Archive for October, 2011

September Existing Home Sales

Monday, October 31st, 2011

September’s report on existing home sales from the National Association of Realtors reversed the brief spurt of positive data seen in the prior month.  As we had warned at the time of August’s release, this should come as no surprise if you subscribe to one of Atlas’s leading tenets that America is still in the early innings of what we believe will be a prolonged period of debt destruction and reliquification.

Sales of existing homes contracted by three percent in the month to an annual pace of 4,91 million homes.  The drop came from the single-family component which contracted 3.6 percent, swamping the 1.8 percent increase seen in condo sales.  Supply grew a smidgen to 8.5 months while the average price fell a whopping 3.1% to $212,700.  The median price, at an even lower $165,400, was off 3.4 percent.

Our projection that we are experiencing what will become a long-lived period of debt reduction has two significant components.  First, both individuals and businesses will become more frugal, paying off existing debt and delaying (or defraying) any further borrowing.  Second, some debt destruction will be forced upon the borrower through processes such as bankruptcy and foreclosure.  Unfortunately, the increasing supply of existing homes coming on to the market is being bloated to some extent by the latter as foreclosures continue to cast a gloomy pall over the market.

In A Hole

Friday, October 28th, 2011

Let’s pretend you’re walking along out in a field somewhere and you come upon a hole.  If you are anything like me, you’ll stand close enough to the edge of this hole to see what’s in it.  Let’s pretend even further by imagining it to be empty.  So, what do you see now?  Nothing?  If a companion asks, “What’s in the hole?” you’ll say, “Nothing.”  If your buddy, seeking to verify this by checking for himself, gets too close and falls in, there is obviously now something in the hole.  That’s the thing about holes: they’re sometimes hard to see until you fall into one.

One big hole folks might miss until it’s too late involves their pension.  Corporations have underfunded their pensions (which cover about one in three U.S. workers) by $512 billion as reported in The Economist while public-sector deficits may hover around $4.4 trillion.  This suggests there won’t be enough money to give just over one in four private-sector workers their retirement checks if they are supposedly covered by a pension plan.  Employees of various government agencies likely face an even bleaker future.

There is a fudge factor commonly employed by corporations and government agencies which allows them to dig their holes even deeper.  They apply an average assumed rate of return to the existing balance which shows it can grow out of trouble.  That’s like you saying the $400,000 dollar mortgage on your home isn’t really that high because the underlying value will appreciate.  Good luck getting that through a credit check, but many states use an 8% assumed rate when calculating their liabilities despite earning just two to three percent on deposits in government bonds even as the stock portion of their portfolio waivers.  The Federal Reserve’s promise to keep rates exceptionally low for a long time won’t help anyone either.

The Pension Benefit Guaranty Corporation was set up by Congress to backstop plans in distress.  We’re awaiting this year’s total, soon to be released, but last year they reported running a $23 billion deficit themselves.  It is widely reported that corporations are sitting on oodles of cash, and they may be forced by law to put some of it into their underfunded plans.  That could surely suck up a big chunk of their surplus, but does little to help the soon to retire public employee.  When push comes to shove do you think they will be allowed to starve?  I don’t think so either.  That leaves higher taxes, bigger deficits, or an incredibly strong multi-year stock market rally.  How would you handicap those choices?

September Industrial Production

Thursday, October 27th, 2011

Industrial Production expanded in September after a flat report in August according to the Federal Reserve.  Originally growth was recorded for August but a revision to the figures concluded the month was unchanged while July’s count was adjusted higher.  Over all, industrial production has been in an uptrend recently and is now up in 4 out of the last 5 months.

Manufactured consumer goods production improved, led by the automotive industry followed by home electronics.  These are durable items expected to last longer than 3 years and tend to be more expensive, so it suggests manufacturers feel individual Americans are showing some signs of confidence despite what the consumer attitude surveys have been saying.  The automotive and light truck annualized rate of production has been higher than 2010’s run rate in each of the last three months.  Producers also seem to feel companies are likely to continue spending as business equipment output grew by 1 percent.

Capacity Utilization has been increasing but is still below its long-term average.  One area within the economy which is above its long-term trend is at the crude stage of manufacturing.  The demand for raw materials has pushed processors to use 88.8 percent of their capacity which is 2.4 percentage points above the average seen from 1972-2010.  Unless capacity is added for the production of raw materials, this stage of manufacturing is susceptible to rising price pressures.

The industrial production portion of our economy continues to hum along at a reasonable pace despite America’s otherwise tepid recovery.  Another manufacturing indicator, this one from the Institute for Supply Management, has recently flashed a warning sign in the relationship between new orders and inventories, so Atlas will continue to monitor industrial production to see if a slowdown manifests to correct a growing inventory glut within a waning demand environment.  While hoping for a pickup in orders, we are preparing for something short of that scenario.

September Producer Prices

Wednesday, October 26th, 2011

Inflation for the country’s producers flared up in September with a month-over-month increase of 0.8 percent after no change in August.  In the last twelve months such costs have gone up 7 percent.  Stripping out food and energy makes the core figure look better as the changes were 0.2 percent for the month and 2.5 percent year-over-year.

