
"In the big picture what I see is that China and Asia will become (they already are) phenomenal producers. The developed nations will not be able to compete with them. The result will be a crushing decline in the price of manufactured goods, which, in turn, will impact on all goods including foodstuffs and services and medical services. In a vain effort to compete with China, India and Asia, currencies will be devalued across the board.
"Currencies will sink in the face of competitive devaluations (think Venezuela), and whatever can go bankrupt will go bankrupt. Debt will become a dirty word again, as it was during the 1930s (if you can't pay for it with cash, live without it).
"The one item that will withstand this crushing force of deflation will be gold, whereas most items have been sinking against gold. If the deflation that I foresee arrives, items will be plunging in price against the standard - gold. This will be the great deflation that nobody foresees and nobody understands and nobody has protected themselves against.
"When you're willing to agree that gold, not the dollar, is the universal immutable standard, you can see that the forces of deflation are taking over.
"For the sake of argument, let's just say that I am correct. Then as the great deflation envelopes the land, all things (merchandise, stocks, currencies) will sink against gold. So gold then becomes the single item that is not declining, because gold is the standard, and the standard can't go down against the standard. In that case, everyone will opt for the safety of gold. Gold will be seen as the final and ultimate protection against deflation.
"Question - Russell, let me play the devil's advocate. Suppose you are dead wrong, and suddenly all the money that the central banks have injected into the system 'catches on'. Then what?
"Answer - In that case gold surges higher. It goes higher because the amount of fiat currency being produced is far greater than the available amount of gold. The sheer amount of new currencies overwhelms the relatively fixed amount of gold.
"Question - Then, Russell, you're saying that gold is the place to be whether inflation or deflation materializes.
"Answer - Yes, that's the way I see it. Gold will be 'the last man standing', as it is now in Venezuela and Zimbabwe."
Source: Richard Russell, Dow Theory Letters, January 14, 2010.
George Magnus (Financial Times): Sovereign default risks loom large
"The sustainability of sovereign debt hangs heavily over bond markets, and the prospects for economic and financial stability.
"Since 2007, OECD government deficits have risen by 7 per cent of GDP to just over 8 per cent, and debt, excluding contingent liabilities, has risen by about 25 per cent of GDP to just over 100 per cent.
"The biggest increases have occurred in Iceland, Ireland, the US, Japan, the UK, and Spain. There is no peacetime precedent for the current speed and scale of public debt accumulation and it is difficult to assess the social tolerance for high debt levels, and for the pain of protracted fiscal restraint. In several EU member states, the threshold has already been breached. The spectre of sovereign default, therefore, has returned to the rich world.
"Default does not have to mean outright debt repudiation. It can mean some type of moratorium on interest payments, and the restructuring of loan terms. Richer nations are assumed to be above such measures, but not in extreme circumstances. The US abrogated the gold clause in government and private contracts in 1934, and in 1971, it abandoned the gold standard altogether.
"Default can also occur via inflation, currency debasement, the imposition of capital controls, and the imposition of special taxes that break private contracts. Seen in this light, a few countries in eastern and western Europe may already be technically at risk of default.
"At the moment, higher spreads on sovereign bonds and credit default swap rates do not provide convincing evidence of an imminent default crisis, per se. Japan's public debt has already risen above 200 per cent of GDP, but the government can borrow for 10 years at 1.4 per cent, while Australia's government debt is about 25 per cent of GDP, but it pays over 5.5 per cent. Other rich countries with varying debt ratios all pay roughly 3.5-4 per cent. However, the status quo is not sustainable.
"Concerted fiscal restraint could trigger another recession, but the lack of it could end up in bigger default risks. Even Japan, now into its third ageing decade, may be vulnerable, while some eurozone countries, though sheltered from currency turbulence, may yet falter in their deflation commitments and compromise the integrity of the single currency as we know it.
"The UK still lacks a credible debt management strategy, and the US cannot take investor goodwill for granted."
Click here for the full article.
Source: George Magnus, Financial Times, January 13, 2010.
CNBC: Bullard on US interest rates
"The greenback extended declines partly because of comments from St Louis Federal Reserve Bank president, James Bullard, that interest rates may remain low for quite some time. In an exclusive interview with Cheng Lei, Bullard says that maintaining low interest rates is all data dependant."
Click here for a BusinessWeek article.
Source: CNBC, January 12, 2010.
MoneyNews: Pimco's Clarida - Fed unlikely to hike rates this year
"The Federal Reserve is unlikely to raise interest rates before next year, says Richard Clarida, global strategic adviser for money manager Pimco.
"'The Fed has never hiked until they have seen a sustained decline in unemployment,' now 10 percent, he told Bloomberg.
"'By the Fed's own forecast, that is at least a year away.' And thus, so is a rate hike, Clarida says.
"'I don't think the Fed's going to do anything with rates until 2011 or perhaps very late in 2010.'
"In addition to improvement in the labor market, the Fed would want to see durable sources of demand in the economy before it raises rates, Clarida says.
