Restaurant Industry Still In Contraction Mode

A good indicator for the state of the consumer is the National Restaurant Association's Performance Index, which tracks restaurant activity. The NRA reported that in August the index declined to 99.5 (below 100 signals contraction). What I find confusing is that consumers have all the money in the world for ipods, ipads, and iphones, but not for casual dining. From the NRA:
As a result of continued soft sales and traffic levels, the National Restaurant Association’s comprehensive index of restaurant activity remained below 100 for the fourth consecutive month in August. The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 99.5 in August, essentially unchanged from the previous three months. In addition, the RPI stood below 100 for the fourth consecutive month, which signifies contraction in the index of key industry indicators.

The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 98.9 in August – up slightly from a level of 98.8 in July. However, the Current Situation Index remained below 100 for the 36th consecutive month, which signifies contraction in the current situation indicators.

Restaurant operators also continued to report a net decline in customer traffic levels in August. Thirty-five percent of restaurant operators reported an increase in customer traffic between August 2009 and August 2010, matching the proportion of operators who reported higher customer traffic in July. Forty-two percent of operators reported a traffic decline in August, down slightly from 46 percent who reported lower traffic in July.

The Expectations Index, which measures restaurant operators’ six-month outlook for four industry indicators (same-store sales, employees, capital expenditures and business conditions), stood at 100.1 in August – up slightly from a level of 100.0 in July.

Chart Source: American Restaurant Association
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Another Keynesian Idea: G3 Needs To Print More Money To Avoid Trade War

Is is just me or does modern Keynesian theory sound more like bizarro economics with everything turned upside down: money printing good, savings bad, deficits good, fiscal prudence bad, more debt good, and inflation an absolute necessity. To me Keynesian philosophy is almost completely backwards and there is no doubt that it has led the US and other western economies to the brink of economic ruin. But the Keynesians are still not done, they say if we could just have another stimulus package and more QE then the economy would return to normal growth. In an article published today "one of the world's most respected economists," Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley says that in order to avoid a global trade war G3 countries (US, Europe, and Japan) should all print more money. Here is the excerpt from his article:
There is a better way for the G3

If targeted asset purchases succeed in boosting domestic demand, then the G3 economies can, in fact, all export more to one another. Thus, the three central banks need to specify exactly what they will buy and explain through what channels those purchases will stimulate domestic demand. (I have my own ideas about exactly what they should do, but that’s properly the subject for another column.) Those who fear that the Fed, BOJ and ECB have beggar-thy-neighbour intentions will be reassured. This is not a time for constructive ambiguity.

It really does take a Ph.D to come up with this level of sheer nonsense. If I understand the author, the G3 should all print money to reassure the market (and other countries) that they are not engaging in beggar-thy-neighbor policies. This sounds like some Orwellian police state doublespeak. Printing money is currency debasement and represents a beggar-thy-neighbor policy! It may take a while for it to show up in the CPI, but don't let the Keynesians tell you otherwise. Another problem I have with this proposal is the incorrect premise by the author that money printing boosts domestic demand. If that is true, then why is the Fed contemplating QE 2? Didn't QE 1 boost domestic demand? In reality QE 1 did nothing to help the real economy, except artificially boost asset prices. But then again, sound reasoning and empirical evidence mean nothing to a Keynesian economist armed with an faulty computer model.

Black Swan Insights  
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Chicago PMI Increases in September

The Institute for Supply Management-Chicago reported that its Business Barometer Index increased in September to 60.4%, up from 56.7 in August. Highlights from the report:
EMPLOYMENT net hiring continued;
PRODUCTION and NEW ORDERS improved in tandem
ORDER BACKLOGS shrank;
INVENTORIES continued to show decreases.
What I found interesting about the report was not so much the headline number, but the comments at the end of the report. Each month survey panelists are given the opportunity to leave a comment about how their business is doing. Here are the comments:
1. Suppliers have cut staff so much there is no support team when a failure occurs, the response is slow, laborious and inadequate.

2. Tight raw material inventories both in-house and at suppliers are making planning very interesting. Conservative forecasts make this a prudent strategy but current skittish markets can either validate or wreak havoc upon it. Roll the dice.

3. Small business lending is picking up a little. Foreclosures on both Commercial and Residential properties are increasing. We are beginning to see an increase in people walking away from their mortgage obligations because of the decrease in the underlying values of their properties.

4. Just wondering how long this will last!

5. Look for consumer food prices to rise soon. Food manufacturers simply cannot continue to absorb commodity increases.

6. We have a price increase going into effect October 1st, which increases orders for September.

7. For our business, there is a lot of forward looking quotational activity, no new orders, but construction of projects which receive financial approval back in the Spring.

The two main themes are future price inflation and that companies may have cut too many workers during the recession. Despite what the criminals at the Fed claim, consumers can expect to see their cost of living increase (how this can be a sign of deflation is beyond me). The only reason this has not occurred sooner is because businesses have not been able to pass on increased costs due to extremely weak demand. This situation is changing and now companies are more confident they can increase prices. The other trend is that companies may regret firing so many workers. If we see any real increase in final demand, corporations will have to start hiring more people at a rapid rate, which is good for the job market. The major question is if final demand will be there. If history is any guide, demand will remain soft for a protracted period of time following a financial crisis.

Black Swan Insights

Related Articles:
US Economy Expected to Grow Only 1.5% Per Year For The Next Decade
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AAII Sentiment Down Again

According to the American Association of Individual Investors bullish sentiment fell to 42.53% from 44.97%. bearish sentiment increased to 31.61% from 25.40% during the previous week. The percentage of investors who described themselves as neutral market fell to 25.86% from 29.63%. The results are somewhat surprising because the market has been positive during the last week. It seems retail investors are getting cold feet. Regardless, the high number of bulls still indicates that we are closer to a top than a bottom. Ideally you want to be buying stocks when the level of bearishness gets to around 50% or more. We are not there yet.

Here is a 6 month chart of the AAII survey.


















Here is a longer chart which compares AAII bullish sentiment with the SP 500.


















Finally here is a chart which compares AAII bearish sentiment with the SP 500.


















Black Swan Insights

Related Articles:
AAII Investor Sentiment Declines   Sept 23, 2010
AAII Investor Sentiment Up Again Sept 16, 2010
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Bernanke: Fed To Release Details of Emergency Lending Facilities

From the Fed's website:
A final element of the Federal Reserve's efforts to implement the Dodd-Frank Act relates to the transparency of our balance sheet and liquidity programs. Well before enactment, we were providing a great deal of relevant information on our website, in statistical releases, and in regular reports to the Congress. Under a framework established by the act, the Federal Reserve will, by December 1, provide detailed information regarding individual transactions conducted across a range of credit and liquidity programs over the period from December 1, 2007, to July 20, 2010. This information will include the names of counterparties, the date and dollar value of individual transactions, the terms of repayment, and other relevant information. On an ongoing basis, subject to lags specified by the Congress to protect the efficacy of the programs, the Federal Reserve also will routinely provide information regarding the identities of counterparties, amounts financed or purchased and collateral pledged for transactions under the discount window, open market operations, and emergency lending facilities.

