So, let’s do the math: There are 3.8M homes for sale and that is a glut of homes that is more than double the rate we had in the “healthy” economy we had in the first half of the decade. BUT, that does not include at least 14.9M VACANT homes that will, one assumes, either have to be sold by the banks or written completely off to the tune of (at the $186,000 national median) $2,771,400,000,000. These are real numbers folks, no matter how much you try to sugar-coat it, these numbers eventually come back to bite the economy in the assets. “We haven’t seen a bottom in home prices, and it could take into 2011 before we see equilibrium in the market,” said Michelle Meyer, an economist at Barclays Capital in New York.
I know – Ouch, ouch and ouch! You may say: Phil, how can you point to these things and not be reporting from a fallout shelter in the backwoods of Canada? Well, for one thing, I have faith that all this can be fixed over time – we simply lack the political will so far. I solved this housing crisis 2 years ago and some of my proposed measures have actually been implemented but not my biggie, where I last posted in February “How to Solve the housing crisis TOMORROW.” Fortunately, I’m not the only problem solver in this country. Our friends at GM, just 3 years after gasoline first hit $2.50 per gallon, are ready to go to production with a car that gets 230 miles per gallon (city)! Automobiles use 40% of the world’s fuel or 33M barrels of oil a day and most of that is city driving. Make no mistake about it, OPEC is terrified of this and they have now lowered their forecast for 2009 by 480,000 barrels a day, not based on the GM Volt, but on the already rapid trend of permanent demand destruction as global consumers just say no to conspicuous consumption in a jobless (and homeless) economy.
Another reason you have to love this country is we sure can pull it together when we have to. Productivity is up 6.4% in Q2 as a frightened worker turns out to be a highly motivated worker. This was up considerably from the 5.3% gain expected but, unfortunately, Q1 productivity was revised down by 81% from 1.6% to 0.3% so it kind of calls into question yet another set of vital government statistics. Hours worked dropped an average of 7.6%, something we discussed on the weekend as I had pointed out that the 150M people who do have jobs in this country are making 5-10% less for doing them and that is just like having another 15M people out of work. Oops, sorry – this was supposed to be the bullish counterpoint…
Wednesday: The lack of a retrace was getting downright unhealthy. As I often complain - rapid rises in the market, especially when accomplished through what we call “stick saves” create virtual air pockets in stock prices and make investing more and more dangerous as we move up. A simple example I use for members is to imagine the stock market has just 100 total shares. In March, those 100 shares were worth $1,000 and there was $1,000 sitting on the sidelines in cash. Shares are bought and sold every day but it doesn’t really matter as they are never all bought or all sold. The bottom line is that perhaps 25% of the cash actually moved off the sidelines but the market has gained 50% since March. Where does that leave us? Well that means we now have 100 shares of stock “worth” $1,500 but now there is only $750 on the sidelines to buy it.
That makes it exponentially harder to move the market higher as the values grow as it takes more and more sideline capital to grow the market each day. Since low interest rates, unemployment and debt are still keeping the sideline capital from growing – the market holders face a diminishing pool of sellers. In fact, the entire expansion of “value” of the market is an illusion as it WAS possible in March to exchange 100% of the stocks for the cash on the sidelines for $1,000 (assuming everyone on the sidelines would make the trade). Now that we have USED 25% of the sideline money to inflate the apparent value of the stocks, we have a serious problem because, even if EVERY SINGLE DOLLAR of sideline capital were exchanged for stocks in a panic sale, there is only enough to pay out 50% of the market’s current “value.“
I’m not saying that the market is drastically overvalued but I am saying that, if we were to have a panic event, we could have a drop that makes last year look like practice. This is the problem with moving the peg of market value up the field without letting the growth be fueled by real earnings and real capital inflows. In a normal market, stocks and sideline cash keep pace with each other as buyers and sellers balance out and the rises in the market are driven by capital inflows which come from the creation of additional REAL wealth, not the paper wealth of a portfolio increase. None of that has happened here. Real wealth was destroyed by the Trillions, the market dropped to reflect that fact but now over 25% of the stocks are back within 20% of their all-time highs. It does pay to consider that we may have gone a bit too far, too fast…
So color me skeptical and let’s move on to review today’s markets…
China does not do things in half measures, bank lending didn’t just pull back a bit in July – it was off 77% from June! That’s only 23% away from zero… ”Even though the Chinese government insists it’ll keep a loose monetary policy, the reality may be that some credit tightening measures have already been implemented,” said Ben Kwong, chief operating officer at KGI Asia. “The market is worried that a significant slowdown in lending means less liquidity and [investors are] taking profits.“ Mr. Kwong also listed the fall in commodity prices because of the U.S. dollar’s recent strength as a contributor to the slump. ”Investors seem to be nervous after sizable rallies recently, and they also want to check whether the Fed hints at an ‘exit strategy’ timing during the meeting,” said Choi Seong-lak at SK Securities in Seoul, referring to the potential for the Fed to reverse monetary easing measures…
What’s wrong in Asia? Well one fine example is this Bloomberg story that lead inventories in China are now double the size of the global stockpiles held at the London Metal Exchange. Evidence suggests that the entire Q2 materials rally was little more than China stockpiling raw materials. That means, at best, there will be much less demand going forward as China works off their inventory or, at worst, the global metals market are under constant threat of collapse should China shift policy and decide to sell back some of what they bought.
