Archive for October, 2010

Foul Play

Friday, October 29th, 2010

Now I know I may be stepping on some toes here, but I have a gripe.  In sports every game has rules which regulate how it is to be played, which also specify behavior deemed illegal.  Performing the latter can result in penalties being levied against the perpetrator or offending team.  These acts of poor sportsmanship or cheating are called fouls.  Yet I hear commentators at basketball games say a team still has some number of fouls to give as if they were presents for the opposition.  Is that really how we want to structure moral authority?
The investing environment seems to be taking a somewhat similar approach these days.  We hear about high frequency trading strategies, apparently a method of front running clients, which has received at least partial blame for the so called flash crash that cost many Main Street investors a tidy sum.  Is this how the game should be played?  Not according to the rules.  Investment bankers spin out esoteric products—derivatives—which can be designed to disguise shortcomings like some say Goldman Sachs did for Greece.  False fronts erected by major banks to facilitate the bundling of mortgage backed securities that are sliced and diced into structured investment vehicles no one seems to understand also allows them to dodge fees due to state agencies.  Recently trading floors at big banks have been hastily expanded to spin out more proprietary products with an inch-thick prospectus, so that retail investors—that’s mom and pop to us—can be sold more esoteric investments before the latest Basel accord takes effect which will regulate such practices more stringently.
How many fouls must we allow them?  I thought fouls are punishment for bad behavior, not a license to a random number of infractions.  How did they become so institutionalized?  I realize that coach Valvano’s great moment would never have happened if it wasn’t accepted behavior.  It still doesn’t seem right to me, but at least that was just a game.  Wall Street seems to be playing with our future while lining their pockets to our detriment.  This game is for keeps.

September Consumer Confidence

Thursday, October 28th, 2010

The word retreat is not the kind of verb one likes to see in headlines of an indicator, yet this is how the Conference Board described its reading of the September Consumer Confidence Index. The index is currently at 48.5 after Augusts’ revised reading of 53.2. It has now fallen about 23% from its May high of 62.7.

The year-over-year reading is now negative as well. This indicator tends to be sensitive to the labor market, so its currently depressed reading is not too much of a surprise with unemployment and underemployment being as high as they are. The short term outlook by consumers has degraded with those who characterized the current business environment as “bad” growing to 46.1% from 42.3% while those calling conditions “good” fell to 8.1% from 8.4%. Looking further down the horizon does not provide a better outlook as the expectations for the economy also deteriorated. Consumers feel business conditions will get worse while not expecting the labor economy to provide any relief.

In an economy that is over two-thirds consumption, the consumer attracts a lot of attention. Their attitudes are thought to indicate their future behaviors. This is not always true however. Recent reports from individual retailers have been rather optimistic. Perhaps consumers are trying to overcome their bad feelings by doing what feels good…shopping.

Quantitative Easing

Wednesday, October 27th, 2010

Propel, propel, propel your craft placidly down the solution.  Ah the wonders of our native tongue!  Using high-falootin’ words, of course, may sometimes prove confusing.  That is why, here at Atlas, we employ just the simplest of prose.

Of course, not everyone does the same.  Consider a term now gaining in popularity which is much ballyhooed in both economic and political circles referred to as “quantitative easing.”  In what may be, perhaps, an attempt to be even more obscure, many just call it “QE2,” with a wink as they complete their thought with some sea-faring innuendo.  What does it mean?  A recent issue of The Economist provided a refreshingly simple definition: “the printing of money to buy bonds.”  Ah, I see; thank you very much.  Should we care?  Perhaps.  Some feel this is a policy bound to end with rampant inflation.  Others feel it to be the hallmark of a society (and its currency) in decline.  Many of our trade partners see it as part of a larger, ongoing “currency war.”  What we can say for sure here at Atlas is that this drama being played on a global stage will ultimately be resolved in a way which draws all the players closer to a shared standard of living.

In the short run, not every country will most likely see this solution as a win.  On the other hand, as Keynes once said, “In the long run we will all be dead.”  Remember this, though, by allowing me to return to the childhood ditty with which I began these thoughts:  Ecstasy, ecstasy, ecstasy, ecstasy; existence is but an illusion.