If this is true, it would come as a serve blow to the Fed's much prized secrecy. Why the sudden change of heart by the Fed? It was probably the realization by the Fed's lawyers that it was going to lose its appeal to keep the records secret. It seems that we are finally going to get the truth about what really happened during the financial crisis and which institutions needed the most assistance. I bet the major banks don't like this at all!


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Auditors Failed To Enforce Accounting Standards--PCAOB Report

The Public Company Accounting Oversight Board released a report today which reveals that auditors failed to make companies comply with GAAP in key areas such as mark to market accounting and off-balance sheet transactions.  The PCAOB observed individual audits at major financial institutions during the 2007-2009 period. Here are the major findings from the report:
PCAOB inspectors identified instances where auditors appeared not to have complied with PCAOB auditing standards in connection with audit areas that were significantly affected by the economic crisis, such as fair value measurements, impairment of goodwill, indefinite-lived intangible assets, and other long-lived assets, allowance for loan losses, off-balance-sheet structures, revenue recognition, inventory, and income taxes.

Firms have made efforts to respond to the increased risks stemming from the economic crisis. The deficiencies identified by inspectors in their reviews of issuer audits suggest that firms should continue to focus on making improvements to their quality control systems.
One of the major issues of contention, the report states was fair value measurements (mark to market accounting). During the financial crisis, there were times when it was hard to get a real market price for a security due to the illiquid nature of some mortgage derivatives. The report states that auditors failed to challenge company models, which produced overly favorable prices for assets that had declined in value. This is an important fact because auditors are not supposed to simply agree a company's internal valuation model. They are supposed to critically evaluate key assumptions used by the models like credit loss and prepayment expectations. The point being that auditors should use their own assumptions to see if a company's valuation model is reasonable or too optimistic. Another failure by auditors was that when they did use competing valuation models, they were usually from third party providers, most likely Mood'y or S&P. The report contends that auditors failed to ask these third party providers what were the key methods and assumptions used in the models. So in effect auditors were simply plugging in models which they failed to properly understand to price obsure assets. The most egregious example cited by the report was that some auditors completely failed to test the valuation of hard to price assets (most likely level 3 assets). They just blindly accepted the company's internal valuation and moved on.

Another major problem found by the PCAOB was how audit firms evaluated off-balance sheet transactions. In particular the report found that auditors did a poor job of making sure they were being accounted for correctly. The idea seemed to be that if an asset was off-balance sheet, then it was out of sight and out of mind. Audit firms should have make a strong attempt to ascertain under what conditions a company's off-balance sheet asset may be forced back on to the balance sheet. Also, did the company make guarantees to third parties to repurchase the asset if credit quality was impaired. Many banks such as Merrill Lynch hid toxic CDO's off balance sheet through special purpose entities who then sold them to outside investors. The key fact was that Merrill Lynch made contractual guarantees to these investors that the firm would buy back the assets if they started to perform poorly. However, Merrill accounted for these assets as if they were not ultimately liable for any losses. It worked for a long time, until they were forced to put them back on the balance sheet. This pretty much amounts to fraud my intentionally misleading stockholders and providing knowingly false information.

The real problem I have is that these same problems are still with us, especially after the FASB relaxed marke to market accounting. The banks continue to lie about there assets, this time with government approval.

Black Swan Insights

Related Articles:
How Merrill Lynch Hid $31 billion In Toxic Assets Off Balance Sheet
Corporate Integrity--- Can you trust company earnings?
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Plosser Against New Round Of QE, Rosengren Favors More Stimulus

We had two Fed officials speak today Charles Plosser and Eric Rosengren. What is interesting is that there seems to be a divide forming within the Fed about more QE (money printing). Mr. Plosser (currently a non-voting member of the FOMC) is against it on the basis that it will do nothing to help the real economy or lower unemployment. All it will do is lower treasury yields by a insignificant 10 to 20 bps. The only time when he would consider more QE is if there was a real chance of deflation, which he does not think is likely. He notes:
"Because I see little gain at this point, and some costs, I would prefer not to engage in further asset purchases at this time," Plosser said in prepared remarks delivered at a chamber of commerce event in Vineland, N.J. "The Fed must be credible," the central banker said. "Protecting that credibility is why, based on my current outlook, I do not support further asset purchases of any size at this time."
The problem is that Mr. Plosser does not get to vote until 2011. While, Mr. Plosser is against more QE, Boston Fed president Rosengren (voting member FOMC) postulates that it may be necessary to support economic growth with more QE. Apparently he has not seen Morgan Stanley's econometric models which show that a 2 trillion asset purchase by the Fed would 1) lower Treasury yields by 50bp; 2) increase GDP growth by 0.3pp in 2011 and 0.4pp in 2012; and 3) lower the unemployment rate by 0.3pp by the end of 2011 and 0.5pp by the end of 2012. Simply, stated if the Fed continues money printing at this point it is debt monetezation regardless of what they day. Mr. Rosengren offers the usual generic arguments for money printing:
"While the economy is growing, it is currently growing too slowly to significantly reduce the unemployment rate or stem disinflationary pressures created by the high degree of slack in the economy," Federal Reserve Bank of Boston President Eric Rosengren said.

"My firm view is that it is important that policymakers be open to implementing policies consistent with achieving full employment, and an appropriate level of inflation, within a reasonable time frame," he said.

"Views on securities purchases differ within the ranks of policymakers and all manner of observers," Rosengren said. "It is important to keep firmly in mind the goal of such purchases: to stimulate the economy by reducing long-term interest rates to a level that is more consistent with where they would be, were we able to further reduce the federal funds rate."
Despite the fact that money printing does nothing to help the economy, Rosengren's argument is what the hell lets print some more and see what happens. The problem for people who believe in monetary sanity is that there seems to be only one voting member who is willing to challenge Zimbabwe Ben and that is Hoenig of Kansas City. Fisher of the Dallas Fed (non-voting member) has historically talked a good game about prudence, low inflation, etc., but has not had the courage to vote against Bernanke. Currently the Zimbabwe School of Economics is the dominate force at the FED.

Black Swan Insights

Related Articles:
Ambrose Evans-Pritchard: "The Fed Is Out Of Control"
Don't Bet On QE 2 Just Yet--Morgan Stanley
Fed's Lacker Against More Money Printing
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How High Does Irish CDS Have To Rise Before It Is A Crisis?

