Friday, December 3, 2010

Weekend Weimar and Beagle

It's that time of the week .... we'll be back on Monday

Mr$. Bonddad and I were out of town last week, so we had friends watch the house. We left a 12-pack for our nephew, which Sarge knocked off the kitchen island. However -- he sacrificed his paw for the beer. Anything for the beer. He's fine now.

Weekly Indicators: New Deal democrat smackdown Edition

- by New Deal democrat

On Wednesday, some commenter named "New Deal democrat" took up Prof. Brad Delong on a bet at his blog. Prof. Delong said, based on the ADP report, that less than 130,000 jobs would be added in November. This eeedjyut NDD threw a dart and predicted +190,000. So, this week's big number had to be the very disappointing +39,000 jobs report this morning. U-3 unemployment went back up to 9.8%. The average workweek declined -0.1 hours. Overtime was flat. The manufacturing workweek, one of the ten LEI, was also flat.

In addition to 11,000 workers laid off in government, there were another 15,000 laid off in manufacturing, and 28,100 lost in retail. Government losses, alas, were expected. Manufacturing losses are probably the coincident fruits of the decline in the manufacturing component of the LEI over the summer.

All was not bleak. YoY hourly earnings were up 1.6%. Aggregate hours worked increased 0.1%. Much more importantly, both September's and October's numbers were revised higher - a pattern that has persisted now for 11 of the last 12 months. September's original report of -95,000 including census losses has been revised upward +71,000 in the last two months to -24,000. October's good report was also revised up to +172,000. Last month, the final revisions to August turned that report, which also included census losses, from -54,000 to -1,000, a gain of +53,000.

Since the NFP report today seems to contradict the flood of good new reports we've seen in the last months, why do I suspect that in two months' time this report will look substantially different? I may yet have my revenge on Prof. Delong!

(Seriously, I do expect that this report will be revised substantially upward. More Monday.)

Now let's take a look at this week's high frequency data:

Gas at the pump declined two more cents to $2.86 a gallon. This is about $0.15 above its average from a few months ago. A barrel of Oil increased to $86 this week. Gasoline usage reamins lower than last year, 8.867 B gallons vs. 8.943 B a year ago. Gasoline stocks are still back into their normal range for this time of year. Over the longer term, gasoline usage still remains about 5% below its rate from the first half of the past decade.

The Mortgage Bankers' Association reported that its seasonally adjusted Purchase Index increased 1.1% last week, rising to a another post-April high, and for the first time in ages actually exceeed its level of a year ago, by 2.7%. Meanwhile, the Refinance Index came to an abrupt halt, decreasing 21.6% from a week ago, showing the dramatic effect of increased mortgage rates (to which this index is, not surrisingly, very sensitive).

The BLS reported 436,000 new claims. The 4 week moving average fell to 431,000. Five of the last six weeks have shown 440,000 or fewer new claims. It certainly appears that we are moving into a lower range.

The ICSC reported same store sales for the week ending November 27 increased 3.5% YoY, the best showing in several months, and were also up 0.5% week over week. Shoppertrak reported that "Black Friday weekend" sales were flat compared with last year.

Railfax for the fourth week in a row showed a slight decline in the advance over last year's loads for all sectors. Motor vehicles and housing materials remained slightly ahead of last year's rate. I understand that retailers ordered holiday shipments early this year, because of bottlenecks and delayed shipping last year, so a word of caution about over-interpreting the recent relative decline.

The American Staffing Association reported for the week ending November 20 another increase to 101.0. This metric now exceeds every other year for the same week except 2007. In the next few weeks this index will decline substantially, but the question will be how far in comparison with last year.

M1 was up 1% for the week, up 2.3% vs. last month, and +8% YoY, meaning "real M1" is up 6.8%. M2 was up less than 0.1%for the week, 0.4% vs. last month, and 3.2% YoY, meaning "real M2" is up 2.0%. Real M2 is not going down, but it is making very little progress towards breaking out of the "red zone" below +2.5% YoY.

Weekly BAA commercial bond rates decreased 0.08% last week back to 5.95%. This compares with yields on 10 year bond yields down-.05%. This does not indicate any stress on corporate bonds.

The Daily Treasury Statement showed that this year set a new record for November tax recesipts, at $138.9 B in receipts vs. $127.7 B a year ago, a gain of 11.2 B or 8.9% (but bear in mind there was one more reporting day this year than last. Nevertheless, this November's pace set a new record for the month, 2.0% above the previous record from November 2007 (which is less than the 4.6% inflation since then). Since the real, seasonally adjusted bottom in tax receipts took place no later than October 2009, this also marks the first advance over an increasing absolute number from a year before.

Finally ... my post yesterday about DK certainly hit a nerve, as there have been over 20 comments. If you haven't, I encourage you to read them all. One of the reasons I added the "recent comments" section at the right is so that commenters could continue to discuss something after it has scrolled out of view, so feel free to do so. Obviously, you are not alone. And to those who said that after Bonddad left, there was no more decent discussion of the economy on DK ... errmmm, {{clearing throat}}... personally, I feel insulted. But have a nice weekend!

