Newsletter - marketcommentary

No Report For Holiday Weekend

9/2/2010 6:00:00 PM

Please read our last few comments and special report for our current views.

Fed Facing Liquidity Trap

8/26/2010 12:00:00 PM

Five years ago on the eve of another of the Fed's annual financial symposiums at Jackson Hole, we wrote the following"

"Since 1999 when the financial bubble was in full bloom (due in large part to the Fed) we have been saying that the central bank faced a dilemma with limited choices----none of them good. They could either kill the bubble, let the economy and markets take a hit and come out of it ready to resume healthy growth----or they could keep extending the bubble for a while longer with far worse consequences down the road. The Fed, under Greenspan, chose the latter course, resulting in a dangerous housing bubble following the financial bubble of the late 1990s. This is evident in the fragile economic unbalanced recovery, the massive trade deficit, low consumer savings rate and record household debt. The standard measures of the economy indicate to many that Greenspan has won his bet, and the Jackson Hole symposium will probably be full of praise for his long tenure. We hope that they are right, but we believe that the final word on Greenspan's reign as Fed Chairman is not yet written, and history may not view him kindly."

Now, five years later another Jackson Hole symposium will attempt to find solutions to the economic mess that partially resulted from the Fed's reckless actions. The problem is that an already sub-par recovery (if we can even call it that) is giving signs of petering out even after all the massive stimulus programs provided by the Fed, the Administration and Congress. Sales of existing and new homes have dropped to new lows while consumers beset by high unemployment, minimal wage increases, near-record debt and limited access to credit are reluctant to spend. At the same time the inventory replenishment that was one of the few contributors to growth is now winding down and yesterday's report indicated that core capital goods orders declined by 8% in July.

With the recognition that economic growth is showing signs of coming to a halt, the talk has turned to the possibility of more quantitative easing or QE2. The problem, though, is that after TARP, the stimulus plan, Fed purchases of $1.7 trillion of government securities and near-zero interest rates, there is little more the Fed can do that they haven't already done. At this point the Fed cannot use monetary policy to force companies, banks and consumers to take credit that they do not want to use. In economic literature, this situation is known as a "liquidity trap", a phrase you will probably hear a lot in coming months.

The dilemma is well presented in today's Wall Street Journal op-ed column by Alan Blinder, a Princeton economist and former Fed member, who is certainly not a perma-bear. The article, called "The Fed is Running Out of Ammo", outlines three options for the Fed-----expanding the Fed's balance further, changing the "extended period" language in the Fed's statement or lowering the interest rate on bank reserves. He then demonstrates that each one of these options has either negative political consequences, economic drawbacks or limited effectiveness. He concludes by saying that if the economy doesn't pick up, it's time to use even this "weak ammunition", although he obviously doesn't think it would be of much help.

In sum we believe that all of the options with regard to economic policy are negative, a point being gradually recognized by the stock market. The S&P 500 peaked exactly three months ago on April 26^th. Yesterday it found support at about 1040 for the third time, although it has temporarily dipped to 1010 on July 1^st. In our view both of these support lines will be pierced and the market is likely to decline significantly from there.

Economic Weakness Accelerating

8/19/2010 8:00:00 PM

It becomes clearer every day that the economy is headed for a renewed recession or a recovery so slow it will seem like one. Initial unemployment claims climbed to 500,000 last week for the first time since November while the Philadelphia Fed index dropped below the zero line for the first time since July 2009. This follows a pattern of generally softening economic data over the last two or three months.

As we have long expected, the economy is tracing out a trajectory typical of a balance sheet induced recession rather than the garden-variety inventory recessions typical of the period since the end of World War ll. In a balance sheet recession the dire effects of debt deleveraging overwhelm the efforts of the government to stimulate the economy as is happening now, and the economy undergoes a lengthy period of deflation, sub-par recoveries and frequent slowdowns as the U.S.

The Pause That Doesn't Refresh

8/12/2010 5:30:00 PM

The Fed tried to thread a needle and ended up satisfying nobody. They confirmed to all the doubters that the economy was indeed weak and that they really couldn't do much about it without resorting to completely untried and unorthodox measures with unpredictable results. To all intents and purposes the Fed showed to all that the emperor has no clothes. The $200 billion in proposed Treasury bond purchases only compensates for the coming rollover of mortgage bonds, and, in any event, is dwarfed by the measures previously taken with little effect on the economy, although it did succeed in averting a financial meltdown.