Despite the stock market continuing its relentless climb based on QE 2, there is big trouble in Irish CDS which closed today at a new all time high of 483 bps. I have covered the problems facing Ireland and remain convinced that it will be the nex crisis country in Europe. If I remember correctly, the situation in Greece started to quickly unravel after its CDS went above 400 bps. Since Ireland has blown through this level, it is only a matter of time before the Emerald Isle is forced to ask the EU for a bailout. No doubt Ireland will receive financial assistance as no one is allowed to fail in the EU (until the EU itself fails). Expect more money printing by the ECB to make sure Irish bond auctions don't fail. This should be a positive for gold.
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Truck Tonnage Index Plunged 2.7 Percent in August--ATA

Another sign of how depressed the real economy is. The American Trucking Association reported that truck tonnage decreased in August. Furthermore, the ATA expects the economy to remain weak for the rest of the year. From the ATA:
The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index fell 2.7 percent in August, which was the largest month-to-month decrease since March 2009. The latest drop lowered the SA index from 110 (2000=100) in July to 106.9 in August.

The not seasonally adjusted index, which represents the change in tonnage actually hauled by the fleets before any seasonal adjustment, equaled 113.5 in August, up 3.2 percent from the previous month.

Compared with August 2009, SA tonnage climbed 2.9 percent, which was well below July’s 7.4 percent year-over-year gain. Year-to-date, tonnage is up 6.2 percent compared with the same period in 2009.
















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Retail Gasoline Usage Down Again--4 Week Average At Multi-Year Lows

You would think that with the recession officially over and the stock market giddy with QE anticipation, retail gasoline consumption would be surging. But wait, gasoline consumption is an indicator of the real economy and the 4-week average has fallen back to levels not seen since Nov 2008. It seems that Americans don't feel like driving as much when they have to pay $3.10 a gallon (in Southern California) courtesy of Zimbabwe Ben and his money printing friends. If Ben has it his way you will be paying $5 a gallon so that the Fed can meet its much desired inflation target. From Spending Pulse:
 
U.S. weekly gasoline dipped 0.3% to 8.978 million barrels a day in the week ended Sept. 24, according to a SpendingPulse report by MasterCard Advisors LLC, a division of MasterCard Inc. (MA). The 28,000-barrels-a-day drop put demand at a four-year low for the week.

Demand was down 194,000 barrels a day, or 2.1%, from a year earlier. It was the third straight weekly drop and biggest year-to-year fall in three months, since the week ended June 25.

In the last four weeks, demand averaged 8.99 million barrels a day, the lowest level since the four weeks ended Nov. 14, 2008. The drop of 0.7%, or 60,000 barrels a day, from a year earlier was slim, but it was the biggest decline since July 9.
Based on declining demand for gasoline, you may be thinking that it is safe to short oil with impunity. However, you have to remember that Fed money printing has massively distorted the market to the point where it is no longer a free market--just central bank interventions. No wonder gold is at a new all time high.

Black Swan Insights
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Case Shiller Index Flat In July

From the press release:
Data through July 2010, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show that the annual growth rates in 16 of the 20 MSAs and the 10- and 20-City Composites slowed in July compared to June 2010. The 10-City Composite is up 4.1% and the 20-City Composite is up 3.2% from where they were in July 2009. For June they were reported as +5.0% and +4.2%, respectively. Although home prices increased in most markets in July versus June, 15 MSAs and both Composites saw these monthly rates moderate in July.

“Home prices crept forward in July. Ten of the 20 cities saw year-over-year gains and only one – Las Vegas – made a new bottom, as the impact of the first time home buyer program continued to fade away,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “The year-overyear growth rates for 16 of the cities and both Composites weakened in July compared to June. While we could still see some residual support from the homebuyers’ tax credit, which covers purchases closing through September 30th, anyone looking for home price to return to the lofty 2005-2006 might be disappointed. Judging from the recent behavior of the housing market, stable prices seem more likely.





















It is important to remember that while this is the most watched index for home prices, it is also a lagging indicator because it uses a 3 month weighted average to calculate prices. For example this months data includes May, June, and July. From other indicators I follow like Dataquick, prices really started to roll over in August so next months Case Shiller data should start to show declines.

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FHFA: Home Prices Dip Again in July
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Europe's Economy Is Running On Fumes

One of the indicators I follow is the EuroCoin indicator, which provides a real-time look into Eurozone GDP. The indicator is released near the end of the month and is therefore a leading indicator when it comes to predicting euroland GDP. Well the September reading came in and it was not good, indicating that the problems in Europe continue to impact economic growth. From the press release:

· In September €-coin fell slightly,from 0.37% in August to 0.34%.The value of the indicator continues to indicate a slackening of the recovery compared with the first six months of the year.
· This month modest growth in long-term yields has held back the indicator, which has nevertheless been sustained by the favourable trend in share indexes.











As you can see the EU economy is practically on life support after the sovereign debt crisis. Growth is almost non-existent, which makes it hard for over indebted countries like Greece, Spain, and Ireland to grow their way out of their problems. Earlier this year, the euro was down substantially, which allowed EU countries to increase exports and gave them some breathing room. However, the euro has rebounded thanks to the anticipation of QE 2 by the Fed, which should prevent EU countries from growing exports in any meaningful way. Without exports it is hard to see how these struggling countries can ever turn turn things around. Austerity reduces domestic consumption and a stronger euro reduces exports. What else is left to increase economic growth? Money printing perhaps, which is the preferred tool of central banks is always a possibility but that does nothing to help the real economy.

Black Swan Insights
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Ambrose Evans-Pritchard: "The Fed Is Out Of Control"

It seems that even establishment economist Ambrose Evans-Pritchard is gradually finding religion when it comes to monetary sanity. He has a piece today titled "Shut Down the Fed" which outlines why QE 2 is noting more than monetary madness and that the Fed should not attempt to create inflation. While he goes on to say that he supported QE 1 because of the financial crisis, but he notes that QE 2 is not justified based on the stabilization of M3 and M2. Mr. Pritchard feels betrayed by Bernanke's blatant attempt to create inflation (illegally reducing the purchasing power of the dollar) through money printing. Mr. Pritchard goes on to to say the "Fed is trying to conjure away the hangover from the last binge (which Greenspan/Bernanke caused, let us not forget), as if to vindicate its prior claim that you can always clean up painlessly after asset bubbles." This is a must read article written by a well respected economist. It seems the tide may be turning against Zimbabwe Ben. The only thing I disagree with is Mr. Pritchard's hope that some members of the FOMC will try to stop Bernanke. Outside of Hoenig, they are all gutless pieces of filth who want to destroy the dollar through inflation at all costs.  From the article:
I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.


My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION. If the Federal Open Market Committee cannot see the difference, God help America.

We now learn from last week’s minutes that the Fed is willing “to provide additional accommodation if needed to … return inflation, over time, to levels consistent with its mandate.”

