This was the title for an April 15th Financial Times article following the March Consumer Price Index (CPI) report showing a .4% year-over-year decline. Think about the significance of this statement for a moment. Prices have risen for 53 consecutive years.....53! And you probably thought that Joe DiMaggio's 56 game hitting streak was impressive. However, anyone that has taken an introductory economics course learned that cyclical patterns will lead to either rising or falling prices as the economy expands and contracts. Every basic textbook reminds us that rapidly expanding economies lead to full capacity utilization driving prices upward. The opposite should also hold true as economies slow and these pressures ebb, theoretically pushing prices down. Oddly, this basic free market principle does not seem to apply given inflation's impressive 53-year winning streak.
How is it that prices have continually risen despite the recessions and economic shocks of the past half century? Enter the Central Bank, affectionately dubbed the Federal Reserve, although it is neither Federal nor does it maintain any significant reserves. The Fed, run by a consortium of private bankers, has designed a debt-based system that requires ever-expanding prices to fuel the repayment of all outstanding loans. Although this may sound confusing, bare with me for a moment. If you could call a timeout and pause all economic activity while simultaneously requiring the immediate repayment of any outstanding debt, the global economic system would collapse. More simply, the amount of debt in circulation far exceeds the amount of cash currently in the system, and the ability of debtors to repay their obligations. This makes complete sense when examined from the perspective of an average middle class household. It may have modest savings, but a huge mortgage and credit card debt, which is reliant upon future income to repay, eclipses whatever savings accumulated. These future earnings will not exist without a continuously expanding money supply. Inflation represents the Fed's best and only tool to ensure that enough money is circulating through the system to repay these future obligations.
So the Fed's 1%-2% targeted annual inflation rate is beginning to make a little more sense. The bankers have convinced the general public that our economy cannot achieve sustainable growth without modest inflation, which is a complete a lie. Deflation, per the Fed's mandate, should be fought with all the tools available at its disposal. In a true deflationary environment, income streams will contract, inhibiting businesses and individuals alike from repaying their respective debts. This results in skyrocketing defaults and the failure of every major bank that is reliant on future inflationary earnings for their debtors to repay current obligations.
Deflation is best compared to a forest fire, painful and destructive in the near-term, but instrumental for building a solid foundation for future growth. Other than serving as a pricing mechanism, it encourages saving (through increased purchasing power) and proper capital formation supported by these savings, rather than debt. However, given the current system's complete over reliance on debt, any prolonged period of deflation will also lead to a complete collapse of the system. To further simplify, the current monetary system is structurally flawed and bound to collapse because it violates the most basic economic covenant; that prices must rise and fall with the cycles.
This brings me to my final question. Is the foundation of modern finance built on a flawed theory "that a dollar today is always going to be worth more than a dollar tomorrow?" After all, in a true free market, shouldn't bank lending models at least factor in for the possibility of a deflationary environment? Economic principles and common sense tell us that nothing happens 100% of the time, not even inflation. The most recent monthly CPI report proves this fact.
I realize that this post may seem overly theoretical, but I believe that these questions are essential to understanding the issues that plague our economy and declining standard of living. Make no mistake about the future of this topic, however, as people begin questioning the viability of the current monetary system.
Thursday, April 16, 2009
Saturday, April 11, 2009
Financial Earnings Do Not Equal Solvency
Wells Fargo reported record profits, nearly doubling analyst estimates despite the worst recession in the post-war era. The Fed designed its aggressive policy to slash interest rates over the past year to yield the maximum benefit for banks just as the economy fell of a cliff. The major banks are sitting on a pile of free cash as depositors earn less than 1% on their savings. This steepening of the yield curve has made it impossible for even bankers to lose money. So the Fed's actions have punished savers yet again and transferred a significant amount of wealth from the saving public to the banks. These actions continue to discourage saving while simultaneously encouraging excessive risk taking by lenders and debtors. However, an economy needs a solid savings base in order to encourage sustainable capital investment that is not based purely on debt. This begs the question; why do oil companies reporting record profits infuriate the general public while banks are applauded for producing record quarters? After all, don't both these industries generate their profits at the expense of the general public?