More Thoughts on the Employment Report

First, consider this chart:

The last six months have been extremely disappointing from an employment perspective. While we saw nice increases before that time, since then total establishment job growth has been fluctuating right around 0. Last month we printed over 150,000, and this month we saw a mere 39,000 -- a clear deceleration.

This is especially concerning considering the improvement we've seen over the last month. As I've been noting all week, and as reported in the latest Beige Book -- the last month we've seen a good improvement across the board in a variety of economic sectors.

The question is why the slowdown?

Here are some thoughts, in no particular order of importance.

1.) We've only recently seen a pick-up in economic activity and numbers. The previous Beige Book indicated the economy was weakening. In other words, there hasn't been enough improvement, especially in light of the slowdown we saw over the summer as a result of the EU situation.

2.) Companies are printing strong profit numbers without new hiring; from their perspective, there is no need for new employees.

3.) There isn't enough domestic growth (US based growth) to warrant the new hiring

4.) The legal uncertainty argument: the changes we've seen in the laws are extremely complicated and one (health care) has a direct bearing on hiring decisions. Until companies have sorted out the ramifications of these changes (and as soon as regulations are actually written) then we'll see an increase.

5.) There is still uncertainty about the future; that is, there is still enough concern about future growth prospects to put a freeze on big hiring plans.

6.) We're still seeing enough problems from Europe to raise enough concern about the future.

NFP + 39,000, Unemployment Rate +9.8%

From the BLS:

The unemployment rate edged up to 9.8 percent in November, and nonfarm payroll employment was little changed (+39,000), the U.S. Bureau of Labor Statistics reported today. Temporary help services and health care continued to add jobs over the month, while employment fell in retail trade. Employment in most major industries changed little in November.

This is extremely disappointing, especially in light of the ADP employment numbers and the improving situation in the initial jobless claims market.

Let's start with the household survey.

The civilian labor force (the denominator in certain calculations) was essentially unchanged, moving from 153,904 to 154,007. The total employed decreased from 139,061 to 138,888, or a decrease of 173,000 This led to a decrease in the employment/population ratio from 58.3% to 58.2%. The total number of unemployed increased from 14,843 to 15,119, or an increase of 276,000. This lead to the increase in the unemployment rate from 9.6% to 0.8%. So, according to the household survey, there was a decrease in employment and an increase in unemployment over a steady sized population. Basically, this is the worst case scenario for the employment situation.

Let's move to the establishment survey:

Total private hiring increased 50,000. Goods producing industries decreased 15,000 while services increased 65,000. Most of this gain came from professional and business employment, which increased 53,000, while health care and education employment increased 30,000.

Average weekly hours were unchanged at 34.3 hours, but average hourly earnings increase a penny, which in turn increased average weekly earnings.

Again, this report is a big disappointment, especially considering the momentum increase in the employment situation. On a scale of 1 to 10, I'd give this report a 3. Some jobs were created and earnings did increase, but we're still stuck in the barely growing employment situation we were in before.

A note to commenter Bobby: the original post had far to many typos. Thanks for the catch and I will work on that in the future.

Yesterday's Market

Yesterday, the markets opened with a strong rally (a) that eventually changed into a sideways market that consolidated in to rectangles (b and c). As with Wednesday's trading, notice that the MACD spiked in the AM with the rally but then moved lower for the rest of the day. This is a fairly standard development for this indicator on early spike days.

On the daily chart, notice that prices are continuing to move beyond the resistance line (a).

On the daily chart of the IWMs (the Russell 2000), notice that prices have moved through resistance (a) with a strong bar. Also notice the EMA position (a) -- the shorter EMAs are about the longer EMAs, all the EMAs are moving higher and prices are above the EMAs. This is important because the IWMs represent risk capital -- money that is more oriented towards capital gain rather than gain and dividends. As such, this move confirms that upward move of the SPYs.

Also note the transports are printing a chart similar to the IWMs, adding further confirmation to the upward move we're seeing in the equity markets.

The dollar has clearly broken its uptrend (a) and is now moving lower in a downward sloping channel (b). Notice that within the channel there are several strong downward moves (c), indicating selling pressure is fairly strong right now.

On the dollar's daily chart, notice that prices hit resistance at the 200 day EMA (a) but are now moving lower. This lower move coincides with a possible easing of stresses in the EU region, adding fundamental downward pressure on the dollar.

Thursday, December 2, 2010

Beige Book Shows A Decent Picture Of the Economy

Over the last week, I've looked at several major sectors of the U.S. economy (see here, here, here, and here). The purpose of this has been to demonstrate the economy is actually in better shape then previously thought. In addition, this week we've had some incredibly good numbers come out -- Chicago PMI printed some of its strongest numbers in over two years, auto sales were good, the ISM manufacturing numbers were good, and the ADP employment report was decent. The only bad news was the case shiller price index, which showed a decrease in home prices.

To sum it all up, here is the latest Beige Book from the Federal Reserve, which shows all of the above.