NO, NO, NO, this cannot possibly be true.

Ben Bernanke has not only refused to abandon his idee fixe of an “inflation target”, a key cause of the global central banking catastrophe of the last twenty years (because it can and did allow asset booms to run amok, and let credit levels reach dangerous extremes).

Worse still, he seems determined to print trillions of emergency stimulus without commensurate emergency justification to test his Princeton theories, which by the way are as old as the hills. Keynes ridiculed the “tyranny of the general price level” in the early 1930s, and quite rightly so. Bernanke is reviving a doctrine that was already shown to be bunk eighty years ago.

So all those hillsmen in Idaho, with their Colt 45s and boxes of krugerrands, who sent furious emails to the Telegraph accusing me of defending a hyperinflating establishment cabal were right all along. The Fed is indeed out of control.

The sophisticates at banking conferences in London, Frankfurt, and New York who aplogized for this primitive monetary creationsim – as I did – are the ones who lost the plot.

My apologies. Mercy, for I have sinned against sound money, and therefore against sound politics.
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Suddenly Gold is Favored By Central Banks

I can remember back in 1999-2000 when the Bank of England was desperately trying to sell its gold at a 20+ year low. No one at the time wanted to own gold. Instead all the central banks wanted US treasuries. How times have changed. Now with gold at all time highs and the dollar near its lows, central banks are finally coming around to the idea of gold as a reserve asset. A recent report from the World Gold Council reported that central banks sold the least amount of gold last year since 1999. Can you imagine what will happen when central banks become net buyers of gold along with pension funds and other institutional investors. I read a piece somewhere which said gold only makes up 0.3% of pension fund assets. Eventually these types of investors will start allocating 5-10% of their assets to gold as a way of diversifying their portfolios. From Axcess News:
 According to the World Gold Council (WGC), Central Banks and the International Monetary Fund sold fewer tons of gold last year than any previous period since 1999. Yesterday marked an end to their year and according to the latest WGC report, only 94.5 metric tons were sold in 2009.
Black Swan Insights
Since the Central Banks Agreement took effect, Germany has 61 fewer tons of gold, yet with gold prices rising to record levels, in 2009 its gold reserves as a percentage of total reserve rose to 64% from 35.2% in 1999.  France rose from 42.5% to 63.3% and Portugal jumped to 83.7% in 2009 from 39.9%.
The Central Banks Agreement was intended to stabilize the value of gold due to its monetary-backing against currencies.  The Banks were concerned that if buying and selling wasn't coordinated it could destabilize gold and therefore currencies worldwide.
While countries such as Switzerland sold gold, reducing their tonnage from 2,590.2 in 1999 to 1,040.1 in 2009, other countries have been increasing their holdings.  Venezuela has added gold to its holdings, buying bullion direct from mining companies as many other countries have done.  In turn, while Central Banks are not accustomed to buying gold off the open market, buying from mining companies could shrink the supply of gold made available for sale.  This could add to the price of gold heading into the fourth quarter of this year.
Goldman Sachs had forecast gold prices to reach as high as $1330 per ounce in the fourth quarter and StandardBank has held firmly to its belief that gold would trade in the $1300 per ounce range during the last four months of this year.  But with news out that Central Banks have reduced their Agreement from a maximum allowed of 500 tons to 400 tons, it is setting the tone for a more bullish outlook on gold.
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Don't Bet On QE 2 Just Yet--Morgan Stanley

While Goldman and the rest of the market expect QE 2 to be announced in either November or December, perennial optimist Morgan Stanley is out with a research piece which argues that it might not happen during 2010. Why? Because Morgan believes future economic data will surprise to the upside, particularly Q3 GDP which the firm expects to come in at 2.6%. Furthermore, the firm postulates that more QE will not do much to improve the economy. According to their econometric models, a "$2 trillion asset purchase program would: 1) lower Treasury yields by 50bp; 2) increase GDP growth by 0.3pp in 2011 and 0.4pp in 2012; and 3) lower the unemployment rate by 0.3pp by the end of 2011 and 0.5pp by the end of 2012." If Morgan is right there is very little reason for the Fed to initiate a new QE program. It would not materially effect the real economy and would only send gold and other commodities higher. 

Eve though Morgan Stanley thinks the chances are low of more QE, they believe the trigger for any new announcement would be an indication that US GDP growth is trending below 2% for an extended period of time.

From Morgan Stanley:
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Marc Faber on Bloomberg

The always informative Marc Faber was on Bloomberg yesterday. He discussed the Chinese yuan, gold, and stocks. He expects the yuan to appreciate by 10-20% and postulates that the global race to the bottom is heating up with the recent currency intervention by the Japanese. Likes Asian currencies such as the Thai Bhat or Malaysian currency. Emerging markets are still the place to be because they can continue to grow while developed countries stagnate. Regarding the stock market, Faber thinks the market will decline in October with the SP 500 possibly falling to around 950. Finally, Faber says he is still bullish on gold as central banks around the world print money. However, he does not know how high it will go because he does not know how much money will be printed.



Related Articles:
September Thoughts From Marc Faber
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ASA Staffing Index Continues Upward Climb

The American Staffing Association released its weekly employment index, which tracks temporary and contract work. From the ASA:
During the week of Sept. 6–12, 2010, temporary and contract employment rose 0.64%, maintaining the index at a value of 96.

At a current index value of 96, U.S. staffing employment is 39% higher than the level reported for the first week of the current year and is 25% higher than the same weekly period in 2009.

Staffing employment in September is 25% higher than in the same month last year, according to the ASA Staffing Index. The index for September is 96, up one point from 95 for August, suggesting that staffing employment has increased about 1% over the past month.



















I like to follow this indicator because historically, an increase in temporary employment has been a leading indicator of full time employment. So far, this has not occurred as corporations don't feel confident enough to hire full time workers. Instead they prefer temporary workers who can be laid off quickly if demand drops.

Black Swan Insights
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Mortage Delinquencies Remain High

The Office of the Comptroller of the Currency and the Office of Thrift Supervision released their Mortgage Metrics Report which shows trends within the mortgage market. Here are the results:
 ■During the second quarter, 87.3 percent of mortgages were current and performing—unchanged from the previous quarter but a decline from 88.6 percent in the same quarter a year earlier.

■The number of mortgages that were seriously delinquent (60 or more days past due) and newly initiated foreclosures fell during the quarter to the lowest levels of the last 12 months, but were up from a year earlier.

■Mortgages that were 30-to-59 days delinquent increased during the quarter, consistent with seasonal trends. Early-stage delinquencies increased across all risk categories from the previous quarter, but were down from a year earlier for prime, Alt-A, and subprime mortgages.

■Servicers initiated more than 292,000 new foreclosure proceedings during the second quarter—the fewest new foreclosure proceedings of any of the previous five quarters.