Thursday: The Fed did nothing – yay!
…The commodity pushers are all singing happy days are here again, keying off Bernanke’s promise to continue to “employ all available tools to promote economic recovery and price stability.”
Now price stability may sound like a good thing but it’s not because Ben is not promising the US consumers that prices will remain low, Ben is promising us, the investing public, that he will not allow deflation to harm our long-term investments so we should BUYBUYBUY because he also promises to keep “exceptionally low levels of the federal funds rate for an extended period.” I always think it’s funny when conservatives complain that the government shouldn’t be telling people what to do but here is the Federal Reserve telling us exactly how they want us to invest our money. They’re NOT going to give you a high interest rate for keeping it in the bank so you’d better get it off the sidelines and into stocks and commodities, where they do promise to use “all available tools” including the purchase of $1.2Tn of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. BY THE END OF THE YEAR! Wow, that’s $350Bn a month. Hey Mr. Chairman, I have some mortgage backed securities I’d like to sell. Mr. Chairman. Mr. Chairman. Ben…. Darn, he’s gone – maybe next month….
As I said in my Alert to members just after the Fed yesterday, the statement is not bullish on the economy, even the $1.4Tn is not new money, it’s just a renewed commitment to spend it. This was taken as a dollar negative in Europe but, “in reality” (such as it is), Fed accounting does not affect our national budget so they can spend this money without impacting US debt but it is a sneaky way to jam the money supply to nosebleed levels. To me, this was nothing to be bullish about and is simply more of an example that our economy, like China, is stimulated but not improved.
I hate to be a gloomy gus but I had to point out to members last night that Foreclosures Set 3rd Record High in 5 Months. A total of 360,149 properties received a default or auction notice or were seized last month. “We’re in a deep hole,” Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc., said in an interview. “There is a whole new wave of foreclosures tied to the cyclical dynamics of the economy.” The median price of an existing single-family house dropped 15.6 percent to $174,100 in the second quarter, the most in records dating to 1979, the National Association of Realtors said yesterday. “There are a slew of factors showing fundamental weakness on the demand side: tighter underwriting, job loss, investors who’ve been badly burned,” said Stuart Gabriel, director of the UCLA Ziman Center for Real Estate in Los Angeles. “We have not seen the bottom of the housing market.”
We nave not seen the bottom of the jobs market either as another 558,000 Americans lost their jobs last week, more than the 540,000 expected and last month was revised slightly higher as well. This may come as a shock to Uncle Ben as he seeks to maintain the stability of $70 oil but unemployed people can’t afford to drive to the mall and buy semiconductors and other commodities so July Retail Sales came in at -0.1%, which is about what we at PSW expected but is a total shock to the “expert economists” who thought they were going to be up 0.9%. A 1,000% miss is pretty normal for these bozos, who generally live within walking distance of a college and spend about $5 a week on gas as they take their classic cars out for a spin so forgive them if they are totally clueless as to what is happening in the lives of real people.
In California, a state that is bigger than any country in Europe except united Germany, 1 out of 10 homes is being foreclosed this year. That rate is 1/123 for the month of July and is UP 15% from June. Arizona is our second most foreclosed state but they are catching up with a July rate of 1/135 but that’s up a whopping 25% from June – mmmmm, can’t you just smell those green shoots? Also, 126,000 people went bankrupt last month, 34% more than last July and we are on pace for 1.4M for the year and that’s in the average 3.2 person household so 4.5M people in families that have nothing at all and will not likely be “rebounding” for 7 more years at least.
Even WMT posted lower 2nd quarter sales this morning with same-store sales falling 1.2% and miles below expectations of up 3%. The company managed to save their stock by raising the low end of their guidance for they year by a nickel as they are managing to put the squeeze on their suppliers and pay remaining workers a lot closer to minimum wage ($7.25/hr). The company did make $3.44Bn for the quarter and that’s .88 a share so still not a bad place to park your money but if WMT can’t do well then you can expect a few major retailers to join the 1.4M individuals in bankruptcy court at the end of this year as we are just one bad Christmas season away from catastrophe.
