Friday, October 30, 2009
Monthly reports for October were more mixed. New home sales unexpectedly declined, although within the range of "noise" in the uptrend since the bottom at the beginning of this year. Personal income was flat (a troubling sign) and spending declined. The University of Michigan consumer sentiment barometer increased in the second half of October, but is down for the month. On the other hand, durable goods orders advanced more than expected. The Chicago PMI also jumped to 54.2, which bodes well for Monday's ISM national manufacturing report for October. Production jumped to 63.9, New Orders to 61.4, and supplier deliveries to 50.7. Employment, unfortunately, lagged and was virtually unchanged at a depressing 38.3.
Likewise, Edmunds.com reported that October auto sales "look to be on track for Seasonally Adjusted Annualized Rate (SAAR) in the low 10 million range." That would still make October the third best month this year, and demonstates that cash-for-clunkers didn't decimate future demand. Here's the monthly chart since the February bottom:
Most of the high-frequency weekly data, however, was good.
Same store retail sales for the week ending October 25 were up again both YoY and WoW, a very good sign for continued consumer spending:
WEEK ENDING INDEX 1977=100 YEAR/YEAR CHANGE WEEKLY CHANGE
Oct 25 490.8 2.4 0.1
Oct 17 490.3 2.8 0.2
Oct 10 489.4 1.0 0.6
Oct 3 486.5 1.0 0.3
The Edmunds.com and same store retail sales numbers are also good news for the "real retail sales" number for October. I have previously described Real retail sales as the "holy grail" leading indicator for job growth.
In a similar vein, New Jobless Claims held steady at 530,000, while the 4 week moving average declined to 526,000. This is more than 20% lower than the peak number from 7 months ago, and if maintained another month or so, may mean that the bottom for jobs in the economy is at hand.
On the other hand, ShopperTrak "reported that year-over-year GAFO retail sales declined 4.0 percent for the week ending October 24 while sales fell 4.8 percent versus the previous week ending October 17." The release explained that "sales declined last week as Columbus Day sales and promotions ended and retailers experience the annual lull leading up to Halloween."
Railfax showed all rail traffic except for cyclical traffic increased for the last week, which is impressive since all sectors should have already begun their seasonal decline. Even cyclical traffic declined less than it did last year, so a year-over-year weekly improvement.
Meanwhile, truck traffic declined slightly from August to September, but September was still the second best month all year. As the graph below shows, the trend is clearly still up from earlier this year.
Some of the increase also appears to be seasonal.
Finally, the price of Oil meandered around the $80 mark, a threat to the incipient economic expansion.
1.) "I complain therefore I am". People -- a large percentage of whom argued for the stimulus and in some cases are arguing for more -- are now complaining that government spending was responsible for some of the growth. Here's a news flash: we're in the middle of a pure Keynsean period where the government is supposed to ameliorate the impact of the recession and help us get back to a period of full employment. That is one of the central themes of Keynes arguments. In addition, consider that government spending usually accounts for about 20% of economic growth. Do we now completely discount this part of the GDP equation going forward?
2.) "GDP doesn't matter or is a bad indicator of economic activity." Since when? We've been using this number for a really long time. Here is the basic definition:
The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
It tells us lots of incredibly important information. But now it's flawed? Please. If you want to look at other parts of the economy -- like quality of life etc. -- there are plenty of statistics already available. But don't tell me that because GDP doesn't include quality of life issues or because it doesn't favor certain types of activities over others that it's somehow flawed. That's plain bullshit. What they're really saying is "I know squat about how economic numbers work together. But I really want people to think I do. So to hide my ignorance I'll just say all the numbers are bogus and use a made-up number that can't be empirically verified that also jibes with my point of view."
Here's the basic deal: the government spent money and initiated programs to get the economy moving forward. Guess what? It worked. That's because it was designed to work that way.
"Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change."
That addition -- 1.66 points -- can be found in BEA Table 1.2.2, on Line 15. Without Motor vehicle output -- Line 16 -- GDP would have come in at 1.88 percent.
But let's look at the historical record, because it tells an interesting story.
Going back to 1975 -- 139 quarters -- Motor vehicle output has averaged a +0.09 percentage point contribution to GDP. That's it. It has exceeded 1.50 percentage points -- as it did today -- in exactly 12 previous quarters. That's it. About 9 percent of the time does this line print greater than 1.50.
