Contrarian Musings

Market Update - Is the Bear Market Over?

2009-04-16T13:42:00Z

Is the bear market over? Is the recession ending? Well, stocks have rallied off their lows in impressive fashion, the economic backdrop is improving, the Federal Reserve is buying every kind of asset imaginable and the consensus seems to be that this is nothing but another one of the sucker rallies we’ve experienced over the last six months. Put all that together and I’m pretty comfortable with the idea that stocks can continue to rise for a while longer.

One thing that a lot of the recent commentary ignores though is that while the Spring stock market rally has been nice, it still leaves the major averages down for the year.

The major international stock measure, the EAFE index, is also down for the year:

So, while this has been a nice few weeks, it does not a bull market make. There is probably room for the market to rally further and this may yet turn into a cyclical bull market if the economic stats continue to improve, but that’s a long way in the future. In the meantime, there is a lot that needs to go right for stocks to keep climbing.

The economy does seem to be stabilizing though and for that we can thank the Federal Reserve. Bernanke has thrown everything but the kitchen sink at this recession and while I abhor his methods and worry deeply about the long term implications, we are seeing results. Monetary policy works with a lag, but it is powerful stuff. The Fed has essentially taken over lending in large parts of the economy, adding roughly $1 trillion in assets to its balance sheet. It would be surprising only if that didn’t have any effect in the real economy.

With the Fed pushing down mortgage rates, the housing market seems to finally be finding a bottom, at least in terms of sales if not price. Home sales in CA and FL have been rising for 6 months. Nationwide, the housing affordability index is at an all time high (most affordable). A lot of commentators have derided the sales numbers by saying that they are mostly distressed sales, but to me that is irrelevant. The inventory needs to be cleared and the quickest way to do that is through lower prices. That is how this supply/demand thing works after all. Housing starts, existing home sales, new home sales and pending home sales have all seen recent improvement. Read more…

Retail Sales A Big Disappointment

2009-04-14T15:17:00Z

According to the monthly Commerce Department report, retail sales, which account for about one-third of US GDP, fell slightly in March, following an upwardly-revised 0.3% gain in February. Total sales in March decreased 1.1%, much worse than the 0.3% increase forecasted by economists. For the quarter, January’s 1.9% gain was the first monthly increase since June 2008 and the largest since November 2007. Add that with February’s positive reading and March’s disappointing results, and you still have a 1st quarter that is greatly exceeding expectations. What is that going to do for this quarter’s GDP number?!? In the last year though, total sales are still down a staggering 9.4%.

Excluding a 2.3% decline in auto sales, retail sales were a bit better, down 0.9%, but still much worse than the -0.2% expected. This follows an upwardly-revised 1.0% gain in sales ex-auto in February.

Although today’s report may seem bleak, the data reported by the government is not adjusted for any price changes. This means that the government numbers may be overstated when prices are rising, and understated when prices reverse course. And considering we are in the midst of a deflationary environment, except, say for gas prices in the last couple of months, this seems to be better news than at first glance.

Also, the government’s estimates for March could be somewhat understated, even with seasonal adjustments, since this year’s late Easter season pushed some sales that would typically occur in March into April. It might just be wishful thinking, but in a separate report by the International Council of Shopping Centers, chain stores’ same-store sales rose 0.8% last week, the first week of April.

The facts are there. Consumers are in deed cutting back, and by a whole lot. But this is the question I must ask. Are consumer habits changing permanently, whereas our consumer and debt-driven economy will suffer through years of stagnation, or is this just a case of extreme deflation coupled with devastating fear in an absolutely normal (yet severe) cyclical recession?

Trading Against The Prophets

2009-04-06T13:27:00Z

Here’s an interesting study from three professors at Texas A&M:

Abstract:
We find that positions taken by short sellers that conflict with consensus analyst recommendations are highly informative about future returns, and investors can profit by trading with the shorts. A six-month, abnormal return of 9.6% can be earned from a zero-investment strategy that 1) shorts firms with highly favorable analyst recommendations (buy signal) but high short interest (sell signal), and 2) buys firms with highly unfavorable analyst recommendations (sell signal) but low short interest (buy signal). To understand why this strategy is so profitable, we investigate whether shorts and analysts differ in their use of information that prior research shows to be predictive of future returns. We find that analysts tend to over-recommend stocks with high growth and high accruals - despite a negative association with future returns. In contrast, short sellers correctly use this and other fundamental analysis information to identify situations when analysts’ recommendations are misleading.

