Since we go to press Friday night, we can't obviously describe this year's annual stroll down Fifth Avenue known far and wide as the Easter Parade, where the swells and the not-so-posh proudly display their finery, crowned more often than not by some outrageously flamboyant headwear. Rumor has it, though, that the latest aspirant for the presidency of this fair land, Donald Trump, plans to join the preening multitudes, carefully ruffled locks and all, disguised as an industrial-strength mop, to publicize his hopes of making a clean sweep of the nominating field come 2012.
Mr. Trump has chosen an auspicious moment for his political debut, what with concerns growing about the nation's dangerous accretion of debt. For he's the only candidate able to boast more than passing experience with bankruptcy: As we recall, one of the hotel and casino entities bearing his name has been forced to seek that ignominious refuge not once but three times when the wolves (politely known as creditors) began howling at its door.
Moreover, if we understand him rightly (no easy chore in itself, given the din and roar of bombast that accompany virtually his every utterance), he has devised the ideal solution to one of those sticky conundrums confronting Washington that combines foreign and domestic problems. We're referring to the civil war in Libya, which has prompted NATO to try to quash the odious Gadhafi, and the shocking surge in gasoline prices that the shutdown of crude supplies from that benighted country has helped fuel here at home.
What Mr. Trump seemingly recommends (we're cribbing from a Fox News interview) is since we're spending $1 billion in the effort to dislodge Gadhafi (he doesn't bother to identify the source of that figure, but, hey, why be picayune about hundreds of millions of dollars more or less), we pressure the Saudis or maybe the Chinese to cough up the dough to cover the cost of our involvement. He's not clear on just what form such pressure or involvement would take, but alludes to our military as the only one that can do the job (whatever the job might be).
We can only assume that in one of those magical transmutations, Mr. Trump's suggestions would somehow result in the new American dream: lower gas prices. Come to think of it -- and admittedly we haven't run this one up the flagpole to see if Donald salutes -- we might make profitable use of the Trump Doctrine to place the oil fields of the United Arab Emirates and Kuwait in a kind of protective custody as well.
Why, before you know it, the world would be swimming in oil and prices at the pump would tank. Oddly enough, quite independent of Mr. Trump's urging, the Saudi oil minister, Ali al Naimi, complacently assured one and all last week that the world's loaded to the gills with oil. "Oversupplied" with oil is the way he put it, an interesting locution in light of the fact that crude has run up from less than $70 a barrel a year ago to over $112 today, and naifs like us always assumed that higher prices typically were caused by an excess of demand over supply. Our thanks to Mr. Naimi for setting us straight.
Not the least of the obstacles that Mr. Trump may encounter on his boisterous ride to the White House is paradoxically the runaway bull market and the generous fruits it has showered on investors. For in contrast to Mr. Trump, who trumpets the claim whenever the occasion arises (and frequently when it doesn't) that he's a billionaire several times over, not everyone who has invested with him has enjoyed a profusion of happy returns. Quite the opposite.
Just ask a bondholder in some of those casinos that went bankrupt. Or a stockholder in Trump Entertainment Resorts, whose shares in December 2008 skidded from $4 to 23 cents as the company missed a $53.1 million interest payment and also wound up in bankruptcy.
And no matter the old and rusted boilerplate warning that accompanies every recommendation a securities firm issues that prior performance is no guarantee of future gains, investors remain convinced it is. But if not a guarantee, it might still be a feasible guide. Regrettably, especially for someone running for high office, investors do tend to be sore losers and have been known to bear loud witness against anyone they perceive as responsible for their losses.
So word tends to get around, even to the multitudes at some considerable remove from Wall Street and to whom Donald Trump is just another familiar face (and sound) on TV.
AFTER A BAD OPENING-SESSION SHUDDER, the stock market shook off Standard & Poor's warning of a possible credit-rating downgrade if Washington fails to mend its feckless finances and spent the rest of the holiday-truncated week sailing merrily on to new highs in the averages. The swiftness with which S&P's stricture was dismissed and its impact evaporated was a clear register of the upbeat mood in the Street. It didn't hurt, either, that the agency's caution was carefully couched to convey it posed no immediate menace and, in any case, the worries it articulated, however valid, were hardly brand new.
Besides, as they have been for the better part of the past couple of years, investors remain living proof of the pithy axiom that nothing succeeds like excess, and they've been more than amply rewarded for that steadfast conviction. Until the market turns tail big-time, they're not apt to take up extended residence in the storm shelters.
There's this, too: As a shrewd investor observed to us, with inflation beginning to bite whatever the official protestations to the contrary, and Bernanke & Co. striving to keep a tight lid on yields, equities seem all the more attractive, if only because the alternatives are so darn uninviting.
