Thursday, August 26, 2010

Morning Note...

**Please note that the Morning Note will be going on a brief hiatus… First, I will be in and out of the office with vacation days over the next week or so and that makes it hard to write consistently.  Second, I am struggling to find anything value-added to say this time of year, so it’s better to step back and regroup a bit…  My plan is to return to writing on Tuesday, September 7th.  So, until then…have a great holiday and enjoy what’s left of the summer!  Ben**

Futures are ~40bps higher this morning as Initial Jobless Claims for the week ending August 21st surprise to the upside, coming in at 473k versus the 490k expectation.  However, the prior week’s reading was revised upward to 504k from 500k, and the sobering fact is that 473k is not exactly something to cheer about.  Continuing Claims came in at 4.456k versus the 4.495k expectation.  In earnings news, Guess Inc. (GES) reported record net earnings last night, Hain Celestial (HAIN) reported higher net sales, Jo-Ann Stores (JAS) swung to a Q2 profit and raised guidance, and JDSU reported that it swung to a profit in fiscal Q4 on a jump in sales in optical networking products.  In M&A news, 3Par (PAR) accepts DELL’s increased $24.30 bid for the company.  Asia was mixed overnight and Europe is roughly 1% higher on an 89% increase in profits from Credit Agricole (ACA FP; +3.4%) and despite news of weaker sales from Diageo (DGE LN; -1.5%)  Oil is up 1.25%, the USD is down 25bps, and Gold futures are flat at $1240/oz. 

Short term, the market feels a bit oversold…we’re down about 7% from two weeks ago…but longer term, it’s anybody’s guess.  My two cents is that we may be stuck in a range through mid-term elections, but if anything, the risk is to the downside.  Note that the Q2 GDP release is due tomorrow at 8:30am, along with Personal Consumption data.  Also note that Helicopter Ben speaks tomorrow in Jackson Hole, Wyoming.  Fed-watchers will be looking for signs of a shift toward significant asset purchases by the FOMC. 

Not really new news, but interesting to see this in print from Bloomberg today:

Savers Pay U.S. Banks to Keep Cash as Rates Dip, Fees Multiply 2010-08-26 06:31:19.592 GMT

Aug. 26 (Bloomberg) -- Average interest on savings, checking, money-market and CD accounts fell to 0.99% in July, first decline below 1% in a decade: Market Rates Insight.

For a bit of doom and gloom, here’s a recent summary of the “wall of worry” from John Mauldin:

Where Is My V-Shaped Recovery?

Remember all the bulls and cheerleaders late last year and into this one talking about a V-shaped recovery? They were making their projections based on what had happened in past recessions. I (and others) argued that that data was meaningless, as it did not reflect the fact that a balance-sheet recession requires years of deleveraging, is inherently deflationary, and all the factors that produce the normal "V" are no longer in play. Bank lending is still dropping. Savings rates go up. Debt gets paid down. Governments run into limits as to how much they can stimulate the economy without creating large and destabilizing debt. Central banks push rates to zero, and then what? This is a far different environment than we have had for the last 70 years. Using past performance to predict future results when the future environment is significantly different than the period in which the data was collected is misleading at best and worthless at worst, leading to bad decisions. Much better to deal with reality.

And just to show that I am really the optimist in the room, let's turn to my good friend David Rosenberg, writing this morning under the following headline:

"U.S. RECESSION NEVER ENDED; GDP TO CONTRACT IN Q3… Our suspicions have been confirmed - the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008. The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the 'build in' for Q3 is -1.5% at an annual rate. Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak-to-trough contraction in the 2001 recession was 1.3%! That is incredible. Interestingly, and dovetailing nicely with our deflation theme, nominal GDP fell 0.3% in May and by 0.4% in June. This is a key reason why Treasury yields are melting."

Politicians are going to be greeted with a GDP number for the third quarter, right before the elections. Will it be negative like Rosie thinks? I am not sure, but in any event it will not be good. Structural unemployment will still be over 10% and deficits will be high.

…Unemployment and continuing claims have started to rise again. This is not what happens in V-shaped recoveries, gentle reader. The ONLY reason the headline unemployment number has dropped a little is that the Labor Department has dropped so many people from the labor force. Again, if you have not looked for a job for four weeks, they do not count you as unemployed. If you use the labor-force number from just last April, unemployment is 10.5%. Brutal. Who doesn't know too many people without jobs?

