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Friday, January 20, 2006
Read between the lines
Federal Reserve Bank of San Francisco President Janet Yellen said inflation is in the ``upper
half'' of her preferred zone and there is a risk it may accelerate, according to Bloomberg.The remarks make Yellen the fourth member of the Fed's Open Market Committee, which decides the main U.S. interest rate,
to express concern this week about inflation threats.
What Housing Bubble?
Federal Reserve Chairman Alan Greenspan in a letter released yesterday sought to recast arguments
to cut Fannie Mae's (FNM) and Freddie Mac's
(FRE) investment portfolios as a way to refocus the government-chartered mortgage companies on their public housing mission,
the Wall Street Journal reported. Mr. Greenspan reiterated his previous concerns, and those held by the Bush administration, that Fannie's
and Freddie's vast mortgage holdings pose a threat to the U.S. financial system which "normal market forces are unable to
resolve." Mr. Greenspan's comments, expanded on the Fed's usual rationale for limiting the GSEs' assets and turned around
arguments from opponents who say cutting Fannie's and Freddie's portfolios will hurt their ability to finance affordable-housing
projects. "The purpose of this guidance," Mr. Greenspan said, "is not just to limit the GSEs' portfolios, but to firmly
anchor the GSEs to their public purpose. Strong portfolio guidance by Congress is needed because GSEs are an unusual government
intervention in private markets; such institutions lack the typical financial market discipline that is commonplace for other
publicly traded firms."
The Myth of the Great Corprate Cash Horde
Conventional wisdom is that corporations sitting on mounds of cash are poised to finally put some of it to work in 2006
as the consumer falters. But that may be mythology, the Wall Street Journal says. For one thing, businesses haven't really been all that cautious. Spending on equipment and software grew nearly
12% in 2004, the fastest since 1999, and grew at an average rate of nearly 10% in the first three quarters of 2005, according
to the Commerce Department. The corporate cash hill is hardly Mount Olympus, the newspaper said. In the third quarter,
U.S. nonfinancial businesses generated $178 billion more in internal funds than they spent in cap ex, on an annualized basis.
That is the biggest such surplus since the Fed started keeping track in 1952, but that number would have been just $45 billion
if not for last year's one-time repatriation of foreign earnings under a generous tax law that has since expired, says senior
Citigroup economist Steven Wieting
Thursday, January 19, 2006
Charts of interest . . .
Charts of Interest:
Bullish Percent for NYSE
(Chart courtesy Dorsey Wright)
Bullish Percent for S&P 500
(Chart courtesy Dorsey Wright)
Bullish Percent for Nasdaq-100 (NDX)
(Chart courtesy Dorsey Wright)
Bullish Percent for Dow Jones Industrial Average
(Chart courtesy Dorsey Wright)
New Housing Chart
I see a nice solid double top/head and shoulders formation possibly in process here.
Let's watch the numbers as today's housing numbers show another solid decline and further than the "experts" expected.
Brokeback Dollar
Observe the evidence on display within this morning's news, supporting our main-macro-theme as relates to the tsunami of
excess USD liquidity, flooding the globe:
- Colombia sold Inflation-Linked TES this morning, with the 5-Year paper placed at a price to yield just 2.18% … ten basis
points below the W/I price, and a decline of (-) 32 bp from the previous sale conducted in November.
- Colombia sold 10-Year Inflation-Linked TES paper at a price to yield 2.99%, a decline of more than (-) 50 bp from November,
for a ‘curve’ spread over the 5-Year paper of just +80 bp … flattening from nearly +100 bp in November.
Indeed,Colombia, once considered the ‘drug-cartel-capital’ of the world, is selling debt at SKY HIGH prices, carrying razor
thin yields … and backed by one of the strongest currencies in the world. Yes, the Colombian Peso, COP, has
been among the world’s strongest currencies over the last 6-12 months … strong enough to draw a ‘cover’ in excess of 3:1 at
this morning’s auction of COP-denominated debt.
