Busy Weekend in the Hamptons

File this one under anecdotal evidence:

Back on Memorial Day weekend, I noted it was very Quiet in the Hamptons. The crowds weren’t here, the restaurants were empty, and despite the gorgeous weather, the beaches were surprisingly human-free.

This weekend is the opposite: Crowded roads, lots of traffic, full restaurants, busy shops.

Whether its something significant or merely one of those random things, I can unreservedly say thing seems much more active here than they did at the beginning of the Summer.

I still see plenty of For Sale signs around — but the vibe is definitely totally different. Whether that translates into a sustainable recovery or a mere bounce has yet to be determined.

The world, it seems, is no longer coming to an end . . .

Leen’s Photos: Driza, Ritholtz, Rosner, Kotok, Tobey, King et al.

I thought the residents of The Big Picture would like to see some of the photos I took on this year’s fishing junket and economic debate session at Leen’s Lodge in Grand Lake Stream Maine. Our host Charles Driza did a tremendous job of taking care of our various wants and needs.  If you ever want to take the family on a really great vacation, call Charles at  800-995-3367 or go to www.leenslodge.com

The photo below shows Charles in a rare moment of rest during one of the lunches he organized for us each day.  Charles is a mechanical engineer by training and a registered Maine Guide.   Besides running Leen’s, Charles is particularly known for his excellent hunting trips, both in ME and in LA during the winter months.


Copyright 2009 RC Whalen

We had great weather this year and the cooperation of the Almighty in this regard also allowed me to capture some of my favorite economists and analysts for posterity.   First of course is our gracious host on TBP Barry Ritholtz, who is shown here in the dining room of the main lodge after a bit of surfing on his ever ready MAC notebook.


Copyright 2009 RC Whalen

Barry looks like a very happy cat because we were all waiting for dinner, which at Leen’s is a feast.  I am amazed I was able to get back into my car after five days of eating great food and drinking the endless supply of wine provided by David Kotok, the genius behind this event.  As I said at dinner on day 2, David Kotok is not only a great manager of other people’s money and a great friend, but he is also a committed public citizen because he has taken as his mission in life to broaden dialog and understanding among financial professionals all over the world.    See David below holding forth on an island in the middle of the Big Lake during the lunches the the Maine Guides put on for us each day.

Copyright 2009 RC Whalen

Copyright 2009 RC Whalen

We had almost 50 participants in this year’s fishing trip, including a number of new inductees.   We did not catch enough catfish to have the traditional investiture ceremony as last year, but we still had some fun with the newbies.  One of the names the readers of TBP will recognize is our friend Josh Rosner, who arrived at Leen’s sporting a very impressive rod and reel that it took us several days to learn how to operate.   Something about magnets and centrifugal force.  Finally, we read the instructions.  Duh!  The photo below shows Josh in the bow of a guide’s canoe.

Copyright 2009 RC Whalen

Copyright 2009 RC Whalen

When we are out on the lake, we generally use these beautiful hand-build canoes with small outboard motors.  These craft have square sterns and are remarkably stable.  Our guide for the past several years has been Dale Tobey (djtobey[at]netzero.net), the past president of the Maine Guides Association and a real honest-to-God woodsman who builds his own canoes in the wintertime, raises hounds and hunts and traps in the woods of Maine.  In the photo below, you see Dale with Matt Greco of CNBC, who caught a good number of bass on the last day.

Copyright 2009 RC Whalen

Copyright 2009 RC Whalen

Besides Charles Driza, the people who really make the trip work are the guides and the staff of Leen’s, who all live in the local community and work from dawn till late at night to make our experience a real treat.  The first photo below shows the Maine Guides after the lunch on Saturday.  The lady on the far right of the photo, Sue, baked us fresh pies and cobblers in a dutch oven over an open fire.  Randy Spencer of the Maine Guides is in the center front row.  Randy and CNBC’s Steve Liesman provided great musical entertainent in the evenings for the group.  Randy writes and performs songs, and has also written a history of the Maine Guides.

Copyright 2009 RC Whalen

Copyright 2009 RC Whalen

Here are a copy of photos of Steve and the other campers during one of the lunches on an island in the middle of the Big Lake.  There is also a shot of the canoes used by the group.

Copyright 2009 RC Whalen

Copyright 2009 RC Whalen

Copyright 2009 RC Whalen

Copyright 2009 RC Whalen

Copyright 2009 RC Whalen

Copyright 2009 RC Whalen

Finally, we have to pay a special tribute to Laura King, our hostess at Leen’s Lodge. Laura is a Passamaquody Indian who lives in Princeton Maine. A life-long resident, Laura has many duties at the lodge, including cooking & telling the guests where the fish are! Laura is known for her helpful attitude and great desserts. Laura’s family members, including her husband Gary, and daughters Bea and Fay, are often helping her at the lodge as the work load increases in the summer season.   Leen’s Lodge is blessed to have Laura King and the other members of the Leen’s family to serve its guests.  And beware:  Laura is a great poker player.

