First off let’s talk earnings.  Of the 66 S&P 500 companies that have reported so far, a full 80% have beat expectations.  So yippee right?  Not so faster Mister!  These guys have been lowering estimates for the four weeks prior to the kick off for the reporting season.  Lower the bar in order to beat?  Look beneath the headlines and you’ll see that earnings growth rates are slowing and margins are tightening.

On April 17th, the Bureau of Labor Statistics reported that median weekly earnings for full-time wage and salary workers rose 1.9% year-over-year while CPI-U rose 2.8%.  This means yet another year of falling real wages.  It is tough to buy into the economic recovery story when household incomes continue to fall.

On April 19th, we learned that the number of Americans filing for unemployment was higher than expected while sales of previously owned U.S. homes fell 2.6% in March for the second consecutive month versus expectations of an increase.  You don’t say!  Real wages continue to fall, unemployment continues to be a problem but housing isn’t recovering?  What the heck do these pundits think people use to buy a home?  Or right, debt!  Meanwhile, banks have little interest in taking on mortgage risk when they can borrow from the Fed at basically 0% and turn around and buy Treasuries.  Look across the pond as the European economy continues to slow and as for China, that slowing story isn’t over yet.

All this and yet the bulls are gleefully claiming that gold is dead.  The metal is still up 4.9% YTD as of April 19th and has returned over 18% on an annualized basis over the past 5 years.  The major force driving gold up has been the devaluing of fiat currencies, which is not likely to end anytime soon with such enormous amounts of sovereign debt and no politicians within sight willing to articulate and then act upon the painful truths.  On April 18th the Financial Times published an article entitled “Big Investors Bet Fed will embark on QE3.”  Anyone who has read Bernanke’s analysis of the Great Depression and his criticism of the Bank of Japan over the years has to agree with this notion.  Translation, devaluing dollar makes gold look awfully pretty.

The ECB will come under increasing pressure to support more of its dicey members as the reality of the Spanish, Portuguese and Italian economies comes to light.  It is incredible to think that the most recent LTRO with over a trillion Euros only bought about five months of market glee. While Merkel may enjoy the support of her constituents when she pounds the austerity table, finger wagging at Spain, an insanely high unemployment rate coupled with massive debt and a slowing economy doesn’t exactly make a nation amenable to more pain.  If there is one thing I know for certain, politicians don’t like to lose their jobs.  Spain is in free-fall, with its economy too weak to withstand more fiscal austerity, yet without taking that step, the nation won’t be able to find enough private buyers.  Spain is too big to fail, but also too big to rescue.  Rock, meet hard place.

Elle’s Rule #12:  Never underestimate the destructive potential of a politician in pursuit of a dream on someone else’s dime.  I have no doubt that insanely destructive actions will be taken in a vain attempt to salvage the unsalvageable.

Japan has pledged to give a $60 billion loan to the IMF.  You just can’t make this stuff up.  The nation with the second highest debt to GDP in the world, (second only to Zimbabwe) is going to LOAN money to the IMF?  Say it with me, “Printing Press!”  China’s official press agency reported that an “unidentified” (seriously have to love this stuff) PBOC official has hinted rather loudly at an upcoming cut in the banking sector reserve requirement ratio.  India cut rates 50 basis points earlier this week and Brazil’s central bank cut its policy rate 75 basis points, the sixth straight cut, to a two-year low of 9%, which is only 25 basis points away from its lowest level in 15 years.  All this has the markets getting a bit excited, but remember that liquidity can never replace stable politics and sound fundamentals.

Recovery?  Global growth?  Really?  If things are turning so rosy why are central bankers all over the place putting the credit IVs back in and starting up the drips?  When central bankers get loose, gold goes up.  It doesn’t need to be any more complicated than that.  Just some things to ponder from your desperately-wanting-to-be-a-bull portfolio manager.

The first quarter of 2012 was a stunner in the equity markets, giving us the best first quarter since 1998, which begs the question, what did 1998 look like relative to 2012?

We must also take into consideration the weather, which has given us not only an exceptionally warm January and February, but this past March was reportedly the warmest on record!  The Easter bunny will arrive two weeks earlier than last year as well, which makes the third-biggest buying holiday in the U.S., (behind Christmas and Valentine’s Day) likely to help support economic data in the coming weeks.

