Looks to me like maybe the payback has run its course.
I’d look for a rebound through the orange line I drew.

The only problem is there aren’t a lot of actual houses for sale.
So a pick up in housing starts can’t be far off either as they are very low given 1-3% GDP growth supported mainly by income helped by the govt deficit spending, lower home prices, and reasonable mortgage rates?

And yes, the surviving companies are those that have figured out how to make money in this environment, and most have massive operating leverage should GDP pick up to more normal recovery levels.

Still looks to me like over the next few years the big money will be lost by being out of stocks given where it seems we are in this cycle.

Unless Congress gets serious about near term deficit reduction. So far it’s pretty much all talk, but who knows!

On Wed, Aug 25, 2010 at 10:48 AM, wrote:

The payback from the expiry of the government’s tax program has been horrific. As can be seen from the chart, new home sales are at multi-decade lows. Existing sales yesterday were alarmingly poor. Despite this news, homebuilders are doing better, no doubt helped by Toll Brothers’ earnings today which were significantly better than expected.

>   
>   (email exchange)
>   
>   On Tue, Aug 24, 2010 at 8:32 AM, Seth wrote:
>   
>   stocks look bad
>   looks like another panic
>   

It doesn’t look good technically.

Must be coming out of europe with gold up/euro down dynamic, etc.

Insiders there must be bailing.

Maybe they know something we don’t, or maybe they are wrong.

History is no help as in the past it’s been both.

Austerity is trimming growth there a bit around the edges, but deficits remain reasonably high, so GDP’s are probably at least muddling through, with overall growth probably positive.

The ECB keeps the short term funding channels open for the member nations, but that may not be fully appreciated yet.

On a mark to market basis bank capital is probably below requirements, and they may not realize that doesn’t have to matter to the real economy for as long as the ECB continues to fund them.

Lower crude oil prices support consumption of other things. With US crude oil product consumption up and Saudi output rising, demand must be ok. Maybe Saudis are worried and want lower prices to help world growth as well. Hard to ever say what they are actually up to. They may see the Iraqi production coming on stream and are trying to engineer an increase in demand. Again, no way to tell what they are up to.

The lower 10 year rates reflects expectations of ‘low for longer’ from the Fed due to high unemployment and falling rates of inflation as measured by the Fed. And the possibility of more QE that could flatten the curve further.

There is also the notion that there’s nothing left that the Fed can do of any consequence regarding aggregate demand, and Congress thinks it’s run out of money, which means flying without a net. That increases the weight of the downside in the balance of risks.

If markets and Congress knew that fiscal policy had no nominal limit and deficit spending was not dependent on being able to borrow from the likes of China to be paid by our grandchildren, the balance of risks would be viewed very differently. But they don’t know that.

With the elections coming and California reverting to vouchers again, the time is right for my per capita revenue sharing. But it’s not even a consideration.

Q3 and Q4 GDP estimates are looking more like 1.5%, and Q2 looks to be revised down toward 1% Friday. Not a double dip but no drop in unemployment either as productivity might be at least that high. That’s worse politically than it is for equities, and adds support for a ’second stimulus’ type of reaction. But that’s way down the road. More likely it causes most of the expiring tax cuts to be extended.

Thursday’s claims can make a big difference as well. The jump to 500,000 last week added an element of fear internationally.

Also, in thin summer markets technicals often cause exaggerated moves. Volume is very low, and a given size buying or selling causes larger moves to find someone willing to take the other side, and momentum type traders can easily overwhelm investors.

Caterpillar CEO says no double-dip recession

August 19 (AP) — Global equipment sales increased 32 percent. And engine and turbine sales were up 5 percent overall. “There seems to be a doom and gloom out there in the punditry,”CEO Doug Oberhelman said. “We’re not seeing that.” Caterpillar said equipment sales in the Asia Pacific region surged 41 percent in July, and North American sales improved 38 percent over last year. The smallest increase came in Europe, Africa and the Middle East where sales still increased 19 percent. CFO Ed Rapp says 2010 has been a year of recovery since the economy bottomed out in August or September, with the developing world leading the way in growth. Rapp said that in past double-dip recessions, the first recession is usually a weak one and the central banks usually typically act prematurely to raise interest rates and scale back stimulus efforts. He said neither one of those applies to the current recession.