More specifically: Read more…

Economic Report: Non-Farm Payrolls - March

2009-04-03T14:08:00Z

Nonfarm payrolls in the US fell for the 15th straight month, as another 663,000 jobs were lost in March. January, with 741,000 total job losses, became the worst month since 1949, after sharp revisions were accounted for. There were no such revisions for February. The increased losses and revisions signal a worsening labor market, as 5.1 million jobs were lost since the recession began in December 2007. And the decline has been fast and fierce, with payrolls falling by 3.7 million just in the last six months. That’s a 2.7% decline, the second-largest percentage loss in 50 years.

The unemployment rate surged in March, gaining 0.4%, to a 8.5% annual rate. That’s the highest level in over 25 years. Its meteoric rise of 3.6% in the past few months accounts for most of the gain since the beginning of the recession. Read more…

Administration To Play Key Role In Naming GM Board

2009-04-02T14:03:00Z

President Obama has said that ”his” government has no interest in running GM, but they sure have a funny way of showing it (via WaPO):

The Obama administration will play a key role in reshaping General Motors‘ board of directors over the next six months, potentially giving it even greater control in the management of the storied American manufacturer.

The president’s auto task force plans to consult with the company as it replaces a majority of its board, a White House official said. The board today largely consists of the current and former chiefs of major U.S. corporations such as Coca-Cola, Ernst & Young, Pfizer and Eastman Kodak. It is not known which of the 12 board members will leave.

The president said Monday that “the United States government has no interest in running GM.” But in practice it is already exerting tremendous influence over it, a situation that has triggered fierce debate over how much power the government should wield over the companies that it aids.

Kent Kresa, 71, GM’s new chairman, said yesterday that company officials will seek to replace a majority on the board by August, as the automaker moves to restructure operations.

“There will be continuing coordination as decisions about the leadership of the company are made,” a White House official said yesterday. “Folks from the autos task force will be involved in those decisions.”

Kresa, a former Northrop Grumman chief executive who has been a GM director since 2003, was selected to be chairman by the Obama administration after it ousted chairman and chief executive G. Richard Wagoner Jr. on Sunday. Fritz Henderson was named chief executive.

Okay, so the administration has replaced the CEO, brought in a new Chairman, told them what kind of cars they want them to build and will play a major role in naming the board members. Other than that, they have no interest in running the company. That’s a relief. Republicans are squawking: Read more…

Alternative GOP Budget

2009-04-02T13:47:00Z

Rep. Paul Ryan presented the Republican’s alternative budget today. Rep. Ryan is emerging as a voice of economic sanity in Washington but his budget, while better than the Democratic alternative, is a disappointment.

The plan’s executive summary can be found here. The full version is here.

I won’t waste a lot of time going into details since this budget has exactly zero chance of being enacted, but here are a few highlights:

Freezes discretionary spending on all programs except defense and veterans benefits through 2014.
Adds a means test for Social Security if certain targets are breached.
Also adds a means test for Medicare (at least if I’m reading this right). Enrolls new recipients in private insurance plans modeled after the Federal Government plan.
Permanently extends the 2001/2003 tax relief provisions and alternative minimum tax patch.
Offers a simplified, flat tax system as an alternative to the current system.
Cuts corporate tax rates to 25%.
Proposes shifting the Fed to inflation targeting.

Treasury Playing Favorites?

2009-04-01T19:26:00Z

The Treasury Department’s public/private partnership for purchasing the toxic assets of the banking system is an exclusive club (via WSJ):

The investment community was already suspicious last week when Secretary Timothy Geithner unveiled his plan, announcing that Treasury would select four or five companies as “fund managers” to purchase toxic securities. Given that the whole idea is to create a liquid market for these assets, we’d have thought Treasury would encourage as many players as possible.

