Monthly Archives: June 2011

Financial Stocks – Notable Price Action

I think that the relatively poor “price action” of various financial stocks is notable.  It is one of many current indications that overall stock market health is not as strong as a casual glance at the major indices would indicate.

Below is a chart featuring the XLF (the financial ETF) on a daily basis since 2007.  As well, the S&P500 is plotted above it, with GS and JPM shown below it.  The blue line on each indicates the 200dma:

(click on chart image to enlarge)(chart courtesy of


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1296.67 as this post is written

Analyst And Strategist S&P500 Earnings Estimates For 2011 & 2012

On June 27 The Wall Street Journal published an article titled “Stocks Fall.  Optimism Stands Tall.”

As seen in this article:

Analysts expect the S&P 500 companies to earn $99.86 a share in aggregate this year, up 2.3% from their April 1 estimate, according to FactSet. Strategists expect $95.24, according to John Butters, senior earnings analyst at FactSet. The median gap between the two groups is now 5.6%, the biggest disparity in at least three years, he says.

For 2012, the divergence is even wider: $112 a share for analysts, compared with $105 for strategists.

Yesterday a Bloomberg article concerning S&P500 sales and profits also indicated that 2011 earnings are forecast in the $99/share range, as seen in this excerpt:

Revenue gains may push S&P 500 profits to $99.08 a share this year, up 17 percent from 2010, after rising 37 percent a year earlier, the biggest two-year expansion since 1995, analyst estimates compiled by Bloomberg show.


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.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1280.10 as this post is written

Updates On Economic Indicators June 2011

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 June Chicago Fed National Activity Index (CFNAI)(pdf) updated as of June 23, 2011:

The Consumer Metrics Institute Contraction Watch:

The USA TODAY/IHS Global Insight Economic Outlook Index:

An excerpt from the June 22 Press Release, titled “Index forecasts stronger growth this fall” :

The June update of the USA TODAY/IHS Global Insight Economic Outlook Index shows real GDP growth, at a six-month annualized growth rate, remaining below 3% through the summer and then gaining strength in October and November with 3.3%-3.4% growth rates. Temporary automotive supply disruptions resulting from the Japan earthquake plus high energy and food prices are the main reasons for the slowdown. A return to stronger growth is expected in the fall as automotive supply levels return to normal, businesses increase equipment spending, export growth remains strong and employment slowly improves. The weak housing market and concerns about European debt remain drags on the recovery.

The ECRI WLI (Weekly Leading Index):

As of 6/17/11 the WLI was at 127.0 and the WLI, Gr. was at 2.9%.  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 May 31 was at 46.7, as seen below:

An excerpt from the May 31 Press release:

The depiction of the economy in U.S. newspapers continued to be more negative than positive in May, lengthening a long-term trend held since November 2007. In May, the Dow Jones Economic Sentiment Indicator hit 46.6, unchanged since April and more than 3 points away from the positive side of the 100-point scale.

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

Here is the latest chart, depicting 6-18-09 to 6-18-11:

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

As per the June 17 release, the LEI was at 114.7 and the CEI was at 102.9 in May.

An excerpt from the June 17 Press Release:

Says Ataman Ozyildirim, economist at The Conference Board: “The U.S. LEI rebounded in May and resumed its upward trend with a majority of the components supporting this gain. The Coincident Economic Index, a monthly measure of current economic conditions, continued to increase slowly but steadily. Overall, despite short-term volatility, the composite indexes still point to expanding economic activity in the coming months.”

Says Ken Goldstein, economist at The Conference Board: “Modest economic growth is being buffeted by some strong headwinds, including high gas and food prices and a soft housing market. The economy will likely continue to grow through the summer and fall, however it will be choppy.”


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.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1268.45 as this post is written

Ben Bernanke’s June 22 Press Conference – Notable Aspects

On Wednesday June 22 Ben Bernanke gave his scheduled Press Conference.  Overall, I found his remarks less notable than that of his April 27 Press Conference, which I commented upon in the April 28 post titled “Ben Bernanke’s April 27 Press Conference – My Comments.”

