Oct 30th

Market Insight: “Taking Some Off the Table”

Author: Kenn Lamson

Comments: 0

Regular readers have no doubt noted Harmonic’s skepticism regarding the equity market rally. Of late:

  • Technical measures are flashing “overbought”, including a recent spike in equity market volatility

  • Financial stocks, formerly leading the charge higher, have stagnated in recent weeks.
  • In our view the market is quite expensive - about 27 times trailing 12 months earnings, and 17 times expected earnings (which of course assumes those estimates are plausible).
  • Equities have traded lower on high volume and higher on low volume, and wavered in the face of good news.
  • While 3Q09 earnings have surprised on the upside, we have little confidence that margin expansion is sustainable in the face of continued increases in consumer-driven demand pressure.
  • While we’re certainly not market timers, our oft-stated edginess about the rally since mid-year has led us to prudently watch daily and weekly market action closely. After months of “buying on weakness”, the recent behavior of the markets seems uncertain – it feels “heavy” to us.

Consequently we’ve “taken some off the table” in recent days by reducing clients’ exposure to large-cap US stocks. At the moment we’re not expecting an outright plummet, but given enough downside momentum a 10-15% correction is not at all out of the question.

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Oct 30th

Weekly Economic Insight: 26 Oct – 30 Oct

Author: Kenn Lamson

Comments: 0

Many of this week’s releases failed to reach the consensus estimates, weighing on an already heavy-feeling market.

Arguably the “less negative” print on the Case-Shiller Home Price Index is due to bargain hunting in deeply oversold housing markets. The breadth of the move higher is encouraging, though, as is its four month trend.

Dampening the marginally positive news of the Case-Shiller data was the lower-than-expected new home sales figure. The decline in this report was undoubtedly due to the expiration of the $8000 first-time homebuyer credit. Since new home sales data are recorded when contracts are signed (as opposed to existing home sales, which are recorded at closings) and buyers had to close by November 30 to receive the credit, signing a contract in September is cutting it close.

Although a direct linkage is difficult to demonstrate, we’d argue that the continued exceptionally weak confidence numbers are largely due to the difficult job market. For comparison, consumer confidence readings have historically averaged 72.0 in recessions.

Durable goods orders rose for the fourth time in six months, although this week’s release fell short of expectations. Interestingly, durable goods inventories declined for the ninth consecutive month; 3Q09 was supposed to be one in which companies restocked.

The advance GDP figure, bolstered by consumer spending (particularly through the Cash-for-Clunkers program), surprised on the upside. Residential investment spiked at an annualized rate of 23% during the quarter; clearly the $8000 first-time homebuyer tax credit boosted this figure so it remains to be seen whether this strength will continue. Inventory building contributed 0.9% to GDP (given the decline in durable goods inventories noted above, this must’ve been driven by nondurables), and business investment fell at an annualized -2.5% rate. As we’ve stated before, there was little question that 3Q09 GDP would be substantially positive; the real question surrounds the sustainability of that trend, especially when the “stimulus” runs out or is removed.

Like the GDP data, consumer spending was largely driven by the effect of the “Consumer Assistance to Recycle and Save” Act (aka, “cash-for-clunkers”). From August to September, the annualized rate of spending on durable goods, nondurable goods and services fell -7.0%, rose 0.7% and 0.2% respectively. The growth in services spending continues a narrowly positive trend over the past six months. Consumers saved 3.3% of their disposable personal income in September, down from 4.8% in August.

RELEASE

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

(leading, coincident, or lagging indicator)

S&P Case-Shiller 20-city Home Price Index (lagging)

August

146.00

NA

144.23

The rate of price declines fell for the seventh consecutive month, to -11.3% compared to the same month last year. Nineteen of the 20 MSAs showed year-over-year improvement in prices and 16 showed month-over-month raises. Prices stand at their August 2003 levels, and have declined -29.3% from their peak.

Consumer Confidence (leading)

October

47.70

54.00

53.40

Confidence fell to its lowest level since July, as both the “present situation index” and “expectations index” declined.

Durable Goods Orders (leading)

September

1.0%

1.5%

-2.6%

Orders excluding transportation rose 0.9% and excluding defense-related items rose 0.5%. Monthly bright spots included orders for machinery (+7.9%) and defense aircraft and parts (+12.5%). Weakness was seen in nondefense aircraft (-2.1%) and communications equipment (-7.0%). Over the past 12 months durable goods orders have dropped -24.1%.

