Archive for May, 2013

On a Cash Course

Friday, May 31st, 2013

It’s hard to pin down distance when dealing with stellar objects, even those in our own neighborhood.  Nothing stands still.  Everything spins and rotates and moves all catawampus.  Still, if we were to measure the distance from Earth to Mars, when closest, the two are roughly 34 million miles apart.  If that sounds like tight quarters, they are also 55 million kilometers apart.

But wait, you say, aren’t you just saying the same thing in two different ways?  Yes I am, I reply, but does it really matter?  I mean, a million here, a million there; it’s still a far piece.  Unless, of course, you get a whole lot closer.  The 1999 crash of NASA’s Mars Climate Orbiter happened because data in inches and feet were used to guide it as if the units were metric instead.  Big $125 million oops there.

Understanding the language being spoken is obviously very important.  Here at Atlas we occasionally refer to a piece written by the San Francisco branch of the Federal Reserve back in August of 2011.  It discusses the correlation between two age-based American populations and the stock market’s price to earnings (P/E).  The P/E ratio is a well-known, popular method of valuing statistical measures of our equity markets.  But value should not be confused with price since price is just one of the factors which comprise the ratio itself.  The remaining component, earnings, can be tricky as an eel to grab hold of, and that’s where the paper tends to drift.  While thought provoking and a good read (if you’re interested, here’s a link to it), discerning when the authors are describing valuations versus price can be tricky.  As one point toward the end, they actually make the leap from value to price, applying the whole to their age-based ratio, and coming up with a rather dour forecast for the next couple of decades.  They offer up a brief list of caveats, and I’m certain many more could be found with little effort.

Nothing is more dangerous to the health of your portfolio than an economist with a ruler.  That said, here at Atlas we have always favored the demographic argument as primum mobile for this current period of economic history.  We will keep their conclusions in mind, but they will not form the prime directive of our investment decisions.   (by J R)

Chicago Fed National Activity Index

Thursday, May 30th, 2013

Economic activity slowed in April according to the Chicago Fed National Activity Index (CFNAI).  The survey is comprised of 85 monthly national indicators representing four broad categories designed to replicate the movements of the overall economy.  Three of these four fell in the period.  The indicator’s three month moving average (-0.04) suggests the economy is growing slightly below trend; zero represents trend growth.

All three of the falling categories did so for at least a second consecutive month.  Production and income took the biggest hit for the period.  There appears to have been a slowdown in manufacturing to start the second quarter.  Personal consumption and housing continued to run below trend for the month.  This portion of the economy has not been keeping up with its normal run rate since May 2007!  Sales also ticked slightly lower for the period.  Only the labor market appears to be growing close to normal as its reading was 0.0 which is right in line with the trend.

The one component that sticks out in this indicator is the personal consumption and housing portion.  It has been running below trend for six years.  Despite their best efforts, the Federal Reserve has not been able to stimulate demand to a level within historic norms.  Atlas is of the opinion that, between the demographics of the country and lasting effects of the financial crisis, the level of consumption will remain subdued.  The central bank should accept the lower level and reign in some of its measures, rebuilding its supply of dry powder for the next economic confrontation.    (by C. Cox)

April CPI

Wednesday, May 29th, 2013

The Consumer Price Index (CPI) fell in April according to the Bureau of Labor Statistics.  The prices for the basket of goods represented in the indicator fell 0.4 percent during the month.  This follows the 0.3 percent decline in March.  If food and energy are removed from the basket, the remaining goods, (known as the “core” CPI) cost increased by 0.1 percent.

Falling 4.3 percent, energy led the overall basket lower.  March’s drop was 2.6 percent.  Gasoline was the primary culprit behind the fall.  The petrol price collapsed 8.1 percent!  This is after the 4.4 percent drop to end the first quarter.

