Archive for January, 2014


Friday, January 31st, 2014

Polls suggest there are a whole lot of folks out there upset with the president because they feel our economy is a mess. A Bloomberg National Poll taken this past December showed 58% of Americans felt Obama’s economic stewardship was, shall we say, deficient. That was his worst showing since September, 2011, hardly a positive omen for election hopes later this year. A separate poll suggests the blame for all of this has begun to shift squarely onto the president’s shoulders with 49% blaming economic woes on “policies of the present” versus 41% who still hold a grudge against “policies of the past.”

Allow me to stir the pot by asking, “How come?” Estimates by economists at some of America’s leading banks show our economy just wrapped up its best six month period since the recession ended. The Chicago Fed reports it has been growing at or above historic averages for the past several months. Momentum is picking up. Companies in the U.S. created over 180,000 new jobs on a monthly basis last year.

It seems to me that there are two intertwined issues which must be addressed: employment and wages. Despite all the hiring mentioned above, the jobs market has not recovered completely from the recession. Labor Department data shows there are fewer people working today than in 2007. Only 62.8% of working age Americans are in the work force, a low-water mark not seen since early 1978, and this factor has dropped faster over the last six months than it did in the previous twenty-one despite corporate hiring. Adding to the problem, job creation is relegated disproportionately to low-wage areas such as hospitality. Of the 2.2 million jobs created last year, a Westwood Capital report states half offered wages which had not kept pace with inflation. Real median household income remains 8% lower than it was before the recession began. Should we conclude from all this that potential workers are too discouraged by present conditions to even attempt a job search today?

Let’s take the argument a step further. Should President Obama be blamed for all this, or is he just the easiest target? Here at Atlas we have harped consistently on a major demographic shift as being the leading cause for this malaise. A report last year from the Philadelphia branch of the Federal Reserve seems to concur, stating that baby boomer retirements explained the entire drop in labor participation rates since the first quarter of 2012. It concludes , “It is misleading to attribute the decline in the unemployment rate in the last few years to discouragement.”

So there you go. No finger pointing. No political posturing. The problem is really just a natural process that will work itself out in time. Stop fretting. Oh, by the way, the Labor Department just announced 1,350,663 individuals had their extended unemployment benefits terminated on January first. Regardless where we place the blame for our current conditions, it will be hard to wish them a Happy New Year. (by JR)

December Consumer Prices

Thursday, January 30th, 2014

The Bureau of Labor Statistics’ Consumer Price Index was largely flat as 2013 came to a close. The monthly uptick was 0.3 percent. For the year, the CPI was 1.5 percent higher. By this measure, inflation is hardly becoming a problem for the economy or the central bank.

Most of the uptick can be blamed on energy. This volatile component jumped 2.1 percent in the period. Gasoline led the increase with a 3.1 percent jump in price. Those suffering from the cold weather were also hit with a 2.4 percent increase in fuel oil cost. For those lucky enough to warm the home by burning natural gas, the cost fell by 0.4 percent.

The rest of the consumer prices were mildly higher as the year came to a close. Core CPI (this measure removes food and energy) ticked up just 0.1 percent for the month. New vehicles were flat, while their used counterparts dropped in price. Shelter was slightly higher, up 0.2 percent. Even the volatile food component was only 0.1 percent higher. Food at home was unchanged for the second month in a row, and eating away from home was just 0.1 percent higher in December.

Consumer prices are showing no dramatic signs of inflation per the CPI. Producer prices are demonstrating a similar phenomenon. At this point it time, it is tough to draw any conclusions about price pressures other than to say they are currently tame. As the economy picks up momentum, this may change, but there is scant evidence of accelerating inflation for now. (by C. Cox)

December Producer Price Index

Wednesday, January 29th, 2014

Prices paid by producers and wholesalers were firmly higher in December but remained tame on a year-over-year basis. The uptick of 0.4 percent was the largest monthly increase since June. Year-over-year, the Bureau of Labor Statistics’ Producer Price Index (PPI) has increased 1.2 percent which is the largest annual increase since August.

Energy led the indicator higher in December as a particularly cold month settled over a large portion of the nation. Energy alone was up 1.6 percent. Food offset some of this uptick by falling 0.6 percent in the period. Core PPI (which removes food and energy) was up 0.3 percent during the final month of the year.

Both of the earlier stages of production reversed direction in the period. Intermediate goods (think flour) were 0.6 percent more expensive in December. This followed two months of declines in October and November. Crude goods (think wheat) followed a similar pattern. After falling in the prior two months, including 2.6 percent in November, they were up 2.4 percent to end the year.

There are still very few signs of inflation in the U.S. economy. The earlier stages did produce relatively large upticks for the month, but they will need to be more persistent than one month to get Atlas’ attention. The year-over-year rate coupled with December’s low monthly uptick for the headline and core PPI tallies are not signaling price pressures at this time. (by C. Cox)

December Retail Sales

Tuesday, January 28th, 2014

Consumers increased their spending in December 2013 according to retail sales data from the Census Bureau. The 0.2 percent uptick is the ninth consecutive monthly increase and follows November’s rise of 0.4 percent. For all of 2013, retail spending grew by 4.2 percent. This is slower than the annual paces from 2010-2012, but it is faster than the long-term year-over-year average going back to 1992.

There are components to this indicator that are volatile and that can be removed to reveal another perspective of retail strength. If the money spent on automobiles and gasoline is removed, the pace of sales for other retail goods improved to 0.7 percent. This happened largely because of a 1.8 percent drop in auto sales during the final month of the year. Interestingly, gasoline sales fell for the year by 0.8 percent. Since the Census Bureau does not adjust for prices in this report, it is likely the falling pump prices pushed petroleum purchases lower.

