Saturday, September 01, 2012
The Closing Bell-The presses will keep running full blast
Current Economic Forecast
Real Growth in Gross Domestic Product (revised): +1.0- +2.0%
Inflation (revised): 2.5-3.5 %
Growth in Corporate Profits (revised): 5-10%
Real Growth in Gross Domestic Product +1.0-+2.0
Corporate Profits 0-7%
Current Market Forecast
Dow Jones Industrial Average
Current Trend (revised):
Short Term Trading Range 12022-13302
Intermediate Up Trend 12280-17280
Long Term Trading Range 7148-14180
Very LT Up Trend 4546-15148
2011 Year End Fair Value 10750-10770
2012 Year End Fair Value 11290-11310
Standard & Poor’s 500
Current Trend (revised):
Short Term Trading Range 1266-1422
Intermediate Term Up Trend 1293-1873
Long Term Trading Range 766-1575
Very LT Up Trend 651-2007
2011 Year End Fair Value 1320-1340
2012 Year End Fair Value 1390-1410
Percentage Cash in Our Portfolios
Dividend Growth Portfolio 28%
High Yield Portfolio 28%
Aggressive Growth Portfolio 31%
The economy is a modest positive for Your Money. The economic data continues to come in pretty much according to our script.
Positives this week were: the Case Shiller home price index, weekly and August retail sales, July personal income and spending, July factory orders, the University of Michigan’s consumer sentiment index and the latest Beige Book report.
Negatives: mortgage applications, the Conference Board’s August consumer confidence index and the Richmond Fed’s manufacturing index. Neutral: purchase applications, jobless claims, Chicago PMI and second quarter GDP and corporate profits.
Perhaps the biggest event of the week was Bernanke’s Jackson Hole speech in which (1) he made no QEIII commitment immediately, (2) questioned the effectiveness of asset purchases by the Fed, (3) but...drum roll...............reiterated that the Fed was there if the economy weakened [i.e. have no fear, QEIII is still possible]. In sum, pretty much what investors wanted to hear (keep that printing press running in high gear).
11 questions for Ben (medium):
All in all, a mixed to positive week that melds nicely with our forecast:
‘a below average secular rate of recovery resulting from too much government spending, too much government debt to service, too much government regulation, a financial system with an impaired balance sheet. and a business community unwilling to hire and invest because the aforementioned along with the likelihood a rising and potentially corrosive rate of inflation due to excessive money creation and the historic inability of the Fed to properly time the reversal of that monetary policy.’
Saturday morning humor (medium):
(1) the seasonal pattern of economic data for the prior two years was strong in the first and fourth quarters sandwiching weaker second and third quarters. This year, the pattern held in the first two quarters. But we are beginning to see an improving flow of data in the third quarter---suggesting that 2012 weakness may only have been a one quarter phenomena. I am not jumping up and down, calling for a surge in growth. I am suggesting that the risk of recession continues to fade.
Parsing the second quarter GDP numbers (medium):
(2) the ‘big four’ measures of the economy show little sign of recession. Indeed, as noted above, even retail sales, the heretofore weak sister of this group, showed improvement for the second month in a row,
(3) the seeming move of the electorate towards embracing fiscal responsibility. The hope [the operative word here] is that the more conservative bent in the electorate will be translated into a Romney/Ryan November victory which should be more conducive to fixing the monetary/fiscal problems that plague this economy than an Obama win.
That said, most of the polls and, more importantly, the intrade results [i.e. the betting book] point to an Obama victory---the impact of which I am now contemplating in terms of possible changes to our investment strategy.
(1) a vulnerable banking system. Nothing new this week; but doesn’t mean the risks are any less: [a] investors lose confidence in our financial institutions and refuse to invest in America and [b] the recent scandals are simply signs that our banks are not as sound and well managed as we have been led to believe and, hence, are highly vulnerable to future shocks, particularly a collapse of the EU financial system.
(2) a blow up in the Middle East. The Syrian civil war grinds on accompanied by incessant saber rattling from Israel. My immediate concern here is less political [though if we blink in a confrontation there could be huge long term implications] and more economic, i.e. war brings higher oil prices which negatively impact on our economic growth and inflation rate.
Exacerbating the rising energy cost problem is Hurricane Isaac. Granted widespread damage has been avoided. However, most of the Gulf oil and refinery production was shut down as a precautionary move; and that is already impacting prices. With the economic data flow turning a bit more positive, the last thing we need is higher energy prices sucking buying power out of the consumer’s pocket.
Longer term, there is the potential for better news should the GOP win the November election. Thursday night, Romney made energy independence one of the major planks in his platform. Clearly, a more aggressively pursued policy of energy self sufficiency would go along way in neutralizing the political risk of an unstable Middle East and the economic risk of higher oil prices.