Further, in the 12 previous quarters in which Motor vehicle output printed 1.50 or greater, the subsequent quarter fell back, on average, to +0.14.
So, given the expiration of C4C -- and notwithstanding some extension/modification of the first-time homebuyer tax credit -- how are we going to replace the inevitable artificial goosing of GDP we saw in today's numbers?
The dollar is still very clearly in a downtrend. However at (A) we have a possible move through the trend line which would send prices higher. The vast majority of this chart is still very negative: prices are in a clear downtrend; the eMAs are negatively configured. While the 10 and 20 day EMAs have moved higher this is a preliminary move that needs more traction before we give it compete credence.
Thursday, October 29, 2009
A.) Prices gapped higher at the open on strong volume. Prices then found support at the 10 minute EMA and moved higher.
B.) Prices hit resistant at the 200 minute EMA and traded there for about an hour. They eventually moved through resistance.
C.) Prices continued to find support at the 10, 20 and 50 minute EMAs for the remainder of the day.
While today's rally is good news because it takes us away from the precipice, the chart shows we are not out of the woods by any stretch. Prices are still below the 10 and 20 day EMAs and the 10 and 20 day EMAs are clearly moving lower. In addition, today's volume isn't as impressive as the volume we saw on the sell-off over the last few days. In addition, consider these two other charts:
The Russell 2000 is still in serious trouble. It's printed a double top and prices are simply hanging on just above support. The 10 and 20 day EMAs are moving lower and the 10 day EMA has crossed below the 20 day EMA. In addition, prices printed long bars on the way lower on high volume.
Everything regarding the IWMs above applies to the Transports with the added caveat that the 10 day EMA is about to move through the 50 day EMA.
First, GDP increased 3.5%.
Durable good sales added 1.01 of the 3.5% or 29% of the total increase. That number is the result of C4C. That number is also highly unusual -- meaning it is way out of the ordinary. The highest that number had been since the 4Q05 was .46 -- and that number was also out of the ordinary. Suffice it to saw we're not going to get a goose like that from this number again.
Non-durable goods added .31 and services added .57. So combined these two other areas of growth were responsible for .88 of GDP growth, or 25%. This is why the broad based increase in PCEs (mentioned below) is so important. While car sales were a reason for the increase, they weren't the only reason.
Gross private domestic investment added 1.22 to the 3.5. The big movers there were positive contributions from the change in private inventories and increases in residential investment.
While exports did increase, imports also increased meaning we're back to imports subtracting from growth.
That leaves government spending which added .48 of to the 3.5.
While C4C was a boost, it wasn't the only are that helped. There were other reasons for the increase.
Let's start with the basics:
The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
Here's an important point: yes, cash for clunkers was a big reason for the increase. But there were other contributors as well.
Real personal consumption expenditures increased 3.4 percent in the third quarter, in contrast to a decrease of 0.9 percent in the second. Durable goods increased 22.3 percent, in contrast to a decrease of 5.6 percent. The third-quarter increase largely reflected motor vehicle purchases under the Consumer
Assistance to Recycle and Save Act of 2009 (popularly called, “Cash for Clunkers” Program). Nondurable goods increased 2.0 percent in the third quarter, in contrast to a decrease of 1.9 percent in the second. Services increased 1.2 percent, compared with an increase of 0.2 percent
Yes the cash for clunkers program was a big goose. But notice it wasn't just durable goods that saw increases: non-durable goods and services also increased. And not by small amounts. Also note the durable goods purchases by consumers only comprise 12% of PCEs. Services are by far the biggest component of PCEs, coming in at 65.7%. And non-durable goods comprise 21.9% of purchases. That makes the 1.2% increase in services and 2% increase in non-durables very important. The increase was broad-based.
Real nonresidential fixed investment decreased 2.5 percent in the third quarter, compared with a decrease of 9.6 percent in the second. Nonresidential structures decreased 9.0 percent, compared with a decrease of 17.3 percent. Equipment and software increased 1.1 percent, in contrast to a decrease of 4.9 percent. Real residential fixed investment increased 23.4 percent, in contrast to a decrease of 23.3 percent.
This is more good news for two reasons.