Reports from the twelve Federal Reserve Districts indicate that the economy continued to improve, on balance, during the reporting period from early/mid-October to mid-November. Economic activity in the Boston, Cleveland, Atlanta, Dallas, and San Francisco Districts increased at a slight to modest pace, while a somewhat stronger pace of economic activity was seen in New York, Richmond, Chicago, Minneapolis, and Kansas City. Philadelphia and St. Louis reported business conditions as mixed.

Manufacturing activity continued to expand in almost all Districts, with relatively strong growth seen in metal fabrication and the automotive industries. Reports also showed steady to increasing activity for professional and nonfinancial services. Two Districts noted a decline in demand from government agencies due to budgetary shortfalls. Reports on consumer spending tended to be positive. Nonetheless, several Districts noted that households remain price sensitive and focused on buying necessities. Expectations for the holiday shopping season were generally positive, with several Districts expecting higher sales when compared to year-ago levels. Sales of new cars and light trucks were largely higher than in our last report. Tourism improved in all reporting Districts.

Housing markets remain depressed, with several Districts reporting further weakening during the past six weeks. Conditions in commercial real estate were mixed, and activity stayed at low levels. Agricultural conditions were generally favorable, with several Districts reporting yields nearing historic highs. Agricultural sales to off-shore buyers increased. Overall activity in the energy sector continued to expand.

Lending activity remained stable across most Districts. Credit quality has been steady to improving for most of the Districts that commented on it. Prices for final goods and services were fairly stable, despite rising input costs, especially for agricultural commodities, metals, and fuel. Hiring activity showed some improvement across most Districts. Wage pressures were contained.

Here's the bottom line: the economy is in pretty decent shape right now. There are two problem areas: housing and jobs. Housing will be a problem child for some time because of excess supply, but there are signs the employment picture is getting better (making tomorrow's jobs report all that much more important).

And so, at long last, Daily Kos "economic analysis" goes completely insane

- by New Deal democrat

If you are not interested in left wing political blogs, or don't know anything about the blog Bonddad and I come from, or have no interest in Confirmation Bias, just pass on. This post shouldn't concern you. I promise that boring data analysis will resume shortly.
Watching an old friend or family member sink into alcoholism, psychosis. or some other self-destruction is sad, but at some point you half to accept that they are lost to insanity. Yesterday Daily Kos reached that point. The issue goes way past the issue of a blog post being right or wrong, but rather of economic blogging that isn't a laughingstock. Sadly, it is clear that the largest number of participants there have completely abandoned the ability or desire to think critically when it comes to the economy, and are so invested in bad news that any story, no matter how nonsensical, that fits into that narrative, will be showered with accolades.

At 2:17 am Pacific time yesterday, a writer posted an entry including the following lede:
... (you probably will start noticing it in the MSM soon, if not this morning), it appears that over the past 18 hours our country's largest bank, Bank of America, may have entered into the final stage(s) of a fairly swift implosion. Obviously, the economic, political and social implications of an event of this nature and magnitude occurring right now--if it does continue along its apparent trajectory even for a few more days--are nothing less than horrific.
Yesterday, MSM and blog stories started surfacing concerning two separate issues ... with either one providing more than sufficient cause to drive the two-trillion-dollar behemoth into receivership, or worse--that place where almost all divine oligarchic institutions have gone of late: taxpayer exponential bailout hell.
(my emphasis)

This is a major, breaking story of first magnitude if true. One of the country's largest banks is possibly going to be bankrupt within days, due - according to the writer - to a NJ lower court decision about foreclosures, or publication next year by Wikileaks of some internal emails.

The story swiftly became the top-ranked post on that site, and stayed there for hours. Hundreds of people recommended it and over 500 commented about it.

Not one of those hundreds of people questioned its premise.

Not for a full 9 hours and 11 minutes until a poster named Papicek who has occasionally commented here as well, put up the following:
DJIA is up 249.76 points today and I've yet to hear anything on this from CNBC. If BoA's in trouble and it hits the MSM, it'll hit the markets hard, unless BoA has one of those special lending facilities sweetheart lines of credit available from Treasury, the Fed and/or the FDIC.
So far, all I'm hearing is market rally cheerleading on CNBC.

BTW, Bob Pisani reports that the market buzz is that all the Bush tax cuts will be extended. So, it looks like the US Chamber of Commerce Brotherhood of Thieves and Pickpockets think they're going to get what they paid for from the GOP and corpradems.

BAC shares went up 0.34 today as well, as did all 30 Dow companies.
Another two hours passed, and then a poster named Escamillo said:
You guys should take advantage by shorting BoA stock. It's not just rich fat cats that are "investors", normal people are as well, and you can be too. And if you guys are so sure that BoA is going to tank, you'd be a bunch of saps not to take advantage.

To me, this diary smells like wishful thinking in the guise of objective analysis, but for those of you taking this diary as objective truth, you can make a huge killing.
I know that there are many people who read both that blog and this one. If you do, riddle me this:

If Bank of America is potentially within days of going bankrupt, and its stock going to zero, why are the following statements all true?