Food prices were higher in the month.  The monthly uptick was 0.2 percent, and is up 1.0 percent over the last twelve months.  Atlas was paying special attention to this part of the CPI report because of the drop in nominal food purchases within the Census Bureaus’ recent Retail Sales report.  One possible reason for the fall in non-inflation adjusted food sales is a decrease in prices.  Unfortunately, the CPI is not confirming this explanation.  Instead, the slower food sales may be due to stressed consumer budgets, partially caused by the full reinstatement of the social security withholding.

The “core” basket of goods is still growing at a relatively slow speed.  The sluggish price pace gives the central bank ample justification to keep monetary policy loose.  The “core” measure of inflation has grown 1.7 percent in the last year and is currently annualizing at 1.2 percent.  The Federal Reserve’s long-run goal for price growth is 2.0 percent, and in December they committed to sticking to their easy money game plan as long as inflation expectations in the market place remain below 2.5 percent.  If the earlier stages of production which were highlighted in Atlas’ most recent Producer Price Index posting are foreshadowing the coming trend in prices, the central bank will have plenty of time to pump cash into the system.    (by Christopher)

April Producer Prices

Tuesday, May 28th, 2013

In April, according to the Bureau of Labor Statistics, America’s Producer Price Index (PPI), a measure of changes in wholesale costs, fell as expected by -0.7% at the headline level.  This weakness follows on the -0.6% decline registered in March, bringing the year-over-year increase in prices down -0.4% to a surprisingly low (but still positive) 0.7%.  The core rate, designed to exclude the volatility of food and energy prices, grew a scant 0.1%, half the already slim consensus expectation, but it remains unchanged from last month, showing a 1.7% rise from a year ago.

The large disparity between April’s headline and core measures points to a substantial decline in prices for both food and energy.  Food costs were down 0.8% for the month, having risen in March by that same amount.  Energy prices fell 2.5% on top of the previous monthly 3.4% drop as gasoline came off a full 6.0%, following its 6.8% March fall.

The Federal Reserve does not want to see broad price declines become habitual.  They would prefer to see an annualized level of inflation hovering around two percent or so.  They have established this as a stated goal and are actively managing their balance sheet to make it so.  Looking deeper into this report, here at Atlas we believe the Fed may be seeing some concerning trends.  Prices at the level of crude goods (think corn) fell -0.4% in April.  Intermediate goods (think corn meal) recorded a -0.6% drop.  And the headline (e.g. corn bread mix) was off -0.7% as stated above.  Oddly enough, the equity markets may take a shine to this report, not because it suggests lower prices down the line, but because it provides evidence that the Fed will keep rates low for awhile longer yet while continuing to inject billions of dollars into the banking system every month.    (by J R)

Cat Herds

Friday, May 24th, 2013

Sometimes folks can act together in rather interesting ways for long periods of time.  During the Meiji era in Japan, following the Empress’ lead, blackening ones teeth was quite the fashion statement.  It remained so for hundreds of years after her passing.  Madam Pompadour, Louis XV’s famous mistress, wore her eponymous hair style which even Elvis chose to adopt.  The pace at which such trends get mainstreamed seems much quicker than the rate at which they fade.  Consider Astrid Kirchherr’s inversion in the 60s of the pompadours affected by those young lads from Britain.  Almost in the blink of an eye, the mop top was all the rage, leading to an era easily identifiable (particularly the 70s) in any photo taken of that period.
The Federal Reserve is constantly trying to create a model of human behavior which can be applied to the general field of economics.  They are not alone.  Anyone who can do so successfully will have a bright golden future.  I wouldn’t hold your breath though, given the well recognized madness of crowds and such.  Back in 2011, the Federal Reserve published a paper called “Boomer Retirement: Headwinds for U.S. Equity Markets?”  They answered the question with a definitive Yes!  They demonstrated quite compellingly why the U.S. stock market would trend downward for decades.  By one popular statistical measure however, equity prices have moved up some 40% since their words of caution were published in August, 2011.  That’s life.
Perhaps the problem with such forecasting models can be laid to behavioral expectations that Baby Boomers will behave in a normal fashion.  When have the Baby Boomers ever acted normally?  Predictability is not their hallmark; you would be better off trying to herd cats.  The Fed’s article is worth a read (here’s the link), but I believe we need to follow the financial markets wherever they may obstinately lead rather than ever hoping to somehow corral the animal spirits which drive them.   (by J R)