New Home Sales (leading)

September

402K

440K

429K

New home sales have risen 22% from their cycle low in January 2009. The inventory-to-sales ratio now stands at 7.5 months, down from a peak of 12.4 months.

GDP (lagging)

3Q09 advance

3.5%

3.0%

-0.7%

This stronger-than-consensus release marks the end of the longest and deepest recession of the post WW2 era.

Consumer Spending (leading)

September (MoM)

-0.5%

-0.5%

1.4%

Consumer spending declined -0.3% year-over-year. On an inflation-adjusted basis, MoM spending fell -0.6%.

Oct 28th

Boise-Nampa MSA Unemployment, September 2009

Author: Kenn Lamson

Comments: 0

The US Bureau of Labor Statistics today released September 2009 Unemployment data for the 372 metropolitan statistical areas (MSAs) it surveys. According to the BLS the non-seasonally adjusted unemployment rate for the Boise-Nampa MSA was 9.5% for the month of September, an increase of 4.1% from September 2008. Over that period, the number of unemployed workers in the Boise area employment rose by 11,600, from 15,700 to 27,300 while the labor force shrank from 292,700 to 288,000.

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While, at 9.5%, Boise’s unemployment rate matched that of the national average, it was higher than the state average and other areas surveyed within the state.

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Oct 23th

Weekly Economic Insight: 19 Oct – 23 Oct

Author: Kenn Lamson

Comments: 0

There was little market-moving economic data released this week; what was reported was centered on the housing segment of the economy.

RELEASE

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

(leading, coincident, or lagging indicator)

Housing Starts (leading)

September

590K

610K

598K

The 9.9% margin of error on the seasonally-adjusted annualized Starts rate calls into question the reported 0.5% increase from August. Single family Starts were reported to have risen 3.9% over the month. Further, without the seasonal adjustment, year-to-date Starts fell 43% in comparison to 2008.

Building Permits (leading)

September

573K

595K

580K

Seasonally-adjusted annualized Permits fell -1.2%, but with growth in multi-family properties; permits for single family residences declined -3.0%.

Leading Economic Indicators (leading)

September

1.0%

0.8%

0.4%

LEI rose for the sixth consecutive month. A sister index, the Coincident Economic Index, has also stopped falling.

Existing Home Sales (leading)

September

5.57M

5.35M

5.10M

Removing seasonal adjustments that call into question the accuracy of the “headline” figure, existing home sales declined -5.2% from August but rose 7.8% from last September. Note, however, this statistic was down a revised -6.4% in August.  Importantly, the “supply” of unsold homes continued to decline, to 7.8 months (unadjusted for seasonality.)

As previously discussed, seasonal adjustment factors render much of the “headline” month-to-month housing data irrelevant; thus our focus on the non-seasonally adjusted figures.  That said, there is of course a well-defined seasonal trend in housing purchases, so the year-over-year figures are more instructive. Existing home sales continue on a downward track, but are higher than a year ago. The housing starts trend appears the opposite – slightly higher in the recent month but down drastically year-over-year. As noted above, the supply of unsold homes – “inventory” -  continues to decline.

There remains an ominous overhang from the large and (unfortunately) growing pool of homes in foreclosure and pending foreclosure. According to the Center for Responsible Lending, 2009 total foreclosures are estimated at 2.4 milliion.  Bad enough, but the CRL further projects that foreclosures will more than triple in the next four years, totaling 8.1 million. Yikes.

The Leading Economic Indicators continued their positive trajectory for the sixth consecutive month.  We’ll surely welcome the glimmer of good news.  The heaviest weighted component, money supply (specifically M2), has exploded as the government has flooded the economy with fiscal and monetary stimulus. Unfortunately, little of that liquidity is being transmitted into the real economy, as bank lending has plummeted. It is, of course, actual lending to businesses and consumers that fuels the economy, not simply the existence of the funds on bank balance sheets.  Long story short, we think the LEI is giving a false signal of economic recovery.

Oct 21th

Idaho Unemployment, September 2009

Author: Kenn Lamson

Comments: 0

The US Bureau of Labor Statistics today released state-by-state Unemployment data for September 2009. According to the BLS the seasonally adjusted unemployment rate for the state of Idaho was 8.8% for the month of September, an increase of 3.4% from September 2008. Over that period, employment fell by 32,700 workers, from 647,300 to 614,600.

