Archive for June, 2010

Are we heading towards a double dip recession?  Take a look at the numbers:

May new home sales plunged -32%.

Mortgage delinquencies are up 36% since last year

The Baltic Dry Index has dropped -40% since May 26, 2010.  This index is considered a leading indicator of the future growth of the economy.

Manufacturing index plunged in May
May housing starts fell -10%
May retail sales post biggest decline since September 2009
May existing home sales fell unexpectedly?

Pile on top of those statistics the fact we have a major landscape change occurring in the Gulf of Mexico that will negatively affect the economy and that region as well as continued climbing unemployment and a decline in consumer spending, I just don’t think that a double dip recession is avoidable.

John Mauldin pointed out in his excellent weekly writing Frontline Thoughts that the index of weekly leading economic numbers has turned negative.  There was a -23% decline.  Then he showed this chart of what this type of drop has signaled in the past.


For all of those in the financial services community wanting you to drink “the everything is OK” Kool-aid, they are going to have a tough time spinning out from underneath these deteriorating numbers.

In addition these numbers are showing a renewed decline in real estate.  As I have stated before, it will be tough to turn the Titanic around without a recovering real estate market. 

This is Evidence that Economic Numbers could be Rigged

Either these numbers are rigged or their methodology is flawed or they were able to actually hand pick and find a few thousand happy people.  Now with all of the above bad news that is coming up along with high unemployment and a stock market that has been in the tank since April…The University of Michigan Consumer Sentiment Index jumped to its highest level in 2 years.  Are you kidding me?  If you believe that you might also believe that British Petroleum has the problem in the Gulf under control.  Really, there is no way that could be accurate.   

On Friday the ever so important unemployment numbers are coming out.  That should give us an interesting piece of the puzzle.  I just wonder how many jobs the Government will create out of thin air this time?   

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The consumer and especially the small business owner are in need of bank lending.  Granted, it is credit and debt that got us into this problem.  We are in a period of time when the credit machine was way out of control and out of balance.  Now, we are at the opposite end of that spectrum where banks are lending very little at all. 

Without a good balance of healthy lending occurring, it is going to be tough to get any traction with a recovery. 

So, why aren’t banks lending?  Well, you can draw the conclusion that banks aren’t confident enough in the recovery to lend money thus they are hoarding cash.   I do believe that is the case for a lower percentage of banks.  Then another conclusion you can draw is that the banking system is in trouble.  CNBC reported last week that banks were actually missing their monthly payments back to the federal government.

More than 90 U.S. banks and thrifts missed making a May 17 payment to the U.S. government under its main bank bailout program, signaling a rising number of lenders are struggling to meet their obligations.

The statistics, compiled by SNL Financial from U.S. Treasury data, showed 91 banks and thrifts skipped the May dividend payment under the Troubled Asset Relief Program, or TARP. It was the first missed payment for 23 of the banks; for the others, it was at least their second miss.

The number of banks missing their TARP payments rose for the third straight quarter. In February, 74 banks deferred their payments; 55 deferred last November.

SNL Financial’s analysis found 20 banks have missed four or more payments since the program began in 2008, while eight banks have missed five payments.

Under the TARP program, the U.S. Treasury invested in preferred shares issued banks looking for funds. The banks were to make regular dividend payments to the Treasury, and have the right to repurchase the shares at some point in the future.

While many of the largest U.S. banks easily repaid billions in TARP aid, more than 600 smaller banks still hold $130 billion from the program, created at the height of the financial crisis.

This isn’t a real good sign of health.  So far this year, 83 banks have gone under. For the same time period last year, only 40 banks had failed. 

Thoughts on the Stock Market

We have had a few good weeks in the market following the roughly 12% decline in the market that started in April.  Does this signal that we are out of the woods?  It will take a lot more than a few good weeks.  In October 2007 at the beginning of the bear market, we had an initial decline of roughly 10%.  Following that decline was a period where the market went up. However, the bear market resumed shortly thereafter.  I would still be cautious.

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Economists debate whether or not we are going to fall into the dreaded “double dip” recession.  This occurs when you go through a recession, start a period of recovery, and then fall back into a recession again. 

Let’s look at the basics.  You have a Government that has spent 100’s of billions of dollars to stimulate the economy and yet we have very little to show for it and we still have a large unemployment problem.  Oh pardon the mistake –the politicians have a lot to show for it as they have been able to use our tax money to pay back favors. 

The realization is two fold.  First government spending isn’t going to be the solution to our economic problems.  If you want companies to start hiring, then build confidence back that the Obama Administration and the rest of the politicians are not going to destroy this country by turning us completely into a socialistic country.  You do that by passing legislation and using resources to help the small business owner.  Unfortunately, the opposite is happening.

Second, we are going to be hard pressed to recover without the participation of the consumer.  The consumer is not confident and for good reasons. 

  • We are well into this so called recovery and the unemployment problem is bad as it possibly could be.  That will continue to keep consumers in a less than confident state of mind. 
  • Confidence in spending money is also tied to the stock market.  If the stock market has begun a bear market, consumer confidence will fall off the cliff. 

Then there is the foreclosure crisis, the state of emergency in the Gulf, and the list goes on.   There isn’t much to be confident about in this environment.  So, it shouldn’t be a big surprise that Friday’s consumer spending fell off the cliff (comparatively speaking) when you look at how the above have performed recently. 

So, it really surprises me when economists are so bubbly about things.  The Wall Street Journal had this to say in their weekend edition.