The market has suddenly awakened to the fact that the economy is tanking and that the Fed has used all of its conventional ammunition. Interest rates are near zero, the budget deficit is 10% of GDP and the Fed's balance sheet has tripled to $2.3 trillion. After some $700 billion of TARP funds, $1.7 trillion of Fed purchases of mortgages and Treasuries, untold billions of dollars of guarantees, the auto industry bailout, cash for clunkers, home purchase credits and mortgage workout programs, the economy still cannot stand on its own.

Aside from the Fed's tentative move, new reports released this week convinced even most of the doubters that the economy has weakened considerably and that the outlook ahead is for more softness at a minimum and, potentially, a renewed (or continued?) recession. For a long time it seemed as if we were the only ones talking about deflation, and suddenly it has virtually become the conventional wisdom After a big June increase in the trade deficit and a slowing increase in inventories, most economists have reduced their second quarter GDP growth estimate to a range of 1%-1.5%, compared to the previously reported 2.7%. Taken together with a sharp rise in unemployment claims, the disappointing payroll employment number, a continually declining housing market, tepid consumer spending and yet another gloomy report from the small business survey, the economic outlook going into the third quarter does not look promising.

Anyone looking for help from the global economy has to be disappointed as well. European industrial production dropped in June and the Bank of England reduced its forecast for economic growth. The ECB warned that much of the European recovery over the last year was due to one-off factors such as the rebuilding of inventories and government measures that are now expiring. Now the austerity measures that are being put into place are likely to result in slower growth or recession. In addition new concerns about the peripheral EU nations have begun to emerge once again after being papered over in recent months.

Faltering Recovery

8/5/2010 9:30:00 PM

We have maintained all along that the statistical economic recovery would lose momentum after the effects of the stimulus and inventory replenishment wore off, and the recent data are confirming our view. Moreover there are no drivers to sustain the recovery or prevent deflation without additional drastic measures with an uncertain outcome. The likelihood therefore is either extremely slow growth or the feared double-dip.

The Fed and the administration will attempt to use everything in their arsenal to turn things around, but have used up all of their conventional ammunition and would have to resort to non-traditional methods that have never been tried before. Obviously, the results of these further potential interventions would be highly uncertain as to impact, timing and unintended consequences. The authorities would therefore be hesitant to move before they are more confident that the current pause is the precursor to a new economic downturn.

Not only is the statistical recovery faltering, but it was never that robust to begin with. Real GDP growth in the last four quarters has averaged only 3.5%, a paltry rate compared with the first four quarters of growth in prior recessions. Furthermore, real final sales over this period averaged a meager 1.4%, only 40% of the total. It is therefore clear that inventory replenishment accounted for 60% of the growth in GDP over the last four quarters, and this should wind down with the declining economic momentum.

New economic expansions following recessions are usually powered by four major factors: the end of inventory drawdowns, a robust rebound in housing, renewed substantial growth in consumer spending and a significant increase in employment. That is usually followed by a handoff to other sectors with a resulting positive feedback loop that sustains the recovery for a lengthy period. In the current anemic recovery only the inventory factor has contributed anything significant while housing, consumer spending and employment remain weak. Therefore the handoff is unlikely to happen and the desired positive feedback loop will not take place.

As it soon becomes obvious that the current loss of economic momentum is more than just a pause in an ongoing recovery, we believe that the market will break down from its current S&P 500 trading range between 1217 and 1010 and test the March 2009 lows. Major bear markets tend to bottom at P/Es of ten or less smoothed long-term reported earnings, and we think this one will be no exception. As we previously pointed out, the market has sold at P/Es of ten or under trendline earnings in 17 of the last 60 years indicating it is not an unusual occurrence.

A New Spotlight on Japanese-Style Deflation

7/29/2010 12:00:00 AM

In a scholarly paper that was released today James Bullard, President of the Federal Reserve Bank of St. Louis, stated, "The U.S.

DEFLATION!!

