Archive for December, 2012

November Treasury Budget

Monday, December 31st, 2012

Atlas does not think that fiscal year 2013 is off to a good start according of data released by the Treasury Department.  Both October and November saw increases in the deficit from a year earlier.  The $172 billion deficit in the second month of the fiscal year compares to a shortfall of $137 billion in the same month last year.

The government, however, cannot be blamed for the entire problem.  The Treasury Department conveniently noted in their release that the calendar impacted this month’s deficit.  Because the first of December fell on a Saturday, payments for various benefits were paid a day early and counted as part of November’s outlays.

Higher receipts (which are primarily taxes) helped keep the deficit from being even larger.  The government collected a little over six percent more than in the same month a year ago.  But government outlays were 15.2 percent higher.  Year-to-date, the deficit is nearly 24 percent higher than this time last year.  Of course, some of this should factor out next month because of the advanced December outlays mentioned earlier.

To say that the fiscal situation in the U.S. is bad will not likely upset any apple carts.  The current projected deficit this year will fall just short of $1 trillion according to the Treasury.  Meanwhile, the beltway continues to argue about the best way to tighten things up, so until there is more clarity on the budget, America is on pace to spend $1.36 for every dollar it collects in revenue.   (by C. Cox)

Future Schlock

Friday, December 28th, 2012

One hoary axiom from Wall Street lore generally seen as incontrovertible is the market’s mystic ability to see over the time horizon some six to nine months out.  It is seen as a leading indicator which can tell us what will be happening in the future.  For those adept at reading such tea leaves, they can position their portfolios in advance and make bundles by being prescient.

Looking back over the past three years, we can get some sense of just how precise these forecasts can be.  Over that period markets have predicted five different breakdowns of the European common currency (the Euro), two double-dip recessions here in the U.S. and a couple of hard landings by the Chinese economy with its subsequent deleterious effect on global wealth.  Of course, the sage investor who follows such things may object than none of these tragic events actually happened.  Yeah, but such a string of failures won’t keep Mr. Market down for long.  He’ll no doubt be back soon to rearrange the deck chairs for the next titanic voyage into financial oblivion.

Mr. Market gets quite a bit of expert assistance.  After all, someone needs to interpret the smoke signals for those of us who are illiterate in such matters.  Every major financial firm offers up a plethora of analysts and economists who help us parse their reports.  Politicians of all stripes tell us what will go right if they get their way and, especially, what will go wrong if they don’t.  Central bankers around the world outline the problem and color in the spaces.  And an industrious financial press rails about the state of things from radios, television sets, periodicals, newsletters, blogs, tweets, you name it.

How helpful all of this proves to be is questionable in several respects.  First, given the incredible amount of data and opinions, sorting it all out so as to make it useful is a daunting challenge.  Subsequent application for portfolio creation can be even more difficult.  Perhaps most importantly, serious research by Professor Tetlock at Berkeley shows that all the experts combined can’t get it right even half the time.

What is an investor to do?  I wouldn’t advocate using a magic eight ball, but that almost makes as much sense as following advice from promoters of the stock of the week genre.  We believe that the herd mentality has some self-fulfilling attributes which provide clues to both short-term and more durable moves in various investment classes.  Right or wrong, when large amounts of money are moved in concert by opinion, they exert an effect.  With the proper tools, these trends become easier to spot.  This approach is generally referred to as momentum or relative strength portfolio construction.  While there is no perfect answer, we here at Atlas have found it to be a solution substantially more effective in making prognostications than is the local medium.

Revised Third Quarter Productivity and Unit Labor Costs

Thursday, December 27th, 2012

The nation’s third quarter productivity figure was higher than initially tallied according to the Bureau of Labor Statistics.  This is in line with the similar revision to the quarter’s GDP figure.  The 2.9 percent increase was revised up from the first reading of 1.9 percent.  Unit labor costs fell 1.9 percent which is much better than the 0.1 percent drop initially reported.

The gain in productivity is a result of output growing faster than the increase in hours worked.  Output improved by a seasonally adjusted annualized rate of 4.2 percent.  This added production only required hours worked to go up by 1.3 percent.  Year-over-year, output and hours worked have increased by 3.5 percent and 1.8 percent respectively; this represents a productivity improvement of 1.7 percent over the same period.

The added productivity helped reduced the per-unit costs of output.  The improved production per hour grew faster than the increase in the average hourly rate of compensation.  Including the decrease of 1.9 percent in the third quarter, unit labor costs are only up 0.1 percent in the last year.

Workers are the greatest expense to production.  With that in mind, the year-over-year increase in unit labor cost is signaling that inflation will not rise substantially as a result of higher employee expenditures; the subdued growth in unit labor costs allows companies to remain profitable without needing to pass on large price increases to consumers in order to maintain healthy profit margins.  This is important because the central bank wants to continue being accommodative with its monetary policy as long as there is not extraordinary inflation.     (by C. Cox)

November Employment Report

Wednesday, December 26th, 2012

The headline numbers for November’s unemployment report put out by Bureau of Labor Statistics were rather encouraging.  The number most people pay attention to, the unemployment rate, fell to 7.7 percent from 7.9 percent in October.  The nation added 146,000 jobs in the month as well.  Hourly earnings improved by 0.2 percent, and the average workweek held steady at 34.4 hours.

Data beneath the headlines was a little more mixed.  First, private payrolls increased by 147,000 in November, but September and October payrolls were revised down by a total of 49,000 jobs.  But, as Since payroll cost are the largest expenditure a company has, employers apparently felt confident enough to increase their hiring.  Still, the private payrolls data was split.  While the service sector added 169,000 workers for the month, goods producing firms decreased their number over employees for the second month in a row (22,000 jobs lost in November) after showing zero growth in September.  This is worth noting since manufacturing is more sensitive to the business cycle.  As noted above, the unemployment rate fell, but it did so primarily because 350,000 Americans left the workforce.

