04.02.12
Posted in Economic News, Quarterly Reports at 11:01 am by Kevin C. Kaufhold
Most US economic numbers have now turned upward. Initial unemployment claims continue to go down, production has improved, and retails sales figures have jumped recently. The Fed is obviously pleased, so much so that there has been no serious discussion lately of another round of quantitative easing. The best guess is that 1Q GDP may come in at 2.0 to 2.5%. Leading indicators continue to improve, as well, with a dramatic increase from recession levels.
However, not everything is rosy. Consumer spending still leads personal income, while over 5 million remain unemployed in the US. The greatest drag on the economy continues to be real estate. Even though many feel a bottom has occurred in real estate markets, new home sales declined 1.6% in February and home prices declines by 3.9% in the recent S&P / Case-Shiller survey. Building permits was up from January, at least, and the rate of housing completions also increased.
On the corporate front, productivity gains have moderated, and earnings are moderating, since revenue increases are nil to small, while further cost reductions are unlikely to occur. And with oil prices surging again, some economists are concerned that sustained oil spikes may eventually stall out growth.
The European Economy. The credit crunch in Europe has eased for the interim, due to the ECB low interest rate loan policy which has effectively flooded financial markets with money, and without the stigma of a US styled TARP asset purchase. The Greek situation has also been defused for the time being, although great political unrest exists in that nation. With yields on new 10 year Greek notes at 21%, the capital markets are certainly expecting a default or the need for another bail-out. Other EU nations remain under pressure. Spain has 50% unemployment for young workers, and unemployment throughout the European Union remains at a 15 year high. Germany, France, and Italy are projected by OECD to have a negative 0.4% GDP for the first half of 2012. Overall, even with the ECB monetarization of the financial sector, Europe is just treading water at stagnant levels. Still, this is far better than the dire prospects as recently as November, 2011.
The Chinese and Pacific Economies. News in the Pacific region is not good. Japan is mired in debt problems, and it is looking increasing likely that the landing in China is going to be anything but soft. Almost all Chinese economic data is in a tailspin, from employment, to new orders, to manufacturing and real estate. Even the detail in the data is bad – car sales are down, cement production if off, and steel production has dropped dramatically. China recently experienced its largest trade deficit in ten years. This is definitely not good for the world’s second largest economy, given that China is still overly dependent upon exports and likely does not have self-sustaining internal economic processes. The GDP goal is now down to 7.5%.
Reaction of the Markets. With the domestic economy definitely in recovery mode as well as the doom and gloom EU scenarios fading, equity markets world-wide have markedly advanced in the first quarter. Almost all equity indexes registered a 10% + gain in the last three months alone, which is a very healthy figure for an entire year. The surge initially caught many market participants off guard, and their entry into the markets only furthered the gains. In fact, the 1Q 2012 results are among the best in the last 10 years. The real question now is how much further equity markets can realistically go, given the breadth of the gains.
Investing Ideas – Staying Invested. The recent and sharp increases in asset pricing highlights the fact that capital markets will often surge dramatically or plunge unexpectedly within very short time spans. By staying fully invested up to the level of risk tolerance, investors can in an automatic fashion take advantage of these huge swings. Long-term investors will even find the dramatic sell-offs to be opportunities to seek out under-valued situations.
Main Web-site at: Kaufhold Company, LLC
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01.03.11
Posted in Economic News, Quarterly Reports at 9:42 am by Kevin C. Kaufhold
Potential GDP and the Impact of the Recession. With everything from retail sales to initial unemployment claims showing improvements in the data, one may surmise that the economy is moving into a definite expansion phase. Indeed, many economists are now opening believing that the economy accelerated at the end of the year. While the economy is obviously on a growth path again, the loss of national output during the recession has been quite sobering. The tremendous drop in output is starkly visible in the following graph which compares real potential GDP versus real actual GDP.
Real GDP has so significantly trailed below the potential trend-line that it is a wonder that unemployment and industrial under-utilization are not even higher. By comparison, the 2001-2002 recession is merely a small downward blip on the same graph. The overheated economy of the last 1990’s displays a good amount of over-capacity, but not anywhere near the vast amounts of resources idled by the 2008-2009 recession.
Even with the recent pick-up in many of the economic data tracts, the structural forces causing the most recent recession have been so enormous that it may be a while before they are wrung out of the economy. For a more extensive discussion of current aggregate economic activity and the structural forces behind the aggregate numbers, please see 2010 4Q Aggregate.