Here are Ben Bernanke’s comments I found most notable, although I don’t necessarily agree with them.  These comments are excerpted from the transcript (preliminary) (pdf), with Bernanke’s responses as indicated to the various questions:

from page 6:

Greg Ip: Mr. Chairman, the Committee lowered not just this year’s central tendency forecast but also 2012.  And, yet, the statement of the Committee attributes most of the revision forecast to temporary factors.  So I was wondering if you could explain what seems to be persisting in terms of holding the recovery back.  I did see the statement says in part to factors that are likely to be temporary.  Are there more permanent factors that are producing a worse outlook than three months ago?

Chairman Bernanke: Well, as you — as you point out, what we say is that the temporary factors are in part the reason for the slowdown.  In other words, part of the slowdown is temporary, and part of it may be longer lasting.  We do believe that growth is going to pick up going into 2012 but at a somewhat slower pace from — than we had anticipated in April.  We don’t have a precise read on why this slower pace of growth is persisting.  One way to think about it is that maybe some of the headwinds that have been concerning us like, you know, weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, some of these headwinds may be stronger and more persistent than we thought.  And I think it’s an appropriate balance to attribute the slowdown partly to these identifiable temporary factors but to acknowledge a possibility that some of the slowdown is due to factors which are longer lived and which will be still operative by next year.  You note that, in 2013, we have growth at about the same rate that we anticipated in April.

from page 6:

Bernanke, in response to a question about further easing, from Steve Liesman:

With respect to additional asset purchases, we haven’t taken any action, obviously, today.  We’ll be reviewing the outlook going forward.  It will be a Committee decision.  I think the point I would make, though, in terms of where we are today versus where we were, say, in August of last year when I began to talk about asset purchases is that at that time inflation was very low and falling.  Many objective indicators suggested that deflation was a nontrivial risk.  And I think that the securities purchases have been very successful in eliminating deflation risk.  I don’t think people appreciate necessarily that deflation can be a very pernicious situation where — could have very longlasting effects on economic growth.

In addition, growth in payrolls has actually picked up.  In the four months before the Jackson Hole speech in August, there was about an 80,000 per-month payroll increase.  So far in 2011, including the weak payroll report in May, the average is closer to 180,000.  So there has been improvement in the labor market, albeit not as strong as we would like.  As of last August, we were essentially missing significantly in both — on both sides of our mandate.  Inflation was too low and falling, and unemployment looked like it might be even beginning to rise again.  In that case, the case for monetary action was pretty clear in my mind.  I think we are in a different position today, certainly not where we’d like to be but closer to the dual mandate objectives than we were at that time.  So, again, the situation is different today than last August; but we’ll continue to monitor the economy and act as needed.

from page 20:

Bernanke’s response to a question about the timing of the growth rate of employment:

In terms of the unemployment rate, though, given that growth is not much above the long-run potential rate of growth — and we have in our projections an estimate of 2.5 to 2.8 percent.  We haven’t really done much better than that — it takes growth faster than potential to bring down unemployment.  And since we’re not getting that, we project unemployment to come down very painfully slowly.  At some point, if growth picks up as we anticipate, job numbers will start getting better.  We’re still some years away from full employment in the sense of 5 ½ percent, say; and that’s, of course, very frustrating because it means that many people will be out of work for a very extended time.  And that can have significant long-term consequences that concern me very much.

from page 21:

Akihiro Okada: Mr. Chairman, I am Akihiro Okada with Yomiuri Shimbun, a Japanese newspaper. During the Japanese lost decade in the 1990s, you strongly criticized Japan’s radical policies. Recently Barry Summers suggested in his column that the U.S. is in the middle of its own lost decade.  Based on those points with QE2 ending, what do you think of Japan’s experience and the reality facing the U.S.?  Are there any history lessons that we should be reminded about?  Thank you.