Copyright 2009 RC Whalen

Copyright 2009 RC Whalen

Tight lines,


Overdue: Market Correction Begins


Dow falls 140 plus points as “Confidence” drops.

There seems to be this subsection of pundits who believe that if we only could manipulate the sentiment, everything else would improve. This of course gets it exactly backwards — when the economy’s fundamentals improve — jobs, wages, credit, etc. — sentiment will follow.


Kass’s Summary of Bearishness

Doug Kass very publicly made a prescient bottom call in early March. He has now flipped Bearish, and explains why:

1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

4. The credit aftershock will continue to haunt the economy.

5. The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.

6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

7. Commercial real estate has only begun to enter a cyclical downturn.

8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

9. Municipalities have historically provided economic stability — no more.

10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.

Doug points to the animal spirits in full force, shorts scrambling to cover, and a crowded bullish sentiment as additional reasons for the tactical shift. He believes a “self-sustaining economic recovery appears doubtful”

That fits in well with my 1973/74 parallel of the current market environment.


Kass: A Summary of My Bearishness
Doug Kass
The Street.com, 08/10/09

Where to Next for Commodities?

Good Evening: U.S. stocks took a bit of a breather today after seeing little to dislike in Friday’s nonfarm payrolls report. The slight trimming to Friday’s gains came on light volume, and then only after another series of afternoon upticks. The weakest performers on Monday (and, actually, for much of the past week) were the economically sensitive names like materials and industrials. If the green shoots are indeed sprouting into something more substantial right before our very eyes, then why are these companies underperforming? As has so often been the case in recent years, the answer may lie with potential policy changes in China.

Friday’s employment figures were indeed better than had been expected, even as the U.S. lost more than another quarter million jobs in July. -274K didn’t beat the “whisper number” estimates for -250K or less, but it did beat the average prognostication, and the revisions were positive to boot. The unemployment rate actually dropped (though mostly a statistical quirk), the work week expanded, and average hourly earnings rose. Losing fewer jobs isn’t exactly the stuff that makes for economic growth, but it was a solid report for this point in the cycle. Stocks went out at their best levels of the year on Friday, despite some late profit taking as investors headed out to the beach.

Wall Street’s celebration spilled over into Asian trading overnight, but not so with Europe this morning. U.S. stocks thus opened a 0.5% lower on Monday before clawing back most of those losses within 90 minutes. Risk aversion made a small comeback in the early afternoon, though, as stocks weakened while Treasurys and the dollar rallied. The S&P gave back almost 1% and tested the 1000 level, but, holding firm at this millennial mark, the S&P and the other averages then rallied into the close. The final tally left the indexes down between 0.1% (Russell 2000) and 1% (Dow Transports). Treasurys found buyers ahead of this week’s large refunding, and yields fell 6 to 8 bps in the process. The greenback added 0.3% to Friday’s strong showing, and most commodities finished mixed. With only the precious metals sporting noteworthy declines (gold and silver were off 1.5% and 2% respectively), the CRB index still managed to finish unchanged on Monday.

On a day with little news flow and even less volume, it is tempting for a writer to ascribe “signal” to what is mostly just noise. I will take that risk tonight by wondering what lies in store for commodities and their associated equities. Those of us domiciled here in the U.S. tend to view global economic activity through an American-centric lens. But when it comes to commodities, the most important marginal buyers are in Asia. We all know the 40% of one ton gorilla is China when it comes to raw materials, so in thinking where commodities might be headed, we have to look at what the Cadres in that country might be up to before registering any potentially useful guesses.

Easily distracted readers will want to skip to the final paragraph, but some history probably is in order. Since no matter how capitalistic many individuals and businesses have endeavored to become in the decades since China began to open up, it is important to remember that China is still a centrally planned, command economy (with emphasis on the second to last word). As its needs for grain, oil, copper, and other consumables rose during the ’70’s, ’80’s, and 90’s, it fell to the functionaries in Beijing to direct the buying. It seemed that whenever the sharpies in the global commodities markets had China’s buying patterns figured out, the purchasing commanders in that nation found a way to game the system that tried to game them.

Suddenly plentiful grain harvests would be announced, or new coal mines in the interior would be found, and the resulting price drops in various commodities could be brutal when China supposedly didn’t need as much as had been forecast. In the run up to the 2008 Olympic games, for example, commodity longs came to count on Chinese demand for just about anything that could be grown, drilled, or dug from the ground. Once the Olympics went off without a hitch, Chinese demand just stopped — cold. Tanker shipping rates collapsed and commodity prices were decimated in the wake of the Chinese demand drought. The credit crisis in most Western nations then exacerbated the problem.