The Relationship between Confidence, Jobs, and Spending. Consumer confidence and consumer expectations decreased somewhat in November, according to a Conference Board report. Most analysts had been expecting an increase. The lack of employment possibilities appeared to be behind the drop, with a separate survey finding that more people thought jobs were difficult to obtain and fewer jobs were plentiful. So long as the job market remains sluggish, consumer perspectives will remain cautious, according to Conference Board analysts. The report ended on an upbeat note, even with the downturn in consumer indexes, believing that the economic expansion will continue into 2011, but growth may moderate. Sources: the Conference Board; Reuters, Dec 28, 2010. Another survey has found that consumer sentiment rose slightly in December. Source: University of Michigan Survey.
Meanwhile, modest concerns over employment are not stopping consumer spending, which rose 0.4% in November, adjusted for inflation. On an annualized basis, spending may be up 4%, the largest increase in four years. Sources: Commerce Dept, Dec. 29, 2010.
Holiday Retail Sales Up. Retail industry commentators believe that sales for the Thanksgiving to Christmas holiday period will be around 4% higher than the prior year. This is even considering a fall in sales in the week ending on Christmas Day, as the Dec. 26 sales figures are not included in Christmas week figures this year. Additionally, many people who stayed at home during the northeast snow storm at Christmas will shop more in the coming days. Sources: ShopperTrak; Reuters, Dec. 29, 2010.
On the Real Estate Front. For the third straight month, residential prices fell, down 1.3% in October. The price decreases may stem from the loss of first time buyer tax credits. In Canada, residential prices have risen 44% since 2005, while US prices have fallen 18% at the same time. To explain the difference, Canada markets did not utilize subprime mortgages. Sources: Natl Bank of Canada; S&P; WSJ, 12-30-10, at A1.
30 year fixed mortgage rates have been climbing since November, up from 4.17% to 4.81%. This is in spite of new quantitative easing by the Fed which should decrease interest rates by putting more money supply into the economy. The interest rate climb may be in anticipation of an expanding economy over the coming year as well as an abundant supply of treasury bonds flooding the capital money markets.
Meanwhile, new home sales were holding at an annualized rate of 290,000 as of November. This is only one fifth of peak levels in 2005. Sources: Case Shiller; Feddie Mac; WSJ, 12-29-10 at A1, and at C1. Pending homes sales based on signed agreements rose by 3.5% in the most recent month. Source: Natl Assn of Realtors; Reuters, 12-30-10.
Some analysts generally feel that the real estate market has been bouncing along the bottom of demand for some time, and that such lackluster pricing and sales will continue until excess housing stock inventories are finally worked through.
Ex Food & Energy Prices Low. Prices for consumption items, excluding food and energy, increased only 0.1% in November, for an annualized rate of 0.8%. This is a closely watched index, as it is far less volatile than the CPI, with food and energy included. At these levels, the general economy may be close to a deflationary environment, even while price indexes containing food and energy are showing increases with oil prices advancing.
Unemployment Claims Go Down. Initial claims went down 4,000 the week of December 18, to 420,000. The downward trend in unemployment claims started in August, 2009, and is now below the level where employers are adding jobs to the economy on a net basis. For the latest week, initial claims dropped an amazing 34,000, to a seasonally adjusted 388,000, the lowest in 2 ½ years. The four week average of new claims, considered to be more stable than weekly numbers, fell to 414,000, also the lowest in 2 ½ years. Sources: Labor Dept; WSJ, 12-24-10, at A3; Reuters, 12-30-10.
While there was much rejoicing in the December unemployment numbers, it should be remembered that November’s payroll report showed only 39,000 jobs created. Thus, December’s claims may either be a good harbinger of things to come or merely upwardly biased from the holiday season. Further, the number of continued benefits actually rose to 4.13 million in the week ending Dec. 18. The latest figures will likely not move the 9.8% unemployment rate much, in any event. This is due to discouraged workers coming back into the labor force after no longer counting as unemployed persons. For the unemployment rate to fall decisively, initial claims may need to be consistently below 400,000 with more than 150,000 jobs being created a month. Source: Reuters, 12-30-10.
Manufacturing Up. A Chicago business index jumped six points in November, surging ahead of even the highest expectations. The index currently stands in definite expansion territory, being the highest since 1988. There may have been a seasonal bias in the figures, but the numbers are very encouraging. Observers are looking forward to two other ISM reports due in the first week of January for confirmation of these large increases occurring in other areas of the country. Source: ISM; Reuters, 12-30-10.