This upcoming week will see financial heavyweights Goldman Sachs, JP Morgan Chase, Bank of America and Citibank all report first quarter results. These companies are all expected to post solid numbers as they will benefit from the same operating environment that Wells Fargo exploited during the quarter. However, the market has priced in a solid earnings season for these banks following the Wells Fargo pre-announcement on Thursday and significant run-up in bank shares over the past four weeks. Do not expect the banks reporting this week to "blow out" the numbers because Wells Fargo achieved its results by under-reserving for future losses. I advised investors to avoid shorting financial stocks ahead of the mark-to-market rule change several weeks ago, and they have rallied sharply since that point.
Let me be as clear as possible. Although the financial sector will produce positive operating cash flow aided by free money, it remains insolvent, sitting atop a pile of bad assets. While bank share prices no longer reflect this reality, it is only a matter of time before the market prices these bank stocks accordingly. With additional capital raises looming and loan defaults accelerating, some excellent long term shorting opportunities are emerging within the sector following this earnings season. No other industry employs the amount of leverage that financials utilize. Even at a 10:1 leverage ratio, banks use $1 in equity to fund $10 in lending. So a small change in the value of the underlying assets can wipe out a large amount of equity. This is exactly what has plagued the sector for the past 18 months. The banks' tangible equity pales in comparison to the size of their actual balance sheets. After all, what is a couple billion dollars in quarterly profit when banks maintain balance sheets in the hundreds of billions? Further, these balance sheets will continue to deteriorate as the economy contracts.
This upcoming week will see financial heavyweights Goldman Sachs, JP Morgan Chase, Bank of America and Citibank all report first quarter results. These companies are all expected to post solid numbers as they will benefit from the same operating environment that Wells Fargo exploited during the quarter. However, the market has priced in a solid earnings season for these banks following the Wells Fargo pre-announcement on Thursday and significant run-up in bank shares over the past four weeks. Do not expect the banks reporting this week to "blow out" the numbers because Wells Fargo achieved its results by under-reserving for future losses. I advised investors to avoid shorting financial stocks ahead of the mark-to-market rule change several weeks ago, and they have rallied sharply since that point.
Let me be as clear as possible. Although the financial sector will produce positive operating cash flow aided by free money, it remains insolvent, sitting atop a pile of bad assets. While bank share prices no longer reflect this reality, it is only a matter of time before the market prices these bank stocks accordingly. With additional capital raises looming and loan defaults accelerating, some excellent long term shorting opportunities are emerging within the sector following this earnings season. No other industry employs the amount of leverage that financials utilize. Even at a 10:1 leverage ratio, banks use $1 in equity to fund $10 in lending. So a small change in the value of the underlying assets can wipe out a large amount of equity. This is exactly what has plagued the sector for the past 18 months. The banks' tangible equity pales in comparison to the size of their actual balance sheets. After all, what is a couple billion dollars in quarterly profit when banks maintain balance sheets in the hundreds of billions? Further, these balance sheets will continue to deteriorate as the economy contracts.
Friday, April 3, 2009
The Service Based Economic Model Has Failed
The once popular rhetoric of the past decade has turned to a whisper as cracks in our service based economy continue to widen. The dinner bill is due and everyone is trying to pass the check off to the next person as they scramble for the exits. Unfortunately, the years of binging are much more expensive than anyone could have imagined as the sticker shock sets in.