Upon seeing the prices of raw materials fall between 50% and 80%, China announced a stimulus package over the winter and went on a restocking binge. Even when global equities hit bottom in March, global commodity prices never again reached their 2008 lows. China, courtesy of the generous bank lending instigated by the powers that be, was back. The Fed and other central banks may have lent an unwitting hand to China’s commodity appetite in the first half of 2009 with their wanton efforts to reflate. After all, commodities are real goods priced in nominal dollars, so what better way for China to hedge against Western monetary debasement than to stock up while prices were at WalMart levels? So strong was the demand for commodities during the opening two quarters of 2009 that green shoots were sighted, shipping rates shot up, and commentators openly worried about a bubble in China (see below). Andy Xie, Morgan Stanley’s former expert on China, is bearish; others, including Templeton’s Mark Mobius, are cautious but don’t see a bubble (see below).

Fast forward to today, and worries about Chinese demand have resurfaced. Shipping rates have started to fall again, and commodity prices are just now starting to wobble. Whether they fall may depend on what happens to Chinese economic activity, which, in turn, depends upon what the mandarins have decided to do about reining in bank lending. If lending is in fact set to drop, then commodity prices will likely again feel the effects of gravity.

But take a look at the Rio Tinto story before jumping to the conclusion that Chinese demand will soon be back in hibernation. Iron ore rates are up for renegotiation, and Rio Tinto is a primary supplier to Beijing. So what shall we make of the arrest of Rio Tinto employees? Is industrial espionage truly at work, or is China hoping for Rio, BHP, and the others to cry “Uncle” once again on pricing? The rumors of a drop in Chinese bank lending support China’s negotiating stance, too, so the stories may not be just a coincidence.

Like everyone else outside the Forbidden City, though, I really have no idea what China is up to these days. The evidence can be interpreted in whichever way a commodity bull or bear would like. I do know this, however. The FOMC is unlikely to do anything more than just talk about exit strategies when it meets this week. Promises, as opposed to action, will probably continue well into next year, too. Chairman Bernanke will do everything in his power to avoid having a “D” (for deflation) show up on his report card. So rather than deciphering the inscrutable maneuverings in China, all we have to remember is that the Fed looks set to keep right on printing fresh greenbacks. Over any short period, commodities can literally go anywhere, just as they both skyrocketed and crashed during calendar 2008. Long term, however, they will be moving higher. Not even China’s best gamesmanship can prevent it.

– Jack McHugh

U.S. Stocks Fall on Valuations; 3M, Eli Lilly, Best Buy Drop
China to Cut Loans as Stocks ‘Bubble’ Grows, Xie Says
China Rally Will Last, No ‘Bubble’ Seen, Harvest Says
Templeton’s Mobius Says Stocks Face 30% ‘Correction’
Baltic Dry Index Has Worst Week Since October as Demand Slows
Rio Tinto Accuser Says Article Was His Own Opinion

Comstock: Indebtedness May Cause Two Lost Decades



When I make presentations, I use a chart showing the long term ratio of (all US, private and public) Debt to GDP. The chart above is a variation of that.


The CHART OF THE DAY shows U.S. total debt and gross domestic product since 1952, along with the ratio between them, based on data compiled by Bloomberg. The ratio rose in the first quarter to 372 percent even as household borrowing dropped for a second straight quarter, an unprecedented streak.

The U.S. is headed for “a deleveraging period” in which the amount of so-called private debt, including consumer borrowing, collapses as government borrowing explodes, Comstock wrote.

Assuming that private borrowers pay down debt at the same pace as they did in Japan after its 1980s economic bubble burst, the savings rate will climb to about 10 percent in 2018, the report said. The estimate was made in a study by the Federal Reserve Bank of San Francisco that Comstock cited. It’s more than double the 4.6 percent rate for June.

Comstocks suggest the U.S. economy may be entering into a lost decade like Japan’s economy. Comstock Partners they expect  a 20 period of substandard performance.

My fear is that zombie banks can turn us Japanese, but 20 lost years? Sheesh, I shudder to think about it.


Lost Couple of Decades’ Looming for U.S. Economy: Chart of Day
David Wilson
Bloomberg, August 7 2009

What do PG and AXP Tell Us About the Economy?

Good Evening: And so it continues. The pattern of an early drop in stock prices, followed by a late day rally held true to form again today. This trend has become so entrenched in recent weeks that, according to CF Global’s Philip Grant (who writes a fine market recap of his own), “the S&P 500 has now gone twenty one consecutive trading days (dating back to July 7) without sustaining a loss of 0.5% or greater.” Despite some choppy economic data and an earnings miss by Dow stalwart, Procter & Gamble, all it took was a hint of improvement in the July charge off data from American Express to bring the major averages back from their early declines. Since the transaction volumes at AXP are still falling at a double digit rate, what struck me about today’s news flow is that PG, AXP, and the ISM services survey all portray a less healthy U.S. consumer than Mr. Market would have us believe.