State Tax Revenues Up. In the third quarter, stats and local tax revenues rose 5.2% to $284.3 Billion from a year ago. Higher income and sales tax receipts were responsible for the increase, as well as higher tax rates imposed in some jurisdictions. Property taxes are still increasing in areas when a delay occurs in assessments and collections. Because of this, property tax revenues may be down into 2012. Sources: Census Bureau; WSJ, 12-30-10, at A6.
Banks Lending Again? Since late 2008, a key ingredient has been missing in small business formation and expansion, which has been the almost infamous refusal of many banks to actually lend money. Without loans, small businesses have not been able to lead the cusp of an economic expansion, which has been normal in the initial stages of a recovery. The lack of lending has been considered by some commentators as being a large, structural rock-block to any full-fledged expansion. Commercial and industrial loans in the fourth quarter of 2010 may have increased 0.2%, the first quarterly increase in two years. While the change is statistically insignificant, it may represent a turning point in credit availability. Banks are claiming that demand for loans is finally increasing, while many firms believe that lending institutions are just now becoming rationale about typical business risks, and shedding themselves of a bunker mentality. Sources: Moody’s; WSJ, 12-30-10, at A1.
Main Website: www.kaufholdco.com
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04.02.10
Posted in Quarterly Reports, Research Notes at 9:51 am by Kevin C. Kaufhold
Long-leading and leading economic indicator indexes developed by the Kaufhold Company for use with asset allocation policies have been updated to include the latest available monthly data. These indexes are designed for use as signals of an impending economic regime change that may generate the desire to rebalance portfolio allocations.
The Long-Leading AA Index. This index is meant to be an “early warning” of possible shifts in the macro-economic climate which may occur many years forward in time.
The individual components of the AA long-leading index have between 10 to 58 months leads over the business cycle peak. Note that the peak of the composite index was ahead of the 2007 business cycle peak by some 36 months, and the index bottomed out ahead of the March 2009 trough by over 26 months. This index can even be considered contrarian in nature, dipping at the business cycle peaks, and then advancing far ahead of an upcoing recession. Currently, the index is showing signs of stablizing after a long period of expansion. If this represents a long-lead on the next peak or at least expected growth in the aggregate economy, then the data may be anticipating economic growth as far out as 1 to 5 years.
The Leading AA Index. Designed to be near-term in nature, this index is composed of four fundamental variables, a quality-oriented credit spread (Aaa – Baa), manufacturing average weekly hours, the four week moving average of initial unemployment claims, and consumer sentiment (U of Michigan version). The following graph shows the the index back to 1959, both as to monthly values and a 12 month moving average.
Notice that in most instances, the peaks and troughs of the index have closely coincided with the business cycle. Currently, all component variables have made substantial improvements since 2009. This is reflected in the very distinct “V” shape in the aggregate index from late 2007 to the present. The latest data may also be displaying a possible stabilization from the rapid advances in the economic data, however.
Caveats. Both indexes suggest the possibility of forward economic growth, and therefore imply something of an expansionary asset allocation policy in near and long-term time frames. A few words of caution are in order, however. Unemployment is still at near-recession highs, and job creation will likely occur at a very slow pace. Residential real-estate may be recovering somewhat, but with millions of existing homes essentially in a pre-foreclosure state, it will take a long time to work through excess housing stock inventories. Consumer sentiment may be adversely affected in the coming months by many factors, including the relative lack of jobs and the real likelihood of wage and fringe-benefit pressure for those people having jobs. Further, the capital markets may first now be realizing the depths of problems associated with commercial real estate, and therefore may not have yet fully priced in these difficulties. And, the massive federal deficit is causing increasing concern for some investors who wonder if the political system can adequately address the problem. Rather than a sharp return to economic vitality, all of these factors suggest a gradual recovery, at best. Indeed, these caveats may now be creeping into the data, with the rapid growth of the long-leading and leading index values now possibly tapering off.
For More Information. Development of the indexes follows procedures set forth in working paper 2010.1, which can be found at:
http://www.kaufholdco.com/files/2010.1_Varying_AA.pdf
The Economic Data page provides further details:
http://www.kaufholdco.com/Econdata.html
The main web-page of the company is located at: http://www.kaufholdco.com
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