Chairman Bernanke: Well, I’m a little bit more sympathetic to central bankers now than I was ten years ago.  I think it’s very important to understand that in my comments, both in my comment in the published comment a decade ago as well as in my speech in 2002 about deflation, my main point was that a determined  central bank can always do something about deflation.  After all, inflation is a monetary phenomenon, a central bank can always create money, so on.  I also argued — and I think it’s well understood that deflation, persistent deflation can be a very debilitating factor in — in growth and employment in an economy.  So we acted on that advice here in the United States, as I just described, in August, September of last year.  We could infer from, say, TIPS prices and inflation index bond prices, that investors saw something on the order of one-third chance of outright deflation going forward.  So there was a significant risk there.  The securities purchases that we did were intended in part to end that risk of deflation.  And I think it’s widely agreed that we succeeded in ending that deflation risk.  I think also that our policies were constructive on the employment side.  This, I realize, is a bit more controversial.  But we did take actions as needed, even though we were to zero lower bound of interest rates, to address deflation. So that was the thrust of my remarks ten years ago.  And we’ve been consistent with that — with that approach.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1283.50 as this post is written

MacroMarkets June 2011 Home Price Expectations Survey

On June 22 MacroMarkets released its June 2011 Home Price Expectations Survey (pdf) results.  This Survey is now done on a quarterly basis.

The accompanying chart is seen below:

(click on chart image to enlarge)

As one can see from the above chart, the average expectation is that not only has the residential real estate market (nearly) hit a “bottom” as far as pricing; but that steady yet mild appreciation will occur through 2015.

The survey detail (pdf) is interesting.  Of the 100+ survey respondents, 18 (of the displayed responses) foresee a cumulative price decrease through 2015; and of those 18, only three, Gary Shilling, John Brynjolfsson, and Anthony Sanders foresee a double-digit percentage cumulative price drop.  Gary Shilling remains the most “bearish” of the survey participants with a forecast of a 19.68% cumulative price decline through 2015.

The Median Cumulative Home Price Appreciation for years 2011-2015 is seen as -3.10%, -2.22%, -.15%, 2.94%, and 6.72% respectively.

For a variety of reasons, I continue to believe that even the most “bearish” of these forecasts (as seen in Gary Shilling’s above-referenced forecast)  will prove too optimistic in hindsight.  Although a 19.68% decline is substantial, from a longer-term historical perspective such a decline is rather tame in light of the wild excesses that occurred over the “bubble” years.

I have written extensively about the residential real estate situation.  For a variety of reasons, it is exceedingly complex.  While many people continue to have an optimistic view regarding future residential real estate prices, in my opinion such a view is unsupported on an “all things considered” basis.  Furthermore, (even) from these price levels there exists outsized potential for a price decline of severe magnitude, unfortunately.  I discussed this downside, based upon historical price activity, in the October 24, 2010 post.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1292.89 as this post is written

McKinsey Economic Conditions Snapshot – Notable Aspects

Recently McKinsey released their “Economic Conditions Snapshot, June 2011”

As stated in the survey:

Over the past three months, executives around the world have grown more pessimistic about their nations’ economies: compared with three months ago, a smaller share say their economies improved over the past six months, and slightly more expect worsening conditions over the rest of 2011, according to our most recent survey.

The aspect that I found most interesting had to do with the North America executives’ responses to the question “How do you expect your country’s economy to be 6 months from now?”

Only 2% indicated “Substantially worse.”

Of the other four response categories, the majority indicated “Moderately better” (44%), or “The same” (35%); while 4% indicated “Substantially better.”  15% indicated “Moderately worse.”

I find these responses to be one more indication confirming that consensus expectations regarding future economic conditions are for that of low growth with (very) little chance of substantial economic weakness.


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.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1294.28 as this post is written

CEO & CFO Surveys 2Q 2011

On June 14 the Business Roundtable’s CEO Economic Outlook Survey was released for the 2nd quarter.  The June Duke/CFO Magazine Global Business Outlook Survey was released on June 8.  Both contain a variety of statistics regarding how executives view business and economic conditions.

In the CEO survey, of particular interest is the CEO Economic Outlook Index, which decreased to 109.9 from 113 in the 1st quarter.  Also stated in the report, “In terms of the overall U.S. economy, member CEOs estimate real GDP will grow by 2.8 percent in 2011, a slight decrease from the 2.9 percent projected in the first quarter of 2011.”

