Confidence Up

April 2nd, 2017

The Conference Board’s survey of Consumer Confidence shot up to 125, a 16 year high. Unfortunately, that previous high was set as the dot-com frenzy was nearing its end and just before the start of the 2001 recession. History could not possibly repeat itself, could it?

Confidence201703

There have been other frenzies in the past decades: the dot-com boom of the late ’90s, the housing and consumer debt boom of the ’00s, the run up in gold prices in the ’10s, the spike in interest rates in the late ’70s – eary ’80s. In the rear view mirror, the correction seems predictable.

From 1995 – 2000, the SP500 index tripled on the giddy expectations of a new global internet economy. Here was the plan: global supply chains spread among developing countries would assemble products which would be shipped to markets around the world. The U.S. and other developed countries could steer the global economy to new heights, and rid themselves of the nasty pollution that comes from manufacturing stuff.

Then, the new global digital economy went oops…

After falling back about 40%, the index then doubled from early 2003 through 2007. During that five year period, the house price index grew 40%, more than double its annual growth rate for the past century. In the old mortgage model, a lender would take a risk on the fortunes and reliability of a single family to repay a mortgage. Now, through the power of computerized algorithms, that risk could be sliced and diced so thin and spread among so many synthetic mortgages that the risk virtually disappeared. The smart people in the financial industry had finally figured out the secret to securitized debt. Every family could now build wealth by owning a home. Oh, happy days!

Then, housing went oops….

As the financial crisis gripped most of the developed world, central banks took on vast quantities of debt and expanded the money supply to counteract a slide into a global depression. Expanding the money supply usually brings an increase in inflation, and to protect against that coming inflation, investors around the world turned to gold. From the depths of the financial crisis in early 2009 toward the latter part of 2011, a period of less than 3 years, the price of gold doubled. But inflation did not rise as expected. The central banks had simply been fighting a strong undercurrent of deflation, stronger than even they had realized.

As inflation remained low, gold went oops….

The trick is to figure out beforehand what will go oops next. The pattern is this: an increasing number of people become convinced of “X” idea and begin to take it for granted. Then some series of events undermines a belief in “X” and the stampede begins. The massive increase in sovereign debt looks like a prime candidate for default and debacle but the central banks of developed countries have many legal and financial tools at their disposal to stem any panics.

For a dominant economic power like the U.S., the “X” has traditionally been based on private debt whose value can not be easily controlled by government dictate. In the late 90s, it was technology. Most of us associate that period with wildly inflated stock prices and IPOs that jumped in price on opening day. What may have escaped our attention is that corporate debt increased by almost 60% from the beginning of 1995 to the end of 2000. When the towers came down on 9-11, corporate debt had grown 75%. From early 2002 through 2005, there was no growth in corporate debt.

As corporate debt grew in the late 90s, government debt decreased. As corporate debt growth stopped in the early ’00s, household debt and government debt surged upwards. So let’s keep our eyes on this dance of corporate, household and government debt.

DanceOfDebt2016

Since the financial and housing crisis that began in 2008, federal govt debt has doubled, while household debt declined. It has taken eight years for household debt to finally surpass its 2008 high water mark, and is now approaching $15 trillion.

Since 2006, corporate debt has almost doubled. It is my guess that this is where the next crisis lies.

CorpDebt2016

After the next crisis, we will look back and see that there was such an obvious over-confidence in that “X.”  Analysts will help us understand the details and unfolding of the crisis till we think that we can avoid it next time.  Like whack-a-mole, the next crisis will pop up from another hidey hole.  The trick is to have several smaller hammers instead of one big hammer.

Caution: Strong Growth Ahead

This week, the Congressional Budget Office (CBO) released their estimate of the fiscal impact of the AHCA, the draft version of the Republican health care reform plan. I’ll take a look at the CBO methodology later in this post. For those who may be tiring of the almost constant focus on the AHCA, let’s turn our attention to some economic indicators.

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CWPI (Constant Weighted Purchasing Index)

February’s survey of purchasing managers (PMI) indicated a broad base of confidence among purchasing managers in most industries. New orders in manufacturing are surging, an expansion more typical in the early stages of recovery after recession. Regardless of how one feels about Trump, there is a sense of renewal in the business community. Consumer Confidence is at record highs. Confident of finding another job, the number of employees who are quitting their jobs is at a 16 year high.

The CWPI is a composite of both the manufacturing and non-manufacturing PMI surveys and is weighted toward the two strongest indicators of future growth, employment and new orders. Since October, the composite has been rising from mild to strong growth.

CWPI201702

For most of 2016, new orders and employment were below their five year average.  Since October, they have been above that average.

EmpNewOrders201702

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Housing

The Housing Market Index released by the National Assn of Homebuilders just set a multi-year record. Housing starts are strong and single family homes under construction are the best in ten years. A popular ETF of homebuilders, XHB, is nearing a recovery high set in August 2015. 58,000 construction employees found work during a particularly warm February. Now the big picture. As a percent of the working age population, housing starts are still at multi-decade lows.

HouseStartsPctWorkPop201702

There has been an upshift toward multi-family units in some cities but, in a broad historical context, these are also near all time lows as a percent of the working age population.

MultiFamPctWorkPop201702

A primary driver of new housing construction, both single and multi-family, is the growth in new households, which is still soft. In 2016, households grew by 1%, below the 30 year average of 1.2%, and far below the 70 year average of 1.7%.

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Consumer Credit

Here’s an interesting data series from the FRED database at the Federal Reserve: the percent of people with subprime credit in each county. Click on the link and zoom in to see the data for a particular county. In New York City, Manhattan has a 16% subprime rate, less than half the 35% rate of the nearby Bronx. Give the link a few seconds to load the data and display the map.

Subprime

On July 1st, the credit rating agencies will remove tax liens and judgments from their records if liens do not include the full name, address, SSN or date of birth of the debtor. This will raise the credit scores of hundreds of thousands of subprime consumers.

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Real Estate Pricing Tool

Trulia has a heat map, by zip code, of the median home price per square foot. I will include this handy tool on the tool page.

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IRS Data

Of the 145 million returns filed, 46 million itemized deductions. Under the Republican draft of tax reform (PDF), almost all deductions would be eliminated in favor of a standard deduction that is almost twice as large as current law, $12,000 vs. $6300. (Deductions, Child Credits ). Half of capital gains, interest and dividends would not be taxed. For most filers, the dreaded 1040 tax form is only 14 lines. Publishers of tax software like Intuit are sure to lobby against such simplicity.

