“WASHINGTON (MarketWatch) — The output of the nation’s factories, mines and utilities rose a seasonally adjusted 0.6% in December, the sixth increase in a row following the worst downturn since the end of World War II, the Federal Reserve reported today. “

The glass half full crowd is pointing to the sixth straight month of rising industrial production as a sign of the economy’s health. Indeed it does point to a recovery.The question, especially given our prior post, is are we just recovering from a near depression level low recorded mid last year amidst the panic and rebuilding depleted inventories or are we at the start of an industrial production growth trend. Employment, credit, and consumption would lead us to believe the latter is the case but we are ever hopeful. U of Michigan’s Mark Perry at his blog Carpe Diem views things this way:

“The monthly increase in December industrial production marks the first time since late 1997 of six consecutive monthly increases, and the cumulative gain of 4.5% through December is largest six-month gain since early 1998 (see top chart above). Although the year-to-year growth rate through December is negative (-2.0%), it’s the least negative growth rate since the summer of 2008 and the trend in this series, along with the six straight monthly increases, is another V-sign of economic recovery (see bottom chart above).”

A V-shaped recovery would be great but it would seem to be merely a hope without an increase in employment and consumer spending. The so-called jobless recovery which some portend is possible but can only go so far. A V-shaped recovery implies a swift return to prior activity levels and with twice as many people unemployed as in the prior state, it is difficult to see how that can occur. Remember, consistent with the prior post’s quotes from Goldman Sachs, what we have seen is a reduction in the number of the newly unemployed or a reduction in the rate of unemployment growth. What we need to see is actual employment growth. Also, employment growth simply meets population growth when we are adding 150,000 jobs to the economy per month. So we need to exceed that level to begin to put some of the millions of unemployed back to work.

The Commerce Department released retail sales yesterday. The news was not good. As reported by Bloomberg/BusinessWeek:

“Sales at U.S. retailers unexpectedly fell in December following a bigger gain than previously estimated the prior month, highlighting the risk that the largest part of the economy will be slow to recover.

The 0.3 percent decrease came after a 1.8 percent jump the prior month, Commerce Department figures showed today in Washington. Other reports showed inventories rose more than forecast in November and jobless claims climbed last week.”

David Rosenberg, former Merrill Lynch chief economist and currently of Gluskin Sheff puts the impact this way:

“The problem with having a weak December retail sales figure is that the consumer spending momentum heading into the current quarter is nearly zero.

…the problem with having a weaker December number is that the consumer spending momentum heading into the first quarter is pretty well non-existent (a zero build-in on the parts of the retail sales report that feeds into the consumer spending segment of GDP). Businesses will see what is happening to final demand and likely keep the “inventory build” story as a 2009 Q4 adjustment as opposed to a new cycle. Real GDP growth is likely to come in between 4.0-5.0% for Q4 and almost collapse towards 1.0% in Q1 (current quarter) and the surprise would be a Q2 relapse. Tough to handicap, but the expected second half slowdown (in some circles) may be sharper and earlier than many believe.”

David Indiviglio of The Atlantic seems to concur:

“So retail sales reinforce the news that November was great. But they also confirm that December was not-so-great. Without solid consumer spending, it will be difficult for companies to justify more hiring.

And inventories rose more than thought in November. So, despite the decent sales that month, we still saw more production than purchasing. And given that December’s sales were weak, I’d expect that inventories rose even further last month.

Of course, 2009 is over, and thank God. But if it left excess inventory in its wake for the first part of 2010 to deal with, then that decreases the likelihood that we’ll see significant job growth towards the beginning of the year. Given December’s unemployment report, that’s probably not surprising, but does confirm our fears.”

After a bullish start to the year the reality of a more moribund than expected December from both the employment and consumer fronts is sending a shiver through the market. Today Goldman Sachs takes a deeper view of last week’s lower than expected employment numbers and concludes that layoffs are tailing off but hiring is not picking up and therein lies the rub:

“the problem with having a weaker December number is that the consumer spending momentum heading into the first quarter is pretty well non-existent (a zero build-in on the parts of the retail sales report that feeds into the consumer spending segment of GDP). Businesses will see what is happening to final demand and likely keep the “inventory build” story as a 2009 Q4 adjustment as opposed to a new cycle. Real GDP growth is likely to come in between 4.0-5.0% for Q4 and almost collapse towards 1.0% in Q1 (current quarter) and the surprise would be a Q2 relapse. Tough to handicap, but the expected second half slowdown (in some circles) may be sharper and earlier than many believe.”