When Procter and Gamble announced an 18% decline in its Q4 earnings this morning, U.S. stocks were bound to take an early hit. Sales fell across the board for PG, a company that is supposed to be in the “recession-proof” category. The pre-opening economic data didn’t help, either. The employment data (Challenger Job Cut Report, ADP payroll estimate) were both on the weak side, setting up a potentially wider range of outcomes for Friday’s unemployment figures. The first dip in equities was bought once trading commenced, but that buying dissolved as soon as the ISM services survey results were posted. Against consensus estimates for a rise to 48.2, this survey of non manufacturing businesses inconveniently fell to 46.4 in June. Since, like many other data points of late, this piece of data had been getting less bad (remember, 50 is zero growth), a relapse for the worse was unwelcome. Factory orders were on the high side of expectations, but the major averages wasted little time in dropping 1% to 1.5% in the wake of the ISM release.

After bouncing around in the lower half of the day’s range for the next few hours, stocks recouped all their losses after American Express told analysts that AXP’s charge off rate in July would likely fall to 9.2% in July, versus 9.9% in June. The green shoots crowd seized upon this wonderful piece of news and bid up the company’s shares (AXP rose 5.75%). Not satisfied, market participants then presumed that all financial companies would soon see declining credit losses and bid up the whole financial sector (the BKX finished + 3.5%). Buyers even latched onto the lowly AIG and sent it zooming ahead to the tune of almost 63% today. First, the shorts trying to cover sent the name higher; then, rally established, the trend-seeking Quants bought more.

After trading above the unchanged mark for a short spell, the averages fell back a bit into the close. Wednesday’s losses ranged from 0.3% for the S&P to 0.9% for the Dow Transports. Treasurys had been up this morning, despite a larger than expected refunding schedule announced for next week, but the equity rally acted like gravity on government securities as the day progressed. Two year notes were flat, but yields rose as much as 8 bps on the long end of the curve. The dollar was a bit weaker and commodities were a bit firmer. The CRB index finished with a gain of 0.5%.

Just last year, Procter and Gamble was raising prices on many of its household products to combat the rising costs of raw material inputs. Presto! Margins were restored. But the consumer products giant will now have to rethink its strategy due to falling volumes (see below). Consumers are cutting back, even on items in PG’s sweet spot that are considered non-discretionary. Procter’s troubles aren’t behind it, either, since the company said it expects the weakness to continue for the rest of the year.

This picture of a consumer who is skimping on the basics was also confirmed by American Express today, it’s cheerful credit news notwithstanding. According to Reuters, CFO, Daniel Henry, said billed business declined 13 percent in July, compared to a 14 percent fall in June and a 17 percent drop in May. Double digit declines in a company’s main business are not good, even if the trend has a gentler negative slope. Consumers are charging less on their credit cards, including items like Crest, Tide, and quadruple-bladed Gillette razors. With today’s ISM non manufacturing survey saying that the largest sector of the U.S. economy (services) is still under pressure, it’s hard to see how PG and AXP will see better days any time soon.

If these behemoths are struggling, then what do their woes imply for the rest of the economy — or the stock market? Now that Q2 earnings season is largely in the books, the basic theme has been one of falling revenues but better than expected profits. The difference has been cost cutting (layoffs, less travel, etc.), but one company’s cost cuts hit the revenue line of other businesses. In the final article you see below, Charles Rotblut, CFA. and Senior Market Analyst & Editor at Zacks, argues this trend cannot persist.

Zacks lives and breathes earnings estimates, and Mr. Rotblut notes that earnings estimates aren’t rising as much as they should be if a recovery were truly taking hold. Even using the highest estimates for the combined earnings of the S&P 500 ($60.00), an index level of 1000 puts the P/E at a non bargain level of 16.67. These are only operating estimates (the “as reported” figures are far worse), so I think Mr. Rotblut’s caution is justified. The economy may be getting less worse, but the 50% leap in the S&P since March implies an economy that is getting better. All the more reason to pay close attention to Friday’s employment data. More than the number of the newly jobless, and more than even the unemployment rate, I’ll be watching to see if hours worked and average hourly earnings can tick higher. These last two series are the stuff of real incomes, the very stuff, in fact, that consumers need in order to pay for a load of P&G items with their American Express cards.

– Jack McHugh

U.S. Markets Wrap: Stocks Drop on Economic Data; Bonds Fall
P&G Profit Declines as Consumers Curb Spending
American Express card defaults fall, stock surges
Why Aren’t Profit Forecasts Higher?

Trading Observations

A friend (A) at a major trading house is a young but astute market oberver.