BetterWayTaxForm.png
Health insurance reform is the prerequisite to tax reform.  If House Speaker Paul Ryan encounters strong resistance in his own party to health insurance reform, his tax reform plan will be stymied as well.

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AHCA

This past Monday, the Congressional Budget Office released their “score” (summary report and full PDF report) of the American Health Care Act, or AHCA. Score is a euphemism for the 10 year cost estimate that the CBO customarily gives on proposed legislation.

The CBO was careful to stress the uncertainty of their estimate. A critical component is the human response to changing incentives and the tentativeness of future state legislation. With most major legislation, the CBO estimates the macroeconomic effects. They did not include such an analysis in this report and note that fact. In short, the CBO is saying “take this estimate with a grain of salt.”

The headline number was the amount of people estimated to lose their health insurance over the next ten years – a whopping 24 million. Democrats used this ballpark estimate as a defining fact as they bludgeoned the plan. How did the CBO come up with their numbers?

Medicaid is the health insurance program for low income families and individuals.  When the program was introduced in 1965, enrollment was 1/4 million.  Today, 74 million are on the program.  The federal government and states share the costs of the program; the federal share averages 57%. Under the ACA’s Medicaid expansion, low income individuals younger than 65 without children could enroll.  An increase in the income threshold enabled more people to qualify for the program.  The federal share was guaranteed to not fall below 90% of those individuals enrolled under the expansion guidelines.

Medicaid (CMS) reports that 16.3 million people were added to Medicaid under the ACA expansion program and represent almost 75% of all enrollment under ACA. California has 12% of the U.S. population, but accounts for more than 25% of additional enrollees under Medicaid expansion. (State-by-state Medicaid enrollment ) Only 31 states adopted Medicaid expansion. The CBO estimates that those 16.3 million are 50% of the total pool of individuals that would be eligible if all states adopted the expansion program. So the CBO estimate of the total pool is almost 33 million.

Undere current law, the CBO estimates that additional states will adopt expansion so that 80% of the estimated total pool, or 26.4 million, will be enrolled under Medicaid expansion by 2026.  Under the AHCA, the CBO estimates that only 30% of that eligible population of 33 million, about 10 million, will be enrolled as of 2026. 26.4 million (under ACA) – 10 million (under AHCA) equals 16 million whom the CBO estimates will lose coverage under Medicaid. Note that this is a lot of blue sky math.

To summarize the ten year loss estimate under the rollback of Medicaid expansion: 6 million current enrollees and 10 million anticipated enrollees.

Medicaid expansion accounts for 16 million fewer enrollees. Where are the remaining 8 million missing? In the non-group private market. Currently, there are 11.5 – 12 million enrolled in these individual plans, an increase of about 5 million over the 6.6 million enrollees in 2007 (Health and Human Services brief) . The CBO estimates that, in 2018 and 2019, 2 million additional enrollees would take advantage of the ACA subsidies to buy policies. That results in a potential pool of about 14 million. Under the AHCA, the CBO estimates that the non-group private insurance market will return to its former level of 6 – 7 million, a loss of about 8 million.

Voila! 16 million under Medicaid expansion + 8 million in non-group private insurance = 24 million loss.

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Side Note

How do people get their health insurance?
74 million people, about 25% of the population, are enrolled in Medicaid. Half of Medicaid enrollees are children.
55 million, about 16% of the population, are on Medicare.
Over 150 million, or 50% of the population, are enrolled in an employer group plan (Kaiser Family Foundation).
Approximately 27 million, or 9% of the population, are uninsured.

Before the ACA, almost 50 million, or 16% of the population, were classified as uninsured. About 6 million of these uninsured had high deductible insurance plans called catastrophic plans. Offered by large insurance companies, they contained exclusions for pre-existing conditions, did not cover pregnancy, or mental disease, but were adequate for many self-employed tradespeople, contractors, consultants and farmers. (Info) In late 2013, the ACA redefined catastrophic plans by specifying the minimum benefits that a catastrophic plan must offer and, in 2014, began offering these plans through the state health care exchanges.

Post-Election Bounce

January 1, 2017

Happy New Year!  How many days will it take before we remember to write the year correctly as 2017, not 2016? It is going to be an interesting year, I bet.  But let’s do a year end review.

Homeownership

The home ownership rate has fallen near the lows set in 1985 and the mid-1960s at about less than 64%. (Graph)  In 2004, the rate hit a high of 69%.  For the U.S., the sweet spot is probably around 2/3 or 66%.  Most other countries have higher rates of home ownership, including Cuba with a rate of 90%. (Wikipedia article)  Rents in some cities have been growing rapidly.  In the country as a whole, rents have increased almost 4%, about twice the growth in the CPI, the general rate of inflation for all goods and services. (Graph)

Earnings

Real, or inflation-adjusted, weekly earnings of full time workers spiked up during the recession as employers laid off lower paid and less productive workers.  By late 2013, weekly earnings had fallen to 2006 levels and have risen since, finally surpassing that 2009 peak this year.

Core Work Force

Almost every month I look at the changes in the core work force of those aged 25-54 who are in their prime working years, who buy homes for the first time and have families.  These are the formative years when people build their careers, and form product preferences, making them a prime target for advertisers.  The economy depends on this age group.  They fund the benefit systems of Social Security and Medicare by paying taxes without collecting a benefit.  In short, an economy dependent on intergenerational transfers of money needs this core work force to be employed.

For two decades, from 1988 to 2008, the labor participation rate of this age group remained steady at 82% – 83%. (BLS graph) By the summer of 2015, it had fallen to 80%.  A few percent might not seem like much but each percent is about a million workers.  For the past year it has climbed up from that trough, regaining about half of what was lost since the Great Recession.

Consumer Confidence

A post-election bounce in consumer confidence has put it near the levels of 2001, near the end of the dot-com boom and just before 9-11. (Conference Board)  In 2012, the confidence index was almost half what it is today.

Business Sentiment

Small business sentiment has improved significantly since the November election (NFIB Survey).  Almost a quarter of businesses surveyed expect to add more employees, a jump of 2-1/2 times the 9% of businesses who responded positively in the October survey.  In October, 4% of companies expected sales growth in the coming year.  After the election, 20% responded positively.  This jump in sentiment indicates the degree of hope – and expectation – that business owners have built on the election of Donald Trump.

Hope leads to investment and business investment growth has turned negative (Graph). Recession often, but not always, accompanies negative growth. Since 1960, investment growth has turned negative eleven times.  Eight downturns preceded or accompanied recessions.  Let’s hope this renewed hope and some policy changes reverses sentiment.