(3) the drought persists in the Midwest, though one of the positives from Hurricane Isaac is that a portion of the Midwest will receive some much needed rain. While it will likely do nothing to help this season’s corn and soybean crops, it could have a positive impact on winter wheat production.
The promise of rain turned grain prices a bit more mixed this week. However, to the extent that higher grain and meat prices persist and are passed on to consumers, higher food [and energy] prices act as a tax on income and hence restrain economic growth. Combine this with the fear of the ‘fiscal cliff’ and you have a formula for lower confidence and a threat of a serious slowdown in consumption and investment.
This is a long in the weeds look at the current drought conditions and their impact of commodity prices---the net of which is that prices have not stopped going up.
(4) the ECRI weekly index was up yet again this week. As you know, this indicator’s ongoing erratic performance sustains my skepticism regarding the validity of its recession prediction. Indeed, if it doesn’t start getting worse pretty soon, the keepers of this index are going to have to cry ‘uncle’. I am going to leave this as a risk a bit longer; but at the moment, it looks doomed to the dustbin of ‘worries that never materialized’.
(5) another week and nothing done on the ‘fiscal cliff’; and since congress will be in a re-election mode until November, there is nothing to expect anytime soon.
As you know, my position on the ‘fiscal cliff’ as it currently exists is that in the end, the scheduled tax increases and spending cuts will not occur; or if they do, they will be quickly reversed. Whoever wins in November will do something in January to alter this outcome---we just don’t what that will be.
That said, there is another potential problem lurking that hasn’t gotten that much attention, to wit, a rise in interest rates and their impact on the fiscal budget should the move to the upside continue. Regrettably, the US government’s debt has grown to such a size that its interest cost is now a major budget line item---and that is with rates at/near historic lows. If investors tire of endless deficits and start to lose faith in our political class’ commitment to fiscal responsibility [the mystery is why this hasn’t already occurred], rates could rise significantly and this budget line item will explode and make all the more difficult any vow to reduce government spending as a percent of GDP.
In the meantime, the inability of our political class to focus on anything but its own re-election contributes to the fear and uncertainty among businesses and consumers and by extension their willingness to spend, invest and hire.
(6) finally, the sovereign and bank debt crisis in Europe remains the biggest risk to our forecast. This week, the eurocrats returned from vacation and took up where they had left off in early August---endless promises followed by retraction or obfuscation. In the end, Greece is bankrupt and in danger of imploding, Portugal is a short hair away from following suit and Spain is a stick of dynamite stuck up Europe’s ass.
Draghi’s speech notwithstanding, conditions are worse today than they were five minutes before his ‘everything possible’ pledge. The eurocrats may pull a rabbit out of the hat [indeed that is our forecast]; but nothing has happened to date that suggests they will.
Nevertheless, investors maintain their willingness to believe the best. As you know, my concern is that their patience wears thin and they trash the eurobond/eurocurrency markets, creating a crisis that is beyond the eurocrats’ capability to resolve---a likely outcome of which is a freezing up of the entire financial system which infects our own [via counterparty risk in credit default swaps].
Bottom line is unchanged: ‘the US economy remains on its sluggish growth track and unfortunately is getting no help from the political class, the financial system, the weather or the yahoos in charge of avoiding a financial catastrophe in Europe. Yet the inherent strength of what is left of our capitalist system has, at least to date, managed to move the economy forward in spite of these headwinds. So for the moment our forecast remains unchanged.
Nevertheless, I can’t overstate my concern that the financial markets will tire of watching the exceptionally slow motion pace of the current ‘muddle through’ eurocrat strategy, start pricing European debt for a worse case scenario which in turn overwhelms the EU bureaucracy and creates enormous problems for our own less than perfect banking system.’
This week’s data:
(1) housing: weekly mortgage applications declined though purchase applications increased modestly; the Case Shiller home price index rose again,
(2) consumer: weekly retail sales were positive and August retail sales were much stronger than expected; weekly jobless claims were flat; both the July personal income and personal spending stats were up, in line with forecasts; the Conference Board’s August index of consumer confidence was very disappointing, while the University of Michigan’s sentiment index was better than estimates,
(3) industry: July factory orders were stronger that expected; the August Chicago Fed manufacturing index was up and the Richmond Fed index was down; August Chicago PMI was in line,
(4) macroeconomic: the first revision of second quarter GDP was up as expected as was the GDP deflator; second quarter corporate profits were down but off of an upward revised number; the latest Beige Book report portrayed a sluggishly growing economy.