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.Moreover, for the moment, at least, the economy, however gradually and spottily, is getting better. Corporate earnings in particular have been flourishing, although with the upswing in commodities and consumer income lagging, margin erosion can't be far behind. And despite the improved tone, as the accompanying chart offers graphic testimony, there's still one huge gapping hole in the economy: housing.
The chart is the handwork of Yale economist Robert Shiller, and it plots an index (fittingly called the Case-Shiller Index) that depicts the trends of house values over the past 120 years. It has been updated for Barry Ritholtz's Big Picture blog by Steve Barry. So much for its provenance. More to the point, it provides a beautiful snapshot of the biggest housing bubble in history, which peaked in July 2008 and has been deflating at a murderous rate ever since.
And despite the occasional glint of better tidings, the outlook remains unwholesomely grim and prices continue their mournful descent. Not the least of the reasons for housing's dour prospects is that so many home owners are underwater. Just in case you're lucky enough not to have shared that sorry condition, "underwater" in this context simply means the value of their homes is less than they paid for them, and not infrequently these days a whole lot less.
The estimate by CoreLogic is that 11.1 million people with mortgages, or 23% of the total, are in that decidedly uncomfortable position. Zillow, a Seattle-based service, reckons that 27% may be closer to the mark.
Nor do such numbers, disquieting as they are, tell the whole sad story. For as Mark Hanson, a savvy professional observer of the real-estate scene points out, they fail to include what he calls effective negative equity. Effective negative equity, he explains, begins at the point at which the homeowner can't sell his house and buy another because he has to pay a real-estate broker 6% of the sale proceeds and then plunk down 10%-20%, depending on the type of loan needed.
There are in the neighborhood of 3.5 million previously owned homes on the market. And there are something approaching two million homes that are in foreclosure or whose owners have fallen behind in mortgage payments. The bad news is that the banks are back in the foreclosure mode after a relatively immobile interlude, and that means, by one knowledgeable estimate, that the shadow inventory of homes destined to hit the market may be as high as eight million.
The pause in bank and servicer foreclosures was inspired by a regulatory crackdown and lawsuits that followed revelations of sloppy bookkeeping, robot-signing of foreclosure notices and errant, inadequately trained personnel, those collective serious flaws that came to be known as Foreclosuregate.
As Mark Hanson points out, banks and servicers are back with a vengeance and cutting asking prices sharply "to blow out distressed inventory." Other price depressants he cites include unfavorable demographics, soaring energy costs and a broken mortgage market.
How low can home prices fall? The consensus is somewhere between 5% and 10%. But as the chart suggests, that may prove conservative given all that room on the downside before the bubble has completely burst.
Sunday, April 24, 2011
Monday, April 11, 2011
Where did all the bears go?
Gosh, were we ever wrong. We were sure that the shut-the-government-down fiasco was due to be settled in a flash once the cry went up from an angry citizenry that if Uncle Sam was forced to hang out a "temporarily closed for business" shingle and paychecks would not be issued for nonessential federal employees, the withholding had better start with congressmen—or else. Man, you could see the pitchforks and the feathers and smell the tar.
If you can't depend on our chosen representatives to act like the greedy cowards they've proved themselves to be many a time and oft, invariably willing to chose principal over principle, what can a man count on? Yet here we are, the hours tick away, the deadline looms ever closer—and the squabble drags inexorably on.
Back at the end of February, we warned of the possibility that the government might be mothballed and pooh-poohed the comforting predictions by the sunshine crowd that it would never happen, and even if it did, the effect would be just about nil.
What was silly then is particularly ludicrous now, with the economy still fragile, the recovery powered largely by stimulus courtesy of Washington, the dollar weakening ignominiously, unemployment high and confidence shaky. Not to mention the enormous dislocation, confusion and concern sure to ensue should the government go AWOL.
Moreover, chances are that even a last-minute, Band-Aid agreement to keep the government operating for another week or two would only ensure a replay of the whole nasty wrangling and postpone the day of reckoning. As to the notion that a shutdown wouldn't affect Wall Street—tell that to the savvy folks who've been pushing the price of gold to all-time highs: they're pretty serious people and entitled to a chuckle or two.
WE'VE LONG FELT that had Sigmund Freud not been so obsessed with listening to his patients nestled on a couch telling him their woes, most of which they blamed on having chosen the wrong mom and pop and then compounding their grievous error by choosing the wrong spouse, he would have a been a great portfolio manager. For while it helps, we suppose, to be able to tell the difference between a balance sheet and an income statement and know what P/E stands for, nothing in the investment armamentarium beats an educated grasp of crowd psychology.