1.) The rate of decline of non-residential fixed investment dropped at a smaller rate. We saw a slight increase in equipment and software investment.
2.) Residential investment increased at a strong rate. Now I'm guess that some of that increase is the result of coming off a low bottom. But not all.
Real exports of goods and services increased 14.7 percent in the third quarter, in contrast to a decrease of 4.1 percent in the second. Real imports of goods and services increased 16.4 percent, in contrast to a decrease of 14.7 percent.
While imports increased at a larger rate than exports, exports were still up 14%. That tells us that our trading partners are buying things -- meaning they are recovering. The increase in imports indicates we're recovering.
Simply put, this is a good report.
A and B.) Notice there are two upward sloping trend lines that emerge from the bottom earlier this year. The first one (A) has now become overhead resistance. The second one (B) is still in place.
C.) Prices consolidated in a triangle consolidation formation.
D.) Prices broke out of this formation three weeks ago
E.) The RSI is not overbought right here. This is very interesting.
F.) The MACD is moving slightly higher. But also note it is coming off of an extremely overbought condition in mid-2008 and a very oversold condition at the end of 2009/beginning of 2009.
A.) Notice that the $73-$75 area was a huge supply area for about 4 months. That's a long time to hold resistance. Remember -- the longer a trend the more important its breaking.
B.) Prices broke through upside resistance earlier this month.
C.) Prices peaked and are now retreating a bit. Also note the bullish EMA picture -- shorter about longer and all rising. However, the 10 day EMA is about to move lower.
D.) The RSI is retreating and
E.) The MACD is about to give a sell signal.
Ideally, oil prices are supposed to rise in the spring for the summer driving season and then fall after Labor day. That didn't happen this time around -- prices spiked after labor day.
This is a conflicted situation -- the weekly chart says we're moving higher and the daily chart says we're going to move a bit lower.
Wednesday, October 28, 2009
A.) The DIAs have broken a long-term uptrend on increasing volume.
A.) The QQQQs have broken an uptrend that lasted six months.
B.) The QQQQs have broken to the downside with longer and stronger bars on increasing volume.
A.) The IWMs formed a double top
B.) The IWMs broke through long-term support
C.) Prices broke through the lowest price between the two tops
D.) Prices are moving down with longer bards on stronger/rising volume.
Tomorrow's GDP report is that must more important now.
Anyway, the reason I mention this is the transports aren't looking that good right now.
Let's start with the weekly chart:
Click for a larger image.
There are two key points.
-- Prices have broken a long upward sloping trend line and
-- The MACD is about is give a sell signal.
Let's add the daily chart:
Click for a larger image
First notice the chart has probably printed a double top. This is a reversal formation -- one of the main chart events we look for.
Secondly, I've broken the chart down into two boxes box A and box B. Notice that box B is technically weaker than box A -- both the MACD and RSI have printed weaker numbers.
Third, notice point C. Prices have moved through all the EMAs and a trend line. Also note the 10 day EMA has moved through the 20 day EMA -- another bearish development.
Yesterday I noted that several broad markets are sending sell signals. The transports were one of these markets. Putting all of these elements together it looks like we are heading for a correction. However, it's very important to remember this is a technical read; it is one side of the equation. It is not an analysis of the fundamental side of the equation. We still have a very important GDP print tomorrow which could completely reverse all of this information.
My best guess about what is happening is traders are taking some money off the table in anticipation of a weak GDP print tomorrow. They've made some great profits; now its time to recognize some of those profits.
Wall St. Journal (posted online Tuesday evening):
Americans are growing increasingly pessimistic about the economy after a mild upswing of attitudes in September. But Republicans haven't been able to profit politically from the economic gloom, according to a new Wall Street Journal/NBC News poll.
The survey found a country in a decidedly negative mood, nearly a year after the election of President Barack Obama. For the first time during the Obama presidency, a majority of Americans sees the country as being on the wrong track.
The reason that politicians of all stripes are currently so reviled is because of their inability to get anything done, along with an attitude down in Washington that can best be summed up by a Groucho Marx skit that's almost 80 years old -- but is simply spot-on.
The bloom's off the rose, methinks.