■Completed foreclosures, in which borrowers lost their homes, increased by 7 percent during the quarter to nearly 163,000—a 54 percent increase from a year earlier, as the large volume of seriously delinquent mortgages and foreclosures in process worked through the system.
On the face of it mortgage delinquencies seem to be stabilizing. But then you see the fact that early stage defaults continue to climb quarter over quarter. Those are future foreclosures with about a 1 year lag because it can take a long time to actually foreclose on somebody. One bright spot was that new foreclosure proceedings were down. However, completed foreclosures were up substantially as the banks finally got around to foreclosing on people. Overall, the report was a mixed bag. 

Black Swan Insights
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A New Proposal from the Fed: Taxpayers to Insure ABS Market

    Just when I thought I had heard it all, here comes another working paper from the Federal Reserve titled "An Analysis of Government Guarantees and the Functioning of Asset-Backed Securities Markets" by Diana Hancock and Wayne Passmore. This time the topic is about whether the US government should create a bond insurer to guarantee the asset backed securities market. This new bond insurer would act much like Fannie Mae does in the mortgage market. This new insurer would guarantee selected ABS for a premium, which would be invested and used to pay out any losses. The authors note that the securitization market is a great and much needed source of liquidity for financial markets, but it occasionally blows up during crises. The reason for the blow up is because investors suddenly realize that the collateral in the ABS is not quite as a good as they though it was. A "run" ensues, and the market stops functioning, which can lead to liquidity problems within the financial system. To solve this problem there needs to be a bond insurer who act as guarantor of asset backed securities. This would create a viable backstop and prevent the securitization market from seizing up during market panics. Investors could rest assured that the government has effectively abolished all risk in owning ABS (for a small fee and with no counter party risk). It is almost too good to be true. A world without risk.
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Global Trade Fell In July

This is an important indicator for central banks because it is an early indicator of global trade. From CPB Netherlands Bureau for Economic Policy Analysis:
• July 2010: world trade down by 0.8% month on month, after an upwardly revised 0.8% increase in June.

• July 2010: world trade momentum declines for sixth consecutive month to 2.8%.

• July 2010: world industrial production increases marginally with 0.1%.
Based on preliminary data, world trade volume decreased by 0.8% in July from the previous month, following a marginally upwardly revised increase of 0.8% in June. Across the world, import volumes were either flat (emerging Asia) or declining (everywhere else, most notably in the United States). Export volumes in most emerging economies declined substantially, while those in advanced economies reversed sign compared to June: exports from the United States and Japan registered strong increases, but exports from the Euro Area decreased.

Monthly trade figures are volatile and focus on ‘momentum’ is therefore preferable. At 2.8%, momentumremains positive in July. It has been gradually decreasing since January 2010 however, when it peaked at 6.4%.
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Existing Home Sales Plummet In August

You can always count on the NAR to present their usual propaganda regarding the housing market. Case in point the NAR's press release which proclaimed "Existing-Home Sales Move Up in August." The way the NAR came up with this misleading number is by comparing existing home sales in August with July's number. What should have been done is to compare August 2010's number to August 2009 to get a real indication of existing home sales. Why? Because the housing market is very seasonal and fluctuates quite a bit month to month.  From the NAR:

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 7.6 percent to a seasonally adjusted annual rate of 4.13 million in August from an upwardly revised 3.84 million in July, but remain 19.0 percent below the 5.10 million-unit pace in August 2009.
Total housing inventory at the end of August slipped 0.6 percent to 3.98 million existing homes available for sale, which represents an 11.6-month supply at the current sales pace, down from a 12.5-month supply in July
You can see why the NAR did not use year over year numbers in its headline. It is pretty depressing to report existing home sales falling 19% year over year. The big problem in the housing market remains high levels of inventory. We are currently at 11.6 months of supply while the historical average is between 4-7 months supply.

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AAII Investor Sentiment Declines

Today we got a somewhat strange reading from the AAII Investor Sentiment Survey. Despite a generally bullish market environment,  bullish sentiment fell to 44.97% from 50.89% and bearish sentiment rose to 25.40% from 24.26%. The percentage of investors who described themselves as neutral on the stock market rose to 29.63% from 24.85%. I say the data is odd because when the market rises usually AAII bullish sentiment goes up as well, but we have not seen this happen. From a contrarian point of view you would have liked to seen bullish sentiment rise again to 55% in order to signal a top in the market. Looks like we may be nearing a top soon.

I will have the charts up in a few hours.

UPDATE: Here are the charts

This is a six month chart of the AAII Sentiment Survey















Here is a 1 year chart which shows AAII bullish sentiment with the SP 500















Black Swan Insights

Related Articles:
AAII Investor Sentiment Up Again
AAII Sentiment Survey Surges For Second Week
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HAMP---50% Failure Rate For Trial Loan Modifications

The government's Home Affordable Modification Program released their monthly report and it is not very encouraging. The main reason is because these people cannot afford their homes. Here is the a chart which summarizes the entire program and shows the total number of mortgage modifications.


You can see that of 1,334,117 trial modifications 663,538 were cancelled, which results in a failure rate of just under 50% for the program. The main problem is that borrowers cannot afford the new monthly payment even after the loan modification. For example, after the loan modification the average borrower's back-end-debt-to-income ratio (which includes total debt repayments like car, mortgage, insurance,etc) is 63.5%. This is not sustainable and of course ends with the borrower defaulting. Another problem with these modifications is that they do not reduce principal and rely on more gimmicks like reduced interest rates and term extension. The only real solution is debt forbearance. I don't like the idea but if the goal is to keep these people in their homes, then it is the only viable option.

Some may see the 448,937 permanent modifications and think the program is working. You should not. The reason for the low default rate on permanent modifications is because the majority of them were initiated after Jan 2010 so they are still new. Just give it time and you will start to see the default rate increase dramatically. 

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Volker: Mortgage Market Still Dysfunctional

From Dow Jones:
Paul Volcker, chairman of President Barack Obama's Economic Recovery Advisory Board and former Federal Reserve Chairman, said the U.S. mortgage market, money market funds and rating agencies are issues that still need to be addressed in the wake of the global economic crisis.

He was speaking at an International Economic Alliance event in New York.

The mortgage market is the "biggest single thing to work on now," said Volcker, adding that it is dysfunctional due to its dependence on the government. He also discussed money market funds, whose place in the financial system ballooned in the lead-up to the crisis, but are free of capital requirements. Volcker added he is not pleased with how the rating agencies have been dealt with.
The reason the issue of what to do with Fannie and Freddie was not resolved is because no politically expedient solution exists. Either continue to spend hundreds of billions supporting these insolvent institutions or put them through bankruptcy/break them up into smaller institutions. Most taxpayers do not want to continue propping up these institutions forever. But if you allow them to fail, it would surely hit the mortgage market hard because these two government wards buy or guarantee 90% of all mortgages right now. In effect Fannie and Freddie are the mortgage market. The only reason banks are making any loans at all right now is because they can always resell them to Fannie and Freddie. There will not be a sizable private mortgage market for a long time because insolvent financial institutions are continuing to delever their balance sheets.

