Archive for July, 2011

May 2011 Income and Outlays

Wednesday, July 20th, 2011

Americans’ income grew by $36.3 billion in the month of May according to the Bureau of Economic Analysis.  This 0.3 percent gain was accompanied by a much smaller increase in personal consumption expenditures of $4.6 billion.  What happened to the rest of the money people made?  Personal savings increased by $23.1 billion.  Ironically, for an economy that is growing as slowly as ours, such a jump in savings provides little help to the big picture since the country desperately needs more demand if we hope to grow our way to prosperity.

Here’s how the numbers break down.  The largest income category, “wages and salaries,” improved by $14.1 billion.  Other categories logging in gains were rental income, income on assets, and transfer payments.  Proprietors’ income fell $1.7 billion.  Overall spending stagnated in May.  Durable goods purchases decreased 1.5 percent after showing zero growth in April.  Japan’s auto shortages may help explain some of the lackluster movement in this category.  Non-durables fell 0.3 percent while services expanded 0.2 percent.  Also included in the release is the Federal Reserves’ favorite inflation gauge, now up 1.2 percent from a year-ago.

The country has been experiencing a slowdown in the year-over-year growth of real disposable income since the middle of 2010.  This has been putting pressure on Americans’ ability to spend faster, an important data point since our consumption is the largest component of GDP.  The last three months of spending data has been relatively flat.  If there is not a pick-up in inflation-adjusted pay mirrored by a commensurate increase in consumption, our economy can perhaps subsist but will find it difficult to flourish.  Why individuals have suddenly become savers instead of buyers is an important issue we must understand before a true assessment of the economy’s health can be completed.

May New Home Sales

Tuesday, July 19th, 2011

Following the lead of the larger market for existing homes purchases, new home sales continued to weaken in May according to the U.S. Census Bureau.   The statistic fell 2.1 percent in the fifth month of the year to 319,000.  The fall was actually less than expected and puts the year-over-year change 13.6 percent higher than 12 months ago.  The median price is over $40,000 cheaper than May 2010 with a reading of $222,600.  Lower prices and slowing sales help illustrate how housing continues to be a strong headwind for the economy.

Ill winds of gale force current blowing from this industry’s collapse have helped to uproot our economy, but there may be signs of relative calm in the new home marketplace.   The inventory of new homes for sale is lower than any other point in the almost 50 years that the Census Bureau has been tracking this number.  The recent stock sits at 166,000 homes, representing a 6.2 month supply at the present purchasing pace.  At some point, home builders will need to begin to restock the supply of unused homes.   In the meantime, housing and the economy remain in the doldrums with little activity.  Since the government’s rescue efforts do not seem to have provided the security many buyers need to feel before plunging into the real-estate market, it looks like the market will need something the authorities are unable stimulate, more time.

Is Anybody Listening?

Monday, July 18th, 2011

It is almost impossible to avoid hearing someone discussing the U.S. debt ceiling issue.  In short, estimates suggest our nation may be flat broke by August second.  Some say it’s possible no checks will be written paying our soldiers for their service, that no social security deposits will be issued.  Others suggest America will not be able to pay interest due on maturing T-bills and that our credit rating will fall to junk status.  Serious stuff, and all of it coming fast, literally in a matter of days unless Congress agrees to raise the debt ceiling, thereby allowing our government to borrow money from somewhere to cover all of these payments.

Golly, the bond market for U.S. debt must be in complete disarray right?  Well, actually, no it isn’t.  We keep selling bonds, bills and notes on almost a daily basis and demand remains strong.

Who can we believe then?  The rating agencies?  These were the same folks who told us things were good a few years ago, right up until things went horribly bad.  Now they say our economy is heading for disaster and no one apparently believes them, especially the politicians running this show.  They know we have seen the debt ceiling raised some 37 times since 1980 according to the OMB, with the government actually being shut down in eleven instances while things were worked out.