- that possibility was never mentioned on CNBC.

- it was never mentioned on Bloomberg

- it was never mentioned on CNN Money

- it was never mentioned on the Calculated Risk blog

- it was never mentioned on The Big Picture blog

- it was never mentioned at Seeking Alpha (investment site)

- it was never mentioned on Mish's blog (and Mish has been a Doomer for ages)

- it was never mentioned at The Automatic Earth (uber Doomers)

- it was never mentioned at Zero Hedge (specializing in short selling stories)

- it was never mentioned at Financial Armageddon (another Doomer site)

- not one short seller like Bill Fleckenstein wrote an article nor appeared on any financial channel to try to panic investors so that they could cash in their short positions for a hefty profit.

In short, why was the first - and only - person who broke this First Order Magnitude Story somebody who has no particular investing acumen, who has no financial position, who is not an economist or advisor, but rather an obscure public relations flak who apparently has a small credit-checking business on the side?

Because the story is ludicrous, that's why. The story was based on a major factual error by the writer. He relied upon this Business Insider story that said that BofA shares were down 1.7% on Tuesday, and misread it as 17%. With that mistake, he assumed BofA was beginning a death spiral. Even though ultimately his factual error was pointed out to him, all he did was delete the reference, but he did not change his story at all - even though its premise was completely undercut.

And so invested in any story of Doom were his hundreds of readers that it never dawned on them that the story might be wrong. They made it the number 1 story for hours on end at a supposedly "reality-based" site.

This isn't about whether the economy is "good" or not. It is close to the worst level in 70 years. This also isn't about whether the economy is "improving" or not, and for what percentages of people, although I think the evidence is that it is improving for most people who are employed. Further, I claim no special knowledge of BofA. Who knows what unknown events might lurk in the future.

No, this is about basic rationality. BofA isn't going bankrupt because of Wikileaks, nor because of some lower state court decision about foreclosure improprieties. And it is absolutely not going bankrupt in the next week.

It isn't the first time that writer has been wrong. It isn't even the 20th or 50th. In fact, it isn't even the first time his prediction of Doom due to a corporation going bankrupt has been wrong. Over a year in May 2009 he claimed that there were going to be
upcoming six-figure job losses certain to occur throughout the auto industry
due to the presumed liquidation and disappearance of both General Motors and Chrysler.

The long, long record of blown predictions by that writer isn't even the point any more. Rather, the slightest amount of critical analysis would have led one to the questions finally posed by Papicek a full 9 hours after the story was published. But no such critical analysis was to be found, and those who could provide it no longer will do so at that site.

At at some time you go beyond simply being wrong to being looney. Not just the writer, but all those who were so psychologically invested in bad news that they uncritically accepted and endorsed yesterday's lunacy, have reached that point.

U.S. Economic Status,Part IV: Employment

While the unemployment rate is concerning, it's important to note the current experience is hardly new; in fact, we've been here after each recession since the mid 1970s recession.

Note that after the mid-1970s recession, unemployment hit 9%. After four years it dropped to 6%, but never hit 5% -- the level most economists use to describe full employment.

After the second recession of the early 1980s, unemployment was nearly 11%. It took over 5 years to get back to "full employment."

After the early 1990s recession, unemployment rose to over 7.5%. Again, it took over five years to get back to full employment.

Although the unemployment rate increased after the early 2000s recession, it didn't hit very high levels. But like the last three recoveries, it took a long time (as in nearly four years) for the unemployment rate to drop.

This commonality with previous recoveries does not make the current situation any easier, and should not be used as justification for doing nothing. However, it is important to remember we've been here before.

Initial unemployment claims have remained at a stubbornly annoying high level for the better part of the year. However, this is not the first time we have seen this behavior from initial claims.

Notice in the above graph of initial claims there have been two different types of "recoveries" in initial unemployment claims; fast recoveries that occurred before the early 1990s expansion, and slow recoveries that occurred in the last three expansions. This is one of the primary reasons the last three expansions have been labeled "jobless" recoveries. I explained the reasons for this development of "jobless recoveries" in two posts, located here and here. NDD offered a rebuttal here.

Taking a closer look at the early 1990s expansion, notice the initial unemployment claims remained elevated for about a year and a half after the recession ended.

The same is true for the early 2000s recovery -- initial unemployment claims remained high for about a year and a half after the recession ended.

Notice that with this recovery, we are experiencing the same developments.

In short, it appears that while concerning, initial unemployment claims are behaving much as they have in the last two recoveries. This leads to a question regarding the definition of recovery -- that is, can you have a recovery without a drop in initial unemployment claims below a level of say, 400,000?

Yesterday's Market

Yesterday, prices gapped higher at the open (a) and then formed two consolidation patterns for the rest of the day; a triangle in the AM (b) and a rectangle in the PM (c). Also note the MACD (d) which jumped on the gap higher but then moved lower for the rest of the trading day. This is a standard pattern for a consolidation day.