Granted, getting a handle on investor sentiment is not an automatic guarantee of making a killing on the Street. It's a contrarian indicator that has been around for a spell, and like a lot of venerable technical tools is a bit the worse for the wear. It's grounded in the logical assumption that when everyone's bullish, it implies that a lot of buying power has already been used up and, of course, when everyone's bearish, the opposite holds.
If not infallible (what is, as we've noted before, besides the pope and financial journalists?), it provides investors with a highly reliable litmus test when the market reaches extremes of optimism or pessimism. And, right now, bullishness is dangerously rampant.
Bulls in Command—for Now
The spread between bulls and bears is the highest since 2007.
For confirmation, just take a gander at that simple chart that enlivens this grim page, the handiwork of Investors Intelligence, which weekly tracks the view of those earnest souls, investment advisors, who tell you when, and often what, to buy and sell. It depicts the difference between the number of advisors who are upbeat and who are downbeat.
That awesome spread in favor of the bulls works out to 41.6%, the most lopsided since the October 2007 all-time market peak, when the comparable gap was 42.4% and set the stage for the beginnings—and forgive us for stirring painful memories—of the worst equity disasters of the past half century.
Nothing more graphically illustrates the panicky stampede for the exits by the bears than the shrinkage in the latest reported week in their ranks from 23.1% to 15.7% of the advisors surveyed. According to the folks at Bespoke Investment, in only 16 other weeks since 1975 have the bears thrown in the towel so precipitously.
And it isn't only the pros who are manifesting sharply rising exuberance: The investment masses, who've been more than a tad cautious of late, are venturing more boldly out of their cocoon. The latest report by the American Association of Individual Investors shows that 43.6% of its members were bulls, 28.8% bears and 27.6% on the fence. Barring a calamity that scares the dickens out of them, we'd expect many of those fence-sitters to clamber down to the bullish side just in time to catch the next market slide.
Richard Band, boss man at an advisory outfit called Profitable Investing, whom we don't know but stumbled upon via a quote while perusing the latest edition of Investors Intelligence, and who seems like a reasonable chap, offers investors some caveats beyond the preponderance of bulls, like extended valuations, insider selling and rather meager dividend yields, that are worth your mulling.
On overly generous valuations, he cites the Q Ratio, which compares a corporation's market cap with the replacement value of its assets. Currently, Band points out, except for a brief period at the end of the dot-com bubble, U.S. corporations are trading at a higher premium to the replacement value of their assets than at anytime in the past 110 years.
As to the stingy attitude managements have had toward sharing the piles of cash they've accumulated with shareholders, he notes that the present yield of 1.86% on the S&P 500 is only "an eyelash away from the 1.76% low set at the market top in 2007." Making him more than a little leery, too, is that, last time he looked, insider sales by the top dogs of Big Board and Amex companies were 10 times their purchases, prompting him to comment: "In my 30-odd years as an insider sleuth, I've never seen a figure that high."
All of which makes him think "the party is slowly winding down," though he reckons the bull market still has four to six months left before it goes kaput. Here we part company. We feel—you'll never guess, we're sure—he's too hopeful.
ALTHOUGH IT'S A CLOSE CALL, we do, as implied at the top of this screed, favor a dysfunctional government, with all its sins, over a non-functioning government. But suppose the choice is between a dysfunctional central bank versus a non-functioning central bank? Well, (and pace, Ben, this doesn't concern you) if we lived in the European Union, we'd choose the non-functioning version in a heartbeat.
What prompts this irascible judgment is last week's boost in the European Central Bank's benchmark interest rate by 0.25 of a percentage point. In itself, that's not the end of the world, but the scuttlebutt has it that it's only the first in a series of similar hikes. And perhaps the best guarantee that more of the same is in the offing is the denial by Jean-Claude Trichet, the ECB's president, that he and his cohorts have decided to become serial rate boosters.
The bank's switch to tightening presumably is occasioned by Trichet's concerns about inflation. Michael Darda, chief economist and market strategist at MKM Partners, isn't buying it, and neither are we. Or, at the very least, inflation doesn't stack up as all that immediately threatening. Of course, to judge by some of his past actions, Mr. Trichet doesn't possess a great nose for inflation. Back in July 2008 and after the recession hit the euro zone and just before Lehman did its swan dive, he raised rates. Exquisite timing.
And Trichet may yet regret hiking rates last week. Here, too, his timing may be more than a little off. Last week's increase, Michael observes, has inverted the spread between GDP and the ECB target rate, in the process "dramatically increasing the risk of more debt trauma in the periphery and a hard-landing scenario for the euro zone as a whole." Not a pretty prospect.