The official March U-3 unemployment rate rose to 8.5% as the U.S. shed another 663,000 jobs in March, roughly in line with estimates. Even more concerning was the large January adjustment, pushing total job losses to 740,000 for the month. It's odd how the current month figures came in so close to estimates while there was such a significant adjustment to the January report. Originally, the BLS estimated that the U.S. "only" lost 598K jobs in its original January release. That's nearly a 24% margin of error from the most recent revision. Would the BLS ever consider transferring job losses to prior months in order to cushion the impact on the markets? I will let you decide for yourself, but I fail to see the point behind releasing a draft report that could include a 24% margin of error. The U-6 unemployment rate, which is far more reflective of reality, soared to 15.6%. As I previously stated, this figure factors in underemployed and marginally attached workers.
http://www.bls.gov/news.release/empsit.t12.htm
Treasury prices fell last week and yields rose to 2.9% on the 10-year note as the market anticipated the U.S. will sell an anticipated $59B in notes this week. Interest rates have climbed back to the levels prior to the Fed's announcement of its treasury purchase program in March. Yields would have risen to well over 3% had it not been for these note purchases. The Treasury has several auctions scheduled for next week, and investors will keep a close eye on the auction results, although the Fed will no doubt provide support in the face of waning foreign demand. Note that the CDS spreads on government issued debt has risen steadily over the past six months as risk is transferred from the private sector to the government with all the bailouts.
I want to take a step back and discuss where I think the general economy is headed over the next several years. Putting the recent equity market rally aside, I have long-term concerns on the U.S. economy. This stance is a matter of common sense and based on the following factors:
1) Slightly less than 70% of the U.S. economy is based on consumer spending. This debt-fueled spending has also supported 25% of the world economy, buoying export countries like China, Japan, and Taiwan. As American consumption increased, productive capacity declined, forcing the government and households to take on more debt to maintain their standard of living. There are more than $5T in outstanding credit lines and $500B was pulled in Q4. Prominent banking analyst, Meredith Whitney, believes that banks could pull more than $2.7T by the end of 2010. With rising unemployment and lower credit availability, it does not take a genius to see where consumer spending is headed over the next year....down.
2) The American standard of living has steadily declined over the past several decades. There are currently 32M people on food stamps in this country, representing over 10% of the population. This is an astonishing number for the largest economy in the world and indicative of a failed system. It was possible in the 1950’s and 1960’s for a factory worker to comfortably support his family on one income alone. Today, that quality manufacturing job has disappeared, while it often takes dual incomes to maintain a similar standard of living. In short, families have to work longer and harder for lower wages as the cost of living skyrockets. This often goes unreported in most media outlets because these fundamental shifts are easy to overlook.
3) Neither the government nor the private sector has come up with a long-term structural solution to resolve the growing trade deficit. The approach has been to throw more debt at the problem just as the economy tries to deleverage. There is a significant difference between this downturn and those in prior cycles. America had a stronger savings rate and manufacturing base to fall back on during the prior postwar recessions. Unfortunately, the spending programs outlined in the stimulus consists of too many one time handouts that add little long-term value to kick start the economy. In other words, this country must make a fundamental shift from over consumption to production, but no administration over the past 20 years has been willing to tackle these serious issues.
4) Putting the credit crisis aside for a moment, the economy was due for a significant correction based on the demographics of the U.S. population. The baby boomers have just surpassed their peak spending years at roughly 48 years of age. This will result in a severe spending slowdown that will dramatically reduce GDP growth for the better part of the next decade. It will not be until the echo boomers reach their peak spending years that you will see a meaningful rebound within the domestic economy.
The questions that bullish money managers and analysts cannot answer should also be the simplest. What will bring the quality jobs back? What catalyst will provide the foundation for a sustained economic recovery as consumers reign in their spending to reduce their debt levels? These are the fundamental questions that bullish analysts continue to dodge. Until these issues are resolved, the economic contraction will not see the bottom.