Karim writes:

New Purchase index down a tad but remains reasonably flat after correcting when the home buying credit expired.

Yesterday, Minny Fed President Kocherlakota talked about last week’s FOMC:

“The FOMC’s decision has had a larger impact on financial markets than I would have anticipated. My own interpretation is that the FOMC action led investors to believe that the economic situation in the United States was worse than they, the investors, had imagined. In my view, this reaction is unwarranted. I would say that there is no new information about the current state of the economy to be learned from the FOMC’s actions or its statement.”

Agreed. Q2 earnings good with Q2 gdp probably around 1%. Q3 GDP estimates still around 2.5% should be good further support earnings.

Modest growth not enough to bring down unemployment for a while, good for stocks however.

This was my interpretation but nice to hear an FOMC member say so.

And this from page 1 of today’s FT:

Call centre workers are becoming as cheap to hire in the US as they are in India, according to the head of the country’s largest business process outsourcing company.

Link

All above reasonably positive news…..

Yes, for stocks.
But not if you are a call center worker, or anyone else looking for a job…

Negative headline for a slight miss, and 3.8% top line growth and double digit earnings growth year over year.

And that is in Q2 where GDP growth was probably only 1% or so, and still looking a bit higher for Q3, supported by ongoing 8%+ federal budget deficits.

Not a good economy for sure, as shockingly high unemployment continues and the federal govt does nothing to further support aggregate demand, because they all believe the myth that the federal govt has run out of money and in order to spend have to borrow from the likes of China and leave the debts for our children to pay back.

Lowe’s results miss estimates

August 16th (Reuters) — Home improvement chain Lowe’s Cos missed quarterly profit and sales estimates as benefits from the homebuyer tax credit and cash for appliances programs waned.

Net income rose to $832 million, or 58 cents a share, in the second quarter ended July 30 from $759 million, or 51 cents a share, a year earlier.

Analysts on average were expecting 59 cents a share, according to Thomson Reuters I/B/E/S.

Sales rose 3.8 percent to $14.36 billion, but missed the average estimate of $14.52 billion.

Link:

Valance Chart Review (PDF)

Karim writes:

Yes, which means it remains a good market for stocks.

High unemployment is good for cost control and helps keep the Fed on hold. And 0 rates remain a deflationary influence as well.

Top line growth is modestly positive growing by productivity increases plus some hours and employment gains.

Earnings trend remains positive with productivity gains, some top line growth, and a loose labor market.

All supported by a federal deficit that still exceeds 8% of gdp.

Tough political environment with most of the real wealth going to the top as unemployment remains near the highs.

I tend to agree with Karim and Fed Chairman Bernanke.
Modestly improving GDP growth with unemployment coming down very gradually until a consumer credit expansion takes hold.

Good for stocks, not so good for most of the people still struggling to survive, as the Obama administration continues to preside over what might be the largest transfer of wealth from bottom to top in the history of the world.

And no credible energy policy. We are completely at the mercy of the Saudis who can unilaterally hike prices any time they feel like it.