And let’s not kid ourselves with that down 0.1% number on Retail Sales as that includes automobiles under the $1Bn “cash for clunkers” stimulus. Without automobiles, which were up 2.4%, retail sales were down 0.6%. Also interesting for the oil bulls is gasoline sales were down 2.1% so Americans are not going anywhere and are not buying anything. Retail sales excluding autos and gas decreased 0.4% in July, the fifth drop in a row. Furniture retailers fell 0.9% and building material and garden supplies dealers were dropped 2.1%. Food and beverage stores declined 0.3%. Electronic and appliance stores were down 1.4%. General merchandise stores tumbled 0.8%. Sporting goods, hobby, book and music stores fell 1.9%. There were some increases: Health and personal care stores, up 0.7%; restaurants and bars, up 0.4%; clothing stores, up 0.6%; and mail order and Internet retailers, up 0.1%.
So that’s the bad news but it’s time, once again, to switch off our brains and watch our levels..
According to Briefing.com: Two months ago, the 2009 bottoms-up operating earnings estimate (adding all the estimates company by company) for the S&P 500 was $79.09, according to Standard & Poor’s. Today, it is $55.81 for 2009. For the forward four quarters of the second quarter of 2009 through the first quarter of 2010 it is $62.37. Two months ago, the top-down earnings forecast (making economic assumptions and then backing out total earnings projections) for the S&P 500 was $45.78. Today, it is $43.03 for 2009. For the forward four quarters of the second quarter of 2009 through the first quarter of 2010 it is $44.00. In other words, the market rebound has occurred despite any improvement in the earnings outlook as forecasted by Standard & Poor’s. Granted consensus estimates have risen from their nadir, yet the earnings outlook itself hasn’t improved from where it was just two months ago.
Unfortunately, there is a huge difference between operating earnings and “as-reported” earnings, which include all charges. Those charges have been huge and the as-reported earnings estimate for the next 4 quarters is just $31.07, less than HALF of the operating earnings. So we have an apparent p/e of 16.1, which is high in itself but can be argued to be fair assuming low interest and forward growth. What we can’t justify is the as-reported p/e of 35.6, that is way overvalued, even if every single stock in the S&P was a biotech with a successful stage 3 trial!
While many companies have come in ahead of estimates this quarter, very few have done so on revenue growth. What we are seeing is a lot of companies who have done a tremendous job cutting costs – at the expense of 6M jobs, 4M foreclosed homes, 2M individual bankruptcies and $3Tn in government aid. Yesterday’s loss of 546,000 jobs indicates those jobs aren’t exactly coming back and the problem with “celebrating” earnings based on cost cutting is the same problem you have celebrating that a person has stopped bleeding because they have run out of blood – if you don’t replace it soon, he’s still going to die. Getting worse more slowly is not the path to market prosperity…
Let’s keep in mind that the average price of a barrel of oil in Q2 was $57.50. Oil opened July 1st at $60 and ran straight up to the $70s and is averaging $10 more per barrel. Productivity and wage reports indicate that there weren’t any raises being handed out in Q3 so far so we can look at that $10 per barrel price increase passed on to the US consumers at a rate of $200M per day. Globally (and 50% of the S&P 500s revenues are global), that’s $1Bn per day out of the pockets of consumers going into the same barrels of oil that they burned for $90Bn less in Q2. Perhaps we can project some profit growth in the energy sector for Q3 but that money had to come from somewhere and the horrendous Retail Sales report we got yesterday shows that the money was clearly drained from Electronics (down 1.4%), Food and Beverages (down 0.3%), Leisure (down 1.4%), Building Materials (down 2.1) and General Merchandise (down 0.8%). One bright spot – increased drinking caused Bars to rise 0.4% so party on markets!
Which reminds me – Yesterday, the GE-owned energy pushers at CNBC had the nerve to spin the slowdown in retail sales on Cash for Clunkers, making the premise with their “expert analysts” that people buying cars in this program made less other consumer purchases. What total nonsense! 250,000 cars were sold under this program in total and 95% of those sales were financed with average deposits of $1,000 so, at worst, we’re looking at about $250M less consumer spending power while the 119,750,000 (99.8%) other families in this country were completely unaffected. OIL HOWEVER, is used by 100% of those 120M American families and they had to fork over an extra $6Bn to the US energy cartel in July and that is direct, after tax money, right out of the wallets of the US consumers.