The country’s employment situation is improving, but it is not healthy.  This is not out of line with other recoveries in the sense that employment is a lagging indicator.  Employers are always reluctant to bring on the next worker because of the costs associated with hiring.  Before adding to the payroll, they want to make sure their investment is worth the upfront costs.  Companies seem to be additionally unsure about these expenses because of the fiscal tug-of-war going on inside the Beltway.  Currently, there is some payroll progress being made, but it is not at a pace commensurate with a strong economy.     (by C. Cox)

October Income and Spending

Monday, December 24th, 2012

Personal income and consumer spending was disappointing in October according to the latest data provided by the Bureau of Economic Analysis.  Both measures of the economy were lower than the previous month, and even with adjustments made for the terrible hurricane hitting the densely populated east coast at the end of October, the tally was less than what the Bloomberg consensus was anticipating.

Consumers rule our economy, and no indicator does a better job of monitoring the strength of their consumption than the outlays component of this report.  Just like the retail sales indicator that we wrote about a few weeks ago, it appears super storm Sandy slowed spending by consumers.  When adjusted for inflation, consumption fell 0.3 percent for the month; the year-over-year change deteriorated as well, moving to 1.3 percent from 1.9 percent in September.  The best 12-month improvement since the end of the great recession occurred in November 2010 with a 3.2 percent gain.  The improvements have now been trending lower for nearly two years.

Growing income helps facilitate higher levels of consumption.  Unfortunately the primary measure of income fell for the month.  Real disposable personal income measures the amount of money a consumer can spend after taxes and inflation.  It ticked down 0.1 percent.  The savings rate improved to 3.4 percent compared with 3.3 percent in September; the added saving also hurts consumption.

Inflation remains tame according to the Federal Reserve’s favorite measure of price changes.  The core (it excludes food and energy) personal consumption expenditure price index increased by 0.1 percent after September’s revised increase of 0.3 percent. Over the last year, this measure of inflation has grown by 1.6 percent.  This is well below the 20 year average of 1.9 percent.

The level of consumption only reiterates the challenging economy America is experiencing.  If consumer growth is rising at less than 2 percent a year, the smaller areas of the economy (business investment, government outlays, or net-exports) will need to grow faster in order to keep the expansion increasing.  Businesses seem hesitant to part with cash, our nation’s fiscal position makes it unlikely that government spending will add a significant amount to output, and many of our trading partners are experiencing their own difficulties, so exports are probably not going to save the day.  If the economy is going to materially improve, consumers will need to spend.     (by C. Cox)


Friday, December 21st, 2012

Momentous issues are thrusting themselves upon the world’s economies these days.  Here in the United States a bi-polar Congress argues the merits of fiscal discipline versus a social safety net for the unemployed and aging.  In Europe the discussion surrounds the very survivability of their common currency, the Euro.  In both instances, events conspire to draw the respective governing bodies into heated debates which continue up to but just short of a point of failure.  Repeatedly, at the edge of the abyss, a compromise is reached which extends the argument to a future date rather than actually accomplishing any satisfactory resolution.

It’s as if various factions are attending a quilting bee, each with their own colors and patterns in mind, trying to stitch something together.  Unfortunately it appears neither side knows how to sew very well.  Each stitch gets added at the last moment with a haphazard result; something allows the pieces to be held together for a bit longer but always there seems to be the danger that everything is set to unravel.

Competing agendas make for a crazy quilt, or perhaps a cloak of many colors which fits no one very well.  Brinksmanship leads to a series of unsatisfactory stitches added over time in quick bursts of ineffectual compromise.  Better seamstresses have been hired, the Volker Commission or the Simpson-Bowles Commission come to mind.  But the political players insist on using their own needle and thread to placate interest groups instead of applying a truly bipartisan and ultimately crucial solution.

I always wondered why Dr. Frankenstein wasn’t more careful with his own creation.  As depicted by Boris Karloff, the monster was an ugly pastiche of amateurish stitch marks holding his head on and brain in.  The good doctor should have hired a better seamstress and let the work be done properly.  The same thing applies to both the European Union and our own Congress.  If they keep adding stitches one at a time like they have been, the result may prove to be something big, ugly, and monstrously out of control.

October New Home Sales

Thursday, December 20th, 2012

New home sales fell in October according to the Census Bureau.  The 368,000 seasonally adjusted annualized rate is off slightly from September’s 369,000 units.  This is more significant than at first glance because September’s number was revised down by 20,000 units; August was also recalibrated and lost 2,000 sales.

The number of units sold was not the only weakness in the report.  For the second month in a row, the median and average prices fell.  October’s 4.2 percent slide in median price follows September’s decrease of 2.4 percent.  The average cost of a new home has fallen 3.2 percent and 4.2 percent in September and October respectively.  Year-over-year new home price gains have slowed considerably in the past few months as the 12-month gain in the median price has gone from 15.7 percent in August to just 5.7 percent in October; the year-over-year average price increase has decreased to 8.0 percent from 16.0 percent during the same period.

Inventories remain tight.  At the current sales pace, the supply would last 4.8 months, a slight uptick from September’s 4.7 months.  There are currently 147,000 (seasonally adjusted) new homes on the market.  The low inventory would normally stimulate builders to construct additional units, but the latest jobs report showed a loss of 20,000 construction jobs suggesting that builders are not very anxious to increase their output.  Housing may have found a bottom, but it is not yet exhibiting the qualities of a recovered segment of our economy.  (by C. Cox)