On the daily chart, notice that prices moved through key resistance yesterday.

The Treasury market was a mirror image of the equity market. Prices gapped lower at the open (a), and then rose a bit during the AM. However, as soon as prices hit the 10 and 20 day EMA they started to move lower (c), and did so for the rest of the day. Also notice the MACD (d) was rising for most of the day.

Treasury prices continue lower (a). Also note the EMA picture; the shorter are below the longer, all EMAs are moving lower and prices are below the EMAs (b).

Notice that equities are rising and bonds are falling. This is indicative of a bull market, as money leaves the bond market (which is considered safer) and moves into equities (which is considered riskier).

While the dollar has recently enjoyed a strong rally (a), notice it has hit resistance at the 200 day EMA (b).

Wednesday, December 1, 2010

Mini-May? LIBOR is awakening

- by New Deal democrat

In the past I identified 7 harbingers of the sudden downdraft in the economy that took place over the late spring and summer. With the renewed Euro crisis, other commentators, notably Prof. James Hamilton of Econbrowswer have picked up on the resemblences of the current situation to then (and with Calculated Risk reposting Hamilton's work, you should expect that the resemblences are at this point becoming widely known).

A few weeks ago, I updated the 7 harbingers and concluded they were not suggeting another downdraft at that point. There has been at least one important change, so let's update again.

Harbingers which have turned down:

Shanghai stock index - after a 10% crash in 2 days this market has moved sideways. In April-May it plummeted about twice as much.

Oil prices at 4% of GDP - Oil came very close to $90 again at the beginning of November but already backed off. The duration of the upward move was shorter, and unlike April, there were no intraday moves over $90. Here's a graph:

Libor index rising - this is probably the most telling harbinger of all.

Here's what I said a few weeks ago: "Not only is it still asleep, it has actually declined in the last couple of weeks. There is ZERO anticipation of banking stress evident."

This has changed. LIBOR is awakening from its slumber:

While the percentage move is small at this point, fear is again being introduced into the banking system. Since the European monetary and political leaders appear hapless at this point, unless there is a sudden introduction of shrewdness, I would expect LIBOR to continue to rise. This is the only way I see that the Euro crisis affects the US economy at this point.

Harbingers that have not confirmed a slowdown:

Bond yields correlation with stock prices - This one is a close call. For the last two months, these have both moved up, but on a daily basis these continue to move as mirror images and not in tandem, indicating no fear of a deflationary pulse:

Real M1 and M2 money supply stagnant or shrinking - to the contrary, both continued to grow in November

Price growth exceeded wage growth - Unlike springtime, wage growth now, albeit poor as measured by median compensation, is still running ahead of inflation. Measured by personal income, it is well ahead of inflation.

Decline in housing permits and purchase mortgage applications - purchase mortgage applications are trending sideways and permits are due out tomorrow. They are also expected to trend sideways.

One more thing: The more I have thought about it since summer, the more I believe the BP oil catastrophe in the Gulf of Mexico had an outsized effect on US consumer and employer psychology. Day after day, live video from the bottom of the Gulf showed an ongoing cataclysm, with US authorities looking helpless and ineffectual. G*d willing, we will not see any similar disastrous event unfold now.

In Conclusion, three of our harbingers show increased risk. Of these, the Shanghai index shows only half of the decline as in spring, and Oil did not go as high, or stay there as long, as in April.

The other 4 harbingers do not show increased stress, in fact they are positive for the economy. Also, there is no focusing disaster to trigger the response of Pavlovian fear of another September 2008 style meltdown that I believe was instrumental in the summer slowdown.

My view at this point: it's Mini-May.

On the Deficit Commission

SilverOz here.

The Deficit Commission released it's report today and I for one like most of it. Obviously, any cutting of the deficit and reigning in the growth of federal debt is not going to please everyone and there are several things in this report that I would do differently, but then I am not on the Commission. For this post though, I would like to concentrate on the tax changes recommended (specifically the "illustrative proposal").

The Commission proposes essentially ending all tax expenditures (what we know as deductions, credits, and subsidies) and then using the bulk of that savings to consolidate the tax code into three brackets and lower overall rates. What they don't tell us is where each of these brackets begins and ends (at least not where I could find in the report), which while interesting, doesn't impact the discussion since they do provide some breakdown of the impact on various income quintiles. Essentially what the commission is doing is making the effective tax rates the actual tax rates, which will make the code more fair at any given income point (but depending on ones opinion, not necessarily fair across different incomes (ie rich and poor)). Under the current code, two people making the exact same income living in the same city (and even neighborhood) can end up paying widely different amounts in taxes depending on all the various deductions and credits. And while these changes may not be good news for accountants, the simplification of the tax code would save money and time in its own right.

Under the Commission's illustrative proposal, they would eliminate all tax expenditures except for the earned income tax credit (EITC) and child tax credit, change the mortgage interest deduction into a non-refundable credit capped at a $500,000 mortgage, eliminate the tax-exempt status of new muni bonds, and tax all cap gains and dividends as ordinary income (among other things). These changes would then allow for brackets of 12%, 22%, and 28% (all with a standard deduction). The lower brackets would actually increase revenue generated (somewhat) by not utilizing all of the savings from the elimination of tax expenditures for the lower brackets, which allows some to be used to offset the deficit (ie the proposal does raise some taxes somewhere between $80-180 billion).