Those who have followed anything I’ve written over the years over at Blah3, or more recently here at the Bonddad Blog, know that I have the utmost respect for former Merrill Lynch economist David Rosenberg (now of Toronto’s Gluskin Sheff). I think Rosie’s one of the best in the business, and has always called it as he’s seen it. To his great credit, he was always unwilling to simply toe the sell-side line and blow bullish smoke up everyone’s behind, despite often catching flak for his bearish posture. He was foretelling the story of our recent catastrophe – particularly as it relates to the housing bubble – long before anyone else (including Roubini or Taleb) was onboard. And, unlike them, he was very specific about what was going to trigger the recession -- he wrote about a housing market bubble forming in August 2004 and articulated very clearly that trouble was brewing as a result of it.
When Rosie left Merrill, there was almost immediately a very subtle, very nuanced shift toward a more bullish posture. And when the announcement was made that Ethan Harris was to replace him, the bullish spin went into overdrive (how could it be otherwise when you’ve now got an economist forecasting 3%+ GDP growth for the next six quarters?).
Lately, it seems as though the rhetoric has been escalating.
Those who have followed Rosie know two things for sure about his work, since he hammered them home every chance he could (almost daily):
1) The U.S. consumer – whose Debt-to-Income ratio rose to the stratosphere in an orgy of consumption – needs to return to a more frugal existence, spending less and saving more. As I detailed recently, a mere return to the long-term trendline of Debt-to-Income implies a shedding of about $1.6 trillion of debt (reversion to the mean implies a shedding of over $5 trillion).
2) Rosie has maintained – and continues to do so – that this will be the mother of all jobless recoveries (it arguably already is given the how far we are from the recession’s starting point and the fact that we’re still bleeding jobs).
Now, Rosie’s taken his shots – broadly speaking – at economists who never saw the recession coming and are now opining about a V-shaped recovery. And he’s referred to them in not-so-glowing terms (e.g. shills, hacks, montebanks, etc.), although he’s rarely mentioned anyone by name (though once in a while he lets one fly). In all fairness, it must be pointed out that Rosie has remained steadfastly bearish in the face of the stock market’s 60% rally, and legitimate criticism could certainly be leveled against him on that front.
Now it appears Merrill has decided to retaliate against what they must perceive as Rosie’s assault against their change in perspective since his departure.
In an Oct. 9 piece that purports to refute Rosie’s view of the consumer -- A balanced view of household rebalancing – the Merrill team argues that the U.S. consumer is in better shape than folks like Rosie think, and adds this zinger for good measure: “However, our results strongly contradict some of the more alarmist views on the consumer.” It continues: “The popular press suggests an extreme deleveraging by U.S. consumers is likely. We think this view is unlikely, as households can restore their net worth in several ways. Households could choose either to pay down debt or to accumulate assets, in
order to restore their net worth.”
Their upshot: “None of this should take away from the bottom line: the extreme deleveraging predictions discussed elsewhere need not occur if households actually care much more about their net worth rather than just their debt ratio. Under what we believe are a reasonable set of assumptions, the household sector can repair its balance sheet by pushing up the saving rate to anywhere from 5 to 10%. This should restrain the growth in consumer spending in the coming years, but only by about ¼ to ¾% per year.”
The gist of the argument is that households are more focused in net worth than on debt or on debt-to-income and that, in any event, they could restore the balance by “accumulating assets in order to restore net worth.” How they could accumulate those assets in the absence of either higher incomes, lower debt, or increased savings remains unexplained. (Last I checked, assets had to be paid for somehow, or am I mistaken about that?)
In another shot across the bow (Oct. 20), they take aim squarely at the “jobless recovery” that most (led by Rosie) are forecasting:
Reasons this recovery can be particularly jobless
Turn to page A3 of today's Wall Street Journal, "Employers Hold Off on Hiring". Even though the profit outlook is improving, many companies are holding off on hiring. The WSJ points out that the situation is so bleak in the labor market that even if the economy was churning out jobs as quickly as the 1990s expansion (2.2 million private sector jobs a year), it would still take the economy until 2017 to reach a 5% unemployment rate. While hiring usually lags the economic recovery, the WSJ highlights several reasons why the outlook may be worse this time around:
1 Many businesses have doubts about the durability of the upturn and attribute much of the recent growth in orders to government stimulus and a temporary inventory rebuild.
