12.27.10
Posted in News at 9:41 am by Kevin C. Kaufhold
The new tax law passed in December, 2010, extended the Bush era tax cuts for an interim period. A short outline follows:
- Current individual income tax rates, with a maximum rate of 35%, will remain in place for the next two years
- The flat rate of 15% for many capital gains and dividends will stay in effect for two years.
- The Alternative Minimum Tax will also be kept in place at current levels.
- The estate and gift tax is being modified from a complete exemption to a top rate of 35% after an exemption for the first $5 million per individual, for 2011 and 2012.
- The $1,000 child credit is extended for two years and the earned income tax credit for larger families and married coupled has been expanded.
- Accelerated depreciation of new business equipment investment is set at 100% for 2011 and 50% for 2012.
- The FICA payroll tax will be cut to 4.2% from 6.2% on the first $106,800 for 2011 only.
- Unemployment insurance benefits will be extended at current levels through the end of 2011.
The cost of the tax cuts may be as high as $858 Billion, apportioned over an expected ten year period. The individual income and investment tax rates amount to $407 Billion; payroll tax reduction at $111 Billion; the AMT patch at $136 Billion; estate taxes $68 Billion; business investment incentives at $21 Billion; and the unemployment extension $56 Billion. Source: WSJ, 12-18, 2010, at A5.
The Obama administration felt that continuation of the tax cuts and new cuts on payroll taxes were needed for purposes of fiscal stimulus. The payroll tax reduction, in particular, was thought to generate a quick increase in consumer spending, and with a concentration on lower and middle-class income workers. Congressional Republicans were enthused by the tax law provisions, since many of the cuts favored business and higher income individuals. Many Democrats were agreeable to the plan only after the unemployment provisions were inserted in the bill. Even then, concerns were being expressed over the loss of revenues to the Social Security system through the reductions in the payroll tax and an overall tilt towards higher-income groups.
While the tax plan may at least maintain the current level of tax-derived stimulus, the real question becomes budget related. Over the long-term, the legislation will lead to even larger deficits. For the time being, private capital markets appear willing to buy additional Treasury debt, although the appetite for federal debt may disappear if no credible deficit-reduction plan emerges in the political discourse. Republicans are advocating deep cuts in federal spending to narrow the budget gap, while Democratic congressional sources believe that any such expenditure reductions will be grossly insufficient, given the large amount of federal dollar already committed to Defense and numerous entitlement programs. Source: WSJ, 12-7-10 at A2. The debate on the tax cuts may be over for a few years, but the dialogue on the budget deficit is just beginning.
For a legal perspective, see Limits on the Estate Tax Extended on the Kaufhold & Associates, P.C. web-site.
Main Web Site: www.kaufholdco.com
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12.07.10
Posted in News at 9:56 am by Kevin C. Kaufhold
The Deleveraging of America. Macro investors who have bet on a slow, painful recovery have been the big winners this year, some having huge one-year gains. Believing that the US and other developed countries are in the midst of consumer-led deleveraging of debt positions, some investment firms have posted remarkable gains. While other investment managers have seen the recession in cyclical terms, some groups see a long restructuring of the economy which last occurred in the Great Depression. In such an uncertain economic climate, Treasury bonds, precious metals, and some currency positions have all remained in great demand, even amid speculation earlier this year that the Fed may begin to raise interest rates. Source: WSJ, 10-22-10, at C1 (article on Bridgewater’s macro approach).
More News on the May Flash Crash. Federal regulators have now issued a report on the near-cataclysmic failure of the stock market in May, 2010. the report identified one particular firm who chose to quickly sell a large number of futures contracts using computer programming. Six of twelve high frequency traders then magnified this sale by removing themselves from the buy-side of the market. The traders then also began aggressively selling futures contracts. This generated a significant loss of buy liquidity. The loss of liquidity in the futures market then impacted individual equities. Routine systems used by brokers and many market participants also failed to keep pace with order execution.
Overall, the report felt that in times of significant volatility, high trading is not a good indicator of market liquidity. But the report played down the adverse impact of shutdown of data links by stock exchanges during the events of May 6. In a separate proposal, the SEC has proposed rules which would halt trading during episodes of dramatic pricing moves. Proposals have also been made to synchronize exchange rules halting or slowing trading, as well as obligating market makers to stay in the capital markets to provide needed liquidity. Source: WSJ, 10-2-10, at B1.
Main Web Site: www.kaufholdco.com
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05.15.10
Posted in News, Research Notes at 11:17 pm by Kevin C. Kaufhold
Within the span of an hour on May 6, the Dow Jones Industrial Average dropped almost 900 points, just short of a 10% loss. The initial speculation that a “fat finger” trading error may have occurred in Procter & Gamble or other company has now been discounted. Terrorist attacks and technical glitches have also been ruled out.
The sudden drop instead may be the result of an increasingly complex and interdependent equity market system that has become highly electronic in nature, simultaneously trading shares of stocks on numerous exchanges across the globe. An unintended consequence of the growing technological sophistication of the markets may be the increasing likelihood of breaks occurring in an otherwise orderly pricing system during times of economic stress. The rapid loss of a functioning system of quotes has been recently observed in individual equities when computerized sellers cannot find enough buyers, but never before has been seen across the entire US equity marketplace.
DJIA Intraday Pricing 5-6-10
While many facts are still coming to light, the events of May 6 may have unfolded something like this:
- After a day and a half of growing concern over government debt issues in Europe, equity markets were unsettled and generally dropping in pricing levels. There was also a belief that a technical correction or pause in equity pricing could be looming in the coming days and weeks.
- The earliest sign of big trouble on May 6 was observed at the Chicago Mercantile Exchange, where a sudden drop occurred in the value of e-minis, which are futures contracts of the S&P 500 index.