The official March U-3 unemployment rate rose to 8.5% as the U.S. shed another 663,000 jobs in March, roughly in line with estimates. Even more concerning was the large January adjustment, pushing total job losses to 740,000 for the month. It's odd how the current month figures came in so close to estimates while there was such a significant adjustment to the January report. Originally, the BLS estimated that the U.S. "only" lost 598K jobs in its original January release. That's nearly a 24% margin of error from the most recent revision. Would the BLS ever consider transferring job losses to prior months in order to cushion the impact on the markets? I will let you decide for yourself, but I fail to see the point behind releasing a draft report that could include a 24% margin of error. The U-6 unemployment rate, which is far more reflective of reality, soared to 15.6%. As I previously stated, this figure factors in underemployed and marginally attached workers.
http://www.bls.gov/news.release/empsit.t12.htm
Treasury prices fell last week and yields rose to 2.9% on the 10-year note as the market anticipated the U.S. will sell an anticipated $59B in notes this week. Interest rates have climbed back to the levels prior to the Fed's announcement of its treasury purchase program in March. Yields would have risen to well over 3% had it not been for these note purchases. The Treasury has several auctions scheduled for next week, and investors will keep a close eye on the auction results, although the Fed will no doubt provide support in the face of waning foreign demand. Note that the CDS spreads on government issued debt has risen steadily over the past six months as risk is transferred from the private sector to the government with all the bailouts.
I want to take a step back and discuss where I think the general economy is headed over the next several years. Putting the recent equity market rally aside, I have long-term concerns on the U.S. economy. This stance is a matter of common sense and based on the following factors:
1) Slightly less than 70% of the U.S. economy is based on consumer spending. This debt-fueled spending has also supported 25% of the world economy, buoying export countries like China, Japan, and Taiwan. As American consumption increased, productive capacity declined, forcing the government and households to take on more debt to maintain their standard of living. There are more than $5T in outstanding credit lines and $500B was pulled in Q4. Prominent banking analyst, Meredith Whitney, believes that banks could pull more than $2.7T by the end of 2010. With rising unemployment and lower credit availability, it does not take a genius to see where consumer spending is headed over the next year....down.
2) The American standard of living has steadily declined over the past several decades. There are currently 32M people on food stamps in this country, representing over 10% of the population. This is an astonishing number for the largest economy in the world and indicative of a failed system. It was possible in the 1950’s and 1960’s for a factory worker to comfortably support his family on one income alone. Today, that quality manufacturing job has disappeared, while it often takes dual incomes to maintain a similar standard of living. In short, families have to work longer and harder for lower wages as the cost of living skyrockets. This often goes unreported in most media outlets because these fundamental shifts are easy to overlook.
3) Neither the government nor the private sector has come up with a long-term structural solution to resolve the growing trade deficit. The approach has been to throw more debt at the problem just as the economy tries to deleverage. There is a significant difference between this downturn and those in prior cycles. America had a stronger savings rate and manufacturing base to fall back on during the prior postwar recessions. Unfortunately, the spending programs outlined in the stimulus consists of too many one time handouts that add little long-term value to kick start the economy. In other words, this country must make a fundamental shift from over consumption to production, but no administration over the past 20 years has been willing to tackle these serious issues.
4) Putting the credit crisis aside for a moment, the economy was due for a significant correction based on the demographics of the U.S. population. The baby boomers have just surpassed their peak spending years at roughly 48 years of age. This will result in a severe spending slowdown that will dramatically reduce GDP growth for the better part of the next decade. It will not be until the echo boomers reach their peak spending years that you will see a meaningful rebound within the domestic economy.
The questions that bullish money managers and analysts cannot answer should also be the simplest. What will bring the quality jobs back? What catalyst will provide the foundation for a sustained economic recovery as consumers reign in their spending to reduce their debt levels? These are the fundamental questions that bullish analysts continue to dodge. Until these issues are resolved, the economic contraction will not see the bottom.