We don't want to pick on Trichet, but we will anyway. For he appears to be auditioning for the role of the Don Quixote of central bankers, attacking the phantom windmills of inflation. The irony of Trichet's move, in Michael's view, as expressed in a commentary bearing the headline of "Accommodation or Suffocation," is that the liquidity backdrop in Europe suggests monetary policy is much tighter than it was in the summer of 2008, despite the fact that real rates are lower. Indeed, the ECB's balance sheet is now contracting on a year-over-year basis, and broad money is growing at less than the rate of inflation.
"Sadly," Michael reflects, "the ECB appears to be headed down the path forged by the Bank of Japan over the better part of the last two decades: confusing low rates with easy money and blaming weakness in the monetary aggregates and nominal GDP on structural factors beyond its control."
Ah well, central bankers have a penchant for making bad things worse.
If you can't depend on our chosen representatives to act like the greedy cowards they've proved themselves to be many a time and oft, invariably willing to chose principal over principle, what can a man count on? Yet here we are, the hours tick away, the deadline looms ever closer—and the squabble drags inexorably on.
Back at the end of February, we warned of the possibility that the government might be mothballed and pooh-poohed the comforting predictions by the sunshine crowd that it would never happen, and even if it did, the effect would be just about nil.
What was silly then is particularly ludicrous now, with the economy still fragile, the recovery powered largely by stimulus courtesy of Washington, the dollar weakening ignominiously, unemployment high and confidence shaky. Not to mention the enormous dislocation, confusion and concern sure to ensue should the government go AWOL.
Moreover, chances are that even a last-minute, Band-Aid agreement to keep the government operating for another week or two would only ensure a replay of the whole nasty wrangling and postpone the day of reckoning. As to the notion that a shutdown wouldn't affect Wall Street—tell that to the savvy folks who've been pushing the price of gold to all-time highs: they're pretty serious people and entitled to a chuckle or two.
WE'VE LONG FELT that had Sigmund Freud not been so obsessed with listening to his patients nestled on a couch telling him their woes, most of which they blamed on having chosen the wrong mom and pop and then compounding their grievous error by choosing the wrong spouse, he would have a been a great portfolio manager. For while it helps, we suppose, to be able to tell the difference between a balance sheet and an income statement and know what P/E stands for, nothing in the investment armamentarium beats an educated grasp of crowd psychology.
Granted, getting a handle on investor sentiment is not an automatic guarantee of making a killing on the Street. It's a contrarian indicator that has been around for a spell, and like a lot of venerable technical tools is a bit the worse for the wear. It's grounded in the logical assumption that when everyone's bullish, it implies that a lot of buying power has already been used up and, of course, when everyone's bearish, the opposite holds.
If not infallible (what is, as we've noted before, besides the pope and financial journalists?), it provides investors with a highly reliable litmus test when the market reaches extremes of optimism or pessimism. And, right now, bullishness is dangerously rampant.
Bulls in Command—for Now
The spread between bulls and bears is the highest since 2007.
For confirmation, just take a gander at that simple chart that enlivens this grim page, the handiwork of Investors Intelligence, which weekly tracks the view of those earnest souls, investment advisors, who tell you when, and often what, to buy and sell. It depicts the difference between the number of advisors who are upbeat and who are downbeat.
That awesome spread in favor of the bulls works out to 41.6%, the most lopsided since the October 2007 all-time market peak, when the comparable gap was 42.4% and set the stage for the beginnings—and forgive us for stirring painful memories—of the worst equity disasters of the past half century.
Nothing more graphically illustrates the panicky stampede for the exits by the bears than the shrinkage in the latest reported week in their ranks from 23.1% to 15.7% of the advisors surveyed. According to the folks at Bespoke Investment, in only 16 other weeks since 1975 have the bears thrown in the towel so precipitously.
And it isn't only the pros who are manifesting sharply rising exuberance: The investment masses, who've been more than a tad cautious of late, are venturing more boldly out of their cocoon. The latest report by the American Association of Individual Investors shows that 43.6% of its members were bulls, 28.8% bears and 27.6% on the fence. Barring a calamity that scares the dickens out of them, we'd expect many of those fence-sitters to clamber down to the bullish side just in time to catch the next market slide.
Richard Band, boss man at an advisory outfit called Profitable Investing, whom we don't know but stumbled upon via a quote while perusing the latest edition of Investors Intelligence, and who seems like a reasonable chap, offers investors some caveats beyond the preponderance of bulls, like extended valuations, insider selling and rather meager dividend yields, that are worth your mulling.
On overly generous valuations, he cites the Q Ratio, which compares a corporation's market cap with the replacement value of its assets. Currently, Band points out, except for a brief period at the end of the dot-com bubble, U.S. corporations are trading at a higher premium to the replacement value of their assets than at anytime in the past 110 years.