- It is so far unknown what set off the drop in S&P futures, but the sharp plunge may have then pushed down the underlying valuations of most individual stocks in the S&P Index. The vast majority of equities in the S&P are traded on the NYSE.
- As prices dropped, stop loss orders that are part of many typical offers were automatically converted into market sell orders, causing further selling pressure on specific equities. Ironically, even though stop loss orders are designed to prevent larger losses from occurring in the event of a market downturn, they had the effect of locking in losses after the markets subsequently recovered.
- As a possible response to the raft of sell orders being executed, some high frequency traders sold their current positions, and then simply withdrew from the market until a bottom was achieved. This had the dual effect of adding to the downward pricing pressure as well as drying up liquidity at the very time when transactions were most needed.
- Some participants may have also been rattled by an earlier glitch in wireless devices used by floor traders which had occurred a few days before. In a review of the transactions of May 6, no such electronic flaw was found. Some traders may have believed however that the problem with non-functioning hand-held devices was re-emerging.
- The reduction of specialists over the last several years at the NYSE may have also added to the economic stress of the day. With New York becoming more electronic in its trading, far fewer specialists exist with the specific job duty of providing a market when traders cannot be found on both sides of a transaction.
- As the sell orders poured in, the NYSE went into slow mode for many individual stocks, with floor traders manually seeking out bidders. This was supposed to allow market participants time to think through transactions, potentially becoming buyers when they saw opportunities arising.
- Circuit breakers on specific stocks existed only on the NYSE, however. Once the slow trading restriction was imposed in New York, trading simply moved to other electronic exchanges. This has been a growing tendancy lately, with a decentralized and computerized system of 50 or more exchanges and trading networks now existing. With many potential buyers slowed down in their activities in New York, the market-wide pricing equilibrium tilted dramatically towards the sell side. In another fitting irony, imposition of circuit breakers that were designed for market relief actually contributed to the problem by effectively removing buyers and liquidity from the system.
- Many stocks have a stub quote of one penny. This quote is not meant to be used for actual transactions, but only as an electronic place holder for quotes on individual equities. As liquidity and buyers disappeared from the exchanges however, electronic searches were still looking for the best available price. When only the stub quotes could be located, numerous trades were automatically executed at or near zero value per share.
- As the prices careened downward, huge disparities opened up between the quoted price and perceived fundamental value. Large, institutional buyers and traders began emerging to take advantage of this divergence in value. As more buyers entered the markets, pricing on many equities rose. After an hour or more of pricing free fall, the markets re-established a still shaky, but functioning equilibrium.
- Buy and hold types of investors were generally unaffected by the day’s events, as the ending quotes on several indexes were down only 3% from the start of the episode.
- Many of the trades were ultimately cancelled by exchanges that exercised their discretion to correct ”erroneous” orders. Any trade that was off 60% or more in value from the start of the difficulties was subject to cancellation. The voided orders produced many complaints from indiviudals who thought they had made a once-in-a-lifetime trade. Complaints also emanated from brokerage clients who were unable to access overwhelmed financial web-sites and phone systems.
Possible remedies include:
- Market-wide circuit breakers for both individual equities and overall indexes could be imposed. If all exchanges simultaneously slowed down in times of severe uncertainty, buyers and sellers at all exchanges would be able to equally sort through their positions in a methodical manner.
- Elimination of stub quotes would prevent computers from executing unrealistic quotes that are not based on underlying valuations.
- A requirement of a minimum sale price maybe useful, rather than reliance on market orders. This is a common practice in Europe, with many larger orders requiring a minimum price for a sale. No execution of the order is thus possible below the limit. This would prevent a ridiculous price from being executed on a market order that presupposes a highly liquid and well-functioning marketplace of willing buyers and sellers.
- A system-wide rejection of orders could occur if the offer is more than 5% away from the last executed price. This is currently a standard practice on the BATS Exchange in the US. In fact, at the height of the disturbance on May 6, BATS declined almost 95% of the quotes going through its system, preventing 47.6 million orders from executing. It is believed that many of those orders were then attempted and executed on other exchanges.
Overall, the market activities of May 6 may be best described as a cascade event. Known in the fields of chemistry, ecology, medicine, and electronics, an unforeseen chain of events will cascade across and affect the stability of a system, often in uncontrolled and unpredictable ways. As applied to the capital markets, any single action on the day in question may have produced only a barely perceptable impact on pricing. In combination however, the independent activities of a multitude of market participants generated a chain reaction which destabilized the capital markets for all equities. It was an amazing display of a highly improbable outcome actually coming to fruition through a lightning-fast, global interaction of decentralized economic structures.
Numerous sources were reviewed and used for this post, including WSJ; NY Times; AP; Reuters; Columbia University Business School posts; and Congressional testimony from the SEC. The above graph is taken from Google Finance, and was originally seen in a Columbia University blog.
Main web-site is at: www.kaufholdco.com
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04.27.10
Posted in News at 2:20 pm by Kevin C. Kaufhold
With mortgage delinquencies down for the first time since 2008 and consumer credit debt past due notices falling in March, consumers may have finally gained a grip on their personal finances. To be sure, it has been a long struggle, with unemployment soaring over 10% throughout 2009. But with numerous industries and almost all business sectors now improving, two key questions emerge: Is the economy now self-sustaining? Are inflationary pressures starting to building? For a glimpse into those issues, see below news items.
In the Residential Market. New home sales increased 27% last month alone. This was the largest single-month increase in 47 years. Median prices were up 4% from last year, too. The statistics represent sales contracts and not completed purchases, and thus are a prelude to the actual sales of homes. Even sales of previously occupied homes increased 6.8% last month. The big jump is likely due to the government tax credit for first-time home buyers, which now expires at the end of April. Sources: Commerce Dept, AP, WSJ, 4-23-10; Natl Assn of Realtors, 4-22-10.