2 Businesses face uncertainty over the regulatory outlook and the costs associated with the expansion of health care and climate legislation.
3 Companies have also been able successful at boosting productivity to make up for the sharp declines in headcount.
4 Many companies also have excess labor on hand - after cutting hours to record lows, companies can boost production simply by increasing hours without having to add existing workers.
Reasons we disagree with the jobless recovery view
Of course, the first two factors have some merit at the margin but are unlikely to be major drivers of hiring activity, in our view. The productivity argument arises after each recession and works for a time until the typical lag we normally witness in the relationship between activity and hiring kicks in. The final point is the one that is, in our view, most mistaken. Although it is true that hours have been cut to record lows, that does not mean there is excess labor. Not all labor is fungible and there could be demographic and work rule reasons why firms have chosen to cut hours rather than production in certain industries. Finally, a number of industries work with such a lean workforce that, when the downturn came, these workers saw their hours cut as the alternative was for the plant to shut down - these industries were not likely going to be the drivers of growth in the labor market under any circumstances.
I don’t find either of their arguments particularly compelling.
Yesterday, as a matter of fact, the Merrill team had to contend with what can only be described as a huge setback in consumer confidence. With economic releases looking increasingly mixed, the ML team seems challenged in support of their more optimistic view.
In any event, there most definitely seems to be a very subtle – yet discernible – to and fro taking place between Rosie and his former shop.
Click for a larger image
Regarding the copper market
A.) The 40-41 was a supply area for a month and a half; prices simply could not get over this level.
B.) Starting at the beginning of October prices made another run at breaking through resistance.
C.) Over the last week prices have moved through resistance. After moving through they stopped to consolidate their gains.
D.) Momentum favors further upside moves.
Finally notice the EMA configuration: all are moving higher, the shorter ones are above the longer ones and prices are above all of the EMAs.
This is a bullish chart.
Tuesday, October 27, 2009
A.) The SPYs have broken a long upward sloping trend line.
A.) The QQQQs have broken a long term trend line.
B.) The Russell 2000 has formed a double top and has broken a long term trend line.
A.) The transports have formed a double top and B.) have broken a long-term trend line.
We have four average that are breaking long-term trend lines. That is not good.
One of the biggest clouds on the economic horizon is the vast amount of debt U.S. households took on during the boom years. The Federal Reserve puts total household debt, including mortgage debt, at about $13.7 trillion, or 125% of annual after-tax income, a burden that many economists believe will take several years to pare down to what they see as a more sustainable level of 100%. During that "deleveraging" process, the logic goes, U.S. consumers -- whose spending makes up more than two-thirds of the U.S. economy and about one-fifth of the global economy -- won't be able to play a leading role in any recovery.
The gloomy forecasts, though, miss an important point: Debts have value only to the extent that they are being paid, and a rapidly rising number of U.S. households aren't doing so. Those defaults are leading to losses at banks, a wave of foreclosures, trouble for neighborhoods and strife for families. But they are also providing an immediate, albeit radical, form of debt relief.
"It's not ideal, because it carries other costs," said Karen Dynan, a consumer-finance specialist at the liberal Brookings Institution think tank who recently served as a senior adviser to the Federal Reserve. But it is "going to help get household balance sheets back to the right place."
If one accounts for defaults, U.S. households' debt burden is shrinking a lot faster than the official data suggest. First American CoreLogic, which tracks the performance of mortgage loans, estimates that some 9.3% of the nation's 52.4 million mortgage holders were 60 or more days behind on their payments as of July. That represents relief on about $1.2 trillion in loans. The official data miss most of that, because the Fed doesn't erase debts until banks have foreclosed, sold the homes and taken the loans off their books, a process that can drag out for more than a year.
As a result, some economists are expecting a sharp improvement as widely watched indicators of consumers' finances catch up to reality. Joseph Carson, director of global economic research at AllianceBernstein, expects the share of households' after-tax income that goes to pay loans, rent and other financial obligations to fall to 16.3% by the middle of next year, well below the average for the 20-year period leading up to the housing boom. As of June, it stood at 18.1%.
No, I am not happy, pleased or even celebrating that this is happening. However, a logical outcome of the wave of defaults is a lower debt/income ratio which has positive long-term implications.