If we look a little deeper at the markets, Apple rose 48% in the recent rally and is responsible for nearly 20% of the appreciation in the S&P500.  It represents 4% of the S&P 500′s market capitalization and 11% of the Nasdaq!  Divergence is everywhere, meaning there is no clear, consistent trend despite the headlines.  Small and mid cap stocks, the broader NYSC composite, transports, the Baltic Dry Index and Treasury yields have not made new highs, contrary to what would be expected in a true bull run.

With Q1 earnings season barely a month away, the stock market will need to see $108 on operating EPS (earnings per share) to justify the market at its current price to earnings level (P/E).  Current consensus is for $105 and my calculations tell me that is overly optimistic.

Bottom Line:  Don’t let the tail wag the dog.  The markets have become increasingly dependent on monetary stimulus while often disregarding economic and investment specific fundamentals.  On Tuesday April 3rd, the Federal Open Markets Committee (FOMC) notes revealed that the committee believes the economy is strengthening, which led the markets to believe that another round of quantitative easing is less likely.  Stock indices immediately took a turn towards the downside and volatility rose.  We work within markets in which bad news is good and good news is bad.  When the markets do not reflect the same reality as the macroeconomic fundamentals, guess which one eventually wins?

President Obama wants a sweeping new program to help more struggling homeowners refinance their mortgages at lower interest rates, but there’s an important detail – a fee Uncle Sam will likely charge homeowners for the government’s help. The President proposed lowering monthly payments for millions of homeowners by refinancing their loans through the Federal Housing Administration. The agency provides insurance against default for banks that make riskier loans mainly to borrowers who make small down payments. FHA currently tacks 1.15% on top of the interest rate of new mortgages it guarantees. While the Administration has not yet decided how to structure charges this new refi program, a fee of that size could reduce savings for borrowers and make it less cost effective for the borrower. To help pay for this plan, the President proposed a new fee on big banks. It would raise $5 billion to $10 billion a year to subsidize premiums–”a big chunk of the cost,” the administration official said. The subsidies would help keep the program affordable, he said–and attractive to as many eligible borrowers as possible.

• This is all about trying to boost up the prices of homes to give people the impression that they are better off, but it is yet another example of government getting cause and effect all messed up AND taking money away from one group and giving it to another.
• Keep in mind that this refinancing would harm the owners of mortgage bonds, which are primarily mutual funds, pensions and real estate investment trusts.  So in order to try and boost the price of my home, the government is going to raid my savings!

On to the efficacy of the program:

• The price of anything is determined by supply and demand.
• The demand for housing is a function of 3 things:  Household income, stability of that income (will you need to move/ will your paychecks keep coming) and interest rates.
• From 1999 to 2007 Median the median home price rose 54% while median household income FELL 1%.  Prices skyrocketed while the ability to pay fell?  Why?
• Interest rates and the availability of credit expanded.  Houses were no longer purchased to become a home, but rather as a fail-safe investment.   This drove demand well beyond what it should have been.
• The exploding demand induced a construction boom.  Now we have more homes that the economy can support.
• Unemployment may have fallen to 8.3%, but that is a misleading indicator.  The employed as a percent of the population bottomed at 58.2% in Dec 2009 and is now only 58.5%.  0.3% increase since the depths of the recession.  Meanwhile household income has continued to fall, even after the end of the recession and is now 14.2% below the 2009 peak.
• The housing problem can only be solved by 1, letting the excess supply get worked out and 2, a growing economy in which household income rises.  No amount of government manipulation of interest rates and the supply of loans can, over the long run, counter the gravity-like reality of simple supply and demand.

Adding Fannie and Freddie to the National Books

House lawmakers passed legislation Tuesday to put the operations of Fannie Mae and Freddie Mac on the federal budget to more accurately reflect the costs of their rescue. When the government took over Fannie and Freddie through a legal process known as conservatorship, the Bush administration opted against incorporating the companies’ obligations into the federal budget, citing the arrangement’s “temporary nature.” The President’s administration has maintained that policy, accounting for Fannie and Freddie as entities that are independent from the government but receive regular infusions of cash. Critics, however, argue that this arrangement doesn’t reflect reality.