GEE, no wonder Gold in COP made a new all-time high
on Monday, at ‘only’ 1,279,179 pesos per ounce !!!
We don't need no stinkin' wages . . .
How does the consumer keep up with the inflation in housing, energy, healthcare, education,
etc?
First up: Bloomberg:
"American workers have rarely taken home a smaller share of the nation's prosperity, a condition that is undermining bipartisan
support for free trade and creating friction between President George W. Bush's administration and the Federal Reserve.
After 16 consecutive quarters of economic growth, pay is rising at a slower rate than in any similar expansion since
the end of World War II. Companies are paying less of their cash gains in the form of wages and salaries than at
any time since the Great Depression, according to government figures . . .
"There is no doubt that something is happening'' to reduce labor's share of income, says Robert Solow, a Nobel Prize-winning
economist and professor emeritus at Massachusetts Institute of Technology in Cambridge. An economy that doesn't distribute
its gains widely is "poorly performing,'' he says.
From the final quarter of 2001 through last year's third quarter, total compensation paid to employees by corporations,
including health benefits, rose at a 4.3 percent average annual rate, according to government figures. That's the slowest
growth for any similar period in post-war expansions lasting at least four years.
'Not Connecting'
Stripping away benefits, corporate wages and salaries rose at a 3.4 percent annual rate in the 16-quarter period, the
slowest of any post-war expansion lasting that long. Wages and salaries as a share of the cash corporations are generating
from the expansion stood at 51 percent in the second and third quarters, the lowest in government records going back to 1929.
Including benefits, labor's share was the lowest since 1997. (emphasis added)
Beige Book
The nation's economy continued to expand at a moderate pace in most regions in the past six
weeks while consumer prices were said to be rising only moderately, the Federal Reserve reported yesterday in its Beige Book
report.
The latest Beige Book summary by region, from Thomson Financial:
- Boston: Business activity continued to expand, although it wasn't generally translating into job gains. Businesses expect
"more of the same" growth in 2006.
- New York: The economy continued to expand at a moderate pace, although there were some signs of softness in housing.
- Philadelphia: The economy expanded moderately. Businesses expect shipments and new orders to expand at the current pace
in 2006.
- Cleveland: Business conditions remained reasonably strong, but business spending outpaced consumer spending, which was
weaker than hoped for in the holiday season.
- Richmond: The economy continued to expand at a solid pace, despite somewhat slower growth in manufacturing and housing.
- Atlanta: Economic activity continued to expand at a solid pace. Retail sales were positive. Housing moderated while manufacturing
expanded.
- Chicago: Economic activity continued to expand at a moderate pace. Employment expanded further. Residential construction
tapered off.
- St. Louis: The economy expanded modestly. Manufacturing was mixed. Home sales increased.
- Minneapolis: The economy grew moderately. Consumer spending, manufacturing and commercial real estate expanded. Residential
real estate softened.
- Kansas City: The economy expanded moderately. Consumer spending and manufacturing activity rose at a solid pace. Labor
markets firmed further.
- Dallas: Economic activity accelerated. Energy activity strengthened as the cleanup from recent storms continued. Manufacturing
picked up. Real-estate markets improved gradually.
- San Francisco: The economy continued to expand at a solid pace. Price inflation was modest overall. Retail sales expanded.
Manufacturers saw strong demand.
Wednesday, January 18, 2006
More Trading
Citigroup (C) plans to launch its own electronic stock-trading network, a
move that could siphon some trading volume from the New York Stock Exchange and Nasdaq Stock Market, the Wall Street Journal reported. The venture, expected to be rolled out this spring, follows Citigroup's acquisition last week of OnTrade
Inc., an electronic communications network, also known as an ECN. The trading launch by one of the world's largest
banks underscores how big brokerage firms are trying to protect themselves from the possibility that stock exchanges will
raise the cost of trading after becoming publicly held companies, the newspaper said.