Home prices in 20 U.S. cities rose in August for a third consecutive month, bolstering the case that an economic recovery is at hand.
The S&P/Case-Shiller home-price index climbed 1 percent from the prior month on a seasonally adjusted basis after a 1.2 percent increase in July, the group said today in New York. From a year earlier, the gauge was down 11.3 percent, less than forecast.
Rising home sales, due in part to government programs including the first-time buyer credit and efforts to lower borrowing costs, have helped stem the slump in property values that precipitated the worst recession since the 1930s. Sustained gains in household spending, the biggest part of the economy, may be harder to come by as joblessness mounts.
Here are the charts from the report:
Click for a larger image.
While prices are still negative year over year, the rate of decline is improving. In addition
Only three cities printed a negative month over month growth in the latest survey. This is another positive development for housing prices.
The blog Calculated Rish has put forward the idea that housing will see two bottoms: one in the pace of sales and one in prices. I still think that's a correct assessment.
The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.0% in September, to a seasonally adjusted level of 82.3 (2002 = 100). Revised data show the index rose 1.6% in August, to 81.6.
Here is a graph of the index:
Click for a larger image.
This index isn't printing as strongly as other regional indexes, largely because the Chicago index didn't start to rise until mid-year. But it is currently moving in the right direction. It rose because three of the four components increased last month:
Click for a larger image.
Then there is the Chicago Fed National Activity Index. Here is a chart of the three month moving average:
The best news from the chart is it is now at levels associated with national expansion:
But the Dallas Fed's number dropped last month:
Texas factory activity declined in October, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index—a key indicator of current manufacturing activity—edged further into negative territory, suggesting output in October contracted after remaining stable in September.
Here is the accompanying chart:
Overall the Dallas chart is also moving in the right direction; it has been in a clear upward trajectory since the beginning of the year. So far, this data point looks like an outlier to the general trend.
Overall, these three reports are good good news. We have two reports that show a brightening picture and a third that is still in an upward sloping trend.
A.) The IEFs are bounded by two trendlines right now.
B.) There is a second upward trend that started at the beginning of August.
C.) There is a third trend line that is providing support for prices.
D.) Prices have moved through line C (mentioned just above).
Note that EMAs are turning bearish.
-- The 10 and 20 are moving lower.
-- The 10 day EMA has moved through the 200 day EMA; the 20 is about to.
-- The 50 is just turning negative.
-- Prices are below all the EMAs
Monday, October 26, 2009
Click for a larger image.
A.) Prices moved higher at the open printing some strong candles. But the volume was weak.
B.) After getting over the EMAs, prices couldn't maintain their momentum. As a result, they printed some weak bars.
C.) Within the period of of 40 minutes the market saw an increase in volume and a strong downward movement. Notice the strength of the downward moving candles.
D.) For the rest of the day prices ran into upside resistance at various EMAs.
This is a bad idea for two reasons.
First, pay is not the federal government's business. Period. It smacks of a command economy like the economies that existed in the eastern block. Those economies were at best jokes. They did succeed in making everyone equal -- everyone eventually became poor. The US is based on a capitalist model where the market sets the rates. Period.
But most importantly, this is a shareholder issue. For those of you who are unfamiliar with corporate law, the basic structure of a corporation is the shareholders are the owners of the company. They hire the board of directors who implement macro-level policy for the shareholders. The board also hires the managers who carry out the day to day operations of the company. However, this whole situation boils down to the shareholders -- it is their responsibility to vote for or against directors. It's also up to the shareholders to get rid of directors they don't like or who are not doing well for the company. If you don't like the way the company is being run you have two choices: sell your shares and stop being an owner or figure out a way to start working with other shareholders to effect change at the company.
This does lead to a second point: does US corporate law need to change? That is, do we need change the way corporations are governed? That is always a possibility. However, that is something that has to happen at the state level where corporate law is created.
Consider this passage from a blog posting of activist investor Carl Icahn:
It is unfortunate that it took a force the size of the U.S. government to shake up the board and management at GM. In effect, the government has become the world's biggest activist investor, making the same kinds of demands that any activist or creditor should rightfully make in return for its investment.
Shaking up managements and boards is a no-brainer at underperforming companies for activist hedge funds and private equity firms, including Quadrangle Group, which Rattner co-founded. Why should investors tolerate poor performance? Why should taxpayers?