7/22/2010 5:00:00 PM

Wow! We see the word "Deflation" everywhere; we see it in every financial publication and hear it every time we turn on financial TV. We see that the pundits who were bearish because of runaway inflation have just recently included deflation as well as inflation to be the problem. We were talking and warning about the ramifications of deflation as far back as the late 1990s. That was when we authored the "Cycle of Deflation" (see 1^st chart). Whenever we used the word deflation back then, and through 2001, Microsoft Word did not recognize the word and then spell check would constantly try to get us to replace this unusual word with inflation or some other word that started with "de.... ."

You may wonder why we would bring up the fact that we were so early in deflationary warnings which are really only just now becoming recognized as a threat. At that time, we believed that the deflation about which we were warning during the biggest financial mania of all times would have taken place when the bear market started in 2000 and the recession hit in 2001. However, the Fed decided to make sure deflation did not take place by lowering fed funds from 6 ¼ % to 1% and, then kept it there for a year. Remember, 2002 was when Bernanke gave the helicopter speech where he implied that he would do whatever it took to control deflation-"even drop money out of helicopters." Well, what they did was exacerbate a housing bubble that was already in force and started a second financial mania with stocks following the housing market into the stratosphere.

We wish Greenspan and Bernanke would have let the tremendous overleveraging (even at that time) unwind with the recession and, even though it would have been very painful, let the public repair their balance sheets as they either paid off or defaulted on their debt.

Valuations

7/15/2010 5:00:00 PM

We stated in the 4^th of July holiday comment that we would discuss valuations in the "special report" we wrote last week. As it turned out the "special report" got too bogged down in the discussion of why the private debt in our country would have to be deleveraged before a significant recovery could take place. We encourage you to read it.

This comment will now address why there is so much controversy about valuations in the stock market presently. The bulls are constantly exclaiming in the financial press and financial TV why investors must buy equities due to these "fantastic valuations." We asked our viewers to prepare for this comment by taking a look at the section on our home page titled "Limbo, Limbo, How Low Can it Go?" There you will find many different metrics that show the historical valuations and where the stock market sold at the peaks and troughs over many years. All these charts were produced by Ned Davis Research, which we consider the best data source available.

We believe after studying the charts mentioned above you will find that none of the most popular metrics will show the stock market to be inexpensive. The only way the main valuation metric (P/E Ratios) could show the market to be cheap is to replace the age old "reported earnings" (Generally Accepted Accounting Principles-GAAP) with "operating earnings."

The pundits are using forward looking "operating earnings" in order to reach for their estimates of 10 to 12 times earnings. "Operating Earnings" which exclude "write-offs," make no sense whatsoever, and only came into existence in the mid 1980s in order to make the market look undervalued.

Today's Comment is Included in Today's Special Report (LEFT)

7/8/2010 4:30:00 PM

Today's comment will be found in a "special report" located on the left side of the home page titled "Debt is Still the Problem and Deflation is the Painful Solution".

Happy 4th of July Holiday Weekend

7/1/2010 3:00:00 PM

As usual we don't write comments on holiday week-ends and this won't be an exception. We will probably write a "special report" early next week that will deal with the constant arguments from the bulls as to how "inexpensive" this market is and why you must buy equities because of the "fantastic valuations". Maybe to prepare you for this "special comment", you should take a look at the section on our home page titled "Limbo, Limbo, How Low Can it Go?" There you will find many different metrics that show historical valuations and where the stock market sold at the peaks and troughs over many years. All of these charts were produced by Ned Davis Research which we consider the best data source available.

The pundits on financial TV shows are constantly using forward "operating earnings" in order to get to their estimates of 10 to 12 times earnings. Please keep in mind that "operating earnings' exclude "write-offs" and only came into existence in the late 1980's in order to make the market look inexpensive. If you wish to go into more details on this subject you might also want to take a look at the article published in Barron's on our home page (Comstock in the News) titled "What's the Real P/E Ratio?".

We also expect to go into the reasons that there is such discomfort in this country. Most of the other bears have been concerned that the money printing by the Government will lead to much higher interest rates and hyper-inflation. We, on the other hand, are much more concerned with the private debt, which dwarfs the public debt, and it is the deleveraging of this private debt (paying it off or defaulting) that will be so painful for our economy.

Have a great 4^th of July holiday and we will continue this next week.