Bullish Sentiment on the Rise
The weekly Investor's Intelligence survey shows an increase in bullish sentiment to 57.3%
from 56.8% and a slight increase in bearish sentiment to 22.9% from 22.1%.
More from Uncle Warren
The U.S. trade deficit is a bigger threat to the domestic economy than either the federal
budget deficit or consumer debt and could lead to "political turmoil," billionaire investor Warren Buffett warned, the Seattle Post-Intelligencer reported. "Right now, the rest of the world owns $3 trillion more of us than we own of them," Buffett told business
students and faculty Tuesday at the University of Nevada, Reno. "In my view, it will create political turmoil at some point.
... Pretty soon, I think there will be a big adjustment," he said without elaborating.
CPI
Consumer price index m/m for Dec came in at (0.1%) vs 0.2% exp; CPI
ex-food & energy m/m came in at 0.2% vs 0.2% exp.
Consumer price index y/y for Dec came in at 3.4% vs 3.6% exp; CPI ex-food & energy y/y
came in at 2.2% vs 2.2% exp.
Consumer price index NSA for Dec came in at 196.8 vs 197.2 exp.
Ownership of US Debt
Right now the "ownership" by other countries of the U.S. that Mr. Buffet is talking about
due to the trade deficit is in the form of debt.
This is why most are not concerned. But most do not understand that debt is ownership: debt holders have a higher lien
on the assets of a company than do stock holders, who primarily own income.
It works a little differently when we are talking about sovereign nations. I described the process in which this trade
deficit and the process of globalization will be resolved.
Soon, and we have already seen some attempt, foreign lenders will want to recycle their dollars into ownership of assets
and companies, tiring of buying low interest debt. The only thing that has stalled this process is the fact that most of the
capital inflows are coming from central banks and so far any attempt by foreign corporations of China to buy U.S. companies
has been thwarted by Congress.
I can only wonder why most are not concerned by this.
Unemployment
| UK unemployment climbs to highest in two years -- FT |
| The unemployment rate in the UK has breached 5 per cent, its highest in two years,
while the growth in average earnings and bonuses fell again, according to official figures published on Wednesday. Lengthening
dole queues, coupled with this week's soft factory gate and consumer prices data, increases the chances that the next move
in interest will be down. Attention at the Bank of England will now turn to the outcome of this month's wage negotiations
to see if there is any evidence of a change in the trend for muted pay growth. |
Mortgage Apps
| Mortgage Applications |
| The weekly MBA mortgage applications index rose 2.2% last week, with purchasing applications
falling -3.0%, and refinancing up another 9.9%. The fixed 30-yr mortgage rate fell 1 basis point to 6.07% while the 15-yr
dropped 2 bps to 5.64%. The 1-yr adjustable rate mortgage rate lowered to 5.39%. |
Tuesday, January 17, 2006
The Weekend Newsletter Contribution
Hedging Your Bets With Matt Davio:
Moving, Moving, Moving.
|
It
seems that Ben "Helicopter Drop" Bernanke is getting a jump-start on expectations that he will be an 'easy money' Federal
Reserve Chairman. The Fed undertook the largest one day open market operations since the week of September 11th, 2001
during this past Wednesday. This massive stimulus followed a heavy week of liquidity injections during the final week
of 2005.
This
massive liquidity injection partially explains the run-away stock and gold markets of the first two weeks of 2006. And
it also explains the rapidly weakening dollar...
But
while the liquidity injections in September 2001 made sense, the only 'crisis' that I can see occurring right now is the retirement
of Chairman Greenspan. Could the Federal Reserve be so insecure about incoming Chairman Bernake that they risk destabilizing
the financial markets with huge and unnecessary liquidity injections? Does outgoing Chairman Greenspan think so highly
of himself that he believes no one else is up to the job of without an added boost of adrenaline? Or is the economy
not growing fast enough for the embattled Republican administration that they feel an extra boost is need for their popularity
polls?
