Monthly Archives: August 2010

The Stock Market And The Economy

In the August 16-August 29 Bloomberg BusinessWeek, there is a quote from Jeremy Siegel in which he says, “The stock market’s telling us there’s some good things happening.  And I don’t think it’s only what they think Bernanke is going to say.  There is now a very broad consensus that this…is not going to develop into a double-dip.”

My comment:

Although I don’t agree with this quote, it is interesting for a variety of reasons.  It appears to echo the belief of many at this juncture.

For now, I will not further comment on it; however, I may reference it in future posts…

A Special Note concerning our economic situation is found here

SPX at 1050.80 as this post is written

State Budget Deficits

On Monday The Wall Street Journal had an Op-ed by Steve Malanga titled “How States Hide Their Budget Deficits.”

Of particular interest is this excerpt:

“Last week, however, the Securities and Exchange Commission (SEC) filed fraud charges against New Jersey for misrepresenting its financial obligations, particularly its pension obligations, and misleading investors in its bonds. New York—and many other states—had better sit up and take notice.”

I have previously written of the topic of state budgets and methods used to “balance” them in the July 21, 2009 post.

There is a lot that can be written about the efforts to conceal the true nature of states’ financial conditions.    By “sweeping (financial) problems under the rug” instead of truly solving the deficit problems, it almost seems as if states are inherently betting (in a big way) that current economic hardship is transitory, and that better future economic conditions will “save the day.”  In effect, there is little need to solve structural budget/financial problems because a strengthening economy will alleviate or eliminate such issues.

As well, of course, the federal government has provided relief.  As the Op-ed states, “…Washington does little to enforce responsible budgeting. In its fiscal stimulus packages of 2009 and 2010, for instance, the federal government funneled hundreds of billions of dollars to the states without regard for their fiscal practices, treating irresponsibility in New Jersey and New York the same as prudence in, say, Texas and Indiana.”

It is not hard to envision a scenario in which the three aforementioned “crutches” states are employing to “make it through” their financial crises are no longer available.  Exceedingly dubious “quick fixes,” placing large (inherent) bets on “sunnier” economic days ahead,  and receiving large-scale federal government support are not conditions that can, or should be, relied upon on an ongoing basis.  Of course, these “crutches” should never have been viewed as feasible options in the first place.

A Special Note concerning our economic situation is found here

SPX at 1051.87 as this post is written

Updates On Economic Indicators August 2010

Here is an update on various indicators that are supposed to predict and/or depict economic activity.  These indicators have been discussed in previous blog posts:

The August Chicago Fed National Activity Index (CFNAI)(pdf) updated as of August 23, 2010:

The Consumer Metrics Institute Contraction Watch:

The USA TODAY/IHS Global Insight Economic Outlook Index:

An excerpt from August 16, 2010:

“The July 28 update of the USA TODAY/IHS Global Insight Economic Outlook Index shows real GDP growth, at a six-month annualized growth rate, slowing to 2.5% in December. The end of government stimulus spending and inventory buildup combined with continuing high unemployment, a weak housing market, tight credit and high debt are behind the slowdown.”

The ECRI WLI (Weekly Leading Index):

As of 8/13/10 the WLI was at 120.8 and the WLI, Gr. was at -10.0%.  A chart of the growth rates of the Weekly Leading and Weekly Coincident Indexes:

The Dow Jones ESI (Economic Sentiment Indicator):

The Indicator as of August 2 was at 42.3, as seen below:

An excerpt from the August 2 Press Release:

“The Dow Jones Economic Sentiment Indicator (ESI) has given an upbeat signal on the economy, registering its biggest rise since October and a return to the level of June 2008.”

also:

““The Dow Jones ESI’s rise suggests the prospects of a double dip recession have receded,” Dow Jones Newswires “Money Talks” Columnist Alen Mattich said. “The ESI is still at a very low level, just above where it has in the past signalled a drop into recession. The indicator, however, has been steadily climbing since April 2010 which implies continued economic improvement.”

also:

“The ESI’s back-testing to 1990 shows that the ESI clearly highlighted the risk that the U.S. economy was sliding into recession in 2001 and 2008 and suggests the indicator can help predict economic turning points as much as seven months in advance of other indicators.”

The Aruoba-Diebold-Scotti Business Conditions (ADS) Index:

Here is the latest chart, updated through 8-14-10:

The Conference Board Leading (LEI) and Coincident (CEI) Economic Indexes:

As per the August 19 release, the LEI was at 109.8 and the CEI was at 101.4 in July.

An excerpt from the August 19, 2010 Press Release:

“”The indicators point to a slow expansion through the end of the year,” says Ken Goldstein, economist at The Conference Board.”

“New Financial Conditions Index”

I wrote a post concerning this index on 3/10/10.  There is currently no updated value available.

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I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

SPX at 1067.36 as this post is written

Consumer Metrics Institute Data: Red Alert?

This post highlights current readings from the Consumer Metrics Institute.  Previous posts solely concerning the Consumer Metrics Institute (CMI) can be found on July 27 and March 31;  as well CMI data is included in the monthly “Updates On Economic Indicators.”

Here is a chart of CMI’s Daily Growth Index: (click on chart images to enlarge)

As one can see, the Daily Growth Index is rapidly approaching the low of the 2008 reading; perhaps more importantly there seems to be no signs of abatement in its downward trajectory.  Also of great importance is the rift between its reading and that of Quarterly GDP.

The second chart is CMI’s Contraction Watch:

Here again, the readings are rather draconian, even when compared to the 2008 event.