It's More Than Just A "Scare"

6/24/2010 8:00:00 PM

The softening in the economy that we have been looking for is now becoming a reality as a wide sampling of the latest monthly or weekly economic releases clearly indicates that a slowdown is now underway. We cite the following.

On the consumer spending front, May retail sales were down 1.1% and anecdotal reports from various retailers indicate that June appears to be weak as well. The labor situation seems to be fragile as private May payrolls were up only 41,000 and weekly initial unemployment claims have been stuck in a range since November. As we previously pointed out, housing has probably started a renewed downturn. The Mortgage Bankers' Association pending purchase applications index has dropped 40% since the ending of the homebuyer tax credit on April 30^th. This is the best leading indicator of future home sales. Monthly new home sales were down 32% to at least a 40-year low, while existing home sales declined 2%, housing starts 10% and building permits 6%. The ISM manufacturing index dropped last month, and current regional Fed indexes from New York, Philadelphia, Richmond and Kansas City indicate continued weakness.

The widespread current declines are supported by evidence from ISI's weekly company surveys. Their overall index peaked in April and has since been trending down. On an industry basis the ISI retail survey dropped 4.8% last week and 20% since the April peak. The homebuilders' survey is at a 4-month low, while the employment survey dropped 3.1% last week and 7% from the recent peak. The transportation survey declined the last four weeks. Semi equipment orders grew only one percent in the latest month, compared to an average of 13.5% over the prior five months.

Why it's Still A Secular Bear Market

6/17/2010 4:00:00 PM

In our view the stock market is in a secular (long-term) downtrend that began in early 2000 and still has some time to go. The collapse in the dot-com bubble (2000-2003) gave way to the historical housing bubble that itself collapsed in 2007, leaving the U.S and the world awash in enormous debt, huge overcapacity and overvalued markets. The deleveraging of this debt and its negative consequences for the economy will create serious headwinds for the stock market for a long time to come.

The current debt crisis cannot be solved by mere declarations from official authorities. The debt crisis began with the decline of the housing market in 2006 and is continuing to this day. Phase I involved the transfer of private debt to sovereign debt by means of massive monetary and fiscal stimulus that has led to statistical economic recovery that remains anemic by historical standards. The problems that emerged with the Dubai crisis heralded the beginning of a sovereign debt crisis and phase ll---the transfer of weak sovereign debt to relatively stronger sovereign debt. The problem is that total debt is not reduced, but keeps getting shifted from weaker to stronger entities. Overall debt is too huge to ever be paid off and the relatively stronger nations will run out of ammunition long before the crisis is resolved.

The only long-term solution is a deleveraging of global debt, a process that cannot be solved with a magic wand waved by central bankers and prime ministers.

The Dire Outlook For Housing

6/10/2010 6:30:00 PM

While the market has been focused on the Euro, China and the BP oil spill, the impending second wave of decline in the housing market has largely gone unnoticed. Recent housing numbers have mostly been bolstered by the home buyers' tax credit that expired on April 30^th, the date when contracts had to be signed to qualify. Sales, however, are not recorded until closing, which has to take place by June 30^th. Sales of new and existing houses may therefore show some further strength until then, but fade after that time. (Sen. Reid has proposed extending the completion date to Sept.

Why It's Not A Normal Recovery

6/3/2010 8:30:00 PM

In our comment of April 22^nd we said that the impression that the economy was undergoing a normal economic recovery was highly misleading, and outlined a number of key economic series that supported our case that the rebound was actually quite weak. Now, six weeks later, after another month or two of updated economic releases, we still believe that the recovery is exceedingly fragile. Below, we will briefly outline ten key economic indicators with attached charts that clearly illustrate our case.

1) While April retail sales were up 9% from the early 2009 low they are still 3.6% below the peak reached 2 1/2 years ago in November 2007. By way of comparison, over the last 43 years retail sales had seldom declined at all, even in recessions. Today's reports from retailers indicate that May sales were tepid as well.

2) April industrial production (IP) was 6.8% over its March 2009 trough, but still 9% below the late 2007 peak. At its current level, IP is still where it was over 10 years ago in late 1999. Never since the 1930's depression has IP failed to exceed a level attained 10 years earlier.