Whatever
the reason, it's a highly disturbing event because it implies a much more aggressive management of the financial markets by
the Central Bank. And that's a dangerous precedent because in the near term the additional liquidity is highly stimulative.
But the effects are similar to the experiences of a habitual drug user. The Fed will have to inject more and more liquidity
to stimulate the markets which will eventually lead to complete collapse.
Now, let’s shift gears at bit and look at a couple of really interesting
charts” The first chart just gives you an overview of the great bubbles
of the last 50 years – from gold and the Nikkei to the Nasdaq and maybe, just maybe, the housing market.
This second chart is from
a highly recommended web site called Calculated Risk. The chart notes that Mortgage Equity Withdrawal (MEW), was $171 Billion in
the third quarter of 2005 out of total household mortgage increases of $289.5 Billion dollars. Goldman Sach's further estimates
that fully 2/3rds of mortgage equity withdrawals are flowing through to personal consumption by homeowners who have turned
their castles into ATM machines.. Using their numbers, one can estimate the impact of Mortgage Equity Withdrawal on GDP:
From the chart, you
can see that without the stimulus of mortgage withdrawal spending, the U.S. GDP would have been negative and recessionary
in 2001 and 2002 and, perhaps more importantly, 1% or less over the last three years.
It thus should be readily apparent from the graph how crucial MEW has been to GDP spending. If MEW falls significantly,
it will be a major drag on GDP: Expect personal consumption to slow, impacting retail.
|
TriFecta
INTC< YHOO< and IBM all smoked after hours, Nasdaq futures are down about 2% after hours, it will be interesting
to see how much absorption buying happens tomorrow am. If the Bulls can't get em going tomorrow, the short side may be the
place to be after this reflation rally fizzle.
See you on the other side.
Softness but for Real Estate indeed!
Consider this EPI chart: 
Where are the quality Jobs and Rising Personal Income oustide of construction?
Deflation/Inflation
As housing cools, Building costs rise . . .
Reds
In 2001 there were riots in Cincinnati resulting from police actions.
As a result, the city of Cincinnati made 70 "emergency" low-interest loans to businesses.
The Cincinnati newspaper reported this morning that so far 50% of those loans have defaulted.
This is a microcosm of what the Federal Reserve has done: use public money (debasing the currency) and increasing debt
in order to support inefficient business so as to avoid economic recession.
This only delays and exacerbates, it over-rides capitalism into the slippery slope of socialism.
Monday, January 16, 2006
This chart shows that the total money supply grew by an annualized rate of +9.5 pct for the quarter-ended
Jan-02-06 compared to the quarter-ended Oct-03-05. For all of 2005 compared to 2004, the money supply grew by +7.8 pct. The
U.S. economy, measured by GDP, grew by half that. The Administration and the Fed are being more than accommodative to economic
needs. They are also paying for a foreign war and for meeting the other special (one-time) costs, such as hurricane recovery
and reconstruction.
With the economy slowing in the U.S., the monetary authorities are in a tight bind here. The Treasury yield differential
on the 10-year and 3-month paper is now just 22 basis points, and there is no differential whatsoever on 10-year to 2-year
paper. That means that presently there is for bankers no economic return from new loans.
That is a situation not unlike the typical U.S. consumer who presently cannot spend on an economic basis, i.e., from income.
Consumers today are dipping into savings or they are borrowing against assets.
Both situations can continue for a while, but not for long without a recession.
So the Fed can either stop raising, which would make the yield curve positive, alleviating very difficult operating conditions
for banks, but shooting gold up and the USD down, which surely is an indicator that inflation is returning, or they can raise
more, which protects the USD but hurts exports, hurts the housing market, and probably for sure sends the economy into the
tank.
I think the important meeting in mid-September by the leaders of all the largest U.S. banks held at the N.Y. Fed office
resolved matters in a way that the market has now made apparent, which is reflation. At the time, as you may recall, I said
that it was crucial for Congress to demand minutes of that meeting.
