Archive for January, 2010

Stacking Records – December Federal Deficit

Wednesday, January 20th, 2010

According to the Treasury Department, our Nation’s shortfall for the month of December came in at $91.9 billion, making it the worst December ever recorded.  That’s a lousy record to set, but the government says it must continue spending more than it makes as they extend unemployment benefits, issue more food stamps, and apply patches to other areas of our economy that are suffering from the recession.  Simultaneously, as millions of folks lose their jobs, receipts from income taxes are falling.  These same people, having less, tend to buy less, so corporate income taxes are declining too.  In December the government also spent a load, some $13 billion, keeping Fannie Mae, and thereby our housing industry, afloat, plus almost $4 billion more on the ongoing TARP plan. For the first three months of our fiscal year this adds up to some grim numbers, with the deficit running at $388.5 billion while revenue is off about 11%.  Last year our deficit hit $1.42 trillion, a record in its own right, and over three times bigger than that set in 2008.  The administration estimates they’ll set a new record this year too, ultimately stacking up a bit more than $9 trillion in red ink by the end of this decade.  These records aren’t 45s being stacked up at a sock hop, folks; this is runaway deficit spending.  If interest rates begin to rise and calls from other nations for us to get our house in order increase, how does Washington think we will be able to extricate ourselves from all this debt?  Hopefully we will get a definitive answer when President Obama lays out the 2011 budget to the nation in February.

November Balance of Trade

Tuesday, January 19th, 2010

In the month of November, according to the Commerce Department, our international trade deficit increased substantially, rising $36.4 billion as imports grew by 2.6% to $174.6 billion.  A revision to the October shortfall reduced it by $700 million to $33.2 billion.  The deficit worsened primarily as the cost of oil rose by more than $5 per barrel, overwhelming the fact that we actually imported less of it. Interestingly, our physical oil imports declined 5.2% in November after declining 9.6% in October.  If the recession is truly coming to an end, we expect that trend should reverse.  On a year-over-year basis, imports are now down 2.3% annualized versus last month’s Y/Y decline of 8.5%.  Exports did increase by 0.9% in the month to $138.2 billion and, while still off 5.5% annualized, showed an improvement from October’s 8.5% Y/Y decline.  Any attempt to interpret this data leaves us with unsatisfactory results.  On the positive side we see increasing imports as a sign domestic consumption is expected to increase, hopefully leading to rebounding retail sales.  The increase in exports will also give a boost to some sectors of our economy, especially manufacturing.  On the down side, an increasing deficit subtracts from the quarter’s GDP calculation, while higher energy prices rarely bode well for America’s consumers.  We’ll file the report and watch our other indicators in hopes of achieving better clarification of the developing trend’s direction.

Milk It!

Friday, January 15th, 2010

Have you ever milked a cow?  I tried to once, back when I was around 10, but I don’t claim to be an old hand at it.  I’m told, however, once you get a pail full from Old Betsy, if you let it sit for awhile (or “set a bit” if you’re from the same part of the country as I), the cream rises to the top and you can skim it off from the milk underneath.  This leads me to more questions concerning a full spectrum of dairy issues ranging from butter (what’s left after you have finished beating the cream?  Or do you whip it instead?) to “blue” milk (what did you take away to make the milk non-fat if you already skimmed off the fat?)  Thankfully this is not an agricultural blog so such profundity is merely rhetorical.  Except for this: having gone to all the aforementioned trouble of separating everything, why must you then spend time recombining it to produce half-and-half?  And that, my friends, is a long-winded way of wending myself back to the original point of this missive.  Here at Atlas we are prepared to make a bold forecast: we think 2010 will have two halves!  Combine the fact that many of our indicators continue moving in a positive direction with the momentum that seems to continue building as the major indices have climbed steadily higher, and you have a recipe for a good first half.  We certainly hope that will be the case, and our portfolios are currently positioned to take advantage of these up-trends.  Then the skies begin to darken and our path is no longer so plain.  Many of the issues that caused last year’s problems seem to us to remain unresolved and the successes being enjoyed presently could be due mostly to the Fed’s printing presses pushing hitherto unimaginable quantities of money into the global banking system at rates so low it is virtually free.  Many of these stimulus programs are scheduled to wind down by the mid-point of this year.  Unless we see some profound changes in the government’s approach to all that stuff they swept under our rug, we intend to become much more conservative in our investment posture in the second half.

Book Burning

Thursday, January 14th, 2010

In a recent commentary I discussed what circumstances might ignite inflation (see Can Inflation Set In? at marketkapz.com).  I am often asked how soon it will be before all the money the government is spending starts pushing prices up.  What if it doesn’t?  Is there an alternative to inflation in the current scenario?  Long ago one of the Federal Reserve’s governors said their job was to remove the punch bowl whenever the party gets started.  Naturally the opposite also applies and that is exactly what all the stimulus plans we have been seeing were designed to do, keep the economy going until it returns to a healthy growth rate.  The current concern I hear many voice is that, given the size of this punch bowl, the Fed won’t be able to drain it before the party gets so wild someone burns down the house.  But what if the house is already on fire and they are trying to put it out using nothing but a punch bowl?  I hope I haven’t stretched the analogy too far, but let’s look quickly at some of the actual numbers involved.  According to recent reports from the Fed, the various stimulus plans have actually injected much less than $2 trillion of new money into the system.  Sure, that’s a lot, but American households have seen their net worth on the books shrink by about $12 trillion from its peak in late 2007, also according to the Fed.  Net worth, investments, and home values are being destroyed at a much faster clip than money can be created.  The Fed isn’t cooking the books; they’re trying to put out this conflagration before it burns the books up.  The end result could be a re-liquefaction, a process of debt destruction that ultimately results in lower prices, lower wages, and lower consumption as deflation takes hold and we become once more a nation, not of spenders, but of savers.  The last time that happened in earnest, we called it The Great Depression.