Debt Deleveraging Process Will Take Many Years

5/27/2010 8:00:00 PM

"...market reactions are widely out of proportion to the real problems...recent events are a disturbing comment on the power of fear...brave people will make a fortune buying in these days, and then we'll all wonder what the scare was about".

"Right now the U.S.

Market Decline Based On More Than Fear

5/20/2010 7:00:00 PM

Today marked a new phase in investors' understanding of the EU crisis. Although the Euro itself recovered a bit, investors realized that Europe's problems could spread to the U.S. and impede or stop its economic recovery. This would possibly mean that the 14-month market rebound in U.S.

It is Still All About the DEBT

5/13/2010 3:30:00 AM

The main article in the Wall Street Journal today dealt with the fact that the U.S. voters are now shifting towards the GOP.   They state, "Republicans have solidified support among voters who had drifted from the party in recent elections, putting the GOP in position for a strong comeback in November's mid-term campaign according to a new Wall Street Journal/NBC News poll. The findings suggest that public opinion has hardened in advance of the 2010 elections, making it tougher for Democrats to translate their legislative successes, or tentatively improving U.S.

Excess Global Debt is Still The Problem

5/6/2010 7:30:00 PM

The impact of the Greek debt crisis on the stock market does not come as a surprise to us. It is one part of the chain of reaction from the excess global debt problem and the related "cycle of deflation" that we have been warning about since the late 1990s.   At that time we wrote about the large amount of debt being used to finance the dot-com boom that collapsed in the early 2000s. From 2003 to 2007 we continually pointed out that the housing boom and related debt buildup sparked by the Fed's extended low-interest rate policy would inevitably have a bad ending.
Since that time we have been insistent that without the reduction of both global and domestic debt any economic recovery would not be sustainable.

It's Not Only Greece

4/29/2010 12:30:00 PM

The Greek credit crisis is just a symptom of world-wide credit problems that was signaled by the emergence of subprime loan disclosures as early as August 2006. The importance of subprime lending problems and its subsequent disastrous effects on the global economic and financial system was not recognized until much later, but nevertheless evolved into a continuing series of economic and financial crises that persist until this day. The problem has now extended to sovereign debt, and, as usual, the weakest links (Dubai and Greece) are exposed first, only to potentially spread to stronger entities later. Not far behind are Portugal and Spain, whose credit ratings have been significantly lowered this week.   It's not just a localized crisis to be solved by some sleight-of-hand by the EU and IMF, but a debt crisis that has the potential to envelop the globe. Since the onset of what started as a subprime problem, private debt has been shifted to government debt, and now stronger governments are attempting to bail out weaker governments with even more debt. Eventually, this will place the stronger governments in jeopardy as well, and what happens then?
In addition to excessive fiscal deficits by some of its weaker members, the EU has some special problems for which there are no good options. The Greek government can either undertake severe fiscal austerity measures, default, be bailed out by the EU, or leave the organization entirely. Each of these has dire unwanted consequences. The result of enough fiscal austerity to relieve debt pressures is a severe recession or, more likely, a depression. An independent nation that is not a member of a multi-national group generally offsets these measures with an easy monetary policy and currency devaluation, something that Greece cannot do as an EU member, since they do not run an independent monetary policy and share a common currency. Default would cause havoc in the EU banking system that holds most of Greece's debt. An EU bailout, which now seems the likely outcome, would only push off the crisis since other weak members would soon demand a similar deal. While the Greek economy is relatively small, and the Portuguese economy slightly smaller, bailing out an economy the size of Spain's would be an enormous, if not impossible undertaking. And leaving the EU would probably bring down the organization.
Furthermore Greece's debt burden is only slightly more onerous than those of a number of other countries including the aforementioned Portugal and Spain as well as Italy, Ireland, Iceland and Great Britain. Globally assets soared in price during the boom, supported by vast increases in debt. Now the assets are severely diminished while the debts remain, and there is insufficient income to pay them off and difficulty even rolling them over. Thus, the world is dealing with an insolvency crisis rather than a more manageable liquidity crisis.
As we write the German parliament is considering, and will probably pass, an authorization of 8.5 billion euros to bail out Greece as part of an overall 45 billion euro EU and IMF package. At the same time the EU and IMF are attempting to coordinate a 120 billion euro package with contributions from the EU and IMF. Yes, it seems the price of the rescue keeps moving up as we write. Goldman estimates the cost of meeting Greece's needs over the next three years at $150 billion euros. Even scarier, J.P.