Consumer goods really gained some momentum this month by putting in a 1 percent increase.  Energy was the leading component, rising 2.3 percent.  Gasoline, after falling in August, surged 4.2 percent.  Food managed to gain 0.6 percent.  Even after excluding these volatile components, consumer goods increased 0.3 percent for the month.  Price increases in the consumer goods portion of the report may end up hitting the prices Americans pay when they check out from their favorite merchants.

Another area worth paying attention to is the crude level of production.  The capacity utilization portion of another indicator we watch, Industrial Production, shows we are using more of our output resources than average in this portion of the manufacturing cycle.  This means the manufacturers will need to raise prices or find a way to increase production.  The former seems to be happening as the prices for crude goods advanced 2.8 percent in a month, and the increase was not pushed by food or fuel.

Atlas has continued to stick with the viewpoint that inflation will not be a long-term problem. We have been adamant that the demographic and debt issues facing the developed nations will keep demand for goods below historic levels.  This month’s PPI report is leaning heavily against us, but if this economy transitions from the slow growth period we are in now into outright contraction sometime in the next year as we believe, our deflationary assumptions are likely to win out.

September Leading Indicators

Tuesday, October 25th, 2011

The Conference Board’s Leading Economic Indicators report for September gained 0.2% over August based primarily on the strength of the same sub-component which caused it to rise last month.  This should sound familiar by now as the yield curve measuring interest rate differentials between the fed funds rate and 10-year Treasury yields skewed the total higher.  This relationship has had a pervasive influence on the LEI for some time now and will likely continue to do so for an extended period.  Unfortunately there seems to be little commensurate favorable response from our economy.  The other positives came from an increase in money supply, vendor performance, consumer expectations, and new consumer goods orders.  The factory workweek had no influence while new orders for non-defense capital goods, stock prices, and initial jobless claims all fell.

The increase isn’t very significant, pointing to a continued sluggish pace of economic growth.  We’ll take a positive number over one which is negative any day, but fear some recent reports regarding orders and expectations may soon head south.  We certainly hope there never comes a time when the only positives are derived from the yield curve and an increase in the money supply.  The Fed can’t heal this economy by itself.

Employment in September

Monday, October 24th, 2011

It’s no secret our country has an issue with jobs.  The most recent recession cleaved jobs away quickly, and the recovery has been slow to bring them back.  Companies added 103,000 jobs in September according to the establishment survey, but this is not enough in a $14 trillion economy.  The household survey indicated the country’s unemployment rate remained unchanged at 9.1 percent.

The total of those without work will remain high so long as the labor force grows as fast as or faster than jobs can be added.  For instance, September’s household report shows 423,000 people joined the labor force but only 398,000 additional Americans were employed.  Of those unemployed, it is the long-term unemployed who have the most about which to be concerned.  This represents a sub-section of unemployment still deteriorating.  There was also a 3.4 percent jump in the number of people not working for 27 weeks or longer.   We find a silver lining in the report which shows hours worked and hourly wages both increased.  The workweek improved by six minutes to 34.3 hours while pay was boosted 0.2 percent after losing 0.1 percent in August.  This may seem small but when multiplied over a labor force as large as America’s it can make a difference. The payroll survey indicates 137,000 jobs were added by the private sector while 34,000 government employees lost jobs.

Here at Atlas we find much of the economy to be concerned about and jobs is one of the first items on our list.  Our sense is that things overall will likely worsen in the next twelve months, negatively impacting the employment market which in turn will put pressure on the economic and social characteristics of our country, perhaps even the world.

Cnut’s Tidal Shift

Friday, October 21st, 2011

King Canute was an Anglo-Saxon king of old.  I’m informed he actually ruled over Denmark, Norway, some of Sweden, and most of England back a bit before the Norman Conquest.  No record exists of King Norman so I won’t go any further into medieval history other than to recount one of Cnut’s (as the Danes do say) more memorable object lessons.

Back then (being the early 11th century) no one disagreed that kings had clout.  To demonstrate the limits of his, Cnut had his throne placed just below the tide line possibly somewhere on the Thames River.  With no internet at that time, or even a printing press, there is some confusion regarding the exact site, but not the results.  Cnut commanded the tide not to rise.  Nevertheless it did and the king got soaked.  As is oft said, you can’t fool with Mother Nature.

Allow me to draw a parallel here.  The European Union banking system ran a stress test this past July to determine which banks were healthy and which might need to be bailed out should Greece default on its sovereign debt.  One institution which came through with flying colors was named Dexia, a bank tied primarily to Belgium and France.  Less than three months later Dexia received a government bailout to prevent an apparent total collapse, on its way to being partially nationalized by the Belgian government.  France is supposedly also stepping in to bankroll a big chunk of the failed firm.  Despite the EU’s declaration that things were all peachy, Dexia was swamped by a rising tide of unfavorable events.

What went wrong?  Many feel the stress test itself was a charade, designed to produce success.  There is precedent for such a jaundiced view since a year prior two Irish banks collapsed soon after passing stress tests of their own.  Remember too that toward the end of 2008 here at home Citigroup was considered well capitalized en route to receiving its second bailout check.  We have little faith that all remaining European banks are healthy with Dexia the sole unfortunate exception.  Major banks, including some in stalwarts like France and Germany, passed the same stress test even while showing results similar to Dexia’s.  It looks to us like the tide is still rising and that more important institutions will likely also prove to be underwater.