The sales figures may show that the governmental incentive is working, but it is doubtful that the real estate market is becoming self-sufficient. With new homes sales down 70% from the peak in July, 2005, and with 5.5 million foreclosures potentially in progress, sales of older homes will most likely continue dominating. Currently, new home sales as a percentage of total residential sales is around 6%, down from almost 16% in the early to mid-2000’s. Inventories of homes available for sale, as well as the number of distressed borrowers, also remain as high as 13 to 17 months in some metropolitan areas. A supply of 6 months is considered by many in real estate businesses to represent a balance of suppliers and buyers. Source: WSJ, 4-23-10.
Mortgage delinquencies declined in March by 8.6% to 1.45 million, the lowest since the spring of 2008. This may be dampened by an estimated 3.6 million more homes to be lost in 2010, however. Source: WSJ, 4-19-10;
Leading Indicators Up. In yet another sign of recovery, the Leading Economic Indicator Index (LEI) rose in March by 1.4%, the largest increase in 10 months. The LEI projects out forward aggregate growth by three to six months. Economic notes attached to the LEI report suggest the continuation of a slow recovery. Seven of ten indictors increased in March, with the largest being the interest rate spread and hours worked in manufacturing. Building permits for homes also increased. Source: The Conference Board, AP, 4-20-10.
Manufacturing Orders, Inventories Rise. Total manufactured durable goods orders fell last month by 1.3%. Excluding transportation however, new orders rose by 2.8%. This may indicate an overall increase in new equipment purchases, with a drop in aircraft orders pulling down the total new orders growth rate. Outside the aircraft industry, manufacturing gains were broad-based. Computers, electronics, machinery, auto and auto parts, all rose.
Business inventories are also increasing at a modest rate. This increase accounted for a significant percentage of the aggregate economy’s growth in the fourth quarter, 2009, in fact. At this stage in the business cycle, a rising inventory count is considered a sign of firm confidence in forward sales. Sources: Commerce Dept, AP, 4-22-10.
Initial Claims Down. First time unemployment claims dropped last week by 24,000, after increasing for two weeks prior. On a seasonally adjusted basis, claims were at 456,000, with a four week average of 460,250. Initial applications peaked at 651,000 in March, 2009, so the long-term trend is clearly downward. However, claims have fallen very slowly, and many economists feel that initial claims must drop to 425,000 before sustained job growth will commence. Even with 162,000 jobs being created in March, unemployment is still hovering at 9.7%. Sources: Dept of Labor, AP, 4-22-10.
The Precursors of Consumer Inflation. While the CPI remains muted at 2.3%, producer prices have been going up dramatically. Year-to-date, rubber prices have increased 74%; lumber 59%; palladium 39%. The PPI for crude goods (iron ore, construction, pulp) rose 44.5% year-over-year; including energy and food, the PPI increased 33.4%. Most of the demand is coming from Asia and several emerging markets. The latest monthly PPI increased 0.7%. Excluding food, wholesale prices on the month were tame however, rising only 0.1%. Source: Dept of Labor, WSJ.
For the time being, producers may be absorbing some of the price increases, with profit warnings now coming from some firms. Input substitution may also be occurring, as well as continuing pressure on labor, both as to wages and as to number of hours employed. Over the course of time however, the very real fear is consumer-level inflation will become evident. Indeed, expectations for inflation may now be creeping into the government bond markets, as demand for TIPS bonds has soared, with last months auction having triple the number of bids as securities offered. ource: WSJ, 4-23-10.
The International Picture. An important estimate of the Greek budget deficit has now increased to 13.6% of GDP. The nation’s credit rating was downgraded by Moody’s to A3 from A2, with warnings that further downgrades were possible. These items may cause the country’s borrowing costs to rise to unsustainable levels. The current government has preferred to up bond markets, but in light of the higher costs, Greece has now requested activation of the EU-IMF financial package. Sources: AP, 4-22-10; AFP, 4-23-10. The IMF has forecast growth in the world economy at 4.2% in 2011, a sharp improvement over 2009 with output being down 0.6%. The forecast warns however, that the global recovery is still vulnerable, with the biggest threat being government debt obligations. The monetary fund also anticipates wide disparities in various regions of the world, with China and other developing nations surging in activity, followed by the US, and then Europe and Japan having much smaller growth projections. Source: IMF, AP; 4-21-10.
Main web-page at: www.kaufholdco.com
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04.18.10
Posted in News at 7:26 pm by Kevin C. Kaufhold
Several economic reports continued a favorable tone this past week. Retail sales increased. Factory production was up. Business inventories again rose. There are also numerous signs of recovery across much of Europe. But a second straight increase in initial claims for unemployment has created some concern over the slow pace of job creation in the US. With three continual months of 9.7% unemployment, the fear is that consumer sentiment and personal income levels will stall out, leading to a very slow recovery in all things related to personal consumption. Still, some economists believe that high unemployment is becoming the norm in post-recession situations, as employers increasingly use low economic points to restructure work environments and labor inputs. In theory, this should eventually result in an increase in productivity, but it certainly weighs on the economy short-term. Pertinent economic news follows.
Sales Surge. Retail sales increased 1.6% in March, up from 0.5% increase in February. The jump in sales was widespread, occurring in disparate areas such as clothing, general merchandise, sporting goods, home furnishing, and building supplies. Auto sales skyrocketed 6.7%, the most since last October. Retail sales are often considered a measure of consumer confidence, which is vastly important to the two-thirds of the economy deriving support from consumer spending activities. Sources: Commerce Dept, AP, 4-14-10.