The change in tax liability by quintile goes up for each, but is definitely skewed towards the highest earners, with the top quintile losing about 3.7% in after tax income (the 3 middle quintiles are around a 1.5% loss and the bottom quintile a .4% loss), but with the top 1% seeing a loss of almost 8% and top .1% seeing a loss of almost 12% (so the tax code retains its progressive nature). What this means is that while everyone is going to see a tax hike, the biggest hikes in terms of percentage of income are skewed toward the wealthiest of Americans as opposed to the middle class.

Finally, I want to comment on the proposed elimination of the mortgage interest tax deduction, as that is an issue that both the left and right (well, the homeowning left and right) seem to get riled up about (full disclosure: I am a homeowner who takes advantage of the deduction). First, it is one of the biggest tax expenditures in the tax code (approximately $100 billion/year) and thus has to be addressed under any real reform. Second, the deduction rewards bad financial behavior, as it rewards those who either a) put down less than 20%, b) buy more house than they should afford (remember the housing bubble), or c) those with bad credit (who get higher interest rates). Also, the deduction is geographically skewed, as more of it's benefits are going to go to say the coasts and other high value areas over the midwest. Finally, the deduction is really nothing more than a reward for taking on debt, something that in light of the recent recession maybe we shouldn't be encouraging anymore (it doesn't reward home ownership, as the cash buyer gets nothing out of it except a higher price to buy at).

In conclusion, I actually like the bulk of the Commission's report and would love to see a bipartisan approach (like this one) on the deficit/debt issue. As a realist however, I know that this report has zero chance of passing and real efforts to reduce our deficit/debt will only come when forced (see Greece).

U.S. Economic Status, Part III: Investment

Let's start with the macro picture of investment, which has been steadily increasing for the last five quarters.

Private non-residential investment has increased the last three quarters, indicating that business is investing in some real estate development.

However, it's the equipment and software investment that is the real reason for the increase. Notice the size of the quarter to quarter increases for the last three quarters.

Residential investment is still low, and will probably be that way for some time.

Inventories are being restocked; this overall number has been increasing solidly since the end of 2009.

However, the inventory to sales ratio is about halfway between 1.25 and 1.30, which is about halfway between the high and the low from the last expansion. Also note this number has been decreasing since the early 1990s. So, for inventories to continue their contribution to the expansion, we need to see sales increase

Yesterday's Market

Yesterday prices gapped lower at the open (a), but then started to move higher but very slowly. Notice the MACD at (c); there is very little movement, indicating the trend is very timid. Along the way we had several consolidation areas (b). At (d) there is a double top with declining momentum (e), indicating a possible change of direction, which occurred at (f). Prices rallied into the close (g), but then sold-off (h) on high volume.

First, notice that prices yesterday ran into resistance from a price level established a few days ago.

Treasury prices gapped higher at the open (a), but hit resistance at the above mentioned price point (b). Also note that momentum started to drop (c) around this time, indicating a possible change in direction was coming. After being unable to break through resistance, prices formed a downward sloping channel, bound by lines (d) and (e).

The dollar continues to move higher (e) with several gaps indicating a supply/demand imbalance. However, yesterday prices broke through the trend line (f), albeit barely. This leads to the question -- how much of a trend line break is necessary for the break to matter? Martin Pring uses the 3% rule -- a 3% break is required for the break to be valid. I'm not so rigid in my analysis. The answer is it depends. Considering the strength of the uptrend, I don't think yesterday's break was important. However, today's action will be the primary determinant.

Copper has broken is primary uptrend (A). However, prices found support at the 50 day EMA (B). Notice the EMA picture shows the 10 and 20 day EMA moved lower, but not in a big way; in addition, the shorter EMAs are above the 50 day EMA. The MACD is still positive and is about to give a buy signal. However, lurking over the technical picture is China, which has printed increasing inflation numbers, indicating they will probably be tightening their lending policies soon.

Tuesday, November 30, 2010

The Washington Lobotomy Factory Is In High Gear

From the NY Times:

As Mr. Obama made his comments at the announcement of the pay freeze, the bipartisan commission he established in February to propose ways to reduce the growth of the national debt entered a final two days of negotiations over combinations of spending cuts and revenue increases. In a sign of the struggle to find a compromise that could attract Democratic and Republicans votes, the commission chairmen — Alan K. Simpson, a former Senate Republican leader, and Erskine B. Bowles, a chief of staff to President Bill Clinton — decided to meet privately with members one at a time on Monday and Tuesday instead of convening all 18 members.

The Republicans on the panel are generally opposed to raising taxes and the Democrats to big changes in Medicare, Medicaid and Social Security.