Normal Recovery? Don't Believe It

4/22/2010 8:00:00 PM

The "Street" and the financial media are portraying a totally misleading impression that the economy is now undergoing a normal recovery as each new piece of economic data is issued. At the same time the stock market has been in the process of pricing in the so-called great news. Let's have a look at the actual numbers.
1) March retail sales were up 8.6% from the low a year earlier. However, this was still 3.6% below the peak sales in May 2008, almost two years ago. Moreover, sales are still slightly below the level reached back in December 2006, over three years earlier. Over the last 43 years retail sales had hardly ever gone down at all, even in recessions.
2) March industrial production (IP) was up 6.1% from the June trough, but was still down 9.1% from the top December 2007. At its current level IP is still where it was over 10 years ago in December 1999. Never since the depression in the 1930s has IP failed to exceed a level established 10 years earlier.

Headlines Exaggerating Strength Of Economy

4/15/2010 7:00:00 PM

The near-euphoria in the market over the perceived surge in the economy is highly misleading. The year-over-year percentage increases we are seeing in various economic indicators are only an indication of how far down we were. It reminds us of the title of a book published a number of years ago entitled Been Down So Long It Looks Like Up To Me.   All that's happened is that the economy is less bad, but it is certainly not strong. Let's look at two key examples---retail sales and industrial production.
Yesterday's report on March retail sales was greeted with banner headlines proclaiming the comeback of the consumer. Typical was the Wall Street Journal's assertion that "Shoppers turned up in surprising force". Yes, it's true that retail sales in March were up 8.6% from the low a year earlier. But this was still 3.6% below the peak sales in May 2008, almost two years ago. Moreover, at current levels sales are actually still slightly below the level reached back in December 2006 over three years earlier. The really significant fact is that over the last 43 years retail sales have hardly ever gone down at all, even in recessions. So the fact that sales have "soared" to a level reached over three years ago is hardly a harbinger of consumer strength.
The same kind of reasoning applies to industrial production (IP). March IP was up 6.1% from the June trough. That may sound good in the headlines, but it was still down a significant 9.1% from the top in December 2007. Moreover, IP in March was at about the same level as it was over 10 years ago, back in December 1999. Never since the depression in the 1930s has IP failed to exceed a level established 10 years earlier.
The same is true of a lot of other key economic indicators. They are up, but from highly depressed numbers, and are still significantly below earlier peaks. Indeed, housing has hardly bounced at all and seems set for another dip. New home sales made a new cyclical low in February and are at the lowest level in at least 47 years dating back to 1963, while the Mortgage Bankers Association purchase index is still hovering near its low.
Small businesses are another major weak spot. They account for an estimated 50% of GDP, 50% of employees and almost all of the job growth.

Fed's Dim View Of The Economy

4/8/2010 7:00:00 PM

For some time we have been emphasizing the weakness of the economic recovery and the reasons why we think it is unsustainable. Now you don't have to take our word for it. Just read the recently-released minutes for the FOMC March 16^th meeting. It essentially confirms most of the doubts we have about the prospects for meaningful economic growth in the period ahead. For your convenience we quote the important points below.
"The staff (made) modest downward adjustments to its projection for real GDP growth in response to the unfavorable news on housing activity, unexpectedly weak spending by state and local governments, and a substantial reduction in the estimated level of household income in the second half of 2009...housing starts.remained flat at a depressed level, investment in non-residential structures was still declining, and state and local government expenditures were being depressed by lower revenues. Moreover, consumer sentiment continued to be damped by very weak labor market conditions, and firms remained reluctant to add to payrolls or to commit to new capital projects...participants also highlighted a variety of factors that would be likely to restrain the overall pace of recovery, especially in light of the waning effects of fiscal stimulus and inventory rebalancing over coming quarters.
"While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter, participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth. For example, real disposable income in January was virtually unchanged from a year earlier and would have been even lower in the absence of a substantial rise in federal transfer payments to households. Business spending on equipment and software picked up substantially over recent months, but anecdotal information suggested that this pickup was driven mainly by increased spending on maintaining existing capital and updating technology rather than expanding capacity.
"...a few participants noted the possibility that fiscal retrenchments in some foreign countries could trigger a slowdown in those economies and hence weigh on the demand for U.S.