I have shaken up boards and managements at many companies in which I have invested, including Blockbuster, ImClone, Stratosphere, Philips Services, Federal-Mogul and many others. Generally, but not always, the net result has been very positive for the company and the shareholders. It is important to get new blood, new strategies and new ideas into underperforming companies.
As the saying goes, 'if you do the same thing all the time, you get the same result.' This applies to many managers. Too many are one-trick ponies. America is losing its economic hegemony because of it.
But most importantly, it is up to shareholders to step up to the plate and demand changes at their companies. For too long and for a variety of reasons, shareholders have been complicit in allowing management excesses and incompetence by not taking a stand.
"Shareholders have reelected these directors, have approved these pay plans and have been enablers for the addictive behavior of the corporate community," said Nell Minow, editor and co-founder of the Corporate Library in a recent BusinessWeek interview.
Let's hope the global economic meltdown causes shareholders to demand more changes on the part of their companies -- and not leave it to the government.
David Altig of the Atlanta Fed, who also blogs at Macroblog, wrote a long note describing "The Growing Case for a Jobless Recovery". It's only fair that I write about a take contrary to my own, and add some further comments:
First, he notes that the Wall Street Journal reports that
"Companies across the economy are holding off on hiring even as the profit outlook improves, amid economic uncertainty and their own success at raising productivity in rough waters.... Hiring always lags behind in economic recoveries, but the outlook this time is worse, many economists say. Most forecasters now expect a prolonged period of high unemployment ...."He next notes that Job opportunities are scarce, relying on the Job Opportunities and Labor Turnover Survey, a/k/a "JOLTS", to the effect that
"At the end of August there were estimated to be fewer than 2.4 million job openings, equal to only 1.8 percent of the total filled and unfilled positions—a new record low."Additionally, Job losses have been disproportionately concentrated in small businesses :
"[B]usinesses with fewer than 50 employees account for about one third of net employment gains in expansions. They have accounted for about 45 percent of job losses since the beginning of this recession. Given that these are the types of businesses most likely to be dependent on bank lending—and given that bank lending does not appear poised for a rapid return to being robust—the prognosis for an employment recovery in these businesses is a question mark."Next, he notes the large number of people who are Involuntarily working part-time , which,
"at 8.8 million, [is] well above the level of past contractions in both absolute and relative terms..... One potential implication of this fact is that firms probably have the capacity to expand production without hiring new workers (or increasing worker productivity). All these firms have to do is give more hours to existing workers...."Finally,
"the percentage of employee separations labeled permanent is at a recorded high..... [T]hose who have been permanently separated from your previous employer, who has no expectation of hiring [them] back..... The last category is the dominant reason for unemployment at this time. That might not seem surprising, but it actually is. Never, in the six recessions preceding the latest one, did permanent separations account for more than 45 percent of the unemployed. The current percentage stands at 56 percent as of September and appears to be still climbing."Concludes Altig:
"none of this is proof positive that we are in for a "jobless recovery," but, to me, the odds appear to be increasing."While I certainly respect the credentials and the perspicacious analysis of Mr. Altig, as he says, it isn't proof positive, and there are some limitations in his argument that cause me to find it less than convincing. In the first place, two of the data series he relies on are less than 20 years old. The small business hiring data only goes back to 1992, and the JOLTS survey only goes back a decade! Saying that one of these series is "at a record" is not the same thing the same statement made for a data series with 50 or 100 years of data behind it. Additionally, the JOLTS data didn't turn more positive until summer 2003 after the last recession, clearly showing that it is a lagging indicator. Most likely the jobs turn will have already happened by the time it shows up in the JOLTS data.
As to the effect of lack of bank lending, one of the first commenters at Altig's blog countered with The National Federation of Independent Business's October 2009 survey of small business people in which very few complained about lack of credit -- it was lack of customers that worried them! I should further point out that bank loans too are a lagging indicator. Historically, lending is always lousy at the beginning of recoveries, and only begins to turn around once the recovery is clearly underway.
While Altig's point about the huge number of people being involuntarily part-time employed makes intuitive sense, it too runs afoul of the data from past recoveries. Traditionally the deeper the initial downturn in the "V" of recession, the stronger the upturn coming out -- and that includes hours worked, as I showed back in July.