“The surprisingly poor sales cast fresh doubt in consumer spending that had allowed economists to raise their forecasts for US growth this year despite a moribund housing market, a dismal job market, and tepid business investment.”

So economists really thought that the consumer facing the prospects of losing their home and their job or the consumer who is not employed or underemployed gave economists enough confidence to raise forecasts?  

The bottom line is that we are going to be extremely lucky to escape a double dip recession.  I think that the question on economists’ mind shouldn’t be whether we face it but how deep this one is going to be.

The probabilities are high that the decline that started in April in the stock market will start to resume again in short order.

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On Friday’s blog, I wrote about the horrid unemployment report that was posted.  You cannot sustain and grow an economy without producing 250,000 plus full time private sector jobs.  As I wrote on Friday, the big jobs number was nothing more than jobs for temporary census workers.  Then on top of all of that, you have the government with their monthly job creation estimate (where they conveniently determine the amount of jobs created that was missed by the unemployment survey) adding back into the unemployment report a whopping 215,000 jobs.  If you take away the government temp jobs and the fantasy jobs, you have a huge job loss for the month of May.  To boot, you have a President and Vice President on the airwaves talking about how they are creating jobs.  Really???  Are you kidding me???  It seems that on a daily basis, some politician makes it their objective to insult my intelligence. 

Even the minimal private sector jobs that are being created are not the types of jobs available pre-financial crisis. In a CNN.com report, “Say Goodbye to Full-Time Jobs with Benefits”, the following was written:

Jobs may be coming back, but they aren’t the same ones workers were used to.  Many of the jobs employers are adding are temporary or contract positions, rather than traditional full-time jobs with benefits. With unemployment remaining near 10%, employers have their pick of workers willing to accept less secure positions.  In 2005, the government estimated that 31% of U.S. workers were already so-called contingent workers. Experts say that number could increase to 40% or more in the next 10 years.  James Stoeckmann, senior practice leader at WorldatWork, a professional association of human resource executives, believes that full-time employees could become the minority of the nation’s workforce within 20 to 30 years, leaving employees without traditional benefits such as health coverage, paid vacations and retirement plans, that most workers take for granted today.

This is very worrisome that we are seeing this trend of weak employment after the 100’s of billions of dollars of stimulus money that has been spent.  It also highlights the very real threat of a double dip recession.  Any economic growth we have had is not sustainable under these circumstances.  This highlights the tightrope scenario.

The unemployment problem in America highlights the tightrope that we are walking.  We are in a scenario that cannot withstand any shocks to the system and unfortunately a very major shock is about to hit us straight out of the Gulf.  Every week the news gets worse.  I don’t know what is thicker.  Is it the oil or the damage control that comes out of the gulf?  You have BP and the President jockeying for damage control.  It’s a little tough to hide the reality of this crisis.  Since this is unprecedented, it is tough to tell what the consequences will be.  Unfortunately, this might be the blow that knocks us off the tightrope.  If not, there are many more out there that could be the next in line.

This leads me to the stock market.  I know that I keep harping about this stock market and how weak it looks.  Until last week, I was trying to give the benefit of the doubt to the bulls.  Last week might just have illustrated that the bears are firmly in control.  For stock market investors, that is not a good sign.  Once again, watch your risk!

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It was a tough May for stock market investors.  It was the worst May for the Dow Jones since 1940 with a loss of -7.92%.   If you listen to Wall Street, this is just a correction.  I would suggest otherwise.  You have to consider whether or not things have changed for this market and we are reverting back to the bear market.

I have felt all along that this is was nothing more than a bear market rally that started in March 2009 that might have ended in April of this year.  All we can do is start to put the evidence together and make a case. 

Let’s take a look at what the Stock Market Almanac has to say about some clues.   Their research indicates that we have entered a not so favorable time period for the stock market.  Their research indicates that the best time to be invested in the market is between November and April and the worst time is between May and October.  The old saying goes “sell in May and go away.”   Dating back to 1950, their research shows an average gain of 0.1% for May through October and 7.3% for November through April.

The six month period between May and October is negative 41% of the time versus 24% of the time for the other six months.

They also turn to another sign that can be evident of a stock market that is changing back to a bear. They have studied 30 years worth of data that shows negative Fridays followed by negative Mondays is characteristic of a negative change in the stock market.  Of course, you have to see this a high number of times.  We are starting to see that pattern emerge.  

I also like to look at what is referred to as moving averages.  Just consider them as important levels in the stock market that you want to be above and not below.   Above these certain moving averages, things are positive and below these moving averages, things are negative.  As long as a stock market stays above or below these moving averages, it is an indication of either a positive or negative future.

The S&P 500 went below the 200 day moving average May 20th.  That price level for the S&P 500 is 1205.  It is negative as long as the market stays below that price level.   During the 2008 bear market, the S&P 500 fell below the 20 day moving average on December 26, 2007 and stayed below it until March 18, 2009.  During that time period, the S&P 500 lost -46%.

Those are just signs that tell you how the market is handling the risk that is present. The problems that are creating these losses in the stock market are real and see no sign of slowing.  As I wrote weeks ago, I am inclined to think that BP has no solution for the gulf oil spill and is just doing damage control.  The White House is telling everyone how they have been on the problem from day one which is furthest from the truth.  The only fix is a long-term solution which means this problem doesn’t go away until August at the earliest.  Can you imagine what this is going to do to that region of the country initially and then to our country economically?  It is truly sad to watch this occur.  

The risks are real.  Make sure that you are comfortable with the risk that you are taking.

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