September Supply Managers

Tuesday, October 26th, 2010

Both of the Institute for Supply Management’s indices continued to grow in September.  The manufacturing measure slipped to 54.4 from 56.3, but any reading over 50 indicates expansion. Manufacturing has grown for 14 months in a row.  The Service sector also expanded for the month. It is now at 53.2 after a 51.5 reading in August.
That the business cycle sensitive manufacturing index managed to stay above the important 50 mark illustrates the factory sector of our economy is growing, but the rate of growth has continued its recent deceleration.  In fact, the index is now at its lowest level since November 2009.  A large part of the drop came from the supplier deliveries component.  Delivery times have shortened suggesting there is some slack building in the manufacturing side of our economy.  Exports fell to 54.5 from the recent may high of 62.0.  It will be interesting to see how this plays out in October with the dollar’s recent weakness.
The service portion of the ISM managed to make up most of its August loss.  In contrast to the manufacturing report, delivery times slowed in the service sector.  This may lead to new hiring as restaurant guests grow tired of waiting for their orders to be served.  The leading portion of the report, new orders, grew as well, suggesting that consumers are ordering more services than last month.
The reports were each positive, but the rate of growth needs to be monitored on the manufacturing side.  With any luck, this indicator will begin to reaccelerate in the final quarter of the year paving the way for the rest of the economy to follow.

Unemployment in September

Monday, October 25th, 2010

There are times I wish I could cry out “Uncle” here at Atlas.  Not because I want to give up, but because sometimes an indicator will flop around like that fish I caught the summer after kindergarten which my Uncle Glenn had to help me land.  Details in the Labor Department’s unemployment report for September were all over the place, just like my trout I took from that stream up near Rock Creek.
First off the report said America’s unemployment rate remains unchanged.  And then, flop!  It added that our country lost 95,000 jobs!  But wait, flip! the private payrolls grew by 64,000.  Oh no, here comes a flop! The “under-employed” figure grew from 16.7% to 17.1%.  Long-term unemployment however, defined as those out of work for more than 27 weeks, fell by 640,000 since May.  Count that as a flip!  But wait, that still means 41.7% or 6.1 million of the unemployed have been out of work long-term. That definitely has to go into the flop! category.

As you can see, America’s labor base is flipping and flopping around like a fish out of water.  It seems likely our economy will be caught in this struggle for some time to come as we continue making adjustments to a new economic environment.  This time around though, we cannot rely on my Uncle Glenn.  Instead, now when I hear folks crying Uncle, it’s for Uncle Sam.

Limbo Crock

Friday, October 22nd, 2010

Now I know America was already well populated before Columbus discovered it.  And I think Limbo Dancing probably pre-dates Chubby Checker but he’s the one who taught me my moves.  Anyway, as I assume you well know, the object is to pass your entire body under a stick set as low to the ground as possible without falling over.
In this period of global slow economic growth nations are now starting to perform their own version of this dance using their currencies.  Here the object is to get the exchange rate of your monetary unit lower than that of your trading partners.  In theory this boosts your exports as they become cheaper on a relative basis.  In turn you keep the population employed as they produce these goods being exported.  The list of countries using this technique is long and expanding.  We complain to China that they are unfairly keeping their Yuan’s value tied to dollars.  Europe worries their Euro is too strong relative to dollars.  The Japanese recently spent two trillion yen trying to weaken their currency.  Brazil is talking about it.  Even the Swiss are doing it.  To believe that every country can lower the value of its currency all at the same time is, in the parlance of economic theory, a crock.
An interesting thing is happening as the world competes to see how low they can go.  Obviously, if all currencies are declining simultaneously, on a relative basis they generally maintain their relationship.  It’s the bar that’s moving; it keeps going up.  And that’s what’s interesting: it seems to be a gold bar.

August Income and Expenditures

Thursday, October 21st, 2010

The Bureau of Economic Analysis’ report on Personal Consumption Expenditures (PCE) continued to show signs of life for the second consecutive month in August.  Wages were higher, consumers continued to spend, and inflation was minimal.  This will help lift the third quarter GDP figure due out at the end of October and is signaling that the economy can continue its steady, albeit slow, expansion.
Personal income managed to grow by 0.5%.  This includes an increase of 0.3% in wages and salaries, the biggest component of income.  Private wage and salary disbursements grew by $26.1 billion in August after growing $25.7 billion in July.  In contrast, government wages and salaries decreased $5.2 billion.  Furloughed state and local workers accounted for $3.9 billion of this total.
Consumption grew 0.4% in August or $41.3 billion.  This is the fourth consecutive month it has increased, and the second in a row it has done so by 0.4%.  Since personal consumption is such a large component of GDP, this is an important piece of the puzzle when trying to see whether we are expanding or contracting.  We only have two months of data for the third quarter, but so far they are looking better than the second quarter’s first two.
The last point of interest in this report is the Federal Reserve’s favorite inflation indicator, the core PCE price index, which grew by .1% for the month and has increased 1.4% year-over-year.  With inflation pressures this low, the Fed will have plenty of room to be accommodative in the near future.  They may have more to say about their plans after the November elections.