On the other hand, those expectations may present a challenge to the incoming administration, which has promised some tax reform and regulatory relief. Small business owners will lobby for different reforms than the executives of large businesses.  Regulations of all types hamper small business but large businesses may welcome some regulation which acts as a barrier to entry into a particular market by smaller firms.

Publicly held firms will continue to lobby for repeal or reform of Sarbane Oxley reporting provisions.  For six years, the Obama administration has wanted to roll back these regulations but has been unable to come up with a compromise between the SEC, which regulates publicly traded companies, and Congress.  A Trump administration may finally reform a law that was rushed into place by George Bush and a Republican Congress in response to the Enron scandal.  That scandal grew in part from the Bush administration’s push to deregulate the energy market.

Voters Veer From Side To Side

We have stumbled from an all Republican government in 2002 to an all Democratic government in 2008 and now come full circle again to an all Republican government. Once in power, neither party can resist using economic policy to pick winners and losers.  Every few years the voters throw out the guys in charge and bring the other guys in, hoping that the party that has been out of power will be chastened somewhat.  Within a few months of taking power, each party digs up their old bones and begins to gnaw on them again.  Tax reform, prison reform, justice and fairness for all, climate change, more regulation, less regulation – these bones are well chewed.

Still we keep trying.  The priests and prophets of long ago kingdoms could not govern.  Neither could the kings and queens of empires.  So we have tried government of the people, by the people and for the people and it has been the bloodiest two centuries in human history.  Still we keep hoping.

The Presidential Test

Most presidents are tested in their first year in office.  Kennedy had to grapple with the Soviet threat and Cuba almost as soon as he took office.   Johnson struggled with urban violence, social upheaval and the war in Vietnam.

Nixon confronted a newly resurgent Viet Cong army when he first took office.  His second term began with the Arab oil embargo.  Ford dealt with the aftermath of Watergate and Nixon’s resignation under the threat of impeachment.

Jimmy Carter began his term with the challenges of high inflation and unemployment, and an energy crisis to boot.  Ronald Reagan wrestled with sky-high interest rates and a back to back recession in his early years.  His successor, H.W. Bush, met a Soviet Union near the end of its 70 year history as Gorbachev loosened the reins of Soviet control of eastern European countries and the Berlin Wall collapsed.

After an unsuccessful attempt to reform health care in his first year of office, Clinton suffered in the off year election of 1994.  G. W. Bush had perhaps the worst first year of any modern President – the tragedy of 9-11.  Obama entered office under a full blown global financial crisis.

Despite Putin’s bargaining rhetoric regarding President-elect Donald Trump, every President has to learn the lesson anew – Russia is not our friend.  Trump will have to learn  the same lesson.  China’s territorial claims in the South China sea may prompt an international incident.  N. Korea could launch a missle at S. Korea and start a small war.  Iran, Afghanistan, Iraq and Syria, Israel’s settlements, Palestinian independence – the crises may come from any of these tinderboxes.  We wish the new President well as he hops into the fire.

The Gathering

February 14, 2015

In January of this year, the SP500 finally rose above the inflation adjusted high set in 2000.  Here is a chart from multpl.com that I have overlaid with a few boxes.  Long term market trends are dubbed “secular” to contrast them with the shorter cyclical swings in valuation.  A secular bear market is a prolonged market downturn in which the inflation adjusted price of the SP500 never gets above a certain historical peak.

These long term periods are easier to define in hindsight.  They have begun with some peak and ended at some trough.  Years after the trough when the market has made a new inflation adjusted high price, market watchers get out their crayons and set the end of the bear market just after that trough.  Based on that historical rule, we would then say that the secular bear market that began in 2000 ended in 2009 at a market low six months after the onset of the financial crisis.

If history is any guide, an investor could expect further price increases for another 2 years (as in the late 1920s), or another 10 years (as in the late 1950s to late 1960s), or another 8 years (as in the 1990s).  In other words, history may not be much of a guide.

If the market tanked in 2017, two years after setting a new high, some sages would nod soberly and say it was just like the 1920s and was to be expected.  If the market continued rising another eight years before falling, ah yes, just like the 1990s.  The signs were all there if you knew where to look.

Secular bear markets share characteristics other than long term price swings.  During past prolonged downturns there have been five recessions within each period.  We have had two recessions since 2000.  Price to earnings, or PE, ratios went really low – about 6 – at the lowest trough of past downturns.  This is also the approximate low in the Shiller CAPE ratio.  Since 2000, the PE ratio has fallen to 10; the CAPE ratio to 13.  The current PE ratio based on the trailing twelve months earnings is almost 20, about 25% above the average. The number of years from peak to trough has been 19.  2000-2009 would be only 9 years, the shortest secular bear period on record.  The number of years from peak to peak has been about 26 years, much longer than the current 15 year period.

 This has led some to predict a further final crushing decline in the market to end the secular bear.  If the doomsayers are correct and we are only two-thirds through a secular bear market, we would expect market prices to plateau this year.  Then will come some shock – China’s real estate market implodes, or its regional banks collapse.  The so called PIGS – Portugal, Ireland, Greece, and Spain – could exit the euro.  There could be a major armed conflict with Russia or Iran that causes investors to abandon equities in droves.  The stronger dollar can put strains on countries whose currencies are pegged to the dollar. Such strains can cause a financial crisis similar to the one in Mexico in 1995 and the Asian and Russian crises of 1997 – 1998.  In the summer of 1998, the SP500 fell 15% in one month as fears grew that regional monetary imbalances would infect the economies of the entire world.

Secular bear markets come in types.  The two that started in 1929 and 2000 arose from what I call discovery shocks.  Investors lose conviction in their own hopes of future gains and leave the market.   The bear market that began in the late 1960s was a series of conflict shocks that spurred erratic changes in inflation.   As the country borrowed money to fund the Vietnam war, inflation rose above 3%, peaking at 6% in the spring of 1970.  The 1970s was marked by domestic and international conflict: the Watergate scandal and the oil supply wars with OPEC drove inflation to a high of 12% in late 1974.  As oil prices quadrupled through the 1970s, inflation spiked at almost 15% in the spring of 1980.  Through most of the decade, inflation stayed above 5% – a low that was almost double the historical average.

