Archive for September, 2011

Revised Q2 GDP

Wednesday, September 21st, 2011

America’s Gross Domestic Product grew at a slower pace in the second quarter than originally calculated according to the first revision by the Bureau of Economic Analysis (BEA). The initial tally (1.3 percent annualized) was already too slow by traditional recovery standards, but since this recovery is not anchored in a traditional recession, perhaps the latest refiguring of 1 percent is apropos.

The BEA attributes the slower growth in GDP to “a deceleration in imports, an upturn in federal government spending, and acceleration in the nonresidential fixed investment.”  The slowing imports point to declining U.S. demand for foreign-made goods.  Since imports subtract from GDP, the BEA is saying that lower imports took less away thereby supporting domestic growth. After federal spending was hit hard in the first quarter, it rebounded by 2 percent from April through June.  Nonresidential fixed investment, money businesses invest in themselves, improved by 9.9 percent.  It is too bad such investments only represent less than 3 percent of the GDP figure.

Growth in these aforementioned components of GDP is not yet large enough to put our economy on firm footing.  Americans will need to spend faster before the economy measurably improves.  Consumer attitudes have continued to sour, but perhaps some savings depletion will counter our bad mood and start a new spending cycle.  Unfortunately, the largest and highest earning segment of the country, the baby boomers, are no longer at a stage in life where they will to consume at the rate our country has seen over the last few decades, so any resumption of such a favorable cycle may be further away than needed.

Two’fers

Tuesday, September 20th, 2011

Don’t you just love that inevitable part of every infomercial when the excited pitchman raises his voice another notch and exhorts, “But wait!  There’s more!”  That’s when they hit you with it.  The two’fer.  If you act quickly, they’ll let you have two for the price of one (fine print: plus separate shipping and handling, but who cares).  So you end up with two Snuggies or Slap Chops and some portion of your Christmas shopping handled.  What’s not to love?

Federal Reserve chairman Ben Bernanke appears to be finding himself in a position where he can emulate the buyers of all those fine products.  First off, he desperately needs to find a way to keep the U.S. economy from falling into another recession.  He has tried a series of stimuli with each delivering less than its predecessor and all combined seeming ultimately to have produced little or none of the desired outcome.  I’m betting he’s getting ready to announce something new quite soon, and it could be a lollapalooza.  Simultaneously, Europe desperately needs to find a way to keep the Eurozone from falling completely apart and having access to a few billion bucks couldn’t hurt their cause.  So Ben may be poised to buy up some of those pesky Eurobonds with greenbacks, giving our friends across the Atlantic needed liquidity while simultaneously injecting additional dollars into the global float to provide additional stimulus.  See?  A two’fer!

Here at Atlas we can appreciate the elegance of such a solution from a theoretical point of view.  On the other hand, it also seems to sound like a case of throwing good money after bad.  We aren’t really convinced it will provide the desired end either.  The diminishing returns of previous efforts do seem to substantiate our case.  I can still remember back to the days of twenty-five cent beers when the local oasis would offer two’fers on weekday afternoons.  Today we see the Fed possibly preparing to buy everyone another round.  Back then we called it Happy Hour.  If Ben does belly up to the bar soon, I wonder who will be laughing.

August Consumer Sentiment

Monday, September 19th, 2011

The American philosopher William James said, “It is our attitude at the beginning of a difficult task which, more than anything else, will affect its successful outcome.”  He would likely be as unsettled by the current difficult economic situation and the attitude reflecting it as we are here at Atlas.  Specifically, the latest Consumer Sentiment reading from the University of Michigan plunged in August to a reading reminiscent of one seen within the depths of the last recession. That recession is over, right?  Now down to 55.7 and off 25 percent over the last three months, the current sentiment figures make us wonder.

This drop is the second largest on record, but Americans are not glum without cause. One-third of all households reported income declines in the August survey for the third year consecutive year.  The past is influencing their expectations as one-third also anticipates no income improvement in the next twelve months.  Spending plans are being cut as potential buyers postpone purchases due to job and income uncertainty.  The good ol’ days of finding a way to afford something after it has been purchased are gone.

While it maybe fun to remember the way things were before the financial fallout, it is also naïve to expect such a period of moderate market volatility seen in those prior decades to return anytime soon.  Perhaps we should consider Mr. James again when he said, “acceptance of what has happened is the first step to overcoming the consequences of any misfortune.”  Atlas does not see an easy way out of the economy’s headwinds that have been exacerbated by the world’s profligate ways.  The recovery has been slow and is likely to continue the pace. Time will be an essential ingredient to the healing process and we may need to accept a slower pace of economic growth for some while to come.

July Income and Spending

Friday, September 16th, 2011

The Commerce Department reported consumer spending increased in July by a strong 0.8%, beating consensus expectations.  After declining by 0.1% in June (revised from a 0.2% drop), this robust increase, the largest in five months, is quite welcome and could ultimately aid the third quarter’s GDP calculation.

One month doesn’t make a trend however, and there were some special factors at play.  A jump in auto sales helped boost the total but this could reflect a bounce from slower sales as a result of supply disruptions caused by the Japanese earthquake.  Also, warm weather boosted utility output as air conditioners were turned up.  If there is no substantial recovery in consumer attitudes, these one-offs will likely be reversed in the August report.

Incomes increased by 0.3% in July which suggests consumers had to dip into savings to cover the increased billings.  This brought the savings rate down one-half percent to 5.0% on the nose.  The June income figure was also revised, now showing a 0.2% gain.