No Inflation. Consumer prices increase a very modest 0.1% in March. Excluding food and energy, core prices were unchanged. Source: Labor Dept. Aside from a debate among economists over the CPI not being completely reflective of mounting pricing concerns, a low inflationary reading at the consumer level coupled with a lack of wage pressures provides plenty of room for the Fed to maintain expansionary monetary policies, at least until employment pciks up.
The Fed is Upbeat. Testifying before Congress’ Joint Economic Committee Congress on Wednesday, Federal Reserve Chairman Ben Bernanke stated that the recovery has “staying power”, although unemployment will remain high for a significant amount of time. Economic growth may be slowed by weakness in housing and commercial real-estate, however.
Bernanke was also concerned with the huge federal budget deficits. While believing that the deficit was unavoidable given the recent recession, The Chairman felt that a credible plan to reduce the deficit was important in maintaining lower interest rates long-term, heightened business confidence, and credibility in borrowing capacity. Source: AP, 4-14-10.
The most recent Fed Beige book, a survey of all 12 Federal Reserve Districts, reinforced Bernanke’s comments. Many sectors, including retailers, shipments, production, auto parts, electronic parts, high tech goods, all had gains. The housing market and commercial real estate were weak to fragile, however. All Fed districts except for St. Louis said the economy increased “somewhat”. This was an improvement from the March survey, with nine districts having modest economic gains. St. Louis “softened” in the latest survey, down from being mixed in March. Employers are still not hiring in most of the Districts. Sources: Fed Reserve, AP; 4-14-10.
A factory survey of the Federal Reserve Board also shows that production increased in March, by 0.9%. Overall industrial production was also marginally better, at 0.1%. Lowered demand for heating lowered the overall figure, as utility production decreased in response to the warmer spring weather. Source: Federal Reserve, 4-14-2010.
And James Bullard, president of the Federal Reserve Bank of St. Louis, believes that the increase in equity pricing reflects fundamental improvements in economic conditions and not the beginnings of an asset bubble. Stating that the economy can return to its balanced growth path, Bullard does not think the low interest rates have encouraged the development of another asset run. Source: Fox Business, 4-15-2010. Bullard is known however to be concerned about the potential impact that the TARP assets may have on inflation if the money supply would remain elevated over the long-term.
Inventories Rise Again. For the second month in a row, business inventories rose. Going up by 0.5% in February following a 0.2% increase in January, the increases are seen as a positive sign of expected product demand increases. Source: Commerce Dept, 4-14-10.
Europe is Recovering, too. Industrial output across the European Union increased by more than expected in February. Production rose by 0.9%, much larger than analyst projections of 0.1%. The increase follows the huge jump of 1.6% in January. Year over year, industrial production was up 4.1%. Outside the 16 member EU zone, the 27 nations more broadly considered part of Europe increased production by 0.7% in February. With a heavy emphasis of high-quality manufactured goods in the EU zone, the industrial sector is being closely watched for indications that the economic expansion is becoming self-sufficient. With financial problems being evident in Greece, the Central Bank of Europe may not see much reason to change their own interest rates in the face of these latest figures. Sources: Eurostat; AP, 4-14-10.
Germany is expected to continue a slow recovery with growth rates at 1.5% in 2010 and 1.4% in 2011, according to a study done by five different economic forecasting groups. Unemployment is projected to fall from 8.1% currently to 7.9% next year. Many governments in Europe subsidized businesses that retained staff during the recession. As a result, employment may be in better shape than in the US, but possibly at the cost of public budgets. Germany may see an increase in its deficits to 4.9% of GDP in 2010. Source: AP, 4-15-2010.
Along those lines, the European Central Bank has now warned that international trade imbalances and government debt is generating the “next phase” of financial problems to face sovereign nations. This may now be occurring in Greece, a government who has just requested economic consultations with EU officials and the IMF. If the deterioration in Greece spreads into other EU nations, one investment house (Morgan Stanley) even believes that Germany may have economic reasons to leave the euro zone. Sources: CFA Daily Digest, reciting several international sources.
But Employment is Still Off. For the second week in a row, new claims for unemployment benefits rose. Initial claims increased by 24,000 last week to 460,000. The four week moving average also moved up, going to 457,750 claims. Last week’s rise was possibly due to difficulties on seasonal adjustment with the Easter holiday. But explaining away this week’s rise is more problematic. Continuing unemployment benefits also increased, up to 4.64 million. The overall trend is still in a positive downtrend, with initial claims a year ago being 609,000, peaking at 651,000 in March, 2009. Sources: Labor Dept, AP; 4-16-10.
Has Residential Real Estate Finally Turned? Home builder sentiment increased recently, as people continued using the home buyer tax credit. A housing sentiment index moved to 19. Sales contracts must be signed by the end of April and close by June 30 to qualify for the tax credit. Source: NAHB / Wells Fargo, AP; 4-15-10. With anything above 50 representing favorable sales conditions, home buying has to move much farther along before this sector is to return to a normal market environment.
Meanwhile, sub-prime delinquencies fell to 46.3% in March, slightly down from 46.9% in February. This is the first drop in almost four years, with continual increases in delinquency rates starting from a low of 6.2% in 2006. This may represent a turning point in sub-prime loans, although the availability of income tax refunds may be affecting figures in March and April. Sources: Source: WSJ, 4-15-2010, citing to Fitch Ratings, Equifax and Moody’sEconomy.com.
Main web-site at: www.kaufholdco.com.