He notes some details of today’s action:

1. Volume is tracking for 11.7 billion shares, which if accomplished would be the largest volume day since June 26th. On that particular day, personal income and spending data for May revealed a sharp rise in the savings rate to 6.9% (which was revised down yesterday to 6.2%). Breadth is negative for both the NYSE and the Nasdaq, but the Arms Index (the ratio of NYSE advancers to NYSE decliners divided by the ratio of NYSE up volume to NYSE down volume) is ridiculously low at 0.37, indicating an outsized amount of volume in advancing stocks relative to the number of stocks which are advancing. Thank Jim Cramer: his call on Mad Money last night to buy Bank of America (its price is high enough now that institutions will feel comfortable buying it…the logic of which I think speaks for itself) has galvanized the bank stocks amidst an otherwise negative tape. JPMorgan’s tender offer for $3.4 billion of its preferred notes for roughly 60 cents on the dollar is also helping sentiment, as is what I’m guessing is a short covering exercise in Citigroup shares ahead of its preferred-to-common conversion tonight. Bank of America is up by about +5%, as is Citigroup, with those two stocks accounting for 1.2 billion shares so far today (at 1:15 p.m.). That puts the better than usual volume in perspective too.

2. Tech is dragging us lower today, both in price and breadth. An “MGIP” chart on Bloomberg reveals that the separation between the two occurred at 10:00 a.m. when the June Factory data (better than the Street’s expectation for -0.8% m/m at +0.4% m/m, with the inventory/shipments ratio declining to 1.42 from 1.45 which indicates that the inventory bulge is moving through the supply chain) and weaker-than-expected ISM non-manufacturing data came out. We saw an immediate separation between the two indices at 10:00 a.m. of about 20 basis points, and that has since widened out to about 50 basis points. Breadth for the two indices also diverged, with NYSE breadth improving after a 10:30 a.m. bottom (-1124 on the A/D line) while Nasdaq breadth rolled over and made a new intraday low just after 1 p.m. (-1144 on its A/D line).

Source for all data is Bloomberg.


Federal Reserve Coupons

Bet you didn’t realize the Fed offered discounts to anyone outside PIMCO, BlackRock, JPM and GS…

Retail Me Not is a searchable coupon tracking site that refers users to deals. You can suggest coupons and sites, and download a widget which will pop up when the site has a coupon code in its database for you visit.

Looks like someone was having some fun with the coupons







Hat tip Bryan

Toothless SEC Leaves SOX Full of Holes

Good Evening: After a morning decline, the major U.S. stock market averages rallied back to close higher today (this is a recording). Worries about a drop in personal incomes was overcome by a rise in pending home sales, though, as we’ll see, the former should matter more than the latter. The reflation trade (stocks & commodities up; Treasuries & the dollar down) thus survived another test today. Ben Bernanke, the FOMC, and investors are all counting on a continuation of these trends, so the payrolls data on Friday are once again setting up to be important. Unemployed people don’t have healthy incomes, and the 2003-2007 period aside, they usually don’t qualify for mortgages. Housing has received a lot of attention of late, so let’s delve into a few numbers to see how applicable the pending home sales index is to actual home sales. To close, I’ll be asking why senior GE managers won’t be doing the jail time prescribed by Sarbanes-Oxley.

Stocks overseas were on the defensive overnight, and it weighed on our stock index futures heading into Tuesday morning. Futures were further strained when the personal income and spending data came out an hour before the open. While spending came in as expected (+0.4%), incomes fell in both real and nominal terms. Incomes had been flattered by federal stimuli in the months preceding this reading, but to drop 1.3% month over month and 3.4% year over year does not bode well for future spending. Just as automakers can’t forever count on 0% financing or the occasional “cash for clunkers” program to boost sales, U.S. GDP cannot forever count on stimulus packages to pull demand forward (and finance it, to boot!). Credit isn’t (and shouldn’t be) easy to come by these days, so it will fall to income growth to support the consumer spending that comprises some 70% of GDP.

U.S. equities opened 0.5% to 0.75% lower this morning, but the lows were in almost as soon as the NYSE bell stopped vibrating. The move back toward unchanged was then aided when pending home sales were reported to have jumped 3.6% in June. This figure was proof positive to some that housing has now bottomed, but I question the validity of this supposedly forward-looking statistic. Pending sales are just that — pending — and they usually depend upon things like mortgage approval or the sale of a previous residence to become final sales. Comparing January to June pending sales with existing home sales for the same period gives us a hint why realtors post “Contract Pending” on the sign out front in lieu of the “Sold” they would rather place in its stead. Pending home sales have risen for 5 straight months and are up 17.6% since January. Existing home sales are only up just more than half as much (+8.9%, according to Bloomberg) during the same period. If Yogi Berra became a real estate broker, he might say, “it’s not sold until you sell it”.

After climbing back into green territory this morning, the major averages settled into a sideways range for most of the rest of the session. The averages were edging lower when a late rally surfaced in the final minutes to leave all the averages in the plus column. The fractional gain in the Dow Transports wasn’t too far behind today’s leader, the Russell 2000 (+0.9%). Treasurys were once again weaker, though the bears didn’t seem to put their hearts into today’s decline. Yields rose between 2 bps and 6 bps as the yield curve steepened. The dollar also had a sleepy session, with the greenback finishing on the positive side of mixed. Commodities likewise snoozed through Tuesday, though gains in the precious metals did allow the CRB index to finish 0.3% higher.