…Bottom line? It is going to be a tough environment for the next 6-8 years. That is just what happens when you have a deleveraging / balance sheet / deflationary / end of the Debt Supercycle recession. It is what it is, and no amount of wishing or finger pointing can change the facts.

Let me take a moment and offer some sympathy to President Obama. This recession/slow period is not his fault. Obamacare? A now-trillion-dollar stimulus? Those he owns. But the recession/credit crisis would have happened if McCain had been elected.

And it is not Bush's fault. Did he make some mistakes? Oh yes. Squandering those surpluses is huge in my book. Not vetoing all that excess spending is at his feet. And there are other issues, but that is not my point.

We Have Met the Enemy, and He Is Us

There is a great line from the old cartoon strip Pogo: "We have met the enemy, and he is us." (Ah, I miss Walt Kelly and Pogo. But I show my age!)

Neither Clinton nor Bush forced people to borrow money against their homes. Yes, some of the laws made it easier. Yes, Greenspan pushed rates lower than they should have been. Allowing banks to go to 30:1 leverage was stupid (courtesy of the Bush administration). Repealing Glass-Steagall in hindsight was not wise (Clinton era).

But we the people borrowed and spent. Congress taxed and spent and we voted for the SOBs and collectively asked for more goodies. Maybe not you, gentle reader, because all my readers too smart to have engaged in such reckless activity, but those other guys sure did. Probably the readers of Paul Krugman. (Did I say that?!?)

So, the current problems are not Obama's fault. But how he deals with them is. Raising taxes in what can only be called a soft environment gives him ownership of the consequences. And it is more than just the Bush tax cuts going away. Obamacare gives us a host of new taxes. (If you want to see more, read http://www.atr.org/six-months-untilbr-largest-tax-hikes-a5171)

Here’s one that is a bit beyond the bounds of the “daily markets,” but brings up an interesting trend (especially given our male-dominated business) and is worth a read…from a recent article in The Atlantic Monthly titled “The End of Men:”

Man has been the dominant sex since, well, the dawn of mankind. But for the first time in human history, that is changing—and with shocking speed. Cultural and economic changes always reinforce each other. And the global economy is evolving in a way that is eroding the historical preference for male children, worldwide. Over several centuries, South Korea, for instance, constructed one of the most rigid patriarchal societies in the world. Many wives who failed to produce male heirs were abused and treated as domestic servants; some families prayed to spirits to kill off girl children. Then, in the 1970s and ’80s, the government embraced an industrial revolution and encouraged women to enter the labor force. Women moved to the city and went to college. They advanced rapidly, from industrial jobs to clerical jobs to professional work. The traditional order began to crumble soon after. In 1990, the country’s laws were revised so that women could keep custody of their children after a divorce and inherit property. In 2005, the court ruled that women could register children under their own names. As recently as 1985, about half of all women in a national survey said they “must have a son.” That percentage fell slowly until 1991 and then plummeted to just over 15 percent by 2003. Male preference in South Korea “is over,” says Monica Das Gupta, a demographer and Asia expert at the World Bank. “It happened so fast. It’s hard to believe it, but it is.” The same shift is now beginning in other rapidly industrializing countries such as India and China.

Up to a point, the reasons behind this shift are obvious. As thinking and communicating have come to eclipse physical strength and stamina as the keys to economic success, those societies that take advantage of the talents of all their adults, not just half of them, have pulled away from the rest. And because geopolitics and global culture are, ultimately, Darwinian, other societies either follow suit or end up marginalized. In 2006, the Organization for Economic Cooperation and Development devised the Gender, Institutions and Development Database, which measures the economic and political power of women in 162 countries. With few exceptions, the greater the power of women, the greater the country’s economic success. Aid agencies have started to recognize this relationship and have pushed to institute political quotas in about 100 countries, essentially forcing women into power in an effort to improve those countries’ fortunes. In some war-torn states, women are stepping in as a sort of maternal rescue team. Liberia’s president, Ellen Johnson Sirleaf, portrayed her country as a sick child in need of her care during her campaign five years ago. Postgenocide Rwanda elected to heal itself by becoming the first country with a majority of women in parliament.