As to the stingy attitude managements have had toward sharing the piles of cash they've accumulated with shareholders, he notes that the present yield of 1.86% on the S&P 500 is only "an eyelash away from the 1.76% low set at the market top in 2007." Making him more than a little leery, too, is that, last time he looked, insider sales by the top dogs of Big Board and Amex companies were 10 times their purchases, prompting him to comment: "In my 30-odd years as an insider sleuth, I've never seen a figure that high."
All of which makes him think "the party is slowly winding down," though he reckons the bull market still has four to six months left before it goes kaput. Here we part company. We feel—you'll never guess, we're sure—he's too hopeful.
ALTHOUGH IT'S A CLOSE CALL, we do, as implied at the top of this screed, favor a dysfunctional government, with all its sins, over a non-functioning government. But suppose the choice is between a dysfunctional central bank versus a non-functioning central bank? Well, (and pace, Ben, this doesn't concern you) if we lived in the European Union, we'd choose the non-functioning version in a heartbeat.
What prompts this irascible judgment is last week's boost in the European Central Bank's benchmark interest rate by 0.25 of a percentage point. In itself, that's not the end of the world, but the scuttlebutt has it that it's only the first in a series of similar hikes. And perhaps the best guarantee that more of the same is in the offing is the denial by Jean-Claude Trichet, the ECB's president, that he and his cohorts have decided to become serial rate boosters.
The bank's switch to tightening presumably is occasioned by Trichet's concerns about inflation. Michael Darda, chief economist and market strategist at MKM Partners, isn't buying it, and neither are we. Or, at the very least, inflation doesn't stack up as all that immediately threatening. Of course, to judge by some of his past actions, Mr. Trichet doesn't possess a great nose for inflation. Back in July 2008 and after the recession hit the euro zone and just before Lehman did its swan dive, he raised rates. Exquisite timing.
And Trichet may yet regret hiking rates last week. Here, too, his timing may be more than a little off. Last week's increase, Michael observes, has inverted the spread between GDP and the ECB target rate, in the process "dramatically increasing the risk of more debt trauma in the periphery and a hard-landing scenario for the euro zone as a whole." Not a pretty prospect.
We don't want to pick on Trichet, but we will anyway. For he appears to be auditioning for the role of the Don Quixote of central bankers, attacking the phantom windmills of inflation. The irony of Trichet's move, in Michael's view, as expressed in a commentary bearing the headline of "Accommodation or Suffocation," is that the liquidity backdrop in Europe suggests monetary policy is much tighter than it was in the summer of 2008, despite the fact that real rates are lower. Indeed, the ECB's balance sheet is now contracting on a year-over-year basis, and broad money is growing at less than the rate of inflation.
"Sadly," Michael reflects, "the ECB appears to be headed down the path forged by the Bank of Japan over the better part of the last two decades: confusing low rates with easy money and blaming weakness in the monetary aggregates and nominal GDP on structural factors beyond its control."
Ah well, central bankers have a penchant for making bad things worse.
Monday, April 4, 2011
No Farewell for Euro-Zone woes
The Greeks have a word for it. Unfortunately, it can't be printed in a family magazine. Suffice to it say, the word in question is not complimentary. But then, how could it be, directed as it is at Moody's?
What occasioned the distinctly earthy expression of disapproval by the heirs of Socrates, Plato and Aristotle was that Moody's, ignoring the country's historic repute as the cradle of democracy, had the effrontery to slash Greece's credit rating three whole notches, thus casting its sovereign debt ever deeper into the Hades of junk bondage, and, adding insult to injury, warned a further cut was not outside the realm of possibility.
Not content with muttering imprecations, the powers-that-be in Greece also blamed the credit agencies with causing undue financial distress for their country and fired off a letter to the European Union demanding it induce Moody's, Standard & Poor's and Fitch to stop being so mean. Actually, we found the complaints by the finance minister and prime minister quite revelatory, since we were under the misimpression that feckless government borrowing and spending has something to do with the financial woes that the likes of Ireland, Portugal, Spain and Greece find themselves wallowing in. Live and learn, we guess.
Nothing daunted, and while it had its scalpel out, Moody's decided to demonstrate its sober impartiality when rendering judgment on the creditworthiness of nations by following its unkind cut to Greece with a downgrade of Spain three days later. No doubt, now that they've gotten into the swing of it, the lads and lassies at the credit-rating services will be paring ratings with some abandon, as it becomes increasingly apparent that the clutch of euro-zone members whose banks and economies are in deep doo-doo are not, as widely assumed, yesterday's worry.
As Harald Malmgren—boss man of the eponymous Malmgren Group, whose insightful observations on global markets we've had the pleasure of quoting on more than one occasion—puts it, "The Euro crisis is not over." Rather, he says, "European politicians have become practiced and effective in postponing problems and diverting market attention from underlying weaknesses."