Thursday, April 2, 2009
Market Wrap (4/2) & What's on Tap for Friday
The verdict is in. I said Wednesday that equities would see limited up side ahead of the Friday jobs report with the mark-to-market rule change providing the only possible exception as an upward catalyst. Once the FASB caved in and approved the measure, markets extended their gains with financials rising over 3%. The S&P closed up 23 points or 2.9%, well off the session highs as stocks pulled back late in the day ahead of tomorrow's employment report. The financial sector underperformed cyclicals, basic materials, and transportation today. The G20 are also increasing the International Monetary Fund's lending power to $750B. The dollar index slipped nearly 1.4% as the European Central Bank cut interest rates by 25 basis points to 1.25%, less than the 50 expected by most observers. Rhetoric coming from the G20 leaders did contribute to the positive sentiment in the market.
The consumer cyclical and transportation sectors drove the market's gains today rising 7% and 6% respectively. The G20's actions coupled with the possible easing of credit conditions fueled investor optimism that the economy will improve sooner than originally anticipated. This also prompted oil to rise 8% to over $52 a barrel. I am particularly confused by the strength exhibited in the retail sector as many of these stocks have soared over the past several weeks in the face of increasing unemployment and rising gas prices. Many of these stocks are no longer pricing in the severe strains that consumers will begin to endure over the next year.
Treasuries declined as investors fled from the safety of government bonds to equities in search of better returns. The yield on the 10-year increased to 2.76% and would have risen further had it not been for the Fed purchasing over $7B of notes in today's session. The Fed will most likely increase its treasury purchase program from $300B to over $600B in the next six months. Given the Fed's current treasury purchase pace, it will most likely surpass its original $300B limit within four months.
I want to hit on a brief point regarding the US dollar fluctuations and impact on equity markets. Investors can attribute about 1% of today's equity market gain to the weaker dollar. If the S&P rises 1% while the dollar falls 1%, then the U.S. market value has not risen from a real dollar perspective. Take today as an example. If you are money manager based out of the Euro-Zone and own a broad based S&P ETF, you are excited that it closed up 3.5%. However, since you will have to convert those gains back into your currency eventually, your real gains from a Euro perspective are only 1.4% (2.9% market gain minus 1.5% daily Euro gain). I just wanted to point this fact out since most people do not consider how currency fluctuations can impact their real returns. So if the S&P doubles from here, but the dollar index loses 50% of its value, then you have a 0% real rate of return.
The DOW is currently hovering near 8,000 after it closed at 11,500 on 12/31/99, meaning that it has lost 3,500 points or 30% this decade. However, once we review the DOW’s performance in terms of gold, which factors in the dollar's declining value, the market’s drop has been even more precipitous. Gold traded at roughly $300/oz when we ushered in this decade, but today, it has soared to over $900/oz, more than tripling its value over the past eight years. Once you apply the DOW/Gold ratio, the market’s drop is stunning. The ratio dropped from 38 (11,500/$300oz) in 2000 to 9 (8,000/$900oz) in 2009. So when you price the index in gold and compare the prices over the same time period, it has dropped by 76% (38-9/38)! This drop follows significant cuts in the capital gain tax rates to 15% and a favorable interest rate environment for the better part of the last decade. These are the types of measurements that main stream commentators and financial networks rarely discuss.
The BLS releases the March employment report tomorrow with economists forecasting 650,000 in job losses for the month. Traders have decided that poor employment numbers no longer matter since it is already baked in to the market. I am not a market timer nor do I aim to become one, but people continue to underestimate the true state of the job market and the longer term impact on the economy.
Company Spotlight
Sears Holdings (SHLD)completely defies all logic closing up over 8% to $52.13 today. Operating cash flows continue to deteriorate as it loses market share to competitors. Consensus analyst estimates for the current and next fiscal year is $.16 and $.58 respectively. Sears real estate holdings continue to decline in value yet the market has assigned this stock a crazy premium trading at over 300 times this year's estimates. It is even expensive when analyzed using enterprise value metrics. Needless to say, if you have the patience and can find the shares to short, you will be rewarded because the stock has no business trading over $20.