The SP500 made new records again this week although FactSet notes that the blended earnings growth for the fourth quarter of 2014 was only 3.1%.  The forward P/E of the SP500 is 17.1%, substantially above both the five and ten year averages (see paragraph below for illustration of changes in forward P/E). FactSet reports that nine out of ten sectors have forward P/E ratios that are above their ten year averages.  Only the telecom sector is selling slightly below its ten year average.  The forward P/E of the SP500 is based on projected earnings over the next year and volatile oil prices have made such earnings estimations difficult.  First quarter earnings by energy companies have been revised downwards by 50%, resulting in a 7.4% decrease in earnings estimates for the SP500.

Small changes in earnings estimates are multiplied 10 to 30 times to reach an evaluation of fair market price.  If 2015 earnings for SP500 companies are estimated at $100, an index price of 2000 is a forward P/E of 20.  If estimates are revised upwards to $110, then an index price of 2000 reflects a forward P/E of 18.  If the forward P/E of the SP500 is above the five and ten year averages as it is today, it means that investors and traders are betting that estimates of forward earnings will be revised upwards, resulting in a lower forward P/E ratio.

Long-term Treasuries (TLT) rose up 11.5% in the five weeks from late December to the end of January – too much, too fast.  After falling back in the last two weeks from their peaks, they are priced at the same level as in July 2012.  In 2014, traders who bet against long term bonds in anticipation of rising interest rates got slaughtered as long term Treasuries rose 25%.  Investors who moved out of long term and into shorter term bonds were disappointed as well.

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Retail Sales

Investors regard the monthly employment report and the retail sales report as the most important barometer of a consumer driven economy.  As an example of the correlation, consider a graph of inflation adjusted retail sales and the SP500 index.

Retail sales in January declined slightly from December.  Investors were somewhat heartened by the 2.4% annual gain, at least 1% above inflation, but remember that last January was particularly poor and was an easy benchmark to beat.  On the other hand, lower gasoline prices lowered this year’s total,  offsetting the comparison with a weak benchmark.

Sales at food and drinking establishments rose more than 11% y-o-y in January.

Large y-o-y gains in food and drink usually occur in the winter months.  January 2000, 2001, 2004, 2006, December 2006, January 2012, and these past two months all peaked at more than 8% y-o-y gains.  Eating and drinking out are largely discretionary for most of us.  A change in the pace of growth in this behavior signals  changes in consumer attitudes that are more real than a consumer confidence survey.  Changes in this discretionary budget item is a survey of wallets. In the past year, the growth of food and drink sales has accelerated, indicating a more confident, less fearful consumer.

While the various consumer sentiment surveys indicate what we tell interviewers, the wallet survey indicates what we really think.  In early 2009, the U. of Michigan Consumer Sentiment Survey showed a rebound of confidence.  What the survey indicated was more a rebound of hope, not confidence.  Consumer spending on eating and drinking out was still declining.

2011 is an indication of the opposite – plunging sentiment according to a survey but growing spending at food and drink establishments, indicating that the volatile drop in sentiment might be short lived.  The plunge in confidence was a response to the budget battles between the Republican House and the President.

Low inflation, relatively low gasoline prices, strong employment and retail sales gains all point to steady moderate growth.  Judging by the PE (19.7) and forward PE (17.1) ratios, the market may have already priced in that growth.

New Year, No Fear

January 4th, 2015

As the calendar flips from December to January, some favorite activities are predictions for the coming year and reviews of the past year.  Here are a few predictions I’ve heard in the past few weeks:

“We think oil will continue to drift downwards as global demand slackens.”

“We think long term Treasuries will continue to show strong gains in the coming year.”

“Output remains strong, and the labor market continues to strengthen.  We expect further gains in the stock market this year.”

“We expect gold to find a bottom in the $900 to $1000 range and we will be initiating a long position at that time.”

Predictions are foolish, of course.  They are too certain.  An expectation is a bit more sober, a pronouncement of a probability.  Did anyone hear these expectations at the beginning of 2014?

“Oil prices will decline by 40% this year.”

“We expect long term Treasuries to gain 25% in 2014.”

“We expect the euro to fall to a 4-1/2 year low against the dollar.”

I don’t remember any of those predictions at the beginning of 2014.  So here’s my expectation – er, prediction: in 2015, I will be surprised by some of the events that will unfold.

If that doesn’t satisfy your prediction craving, here are several – let’s call them guesstimates – of SP500 earnings and price predictions in 2015.

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Blue Light Specials

As I mentioned a few weeks ago, there are a few stock sectors that are “on sale,” selling below their 200 week, or 4 year average.  Falling gas prices in the last half of 2014 have had a negative impact on energy stocks (XLE, VDE).  Selling below their 200 week averages in December, both ETFs are hovering at their 200 week average.  The 50 week average is above the 200 week average, indicating that this is, so far, a relatively short term trend.

Emerging markets have been in the doldrums for a year and a half.  The 50 week average is just about to cross above the 200 week, signalling that the downturn may have exhausted itself.

The mining sector (XME) is down – way down.  The 50 week average is below the 200 week average and current prices of this ETF are below the 50 week average.  The mining sector can be quite cyclical but could be quite profitable in the next six months.

In the summer of 2011, the oil commodity ETF USO lost a third of its value.  In the melt down of 2008, it lost 75% of its value, falling from $115 down to near $30.  This week USO broke below $20, losing half of its value since July.  Since September 2009, shortly after the official end of the recession, the 50 week average has been trading in a range of $34 to $38, and is currently at the low point of that five year range.  While this may not be appropriate for a casual investor, it might be worth a look for those with some play money.

Other sectors – industrials, materials, finance, health, technology, consumer staples, consumer discretionary, retail and utilities – are above both their 50 and 200 week averages.

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Happiness Is An Open Wallet

The Conference Board’s Consumer Confidence gauge rose still further above 90 in December.  At some time in the distant past, in a year called 1985, all the people were happier than they are today.  That long ago time became the benchmark 100 for this index.  The index number is less important than the trend of confidence – whether it is rising, falling or staying the same.

The Case Shiller 20 City Home Price Index for October showed a 4.5% yearly gain.  The double digit gains of last year and the first six months of 2014 were unsustainable.  However, I would be concerned if this continues to fall toward zero, indicating a serious softening of demand, or a lack of affordability or both.

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The non-SP500 World

The SP500 index, composed of the 500 largest companies in the U.S., was up 11.4% for 2014. An index of mid, small and micro-cap companies was up a more modest 7.1% (Standard Poors) for the year.  An index of REITs was up 25.6% in 2014 after stalling during much of 2011, 2012 and 2013. I was surprised to learn that during the past twenty years, REITs outperformed the SP500.