In feminist circles, these social, political, and economic changes are always cast as a slow, arduous form of catch-up in a continuing struggle for female equality. But in the U.S., the world’s most advanced economy, something much more remarkable seems to be happening. American parents are beginning to choose to have girls over boys. As they imagine the pride of watching a child grow and develop and succeed as an adult, it is more often a girl that they see in their mind’s eye.

What if the modern, postindustrial economy is simply more congenial to women than to men? For a long time, evolutionary psychologists have claimed that we are all imprinted with adaptive imperatives from a distant past: men are faster and stronger and hardwired to fight for scarce resources, and that shows up now as a drive to win on Wall Street; women are programmed to find good providers and to care for their offspring, and that is manifested in more- nurturing and more-flexible behavior, ordaining them to domesticity. This kind of thinking frames our sense of the natural order. But what if men and women were fulfilling not biological imperatives but social roles, based on what was more efficient throughout a long era of human history? What if that era has now come to an end? More to the point, what if the economics of the new era are better suited to women?

Once you open your eyes to this possibility, the evidence is all around you. It can be found, most immediately, in the wreckage of the Great Recession, in which three-quarters of the 8 million jobs lost were lost by men. The worst-hit industries were overwhelmingly male and deeply identified with macho: construction, manufacturing, high finance. Some of these jobs will come back, but the overall pattern of dislocation is neither temporary nor random. The recession merely revealed—and accelerated—a profound economic shift that has been going on for at least 30 years, and in some respects even longer.

Earlier this year, for the first time in American history, the balance of the workforce tipped toward women, who now hold a majority of the nation’s jobs. The working class, which has long defined our notions of masculinity, is slowly turning into a matriarchy, with men increasingly absent from the home and women making all the decisions. Women dominate today’s colleges and professional schools—for every two men who will receive a B.A. this year, three women will do the same. Of the 15 job categories projected to grow the most in the next decade in the U.S., all but two are occupied primarily by women. Indeed, the U.S. economy is in some ways becoming a kind of traveling sisterhood: upper-class women leave home and enter the workforce, creating domestic jobs for other women to fill.

The postindustrial economy is indifferent to men’s size and strength. The attributes that are most valuable today—social intelligence, open communication, the ability to sit still and focus—are, at a minimum, not predominantly male. In fact, the opposite may be true…


DBAB ups PAYX.  HSBC ups CHA.  Longbow ups POL, SHLM.  BofAMLCO cuts LFC.  MSCO cuts NDAQ, SCHW.  UBSS cuts MDT. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Today’s Trivia:  For all you 80’s buffs…what does Atari have in common with Chuck E. Cheese’s?

Yesterday’s Question:  Remember Ted Kaczynski?  Why was he known as “The Unabomber” anyway?
                                                                                                                                                             
Yesterday's Answer:  Kaczynski was known as the “Unabomber” because his early mail bombs were sent to universities (UN) and airlines (A). 

Best Quotes:  A mix of summertime quotes…

“Happy Thursday – may time pass quickly for us all!”  --KBW note

“Real quiet. Don't read if you’re busy.”  --BCAP note

“Good Morning - A string of weak economic data that started a few weeks ago continued to shake investor confidence in the past few sessions. Starting with a jump in initial jobless claims last Thursday, followed by a drop in Philly Fed index on Friday, onto a significant miss in existing home sales on Monday, and rounded up with a precipitous decline in durable good orders yesterday, each data release appears to be adding more dark colors to an already bleak picture of economic recovery. Equity markets have reacted violently, having sold off by 3.7% over the past week alone, bringing their cumulative decline to 7% since mid-August.  Cash is holding up much better, with HY and loan indexes sitting roughly unchanged for the period, and HG Master edging higher, mostly on the back of strength in Treasuries. (taken from Oleg Melentyev)  Today's Initial Jobless number will be up in lights, ahead of tomorrows GDP.   If the trend remains, markets will get hit hard after numbers are released.  I guess you can't price in fear.  Even after yesterdays bounce, I still feel like they'll sell any rally.  Have a good day.”  --BofAMLCO