The above emboldened words illustrate the stupidity of Washington. Simply put there is no way to balance the budget without two things happening: taxes going up and some kind of compromise on health care spending. There is just no way for meaningful change to happen without both parties compromising on their key issues. So, expect the problem to continue.

State Tax Revenues improving -- but not enough (w/ update)

- by New Deal democrat

In terms of the normal progression of leading/coincident/lagging data, the Great Recession and the recovery thereafter have almost completely given the lie to the proposition that "it's different this time." But one thing that has been different about this recovery, and has had a very important effect on the generation of jobs, was the abysmal failure of the Congress to extend further aid to the states. Faced with nearly a 20% decline in revenues since the peak of the economy, the "50 little Hoovers" that Paul Krugman has mentioned so often had little choice but to cut into sinew and bone to come up with balanced budgets. To visualize the difference this has made in the jobs recovery, here is a graph of job growth since the bottom last December, in private industry (blue) vs. government (green) and the composite nonfarm payrolls (red).

While the census added and then subtracted 500,000 jobs between February and September, its net affect was zero. Thus the loss of 250,000 government jobs this year is real, and its effect on overall job growth is obvious.

One important question is, whether there is further bloodletting in store for the states, or have their budget woes hit bottom? The Rockefeller Institute reported several months back that overall state tax revenues probably bottomed out at the end of the first quarter or beginning of the second quarter this calendar year. But a crucial test - the holiday season - is upon us. The Tax Foundation reports, citing the Rockefeller Institute, that
November and December are the crucial months for state sales tax collections, which make up a third of state revenues.
Although the Rockefeller Institute has yet to report on third quarter state tax revenues (not just sales tax, but personal and corporate income taxes, and other miscellaneous taxes), the following report by Stateline (a nonprofit, nonpartisan online news site funded by the Pew Foundation that reports on state issues) suggests that the improvement in state tax revenues won't be able to make up for continuing shortfalls even next summer:

[S]tate officials are reporting steady although modest gains in monthly tax collections, a sign that the nascent economic recovery is gaining strength after three years of plunging sales tax revenues that decimated state budgets.

In recent days, officials in 27 states have said that year-over-year monthly revenues are increasing and some are forecasting a rise in tax receipts in state budgets for the fiscal year that begins July 1.... Improved sales tax receipts are leading the revenue recovery in most states.... Corporate tax revenue also is up in many states, consistent with the rise in business profits nationally. ...

Still, there is a flip side to [states'] recovering revenue picture that puts the situation in all states in perspective. [States] may appear to have ... extra cash next year, but most of that will be needed to make up for the loss of federal stimulus money and mounting Medicaid and public pension costs....

Most states do not have surplus revenues, which means they will have to cut spending, raise taxes, borrow or tap reserves to balance their budgets for the fiscal year that begins July 1. NCSL is projecting that states will have a total of $72 billion in budget gaps in 2012.... Many states with revenue increases still are confronting huge budget shortfalls that guarantee years of fiscal turmoil. [For example,] California may have escalating sales tax receipts, but its budget shortfall will exceed $25 billion for the fiscal year starting July 1....
In other words, if Stateline's report is correct, it appears that the combination of the total expiration of federal government assistance (a given at this point), mounting costs, and the ending of one-off tax gimmicks mean that the states (and in particular California) are likely to need to make further cuts next summer, a very depressing prospect, even if the level of those cuts are nowhere near what has been necessary in the last year.

UPDATE: As if they were reading my mind, the Rockefeller Institute released their preliminary report for the third calendar quarter of 2010 today. From their news release:

Tax collections increased by 3.9 percent in the third quarter of 2010, compared to the same period a year earlier, based on data from 48 states. Of states reporting, 42 showed gains in overall tax revenues. Collections improved for the two largest revenue sources — personal income and sales taxes — while corporate income tax revenues declined slightly.

The growth in overall collections is partly driven by new tax laws in several states, but is also due to a slowly recovering economy, according to report authors Lucy Dadayan and Donald Boyd. Yet they cautioned that difficult times for states’ fiscal conditions have not ended.

“The state tax revenue picture in the first three quarters of calendar year 2010 represented significant improvement from the collapse of the preceding quarters,” they write. “Still, the immediate outlook is for revenue collections significantly below prerecession levels, and growing spending pressures. The overall picture remains: States will face continued, significant budget challenges in fiscal 2011 and beyond.”

The full report notes that total state tax revenues were 7.0% below the third quarter of 2008 - which was the last quarter of YoY growth. Since the Rockefeller Institute only gives YoY figures and does not attempt seasonal adjustments, it is impossible to know absolute, seasonally adjusted or even annual numbers, but my best back of the envelope estimate is that with this quarter, state sales taxes have made up about half of their percentage shortfall from peak.

U.S. Economic Status, Part II: Manufacturing

Manufacturing activity was one of the primary drivers of the latest expansion. It was one of the first economic areas to show a rebound. However, over the past few months it has since slowed a bit, although it is hardly crashing. I believe the best description of the growth in this sector is "moderating."