The report also calculated that the headline inflation rate is increasing by 2.8% annually, although the core rose by a lower and more manageable 1.6% annual rate.  Still, this is 0.2% higher than June’s reading.

Demographics is Destiny

Thursday, September 15th, 2011

Atlas Indicators Investment Advisors, Inc. exists for several reasons, but none of them may be as important as our view of the demographic shift our country is experiencing.  Atlas continues to be concerned about the impact aging baby boomers will have on our economy for the next couple of decades.  Some economists marginalize this thesis since we can all see the change coming and therefore markets should be able to adjust accordingly.  However, a recent paper put out by the Federal Reserve Bank of San Francisco (FRBSF) has expressed similar concerns and may illustrate that despite seeing it coming, markets will continue to watch it unfold to their detriment.

Authored by Zheng Liu and Mark M. Spiegel, the article titled “Boomer Retirement: Headwinds for U.S. Equity Markets?” reviews the historical relationship between America’s age distribution and the stock market’s performance.  The authors find a high correlation between two ratios.  The first is the price to earnings ratio (P/E) for stocks which measures the number of years worth of current earnings at which a company’s stock is priced.   The other relationship considered the middle-age to old-age ratio (M/O), comparing the population of 40-49 year-olds to 60-69 year-olds (we don’t know what they did with the 50-59 year-olds).  Given their large numbers, as the baby boomers turned 40, they became part of the middle-aged group causing the M/O ratio to grow.  During this period of the life cycle, they increased their savings and investing.  In turn, this increase in demand drove P/E ratio higher.  Now that baby boomers have started to enter the 60+ stage of life, the M/O ratio is on the decline and will continue to decline until 2025 as boomers move to the denominator of the ratio and the next generation is not large enough to replace them in the numerator.  To simplify, there are too many like JR and Al while not enough like Christopher.   If the correlation between the two ratios continues, the authors suggest the next decade or more will be challenging for stock prices.

This is only part of the story.  While the FRBSF has considered some very granular data, Atlas has been worried about the same story from a less technical but more everyday perspective.  As the boomers age, they will not only transition portfolios, but their consumption will decline as they retire and try hard not to outlive what is left of their savings.  Retiring boomers have been through a tough eleven years which included two equity bear markets, the collapse of the housing bubble, and the worst recession since the end of WWII, leaving them with less than had been projected when their original retirement plans were being formulated.  This has made lasting impressions on their net worth and likely their consumer psyche.  (by Christopher Cox)

July New Home Sales

Wednesday, September 14th, 2011

The housing market is like an artery for the economy.  It helps pump economic activity to a variety of appendages such as loan officers, real estate agents, interior designers, flooring companies, gardeners, masons, and other home related industries.  Like the arteries’ relationship to ones wellbeing, when housing suffers from blockages, the health of the economy suffers.  The Census Bureau’s July new homes sales report continues to show slowing volume indicating the blockage is building.

The annual transaction rate fell 0.7 percent to 298,000 units paralleling the previously released existing home sales’ contraction.  This comes on the heels of downward revisions to both May and June’s readings which are now a combined 18,000 fewer than the earlier count.  Prices also followed the larger existing homes market as the median value fell 6.3 percent to $222,000 with the average cost remaining about unchanged.  The actual number of new homes for sale put in a new record low of 165,000.  Dividing that number by the pace of sales held the inventory at 6.6 months which at least suggests the supply of homes is possibly coming in line with the demand for the dwellings.

In an attempt to prop up the important economic artery, many stents (like tax credits and government backed loans with low down payments) have been tried.  Combined with low interest rates, acting like a blood thinner, many would have guessed the patient would be back to normal activities by now.  Instead the market remains in the recovery room.  The actual cure may be much less academic than the intrusive attempts the “doctors” have made so far.  Perhaps a real change in consumption habits and something as simple time to allow such measures to make an impact is the only way this patient will heal.

July Existing Home Sales

Tuesday, September 13th, 2011

The weakness in the housing market continued in July according to the National Association of Realtors’ (NAR) existing home sales figures.  The rate of sales fell 3.5 percent from June’s pace.  The current annualized transaction figure is 4.67 million units.  This is down from the 4.84 million in June.  The median price slipped to $174,000 and is now 4.4 percent lower than a year ago.  There are several forces keeping the home market weak.

The chief economist at the NAR, Lawrence Yun, feels financial institutions are primarily to blame for the soft housing market.  On the NAR website he is quoted as saying “many buyers are being held back because banks are offering financing to only the most highly qualified borrowers, ignoring a large share of otherwise creditworthy buyers.”  Yun goes on to describe a housing market that could be in better shape if banks loaned money to marginally less qualified buyers.  Interest rates are certainly not impeding the progress as the national average commitment rate for 30-year conventional, fixed rate mortgages was 4.55 percent. This is only slightly higher than in June according to Freddie Mac. Interest rates trended lower most of August, so it will be interesting to see how low the rate gets when the August data is released.

The nation now has roughly 3.65 million existing homes for sale.  At the current sales pace, it will take 9.4 months to move the entire inventory assuming no others are added to the stockpile.  Atlas considers a 6 month supply to be healthy.  The oversupply, tougher credit standards, and cruel labor conditions, along with the country’s continuing demographic shift, keeps the Atlas crew from being too optimistic about the housing market’s near future.