Karim writes:

• “Business in July was strong, the best month since October 2008.” (Fabricated Metal Products)
• “Slow economy has killed sales for new equipment orders.” (Machinery)
• “Quoting activity and sales are slow, and backlog is dropping.” (Computer & Electronic Products)
• “Business continues to be sluggish and has fallen slightly as the economic ills continue.” (Nonmetallic Mineral Products)
• “Retailers are still unwilling to gamble on inventory.” (Printing & Related Support Activities)

Bernanke

While the support to economic activity from stimulative fiscal policies and firms’ restocking of their inventories will diminish over time, rising demand from households and businesses should help sustain growth. In particular, in the household sector, growth in real consumer spending seems likely to pick up in coming quarters from its recent modest pace, supported by gains in income and improving credit conditions. In the business sector, investment in equipment and software has been increasing rapidly, in part as a result of the deferral of capital outlays during the downturn and the need of many businesses to replace aging equipment. At the same time, rising U.S. exports, reflecting the expansion of the global economy and the recovery of world trade, have helped foster growth in the U.S. manufacturing sector.

To be sure, notable restraints on the recovery persist. The housing market has remained weak, with the overhang of vacant or foreclosed houses weighing on home prices and new construction. Similarly, poor economic fundamentals and tight credit are holding back investment in nonresidential structures, such as office buildings, hotels, and shopping malls.

Yes, I think we have a nice L shaped economy with modest GDP growth and modestly improving employment, so far mostly evidenced by the increased hours worked that you’ve been pointing out. Acceleration happens when/if some aspect of private sector credit growth takes off.

If euro solvency risks are indeed fading, it should be back to an ok market for stocks (which could have a large one time shift upwards to reflect the reduced euro risk), and low rates from the Fed until something changes.

Like Japan, the budget deficit may be large enough to keep it all from collapsing but not enough for the kind of growth that would trigger higher rates from the Fed.

Karim writes:

Data off recent peaks but still firmly in expansion territory:
Anecdotes mixed:

• “Component lead times are increasing sharply.” (Computer & Electronic Products)
• “Market had begun to change, but it is now declining again.” (Wood Products)
• “BP oil spill will impact business conditions over the next few months.” (Fabricated Metal Products)
• “The economy continues to be sluggish, with orders 8 percent to 10 percent below last year.” (Nonmetallic Mineral Products)
• “Retail sales are strong for both the domestic and international markets.” (Food, Beverage & Tobacco Products)

Q2 ended

ECB rolled it all over

Greece weathered the quarter end storm without going parabolic as in previous spikes, as ECB buying continues to provide the secondary market liquidity that enables dealers to buy the auctions.

Euro back up towards 1.24

This would be the time for equity markets to bottom and start discounting fading solvency risk

Might get a temporary pull back on tomorrow’s employment report but seems a weak economy is already fully discounted by US equities, probably also well beyond the actual weakness.

Very good, looks like continuing muddling through with moderate growth unemployment drifting lower in a few months when there are no more hours to add to the existing labor force.

Welcome to Japan, Mr. US bond market?

Ok market for stocks, especially with Euro zone risk fading. Just China h2 risk left, seems.

Karim writes:

Not saying inflation is picking up, just that deflation fears seem overblown.

govt deficits = ‘non govt’ savings:

The recovery in wealth last year was a result of resurgent financial markets and increased savings, the report said. The Standard & Poor’s 500 Index rose 20 percent in 2009 and the U.S. savings rate averaged 4.2 percent compared with 2.6 percent a year earlier.

>   
>   (email exchange)
>   
>   On Fri, Jun 11, 2010 at 3:57 AM, wrote:
>   
>   What’s interesting about this to me is Slovakia. The Capital, Bratislava,
>   is 45 minutes from Vienna by car, and they’re third on the list! Ever
>   hear bad things about Slovakia? FLAT TAX of 19 percent for several years
>   now and more and more industry growing there. Great restaurants, clubs,
>   and more so quality of life has greatly increased. Magna has several
>   facilities there as do VW etc etc.
>   

Yes, it’s a ‘race to the bottom’ with whoever has the lowest taxes winning business from other EU nations, eventually forcing them to do same.

This is what’s happened to US States, with the States with the lowest tax rates and benefits getting businesses from other States. The problem is that means that States have to spend the least on education and public services to win business, in a race to the bottom.