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04.12.10
Posted in News at 3:50 pm by Kevin C. Kaufhold
Economic reports from many sectors and industries are showing clear signs of improvement. Job growth occurred in March by dramatic amounts. Services, manufacturing, wholesale, and retail figures showed solid gains. There are no immediate signs of inflation, either. Questions that may be slowing the markets down at this point are the over-extension of sovereign debt, and the timing of Fed interest rate increases (see below stories on both questions).
Meanwhile, asset allocation principles are going through something of a re-evaluation. In light of a perceived failure of traditional allocation concepts in 2008-2009, several ideas are being discussed, including the alignment of allocations according to underlying risk factors, as well as variable allocation percentages across a business cycle (see story, below). Now, for current financial news.
Definite Job Growth. Non-farm payroll increased by 162,000 in March. This represents a significant gain in monthly payroll, and is the strongest showing since the recession began in 2007. Unemployment held in March at 9.7%, the third straight month of no change. The construction industry added 15,000 jobs, and manufacturing increased by 17,000. Hospitality increased by 22,000. Source: 4-2-10, Dept of Labor; McClutchy Newspapers. Source for graph: BLS data at the St. Louis Fed.
While the non-farm payrolls show a net jobs gain, the loss of 8 million jobs since the recession began, coupled with an estimated 6.5 million people currently out of work 26 weeks or more, demonstrate that the recovery is still in an early stage. Initial unemployment claims even increased in the most recent week, up 18,000 to 460,000. This data may be skewed however, with seasonal adjustments for Easter being difficult to make due to the holiday falling on different weeks each year. Source: DOL; AP; 4-8-2010.
Investment Fee Case Decided. The US Supreme Court has reversed a 7th Circuit’s decision which limited investor’s ability to sue investment firms over advisor fees. The lower court used a market-based analysis in holding that investment managers cannot be liable for excessive fees without a showing of fraud. In a unanimous opinion, the Supreme Court instead cited to long-standing precedent in determining whether fund fees are excessive. The existing standard still makes it difficult to challenge fees charged by investment firms for management of mutual fund assets, but allows litigation where the fees are so disproportionately large that they could not have been produced by arm-length negotiations. Source: WSJ, 3-31-10.
The Reformulation of Asset Allocation? Traditional notions of asset allocation failed for many investors following the free-fall in credit markets in the fall of 2008. Almost all forms of assets, including domestic and international equity, fixed income, private equity, and alternative assets fell in lock-step, as demand for any type of risky asset completed evaporated. Several institutional investment funds are now reevaluating the underlying beliefs of asset allocation. Greater consideration is being given to the source of risk in an asset’s classification. How an asset responds to differing market conditions (peaks, trough, severe stress events, political instability in certain regions, etc), is receiving more attention. For example, private and public equity may be placed into the same allocation category described to as “corporate earnings”. Source: WSJ, 3-19-10.
Strong Industrial Gains. The Institute for Supply Management manufacturing survey increased for March to 59.6, the highest since the middle of 2004. Other manufacturing indicators from around the world also show dramatic improvements, with Chinese manufacturing up and Great Britain manufacturing at its strongest since 1994. In the euro zone as an aggregate, manufacturing grew at the quickest pace in 40 months, spurred by new export orders in Germany and France. Source: WSJ on-line, 4-2-2010.
Service Sector is Up, Too. Services grew in March by the largest amount in over two years, according to an ISM service index. Rising from 53 to 55.4 in one month, the index’s gains show that the various service-related industries (food, hospitality, hospitals, etc, financial services), may be responding to pick-ups in other sectors, such as manufacturing. Anything above an index value of 50.0 indicates economic expansion. The service sector is very dependent upon consumer spending and sentiment, so expansion in this index may be a sign of returning confidence among consumers. Source: ISM; AP, 4-5-10.
Positive Real Estate News. The National Association of Realtors reported that the number of buyers agreeing to purchase previously owned homes significantly increased in February. This is considered a barometer of short-term forward real estate closing activity. The increase may stem from the second round of government residential incentives which expire at the end of April. With an index value of 97.6 for February, a reading of 100 is equal to the level of sales activity in 2001. Sources: Natl Assn of Realtors; AP, 4-6-10. A strong sales showing for existing homes is thought to be necessary to whittle down the excess housing stock inventory, both in the listed offerings, as well as from the potentially huge “shadow” residences that have not yet been listed. Since the closing activity increase may stem from the incentive program however, the question still remains as to the durability of housing demand.
The Inflation Issue. With all the good news appearing, the resurgence of inflation is being debated both inside and outside of the Federal Reserve. Some observers believe the huge amount of money supply increases that were necessary to buy the TARP and CDO assets, as well as the massive fiscal stimulus packages of the last year, will invariably generate inflation. Others worry over the prospect of deflation however, especially in light of falling wages and producer prices in some industries. Still others believe that we may be developing a two-track economy, one based in residential and commercial real estate that is still in the midst of depressed conditions, and the second being a broader measure of economic activity that is beginning to rebound. With this view, real estate and associated construction industries may may lag far behind a general recovery in most other areas. So far, the Fed is showing no signs of concern over forward inflationary pressures.
The Problem in Greece (and Elsewhere?). Borrowing costs for Greece have recently skyrocketed, in the wake of that country’s debt problems. The markets are troubled by rumors suggesting that Greece may not be wanting IMF participation in last month’s agreement to provide Greece with loans from EU nations and the IMF. Greek officials denied the varied reports. Greece is scheduled to borrow $72 billion this year, but to date has raised less than half that amount in international bond and debt markets. Source: AP, 4-5-10.
The situation with Greece is also raising investor attention to other governmental debt, such as the State of California, and some municipalities (Los Angeles is the most recent to announce difficulties). Even US government debt is drawing notice by the Chinese and some private investors. The resolve of the various governments to reduce their debt loads may be a critical indicator to many potential and existing investors in debt issues.