Conventional wisdom holds that rising interest rates are bad for REIT stocks.  A study of REIT performance shows that the impact is less than most investors think. In addition, the income growth generated by REITs has outpaced inflation in all but one out the past 15 years. VNQ and RWR are two ETFs in this market space.  VNQ has a 10 year return of about 9%, RWR a bit less.

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Social Security

The Social Security program depends on current taxes to pay current beneficiaries.  In per person inflation adjusted dollars, the federal government collects twice the amount of money it did forty years ago.  Per person revenues have almost caught up to the levels of 2006.

The problem is that there are a lot of people starting to retire.  Politicians of both parties have spent the excess social security taxes collected in the past decades.  Last week I asked what you would do if the stock market lost 30% of its value.

This week’s sobering question for those in or near retirement:  what would you do if social security payments were reduced, or means tested?  With the stroke of a pen, Congress could reduce the maximum monthly benefit from $2533 to say $2100.  This would affect a relatively small percentage of voters, those with higher incomes, a favorite target for benefit cuts.  Perhaps you are taking care of an ailing child or parent and need the income.  You might submit a 4 page form listing your pensions, IRAs, the assessed value of your home and any mortgage you had against the house, your mutual funds, stocks and bonds.  Using a complex formula to factor in your age, special circumstances, the cost of living index in your area and the total of your assets, the Social Security Administration would calculate your monthly benefit.  Can’t happen here in the land of the free, home of the brave?

The Flame of Fame

On Monday, George finished a re-read of Nassim Taleb’s Fooled By Randomness, an examination of probability without the mathematics. Taleb wrote from the point of view of a market trader but the book contained apt lessons for many kinds of decision making.  Mabel went out with a few friends to see the movie Birdman.  She asked George if he wanted to go but he was happy to sit around and read.

Taleb told the story of a emerging market bond trader in the 1990s who made a quarter billion dollars for his firm by “buying on the dips.”  When the price of the bonds declined, the trader took a highly leveraged long position, betting that the price of the bonds would rally.  Each time they did.  The man became convinced that he knew this market well.  He believed in his own astute judgment.  Then came a dip with no subsequent rally.  Instead, prices continued to fall.  The trader had no stop loss set, a floor price where a trader closes his position to prevent further losses.  Instead the trader convinced his bosses at the firm that prices would soon rally.  He increased his position as prices fell further.  Eventually, prices fell so low that the firm, near bankruptcy, fired the trader and closed the position, losing almost 600 million.  George thought about that.  There had been one correction in April and May of 2012, a near correction in October and November of that same year.  Smaller dips had occurred in June and August of 2013, then in January, April and August of this year.  Finally, this month a 7% or so dip.  Like the bond trader in the 1990s, the winning strategy of the past few years had been to buy on these dips.  The subsequent rise in prices helped convince buyers that their particular view of the market, whether fundamental or technical, was a sound one.  Note to self, George thought, don’t confuse good luck with genius.

Earnings and sales reports would drive the market for a few days until Wednesday when the Fed was expected to end its bond buying program.  On Thursday, the first estimate of 3rd quarter GDP would be released.  After the close Monday, Amgen reported earnings that were 12% better than expected.  That would help set a positive mood for Tuesday’s open.

Tuesday’s gauge of consumer confidence from the Conference Board was almost 95, the highest since 2007.  Lower gasoline prices have put extra money in consumer pockets.  A 25% decrease in the price of gas ($4 – $3) puts about $800 in a consumer’s pocket, a “raise” of almost $20 a week.  The declining price of oil caused Chevron to revise its earnings guidance downward by 15-20% for 2014 and 2015 but that was not as bad as anticipated and the shares rose.

The Case Shiller index of home prices in 20 metropolitan areas showed a 5.6% year over year gain, the lowest yearly gain in two years.  After almost a decade, the housing market seemed to be returning to more normal patterns of price appreciation.

On the whole, this earnings season seemed positive but the cautionary tone of Taleb’s book reminded George to stay watchful.  On Sunday, the European Banking Authority had released the results of their 2014 stress tests on more than 120 European banks. Approximately 20% had failed the test, most of them in Italy, Greece, Cyprus and Spain. When a football game ends, fans leave their seats and move toward the exits in a loosely organized fashion.  When a larger bank or sovereign country seems to be in danger of failing or defaulting, investors rush toward the exits as though someone called “Fire!”  Still, George was feeling – well, vindicated – that he had seemed to catch this latest dip near the bottom.
 
The mild weather of late October continued.  In shorts and tee shirt, George raked leaves in the backyard on Wednesday morning.  Taking a break, he poured himself another cup of coffee, then glanced out the window overlooking the front yard.  “Oh, wow,” he muttered.  He went to the front door, commenting to Mabel as he opened it, “Must be a bad accident down the street.  There’s a Channel 3 van parked across the street.  I’m gonna check it out.”  If Mabel had a stopwatch, she would have clocked 14 seconds before George was rushing back inside, hurriedly closing the front door. “Geez,” he exclaimed.  “What’s wrong?” Mabel asked.  “Some woman from the TV station, she starts running across the street toward the house when she saw me!  She called my name, for Chrissake!”

George walked into the kitchen, then took up a position on the side of the fridge where he could look out the window onto the street without being seen.  “There’s some guy with a video camera with her!” He said, managing to fit anger, annoyance and exasperation into the tone of his voice.  Mabel got up from her chair, stood by the living room window, partly concealed by the drapes as she looked out at the street.  “What do you think they want, George?  Should we go out and talk to them?”  “No, that’s the problem.  I think that’s exactly what they want – to talk to us.  Weird!”  Mabel noticed that the rooftop mounted dish on the TV van had been raised up.  “I think they’re broadcasting, honey,” she told George in a loud whisper.  The woman outside stood on the sidewalk, her back to the house, gesturing, turning to the house, then turning back to the camera man who wielded a shoulder mounted video camera pointed at the woman and George and Mabel’s house.  “They wouldn’t come into our front yard, would they?” George wondered aloud. “Isn’t there some kinda law against that?”

Mabel switched channels from the weather to Channel 3. “Oh, no!  This is a live feed.” She turned up the volume.  The woman reporter standing out on their sidewalk was looking at Mabel from the TV screen. There seemed to be several seconds of delay so that George and Mabel could see the woman reporter gesturing on the front sidewalk, then seeing that same gesture shortly on the TV as though time had fractured.