Here’s an interesting quote I recently came across.  “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure.  Leadership means that ‘the buck stops here.’  Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren.  America has a debt problem and a failure of leadership.  America deserves better.”  Given the quantity of harsh commentary issuing out of our nation’s capitol these days, I suppose you could attribute this particular critique to almost anyone, Democrat or Republican.  In fact, it quotes then Senator Obama.  The fact that he said it back in 2006 when President Bush was trying to raise the debt ceiling shows just how intractable this problem has proved to be.  The only sure thing is that probably no one will like it when it comes.

Pounding Sand

Friday, July 15th, 2011

Discovering the derivation of some phrases we would place under the loose heading of Americana can on occasion lead the researcher in many directions.  My people trace back to Climax Springs in the Ozarks where the phase “pounding sand down a rat hole” was meant to suggest doing something futile.  I point this out since, with very little effort, you can find several other usages of the term.  Stay focused; I’m talking futility and just futility.

In an attempt to lift the American economy out of a deep recession both Congress and our Federal Reserve embarked on a series of programs to provide various forms of monetary stimulus.  We saw Cash for Clunkers.  We saw first-time home buyer rebates.  We saw the outright production of funds via the Troubled Asset Relief Program (TARP).  Payroll withholding taxes were reduced to spur spending.  The Federal Reserve chipped in with an effort called Quantitative Easing.  When that initially did not prove sufficient, they began a second round.  Together these are referred to as QE1 and QE2, the second of which recently expired at the end of June this year.  Since the recession was officially declared over, our Treasury Department reports the combined addition from all these programs swelled our deficit by roughly $2.8 trillion dollars.  Toss in another $700 billion from the Fed.  What did that $3.5 trillion total buy?

One way to answer the question is to consider how much our economy has grown over this same period of time.  In other words, how much larger did America’s Gross Domestic Product (GDP) become?  Well, GDP has expanded by $975 billion over this same period so we can conclude that our government was able to buy approximately $1 of growth for every $3.50 it spent.  There is some fear that with all the stimulus plans soon to come to a close that we might slip back into recession unless the powers that be engineer a version of QE3.  A willingness to spend 3.5 times more than you make in an effort to get ahead is proof enough that the majority of our leaders have never run an actual company.  They might as well be pounding sand down a rat hole for all the good that’ll do.

May 2011 Existing Home Sales

Thursday, July 14th, 2011

The housing market’s recovery is considered by many to be a crucial piece needed for the country’s economic well being.  A healthy housing market makes homeowners feel better.  As their mood improves, they are more likely to spend money.  A market that is fluid allows people to move to areas in the country with improving economic prospects because they can sell the home in the town from which they are moving.  The National Association of Realtors’ (NAR) latest existing home sales report does not suggest housing is headed in that direction.

Existing home sales slid 3.8 percent in May to 4.81 million units annualized.   There are currently 3.72 million homes for sale which is a one percent decline from April; but the pace of sales fell faster than the number of homes on the market resulting in an increase in supply from 9 months in April to 9.3 months in May.  Year-over-year the change fell 15.3 percent.  The home buyer tax credit, which ended in the spring of 2010, seems to have artificially improved last year’s figures by moving sales forward.

The national median home price fell 4.6 percent year-over-year to $166,500.  Distressed homes made up 31 percent of May’s sales versus April’s 37 percent.  Freddie Mac reported the national average commitment rate for a 30-year conventional, fixed rate mortgage was 4.64 percent.  NAR’s chief economist Lawrence Yun commented on the loan environment by saying, “although low mortgage interest rates are welcome, they are less meaningful compared to the tightness of loan underwriting standards.”  Atlas has mentioned the lack of lending in other postings, and here is an economist who agrees.  The housing market will likely need to see banks lend to people other than those not in need of financing before a recovery in this important segment of our economy can take hold.