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Idaho appeared in somewhat better shape than the nation as a whole; the national seasonally adjusted unemployment rate rose 3.6% from September 2008 to September 2009, from 6.2% to 9.8%.

Eliminating the seasonal adjustment, Idaho’s labor force declined from 756,400 to 751,900 and the number of unemployed civilians rose from 36,200 to 61,100 on a year-over-year basis.

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An analysis by industry using non-seasonally adjusted figures highlights the sharp contraction in the mining & logging, construction, manufacturing, and other industries within the state. Only education & health services showed year-over-year job growth.

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Oct 19th

Personal Income for the state of Idaho, 2Q09

Author: Kenn Lamson

Comments: 0

The US Commerce Department’s Bureau of Economic Analysis yesterday released state-by-state Personal Income data for second quarter of 2009. While the data is somewhat stale, an analysis may provide insight into the structure of and changes within the economic situation of the citizens of the state of Idaho.

According to the BEA the seasonally adjusted total Personal Income for the state of Idaho was just under $49 billion in 2Q09. Of that total, $30.5 billion was from wages; $9.2 billion from dividends, interest and rent; and $9.3 billion from transfer payments.

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After peaking in the second quarter of 2008, Idaho Personal Income fell through 1Q09 but now appears to have stabilized.

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Idaho clearly has become more dependent on transfer payments, such as unemployment insurance and payments received as part of the American Recovery and Reinvestment Act of 2009, as the percentage of Personal Income derived from this source has risen as income from wages has fallen.

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Idaho Personal Income rose 0.4% from the first quarter of 2009, placing the state 23rd in terms of income growth.

On a quarter-over-quarter basis, Idaho compares favorably to the US average. Personal income rose by 0.4% in Idaho compared to 0.2% nationally. However, as mentioned earlier the bulk of the faster growth came from government payments to individuals.

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Oct 16th

Weekly Economic Insight, 12 October — 16 October

Author: Kenn Lamson

Comments: 0

We saw little market-moving economic data this week, but there were data points from both the consumer and industrial sides of the economy.

 

RELEASE

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

(leading, coincident, or lagging indicator)

Advance Retail Sales (leading)

September

-1.5%

-2.1%

2.7%

Excluding auto sales, retail sales rose 0.5%. Gasoline sales rose, as did sales at furniture & home furnishings, general merchandise, and health & personal care. Declines were seen in building material & garden shops and miscellaneous stores.

Consumer Price Index (lagging)

September (YoY)

-1.3%

-1.4%

-1.5%

Both the food and energy indices have fallen over the past 12 months, by -0.2% and -21.6% respectively.  The food index saw its first YoY drop since 1967.

Consumer Price Index ex- food & energy (lagging)

September (YoY)

1.5%

1.4%

1.4%

The indices for shelter (which comprises about 40% of the total index weight), new vehicles, medical care and tobacco have risen YoY, while the index for used autos has dropped.

Industrial Production (coincident)

September

0.7%

0.2%

0.8%

Manufacturing, which accounts for about 12% of the US economy, climbed at the fastest rate in 4 years during 3Q09. Production at factories and mines rose, while production at utilities declined during the month.

Capacity Utilization (coincident)

September

70.5%

69.8%

69.6%

CapU moved upward for the third consecutive month but remains near record lows.

 

We’ve now seen two months of unexpectedly healthy retail sales. As we pondered in last week’s communiqué, we’re pleased to see firming consumer spending, declining consumer debt and increased savings, but the three indicators would seem to be at odds with one another. Given the consumer’s central role in the recession we’ll continue to watch these and other data points closely for signs of divergence.

 

Consumer inflation remains subdued. We continue to believe that the easing pressure on families’ budgets allowed by dropping food and energy prices, two of the least discretionary expense categories, will contribute positively to economic stabilization.

 

The apparent stabilization in the manufacturing sector, while it has yet to create jobs, is a tick in the positive column for the US economy. Production in September was lead by the consumer sector, which was unsurprisingly supported by a spike in activity for autos.  However, a look at the utilization for the different stages of production shows clearly where the weakness lies:

  • Crude stage = 82.5%, 4% below the long-term average
  • Primary / semifinished stage = 67.3%, 14.7% below the long-term average
  • Finished stage = 69.3%, 8.3% below the long-term average

 

 

Oct 09th

Weekly Economic Insight, 5 October — 9 October

Author: Kenn Lamson

Comments: 0

Last week’s deluge of economic data was followed, thankfully, by only a trickle this week.