Some people suggest that Fannie and Freddie should be broken up into smaller regional units. This idea, while it may be politically viable still represents a taxpayer backed subsidy for the housing market and further distorts the mortgage market. Government intervention is what got us into our problems in the first place. You remember the bogus but politically popular idea of saying that anyone with a pulse deserved a home. It is simply not true. A home is not a right, it is a privilege for those who can afford one.

Personally, I think the only solution is to completely dismantle Fannie and Freddie by allowing them to go into run-off. This would undoubtedly cause mortgage rates to increase (absent more Fed money printing) and cause temporary dislocations in the mortgage market. But these effects could be mitigated by having Fannie and Freddie gradually lower their presence in the mortgage market. For example, the process could take 5 years where the two government wards reduce their participation by 20% per year. The timing is of course up for debate but with mortgage rates at historic lows, refis will make the timeline rather short as prepayments remain higg. Critics of the Keynesian persuasion argue that this policy would reduce home ownership and make it harder for Americans to obtain financing. I agree and these are good things. I don’t want any more housing bubbles. I would also require that potential home buyers put down 20-30% down. If you cannot afford that amount then you should be renting rather than buying a home. We need to have homeowners who can really afford their homes.

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FHFA: Home Prices Dip Again in July

Another indicator I follow is the Federal Home Financing Agency's home price index.They key difference of this index compared to other ones like Case/Shiller is that the FHFA's index is calculated using the prices of houses purchased with mortgages backed by Fannie Mae and Freddie Mac. From the FHFA:
U.S. house prices fell 0.5 percent on a seasonally adjusted basis from June to July, according to the Federal Housing Finance Agency’s monthly House Price Index. The previously reported 0.3 percent decline in June was revised to a 1.2 percent decline. The unusually large revision mainly reflects the addition of new data from late June that show considerably weaker prices than earlier in the month. For the 12v months ending in July, U.S. prices fell 3.3 percent. The U.S. index is 13.8 percent below its April 2007 peak.

The FHFA monthly index is calculated using purchase prices of houses backing mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac. For the nine Census Divisions, seasonally adjusted monthly price changes from June to July ranged from -1.6 percent in the South Atlantic Division to +1.1 percent in the Pacific Division.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
This pretty much confirms that Case/Shiller, which is the main index followed by the market will decline as well. The only question is by how much?
 
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No Surprise--ABC Consumer Confidence Index Falls

From Dow Jones:
U.S. consumer confidence weakened in the week ended Sunday, according to an ABC News index, after hitting a two-month high the prior week.

The reading declined three points to -46 on its scale of -100 to +100. The long-term average is -13.

Before the past week's decline, the confidence level had grown seven points in the prior six weeks.

Meanwhile, 89% of Americans most recently surveyed rate the economy negatively as 75% say it is a bad time to spend money and 55% rate their own finances negatively.
Its interesting, 75% say it is a bad time to spend money and yet millions waste their money on Ipods, Ipads, Iphones, etc. Historically, consumer confidence has been a good barometer of future consumer spending, but that has not been the case during this "recovery." Consumers remain depressed but continue to spend anyway.

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Fed Statement--Will Print More Money If Stock Market Declines

Here it is:
Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.

Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.
The last part is what the market wanted to hear. In plain english the Fed announced that they will print more money if the SP 500 declines substantially. Nothing like an explicit Fed guarantee to support asset prices. First reaction from the market seems positive with the SP 500 reversing most of its losses.

You can really see how determined the Fed is in its pursuit to create inflation. How stable prices and positive inflation are compatible is beyond me. I thought truly stable prices meant 0% inflation, but then again I care about the purchasing power of the dollar. The Fed obviously does not. The dollar is getting smacked in the minutes after the Fed statement. EUR/USD is over 1.32. Gold futures hit record high. Ahh--more competitve currency devaluations, just like the 1930's.









As an aside, hats off to Mr. Hoenig who voted against Zimbawe Ben and his loyal followers.

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Home Builder Confidence Down In August--Lowest Since March 2009

I trust the National Association of Home Builders (NAHB) much more than the National Association of Realtors when it comes to news about the housing market. From the NAHB:
Builder confidence in the market for newly built, single-family homes edged down for a third consecutive month in August, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The HMI declined one point to 13, its lowest level since March of 2009.

“Builders are expressing the same concerns that they are hearing from consumers right now, particularly the sense that the overall economy and job market aren’t gaining any traction,” said NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Mich. “Meanwhile, many continue to report that problems with inaccurate appraisals, competition from the large number of distressed properties on the market, and tight consumer lending conditions are causing them to lose potential sales.”

“Today’s report reflects single-family home builders’ concerns about current and future economic conditions and about the increasing hesitancy they are seeing among potential home buyers,” added NAHB Chief Economist David Crowe. “It also reflects the frustration that builders are feeling regarding the effects that foreclosed property sales are having on the new-homes market, with 87 percent of respondents reporting that their market has been negatively impacted by foreclosures.”



















Below is a chart of housing starts by region. You can see why home builders are in such a negative mood. While it may be painful for home builders, the sharp reduction in housing starts is a necessary part of any future housing recovery. The problem for the national economy is that the housing industry usually helps to lead the economy out of a recession. Not this time.



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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The Decline Continues for Commerical Real Estate--Moody's

It is shocking to see how far prices have fallen for commercial real estate. From Moody's:
US commercial real estate prices as measured by Moody's/REAL Commercial Property Price Indices (CPPI) decreased 3.1% in July, the second consecutive monthly decline of more than 3%.

Nationwide, prices are currently 43.2% below their peak in October 2007 and are only 0.9% above the recession low recorded in October 2009.

The CPPI has declined 7.3% in the past year, and dropped 35.9% in the past two years.

"Commercial real estate markets were caught in a downdraft as the economy appeared to further weaken in the early part of 2010, resulting in relatively large declines in the index in the early summer," said Moody's Managing Director Nick Levidy. "The recent performance, while perhaps somewhat discouraging, should not come as a complete surprise. We have noted for several months that markets are likely to remain choppy for some time as property values slowly form a bottom in conjunction with a gradual recovery of the broader economy."
The reason there have been so few bankruptcies is that banks are more than willing to restructure the debt to avoid taking meaningful write downs. Is is part of the extend and pretend strategy. The idea being that soon or later commercial real estate will recover and that will allow underwater property owners to eventually pay back their debts. Considering prices are now down 40%+ they may have to wait for a long time.