Jackson (further in the) Hole

Wednesday, July 13th, 2011

Rocky Balboa just couldn’t say no to a fight, and he kept getting mauled in movie after movie.  It’s a wonder, having spent so much time on the canvas that Stallone can even stand up these days.  I guess there has been something like six sequels to the original Rocky, most cleverly and carefully accounted for under the titles Rocky II, Rocky III, Rocky IV…well you get my drift.   Surprisingly, other franchises have had even more encores.  Halloween has twelve.  James Bond narrowly escaped the jaws of death so often that eight different actors have had to play the part.  I understand the record goes to a real knee-slapping Japanese flick with the loosely translated title It’s Tough to Be a Man which had 48 iterations, or maybe it was a Hong Kong production I won’t even try to name.  At any rate, once something proves popular, repeating it over and over again often makes dollars and sense to someone.

Ben Bernanke, the Chairman of our Federal Reserve, understands this and may be well on his way to challenging Sly in this area.  First he introduced Quantitative Easing as our financial system seemingly teetered on ruin, hoping to place enough funds into everyone’s pocket to prevent such a debacle.  When he felt the healing process had begun, the Fed eased off the gas but our economy appeared to resume its decline.  A new program was announced by Mr. Bernanke, promptly dubbed Quantitative Easing II (or QE II by the press in the interest of saving space), at a conference held in Jackson Hole, Wyoming.

Jackson Hole is a pretty place less than one hundred miles south of Yellowstone.  A lazy river winds along nearby, upon which adventurous rafters can soak up some scenery and suds.  Off to the west the jagged peaks of the Tetons bite into blue skies like vampire fangs, presenting a suitable metaphor for an annual gathering of the world’s most prominent central bankers, finance ministers and investors hosted by the Fed’s Kansas City branch.  It was here where the chairman announced his proposal for QE II last year, scheduling an end date for it on June 30, 2011.

While no one seems willing to say this second round of stimulus proved to be a resounding success, it has come to an end as promised.  Now analysts are biting their nails waiting to see if Bernanke’s match lit the hoped for fire under our economy which will allow it to blaze on its own.  Nobody is holding their breath though, and some expect Ben B. will suggest the need for more assistance.  He has already hinted that such may be the case in various speeches of late.  I doubt any of us here at Atlas will receive an invitation to this year’s gathering but we will listen with keen interest for any clues that QE III is in production.

Unintended Consequences

Tuesday, July 12th, 2011

I spent a more than a few of my formative years in Texas where I chased horny toads and such through the desert for days on end.  Back then we didn’t worry about the poisonous effect open air and sunshine would have on a child’s development so I generally ran free clad in little more than sneakers, shorts and a t-shirt.  Such proclivities combined with the area where we lived to get me up close and personal with rattlers and tarantulas.  I got stung by wasps, bees, scorpions and the like.  This was due in part to a tendency to stick my hand down every hole I came across to see what might be in it.  I remember once sitting in the dirt under a mesquite tree.  I don’t remember exactly why I was doing that but I do vividly recall that the spot I inadvertently chose was centered on a nest of red ants.  Don’t try that at home, especially wearing shorts and little else.

You may ask what such fond reverie has to do with investing.  Good question.  My choice of locations served to illustrate what has become possibly my most favorite law of the universe, the Law of Unintended Consequences.

Our governments, local, state and federal are now all experiencing the results of this law.  Sometimes I really do think they are motivated by a true desire to help make things better, but why they think everything else will remain stable every time they stir up an ant’s nest is beyond me.   Congress gave the banks money for loans but they just held on to it.   They offered Cash for Clunkers to restart auto sales and ended up with a lot full of used cars.  They gave first-time home buyers incentives and watched the subsequent demand for homes dry up.  They nationalized auto companies and insurance companies to prevent a disaster and yet that spark to ignite the economy seems to have fizzled.  They poured over one trillion dollars into various good ideas and little nothing to show for it as yet.

But bless their little hearts, they keep on trying.  Congress is now attempting to agree on a method to cut spending while increasing their ability to do more of it.  I don’t know about you, but that sure sounds like more surprises just waiting to happen.  Looking at the players involved, I suppose that’s the one thing which should come as no surprise to any of us.