Early on, it struck us that the insistence to impose austerity on euro-zone economies that were wobbly in the extreme and even nudging them to raise interest rates was like forcing a guy with a fractured leg to compete in a marathon—a sure-fire way to stifle any chance of incipient recovery. Comes now Michael Darda, chief economist of MKM Partners, with a piece titled, "Can the Euro Periphery Handle High Rates?" And his answer is as definitive as it is succinct: "Nope."
If occasionally given to an overly rosy view of domestic economic data, Michael has been pretty much on the money on the overall trend and, to his great credit, he has been right as rain on the stock market during its stunning two-year bull romp. He explains his negative take on the financial weak sisters in the euro zone this way:
"Bond yields have shot up to new highs as European debt markets have priced in a succession of European Central Bank rate hikes. With debt spreads wide (and widening), the generic euro-zone yield curve collapsing and broad-based weakness in the euro-area monetary aggregates, we believe the signal from these financial indicators is that an already-too-tight ECB monetary policy is about to get even tighter, with potentially devastating consequences. We do not believe the periphery [Greece, Italy, Spain, Portugal, Ireland] can withstand what appears to be an imminent series of ECB rate hikes."
Michael points out that the leading indicators of the Organization for Economic Cooperation and Development (tongue get tired saying that? Try OECD) for Spain peaked in April of last year, and for Italy in January 2010. Since Spain and Italy together are some five times the combined size of Greece, Portugal and Ireland, a credit-based shock via higher interest rates to Italy and Spain, he fears, "may be the match that lights the fuse."
Michael warns that money growth remains sluggish across the board in the euro zone, carrying it with the threat of enfeebled nominal GDP growth. The European Central Bank, he posits, ought to be more concerned about the rising risk of a Japanese-style "lost decade" than the "backward-looking inflation data" that has it all aflutter.
But, come on, Michael, central bankers—whether in Europe or Asia or the good old U.S.A. or Mars—wouldn't be central bankers if they knew what to worry about. Remember how surpluses in the federal budget kept Alan Greenspan tossing and turning all night long and how Ben Bernanke pooh-poohed the idea that a housing bubble might explode and take the economy with it?
TO BE FAIR, CENTRAL BANKERS aren't the only species with the knack of intuitively focusing on the wrong concern. European politicians, as Harald Malmgren noted, are masters at it and, lest we be accused of xenophobia, our own pols are no slouches in treating mountains as if they were molehills and molehills as if they were mountains.
For example, with the Middle East erupting, much of Europe experiencing financial distress and a still sorry-looking job picture here, Harry Reid of Nevada, the Senate majority leader, unexpectedly fixed his full attention on the brothels in his state. More specifically, he wants to change their status from legal to illegal, a worthy notion, perhaps, but we must be missing something since we can't quite grasp it as one of the burning issues of the day. Of course, his motivation could be more personal: Perhaps the dwelling next to his suddenly has been transformed into a house of ill repute, which obviously would create a terrible traffic nuisance.
In like vein (or is it in like vain?), the inimitable Newt Gingrich has resurfaced as a candidate for the presidency in 2012. Always eager for an interview, even more so now that he's in the running for the top job, Newt seized the recent opportunity to jabber away on the radio. But instead of pontificating on the uprisings in the Middle East or the ballooning deficit, he found himself ruminating on his extramarital romantic adventures. He served his first wife with divorce papers while she was in the hospital recovering from cancer surgery. He shed his second wife after 18 years and a diagnosis that she had multiple sclerosis and married No. 3, with whom he had been having an affair. His explanation was that he felt so passionate about the country that he worked too hard and did some things that were not "appropriate." That's what passion for your country will do to you every time, by golly.
In truth, we're not sure that either Harry or Newt, if their concerns weren't directed toward brothels and brides, would throw much light on the revolutionary wave rolling through the Middle East and North Africa, or the fierce earthquake and tsunami roiling Japan, or the financial fix Europe is in, or runaway prices at the pump, or the decline in consumer confidence or the spotty employment scene. All of which provided a panoply of reasons for the market to take a dive, as it dutifully did.
As share prices tumbled, market sages by and large stroked their chins and declared that stocks, after the sensational two-year run they've enjoyed, were looking for an excuse to go down. It'd be nice if just once those same sages told us that before the market took a header. Instead, they kept pointing to how corporate profits were booming and cash hoards mounting—brilliant discoveries, to be sure—which were supposed to be proof against stocks taking a real hit.
You have to say that the market showed considerable gumption in the face of all the negative news by winding up Friday with a nice bounce. Resilience has been its long suit in its march upward from the wintery depths of March '09. Trouble is, the bad stuff that put a dent in portfolios last week for the most part isn't likely to vanish anytime soon. Nobody can say for sure what happens in Libya or Yemen or even Saudi Arabia. But the region has unleashed a remarkable tide that can't be reversed. Which suggests to us that what seem like punishingly high oil prices and political turmoil in the region are here to stay as well. Reason enough, as we've said before, to buy gold, oil and, perhaps, if it suffers a further drop, natural gas.