But the bigger shock was when Treasury released its application to become a fund manager, a main rule of which is that only firms that already have a minimum of $10 billion in toxic securities under management can apply. Few hedge funds, private equity players or sovereign wealth funds come near this number. The hurdle would bar many who specialize in the very distressed assets that the Obama Administration is trying to offload from banks.

Obviously, that narrows the list of potential managers considerably. So, who qualifies? Read more…

Worst Quarter Ever For Stock Dividends

2009-04-01T19:24:00Z

Via MarketWatch:

While March proved positive for equities, with the S&P 500 up 8.5% from February, the month also capped one of the worst quarters for shareholders, with companies slashing dividends by the most since Standard & Poor’s began keeping record in 1955.

Companies announced 46 dividend cuts totaling a record $42 billion in the first quarter, with the slashing expected to cut actual payments by 18% in the second quarter, the worst since a 24.4% decline in the third quarter of 1958, according to Howard Silverblatt, senior index analyst, Standard & Poor’s.

What was once a safe haven for conservative investors, dividends-paying stocks were hit hard as fear was rife and cash became king. Even great companies with solid balance sheets chose to retain more of their earnings (if any), trimming dividends by record levels. For some perspective: in all of 2008, we saw 61 dividend cuts totaling $40.3 billion. For the 1st quarter of 2009, we have already exceeded that number by $2 billion.

Andrew Cuomo Issues an Ultimatum

2009-03-26T21:12:00Z

NY Attorney General has issued an ultimatum to AIG Financial Products employees:

The e-mail went out at 6:46 p.m. on Friday.

It had been a brutal week inside AIG Financial Products. News that the firm had doled out more than $165 million in retention payments over the past week had angered the country and sent lawmakers into fits of rage. American International Group’s president, Edward M. Liddy, had asked that the unit’s employees consider returning some, if not all, of the money. New York Attorney General Andrew M. Cuomo had subpoenaed AIG for a list of Financial Products employees and how much money each had received.

Now, the firm’s chief operating officer, Gerry Pasciucco, had set a 5 p.m. Monday deadline for staffers to indicate whether they planned to return their retention payments, and if so, what percentage. His e-mail included what appeared to be a tacit ultimatum from Cuomo.

“We have received assurances from Attorney General Cuomo that no names will be released by his office before he completes a security review which is expected to take at least a week,” Pasciucco wrote.”To the extent that we meet certain participation targets, it is not expected that the names would be released at all.”

No matter how you feel about the AIG bonuses, AG Cuomo’s behavior can only be described as thuggish. If you don’t return the bonus, he will release your name to the public which in this environment is like handing the lynch mob a rope and helpfully providing directions to your house. There is a lot to dislike about what the financial sector did over the last few years, but the response of politicians is at least as disgusting and getting more so by the day.

And it turns out that returning the bonus may not relieve you of the taxes due on said bonus: Read more…

Existing Home Sales - February

2009-03-23T15:31:00Z

Well it looks like the housing market is recovering very nicely, even without the long-awaited government’s bad-asset purchase plan in place. Resales of homes and condos in the US spiked higher in February, following a pullback in sales in January. Sales rose 5.1% for the month, from a seasonally-adjusted annualized rate of 4.49 million in January to 4.72 million. The number was above expectations, as economists estimated sales at a rate of 4.50 million.

The US housing market as a whole has improved significantly in the last few months, as inventories, mortgage rates, and prices have all fallen to a point where demand is once again created. Resales of US homes have fallen 4.6% in the past year.

US GDP Estimate for 1st Quarter 2009

2009-03-17T18:56:00Z

The revised 4th Quarter GDP number was released a couple of weeks ago, highlighting a 6.2% decline in total goods and services produced in the US, which included a 4.3% drop in consumer spending, the most in 28 years. Considering the fact that most economists feel that the first quarter of 2009 will be worse than the last in terms of spending, and that consumer spending accounts for almost 70% of GDP, that got us thinking:

How severe, in real inflation-adjusted terms, was this drop in consumer spending compared to other recessions? How will this new downward trend in spending, which is only supposed to get worse in the 1st quarter, affect GDP growth in that quarter? And will the economic downturn be as drastic as predicted in this coming quarter? Read more…

Mexico Imposing Tarifffs on US Goods

2009-03-17T15:53:00Z

Mexico is set to impose tariffs on some US goods. The tariffs are a direct consequence of the Obama administration’s ending of a pilot trucking program:

A long-simmering trade dispute boiled over into sanctions on Monday after Mexico said it would raise tariffs on $2.4bn of US exports in retaliation for ending a pilot programme to allow Mexican trucks on American roads.