"'We had very modest growth in the third quarter (2.2 percent) and perhaps somewhat stronger growth in fourth quarter,' he said.
"'But all that is being driven by an inventory rebound and some temporary fiscal stimulus. The Fed's going to want to see some durable demand from consumers, exports and investment.'
"It's too soon to say the consumer sector has stabilized, Clarida says.
"'If you believe as I do that the household sector in the next five years will be deleveraging, that means there will be more (trouble) to come.'"
Source: Dan Weil, MoneyNews, January 11, 2010.
Reuters: White House plans more to trim joblessness
"President Barack Obama plans more economic stimulus measures to bring down the high US unemployment rate, while cutting the bulging budget is a longer-term challenge, a top White House economic aide said on Sunday.
"'We are ... talking about actions right now to jump-start job creation,' White House Council of Economic Advisers Chairwoman Christina Romer said on CNN's State of the Union.
"'You don't get your budget deficit under control at a 10 percent unemployment rate,' she said.
"Beating back unemployment will be a key yardstick by which US voters will measure Obama's success in November congressional elections and will go a long way to determining his own long-term political future.
"Also troubling to many is a budget deficit that has ballooned from spending aimed at cushioning workers and businesses through the worst recession in decades.
"'We have to do something,' Romer said. 'There are more targeted actions that we think absolutely will help.'
"Obama will focus is on getting the US fiscal house in order over the longer run, she said.
"Congress is considering proposals to help labor markets that include a $155 billion jobs package that has already cleared the House of Representatives."
Source: Mark Felsenthal, Reuters, January 10, 2010.
Asha Bangalore (Northern Trust): Recent Fed rhetoric and highlights of
"In speeches late yesterday [Tuesday], Fed Presidents Plosser and Fisher of Philadelphia and Dallas, respectively, were of the opinion that unemployment rate is most likely to trend higher than the December jobless rate of 10.0%. However, both of these non-voting hawkish members of the FOMC expressed concerns about inflation.
"Plosser was of the opinion that the Fed needs to be pre-emptive such that inflationary expectations remain anchored and an inflationary situation is avoided. He also noted that there is 'extraordinary uncertainty about the prospects for inflation over the next two to five years.'
"President Fisher's speech focused on lawmakers in Washington attempting to reduce the power and independence of the Fed.
"This morning [Wednesday], President Evans of Chicago, also a non-voting member of the FOMC, presented the Chicago Fed's forecast for the economy in 2010. He reiterated that restrictive bank credit and cautious households and businesses are restraining the pace of recovery but indicated that these 'headwinds' would fade in the latter half of 2010.
"The next FOMC meeting is on January 26 and 27, with four new regional Fed Presidents as voting members - Presidents Bullard of St. Louis, Sandra Pinalto of Cleveland, Rosengren of Boston and Hoenig of Kansas City. President Hoenig is the most hawkish of these new voting members, with President Bullard painted as a hawk, while President Pinalto is seen as a centrist and President Rosengren is classified as a dove.
"The latest Beige Book, published today in preparation for the FOMC Meeting, indicates a modestly improving economy. Ten Districts indicated improving conditions compared with the last Beige Book reporting increased activity in eight Districts. Mixed conditions were reported for the Districts of Philadelphia and Richmond.
"The Beige Book assessment of consumer spending in the holiday season is consistent with the tally of chain store sales reports which indicated gains in retail sales from a year ago but below the levels seen in 2007.
"The labor market information in the Beige Book confirms the grim details of the December employment report published last week.
"Price and wage pressures were not problematic.
"The housing market was depicted as recovering from the lows of early-2009, with low mortgage rates and home buyer tax credit program lifting sales. The non-residential real estate sector remains a source of serious concern in nearly all Districts.
"On the financial side, weak demand for all loans, excluding residential mortgages, a deterioration of credit quality, increased loan delinquencies and defaults were noted. Against this backdrop, it is certain the Fed will hold the monetary policy stance unchanged. The minutes of the December FOMC meeting included differences in opinion about the Fed's mortgage purchase program and prospects about inflation. The latest information does little to clarify these muddy waters. The nature of the incoming data after a deep recession and a financial crisis is bound to be mixed and present differences in the evaluation of the status of a recovering economy. Criticisms about the Fed's handling of crises in the past suggest that the Fed is likely to err on the side of being cautious with an emphasis on economic growth."
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, January 13, 2010.
Paul Kasriel (Northern Trust): Ballooning Treasury deficits - it takes
both outlays and receipts to tango
"On Wednesday, the US Treasury reported a record cumulative deficit over the 12 months ended December 2009 of $1.472 trillion. Although the editorial board of the Wall Street Journal surely will rail against exploding federal spending, it will probably fail to mention another key driver of ballooning federal deficits - collapsing federal receipts.