Europe is not going down the tubes, but it'll take awhile to straighten itself out, maybe quite awhile, and our market remains vulnerable to any sudden bad vibes from the Old World. We wouldn't make too much of China's disappointing trade numbers, if only because we don't trust the numbers or believe it's all the fault of the Chinese New Year. We suspect it's Beijing's sleight of hand at work, hoping to ease the pressure to revalue the yuan.
What continues to bother us, with the implications for the economy and the stock market, are jobs—or, more precisely, the lack of them. While last month's employment gains might deserve a muted cheer, a close look at the latest weekly unemployment-insurance claims didn't rate much of a hurrah. On a seasonally adjusted basis, they totaled 397,000, an increase of 26,000 over the previous week. However, ex the seasonal adjustment, new claims weighed in at 406,096, a pretty hefty number this late in the upturn.
Moreover, as our pals at the Liscio Report, Philippa Dunne and Doug Henwood, report, the Job Openings and Labor Turnover Survey (JOLTS) for January "showed a distinct lack of dynamism." Net hiring—hires less separations—was a measly 0.1% of employment; openings dipped to 2.1% of employment, which just matches the 2010 average. January, Doug and Philippa sigh, "was not a sizzling month for employment." They can say that again.
What occasioned the distinctly earthy expression of disapproval by the heirs of Socrates, Plato and Aristotle was that Moody's, ignoring the country's historic repute as the cradle of democracy, had the effrontery to slash Greece's credit rating three whole notches, thus casting its sovereign debt ever deeper into the Hades of junk bondage, and, adding insult to injury, warned a further cut was not outside the realm of possibility.
Not content with muttering imprecations, the powers-that-be in Greece also blamed the credit agencies with causing undue financial distress for their country and fired off a letter to the European Union demanding it induce Moody's, Standard & Poor's and Fitch to stop being so mean. Actually, we found the complaints by the finance minister and prime minister quite revelatory, since we were under the misimpression that feckless government borrowing and spending has something to do with the financial woes that the likes of Ireland, Portugal, Spain and Greece find themselves wallowing in. Live and learn, we guess.
Nothing daunted, and while it had its scalpel out, Moody's decided to demonstrate its sober impartiality when rendering judgment on the creditworthiness of nations by following its unkind cut to Greece with a downgrade of Spain three days later. No doubt, now that they've gotten into the swing of it, the lads and lassies at the credit-rating services will be paring ratings with some abandon, as it becomes increasingly apparent that the clutch of euro-zone members whose banks and economies are in deep doo-doo are not, as widely assumed, yesterday's worry.
As Harald Malmgren—boss man of the eponymous Malmgren Group, whose insightful observations on global markets we've had the pleasure of quoting on more than one occasion—puts it, "The Euro crisis is not over." Rather, he says, "European politicians have become practiced and effective in postponing problems and diverting market attention from underlying weaknesses."
Early on, it struck us that the insistence to impose austerity on euro-zone economies that were wobbly in the extreme and even nudging them to raise interest rates was like forcing a guy with a fractured leg to compete in a marathon—a sure-fire way to stifle any chance of incipient recovery. Comes now Michael Darda, chief economist of MKM Partners, with a piece titled, "Can the Euro Periphery Handle High Rates?" And his answer is as definitive as it is succinct: "Nope."
If occasionally given to an overly rosy view of domestic economic data, Michael has been pretty much on the money on the overall trend and, to his great credit, he has been right as rain on the stock market during its stunning two-year bull romp. He explains his negative take on the financial weak sisters in the euro zone this way:
"Bond yields have shot up to new highs as European debt markets have priced in a succession of European Central Bank rate hikes. With debt spreads wide (and widening), the generic euro-zone yield curve collapsing and broad-based weakness in the euro-area monetary aggregates, we believe the signal from these financial indicators is that an already-too-tight ECB monetary policy is about to get even tighter, with potentially devastating consequences. We do not believe the periphery [Greece, Italy, Spain, Portugal, Ireland] can withstand what appears to be an imminent series of ECB rate hikes."
Michael points out that the leading indicators of the Organization for Economic Cooperation and Development (tongue get tired saying that? Try OECD) for Spain peaked in April of last year, and for Italy in January 2010. Since Spain and Italy together are some five times the combined size of Greece, Portugal and Ireland, a credit-based shock via higher interest rates to Italy and Spain, he fears, "may be the match that lights the fuse."