Reliable source, the reporter said.   In advance of the mid-terms, President visited Liscombs, who have not demonstrated active role in politics for either party.  Speculation about election strategy in the hotly contested Senate and Governor’s races.  A man presumed to be Mr. Liscomb ran back into the house to avoid answering questions.  Supposedly independent political organizations spending a lot of money in Colorado.  Are the Liscombs bundlers for one of these organizations?  Just how independent are these organizations?  Why did the President visit this house, this couple?  Were campaign rules broken?

George had joined Mabel, standing beside her, staring dumbstruck at the TV.  “Are they saying we’re like some kind of political action group like the ones the Koch Brothers fund?” George asked Mabel.  “Oh, they’re not saying anything,” Mabel said with a touch of anger.  “They’re suggesting, provoking…” she stopped as the report concluded.  “Now here comes the tease before the commercial,” she said.  “More on the upcoming elections here in Colorado when we come back,” announced the lunchtime news host.  “You watch too much TV,” George kidded her.  “You’ve gotten hip to their tricks.”

Both of them turned to look outside the living room window.  The reporter now stood with the video tech near the rear of the van.  “I think they’re leaving,” George said.  “No, wait,” Mabel told him.  “The dish on the van is still elevated for upload.  Wait till they lower it.  Then we’ll know they’re leaving.”  “Where did you learn all this stuff?” George asked her.  “Remember when we had that knife fight at the school five years ago?” Mabel asked.  George nodded.  “Two kids went to the hospital.  The local stations covered it, of course.  Got to see the vans.  It’s amazing how much equipment they cram in a regular van.  There’s probably a third person in the van working all the computers and equipment.”

Eventually, the van pulled away from the curb.  George realized that he’d missed the announcement from the Fed on their bond buying program, switched channels to confirm that they had ended the program. Although the Fed had stopped adding to its balance sheet, it continued to hold a whopping $4.5 trillion in assets, the total of the past several years of printing money to support the economy as the country struggled to recover from the Great Recession.

The market closed at the about the same level as Tuesday.  Dreamworks, the studio that produced the How to Train Your Dragon movies,  reported better than expected earnings after the close, sending the stock up 5% in after hours trading.  Kraft also reported earnings slightly higher but the overall sales picture was tepid.  Samsung reported a huge 60% decline in profit, squeezed on the high end by Apple and under pressure from mid and low end competitors.  The giant insurer MetLife had a blow out quarter.  Visa reported better than expected earnings, sending the stock over 4% higher in after market trading.

If Thursday’s first estimate of 3rd quarter GDP growth had come in at 2.5%, below the consensus of 3%, the market could have dropped 2% or more, George thought.  Instead, the estimate was 3.5%.  The market opened up lower then climbed about 1% during the day.

In each earnings season, there are several stories.  One was Gilead Sciences, a small cap biotech firm, whose “killer app”  was a new hepatitis drug called Sovaldi. Gilead reported earnings of $1.79 for the past quarter.  This was about 10% above earlier guidance but in the crazy world of Wall St., investors had been expecting $1.92, a “whisper” earnings number based on anticipated higher sales of Sovaldi.  Instead, sales of the drug were 20% less than the previous quarter.  The stock dropped about 5% on Wednesday, before climbing to new highs on Thursday.  The stock had more than quadrupled since the beginning of 2012.

On Friday the market jumped 1% at the open.  Overnight, the Bank of Japan had announced a massive stimulus program to combat risks of deflation, the bugaboo of all modern economies.  If prices might be slightly lower next year, why buy this year?  As consumers postpone some purchases, the decline in sales leads to further price declines as companies compete more fiercely to get those fewer sales.  Japan’s core CPI, excluding food and energy prices, had risen above 1% in response to earlier stimulus programs but had now fallen in the past several months back toward 1%.

On the domestic front, personal income gains in September were positive, averaging about 2.4% annually and above inflation. Wages and salaries jumped .4%, double the overall income growth. Consumer spending remained tepid, declining to a 1.4% annual pace of growth.  Amazon had warned earlier that they expected the Christmas season to be subdued this year.  Some speculated that the low rate of inflation and consumer spending would further check any rise in interest rates before the middle of 2015 at the earliest.

The market closed just slightly above the level it had reached six weeks earlier.  George had to remind himself that it was just luck.  But he sure felt smart.  Then he noticed a disturbing sign, the dragonfly doji after a gap up, on the chart of SPY, the ETF that tracks the SP500 index. The doji are one of many candelestick patterns, a type of technical analysis that tries to understand the psychology of buyers and sellers in the market from price movements over one to three days. After a number of up days, such a pattern might signal that buying pressure has become exhausted. After reading Taleb’s book, George reminded himself once again to be skeptical of signals. The last dragonfly doji after a 1% gap up that George could find in the past few years occurred on April 28, 2012.  The market had turned down after that one, losing more than 10% over the following five weeks.  Of course, George could have missed some doji simply because the market had not turned after the occurrence of one.  As Taleb noted, our view of historical data suffers from hindsight bias, from knowing what happened after a particular event.  We can not see the future very well but it’s worse than that. We don’t see the past very well either.  George had laughed when he read that.

Next week was the first week of the month when several economic reports would capture the attention of investors.   The monthly labor report at the end of the week would get the most attention.  The ISM indexes of the manufacturing and service sectors would be closely watched for any signs of a slowdown.  The sluggish growth in Europe and the strong dollar would have a negative impact on exports, which would show up in the manufacturing index.  The CWPI, a composite of both of the ISM indexes, had probably peaked the previous month, and should be lower this month as a natural part of the cyclic pattern of the past several years.  Investors could react negatively though to this cyclic decline.  The VIX, the volatility indicator, had dropped into a more calm zone and below its 10 day average.

But investors had not abandoned the safety of long-term Treasuries.

If Republicans took control of the Senate in Tuesday’s election, the market would probably get a boost, George figured.  The results might not be known for days or weeks if there were recounts in some key senatorial races and that might drag the market down a bit in advance of the upcoming labor report.  Would the market go up or down?  George could definitely say yes!  He looked out the window Saturday afternoon and could tell the direction of one thing for sure – leaves.  They were calling to him, or was it his wife with a helpful reminder?

Diminished Expectations

February 3rd, 2014

The SP500 has been hovering over a support trendline in the 1760-1775 range, with buyers coming in at 1775.  At 1750, the market would have corrected 5%, a fairly normal occurrence.  Market watchers have been concerned that the market has not experienced one of these small “shaking of the tree” corrections since May/June of 2012.  Disappointing earnings and revenue reports from bellweather companies, together with selling pressure on some emerging market currencies, have made traders nervous.

