Archive for May, 2010

Wall of Worry

Friday, May 28th, 2010

You may have heard an analyst say “the market climbs a wall of worry.”  This old Wall Street aphorism suggests that while we will always be confronted by some problems and uncertainties regarding the economy’s future, they tend to be resolved and the market rises in anticipation of that happy ending.  We certainly have seen a spectacular increase in the market averages over the past year or so, and many of the problems confronting us at the depths of despair seen in March of ’09 do seem to be well on their way to resolution.  Here at Atlas Indicators we constantly discuss scenarios that might disturb this momentum, looking for those bumps that may upset your portfolio.  Lately the list of these events has lengthened.  Besides oil spill and volcanoes or the potential for terrorism in metropolitan areas, we can list many that are more mundane.  With the end of government stimulus programs will we see our economy begin to sag once again?  Will the robust process of replenishing inventories cease to be a factor as it nears completion?  Can unemployment possibly return to more normal levels?  Will the Goldman Sachs flap spread to the rest of the banking system?  Will European nations default?  How will deficits be addressed on a federal, state, and local level?  Is there a shadow inventory of foreclosures about to flood the housing market before it can regain its footing?  All of these issues will need to be addressed and we can only hope the outcome is positive.  If that is how things play out we will see that, all in all, they were just more bricks in the wall.

April Consumer Prices

Thursday, May 27th, 2010

The Department of Labor released the consumer price index (CPI) and the headline figure declined 0.1% in April.   Over the last year it has gone up 2.2%.  These are hardly alarming figures and will do little to move the Federal Reserve’s low interest rate policy.  Included in the headline number are the two most volatile components, food and energy.  Energy has been up 18.5% over the last year but provided some help by falling 1.4% in April.  Food grew 0.2% for the month and is 0.5% more expensive than April 2009.  While it is fun looking at CPI’s capricious components, it is more insightful to observe the boring core elements which take away food and energy.  This measure of CPI had zero growth over March (March had no growth over February) and only a 1% change in the year-over-year number.  For those looking to update their wardrobe, exciting news can be found in apparel prices for the second month in a row as they fell 0.7% in April.  Offsetting apparel’s contracting prices were recreation, airline fares, and medical care.  Low inflation is good, right? It depends on whether you are borrowing money or not.  Borrowers are often helped by inflation because the currency used to pay off loans is worth less than when the money was borrowed.  Since the US government is such a large debtor, this type of CPI report is not helping its situation.

Chasing Philistines

Wednesday, May 26th, 2010

It’s an old story that continues to resonate even in present day events.  Goliath is the big dog, scary and seemingly untouchable.  Behind him is gathered the Philistine army who cheer him on every day as he goes onto the battlefield and punks out King Saul’s army.  Truthfully, everyone on both sides is afraid of him, but the Philistines see him as their poster boy while the Jews consider him unassailable.  Then David shows up, calls him out, and kicks the pee-waddin’ out of him.  Now the Philistines freak and start running away while the newly embolden Jewish army hunts them down like dogs.  Fast forward to today and let’s re-write the scene in view of the current banking crisis and plans for re-regulating the financial industry.  The casting call goes out.  Who will play Goliath?  Goldman Sachs of course, and we’ll let the SEC play David.  Now all the rest of the banks (playing the Army of the Philistines) have their eyes bugging out.  They wonder, “If the government is willing to go after Goliath, imagine what it can do to us!”  Obviously Goliath isn’t dead yet, and he may not need to lose his head before the other players  begin to fall back in disarray, but it was one swell move on the administration’s part to go after the schoolyard bully first.  We have yet to see what slings and arrows of outrageous fortune Congress will ultimately foist on the banks as the financial re-regulation legislation works its way through their halls.  The strategy will have worked if big banking makes the desired changes in their behavior voluntarily, but we’re not counting on it.

