Archive for September, 2010

What’s In These Things?

Thursday, September 30th, 2010

My wife announced recently that she intended to bake some red velvet cupcakes for a small shindig she was planning to throw at our house.  Naturally my interest was piqued.  “You can join us if you want,” she continued, “but I’m inviting a group I used to work with, and you may feel a little bit out of it.”  So what’s new?
Standing around, listening to a bunch of people discuss how things used to get done and how they should be getting done today if only current circumstances weren’t such an impediment barely sounds worth the price, even when I am being paid in cupcakes.  In fact, it sounds akin to what one would hear at any recent World Economic Forum or Federal Reserve get-together.  After all the conversation is done, when these Masters of the Universe take their private jets back home, I imagine they begin to wonder if everyone truly understands the problems we are facing.  There isn’t enough Calamine in the world to keep that itch of doubt from spreading.  They don’t know what ingredients go into a recipe to fix the current problems any more than I know how to grate red velvet.
Let’s face it, things have changed, a revolution is underway, the past 60 years or so are no longer precedent.  These days it is not a sign of ignorance to feel out of it; the global economic system is enveloped in a fog of uncertainty.  Get used to it.  Heck, feeling out of it comes so natural to me that I generally feel right at home.

July Consumption

Wednesday, September 29th, 2010

After staying virtually unchanged in June, the Bureau of Economic Analysis’ report on Personal Consumption Expenditures (PCE) showed growth in all three of its major components during July.  Consumers may have taken a breather in June but they started the second half of the year by increasing consumption 0.4%.  Income advanced 0.2%.  The Federal Reserve’s favorite inflation gauge, the core PCE price index, ticked up 0.1% for the month and to 1.4% year-over-year.
Since the consumer is the heart of our economy, the increase in spending is a positive sign to see as the second half of the year kicks off.  While consumers were less inclined to buy non-durable goods (sales there fell $7.1 billion), they increased durable goods consumption by $14 billion.  Since durable goods tend to be pricier purchases that may require financing and time to pay, this vote of consumer confidence is an encouraging development.   The country’s consumption of services grew by $12.9 billion.
A rise in personal income helped support the higher consumption habits of July.  Personal income grew by $30 billion over June with wages and salaries comprising $22.1 billion of the jump.  Unfortunately, the nonfarm self-employed who aren’t able to count on either steady wages or a salary, found themselves making less money for the second month in a row.
With many eyes on the Federal Reserve and interest rate policies, the trend of easy money continues to be the path of least resistance.  The Fed’s favorite price monitor is not showing any signs of prices getting out of hand even as the nation’s income and spending habits expanded.  Not that the job at the Fed is easy, but this report, showing some signs of growth while not hinting at inflation, helps solidify their argument for a low interest rate policy.

Red to Pink

Tuesday, September 28th, 2010

I hope you’re sitting down for this.  Our nation’s budget deficit in August fell 13% on a year-over-year basis.  That’s right; we overspent by a mere $90.5 billion versus the $103.6 billion by which we were overdrawn in August of ’09.  Even the analysts were surprised; this was about $4.5 billion less than the consensus had estimated.

What did you get for the money?  The Defense Department, Social Security Administration, and Department of Health and Human Services (read Medicare and Medicaid) all did their part, and the entire government’s bill actually rose 2.2% when comparing this August to last. The decline in the overall deficit comes from an increase in revenue, apparently one a bit more real than the Federal Reserve remittances we discussed in our prior report, bringing receipts for this August to the second highest on record.  One source of this bonanza comes from corporate tax receipts which have soared 30% for fiscal year to date.  On the other hand, taxes collected from individuals fell $791.2 billion over the same period, underscoring how tough times are at the individual level.

The Congressional Budget Office figures our deficit to GDP ratio will shrink to 9.1% from ’09’s 65-year record high of 9.9%.  We’re still in the red and I’m almost tickled pink!  The improvement is being attributed to an economic recovery reportedly underway.  All those folks in Washington who want to keep their seats better hope it picks up steam in a hurry.

Aug Consumer Sentiment

Monday, September 27th, 2010

The University of Michigan’s Consumer Sentiment measure was not able to make much of a rebound in August after experiencing a significant drop in July.  The indicator nudged just a touch higher to 68.9 from 67.8, still lower than that seen at the bottom of some prior recessions.
The most forward looking component of the index, the index of consumer expectations, was up 1% but remains at a depressed level, with the overall view for future income and job growth still quite dull. Half of the households surveyed do not expect an increase in their income over the next year.  In fact, they expect their inflation adjusted income to decline.  Not that they feel there are any viable options.  Eight out of ten households do not expect unemployment to be any lower in the next twelve months.  Only one in three currently expect the economy to grow at an uninterrupted pace over the next five years.
With sentiment as negative as this report suggest, it is difficult to be excited by the marginal increase in the indicator.  Consumer expectations are supposed to be forward looking and provide a hint to spending probability.  From the current survey the view does not appear reassuring.