April Industrial Production

Thursday, May 23rd, 2013

The Federal Reserve reported America’s level of industrial production fell hard in April, dropping by 0.5%, well below the 0.2% declined penciled in by consensus.  They also knocked one-tenth off last month’s total, bringing it to a 0.3% gain.  We had previously warned that March’s cheery news could be disguising some problems and, when we look at the main components of this month’s report, those concerns seem to be coming to the fore.

Output from utilities dropped 3.7%, no big surprise since it largely reflects more normal usage after the spate of cold weather felt in March boosted demand.  And mine production climbed 0.9% after a slight decline in March.  Our concern stays focused on the weakness in the important manufacturing component which followed the 0.3% March fall by a 0.4% dip in April.  Production totals of non-durable goods were off 0.1% while the durable goods component fell 0.6 percent, showing a decline in almost every major category constituting its whole.

Another sign pointing to some weakness in this month’s report centered on capacity utilization.  In April it declined to 77.8%, down 1/2% from the March revision, now 0.2% lower than first reported.  By itself this number is not too worrisome even though it remains below the 80% level generally seen as normal.  Should this become a trend however, it will surely garner attention from a broad swath of economists.
What are we to take away from this report?  Obviously there seems to be some steam leaking out of America’s manufacturing.  The reason can legitimately be laid to several culprits:  the Eurozone is now in its 6th quarter of recession; England is in its second.  Japan seems to remain a basket case.  Concerns about the resiliency of Brazil’s economy–or China’s–are taking the stage.  All this could subtract support for our nation’s second quarter Gross Domestic Product total, leading to a potential further weakness in employment down the road.     (by J R)

April Retail Sales

Wednesday, May 22nd, 2013

Retail sales improved in April according to the Census Bureau.  The uptick of 0.1 percent did not, however, make up for March’s loss of -0.5 percent, which was downwardly revised from the initial tally of -0.4 percent.  When Atlas compares month-over-month changes in essentials like grocery store sales to some of the other components making up this report, we find the areas of strength may be pointing to a split in the wellbeing of American households.

A few encouraging categories in this report improved for the month.  Auto dealers enjoyed a one percent uptick over March figures.  The average age of America’s car fleet is getting long in the tooth, but it still takes some optimism to commit to a monthly payment.  Electronics and appliance stores tacked on 0.8 percent growth in the period.  The building material and gardening equipment category managed a 1.5 percent improvement for the month.  Food services and drinking places rose 0.8 percent.  The reading here is that a growing number Americans are feeling good enough to spend money on food prepared outside of their own kitchen.  This particular data point often leads many of the other subcomponents.  Some of the spare cash to spend eating out may have come from the savings in gasoline.  Petrol stations saw sales fall 4.7 percent for the month.  Most of this is likely caused by falling prices in April. 

The curious parts of the release are the sales being reported by food and beverage stores as well as health and personal care stores.  The former, an essential category, fell 0.8 percent.  This may be pointing either to falling food prices or possibly weaker demand as consumers try to stretch their income.  While the overall trend in prices for food has been higher over the last year, it did show a dip in March’s consumer price index.  Also, sales at health and personal care stores fell again, perhaps caused by household budget strains.

The bifurcation in the direction of the components mentioned in our opening paragraph may speak to a societal split in America’s improving economy.  It is as if one cohort is increasing their consumption of durable goods and eating away from home (these areas of the economy tend to go up when income grows) while another group is spending less on nondiscretionary items like groceries.  Why this split appears to be happening remains to be seen.  Are lower income, underemployed, and unemployed folks changing the mix in their shopping carts or does this reflect something even more serious?  Atlas will look for additional hints of this in future releases of retail sales and measures of inflation.    (by Christopher)