April Industrial Production

Tuesday, May 25th, 2010

According to the Federal Reserve, industrial production (IP) rose 0.8% in April.  Manufacturing was the leading component.  It grew at 1.0% for the second consecutive month and is now up 6% on a year-over-year basis.  Since manufacturing is the largest portion of the report, its leadership is even more encouraging.  Mining and utilities, the other two components of industrial production, had mixed results changing by 1.4% and -1.3% respectively.  Utilities fell for the third month in a row.  If production is rising, it helps to have somebody to buy the merchandise.  This month’s consumption pattern mimicked the past year’s trend with business equipment growing by 1%, and 6% year-over-year.  The consumer goods component grew by 0.2% in April and 3.8% over the last 12 months.  Since there is a high correlation between the IP and Gross Domestic Product (GDP), April’s IP report indicates that the economy is off to a good start for the second quarter and hints that we will see growth in the advanced GDP report due at the end of July.  Capacity utilization (CU) grew 0.6% to 73.6% after March’s number was revised down a tenth of a percent.   While the growth is reassuring, CU is far from the normal levels in the low 80s seen before the recession.  This slack in the economy is a primary reason for Atlas Indicators not being concerned about inflation at this time.  With all of its accommodations, the Federal Reserve may be laying down the kindling to start the inflation flame, but it will take moves in things like employment and CU to ignite it.

April Retail Sales

Monday, May 24th, 2010

In April retail sales continued to expand faster than expected according to the Commerce Department, rising for the seventh consecutive month.  The 0.4% increase was double consensus expectations and positive 0.2% revisions were added to February and March as well.  This result is even more impressive given the shift of normally robust Easter related sales out of April by a quirk of the calendar.  If we adjust for this by combining March and April, then averaging the results, we still come up with results that are both quite strong and very encouraging.  Increasing sales of building materials at hardware stores and garden centers, one of the strongest components of this month’s report, may be pointing to an increasing confidence by home owners in the long-term viability of their residence, possibly the single largest asset they own.  Retail sales have now grown in twelve of the last thirteen months and are up 8.8% year-over-year.  This also suggests to us a continued rise in both consumer sentiment and confidence figures are in the cards.  All this good news compels us to raise this indicator’s needle another notch.

Slow Motion Fast Forward

Friday, May 21st, 2010

Speaking of his own bankruptcy Mark Twain said it proceeded “At first very slowly, and then very suddenly.”  These days we are watching as the specter of bankruptcy slowly spreads its shroud over entire nations, with the threat of sovereign defaults now looming large.  Greece is garnering most of the headlines but recent credit downgrades for Portugal and Spain emphasize the possibility of contagion spreading throughout the Euro-zone.  How is Greece trying to thwart disaster before matters begin to spin too rapidly out of control?  Their deal with the European Union and International Monetary Fund calls for an increase in taxes, cuts in benefits, and a slowing of government spending.  The situation may still be moving slowly but we can use their difficulties as a template for what is happening here.  Fast-forward to our own inevitable day of reckoning and listen to the echoes.  Fed Chairman Bernanke believes that the U.S. economy cannot grow its way out of troubles surrounding our current high deficit and that entitlement programs will need to be reformed.  In a recent report to Congress he said, “In the absence of further policy actions, the federal budget appears set to remain on an unsustainable path,” adding that government must ultimately make hard choices about modifying programs like Social Security, finding ways to restrain federal spending and even accepting that higher taxes will be necessary.

First Quarter Productivity & Labor Cost

Thursday, May 20th, 2010

The Labor Department’s first quarter report on Productivity and Unit Labor Cost (ULC) shows growth in productivity and output as the ULC decreased.  America’s output grew at a slower rate by advancing 4.4% in the first quarter after growing 7% in the last three months of 2009 according to the latest revision.   The pace of the expansion in productivity also slowed.  Productivity rose 3.6% for the quarter compared to the re-revised fourth quarter pace of 6.3%.  Also growing by 6.3% on a year-over- year basis, productivity had its best advance since the fourth quarter of 1962. ULC continued its negative trend by contracting 1.6% while hours worked only grew by 0.8%.  ULC’s decrease is the fourth out of five quarters.  The only quarter over the last five that did not decline was the flat second quarter of 2009.  This serves as a reminder of how tough the American labor economy has been.  With output growing much faster than hours worked, there continues to be no sign that inflation will come from the jobs market.  The needle on the productivity indicator can remain in the 12 o’clock position for now, but any further deterioration in the productivity growth may suggest this indicator has seen its top in this cycle.