What I suspect Altig is truly picking up is a byproduct of the fact that this Recession hit service business and employment far harder than any previous recession. Typically right up to and including the 2001 recession, the brunt of layoffs was borne in manufacturing and construction, while retail and other service businesses were relatively untouched. Layoffs in goods producing industries were 85% or more of the total -- until this Recession, as shown on this graph:
in which , as shown on this chart:
Here's a chart, showing HOW, contrary to earlier recessions, fully half of the 8 million jobs lost in this Recession have come from service businesses:
|Month||Mfg # lost||Services # lost|
[*Services measured from 10/80 peak. M = million]
Service businesses, I suspect, are disproportionately small businesses, and because their owners have no experience even remotely comparable to the present, undoubtedly they and their former employees view their layoffs as permanent. Again, a graph I have previously shown demonstrates that in the 1991 and 2001 recessions, service jobs were lost later and gained back earlier -- turning positive before the end of the recession. In this Recession, as shown on the graph below, courtesy of Raymond James, service layoffs have been endemic -- and they were a surprisingly awful -147,000 of September's poor -263,000 jobs reading.
In a related vein, Arnold Kling of EconLog picked up on Altig's post to discuss the difference between a "Keynesian" and "Recalcuation" recession:
In a Keynesian recession, you are temporarily laid off because of excess inventories and deficient aggregate demand. You wait to be recalled by your firm. This was true of recessions from the end of the second World War through the 1980 recession. Even the 1975 recession, which was a "supply shock" (higher oil prices, requiring some permanent readjustments), had a relatively low share of permanent job losses.While Kling meant to support Altig's point, I think Kling's argument actually undercuts that for a "jobless recovery," precisely because the overwhelming share of job losses in the 1991 and 2001 recessions were in manufacturing -- which, due to productivity enhancements and China, never came back. This time around, with over half of the job losses in services, workers do not need to learn a whole new set of skills in order to return to the labor force. What is needed is an increase in real consumer spending, which -- as I have shown in this graph before, and repeat here
In a Recalculation, you permanently lose your job and you have to find something else. The Recalculation model increasingly holds as we move away from an economy dominated by manufacturing. Even though the 1990 and 2000 recessions were relatively mild, a large share of the job losses were permanent.
-- will cause the service jobs to come back afterward.
As a final note, a typically rejoinder to the above, is "where will the spending come from?" As this graph shows, however, consumers have socked away an additional $300 million in the last year in savings.
Some of that was due to fear, and the need to build a fund in case of job loss. A passing of fear will cause some proportion of that saved money to be spent -- and that is where the increase in real consumer spending will come from.
At the end of the day, either the Leading Economic Indicators are right or they are wrong. When Bonddad and I initially blogged about their increase, there was no shortage of skepticism that there would be anything less than a slight deceleration in the ongoing "cliff diving." And yet this week GDP growth of about 3% is likely to be reported. Those indicators strongly indicate that the 4th quarter is likely to be similar. Among the things that Leading Indicators are specifically supposed to lead is the Index of Coincident Indicators -- which as this graph shows, have also now turned up
-- the laggard being job creation, which accounts for just over 50% of the entire Coincident Index. In 1992 and 2002, jobs were finally added to the economy when the LEI were up about 5% YoY. Should the LEI simply move sideways in October and November, they will be close to that 5% YoY mark in December. So I am not yet ready to join in the pessimism.
The SPYs still look good. Notice we are still printing a series of higher highs (B) and higher lows (A). Also note the price EMA relationship (C). Prices are above all the EMAs, the shorter EMAs are above the longer EMAs and all the EMAs are rising. Simply put, this is a bullish chart.
Is the Russell 2000 forming a double top? Compare sections A and B. The MACD and RSI printed lower on the second top which is bearish. Also note the volume on the second top was lower. Finally, notice how the volume coming out of the second top is increasing indicating more selling pressure. I use the Russell 2000 as a risk proxy; because it is composed of smaller issues it is more dependent on a positive economic environment. When people are concerned about slow growth, they are more likely to sell growth shares.
Also note the Transports may also be printing a double top (A). Note also that at B we have a big candle along with (C) a lower MACD print on the second top.
Food for thought.