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The Great Recession May Be Over But Economic Conditions Remain Depressed

According to the National Bureau of Economic Research the recession is officially over. Don't tell it to the millions of unemployed Americans, suffering small businesses, or the rest of the real economy. But for the large multinationals business really is good. From the NBER:
 At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.
 At least the NBER was honest enough to admit that economic conditions remain weak. The problem is that there has not been a recovery for many sectors in the economy. So while the free fall has stopped (temporarily), the "recovery"  feels more like a continuation of the recession.

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Related Articles:
US Economic Outlook--3 Possible Scenarios
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Gold Headed to $1600 by 2012--Deutsche Bank

I believe that of the major investment banks, Deutsche bank is the only one which has an optimistic price target for gold longer term. From Dow Jones:
Gold posts fresh record high of $1,282.90/oz on Friday, and has more to go, says Deutsche Bank in weekly commodities review, citing exchange rate and interest rate trends, central bank purchases, heightened macro economic volatility and de-hedging as major demand influences. But how high, and is price over-extended or has a bubble formed?, bank asks, reiterating that prices would need to surpass $1,455 to be considered extreme in real terms, hit $2,000 to represent a bubble. So, bank says its target of $1,600 in 2012 isn't excessive given favourable interest rate, exchange rate trends and appearance of new sources of demand from both private, public sectors. "For the time being we believe the drivers of this rally are fundamental rather than speculative," with physically-backed ETFs playing an important role, it says.
It is refreshing to have an investment bank say something positive about gold other than it is a safe haven play. The $2,000 number is on the low side because it is using the government's inflation numbers. Real inflation, as most people know is much higher than government figures. John Williams of Shadow stats believes that if you use real inflation numbers, the price of gold would have to rise to $7,500 to match its inflation adjusted high reached back in 1980. Marc Faber said in the Gloom, Boom, Doom report that he expects gold to reach $4,000 before the bull market is over. Either way, we sill have a way to go in the great gold bull market.

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Dividends or Capital Appreciation? Results Are In!

Remember this the next time some CEO says they are not focused on dividends because they can achieve higher growth by reinvesting earnings. This is a study by Deutsche Bank which shows that dividends are the most important part of the total return for investors. From the Economist:
Take the widespread belief that investors should be indifferent, except for tax reasons, as to whether cash is paid out to them as dividends, or reinvested in the company. If the money is reinvested, then earnings will grow faster; after all, isn't a dividend payout a sign that management has no ideas? Technology companies often don't bother to pay one.

But a look at history should disabuse investors of that notion. The key period is the late 1950s where, in America and Britain, the dividend yield on the market dropped below the government bond yield for the first time. Institutional investors reasoned at that time that the dividends on a diversified pool of equities would grow sufficiently to offset the loss in immediate income. From that point, the payout ratio also started to fall; from 69% pre-1958 to 46% since then.

So did earnings grow faster once companies cut their payouts? Up to a point. The real rate of earnings growth edged up from 1.3% to 1.8% a year but that failed to compensate investors for the fall in the average dividend yield from 5.2% to 3.2%. Rather than using the spare cash to boost earnings, companies wasted it (probably by paying it to executives, who have become massively richer over the period.) A high dividend is a good discipline on managers.

A related issue is that, in real terms, equity prices can fail to rise for an extended period; in 1982, the S&P 500 index was no higher, after adjusting for inflation, than it had been in 1929. All the real return over that period would have come from dividends so the starting yield is very important to future returns. And the yield is currently low.
That last paragraph is the key for the current market environment where stock prices remain flat for an extended period (secular bear market). The reason investors abandoned dividends was because of increased taxation and the argument but forth by management that they could increase earnings at a faster rate by reinvesting earnings. Well, the results are in, and that is simply not true (unless you consider an extra 0.5% growth meaningful). What has happened is that executive compensation has skyrocketed, and top management spend most of their time looting money from shareholders. Back in the good old days of investing (pre-1930 or so) mature companies used to pay out 66% of earnings to shareholders and retain 33% to grow the company. Management could not pay itself $60 million a year and get away with it. But today you have companies like Microsoft which hoard 10's of billions to waste on executive compensation and capital destroying acquisitions. We need to go back to the old days when companies were run for shareholders rather than top management. The only types of companies which act responsibly are the tobacco companies which pay out 60-80% of earnings to shareholders.

Black Swan Insights
FD: I own shares in Altria (MO)

Related Articles;
Corporate Governance: What a Joke
Corporate Integrity--- Can you trust company earnings?
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Irish CDS Continues Upward Momentum--Reaching New Highs

I fell like a broken record, but I keep thinking that the next major problem area will be Ireland. Irish 5 year CDS is surging higher as investors worry about how the country will deal with the recapitalization of Anglo Irish bank. Previously, the government has assured the market that bondholders would not take a hit, but now some government officials have floated the idea that some bondholders will be wiped out. This could cause an important trigger leading to a decline in risk appetite across global capital markets. Yesterday, Irish CDS hit 412 bps, up 7% on a day when the general market was flat to slightly up. Irish CDS is now at new record highs--even surpassing the levels reached during the height of the 2008 financial crisis.

Here is a recent article from bloomberg which describes Ireland's dilemma--Irish Bank Bailout May Cost $52 Billion, Ex-NTMA Head Somers Tells Times.
















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Related Articles:
Irish CDS Explodes Higher---Is Ireland the Next Greece?
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Consumer Sentiment Falls In September

Another weak consumer sentiment report. From Dow Jones:
Consumer sentiment fell to its lowest level since August 2009 as of the middle of September.

The preliminary Reuters/University of Michigan consumer sentiment index for the current month came in at 66.6, from 68.9 in August and 67.8 in July. The index had been expected to stand at 70.

The preliminary current conditions index was 78.4, from 78.3, while the expectations index hit 59.1, versus August's 62.9.

The outlook for inflation wilted, with the preliminary one year inflation reading at 2.2%, the lowest since September 2009, from 2.7% the prior month, while the five year reading was 2.8%, from 2.8%.
I have never been particularly fond of this indicator because it is more of a coincident indicator and does not help predict future stock market performance. As you can see from the chart below, consumer sentiment pretty much tracks the SP 500 and that is about it.


 
 
 
 
 
 
 
 
 
 
 
 
 
 
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US Household Wealth Down In Q2--Fed Data Shows

It seems Zimbabwe Ben's attempt to re-inflate asset prices is not having the desired effect. According the Fed's flow of funds, US household net worth declined in Q2. More importantly debt deleveraging in the household sector continues. The only entity increasing debt is the federal government. From Dow Jones:
Americans, anxious over a slowing economy, kept avoiding debt in the second quarter, while their financial value receded as stock market wealth fell.

In its "Flow of Funds" data, the Federal Reserve on Friday said U.S. household debt tumbled by 2.3%. It also showed that U.S. households' total net worth fell 2.8% during April through June, to $53.50 trillion.