It’s a fallacy of composition in action. If you stand up at a football game you see better, but soon everyone is standing up so nothing’s gained and no one can sit down (in the case of the football game at least until the front row sits down).

One of the public purposes of the federal govt is to set min standards that prevent races to the bottom

World’s Millionaires Increase by 14%, Boston Consulting Reports

By Alexis Leondis

June 10 (Bloomberg) —The global millionaires’ club expanded by about 14 percent in 2009 with Singapore leading the way, The Boston Consulting Group said.

The number of millionaire households increased to 11.2 million, according to the study released yesterday by the Boston-based firm. Singapore posted a 35 percent gain, followed by Malaysia, Slovakia and China. In 2008, the number of millionaire households fell about 14 percent to 9.8 million.

“Given the severity and magnitude of the crisis, I’m surprised at how fast global wealth has come back,” Bruce Holley, a senior partner in the firm’s New York office and topic expert for wealth management and private banking for the U.S., said in a telephone interview before the report was released.

Global wealth rose by 11.5 percent after falling 10 percent in 2008, as assets under management increased to $111.5 trillion, close to the annual study’s record $111.6 trillion in 2007. North America, defined as the U.S. and Canada, had the greatest gain in assets at $4.6 trillion to $35.1 trillion. The U.S. also had the most millionaire households at 4.72 million, the survey said, while Europe remained the wealthiest region, with $37.1 trillion.

Current numbers may differ from those in last year’s report because of currency fluctuations and newer available data, said Peter Damisch, a BCG partner and a co-author of the report. The study looked at 62 countries representing more than 98 percent of global gross domestic product.

Wealth Recovery

The recovery in wealth last year was a result of resurgent financial markets and increased savings, the report said. The Standard & Poor’s 500 Index rose 20 percent in 2009 and the U.S. savings rate averaged 4.2 percent compared with 2.6 percent a year earlier.

Global wealth dropped in 2008 for the first time since the survey’s 2001 inception as the credit crisis sent stock indexes tumbling and slashed the value of real-estate holdings, hedge- fund and private-equity investments.

Less than 1 percent of households globally were considered millionaires, which is defined as investable assets of more than $1 million, exclusive of real estate and property such as art. Wealth became more concentrated with millionaire households controlling 38 percent of the world’s assets compared with 36 percent a year earlier, the study said.

Singapore also had the highest proportion of millionaire households at 11.4 percent, followed by Hong Kong and Switzerland. The fourth, fifth and sixth spots were in the Middle East — Kuwait, Qatar and the United Arab Emirates. The U.S. was seventh-highest at 4.1 percent.

Growth Rate

The amount of offshore wealth, defined as assets housed in a country other than the investor’s legal residence, increased to $7.4 trillion after declining to $6.8 trillion in 2008 as global regulators pressured countries such as Switzerland to cut down on bank secrecy. Switzerland remained the largest offshore center, with about 27 percent, or $2 trillion, of assets, the report said.

Global wealth will increase at an average annual rate of almost 6 percent from yearend 2009 through 2014, which is higher than the 4.8 percent annual growth rate from yearend 2004 through 2009, the study said. Wealth in the Asia-Pacific region, excluding Japan, is expected to rise almost double the global rate. Last year’s survey said total wealth wouldn’t return to pre-recession levels until 2013.

‘Still Feel Burned’

The report’s authors also looked at the performance of 114 wealth management firms worldwide and found revenue declined by an average of 7.3 percent as assets under management increased an average of 14.3 percent. Reasons for decreased revenue include fewer transactions, tougher price negotiations and a shift to lower-risk asset classes and investments that are liquid and simple, the study said.

Investors feel frustrated and distrustful following the market events beginning in 2008, despite the increase in wealth, Holley said.

“People still feel burned,” said Holley. “I think the numbers in the report suggest a much rosier experience than how people actually feel.”