Lastly, here is a chart from Doug Short’s blog of 8-22-10.  It shows CMI’s Growth Index vs. the S&P500 and GDP.  As one can see, if one believes in the efficacy of CMI’s Daily Growth Index both the S&P500 and GDP seem destined for rather sharp downward trajectories:

Of course, before one can draw solid conclusions from CMI’s data, one has to have a solid understanding of the methodologies used.  This is difficult with CMI’s data as it is proprietary, and as such, it is much akin to other “black box” mechanisms where computations aren’t disclosed.

As well, as CMI stated in their August 20 commentary, “Remember that our data only reflects consumer demand for discretionary durable goods.”

However, from an “all-things-considered” basis, it would appear as if CMI’s readings present the most negative forecasts among popularly published indicators.

As I stated in the July 27 post, “It should be very interesting to see how the CMI’s readings evolve as compared to actual economic activity…”

A Special Note concerning our economic situation is found here

SPX at 1071.69 as this post is written

Food Stamps As Of August 2010

This post is an update to a post of April 12 concerning food stamps.  The program is officially called “Supplemental Nutrition Assistance Program,” or SNAP.  As stated on the SNAP website, “As of Oct. 1, 2008, Supplemental Nutrition Assistance Program (SNAP) is the new name for the federal Food Stamp Program.”

The data was last updated August 3, 2010, reflecting May 2010 levels.

Here is a table showing various statistics with regard to National Level participation and costs going back to FY2007.  As seen in this table, the number of people participating as of May 2010 is 40,801,392, up 18.6% from year-ago levels.  As a reference point, the figure as of May 2007 was 26,409,288.

As I wrote in the April 12 post, “Of course, what is particularly disconcerting is not only the extent of participation in these programs, but the fact that this is yet another notable statistic that is getting worse well after the purported end of the recession.”

A Special Note concerning our economic situation is found here

SPX at 1066.48 as this post is written

Identifying The Housing Bubble

The Boston Federal Reserve recently came out with a report dated August 12 titled “Reasonable People Did Disagree:  Optimism and Pessimism About the U.S. Housing Market Before the Crash.” (pdf)

A sentence from the abstract is particularly interesting: “We conclude by arguing that economic theory provides little guidance as to what
should be the “correct” level of asset prices —including housing prices.”

My comments:

This is the latest effort from The Federal Reserve which questions whether asset bubbles,  in this case the Housing Bubble, can be accurately identified as they form.

While one may argue as to whether economic theory can accurately spot asset bubbles, there definitely is a chronic need to do so – as well as to take proper remedial action.  As I wrote in an April 8 post, “Our societal inability to spot and prevent asset bubbles is problematical.”  We simply can’t afford to go through numerous asset bubble booms and busts.   This issue is especially critical now given that there are numerous large asset bubbles currently in existence on a global basis.

A Special Note concerning our economic situation is found here

SPX at 1079.47 as this post is written

The Corporate Bond Bubble

On August 13 The Wall Street Journal had an article titled “J&J Sets a Yield Low.”

From the story: “The health-care products firm sold 10-year bonds with an interest rate of 2.95%, or a risk premium of 0.43 percentage point over comparable Treasurys.”

The story provides an overview of the strong market environment for both corporate and junk bonds.

My view is that the entire corporate bond market is in a bubble.  This bubble is related to the bubble in U.S. Treasuries which I have previously commented upon.

A Special Note concerning our economic situation is found here

SPX at 1092.54 as this post is written

S&P500 Stock Market Forecasts

The August 16-August 29 2010 Bloomberg BusinessWeek had an article on stock forecasts titled “The Market’s Economic Disconnect.”

Here is an excerpt:

“The fastest annual earnings increase in 22 years will push the S&P index up 20 percent in the last six months of 2010 to 1,242, according to the average projection of 12 firms compiled Aug. 3 by Bloomberg. Cash at S&P 500 companies has risen six straight quarters to $836.8 billion as executives have fired workers and reduced capital spending, according to S&P. Earnings at the same companies will increase 35 percent in 2010, the biggest annual gain since 1988, according to more than 8,000 analyst estimates compiled by Bloomberg.”

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

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A Special Note concerning our economic situation is found here

SPX at 1079.25 as this post is written

The August 2010 Wall Street Journal Economic Forecast Survey

I found a few items of interest in the August Wall Street Journal Economic Forecast Survey.

Perhaps the most interesting (and perhaps provocative item) was the following:

“”It is irresponsible nonsense to claim that tax cuts ‘pay for themselves,’ ” said Nicholas Perna of Perna Associates.”

As well, there a variety of interesting questions asked of the economists.  These questions are seen in the Q&A section of the detail.

The current average forecasts among economists polled include the following:

Ten-Year Treasury Yield:

for 12/31/2010: 3.22%

for 12/31/2011: 4.08%

CPI:

for 12/1/2010: 1.1%

for 12/1/2011: 1.8%

Unemployment Rate:

for 12/1/2010: 9.4%

for 12/1/2011: 8.6%

Crude Oil  ($ per bbl):

for 12/31/2010: $78.48

for 12/31/2011: $81.96

GDP:

full-year 2010 : 2.9%

full-year 2011 : 2.9%

As compared to last month’s survey, there were some material changes.

(note: I comment upon this survey each month; commentary on past surveys can be found under the “Economic Forecasts” category)

_____

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with the many of the consensus estimates and much of the commentary in these forecast surveys.

_____

A Special Note concerning our economic situation is found here

SPX at 1079.25 as this post is written