Inventories Rise. Wholesale inventories rose 0.6% in February, after also increasing in January. This is far contrast to 2008-2009, when inventories dropped for 13 straight months in a staggering liquidation of reserves in physical goods and intermediary products. Rising inventories at the beginning of a business cycle suggests that businesses are replenishing goods as a result of increasing final product demand. Sources: Dept of Commerce; AP, 4-9-2010.
Main web-site is at www.kaufholdco.com.
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12.27.09
Posted in News at 5:46 pm by Kevin C. Kaufhold
Many indicators are now showing advances. Business capital spending is up, unemployment continue to decline, consumer activity is up modestly, and personal income rose this past month. Inflation remains muted, which is a definite plus, considering the proclivity of monetary and fiscal expansionary programs still underway.
The following graph demonstrates the pick-up in economic activity. It is a leading indicator index composed on only fundamental factors (no bond or stock return indices are included). It was designed by the Kaufhold Company to be used with regime-swicthing allocation policies. Note the improvement from the March, 2009 lows.
Things are not all rosy however, as revised third quarter GDP numbers were lower than originally estimated, and the nation is still losing jobs on a net basis. With credit continuing to be tight for small businesses and consumers, and with other issues such as commercial real estate yet to be worked out, the economic data is continuing to point towards a slowly improving economy. Data and information coming in this last week includes the following items.
Factories. Manufacturing new orders, excluding transportation, increased in November by 2.0%, after falling 0.7% the monthly before. Durable goods new orders rose only 0.2% however, due to a drop in civilian aircraft orders of over 32% in a single month. Non-defense capital new orders went up 2.9%. This data series is considered a proxy for business spending, and demonstrates early indications of capital structure changes. Source: Commerce Dept, 12-24-09.
Jobs. Initial claims for unemployment benefits fell 28,000 to 452,000 in the last week. This was the lowest in 15 months, and shows continuing improvement in labor markets. Continuing unemployment claims also dropped to 5.07 million. Source: Labor Dept, 12-24-09. Jobs are still being lost on a net basis, but it looks hopeful that a zero net loss in employment will occur sometime in 2010, possibly in the early part of the year.
Consumption and Income. Consumer spending increased for a second month, up 0.5% in November and 0.6% in October. Source: Commerce Dept, 12-23-09. Consumption figures are considered very important, and two-thirds of the economy can be ultimately traced to consumer activities. Many months of consumer increases will be necessary before the economy can stand on its own without governmental stimulus.
Personal Income rose 0.4% in the most recent month, the largest gain since May, 2009. Real disposable income also increased 0.2% in November. The savings rate remains unchanged at 4.7% but overall savings rose by $525 billion. Source: Commerce Dept, 12-23-09. Higher disposable income translates to higher consumption levels long-term. The increased savings point to a healthier long-term capital and investment position, as well, although the trade-off is more muted immediate consumption pattern.
Inflation. The personal consumption expenditure index rose by 1.4% year-over-year in November. This index is an important indicator of inflation at the consumption level. Source: Commerce Dept, 12-23-09. While showing an increase over the last year’s mildly deflationary numbers, the current numbers are considered tame, and do not suggest any immediate pressure to change expansionary monetary policies.
Gross Domestic Product. Revised GDP figures for the third quarter 2009 are much slower than initial estimates, 2.2% versus an estimated 2.8%. The reduced final number was due to lower levels of business investments, higher inventory liquidation than originally calculated, lower nonresidential construction, and heightened imports. The numbers were boosted by government stimulus packages, including the cash for clunkers program. Source: Commerce Dept, 12-22-09. In spite of the downward revision, the third quarter ended four straight output declines. More recent data indicates that fourth quarter estimates may be ahead of either the preliminary or final third quarter GDP.
Around the World. As a new year begins, it is appropriate to review the state of other economies. China believes its economic recovery is still weak, despite its stimulus of $586 Billion (US dollars). The emphasis continues to be on domestic consumption and a reduction in exports. For instance, China has recently imposed duties on some European steel imports and has lobbied European countries to remove restrictions on imports on Chinese shoes. Last month, the Chinese showed no real interest in letting its currency float, despite mounting criticism by other pacific-rim nations to end the peg to the US dollar.
In Europe, The Central Bank is considering detailed disclosures on asset-backed securities in the 16 countries that use the euro. In Greece, the focus is on decreasing the high budget deficit by establishing budget cuts and public sector hiring restraints. European countries linked to the euro had put pressure on Greece to act on its budget woes. Interest rates were held steady in England, at 0.5%. An asset purchase program is also in existence in that country. Home purchase lending has been rising there, and consumer debt has been declining somewhat.
India has now taken the lead from Japan in the manufacturer of small cars, with robust sales in Asia propelling global production of tiny and cheap cars.
Singapore’s consumer prices fell 0.2 year-over-year, showing some improvement in its deflation. Another nation that has seen deflationary pressures build up is Japan.
Sources: Reuters, AP, 12-24-09.
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12.21.09
Posted in News at 6:15 pm by Kevin C. Kaufhold
With many of the leading and coincident economic indicators now showing an upward trend, it is becoming increasingly clear that the economy has bottomed this past summer to early fall. Unemployment remains high however, and manufacturing activity remains uneven. Pricing may be ending a slight deflationary tone, although most of the recent pricing increases at the producer and consumer levels are energy related. With credit remaining tight, the Fed’s actions this week of maintaining an expansionary monetary policy recognizes aggregate under-capacity, and with no major pricing pressure looming. Growth into 2010 may be very slow indeed.