• In 1990, federally backed loans made up roughly 50% of all loan originations.  For the past 3 years, they’ve been over 90% of all loan originations.
• Home prices continue to fall, according to a Case-Shiller report prices fell another 3.7% in November (the most recent report).
• Fannie and Freddie simply transfer the risk of mortgage default from the lender to the taxpayer.
• Although the U.S. government needs very much to get out of the home loan business, it is not reasonable for this to happen anytime soon as it would be entirely too disruptive to an already fragile and critical part of the economy.
• The most likely solution for Fannie and Freddie is to have them slowly wind down their loans, which means they will be on the books for a considerable period of time, thus their financials need to be integrated with the rest of the federal government.
• Ultimately taxpayers and the U.S. economy will only be protected from future bailouts by a full withdrawal of the federal government from housing policy.  Interventions by the FHA, Fannie, Freddie, Federal Home Loan banks etc continue to push excess capital into the housing markets, making the commercial banking sector overly vulnerable to downturns in the housing market.



]]> http://elleseconomy.com/2012/02/08/new-home-refinancing-plan-steals-from-piggy-banks-to-boost-prices/feed/ 0 http://elleseconomy.com/2012/02/06/not-out-of-the-woods-yet-with-the-economy/ http://elleseconomy.com/2012/02/06/not-out-of-the-woods-yet-with-the-economy/#comments Tue, 07 Feb 2012 04:44:37 +0000 Lenore http://elleseconomy.com/?p=907 Continue reading →]]> The Economy

While the domestic economy is strengthening a bit, the recent unemployment numbers greatly overstate the improvement as most of the gains simply came from people leaving the workforce rather than actual employment gains.  At Meritas, we mostly ignore the unemployment numbers and look simply at Civilian Employment as a Percentage of the Population.  This number remained unchanged from December and has only increased 0.2% from January of 2011 and is currently 58.5% after having bottomed out at 58.2% Dec of 2009.  We are only up 0.3% since the bottom of the employment market!  Employment numbers alone don’t tell the whole story – we have to also look at income levels.  Real household income, meaning income adjusted for inflation, was $55,962 in January 2000.  At the end of the recession it had fallen to $53,638.  It is now $50,876.  In twelve years it has fallen over 9%.  On top of that households are saddled with unprecedented levels of debt.  For decades the average household income to debt ratio was about 65%.  It peaked at 140% in 2007 and is now just below 120%.  Falling incomes and the need to reduce debt don’t make for much of an economic tailwind.

As for Commodities

The price for commodities is really a function of two things:  the supply vs. demand for the commodity and the strength of the dollar.  Most commodities, with the exception of natural gas and crude oil are over-bought today, we believe on the false assumption that the European situation is going to be well controlled and that we are economically out of the woods.  The Baltic Dry Index, which is a measure of commodity shipping costs, advanced from a 25 year low for the first time since Dec 12th, after falling rates boosted the number of dry-bulk owners dropping anchor and refusing to hire.  Rates are near or below cash break-even for every vessel class, so we are starting to see more ships anchoring and refusing to trade.  The index is down 62.8% YTD and 38.1% Year-over-Year.  We just saw how little pricing power there is in the market as P&G was forced to roll back prices after an 8% increase cost them 7% of market share.

Gold is trading more as a currency than a commodity these days.  It is a hedge against the loose monetary policy arising from pressures caused by too much debt.  Gold isn’t really going up so much as fiat currencies are being devalued.  Speculators have increased their holdings of gold for four consecutive weeks. Possibly in response to the European sovereign debt crisis and indications from the Fed to expect continued loose monetary policy.  During the last reporting period net purchases were over 33k, brining the net long position to 188k contracts.  Non -commercial energy product accounts failed to increase their holdings of oil after the Fed conference, selling 4,500 contracts on a net basis, reducing the net long positions to just over 300k positions.  This is just 0.1 Standard Deviation below the one-year average.  Copper is clearly driven by what happens in China and there are a lot of concerns about what could happen there this year.  The IMF reported that China’s growth would be cut in half from a projected 8.2% in 2012 if Europe’s debt crisis worsens.  In defense against this, China will likely continue to ease up on their monetary policy, which will push the Shanghai Stock market index up and provide a tailwind to copper.