We got a lot of very rosy outlooks from our reporting companies but WHERE’S THE HIRING? The average reporting company raised guidance by 5% for Q3 yet, during the past 4 weeks of earnings, they handed out pink slips to 2.2M workers. I’ve mentioned before that frightened workers do make for productive workers but that only works until you burn them out and then they get sick and they make mistakes and problems occur and then your company can’t meet production targets and by the time they hire and train they often miss the cycle. There’s a lot of optimistic talk out there, but show me a single company who is putting their money where their mouths are?
It was pointed out by Gluskin-Sheff’s Chief Economist, David Rosenberg yesterday that:
We actually just got the retail sales data for July and in a word, they were simply awful. We can have all the inventory building in the world but it can’t last without a revival in final sales. Retail sales were supposed to be up 0.8% MoM, according to the consensus, but instead fell 0.1%. The breadth of the decline was amazing — only autos (+2.4% — due to Cash for Clunkers), clothing (+0.6%, but that only partially reversed the 1.5% slide in June), restaurants (+0.4%, after a 0.2% drop in June) and drug stores (+0.7% — the third increase in a row, so this is an area of retail sales is worth being excited about)…
A lot of bullish sentiment lately has been based on the logic that we are “burning off” inventory and therefore we must be heading into an upswing in production because GOOD MUST BE PRODUCED! But do they? Let’s say that we don’t need 100M single-family homes in the US for 320M people. What happens if sky-high medical costs and loss of retirement savings send retired parents back to live with their children. Perhaps loss of job opportunities for college grads sends millions of those potential homeowners back to their old bedroom for a few extra years? Let’s say the average number of people per family (and in a home) goes up from 3.2 to 4, that’s a 25% increase and would eliminate the need for 25M homes. Those homes are already built – people were living in them just 2 years ago. We won’t need that inventory to be “rebuilt” for many many years if that happens.
What about cars? Does the average American family need 1 car per licensed driver? When I was a kid, we were lucky to share a car with just 2 people. Why does everyone think it’s so impossible for consumer habits to change back. When I got my first car (1979), the car was $800 and insurance was $300 a year. Now a ratty used car is $3,000 and insurance is over $1,000 for a teenaged driver. That’s 4 times but I used to make $200 a week so the whole thing was 6 week’s work work – there are not too many 16-year olds pulling in $2,000 a month these days and not many Dads with an extra $4K plus gas to toss at kids who are about to go to college. So what if American families go from 3 cars to 2 as a lifestyle change? There’s 50M cars worth of inventory we won’t need replenished.
Do we NEED a TV in every room in the house, an IPod for everyone in the family, multiple laptops, new furniture, carpeting, year-round indoor temperatures of 72 degrees? These are all things we’ve only had for the past generation – they are luxuries from a luxurious age, don’t let people make you believe we CAN’T give them up, our grandparents gave up far more in WWII and their parents gave up nearly everything in the Great Depression. Consider the possibility that it’s excess consumerism that is the fad in the grand scheme of things, not conservation…
Those are my underlying concerns as we may, in fact, be at a bottom but I think it may be a bottom we need to get used to. S&P 1,000 may be the new 1,200, which was the top of a normal range before the market got irrationally exuberant way back in 2006 when there was going to be an HDTV in every home in America and a Hummer in every Chinese driveway as we all refinanced $25Tn worth or real estate to pay for it all. Now the value of that real estate has fallen to $18Tn and about $20Tn of it is financed, leaving the average home in America 20% underwater and there are 6% less people working and the wages for those who are still working are down 10%, making it much harder to service that $20Tn debt load.
What is going to fund the next wave of buying? Where is the growth money coming from? The average US household is currently almost $125,000 in debt and ONLY artificially low interest rates are keeping that debt load from eating up the 25% of their paychecks in interest alone that would be happening at 10%, which is much less than the 15-18% interest we had in the recession of the ’70s. The dollar has been falling considerably since the March market crash, when it was used as a “safe haven” by international investors and those dollars are worth 12% less (worthless?) than they were in March so your stocks BETTER be up 12% or they are losing ground to the dollar.
Is your home up 12%? Are your wages up 12%? If not, you, along with hundreds of Millions of other Americans, are losing ground and that means that one day, you too may choose not to buy that extra car or new TV or 4th IPod – Yes, IT COULD HAPPEN TO YOU! And, when it does, then we will know that our generation can change. Just like “The Greatest Generation” we may end up sacrificing just a small portion of our $13Tn of very conspicuous consumption as we attempt to get real about our future.
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