Nice call by Warren on a day and a half:

Link:

Seven Deadly Frauds of Economic Policy (June 17, PDF Link)

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>   
>   (email exchange)
>   
>   On Wed, Aug 19, 2009 at 9:38 AM, Morris Smith wrote:
>   
>   Really lousy economic data continues about July
>   

Yes, looking awful from a lot of angles.

This latest govt. attack on bank capital, especially small banks, might be biting deeper than the media is on to.

Amazon (AMZN-Hold)

Yesterday, comScore released July online retail data, showing total online spending falling by 7% y/y including a 5% y/y decline in non-travel spending. This data, combined with soft July retail and same-store-sales (SSS) and a weak outlook from Wal-Mart (WMT-Not Rated), reinforces our opinion that consumer spending may be slower to recover than anticipated. We reiterate our Hold rating on Amazon (AMZN) and our $83 per share price target.

comScore reported that July non-travel spending declined by 5% y/y, a sequential deceleration from the 1% y/y decline experienced in June and below the 4% y/y decline witnessed in May. Key category results were somewhat soft, with only Books & Magazines growing by 4% y/y and Consumer Electronics up 5% y/y.

eMarketer released data from the National Retail Federation (NRF) at the end of July indicating that nearly 50% of participating consumers were cutting spending on back-to-school supplies. Additionally, only 22% of respondents said that they would purchase back-to-school supplies on the web, down from 25% a year ago, with 75% opting to shop at traditional discount retailers.

July SSS fell 5% y/y, with the large majority of retailers posting greater than expected declines. The US Census Bureau reported that July total retail sales were flat sequentially but down 8% y/y, with sales down 9% y/y from May through July.

We now estimate that the impact on US eCommerce sales will be a 4% y/y decline in 3Q09 versus a 2% y/y decline in 2Q09, with low single digit growth in 4Q09. Ecommerce spending may decline by 1% y/y in 2009. This lack of consumer demand recovery represents a bit of an overhang on stocks like Amazon.

Amazon’s stock carries a premium valuation to other ecommerce, retail, Internet stocks and the S&P 500 Index, trading at 50x 2009E EPS and 21x 2009E OIBDA. The S&P 500 Index trades at 16x 2009E EPS of $60. Our ecommerce peer group averages 23x 2009E EPS and 10x OIBDA. Using a PEG ratio of 2.0x or 50x our 2009E EPS of $1.65, which equates to 21x our estimated 2009 OIBDA of $1.7 billion, our price target is $83 per share. We rate Amazon.com a Hold.

Orbitz (OWW-Buy)

We are reiterating our Buy on Orbitz (OWW) and raising our price target from $6 to $8 per share. We anticipate that Orbitz will be able to grow EBITDA by 20% y/y in 2009 and could nearly triple free cash flow through increased transaction volume growth and a sustainable cost savings program.

Transaction volumes improved 22% sequentially in Q2, helping to offset the removal of bookings fees on single-carrier flights, resulting in a better-than-expected gross bookings decline of 12% y/y. The removal of booking fees has stimulated consumer demand and shifted share from airlines to online travel agents (OTAs) like Orbitz. We expect further improvement in Q3, forecasting gross bookings to decline by 10% y/y. Q4 may only show a mid-single digit y/y decline in gross bookings, given an easier comparison and some potential price stabilization.

Despite the capacity cuts made last September, all of the major airlines have increasingly turned to the OTAs to shed excess inventory and generate revenue. Given the poor outlook published by the International Air Transport Association (IATA) for the global airline industry ($5 billion in losses, and normal traffic growth not returning until 2011), we anticipate that this trend will continue and may be very difficult to reverse.

Looking forward, Orbitz has committed to expanding its under-indexed hotel business globally. We believe that both Europe and Asia remain growth opportunities for Orbitz. Despite both Priceline (PCLN-Buy) and Expedia (EXPE- Buy) already establishing meaningful franchises on both continents, Orbitz should be able to capture a fair share of the rapidly growing international hotel market.