Michael warns that money growth remains sluggish across the board in the euro zone, carrying it with the threat of enfeebled nominal GDP growth. The European Central Bank, he posits, ought to be more concerned about the rising risk of a Japanese-style "lost decade" than the "backward-looking inflation data" that has it all aflutter.
But, come on, Michael, central bankers—whether in Europe or Asia or the good old U.S.A. or Mars—wouldn't be central bankers if they knew what to worry about. Remember how surpluses in the federal budget kept Alan Greenspan tossing and turning all night long and how Ben Bernanke pooh-poohed the idea that a housing bubble might explode and take the economy with it?
TO BE FAIR, CENTRAL BANKERS aren't the only species with the knack of intuitively focusing on the wrong concern. European politicians, as Harald Malmgren noted, are masters at it and, lest we be accused of xenophobia, our own pols are no slouches in treating mountains as if they were molehills and molehills as if they were mountains.
For example, with the Middle East erupting, much of Europe experiencing financial distress and a still sorry-looking job picture here, Harry Reid of Nevada, the Senate majority leader, unexpectedly fixed his full attention on the brothels in his state. More specifically, he wants to change their status from legal to illegal, a worthy notion, perhaps, but we must be missing something since we can't quite grasp it as one of the burning issues of the day. Of course, his motivation could be more personal: Perhaps the dwelling next to his suddenly has been transformed into a house of ill repute, which obviously would create a terrible traffic nuisance.
In like vein (or is it in like vain?), the inimitable Newt Gingrich has resurfaced as a candidate for the presidency in 2012. Always eager for an interview, even more so now that he's in the running for the top job, Newt seized the recent opportunity to jabber away on the radio. But instead of pontificating on the uprisings in the Middle East or the ballooning deficit, he found himself ruminating on his extramarital romantic adventures. He served his first wife with divorce papers while she was in the hospital recovering from cancer surgery. He shed his second wife after 18 years and a diagnosis that she had multiple sclerosis and married No. 3, with whom he had been having an affair. His explanation was that he felt so passionate about the country that he worked too hard and did some things that were not "appropriate." That's what passion for your country will do to you every time, by golly.
In truth, we're not sure that either Harry or Newt, if their concerns weren't directed toward brothels and brides, would throw much light on the revolutionary wave rolling through the Middle East and North Africa, or the fierce earthquake and tsunami roiling Japan, or the financial fix Europe is in, or runaway prices at the pump, or the decline in consumer confidence or the spotty employment scene. All of which provided a panoply of reasons for the market to take a dive, as it dutifully did.
As share prices tumbled, market sages by and large stroked their chins and declared that stocks, after the sensational two-year run they've enjoyed, were looking for an excuse to go down. It'd be nice if just once those same sages told us that before the market took a header. Instead, they kept pointing to how corporate profits were booming and cash hoards mounting—brilliant discoveries, to be sure—which were supposed to be proof against stocks taking a real hit.
You have to say that the market showed considerable gumption in the face of all the negative news by winding up Friday with a nice bounce. Resilience has been its long suit in its march upward from the wintery depths of March '09. Trouble is, the bad stuff that put a dent in portfolios last week for the most part isn't likely to vanish anytime soon. Nobody can say for sure what happens in Libya or Yemen or even Saudi Arabia. But the region has unleashed a remarkable tide that can't be reversed. Which suggests to us that what seem like punishingly high oil prices and political turmoil in the region are here to stay as well. Reason enough, as we've said before, to buy gold, oil and, perhaps, if it suffers a further drop, natural gas.
Europe is not going down the tubes, but it'll take awhile to straighten itself out, maybe quite awhile, and our market remains vulnerable to any sudden bad vibes from the Old World. We wouldn't make too much of China's disappointing trade numbers, if only because we don't trust the numbers or believe it's all the fault of the Chinese New Year. We suspect it's Beijing's sleight of hand at work, hoping to ease the pressure to revalue the yuan.
What continues to bother us, with the implications for the economy and the stock market, are jobs—or, more precisely, the lack of them. While last month's employment gains might deserve a muted cheer, a close look at the latest weekly unemployment-insurance claims didn't rate much of a hurrah. On a seasonally adjusted basis, they totaled 397,000, an increase of 26,000 over the previous week. However, ex the seasonal adjustment, new claims weighed in at 406,096, a pretty hefty number this late in the upturn.
Moreover, as our pals at the Liscio Report, Philippa Dunne and Doug Henwood, report, the Job Openings and Labor Turnover Survey (JOLTS) for January "showed a distinct lack of dynamism." Net hiring—hires less separations—was a measly 0.1% of employment; openings dipped to 2.1% of employment, which just matches the 2010 average. January, Doug and Philippa sigh, "was not a sizzling month for employment." They can say that again.
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