December Employment

Wednesday, January 13th, 2010

The Labor Department’s December employment report was disappointing.  Instead of the expected slight rise, 85,000 jobs were lost during the month.  November was revised to show an increase of 4,000 instead of the 11,000 drop originally reported, marking the first gain seen in almost two years, but other revisions to prior months resulted in a net gain of just 1,000 jobs, so the December losses were significant.  To make matters worse, a decrease of 661,000 people who opted to leave the work force in December brought the total of those who no longer count toward the data to 1.7 million.  This disturbing trend, which marks the largest such decrease in some 48 years and brings the labor participation rate to a 24 year low of 64.6%, would have pegged the unemployment rate at 10.4% had they not dropped off the roles.  As it is, the unemployment figure remained unchanged at 10%.  The under-employment rate which includes “discouraged” and involuntarily part-time workers did rise, hitting 17.3%.  Unemployment is now lasting 29.1 weeks on average, the longest lapse since record keeping began in 1948.  Here at Atlas Indicators we look for two data points within this monthly report which we feel will provide the first hints that things are truly improving.  The first one, the average length of the work week, was unchanged at 33.2 hours.  We expect that to climb several points as employers allow their current employees to put in longer hours before new workers are brought on board.  The second, a measure of temporary jobs creation, did grow, rising by 47,000.  We see this as a sign business is improving enough to require new hires, but owners remain loath to commit to the expense involved in permanent placements.  When this area stops rising as full-time hiring takes hold, we will feel the economy has begun to strengthen in earnest.  One other segment of the report showed average hourly earnings increased by 0.2% for the month.  We hope to see that manifest as improving retail sales sometime soon.  Year-over-year payroll jobs are down 3.1%, a slight improvement over November, but in general this report provides little cheer to those who are out of work but still must put bread on the table.

December ISM

Tuesday, January 12th, 2010

The Institute for Supply Management’s December report continued to show strong growth.  At 55.9 points, the month’s reading for the manufacturing component was both above consensus and the most optimistic projection.  New orders continued to run ahead of the pack, up over 5 to 65.5 points, practically declaring more strengthening in this segment of our economy is yet to come.  Production hit 61.8, delivery times were off a touch but still good at 56.6, and employment moved further into positive territory at 52.0.  Weakness continued to be seen in inventories which, at 43.4, have yet to show any sign of the expected increase that might foreshadow rising consumer demand.  Order backlogs reaffirmed this softness as they stayed at the neutral 50 level.  The only real concern we have was the big six point plus jump in prices paid which vaulted to 61.5, but few other signs of inflation are yet apparent elsewhere.  The companion report which provides details about the non-manufacturing sectors of our economy was, as usual, more somber.  The good news is that it rose 1.4 to push the headline total to 50.1 points.  While this is saying that essentially no change was seen for December over November, the break above 50 has been a long time coming.  New orders were strong, posting a 52.1, which provides some encouragement that this sector could be starting to grow, which will mean good things down the line for employment.  At 44, the employment index itself hardly illuminates that possibility, but the total was up almost 2-1/2 points.  On the other hand, business activity evinced a robust gain of more that 4 to hit 53.7 points.  All in all these two reports suggest a continued strengthening in the general economy and must be taken as positively portentous.

December Consumer Attitudes

Monday, January 11th, 2010

The University of Michigan’s consumer sentiment report for December showed a decent recovery from the disappointing 67.4 point reading recorded at the end of November.  Rising to 72.5, it points to a consumer who may be feeling a touch less negative, but still hardly positive.  The report’s current conditions assessment came in at 78.0, well above the expectations component’s 68.9 point reading.  That’s too bad since expectations are generally seen as the leader in portending possible future spending, or the lack thereof.  All told, despite the month over month rise, we can take little from these totals that would add to the more positive atmosphere we have seen beginning to develop in some of our other indicators and must, therefore, leave the needle for this data point still mired at the low seven o’clock position.  Here at Atlas Indicators we also follow the Conference Board’s measure of consumer confidence which they said rose 2.3 points in December to 52.9.  Revising November’s headline number up from 49.5 as originally reported to 50.6 adds a pinch of sugar to help improve the taste, but there is still a sour edge to be detected within the internal figures.  The present conditions component fell to 18.8, down 2.4 points, and now resides at the lowest level seen since February of 1983.  On the employment front, consumers who said jobs were plentiful fell 0.2, coming to rest at a horrible 2.9% of the total.  That may not be too surprising, but those who said jobs are hard to come by also fell, off 0.6 to 49.2%.  Only 10.3% felt they would see a raise in the next six months.  Dropping by 0.6%, this could put a damper on some economic predictions for a rapid and robust increase in retail sales, although what folks do often differs from what they say.  Also, the number of respondents who said they planned to buy either a car or a house fell to the lowest point we have seen to date during this recession.  Offsetting these dour numbers, the expectations component exhibited surprising strength, rising 5.3 points to hit 75.6, the best reading we’ve seen since the current recession began some two years ago.  This is especially good news since a rising trend of expectations that reaches somewhere close to 80 has been seen in the past as a sign the economy is beginning to recover.  We remain, however, well below the levels most economists would consider healthy.  For context, consider the average level of this report was a very healthy 103.4 in 2007.  Let’s see if the upward trend has legs.