The cost savings program implemented in 1Q09, reducing expenditures by $40 million to 45 million annually, has driven EBITDA growth of 28% y/y through 1H09. Debt leverage has fallen from 5x to 4x based on our recently raised 2009E OIBDA of $160 million. Interest coverage has improved from 2x to 3x. Free cash flow is also forecast to nearly triple from $0.31 in 2008 to $0.88 in 2009.

Orbitz trades at 10x our 2010E EPS of $0.50, below a market P/E multiple of 14x. Our domestic e-Travel group reflects an average 2010E EPS trading multiple of 14x. Using a PEG of 1.1 or 16x 2010E EPS of $0.50, our 12-month price target is $8 per share. We rate Orbitz a Buy.

Yahoo (YHOO-Hold)

Recent data support our concerns about a sustained slowdown in online advertising. We continue to believe online advertising will remain muted in the third quarter as there has been no evidence of an advertising recovery to date. Yahoo remains vulnerable to declining fundamentals and a long complex integration process with Microsoft. We maintain our Hold rating.

Yesterday, comScore reported that July e-commerce non-travel spending declined 5% y/y and 6% sequentially. This was the largest monthly annual decline in 2009. We do not believe this bodes well for an online advertising recovery in the third quarter, particularly when combined with the University of Michigan’s preliminary consumer confidence sentiment number for the month of August, which showed a continued decline from July.

Yahoo continues to experience a continuous search market share loss in the US. According to comScore, Yahoo’s US search share stood at 19.3% in July, which represents a consistent monthly decline from 21.0% in January.

Data suggests Yahoo’s search ad coverage is down significantly y/y and dropped materially month/month in July. Ad coverage data coincides with a poor July e-commerce report.

This news does not bode well for Google, which also experienced a sequential decline in ad coverage during July. Google also saw a slight US search market share loss to Bing in July to 64.7% from 65.0% in June.

Our channel checks and the comScore data do not support Yahoo’s commentary at last week’s investor conference, where the Company remarked that it saw “green shoots” in ad sales and saw near-term ad budgets coming back. In addition, this commentary is inconsistent with Yahoo’s weak third quarter guidance.

Yahoo continues to battle departures amongst its executive team. Last week, Yahoo’s VP of West Coast sales announced his departure after three years at the Company. Yahoo also recently lost its VP of sales in New England and Canada.

We maintain our cautious view of the online advertising space as we forecast no growth in online advertising during 2009. Yahoo trades at 7x 2009E OIBDA, which is fairly valued in our view, particularly given expectations of a long drawn-out integration process with Microsoft and our concerns about Yahoo’s strategy and growth.

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[Skip to the end]

Looks to me like the earnings season adjustment I wrote about a few weeks ago is now priced in.

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[Skip to the end]

(email exchange)

yes,

seems second quarter earnings should be better than expected and that costs are way down which will
add to profitability even with flattish sales.

and very wide net interest margins will support bank earnings growth even with low volume and continuing losses.

this can be a very good environment for stocks.

Karim writes:

Details a bit firmer than headline.

Overall, still contracting at a slower rate.

	June	May
Composite	47.0	44.0
Activity	49.8	42.4
Prices paid	53.7	46.9
New Orders	48.6	44.4
Employment	43.4	39.0
Export Orders	54.5	47.0
Imports	47.0	46.0

“Business has improved and holding steady.” (Arts, Entertainment & Recreation)

“Activity level is flat. Clients are delaying capital spending decisions.” (Professional, Scientific & Technical Services)

“Economy may be stabilizing. Second half looks more positive than first half.” (Information)

“Have begun spending government stimulus funding, and expect conditions to gradually improve in the near future.” (Public Administration)

“Occupancy levels continue to increase at a slow pace.” (Accommodation & Food Services)

“Activity is still slow and little has changed since last month.” (Wholesale Trade)

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