Hither, Thither, and Yon

Friday, September 24th, 2010

Up and down.  Back and Forth.  One minute I’m here and the next I’m…well, I’m still here but it seems like everything else is gone.   Do you know what I mean?  Wild.
The purview wherein I dwell professionally has exhibited amazingly strange volatility for months now.  That is, perhaps, a rather hoity-toity way of saying the stock markets sure have moved up and down a bunch lately.  Either way, it’s true.  Consider one arcane measure: the 90% up (or down) day.  These occur whenever one of the major stock indices has 90% or more of its trading volume on a single day skewed toward either advancing or declining issues and the total volume increases substantially over that seen the prior day.  Generally speaking, these are rather rare events and are traditionally taken as signs that serious money is either moving into (on up days) or out of (on down days) the market.  In roughly the last five months though, we have seen around fifteen 90% up days and an equal number of 90% down days.  This extreme contradictory behavior is quite unusual.  It suggests that money managers globally just haven’t been able to become confident in their forecasts of our nation’s economic future.  They, and subsequently their portfolios, have been blown back and forth with every revision in various data points.
How do we navigate your portfolio through such turbulent, foggy seas?  We watch our indicators for multiple confirmations that our macro view is on course, then steer steadily in the direction this compass provides, waiting for the clouds to part.  In the meantime we constantly look both here and there for investments which provide a strong cash flow, relying on interest and dividends to provide a bit of extra oomph, hopefully boosting your total return in these uncertain times.

Occasional Showers

Thursday, September 23rd, 2010

Traditionally a table for gifts is set up prior to having a baby shower.  As guests arrive it begins to fill at an accelerating rate until the festivities are scheduled to begin.  A few late stragglers may add to the largess, but soon presents will be drawn down, opened, and the table will become bare once more.
Over the past year or so durable goods orders seem to have suggested a similar pattern, driven primarily by inventory accumulation.  Coming off excruciating lows seen last year after the economy’s sudden collapse, companies began a sudden pronounced drive to rebuild grossly depleted supplies.  Combined with massive government stimulus, it seemed the economic recovery was well on its way.  The supply on the table kept swelling.  But the headline durable goods orders for July, up a scant 0.3%, suggest the flood of visitors are now mostly seated, waiting to see what response each gift elicits when opened.
Some gifts are always much bigger and more expensive than others.  If we eliminate transportation and defense to get July’s core orders, we find they fell 3.8%.  Shipments of core orders, a component of GDP, fell 1.5% to boot, yielding figures much weaker than expected.
We cannot assume the party is over just yet.  Some economists point out that these numbers are seasonally adjusted and technical factors may cause positive revisions in the future.  Maybe, but business cycles, like babies, don’t just happen overnight; they need to gestate. If the guests stay for dinner, that’s good; unfortunately this data suggests they have already started to leave early.

Productivity and Labor Revised

Wednesday, September 22nd, 2010

The Labor Department has revised its second quarter report on Productivity and Unit Labor Cost (ULC).  Originally the productivity figure was estimated to have dropped 0.9%.  The revision shows that it fell by 1.8%, twice as much.  Productivity is important because it allows an economy to grow without impacting inflation when it is increasing.

Unfortunately for the second quarter’s report, it was moving in the wrong direction.  Production, up 1.6%, grew more slowly the number of hours worked, which showed a 3.5% increase.  This is the second largest gain in hours worked since the first quarter of 2006.  Since labor tends to be the most costly expense business encounters, seeing productivity decline in this manner will have a negative impact on many companies’ bottom lines. One solution to this calls for a reduction in labor, cutting jobs. But letting people go can be a very taxing exercise, both emotionally and logistically, for a company to go through, so employers may want to see if this change in productivity is temporary or becoming a trend before letting workers go. Thus retail sales figures will be a key metric to monitor. If demand by consumers for output does not keep up with current production, jobs may need to be cut.

This Productivity and Labor Unit Cost report does not have to be a harbinger of bad news just yet, but here at Atlas we liken it to an economic version of a canary in the coal mine.  Let’s hope it keeps singing.