Food commodities down YoY

• Corn down 4.5% up 0.2% YTD
• Coffee down 13.9% down 5.3% YTD
• Sugar down 25.9% up 3.9% YTD

Metals

• Aluminum down 12.0% up 10.8% YTD
• Copper down 15.7%% up 12.4% YTD
• Gold up 27.4% up 9.6%
• Silver up 15% up 19.9%

Energy

• Brent up 14.1% up 6.1% YTD
• Gasoline up 19%% up 7.9% YTD
• Natural Gas up 19% up 7.9% YTD
• Natural Gas down 41.1% down 15%



]]> http://elleseconomy.com/2012/02/06/not-out-of-the-woods-yet-with-the-economy/feed/ 0 http://elleseconomy.com/2012/01/26/general-motors-enjoys-record-profits/ http://elleseconomy.com/2012/01/26/general-motors-enjoys-record-profits/#comments Fri, 27 Jan 2012 04:43:29 +0000 Lenore http://elleseconomy.com/?p=905 Lenore Hawkins joins David Asman and the Power Players to discuss GM’s record earnings this quarter.



]]> http://elleseconomy.com/2012/01/26/general-motors-enjoys-record-profits/feed/ 0 http://elleseconomy.com/2012/01/26/americans-renouncing-citizenship-over-onerous-tax-code/ http://elleseconomy.com/2012/01/26/americans-renouncing-citizenship-over-onerous-tax-code/#comments Fri, 27 Jan 2012 04:41:16 +0000 Lenore http://elleseconomy.com/?p=902 Continue reading →]]> On January 25th, Lenore Hawkins joined the Freedom Fighters to talk about Americans giving up their citizenship due to the onerous tax code.
• The current tax code is outrageous.  In 1913 the Federal Tax code was 400 pages.  It is now over 72,000 pages!
• Americans spend over 7.6 billion hours a year preparing their taxes which equates to about 3.8 million skilled workers, making the tax compliance industry SIX TIMES the size of the U.S. auto industry.
• 82% of Americans need help preparing their taxes
• 60% hire a professional tax preparer.
• According to the IRS, “If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.”  Thus you are subject to double taxation; tax for the country of residence and a second level of tax from the United States.
• If you decided to give up your U.S. citizenship, you are taxed on all your assets using a mark-to-market regime, which generally means that all property is deemed sold for its “fair market value” on the day before the expatriation date.  You will be forced to then pay taxes on those assets as if you had sold them.

Rather than using a punitive tax code that attempts to bar people from leaving, how about building a legal code, regulations and tax code that attract wealth and high income earners from all over the world?  Their assets and innovation will help the economy grow, providing much needed jobs.






]]> http://elleseconomy.com/2012/01/26/americans-renouncing-citizenship-over-onerous-tax-code/feed/ 0 http://elleseconomy.com/2011/12/27/how-derivatives-led-to-economic-collapse-made-simple-and-fun/ http://elleseconomy.com/2011/12/27/how-derivatives-led-to-economic-collapse-made-simple-and-fun/#comments Wed, 28 Dec 2011 04:40:04 +0000 Lenore http://elleseconomy.com/?p=900 Continue reading →]]> I wish I could take credit for this level of entertaining insight, but I cannot.  This was forwarded to me in an email that I just had to share.

A Primer: Understanding Derivatives

Heidi is the proprietor of a bar in Detroit ..

She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar.

To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later.

Heidi keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Heidi’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar.

Soon she has the largest sales volume for any bar in Detroit .

By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages.

Consequently, Heidi’s gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi’s borrowing limit. He sees no reason for any undue concern because he has the debts of the unemployed alcoholics as collateral!

At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS.

These “securities” then are bundled and traded on international securities markets.

Naive investors don’t really understand that the securities being sold to them as “AAA Secured Bonds” really are debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb – and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices still are climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons.  But, being unemployed alcoholics — they cannot pay back their drinking debts.

Since Heidi cannot fulfill her loan obligations she is forced into bankruptcy.

The bar closes and Heidi’s 11 employees lose their jobs. Overnight, DRINKBOND prices drop by 90%.

The collapsed bond asset value destroys the bank’s liquidity and prevents it from issuing new loans,thus freezing credit and economic activity in the community.

The suppliers of Heidi’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the BOND securities.

They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds.

Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off
150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar no-strings attached cash infusion from the government.

The funds required for this bailout are obtained by new taxes levied on employed, middle-class, nondrinkers who have never been in Heidi’s bar.



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