Economic Indicators Up. The Leading Economic Index rose for the 8th straight month in November, up 0.9% to an index value of 104.9. Financial, employment, and housing areas increased in the latest reading of advance data series. The coincident index increased by 0.2%, but the lagging index continued to fall, by 0.4%. Source: The Conference Board, 12-17-09. These indexes suggest that current activity is starting to pick up from a bottom in the business cycle, confirming the increases in the leading series since March. With the lagging index still falling however, the economy is likely still in a tenuous phase of recovery.
Federal Reserve Holds at Zero. This past week, the Federal Reserve Board maintained its overnight lending rate of near zero. The policy statement accompanying the action indicated that economic activity was picking up and the “deterioration” in the labor market was abating. The Fed expects pricing pressure to continue to be dampened, due to slack in demand. Source: Fed Reserve, 12-16-09.
Job Losses Continue. Initial unemployment claims rose unexpectedly last week, to 480,000. Continuing claims also rose by 5,000 to 5.19 million. Extended benefit claims also rose last week, to 4.73 million. The four week average of initial claims continued to trend downward, however, to 467,500. The four week average is the lowest since September, 2008. Source: Labor Dept, 12-17-09. Initial claims will probably have to fall below 425,000 before the economy can be considered adding jobs on a net basis.
Housing Starts. Residential homes prices rose 0.9% in the last quarter, the first time that a quarterly increase has occurred in two years. Sources: Federal Housing Finance Agency, Reuters, 12-18-09. Housing starts rose last month by 8.9%, to 574,000 annualized unit rate. Single family starts increased 2.1% annualized. Housing permits were also up, by some 6% to 584,000 units. Multi-family housing even rose to 92,000 units, annualized. Inventory for homes under construction fell to 540,000 in November, too. Source: Commerce Dept, 12-16-09. The general consensus is that inventories need to decline further before a balance is regained between buyers and sellers, however.
Pricing Modestly Up. Consumer prices rose in November, up 0.4% seasonally adjusted. A rise in energy prices of 4.1% was responsible for most of the increase. CPI rose 1.8% over the last 12 months. Core prices rose 1.7% over the last year, but were unchanged in the month of November. Source: Labor Dept, 12-16-09.
Producer prices rose in November, the first year-over-year increase since late 2008. The seasonally adjusted price increase was 1.8%. Gasoline prices were the driving factor for the increase, with oil up 14.2%. Core PPI, excluding food and energy, rose 0.5% in the month, and 1.2% in the last year. Source: Labor Dept, 12-15-09.
Factories Activity Uneven. Manufacturing in New York State dropped in December, with the Empire State survey experiencing the largest fall since July. Source: Fed Reserve, 12-15-09. With producer prices rising at the same time, the manufacturing sector may be going through a ragged type of recovery.
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12.14.09
Posted in News at 1:05 pm by Kevin C. Kaufhold
Most of the economic data over the last two weeks has been positive. With so many indicators now pointing upward, the recovery may be firming up. Significant drags remain in the economy however, only some of which include commercial real estate, a enormous “shadow” market in residential real estate, sustained unemployment levels, and tight credit. Overall, the economy may be slowly and gradually recovering from the worst economic downturn since the Depression. This question remains however whether the improvements are self-sustaining. Many analysts believe that at this juncture, continued governmental fiscal and monetary stimulus is very much needed to avoid a fall-back in conditions.
Consumer and Retail Gains. Consumer sentiment may be increasing, with a preliminary estimate of the consumer’s sentiment index up to 73.4. This is far better than expected. Source: Reuters / U of Michigan, 12-11-09. The improved expectations of consumers may be the driving force for an increase in retail activity. Retail sales rose 1.3% last month, the biggest increase since August, and the second straight monthly increase. It was also the first year-over-year gain since August, 2008. Core retail sales, excluding autos, gasoline, and building materials, rose 0.6%. This reading of retail sales has been increasing for five straight months. Source: Commerce Dept, 12-11-09.
Employment Improves. On the jobs front, the number of initial unemployment claims rose 17,000 to 474,000 in the last week, after five straight weeks of decline. While unexpected, the rise may be due to seasonal industries laying people off. The four week moving average for initial claims dropped to 473,750, the lowest since September, 2008. Continuing benefits dropped to 5.16 million in the week ending Nov. 28. This decline is likely due however to people exhausting benefits. Source: Labor Dept, 12-10-09.
Only 11,000 net jobs were lost in November, the smallest amount since December, 2007. This was far below expectations of 130,000 jobs lost. The unemployment rate also declined to 10.0% in November, down from 10.2% in October. The general belief was for steady to slightly increasing unemployment. While the economy has lost jobs for 23 consecutive months, four sectors including government, professional services, education and health services, actually added jobs. Source: Labor Dept, 12-4-09.
Housing May be Picking Up. In housing market, residential mortgage applications rose 8.5% in the last month, and increase of 4.0%. Source: Mortgager Bankers Assn, 12-9-09. Pending homes sales rose 3.7% in October, for the ninth straight month. The government has now extended the tax credit for first time home buyers. Source: Natl Assn of Realtors, 12-3-09. Homebuilding construction also was up 4.4% in October. Source: Commerce Dept.
Business Activity On the Mend. Business inventories rose in October by 0.3%, a shift from rapidly declining inventories over the last year as an effort to cut costs. The rise in business stockpiles may be in anticipation of rising demand, although it could also be from demand not yet picking up to supply levels currently being produced. The markets generally viewed the unexpected rise in inventories optimistically, believing that businesses may be ramping up inventories on the belief that demand was picking up.