"Yes, as shown below, the year-over-year growth in 12-month cumulative federal government outlays remains in double digits, which it entered in October 2008. But notice that the growth rate in federal outlays is slowing. It peaked at 19.2% in July 2009. As of December 2009, the year-over-year growth in 12-month cumulative federal outlays had slowed to 11.8% - the slowest since December 2008's 12.8% growth. But look at what has been happening to the year-over-year rate of contraction in 12-month cumulative total federal receipts. In the 12 months ended December 2009 vs. the 12 months ended December 2008, total federal receipts contracted by 17.1%, a slightly slower rate of contraction than the 17.6% rate of contraction in the 12 months ended November.
"Of course, receipts are contracting. The US economy has only recently emerged from its longest and deepest recession in the post-war era in which both corporate profits and wage/salary income collapsed. Moreover, personal income taxes were cut by both the Bush (Jr.) and Obama administrations, something the editorial board of the Wall Street Journal presumably approved of.
"In sum, although high growth in federal spending is contributing mightily to our record federal deficit, the rate of growth in that spending is slowing. What often is forgotten is that the rate of contraction in federal receipts has accelerated."
Source: Paul Kasriel, Northern Trust - Daily Global Commentary, January 14, 2010.
Asha Bangalore (Northern Trust): US trade deficit widens
"The trade deficit of the US economy widened to $36.4 billion in November from a revised $33.9 billion in the previous month. The inflation adjusted trade deficit of good in the October-November months nearly matches the average of the third quarter of 2009. The trade deficit is predicted to post a smaller deficit in the fourth quarter and help to lift overall GDP.
"Following the recession when world trade shrunk significantly, the volume of exports and imports now show a noticeable upward trend. In November, exports of goods and services rose only 0.9% to $138.2 billion, the highest since in the past year. Imports of goods and services increased 2.6% in November to nearly $175 billion, also the highest in the past year."
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, January 12, 2010.
Clusterstock: Shipping into US unexpectedly jumped in December
"Shipping into the US climbed from November to December, defying typical seasonal trends and perhaps demonstrating growing demand in the US
"'December was a surprisingly good month that put a promising end to 2009,' the research company Panjiva said in a report issued today.
"There was a 3% increase in the number of global manufacturers shipping to the US market.
"There was a 2% increase in the number of US companies receiving waterborne shipments from global manufacturers.
"Traditionally, these numbers decline from November to December (-5% in 2009 and -1% in 2008).
"You can expect that the good news will continue, although it may be more confusing than clarifying. For the first quarter, the year-over-year comparisons will likely look very good. But that will largely be a result of the global trade free fall in 2009. A better comparison is probably against 2008 or 2007."
Source: John Carney and Kamelia Angelova, Clusterstock - Business Insider, January 12, 2010.
Asha Bangalore (Northern Trust): Industrial production - mixed news from
the nation's factories
"The Industrial Production Index rose 0.6% in December after a similar increase in November. However, the reasons for the gain were different. The December increase in production reflects a 5.9% jump in activity at utilities due to inclement weather, while the November gain was largely due to a 0.9% increase in factory production. In December factory production slipped 0.1%. "A mixed performance is seen in factory data for December. Production of consumer goods (+0.6%) and business equipment (+0.9%) increased but construction supplies fell 2.0%. Industrial production has risen 4.7% from the cycle low in June 2009.
"Production at factories has risen 4.5% from the cycle low in June 2009, while on a year-to-year basis, factory production dropped 1.9% in December. The decelerating pace of decline of factory production is noteworthy. The operating rate of the factory sector (68.9%) is still close to the historical low of 65.1%, which implies that businesses have room to meet a growth in demand without undertaking an expansion of capacity. There is nothing in this report that points to an inflationary threat and it is not likely to be seen for several more months."
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, January 15, 2010.
Asha Bangalore (Northern Trust): Retail sales - mixed news
"Retail sales fell 0.3% in December, after an upwardly revised estimate for November (1.8% increase vs. 1.3% in the previous estimate). At first blush, the headline for December looks weak and contradicts the chain store sales reports published last week. These details should help to sort out the report.
"First, unit auto sales increased in December (11.2 million vs. 10.9 million in November) vs. the decline (-0.8%) reported in the retail sales report. Unit auto sales matter for consumer spending in the GDP report for the fourth quarter. But, the fourth quarter average for unit auto sales fell at an annual rate of 20.4% after a nearly 108% jump in the third quarter due to the cash for clunkers program. Therefore, unit auto sales will be a negative for fourth quarter consumer spending. Second, the upbeat chain store sales information published last week were comparisons from a year ago. Retail sales from a year ago presented in today's report also show strong gains (see chart 4). The 2009 sales numbers look rosy compared with the 2008 weak holiday sales numbers. Third, on a quarterly basis, retail sales excluding autos or excluding auto and gas are stronger in the fourth quarter compared with the third quarter (see table below). Fourth, the level of retail sales excluding gasoline ($318.44 billion) in December compared with the fourth quarter average ($318.2 billion) is virtually flat, implying the absence of an arithmetical advantage.
"The main take away is that consumers are spending but gains are essentially lackluster when the details are sorted out."
Source: Asha Bangalore, Northern Trust - Daily Global Commentary, January 14, 2010.