Friday’s employment data will be given thorough scrutiny, since incomes, spending, and even future home sales all depend, to varying degrees, on job growth. Inventory replenishment and deficit spending can only carry GDP so far before real, final demand has to pick up the slack. If the articles you see below about housing are any indication, then don’t count on high income earners to shoulder the demand burden any time soon. In the first piece, Barry Ritholtz rightly wonders how a firefighter qualified for a mortgage of nearly half a million dollars for a condo in Fort Meyers, FL. The sale closed in 2008, which is just a tad after the point at which unsupportable mortgage applications were supposed to be stamped “DOA” at the lender’s desk. I would further ask just why this family is the sole occupant in a multi-story condominium building (see photos accompanying the article). Hasn’t the rest of Florida read the newspapers? Housing has turned the corner, right?

Not in my hometown of Kenilworth, IL, according to yesterday’s Wall Street Journal (see below). Of the 800 homes in my village, some 65 are officially for sale. Having 8% of the town’s housing stock with “For Sale” signs on the front lawn doesn’t sound like a lot, but it’s approximately four times the normal 2%. Even more homes would be on the market, but they are being rented until prices recover. I’m glad other towns are starting to see “bidding wars”, but the article does not make it clear whether these fights are erupting over fully priced homes or distressed sales (i.e. foreclosures).

This is not some highly localized phenomenon, either. The upper end of the housing market is being squeezed across the nation. As the article points out, the culprits range from a dysfunctional jumbo mortgage market to government housing incentives that essentially read, “affluent need not apply”. High salaries have also been quick to feel the corporate knife during this cycle, and real estate taxes have risen in spite of the lower prices fetched among the homes that do eventually sell. And yet, whining about a problem doesn’t solve it. Perhaps higher marginal income tax rates next year will do the trick!

Finally tonight, I’d like to ask why our supposedly reinvigorated SEC is letting GE off the hook so easily. Some will read that GE is paying a fine of $50 million and think the SEC is back on the beat and handing out tickets. But, as Bill Fleckenstein remarked this afternoon in his always excellent Daily Rap (www.fleckenstein.com), $50 million is little more than a parking ticket for GE. Note please that GE’s accounting sins came in 2002 and 2003, or just after Sarbanes-Oxley was passed. Read the following about what became the law of the land in July of 2002 and see if you also think the SEC should set an example by slapping the bracelets on the GE corporate officers who officially signed off on what can now be described as inaccurate, if not fraudulent, earnings results:

Sarbanes-Oxley Section 302: Internal controls
Under Sarbanes-Oxley, two separate sections came into effect—one civil and the other criminal. 15 U.S.C. § 7241 (Section 302) (civil provision); 18 U.S.C. § 1350 (Section 906) (criminal provision).
Section 302 of the Act mandates a set of internal procedures designed to ensure accurate financial disclosure. The signing officers must certify that they are “responsible for establishing and maintaining internal controls” and “have designed such internal controls to ensure that material information relating to the company and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared.” 15 U.S.C. § 7241(a)(4). The officers must “have evaluated the effectiveness of the company’s internal controls as of a date within 90 days prior to the report” and “have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date.” Id.. (source: Wikipedia http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act#Sarbanes-Oxley_Section_802:_Criminal_penalties_for_violation_of_SOX)

Sarbanes-Oxley Section 802: Criminal penalties for violation of SOX
Section 802(a) of the SOX, 18 U.S.C. § 1519 states: “Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.” (source: Wikipedia op. cit.)

By putting senior executives on the hook — personally — SOX was supposed to scare straight the tricky managers who would otherwise cook the books. “No more Enrons or WorldComs!” thundered Congress at the time the legislation passed. Do you think writing a corporate check out of petty cash will deter others from engaging in illegal accounting practices? You be the judge.

– Jack McHugh P.S.

U.S. Stocks Advance as Home Sales Overshadow Valuation Concern
Treasuries Decline as U.S. Pending Home Sales Surge in June
GE Pays $50 Million to Resolve SEC Accounting Probe
Alone in a 32 Story Condo: How Did This Mortgage Close?
High End Homes Frozen Out of Budding Housing Rebound

Pending Sales Rise 6.7%

The NAR’s Pending Home Sale index rose 6.7% over June 2008. Monthly gains (caused in large part by seasonal factors) were also up 3.6%. The biggest gains were in the South and West, regions where the foreclosure rates are the highest.

This annual number is actually a significant data point. It reflects several short term positives for Housing:

1. $8,000 tax credit (soon to be expiring)
2. ZIRP: Mortgage Rates, while up from lows, remain competitive
3. Most foreclosure moratoriums have ended; This will continue driving down prices even further, especially at the lower end of the market.

Good news: More foreclosures going forward should be stimulative of more transactions.