 

 

RELEASE PERIOD ACTUAL EXPECTED (consensus) LAST HIA COMMENT
(leading, coincident, or lagging indicator)
Consumer Credit (lagging) August  $(12.00)  $       (10.00)  $(21.60) Non-revolving credit declined much less than prior months, probably due to “Cash-for-Clunkers”. Revolving credit, however, dropped nearly 8% YoY, the largest decline on record.
ISM Non-manufactur-ing Composite (leading) September      50.90             50.00      48.40 In contrast to the manufacturing segment reported last week, service industries, which comprise a substantial majority of US businesses, expanded in September for the first time in a year.
Trade Balance (lagging) August   -$33B -$32B The trade deficit narrowed for the first time in 4 months as exports rose to their highest levels in a year and imports eased.

 

Consumers continued to reduce debt at a rapid pace in August, with revolving balances like credit cards seeing a 13% annualized decline.

 

We continue to scratch our respective follicly-challenged heads over how consumer spending (reported last week) has risen while consumer credit has dropped precipitously and savings balances rise. One conjecture we propose is that consumers may be liquidating assets from their personal balance sheets, using the proceeds to increase savings or spend.

 

It’s encouraging to see the services component of the ISM data rise above 50.0, the dividing line between growth and contraction, especially given the dominance of service industries in the US economy.

 

 

Oct 08th

The Billion Dollar Gram

Author: Kenn Lamson

Comments: 0

With all the words we read and write about the economy and markets, occasionally we stumble upon an exhibit that confirms for us that indeed “pictures are worth 1000 words.” Such is the case with the graphic below, which quickly puts into perspective the size of the financial crisis.

 

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Oct 05th

Weekly Economic Insight, 28 September – 2 October

Author: Kenn Lamson

Comments: 0

Given the volume of economic data released last week, my absence from our office last Thursday and Friday to attend my 25th (!) high school reunion and again Monday due to illness, I hope readers will forgive the tardiness of our weekly recap.

RELEASE

PERIOD

ACTUAL

EXPECTED (consensus)

LAST

HIA COMMENT

(leading, coincident, or lagging indicator)

S&P Case-Shiller 20-city Home Price Index (lagging)

July

144.23

NA

141.86

Case-Shiller reported a third month of gains for home sale prices. The composite-20 index rose 1.6 percent in July. With the exception of Las Vegas, all metro areas showed gains or flat conditions. Year-on-year rates also improved for a third month, now at minus 13.3 percent for the 20-city Index. Rates of decline in California have definitely come down, now showing year-on-year declines in the mid-teens vs. 20 percent and worse declines earlier in the year. These are exhaustive data but do lag, which is a concern given set backs in new and existing home prices during August.

Consumer Confidence (leading)

September

53.10

57.00

54.10

Consumer confidence deteriorated in September according to the Conference Board’s index. The worse news in the report is the current assessment of the labor market with substantially more saying jobs are hard to get, 47.0 percent vs. 44.3 percent, versus those saying jobs are plentiful, a miniscule 3.4 percent vs. August’s 4.3 percent. This reading indicates bottom line pessimism and points to weak retail sales in the months ahead. The one positive in the report is a continued decline in inflation expectations, at 5.2 percent vs. August’s 5.4 percent and a reflection of lower gasoline prices.

GDP (lagging)

2Q09

-0.7%

-1.2%

-1.0%

We are very much looking in the rear view mirror at this point. But the third estimate for second quarter GDP clearly shows the economy at recession bottom-with the weight of the evidence of more recent data arguing that the recession technically is over. And the component mix for second quarter GDP adds to the argument that the third quarter will be moderately positive. The upward revision was primarily due to higher estimates for business spending on software and nonresidential construction. The latest GDP numbers show the economy at recession bottom with increased likelihood that there will be an inventory boost in the third quarter, resulting in a moderately positive number for overall GDP.