Herein lies the core of the problem with U.S. “democracy,” which is that transparency is a concept preached but not practised
by its leaders. And that’s the reason -- fundamentally – why these wealthy and connected people pay multi millions to earn
a job that pays a few hundred thousands.
If transparency was in fact the policy of the Fed and the Administration, you and I would know what was discussed and agreed
to at the September summit among bankers and we’d be much better able to protect our personal wealth.
Instead we are led into the practice of having to listen to talking heads that have received the “new” policy second, third,
fourth and fifth hand from the leaders of America’s largest bankers. I think this is wrong, but it is a fact we independent
traders have to deal with.
Latest Fed release on M3
H.6 (508)
Table 2
MONEY STOCK MEASURES
Percent change at seasonally adjusted annual rates
---------------------------------------------------------------------------------------------------------
M1 M2 M3
---------------------------------------------------------------------------------------------------------
3 Months from Sep. 2005 TO Dec. 2005 2.6 6.3 8.6
6 Months from June 2005 TO Dec. 2005 -0.3 5.4 9.1
12 Months from Dec. 2004 TO Dec. 2005 -0.1 4.1 7.8
Thirteen weeks ending
January 2, 2006
from thirteen weeks ending:
Oct. 3, 2005 (13 weeks previous) 2.0 6.1 9.5
July 4, 2005 (26 weeks previous) 0.1 5.1 9.0
Jan. 3, 2005 (52 weeks previous) 0.0 4.0 7.5
---------------------------------------------------------------------------------------------------------
Patent Pending
Top 10 Private Sector Patent Recipients for the 2005 Calendar Year.
|
Preliminary Rank in 2005 |
Preliminary # Patents in 2005 |
Organization |
(Final Rank
in 2004) |
(Final Number of Patents in 2004) |
|
1 |
2,941 |
International Business Machines Corporation |
(1) |
(3,248) |
|
2 |
1,828 |
Canon Kabushiki Kaisha |
(3) |
(1,805) |
|
3 |
1,797 * |
Hewlett-Packard Development Company, L.P. * |
(4) |
(1,775) |
|
4 |
1,688 |
Matsushita Electric Industrial Co., Ltd. |
(2) |
(1,934) |
|
5 |
1,641 |
Samsung Electronics Co., Ltd. |
(6) |
(1,604) |
|
6 |
1,561 |
Micron Technology, Inc |
(5) |
(1,601) |
|
7 |
1,549 |
Intel Corporation |
(7) |
(1,513) |
|
8 |
1,271 |
Hitachi, Ltd |
(8) |
(1,893) |
|
9 |
1,258 |
Toshiba Corporation |
(9) |
(1,311) |
|
10 |
1,154 |
Fujitsu Limited |
(11) |
(1,296) |
|
|
|
|
|
* Calendar year counts for 2005 for Hewlett-Packard Development Company, include seven patents issued to Hewlett-Packard
Company.
Sunday, January 15, 2006
Economic Events for Jan 16-21
| Week of January 16 - January 21 |
| Date |
ET |
Release |
For |
Actual |
Briefing.com |
Consensus |
Prior |
Revised From |
| Jan 17 |
08:30 |
NY Empire State Index |
Jan |
|
22.0 |
22.0 |
28.7 |
|
| Jan 17 |
09:15 |
Industrial Production |
Dec |
|
0.7% |
0.6% |
0.7% |
|
| Jan 17 |
09:15 |
Capacity Utilization |
Dec |
|
80.7% |
80.5% |
80.2% |
|
| Jan 18 |
08:30 |
CPI |
Dec |
|
0.2% |
0.2% |
-0.6% |
|
| Jan 18 |
08:30 |
Core CPI |
Dec |
|
0.2% |
0.2% |
0.2% |
|
| Jan 18 |
09:00 |
Net Foreign Purchases |
Nov |
|
NA |
NA |
$106.8B |
|
| Jan 18 |
10:30 |
Crude Inventories |
01/13 |
|
NA |
NA |
-2887K |
|
| Jan 18 |
14:00 |
Fed's Beige Book |
|
|
|
|
|
|
| Jan 19 |
08:30 |
Initial Claims |
01/14 |
|
320K |
NA |
309K |
|
| Jan 19 |
08:30 |
Housing Starts |
Dec |
|
2080K |
2050K |
2123K |
|
| Jan 19 |
08:30 |
Building Permits |
Dec |
|
2100K |
2100K |
2163K |
|
| Jan 19 |
12:00 |
Philadelphia Fed |
Jan |
|
14.0 |
13.4 |
12.6 |
|
| Jan 20 |
09:50 |
Mich Sentiment-Prel. |
Jan |
|
92.0 |
93.0 |
91.5 |
|
Weekly Newsletter Contribution
-- January 16, 2006
Hedging Your Bets With
Matt Davio: Moving, Moving, Moving.