Bad news: July/August is the peak of transactions on a seasonal basis; Look for falling monthly sales starting in the fall through the annual January low. Also, note that once the first time tax credit is expiring, and California subsidies are being canceled due to lack of funds.


I’ll see if I can pull the trailing numbers to identify how easy or difficult the annual comparisons will be going forward.


Uptrend Continues in Pending Home Sales
National Association of Realtors, August 04, 2009

Reflation = S&P 1000; What’s Next?

Good Evening: U.S. stocks once again surged ahead on Monday, leaving the widely watched S&P 500 above 1000 for the first time since last autumn’s precipitous fall. Leading the way were the economically sensitive materials, energy, and industrial names, which themselves were the beneficiaries of a strong tailwind in the commodity pits. As soon as China’s PMI logged its 5th consecutive reading above the 50 mark last Friday morning, natural resource firms around the world have outperformed. This morning’s economic data in the U.S. only added to the momentum behind these resource plays, and today’s proceedings left the S&P up more than 50% since the March lows. Such a prodigious climb in less five months is a quite the achievement for a broad market index. It leaves open only one little question: Where to from here?

Overseas markets were higher overnight, as Asian markets continued to bask in the afterglow of last week’s positive Chinese PMI reading (see below). European markets were also firm in the wake of better than expected earnings announcements from both Barclay’s and HSBC. U.S. stock market futures were some 1% higher prior to the open, and those gains were extended when Monday’s economic data hit the tape (see below). The national ISM survey posted an upside surprise, coming in just below 50, the fulcrum level between expansion and contraction in the manufacturing sector. Construction spending likewise exceeded consensus expectations, but it was the auto sales data that set tongues a wagging. Aided by the “Cash for Clunkers” program (which was oversubscribed in less than one bureaucratically administered week), auto sales were up for what seemed like the first time since the onset of the Great Recession. Ford’s 2.3% gain, for example, was the first uptick for the last U.S. automaker standing since 2007.

Stocks leapt as these data points were revealed, doubling the early gains of 0.5% to 1%. Once the S&P vaulted into 4 digit territory, however, market participants backed off a bit to see if the market could maintain those early gains. The averages traded mostly sideways for the rest of the session, though some late buying left the indexes near their best levels of the day. Reflation and beneficiaries of Chinese demand were the dominant themes, as the averages advanced between 1.25% (Dow) and 2.65% (Dow Transports). Historically, Treasurys have embraced anything having to do with the words recession and deflation. But add “re” to “flation” and you have a word that keeps bond investors up at night. Spying this less than welcome word in the press more than once today, Treasury market participants marked up bond yields between 7 and 16 bps. 5’s, 7’s, and 10’s bore the brunt of the selling. The dollar was also weak, losing a further 1% today, and commodities again soared in response. Crude oil climbed back into the low 70’s, grains roared ahead, and even the metals did their part as the CRB index rose almost 3.5%.

Back on January 2, I decided to hazard a few guesses about 2009. About the S&P 500, I said it might “trade in a wide range. Upper end for S&P is 1000 to 1100, while there is a better than 50/50 chance we see the November 2008 low of 741 taken out in 2009″. Honestly, I thought the rally to 1000 would come first, offering up a four digit welcome mat to the newly elected President, Barack Obama. I thought the reality of a faltering economy and souring loan portfolios would then snap investors back to reality, but while both ends of this forecast have (as of today) now come true, I got the timing exactly backwards. Whereas investors believed back in March that policy actions taken to revive the financial system were too little and too late, here in the first week of August some are even talking about welcoming Goldilocks back to her former perch at the corner of Wall and Broad.

Swinging from optimism to pessimism and back again is old hat for Mr. Market. Just when investors think they know which direction the old geezer is headed, he often — and inconveniently — does an about face. After plunging to the depths just as this past winter was ending, U.S. equities rose with the first green shoots of spring. Now up more than 50% since those harrowing days 5 months ago, many now claim stocks are headed another 10% to 20% higher before the calendar says 2010. Mr. Market doesn’t even look winded. Of course, he looked every bit as spry to NASDAQ investors twice during the dot.com crackup, only to later fall over and set new lows. And, in perhaps his most legendary pump-fake of all time, Mr. Market fooled even the most experienced professionals after the Great Crash in 1929.

As you will see by clicking on the final link below, the Dow dropped from a 1929 high of 381.17 to 198.69 after “Black Tuesday”. Sensing a washout that had purged the market of its sins and populated the tape with astonishing values, the professionals snapped up the bargains the public had left like litter on the NYSE trading floor. By the following April, the Dow had clawed its way back to 294.07, a gain of nearly 50% in just less than six glorious months. Unfortunately, the TARP-less Dow then trapped an entire generation of bargain hunters when it then dropped to 41.22 by 1932.