Corporate Profits (lagging)

2Q09

-19.2%

NA

-17.7%

Corporate profits in the second quarter were revised down slightly to an annualized $1.031 trillion from the original estimate of $1.050 trillion and in comparison to the first quarter’s $0.976 trillion. Profits in the second quarter were up an annualized 24.5 percent, following an 85.1 percent surge the previous quarter. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits are down 19.2 percent on a year-on-year basis, compared to down 24.8 percent in the first quarter.

Consumer Spending (leading)

August (MoM)

1.3%

1.1%

0.2%

While everyone expected spending to be up due to a surge in motor vehicle sales, unexpected good news was that consumers were spreading some cash around elsewhere, too. Once again, strength was in durables, which jumped 5.3 percent on sharply higher motor vehicle sales. Nondurables were robust also with a 2.3 percent boost while services advanced 0.4 percent.

ISM Manufacturing Index (leading)

September

52.60

53.50

52.90

The ISM’s index points to slow, steady expansion in the manufacturing sector. At 52.6, it’s little changed from August’s 52.9 and is still over 50 indicating that more purchasers are reporting expansion rather than contraction. New orders slowed but still remain very strong, at 60.8 vs. 64.9. Production also slowed, down more than 6 points to 55.7 still indicating a month-to-month increase for manufacturing sales. Employment is steady, little changed at 46.2 and pointing to continued but moderate layoffs. Inventories gave the index a big boost, up more than 8 points to 42.5 to indicate that manufacturers are slowing their draws, the result of production needs and also business planning for continued production needs ahead.

Construction Spending (leading)

August (MoM)

0.80%

-0.10%

-0.20%

The construction sector is seeing notably divergent trends. The good news is that housing is on an uptrend, but nonresidential and government construction outlays are headed in the opposite direction. The boost in spending in August was led by a 4.7 percent jump in private residential outlays. In contrast, private nonresidential slipped 0.1 percent and public outlays dropped 1.1 percent in August.

Unemploy-ment Rate (lagging)

September

9.80%

9.80%

9.70%

The civilian unemployment rate continued its uptrend. The latest rate is the highest since 1983. The U-6 unemployment rate, which includes those who are underemployed or have stopped looking for work, rose from 16.8% to 17.0%.

Nonfarm Payrolls (lagging)

September

-263K

-170K

-216K

The September jobs report was disappointing. August and July revisions were down a net 13,000 (the net declines were worse). By major categories, goods-producing jobs decreased 116,000 in September, following a 132,000 drop the month before. In the latest month, construction jobs fell 64,000 while manufacturing declined 51,000 and mining slipped 1,000. Service-providing losses, however, surged back to a 147,000 fall, after contracting only 69,000 in August. The drop in service-providing jobs was led by trade & transportation, down 60,000, and by government, down 53,000. Trade was tugged down mainly by retail jobs which fell 39,000. Government weakness was led by the non-education component of local government, down 24,000, as revenue shortfalls have forced job cuts despite fiscal stimulus monies. Since the start of the recession in December 2007, payroll employment has fallen by 7.2 million.

We continue to watch the apparent dichotomy between rising consumer spending and declining consumer confidence. One must wonder, with savings continuing to climb and credit balances falling, from where are these monies coming and how sustainable is the increase in spending, particularly on durable goods?

As noted in the table, we expect a slightly positive GDP 3Q09 figure. It’s worth mentioning that the year-over-year percentages become somewhat misleading in that they’re showing growth from substantially lower absolute levels. Also, there’s no guarantee that growth won’t slow again as the stimulus funds are used up.

As we’ve noted in earlier missives, corporate profits in recent quarters have largely been driven by expense reduction, not revenue growth. While in a given quarter, as my business partner says, a dollar of expense cuts is as good as a dollar of sales, clearly driving earnings by slashing costs is an unsustainable longer term strategy. The silver lining is that with much lower expense bases, when the recovery appears, companies will have much greater operating leverage. We will be watching very closely for signs of revenue growth as 3Q09 earnings are announced in coming weeks.

The flip-side of the corporate profits data is, of course, the unemployment figures. We found the reports disheartening, but note that the consensus remains too bullish on both the economy and equity market in our view. With an average workweek of only 33 hours (which declined from 33.1 hours last month) and the U-6 rate at 17.0% (up from 16.8% last month), companies will first lengthen workdays and convert temp employees to permanent ones before actually hiring. The corollary to this situation is that there’s no evidence to suggest wage inflation in the foreseeable future, yet another reason our belief is that we are in a deflationary spiral, not an inflationary one.