The consumer cyclical and transportation sectors drove the market's gains today rising 7% and 6% respectively. The G20's actions coupled with the possible easing of credit conditions fueled investor optimism that the economy will improve sooner than originally anticipated. This also prompted oil to rise 8% to over $52 a barrel. I am particularly confused by the strength exhibited in the retail sector as many of these stocks have soared over the past several weeks in the face of increasing unemployment and rising gas prices. Many of these stocks are no longer pricing in the severe strains that consumers will begin to endure over the next year.
Treasuries declined as investors fled from the safety of government bonds to equities in search of better returns. The yield on the 10-year increased to 2.76% and would have risen further had it not been for the Fed purchasing over $7B of notes in today's session. The Fed will most likely increase its treasury purchase program from $300B to over $600B in the next six months. Given the Fed's current treasury purchase pace, it will most likely surpass its original $300B limit within four months.
I want to hit on a brief point regarding the US dollar fluctuations and impact on equity markets. Investors can attribute about 1% of today's equity market gain to the weaker dollar. If the S&P rises 1% while the dollar falls 1%, then the U.S. market value has not risen from a real dollar perspective. Take today as an example. If you are money manager based out of the Euro-Zone and own a broad based S&P ETF, you are excited that it closed up 3.5%. However, since you will have to convert those gains back into your currency eventually, your real gains from a Euro perspective are only 1.4% (2.9% market gain minus 1.5% daily Euro gain). I just wanted to point this fact out since most people do not consider how currency fluctuations can impact their real returns. So if the S&P doubles from here, but the dollar index loses 50% of its value, then you have a 0% real rate of return.
The DOW is currently hovering near 8,000 after it closed at 11,500 on 12/31/99, meaning that it has lost 3,500 points or 30% this decade. However, once we review the DOW’s performance in terms of gold, which factors in the dollar's declining value, the market’s drop has been even more precipitous. Gold traded at roughly $300/oz when we ushered in this decade, but today, it has soared to over $900/oz, more than tripling its value over the past eight years. Once you apply the DOW/Gold ratio, the market’s drop is stunning. The ratio dropped from 38 (11,500/$300oz) in 2000 to 9 (8,000/$900oz) in 2009. So when you price the index in gold and compare the prices over the same time period, it has dropped by 76% (38-9/38)! This drop follows significant cuts in the capital gain tax rates to 15% and a favorable interest rate environment for the better part of the last decade. These are the types of measurements that main stream commentators and financial networks rarely discuss.
The BLS releases the March employment report tomorrow with economists forecasting 650,000 in job losses for the month. Traders have decided that poor employment numbers no longer matter since it is already baked in to the market. I am not a market timer nor do I aim to become one, but people continue to underestimate the true state of the job market and the longer term impact on the economy.
Company Spotlight
Sears Holdings (SHLD)completely defies all logic closing up over 8% to $52.13 today. Operating cash flows continue to deteriorate as it loses market share to competitors. Consensus analyst estimates for the current and next fiscal year is $.16 and $.58 respectively. Sears real estate holdings continue to decline in value yet the market has assigned this stock a crazy premium trading at over 300 times this year's estimates. It is even expensive when analyzed using enterprise value metrics. Needless to say, if you have the patience and can find the shares to short, you will be rewarded because the stock has no business trading over $20.
Wednesday, April 1, 2009
Market Wrap (4/1) & What's on Tap for Thursday
Today's economic data came in roughly in line with expectations as the National ISM numbers showed a slight improvement over the prior month's 35.8 reading with a 36.3. Employment and new orders improved while production held steady over the prior month. This number still indicates significant contraction, but stocks greeted the release with optimism paring their morning losses to close up 1.6%. The data diverged from the Chicago PMI survey released yesterday, which came in below estimates.
Consistent with my forecast yesterday, pending home sales ticked up 2.1% over February as lower mortgage rates and foreclosure sales prompted buyers to enter the market. The West continues to deteriorate as pending sales fell 13% showing that the the general economy is standing in the way of a more sustained housing recovery. All other regions enjoyed pending home sale increases over the prior month. I am interested to see next month's sales data as we enter the home buying season and mortgage rates remain near record lows. The housing situation is actually worse than the data suggests given the shadow inventory held by lenders. Official statistics report that there are 3.8M existing homes currently on the market, equal to about 9.7 months supply. However, lenders are holding over 600,000 residential properties that are not listed on the multiple listings service.