I relate this old tale (akin to a ghost story for asset managers) not to say something similar is about to befall post-millennial bargain hunters. The advent of the digital age allows the Federal Reserve to create a trillion or two with a few keystrokes, and its Great Depression-phobic Chairman, Ben Bernanke, will move mountains (of money) to prevent another depression. I write about the 1929-30 experience as a warning to those whose great grandfathers thought they, too, had nothing to worry about by buying stocks after a huge decline. They were quite sure of themselves, these long ago contrarians, and yet they were quite fooled by what was to come next.

We may not make the same mistakes made 8 decades ago, but that does not imply we will not make some of our own. I guess it’s possible that the alchemists at the Fed have found a way to turn paper into gold and that it’s onward and upward from here for both our economy and markets — but I doubt it. As for what comes next, I honestly don’t know. The one thing I do know is that marching into a cable T.V. studio and telling viewers exactly what will happen next is foolhardy. Foresight is a rare commodity in this environment, and even hindsight can play tricks on us.

For evidence I submit the action in the S&P 500 during the week AFTER Lehman failed. On Friday September 12, the last trading day before the nerve-fraying announcement that LEH would file for bankruptcy protection, the SPX closed at 1252. So, take a guess: Where did the SPX close on the following Friday — after the Lehman earthquake sent tremors around the globe? How much of your life savings would you put on the line — even with the full benefit of hindsight! — if I gave you even money odds on the simple, binary choice of higher or lower? The correct answer is “higher”. The S&P 500 closed at 1255 on September 19, 2008. If you don’t believe me, you can look it up. Mr. Market can throw you for a loop even when you know how the story turns out. What happened to those who bought stocks in early 1930, as well as to those who bought in because they thought Lehman’s failure marked the panic lows, should teach us to be a little more humble when it comes to investing. If not, Mr. Market has a way of teaching us this lesson the hard way.

– Jack McHugh

U.S. Markets Wrap: S&P 500 Tops 1,000; Metals Rise, Bonds Fall

U.S. Economy: Factories Steady, Stimulus Helps Demand

China Manufacturing Expands a Fourth Month, PMI Shows

Chart of the Dow Jones Industrial Average: 1920 to 1940

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Markets: Today versus March 9 Lows

Rosie via Abelson:

“DAVE ROSENBERG IS AMONG the vanishing breed of die-hards (we confess, in case you haven’t guessed, to being another) who still cling to the notion that stocks’ explosive rise since March is perhaps the mother of all bear-market rallies, but nonetheless still a bear-market rally. The essence of his skepticism — which we happily second — is simply that the economy, contrary to Wall Street’s jubilant insistence, has yet to turn the corner.

He wonders, moreover, whether the March 6 lows in the stock market were the real McCoy. Although, in contrast to us, Dave persists in keeping an open mind, he’s doubtful that they were. On March 6, he recounts, the market was trading at two times book, with a 13 times multiple on forward earnings and a P/E of 18 on trailing earnings, and a 3% dividend yield. Pretty rich valuations by all three measures of earnings, but pretty skimpy on yield, to rate as a true market low.

And today, after a 45% rise, the metrics, to dip into the Street cliché, are positively mind-boggling. The dividend yield on the S&P 500, Dave notes, is a meager 2¾%, and payouts so far this year have lagged some 32% behind last year’s not-exactly-torrid pace.

In a like astounding vein, he observes, the trailing P/E on operating earnings (adjusted, he explains, “to take out everything that is bad”) is now at 24 times, while — and if you have a queasy stomach you can skip this number — on trailing reported earnings, the multiple is a mere 760-plus!

“Something tells us,” Dave sighs, “that the marginal buyer of equities today at that price may well be the same person who was loading up on real estate during the summer of ‘06.”

Fascinating stuff . . .


The Great Beer Bash
Barron’s, August 3, 2009

Discrete, discreet trading

One of the things I was concerned with many moons ago is the difference between the types of behaviours you can get in discrete and continuous time. Continuous functions are funky beyond belief, and the less you have to reason about them, generally the better. (For a sample of some of the pathologies, see this book.) Therefore I was particularly interested to read a suggestion by Michael Wellman on making equity trading safer (and, by disallowing order sniffing robots, more discreet) by making it, well, more discrete. Here's the idea: Wellman suggests
a discrete-time market mechanism (technically, a call market), where orders are received continuously but clear only at periodic intervals. The interval could be quite short--say, one second--or aggregate over longer times--five or ten seconds, or a minute. Orders accumulate over the interval, with no information about the order book available to any trading party. At the end of the period, the market clears at a uniform price, traders are notified, and the clearing price becomes public knowledge. Unmatched orders may expire or be retained at the discretion of the submitting traders.
This is really a nice idea. Real users would notice no difference between a market discretised in ten second blocks and a continuous one, but at a stroke bad high frequency trading would be eliminated. Add in a minimum (but low) bid/offer spread too, and the system becomes significantly more robust. The high frequency traders can no longer take your money off the table.