The announcement marks one of the first big tests for trade policy under President Barack Obama, who has sought to tread a fine line between assuaging his domestic constituencies and upholding the US’s international obligations.

Producer Price Index - February

2009-03-17T15:52:00Z

As the global economic slowdown persists, prices paid by the nation’s producers managed to squeak a gain for the month of February, rising for the second straight month after five consecutive declines. The US producer price index gained 0.1% in February, below the 0.4% target that was expected by economists. This comes after record declines in the 4th quarter of 2008, totaling close to 7%. Wholesales energy prices, which fell 9.1% in December, have much to do with the rise in prices for the current month. Energy prices were up 1.3% for the month, as gas prices increased 8.7% at the producer level.

Core PPI, which excludes energy and food prices because of their volatile nature, increased as well, climbing 0.2% after a 0.2% gain the previous month. Economists had forecast a 0.1% rise in the core PPI. Read more…

Analysis: Housing Starts

2009-03-17T14:42:00Z

New residential construction surged in the latest month, as the nation’s homebuilders were helped in February by a boom in demand for multi-family homes. Housing starts for February surged 22% to a seasonally-adjusted annual rate of 583,000, the largest increase in 19 years and the first in eight months. In January, housing starts stood at 466,000, the lowest level on record (records have been kept since 1959). The report was a pleasant surprise, as a new record low of 450,000 annualized units was expected. In the last year, however, housing starts fell by 47%, to a 1,107,000 annual rate. For some perspective: In all of 2007, 1.355 million homes were started. In 2006, 1.8 million homes were started.

Building permits, an indicator of future construction, rose by 3.0% to 547,000 annualized units. Permits for single-family homes, considered by many analysts as the most important figure in the report, surged 11% to 373,000, the largest percentage gain in 18 years. Both are coming off record lows. Building permits in particular are down 44% in the past year. Read more…

The Demise of the Newspaper...

2009-03-17T02:10:00Z

The newspaper industry, America’s source for news and opinion for so long, is struggling to revive readership and to remain a profitable business model, with Seattle becoming the latest victim in the on-going saga. The Seattle Post-Intelligencer decided to shut down operations today, leaving the city with only one mainstream daily, the Seattle Times (via MSNBC):

Hearst Corp., which owns the 146-year-old [Post-Intellingencer], said Monday that it failed to find a buyer for the newspaper, which it put up for a 60-day sale in January after years of losing money. Now the P-I will shift entirely to the Web.

Ad revenue, a newspaper’s main source of income, has fallen in recent years, as advertisers’ shift their focus to lower cost mediums over the Internet.

Seattle follows Denver in losing a daily newspaper this year. The Rocky Mountain News closed after its owner, E.W. Scripps Co., couldn’t find a buyer. In Arizona, Gannett Co.’s Tucson Citizen is set to close Saturday, leaving one newspaper in that city.

And last month Hearst said it would close or sell the San Francisco Chronicle if the newspaper couldn’t slash expenses in coming weeks.

As technology evolves, mainstays in society diminish in importance and may become obsolete longer-term(e.g. the typewriter to the computer). Similarily, the media business model is changing, with less of a focus on print media and an added emphasis over the Internet. The trick is to find a way to be profitable, whether its online or not, as ad revenues decline and more-so because of the faltering economy. Media companies continue to fall at an alarming pace, with four newspaper companies, including the owners of the Los Angeles Times, Chicago Tribune and The Philadelphia Inquirer, seeking Chapter 11 bankruptcy protection in recent months.

The future of the industry remains in question, but one thing is for sure…the news will always be in demand. The question is just how we will receive it.