Consumer Spending Rests On Shaky Foundation

4/1/2010 9:30:00 AM

After seeing this week's announcement that February consumer spending increased 0.3% the pundits were elated and used the number as proof that the consumer was back and that this virtually assured a typical post-war recovery. What the "experts" failed to do however, was examine the underlying data to determine where all this new-found spending power was coming from. True, consumer spending has risen in eight of the last nine months and has climbed 3.7% in that span. Although those results are far from robust it is, at least, an increase.

Market Facing Substantial Headwinds

3/25/2010 7:30:00 PM

In our view the market is seriously overestimating the strength of the economy as the usual drivers of a sustainable recovery, namely consumer spending and housing, are in no condition to provide the catalyst that leads to steady growth. The statistical growth we have witnessed to date is merely a bounce back from the brink of a potential financial disaster that was averted by massive stimulus. However, the lingering after-effects of the credit crisis are creating strong headwinds against a typical post-war type of recovery.
The rise in consumer spending in recent months is nowhere near as strong as the media and the Street would have you believe. The extremely sharp decline in consumer spending during the recession was caused by both negative fundamental factors and outright fear of a collapse. Now the fear is gone, but the negative fundamentals remain. Unemployment remains high, jobs are hard to get and credit is tight. Moreover the consumer has barely begun to pay down the enormous debt accumulated over the last decade, and the deleveraging has a long way to go. Savings rates are still low by historical standards and will take time to return to normal.
The housing industry is still in serious trouble and appears to have turned down again after the bump created by the home buyer tax credit. Existing home sales were down 0.6% in February, the third consecutive drop. Sales are back to the depressed level that existed before the start of the tax credit. In addition new listings were up 10% to the highest level since September while inventories rose to an 8.6 months supply.
The problems were also reflected in new home sales, which were down 2.2% and have now been lower in six of the last seven months to a record low of 308,000 units. Inventories rose 1.3% to a 9.2 months supply despite the fact that new housing starts have been bumping along the bottom. The extension and expansion of the original tax credit does not seem to have given much of a boost to sales and, any event, the credit expires on April 30^th.

Fundamentals Don't Matter Until They Do

3/18/2010 8:30:00 PM

The market rallied when the FOMC said it would keep the Fed Funds rate at current levels for an extended period just as it rallied when it became likely that the EU would paper over (at least temporarily) the Greek financial crisis. The market apparently continues to have great faith that the various central banks throughout the globe will continue to bailout and guarantee that they would never let any entity fail and would assure continued economic growth indefinitely. In other words, what economists and strategists used to refer to as the "Greenspan put" has now essentially become the "Bernanke put".   We at Comstock have no such conviction that piles of additional debt issued or assumed by governments can cure the problems that were brought on by too much debt in the first place.
In this connection the delusions and hopes associated with the current rally bear a lot of resemblance to the unwillingness of investors to recognize reality at the market tops of March 2000 and October 2007.

Newsletter - marketcommentary

No Report For Holiday Weekend

Fed Facing Liquidity Trap

Economic Weakness Accelerating

The Pause That Doesn't Refresh

Faltering Recovery

A New Spotlight on Japanese-Style Deflation

DEFLATION!!

Valuations

Today's Comment is Included in Today's Special Report (LEFT)

Happy 4th of July Holiday Weekend

Have a great 4th of July holiday and we will continue this next week.

It's More Than Just A "Scare"

Why it's Still A Secular Bear Market

The Dire Outlook For Housing

Why It's Not A Normal Recovery

Debt Deleveraging Process Will Take Many Years

Market Decline Based On More Than Fear

It is Still All About the DEBT

Excess Global Debt is Still The Problem

It's Not Only Greece

Normal Recovery? Don't Believe It

Headlines Exaggerating Strength Of Economy

Fed's Dim View Of The Economy

Consumer Spending Rests On Shaky Foundation

Market Facing Substantial Headwinds

Fundamentals Don't Matter Until They Do

Have a great 4^th of July holiday and we will continue this next week.