|
It
seems that Ben "Helicopter Drop" Bernanke is getting a jump-start on expectations that he will be an 'easy money' Federal
Reserve Chairman. The Fed undertook the largest one day open market operations since the week of September 11th, 2001
during this past Wednesday. This massive stimulus followed a heavy week of liquidity injections during the final week
of 2005.
This
massive liquidity injection partially explains the run-away stock and gold markets of the first two weeks of 2006. And
it also explains the rapidly weakening dollar...
But
while the liquidity injections in September 2001 made sense, the only 'crisis' that I can see occurring right now is the retirement
of Chairman Greenspan. Could the Federal Reserve be so insecure about incoming Chairman Bernake that they risk destabilizing
the financial markets with huge and unnecessary liquidity injections? Does outgoing Chairman Greenspan think so highly
of himself that he believes no one else is up to the job of without an added boost of adrenaline? Or is the economy
not growing fast enough for the embattled Republican administration that they feel an extra boost is need for their popularity
polls?
Whatever
the reason, it's a highly disturbing event because it implies a much more aggressive management of the financial markets by
the Central Bank. And that's a dangerous precedent because in the near term the additional liquidity is highly stimulative.
But the effects are similar to the experiences of a habitual drug user. The Fed will have to inject more and more liquidity
to stimulate the markets which will eventually lead to complete collapse.
Now,
let’s shift gears at bit and look at a couple of really interesting charts” The
first chart just gives you an overview of the great bubbles of the last 50 years – from gold and the Nikkei to the Nasdaq
and maybe, just maybe, the housing market.
>
This second
chart is from a highly recommended web site called Calculated Risk. The chart notes that Mortgage Equity Withdrawal (MEW),
was $171 Billion in the third quarter of 2005 out of total household mortgage increases of $289.5 Billion dollars. Goldman
Sach's further estimates that fully 2/3rds of mortgage equity withdrawals are flowing through to personal consumption by homeowners
who have turned their castles into ATM machines.. Using their numbers, one can estimate the impact of Mortgage Equity Withdrawal
on GDP:
From
the chart, you can see that without the stimulus of mortgage withdrawal spending, the U.S. GDP would have been negative and
recessionary in 2001 and 2002 and, perhaps more importantly, 1% or less over the last three years. It thus should be readily apparent from the graph how crucial MEW has been to GDP spending. If MEW falls
significantly, it will be a major drag on GDP: Expect personal consumption to slow, impacting retail.
|
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DISCLAIMER:
This newsletter is written for educational purposes only. By no means do any
of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors
express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.
|
 |
|
Link to my three courses in the Modern Scholar Series sponsored by Recorded Books. Courses include two on investing and one
on China.
| PLATINUM STANDARD |
|
| TRADING EDUCATION |
|
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DISCLAIMER: The newsletters
and blogging on this page are written for educational purposes only. By no means
do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk.
The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in
this newsletter. Future results can be dramatically different from the opinions
expressed herein. Past performance does not guarantee future performance.
|
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