The final quarter ended on a high note for the year; it was the best tally of retail sales on a seasonally adjusted basis of 2013 . This bodes well for the nation’s gross domestic product (GDP) figure. This is another sign of the economy continuing to recover even if the pace of these sales is growing at a slower rate than the previous three years. Slower growth might be expected at this point in the business cycle; after all, the current expansion is over 4.5 years old now. (by C. Cox)

December Treasury Budget

Monday, January 27th, 2014

America’s budget improved in December according to the Department of Treasury. There was a surplus in the final month of 2013 which is also the end of the first quarter of the fiscal year 2014. The $53.2 billion surplus follows the deficit of $135.2 billion a month earlier. Fiscal year-to-date, the nation’s deficit has improved by 40 percent. In each of the three months of fiscal 2014, the comparisons to a year ago are better.

Two components impact this indicator, receipts and outlays. Receipts, mostly taxes, were higher for the month and were greater than a year ago. In the first three months of the fiscal year, receipts were 7.5 percent higher. Outlays fell during the month and on a year-over-year basis. Spending fell 7.6 percent during the first quarter of the fiscal year.

Many factors helped improve the ratio of receipts to outlays during the first fiscal quarter of 2014. The economy grew during the period. All else equal, this will cause receipts to grow as taxes are collected on the larger aggregate income. Also, the top marginal tax bracket is higher than it was in the same period of fiscal 2013. Sequestration started at the beginning of calendar 2013, so the December 2012 outlays were not being constrained by this fiscal device. This method of reducing spending was criticized for not being nuanced enough when it was being put into place, but it appears to have helped nonetheless.

Just days after the Department of Treasury released this information, a budget was passed that will finance the Federal Government until the end of the current fiscal year. The details are still being sifted through, but with any luck, the economy will continue to grow and the budget will mandate more fiscal responsibility. Perhaps in a year from now, America’s fiscal situation will have continued to improve. (by C. Cox)

Wall Street’s Okefenokee

Friday, January 24th, 2014

I’ve had an affinity for swampy areas for as long as I can remember. The Okefenokee is particularly attractive since it is where Pogo and his buddies, some of my earliest mentors, live. It also one big swamp, covering around 438,000 acres across a wide swath of Georgia and Florida. One neat thing about it is its depth, averaging just three to seven feet but with plenty of areas you can walk on if you keep an eye out for gators, copperheads, rattlers, cottonmouths, and such.

Today I find a resemblance between Okefenokee and the bond market. In general, the latter includes a huge variety of IOUs ranging from government bonds to corporate bonds to mortgages and beyond. Measuring the area they cover by a yardstick such as dollars, this market is much broader than the stock market. If we equate liquidity with depth however, a recent change has transformed the landscape. The broad financial collapse a few years back was driven by uncertainties centered around fixed income products and their derivatives. Legislation to avoid a repeat of that event, combined with global efforts to shore up the balance sheets at major financial institutions, has caused big banks to hold fewer such instruments on their balance sheets. Further, it has led them to reduce or even eliminate the trading capabilities they once had. In other words, bond market liquidity has become very shallow even though the total area encompassed by such instruments is enormous and still growing.

This could easily turn into a big problem in a hurry, especially if interest rates begin to rise as the Federal Reserve stops holding them down, or if inflation fears begin to grow. We could see the value of bonds be depressed across the board, likely leading to increased selling. With the traditional infrastructure which used to accommodate such trades now missing, a liquidity crisis could possibly ensue, followed by rapid and severe portfolio losses.

Conventional wisdom has long held that a prudent investment strategy would involve an age-weighted diversification between stocks and bonds. Simply put, an investor uses his age to calculate what percentage of his total portfolio should be in (presumably) safer bonds. A seventy-year-old would have 70% of his savings invested in bonds, increasing the portfolio’s holdings of that asset class each year. However, should things go wrong in a hurry, such a portfolio blend would prove disastrous.

Okefenokee was named such by the original Indian inhabitants. It translates as “land of trembling earth” because the mostly solid patches still shake a touch when you walk on them, reflecting their rather tenuous anchor in the underlying peat beds and blackwater. Here at Atlas we worry that global fixed income markets are presently floating on a similar foundation.
(by J R)

December Institute for Supply Management

Thursday, January 23rd, 2014

According to the Institute for Supply Management, the U.S. economy continued to expand in December. The pace of growth appears to have slowed in both the manufacturing and non-manufacturing portions of the economy, but their impressive string of consecutive months of growth remains intact. The production portion of the economy’s reading was 57.0 versus 57.3 in November. Services slowed to 53.0 from 53.9 in the prior period.

Despite the slight slowdown, manufacturing remained healthy in December. The minor downtick put this indicator at its second best reading of the recover. Only November 2013 has been better since this indicator turned positive 55 months ago. New orders, considered a leading indicator because they will likely turn into actual output, improved to 64.2. Its 0.6 increase puts this important subcomponent at its best level since April 2010 when the count was 65.1.

Non-manufacturing growth continued for the 48th consecutive month. However, the underlying components were mixed. Employment grew at a faster pace in the period, and has now grown in each of the last 17 months. Business activity grew at a slower pace. New orders contracted for the first time since July 2009 which was the month after the Great Recession ended. This may put additional pressure on business activity in the months ahead.

Overall the economy seems to have expanded in the period. This indicator, along with the Chicago Fed National Activity Index, points to continued improvement in overall economic output in the final month of 2013. This does not mean the fragility of the economy has been removed, but in the context of America’s tepid recovery, these indicators are encouraging. (by C. Cox)