As well, ““Fully 87% of our CEOs anticipate higher sales,” said Ivan G. Seidenberg, Chairman of Business Roundtable and Chairman and CEO of Verizon Communications. “As a result, more than half of our CEOs plan to increase both capital spending and U.S. hiring.  This continues a positive trend for our companies’ activity heading into the second half of 2011.””

In the CFO Survey, “Optimism among chief financial officers in the U.S. has fallen, but spending plans indicate continued moderate growth over the next year.”

Also, with regard to hiring, “U.S. companies expect domestic employment to increase by 0.7 percent over the next year.This rate of growth is down from last quarter and implies that, over the next year, the U.S. economy will average fewer than 100,000 new jobs created each month.”

As well, “Nearly 10 percent of firms say they would like to hire, but cannot find employees with the right skills, and 16 percent say they would like to hire more but are resource constrained. Only twelve percent of firms say they are overstaffed for current demand.”

The CFO survey contains the Optimism Index chart, showing U.S. Optimism (with regard to the economy) at 57, as seen below:

It should be interesting to see how well the CEOs and CFOs predict business and economic conditions going forward.   I discussed various aspects of this, and the importance of these predictions, in the July 9 2010 post titled “The Business Environment”.

(past posts on CEO and CFO Surveys can be found under the “CFO and CEO Confidence” tag)


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.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1271.50 as this post is written

S&P500 Price Projections – Livingston Survey June 2011

The June 9, 2011  Livingston Survey (pdf) contains, among its various forecasts, a S&P500 forecast.  It shows the following price forecast for the dates shown:

June 30, 2011   1340

Dec. 30, 2011   1380

June 29, 2012  1413.5

Dec. 31, 2012    1463.5

These figures represent the median value across the 35 forecasters on the survey’s panel.


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.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1271.50 as this post is written

“The Reinhart & Rogoff Book” – General Comments

This Time Is Different (2009) by Carmen Reinhart and Kenneth Rogoff is a widely-quoted and referenced book.  Often it is referred to as “the Reinhart and Rogoff book.”

I find the book to be interesting and unique, although I don’t agree with some of its contents.  From an overall standpoint, perhaps the greatest misgiving I have with regard to the book is the (strong) implication that previous economic episodes are highly relevant to that of today.

With regard to our (putative) current post-financial crisis period, there are a few quotes in the book that are particularly relevant.  The first is found in Chapter 14, page 230, when it says “…the recessions surrounding financial crises are unusually long compared to normal recessions, which typically last less than a year.”  Another quote is seen in Chapter 14, page 235, “It is important to recognize that standard measures of the depth and duration of recessions are not particularly suitable for capturing the epic decline in output that often accompanies deep financial crises.  One factor is the depth of the decline, and another is that growth is sometimes quite modest in the aftermath as the financial system resets.”

I find that many have interpreted the above quotes (and similar findings of the book) with regard to our current economic situation in a rather disconcerting fashion.  Many have interpreted these findings to conclude that since this is the aftermath of a “financial crisis” recovery and growth will be tepid; as such, the lack of recovery / growth that we are now experience is nothing to be unduly concerned about as it is “normal” from a long-term historical standpoint.

I think this viewpoint is a very dangerous one to adopt because it certainly can lull one into a “false sense of security” or otherwise  can breed complacency.

I am of the belief, stated frequently in this blog, that our current economic situation is unique, i.e. not comparable to those in the past.  As such, I am not adopting the aforementioned “don’t be worried, this is normal” mindset as we continually witness various facets of economic weakness and notably odd manifestations of such.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1267.64 as this post is written

The S&P500 Since 2007

In the October 27, 2010 blog post (“Market Overview – Part V:  Stock Market”) I showed two charts of the S&P500.

As we are now approaching various important technical levels of the S&P500, I have updated one of the charts, as seen below:

chart courtesy of; annotations by the author

click on chart to enlarge

As one can see from the chart, one interpretation that can be made is that of a (completed) “Cup & Handle” chart formation as denoted by the green line.  I have added a red line to now denote the 1220 area.  I think it would be significant if the S&P500 falls below this 1220 level now, as the 1220 level is technically significant in many different ways.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1265.42 as this post is written