Vehicle sales, although terrible, came in slightly above expectations adding to the market's gains midday. The year-over-year declines will level out over the next six months as the auto manufacturers begin to compare their figures to weak sales months in 2008. The General Motors CEO stated that vehicle sales are finally bottoming out, but I urge him not to get ahead of himself as consumers continue to deleverage their balance sheets.
As expected, the market continues to ignore the poor economic reports as most of this information has already been "discounted" into the market. After all, the bulls contend that the market is a forward looking mechanism, pricing securities nine months out into the future. If this is truly the case; how was it that the major indices hit their all time highs in October of 2007, less than two months before the official onset of the current recession? The fundamentals do not support a significant market rally from these levels. I will dig deeper into this over the next week, but needless to say, I believe that the market is getting ahead of itself at the moment. However, equities could easily trade up another 10%-15% before turning back down.
Tomorrow is light on the economic front with initial jobless claims due out in the morning with a consensus estimate of 655,000 new filings. Aside from the initial market reaction, this report poses limited downside risk for equities with any better-than-expected figures used as an excuse to rally the markets. The FASB will also vote on the final mark-to-market rule tomorrow, which supported financial shares in today's trading. Banks will apply this rule change retroactively, meaning that it will be applicable for Q1 earnings. What a loss for transparency, and as a non-practicing CPA, I am personally disgusted that this was even considered. Mark to model is best compared to a homeowner valuing their house at twice the market value because they think "that is what it should be worth."
Consistent with my forecast yesterday, pending home sales ticked up 2.1% over February as lower mortgage rates and foreclosure sales prompted buyers to enter the market. The West continues to deteriorate as pending sales fell 13% showing that the the general economy is standing in the way of a more sustained housing recovery. All other regions enjoyed pending home sale increases over the prior month. I am interested to see next month's sales data as we enter the home buying season and mortgage rates remain near record lows. The housing situation is actually worse than the data suggests given the shadow inventory held by lenders. Official statistics report that there are 3.8M existing homes currently on the market, equal to about 9.7 months supply. However, lenders are holding over 600,000 residential properties that are not listed on the multiple listings service.
Vehicle sales, although terrible, came in slightly above expectations adding to the market's gains midday. The year-over-year declines will level out over the next six months as the auto manufacturers begin to compare their figures to weak sales months in 2008. The General Motors CEO stated that vehicle sales are finally bottoming out, but I urge him not to get ahead of himself as consumers continue to deleverage their balance sheets.
As expected, the market continues to ignore the poor economic reports as most of this information has already been "discounted" into the market. After all, the bulls contend that the market is a forward looking mechanism, pricing securities nine months out into the future. If this is truly the case; how was it that the major indices hit their all time highs in October of 2007, less than two months before the official onset of the current recession? The fundamentals do not support a significant market rally from these levels. I will dig deeper into this over the next week, but needless to say, I believe that the market is getting ahead of itself at the moment. However, equities could easily trade up another 10%-15% before turning back down.
Tomorrow is light on the economic front with initial jobless claims due out in the morning with a consensus estimate of 655,000 new filings. Aside from the initial market reaction, this report poses limited downside risk for equities with any better-than-expected figures used as an excuse to rally the markets. The FASB will also vote on the final mark-to-market rule tomorrow, which supported financial shares in today's trading. Banks will apply this rule change retroactively, meaning that it will be applicable for Q1 earnings. What a loss for transparency, and as a non-practicing CPA, I am personally disgusted that this was even considered. Mark to model is best compared to a homeowner valuing their house at twice the market value because they think "that is what it should be worth."
Subscribe to:
Posts (Atom)