Overall industrial production has bounced back from its post recession lows. While the last four months have shown slower growth, note that periods similar to this were evidence in the previous expansion and are also evident from a longer view of the data (which goes back to 1910).

Capacity utilization cratered during the recession, printing its lowest level in almost 40 years. However, it too is bouncing back.

The ISM national manufacturing numbers have been consistently printing about 50 for over a year, indicating the manufacturing sector is doing well.

The ISM new orders index was approaching 50 -- the line that delineates between expansion and contraction -- but bounced back strongly in the latest report:

"The manufacturing sector grew during October, with both new orders and production making significant gains. Since hitting a peak in April, the trend for manufacturing has been toward slower growth. However, this month's report signals a continuation of the recovery that began 15 months ago, and its strength raises expectations for growth in the balance of the quarter. Survey respondents note the recovery in autos, computers and exports as key drivers of this growth. Concerns about inventory growth are lessened by the improvement in new orders during October. With 14 of 18 industries reporting growth in October, manufacturing continues to outperform the other sectors of the economy."
The durable goods new orders numbers have been near stagnant for the last 4-6 months:

However, this number is extremely volatile. As the chart below shows, long periods of near stagnation and volatility occur during expansions.

Let's look at the regional indicators.

The NY Fed's latest numbers were horrible:

The Empire State Manufacturing Survey indicates that conditions deteriorated in November for New York State manufacturers. For the first time since mid-2009, the general business conditions index fell below zero, declining 27 points to -11.1. The new orders index plummeted 37 points to -24.4, and the shipments index also fell below zero. The indexes for both prices paid and prices received declined, with the latter falling into negative territory. The index for number of employees remained above zero but was well below its October level, and the average workweek index dropped to -13.0. Future indexes generally climbed, suggesting that conditions were expected to improve in the months ahead, although the capital spending and technology spending indexes inched lower.
However, this report was balanced out by the Philly Fed's numbers:

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of 1.0 in October to 22.5 in November (see Chart). This is the highest reading in the index since last December. Indexes for new orders and shipments also improved this month, and each index increased 15 points. Indexes for both delivery times and un-filled orders changed from negative to positive this month, suggesting improvement.

And the Richmond Fed also printed an improved number, although not as strong as the Philly Fed's numbers:

In November, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — rose four points to 9 from October's reading of 5. Among the index's components, shipments rose four points to 7, new orders edged up two points to finish at 10, and the jobs index increased six points to 10.

Other indicators also suggested generally stronger activity. The index for capacity utilization moved up three points to 9, while the backlogs of orders contracted at a much slower pace, gaining nine points to −3. The delivery times index added one point to end at 6, and our gauges for inventories were somewhat higher in November. The finished goods inventory index increased ten points to 16, and the raw materials inventory index advanced five points to finish at 15.

Overall, the Eastern seaboard looks to be in fair shape. This is important, as this geographical area was a problem area in the latest Beige Book. While this region is not out of the woods, it is in a clearly better position than a few months ago.

The Chicago Fed was up slightly in its latest report, but has been printing a horizontal number for the last few months:

Here is the relevant information from the latest report:

The Kansas City Manufacturing index has printed three strong months:

While this index was near 0 in August, it has since bounced back, printing a very strong reading last month.

The net percentage of firms reporting month-over-month increases in production in November was 21, up from 10 in October and 14 in September (Tables 1 & 2, Chart). The increase in production occurred among both durable and nondurable goods producing plants, with a sharp rise in machinery, high-tech, printing, and transportation equipment activity partly due to higher export orders. All other month-over-month indicators also improved from the previous month. The shipments, new orders, and order backlog indexes climbed higher, and the employment index reached its highest level since late 2007. The new orders for exports index rose from 0 to 11, and both inventory indexes moved into positive territory.

Texas area factory activity has been bouncing near 0 for the better part of this year:

Texas factory activity increased in October, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, was positive for the second consecutive month and slightly higher than its September reading.

Despite the rise in output, several other manufacturing activity indicators fell again. The new orders and shipments indexes were negative for the fifth consecutive month. The capacity utilization index dipped below zero, with more than one-quarter of respondents reporting a decrease.

Measures of general business conditions improved markedly in October, suggesting the broader economy strengthened. After four months in negative territory, the general business activity index rose sharply from –18 in September to 3 this month. The company outlook index also jumped up, rising from –4 to 13. The advance in the index was largely due to a sharp decline in the share of manufacturers reporting a worsened outlook, falling from 25 percent to 13 percent.

The above numbers show a sector that is slowing as demonstrated by the moderating pace of industrial production growth over the last new months. In addition, capacity utilization is still low and several regional federal reserve manufacturing numbers (New York, Richmond and Texas) show clear signs of slowing. While the durable goods numbers have been near stagnant for the last 4-6 months, this is typical of this particular data series. On the positive side, the ISM number's latest number showed a strong pick-up in the latest report, the overall number has been positive for over a year and the Philly and Kansas City Fed showed strong improvement. In addition, the Chicago Fed manufacturing index is still printing a positive number, although at a moderating pace.