The market is composed of buyers and sellers responding within varying time frames.  In a short to mid term time horizon, one person might pay more attention to turbulence in emerging markets or the latest corporate reports.  A mid to long term investor might pay more attention to rising industrial production, healthy GDP numbers, consumer spending and income, and declining unemployment.

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Apple forecast lower than expected revenues for the coming quarter in the China market.  The announcement prompted an 8% decline in the company’s stock.  Facebook reported blow out revenue growth of 63% in the past quarter, causing the stock to rise about 16%.  FB’s active user base has more than doubled in two years.  Despite the robust growth, the sky high valuation of the company reminds me of some internet stocks in the late 1990s.  The stock has a Price to Sales – not Price to Earnings – ratio of about 15 to 1.  Google has a track record of strong revenue and earnings growth and sports a richly valued price to sales ratio of 6.4.  Does Facebook’s short track record deserve a valuation that is more than twice Google’s?  In 2000, Microsoft had a price-sales ratio of 23 to 1. Fourteen years later, Microsoft’s stock sells for 30% less than it did in 2000.  In 2000, Cisco had a price to sales ratio of 30 to 1.  Cisco’s revenues were growing 50% a year.  “The stock is cheap,” some said.  Fourteen years later, Cisco sells for less than a third of what it did in the heady days of rapid growth.  A word of caution to long term investors.

Amazon reported “only” a 20% increase in quarterly revenue during the busy 4th quarter Christmas season. This is five times the sales growth of the overall retail industry so a casual observer might think that the stock enjoyed a healthy bump up in price, right?  Wrong. After rising 50% over the past year, the company’s stock was priced to perfection. The disappointing growth particularly in overseas markets prompted a lot of selling and an 8% decline in price on Friday.

As I noted last week, many retailers will report quarterly earnings in February.  Many companies get a sense of the bottom line that they will report before the official release of quarterly data.  If there are material differences between consensus expectations and forecast results, a company will issue a revised forward guidance.  Wal-Mart did so this past week, revising its revenue and earnings forecast down for the fourth quarter and lowering earnings projections for the coming year.  The company cited a much greater than forecast impact from November’s reduction of the food stamp program.  The severe storms in December also had a material impact on sales.

In the past two months, Wal-Mart’ stock has declined 8%.  Let’s think about that for a moment.  The market value of Apple and Amazon declined 8% in one day.  It takes two months for Wal-Mart’s stock to decline by the same percentage.  Individuals who invest in companies like Apple and Amazon have to be able to take abrupt market gyrations in stride.  Companies are essentially stories.  Some like Apple and Amazon are stories of growth.  There comes a time when the story changes, as it did for Microsoft and Cisco more than a decade ago.  Apple’s story has been “under construction” in the past 18 months. Since the beginning of 2008, Wal-Mart’s stock has risen 56%, Apple’s is up 150%, and Amazon’s market price has soared more than 6 times.  Growth companies offer rich rewards for the investor who has the time to  follow the story, but it can be difficult to know when the story is changing.

During the past 3 weeks, Home Depot has lost about 6% after gaining 35% since the beginning of 2013.  This giant has one foot in the home construction and remodeling sectors, one foot in the retail sector.  The decline reflects lowered near term expectations for both construction and retail.  Consumer spending has risen steadily but incomes are flat.

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December’s report of new homes sold was disappointing.  After rising above an annual level of 450,000 in the fall, sales have fallen closer to the 400,000 mark.

 Some blame the particularly harsh December in the east, some blame the weak labor report released in early January, others blame the low supply, still others blame rising mortgage rates. The Case Shiller home price index shows a year over year gain of almost 14% in metro area homes, indicating relatively healthy demand.  However, the latest Consumer Confidence survey reports a decline in the number of people planning to buy a home.  On an ominous note, pending home sales in December declined more than 8%, the worst monthly decline in almost four years.  Without a doubt, the severe winter weather in the eastern U.S. was a big factor but it is difficult to assess how much of a change.  This is the second report – employment was the first – that was far below even the lowest of estimates.

The link between employment and new home sales is counterintuitive; changes in new home sales anticipate changes in employment.

In a 2007 paper presented at a Federal Reserve conference, economist Ed Leamer demonstrated that changes in residential investment, a relatively small component of the economy, indicate coming recessions and recoveries.  The National Assn of Homebuilders estimates that each new home generates a bit more than three full time jobs.

Residential investment includes new homes, remodels, furniture and appliances.  Eventually residential investment reaches a point where it is contributing too much to the economy. As that percentage begins to correct to more normal levels, the contraction tugs on the total of economic growth.

As you can see in the chart above, a sustainable “sweet spot” is in the 4 to 4-1/2% of GDP range but residential investment is still less than 3% of GDP.  In past recessions, residential investment has helped recovery.  This time is different.  Housing’s less than normal contribution to the nation’s GDP has dampened overall growth.

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The first estimate of GDP growth for the fourth quarter was a rather remarkable 3.1%.  Although this was in line with estimates, I was concerned that the severe winter weather in the east might have more of a negative impact.  A version of GDP that reflects domestic consumption, Final Sales of Domestic Product, showed a modest 2.1% growth in the 4th quarter, reflecting the impact of the weather, I think. The third quarter growth rate was revised to 4.1%, up substantially from the initial estimate of 2.8%.  The hope is that this is now a 4% growth economy and the first quarter of this year may hold some welcome surprises as delayed economic activity in the 4th quarter is rolled into this year’s first quarter.  As I noted a few weeks ago, the wave like trend of the CWI composite index of manufacturing and non-manufacturing indicated a slight lull in these winter months before another peak in early to mid-spring.

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Consumer Confidence rose to 80, the lower bound of what I consider healthy.  This index fell below 80 in the early part of 2008 and did not get above that mark till this past summer, then fell back in the fall.  A separate Consumer Sentiment survey from the U. of Michigan showed a similar reading at slightly above 81.

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January’s monthly employment numbers will be released next Friday.  I ran a chart of those not in the labor force as a percent of those working.  Thirty years ago, the economy was coming out of the most severe employment recession since the Depression.  It is rather disturbing that this ratio continues to climb to the nose bleed levels of that recession thirty years ago.

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The harsh winter weather may be affecting consumers more than businesses.  Chicago and the upper Midwest region got creamed with cold snap after cold snap in December yet industrial production figures for the month are still robust, declining somewhat from the incredibly strong readings of the past few months.