The Fed data showed corporate equity and mutual fund assets of households dropped in the second quarter. Those three months were painful for the U.S. stock market. The Standard & Poor's 500 index lost 12%. Investors, unnerved by the Greece debt crisis and uncertain about the U.S. economy, fled to the safety of Treasury notes and bonds.

The "Flow of Funds" said household net worth fell to about 4.72 times disposable personal income in the second quarter from a first-quarter level of about 4.91 times income.
Expect a further decline in household net worth for Q3 because home prices started to roll over in July. With a falling net worth, no wonder consumer confidence is at the lowest level since Aug 2009. Consumers will continue to retrench by reducing debt and saving more money (invested in Treasuries not stocks). Hard to have a real recovery under these conditions.

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Why The Unemployment Rate Will Stay High For Years To Come

America's unemployment currently stands at 9.6%. The San Francisco Fed released a report which shows why the rate will not be coming down for years to come. Why? The sheer number of jobs that need to be created each month in order to reduce the unemployment rate is far above the current rate of job growth. The Fed's report plays with the numbers and asks what it would take to reduce the unemployment rate to 8% by June 2012? The numbers not encouraging:
 
1. To keep the unemployment rate steady at 9.6%, the US economy needs to create 100,000 jobs per month. This assumes average population growth of 1% and a flat labor force participation rate.

2. According to the Congressional Budget Office, the US economy needs to create 227,000 jobs per  month. This assumption is based upon a projected uptick in the labor force participation rate to 64.8%. If the CBO is off by only 0.1%, the number jumps 10,000 to 237,000 jobs per month required.

3. The Social Security Administration expects the labor force participation rate to fall to 64.6% in 2012. This means that starting September 2010, the US has to create 208,000 jobs per month to reach the 8% unemployment rate goal.

4. The Bureau of Labor Statistics is predicting a labor force participation rate of 65.5% in 2012. Under this assumption the US economy has to create a whopping 294,000 jobs per month.

5. In August 2010 the US private sector created 67,000 jobs, far below the rate necessary to reduce the unemployment rate. During the last "jobless recovery," when economic conditions were much more favorable job creation averaged 140,000 jobs per month.

Below is a chart which sums it all up.

Figure 1

Job creation needed per month
Assuming 8% unemployment in June 2012
















Bottom line--don't expect the unemployment rate to come down anytime soon. If anything, it might tick up in 2011.

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Fannie Mae's National Housing Survey Results

America's favorite government ward Fannie Mae released the findings of its National Housing Survey. The survey was conducted during June and July 2010. Some of the results are really surprising, considering how bad the housing market is. For example, 69% of underwater homeowners said buying a home is a safe investment. Overall, Americans think housing prices have bottomed and that now is a good time to purchase a home. They also expect higher prices during the next year (LMAO). Hope springs eternal with America's homeowners. Here are some of the key findings from the report:

Housing and the Economy

Eighty-two percent of respondents consider homeownership important to the economy, up two points from January.

Only 30 percent think that the economy is on the right track (compared to 31 percent in January), but 44 percent expect their personal financial situation to improve in the next year.

Delinquent borrowers (57 percent) remain more optimistic about the future than the general population, but they are less confident than they were in January (63 percent).

Seventy percent of respondents think it is a good time to buy a house, up six points from January. This is also four points higher than the 2003 survey – well before home prices peaked – when 66 percent said it was a good time.

More than one in three (36 percent) think now is a very good time to buy a house.

But 83 percent said they believe that it is a bad time to sell a house.

More than three-quarters (78 percent) think home prices will stay the same or go up over the next year, up five points from January, with an average price increase of 0.9 percent.

This includes 31 percent who think prices will increase and 47 percent who feel prices will remain about the same. This is a notable shift from January 2010, when these numbers were 37 percent and 36 percent, respectively.

Eighty-five percent of Americans think home rental prices will stay the same or go up over the next year – 39 percent expect them to go up and 46 percent expect them to stay the same.

Almost half of renters (46 percent) expect rental prices to increase, and respondents expect rental prices to increase by 3.6 percent, on average.

















Desirability of Homeownership

Sixty-seven percent of respondents said they believe buying a home is a safe investment. However, this is down three points from January and 16 percentage points from the 2003 survey – the largest drop by far among all investment types tracked since then.

This compares to 76 percent who think putting money into a bank account (money market or savings account) is safe, up from 74 percent in January.

In contrast, only 15 percent believe buying stocks is a safe investment, down from 17 percent in January.

Eighty-four percent of consumers believe owning makes more sense than renting, down one point from January.

Among renters, 69 percent believe owning makes more sense, down from 75 percent in January.

Sixty-three percent of all survey respondents would likely buy instead of rent if they were to move, down two points from January.

Respondents cite non-financial reasons such as safety (78 percent) and quality of local schools (79 percent) as driving factors in wanting to own a home, ahead of economic considerations.

Seventy-four percent say they prefer a traditional, fixed-rate mortgage with predictable payments over a floating-rate loan.

State of Consumer Household Finances

Nearly six in ten Americans (58 percent) say their monthly household income has remained about the same compared to a year ago, while 46 percent of delinquent borrowers said their income has declined significantly. Just 19 percent of the general population said their income increased significantly.

Thirty-one percent of all respondents said their monthly expenses are significantly higher than they were 12 months ago, 18 points higher than those who said their expenses declined significantly.

Thirty-three percent of the general population are “stressed” about their ability to make payments on their debts. Forty-three percent of renters and 81 percent of delinquent borrowers say they are stressed – while 53 percent of delinquent borrowers say they are “very stressed.”

Twenty-two percent of mortgage borrowers said they have reduced their mortgage debt significantly over the last year. However, 30 percent of delinquent borrowers have significantly increased mortgage debt during the same period, almost three times as high as non-delinquent mortgage borrowers.

Twenty-one percent of the general population has reduced non-mortgage debt significantly over the last year.

Twenty-seven percent of mortgage borrowers have reduced such debt significantly over the last year, while only 19 percent of delinquent borrowers have done so.

However, non-mortgage debt has increased for 26 percent of delinquent borrowers.

Diverging Views on Homeownership Among Borrower Sub-groups


Mortgage borrowers (74 percent) and underwater borrowers (69 percent) are more likely to say owning a home is a safe investment than delinquent borrowers (57 percent) and renters (54 percent). However, this measure has fallen among all sub-groups since January, with delinquent borrowers and renters showing the largest declines, down eight and seven points, respectively.

Mortgage borrowers (83 percent) and underwater borrowers (77 percent) said they are more likely to buy in the future than rent – both groups increased two points from January. The number of renters (37 percent) and delinquent borrowers (52 percent) who said they are more likely to buy in the future declined by seven and four points from January, respectively.

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