Factory orders increased 0.6%. September’s increase in factory orders was revised to 1.6% from an initial 0.9%. These increases were unexpected, and may show that businesses are starting to plan for growth in product demands. Source: Commerce Dept, 12-4-09. Manufacturing expanded in November, the fourth straight month of expansion in that sector. With an index of 53.6, the sector’s pace had declined from November, however. Source: ISM, 12-3-09.
International Trade Shows Gains, too. The trade deficit narrowed in October by 7.6%. US exports were the highest since November, 2008. Source: Commerce Dept, 12-10-09. This points toward somewhat higher expectations of fourth quarter GDP growth.
All is not rosy however. Manufacturing in Britain and Germany remains low. Japan has approved $81 Billion in fiscal stimulus, while the Obama Administration is also working on a second round of stimulus. Many credit agencies are reviewing many sovereign debt issues, not only in Dubai, but globally as well. Source: Reuters, 12-9-09. The services sector contracted in November, down to an index value of 48.7, the lowest levels since July. Anything below 50 indicates contraction. Source: ISM, 12-3-09.
Federal Reserve Chairman Ben Bernanke has stated that the US economy remains fragile, and that unemployment may remain high for some time. Signaling that the Fed would continue low borrowing costs at low levels, Bernanke provided reassurance to capital markets that were beginning to worry about rate hikes in the face of increasingly positive news. Bernanke felt that tight credit and weak job markets posed “formidable headwinds” to the recovery. Source: Reuters, 12-8-09. And in the latest Fed beige book, commercial real estate and construction was still sluggish, while residential real estate markets were somewhat higher from their historically low levels.
Abu Dhabi has now provided Dubai with $10 Billion in aid for Dubai World, but restructuring of the $26 Billion in debt is still under consideration. The funding from Abu Dhabi raised hopes that the situation was improving, but the question still remains whether Dubai intends on selling off many of its assets to cover the maturing debt issues. In the wake of the restructuring request, many investors at home and abroad are reassessing sovereign risk. Source: Reuters, 12-14-09.
Main web-site is at www.kaufholdco.com.
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11.30.09
Posted in News at 12:24 pm by Kevin C. Kaufhold
The economic news was mixed this week, with some items showing improvement, while other matters were more ominous. The housing market may be picking up in boh new and existing homes sales. Consumer confidence and initial unemployment claims improved over prior periods. Manufacturing is still showing signs of weakness, however. Perhaps most troubling are the continuing problems in the financial sector. Bank lending is down, and concern with Dubai sovereign debt sent analysts searching for financial institutions having exposure to mid-east debt instruments.
The Good. New home sales surged 6.2% in the most recent month, to a seasonally adjusted annual rate of 430,000 units. This number is a dramatic change from the sour tone of just the prior week, with data suggesting the existence of massive amounts of excess housing inventory. Data Sources: HUD and Census Bureau, 11-25-09. Another source had sales even higher, at 10% increase in October, with the rise being attributable to the first time home owner’s credit. Source: Natl Assn of Realtors, 11-23-09. Sales of existing homes rose even more, up 9.7%, which is the biggest gain since 1983. Such sales may be spurred by the very low average 30-year fixed mortgage of 4.83%. A fifth straight increase in home prices was also shown in another survey, although recent gains have been more modest than in the summer. The third quarter increase was 3.1%. Source: S&P / Shiller, 11-24-09.
Initial claims for unemployment experienced a big drop of 35,000, down to 466,000 last week. The four week moving average of initial claims also fell, down to 496,500. This was the twelve straight decline in the four week average. Continuing unemployment benefits decreases to 5.43 million. These numbers are the lowest since Sept. 2008 and Feb. 2009, respectively. Source: Labor Dept, 11-25-09.
Consumer spending rose 0.7% in October, while personal income increases 0.2%. Source: Commerce Dept, 11-25-09. Consumer sentiment improved in November, to an index value of 67.4, but still below that of October. Concern regarding jobs and income levels continue to temper the survey findings. Source: Reuters / U of Mich, 11-24-09. Consumer confidence was also higher in November, up to 49.5 in November from 49.7 in October. This may be more of a reflection that business conditions will not worsen however, rather than an expectation of improving conditions. Source: Conference Board, 11-24-09.
The Bad. US GDP for the 3rd quarter was revised downward, to 2.8%. This is a fairly significant revision downward from initial estimates of 3.5%, and tends to confirm many investor and business-level beliefs that the economy is only slowly moving ahead. Strong imports and weak investment in nonresidential structures contributed to the reduction from initial estimates.
Durable good orders dropped 0.6% in October. This data series is an important leading indicator. Non-defense capital goods orders, which is a good proxy for general business spending, decreased 2.9%. Considering that expectations were for a small increase in durables, markets were off on the news. Concern exists that manufacturing may now be weakening, after building up from extreme lows in early 2009. Data Source: Commerce Dept, 11-25-09.
Sovereign debt issues in the Mid-East became an issue this past week when Dubai requested a debt standstill for its holding company, Dubai World. Just a few weeks ago, city officials reassured shareholders that the city-state would meet its debt obligations. Some articles even suggested that in recent weeks, Dubai has even to consider selling off some of its assets to reduce debt loads. World markets reacted negatively to the news, trying to gauge which banks had exposure to Dubai and other sovereign debt. Sources: Financial Times, 11-25-09; WSJ, 11-26-09.
Bank lending was down 2.8% in the 3rd quarter, confirming what many business leaders already knew in dealings with financial institutions. The amount of money extended to customers decreased by $210 billion. Data Source: FDIC, 11-24-09. Part of the problem may lay in bank debt coming due overt the near-term. With banks afraid that their own borrowing costs may be higher in the next few years, several financial institutions have been declining to loan to even good customers, trying instead to maintain existing loan portfolios. Source: WSJ, 11-24-09, at c1.
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