Things That Spring

April 14th, 2013

Across the land, springtime wakens the trees and flowers, birds chirp and squirrels chatter.  From the buildings where the humans live comes the wailing and gnashing of teeth as many procrastinators spend this last weekend before the tax deadline in a spring ritual of angst.  The lost W-2 form is finally found beneath the Netflix DVD that has lain casually on the bookcase, waiting to be watched.  The 1099DIV form is found beneath a birthday card that was never sent.

Lay aside your problems; let’s climb inside the hot air balloon and look at the big picture.  A few weeks ago, economic growth for the fourth quarter of 2012 was revised marginally higher into positive territory, but dropping from the annualized growth rate of 3.1% in the 3rd quarter of 2012.  Let’s look at GDP from a per person basis since WW2.  Until the recession hit in late 2007, economic growth had consistently outpaced population growth.  Then POOF! went the economy and blew away a big gap in GDP.

Let’s zoom in on the past ten years to see the effect.  On a per person basis, the gap is $5,000 of spending that simply didn’t get spent.

Call it the GDP dust bowl of the 2000s, similar to the dust bowl of the 1930s when the wind blew the top soil from the prairie of the Oklahoma panhandle and forced many families from their farms.  In this case, the wind blew away a lot of jobs and chunks of home equity.

Policy makers in Washington want to close that $5000 per person gap.  If they could write a law forcing everyone to spend that $5000, they would.  Instead, they keep giving away money in unemployment benefits, food stamps, disability benefits, crop subsidies – all to keep people from not spending even less and making the problem worse.

Retail sales account for about 1/3rd of the total economy.  Including automobile sales and parts, consumers are still below twenty year averages.

This past Friday, the monthly report on retail sales showed little change from the past month.  When we look at per person real retail and food sales and take out automotive sales we get a feel for core sales, those that we make on a frequent basis.  Once again, we see the same gap that we saw in GDP.  Since mid-2009, this core consumer spending has grown 2.3% annually, above the 1.8% annual growth trend from 1992 through 2006, but it still down $2000 a year from what we would have spent if we had stayed on the same trend line before this past recession hit.

To make it a bit clearer, let’s look again at that chart and compare the 15 year annual growth rate from 1992 to the longer 21 year growth rate.  It has fallen from 1.8% to 1.1% annual growth.

GDP measures spending; let’s look at Gross Domestic Income, or GDI.  A fundamental principles of economics is that it takes money to spend money.  A six year old asks a parent “Why can’t we just go out and get more money?” to which the parent replies “Whaddya think money grows on trees?!”  End of Chapter One in the Parent’s Guide to Economics.

When we compare the country’s income to spending, we find that a dip in income below production precedes recessions.

After the 2008 – 2009 crash and recovery in national income and spending, both are limping along.

A few weeks ago came the monthly New Orders, an indication of business confidence.  As regular readers know, I have been watching this declining trend since September of last year, when the percent change in New Orders was negative.  The recent rise has been a welcome sign of growing confidence but new orders fell 2.7% in February and now hover around the zero growth line. 

On a quarterly basis, the year over year (y-o-y) percent change is still firmly in negative territory, meaning that businesses are not putting up more money to invest in new equipment.  Why?  Because they are still not sure about consumer spending. The six month run up in the SP500 stock index might lead a casual observer to think that the economy and companies are gearing up.  New Orders indicates that there is much more caution out there than the stock index would indicate.

This past Friday, business’ caution to commit to new investment was only reinforced when the latest Consumer Sentiment index was released.  After climbing the past few months, confidence is sinking again.  Maybe it’s the extra 2% coming out of paychecks since January 1st.  Whatever it is, it doesn’t inspire many business owners to put a lot of money into expanding their production.

When the stock market is trading on hope, it looks six months ahead.  The recent run up is hoping for double digit profit growth in the second half of this year.  When the market trades on fear, it looks ahead about 2 seconds, faster than the normal investor can or should react.  Let me get out my broken record for another spin, cue the needle and play that same old song “Diversify.”

P.S. For those of you who are more active investors, check the latest post from Economic Pic in my blog link list on the right.  It shows the past 40 year returns for a strategy of selling the SP500 index in May and buying the long term government / credit index.  The iShares ETF that tracks this index is ITLB.  A comparable ETF from Vanguard is BLV.

Capital and Consumer Spending

If I hit my thumb with a hammer, maybe it won’t hurt this time.  Not likely.  Last week I noted a warning sign in non-defense new orders for capital goods, excluding aircraft.  As I noted previously, aircraft orders are volatile; they may be up 30% one month and down 30% a few months later because orders for planes are placed in rather large blocks with the actual delivery of the aircraft occurring over many months.

A few days ago the most recent durable goods report came out for September, showing a continued decline in the year-over-year gains for new orders.  Declines like this have preceded the past two recessions.

We like to think that this time may be different. Our imagination is capable of soaring the heights of creativity in art and science.  In the economics of our personal lives, it can lead to fanciful thinking.  Fanciful notions led many to buy houses with little money down at the height of the housing boom, thinking that somehow they would refinance when mortgage payments escalated after a certain period.  Magical thinking induced many to increase their credit balances far beyond their means to pay, thinking that they could pay down their credit balances by refinancing their homes.  No matter how much homes went up in value, housing prices would continue to rise.  Then they didn’t.

The chart below shows the housing inflation.  Recessions in the latter part of the past century had caused housing starts to decline to 400,000 before recovering.  In the 2001 recession, easy money and loose standards for mortgage securitization curbed the natural decline.  The bill eventually came due in 2008.

Single family homes create jobs; the market has shown life recently but is still very weak.

The Conference Board’s Consumer Confidence index rose 9 points to 70 in September and is about the same level as this past February, when confidence started sliding to a summer low point of 60.   The new consumer survey is due to be released next week and analysts are predicting another increase of 3 to 4 points. Consumers are feeling upbeat but the decline in new orders shows that businesses continue to be cautious as the prospect of rising taxes and budget cuts next year dampens any optimistic planning.  The slowdown in Europe and Asia contributes to the gloomy reading of Moody’s Business Confidence survey.  Rising consumer confidence before the critical Christmas shopping season may alleviate the pessimism of businesses if consumers actually open up their wallets and spend but retailers have not been building inventory ahead of the shopping season.

While these two forces tug at each other, a prudent investor might exercise some caution.

Consumer Confidence

The Conference Board recently released its November Consumer Confidence Survey. The index stood at 49.5, little changed from October. In 2000, the index was about 140. It declined to 60 in 2003, rose to over 100 in 2007 and plunged to under 30 in 2008. A component of the index, the Present Situation index, is at a low level last seen in 1983.