Weak retail sectors included apparel, furntiniture, autos, general merchandise, and, surprisingly, electronics. E-tailing, pharmacy, sporting goods, hobbies, books, and toys were the bright spots.

So employment remains a key variable driving retail sales and inventory levels which in turn drive production and employment…a virtuous or not so virtuous cycle.

First there were the BRIC countries, Brazil, Russia, India, and China. The acronym BRICs is used to reference these nations, the world’s largest emerging market countries where much of the world’s economic growth is expected to come from. Then, as referenced earlier here, the PIIGS were christened. Representing the eurozone’s weakest economies this acronym stands for Portugal, Italy, Ireland, Greece, and Spain. Clearly being included in this acronym is not a badge of honor.

Now come the MAVINS. This acronym represents the countries with the natural resources and demographics to benefit most from the global growth ahead. This growth fueled mainly by the BRICs and augmented by the developed world will require metals, materials, low-proced quality manufacturing, and energy and these countries will be net exporters of some or all of these. The MAVINS are Mexico, Australia, Vietnam, Indonesia, Nigeria, and South Africa.

I know, quite a mixed bag but each has their own viable reasons for expecting an outsized share of global growth going forward. Given the range, there is something for any type of investor. More conservative investors may want to tend towards Australia and Indonesia while more venturesome folks may look at Vietnamese and South African ETFs. Fans of roller coasters, horror movies, and driving down country roads with headlights off may even find a way to invest in Nigeria.

Joe Wiesenthal of The Business Insider explains the play to CNBC here:

OK, not that kind of market. We’re talking about the stock market.

Given the low volume experienced by our consistently rising stock market over the last few months, the fact that all of the market’s gains have occurred from after hours buys of S&P futures contracts, and the recent pattern of the market rising on both good and bad news, this quote could have come from any one of millions of participants in the markets. I know I’ve thought it. But the above comment was made by Charles Biderman of TrimTabs, a market analysis firm whose focus is the source of liquidity in the market and the flow of funds into and out of the market from a macro perspective. Biderman is a respected market analyst, you can learn a bit more about him here.

He raised eyebrows last week with his view that it was possible that the U.S. government was behind the market’s recent rise. Unable to figure out the origin of approximately $600 billion of new capital that has made its way into the market in recent months he has used the process of elimination to arrive at his view that the Fed or Treasury may be buying S&P futures after hours in order to put a bid under this market. The advantage would be that a rising market builds confidence for spending and hiring, props up balance sheets, and assists in the much needed recovery. While it would not be illegal it would be unusual and mis-leading for this not to be announced in some way. However, announcing such a move would be self-defeating as the market would understand the artificial nature of the move and look to sell into the government while it is buying. It also raises the question as to what happens when it stops buying and eventually starts selling.

We’ve stated before that we are not much for conspiracy theories but given that this is a thought coming from Biderman, and not the lunatic fringe, it bears pondering.

Consider this interview of Biderman from this morning’s Bloomberg News:

We are revisiting this chart as it has developed since we last viewed it and the development remains scary. The all-important employment numbers remain fragile, as evidenced by Friday’s unexpectedly bad numbers. This chart shows that we are in a slow bottoming process like the most recent recessionary period of 2001, not like the V-shaped employment drop and surge after World War II. Bottoming is good relative to falling but a slow bottoming with slow recovery is not good for the economy. (For a larger view of this graph please click here.

One of the more alarming stats regarding employment is the number and percentage of unemployed that have been unemployed for more than 26 weeks. That chart looks as follows (click here):

Calculated Risk brings us both of these charts and the accompanying commentary:

“The current employment recession is the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only early ’80s recession with a peak of 10.8 percent was worse).

Note: The total jobs lost does not include the annual benchmark payroll revision that will be announced on February 5, 2010. The preliminary estimate is for a downward revision of 824,000 jobs – pushing the total jobs lost over 8 million.

Unemployed Over 26 Weeks

According to the BLS, there are a record 6.13 million workers who have been unemployed for more than 26 weeks (and still want a job). This is a record 4.0% of the civilian workforce. (note: records started in 1948).”

Employment remains the bellwether and the outlook remains cloudy. ]]> http://fiftythousandfootview.com/?feed=rss2&p=649 0 http://fiftythousandfootview.com/?p=643 http://fiftythousandfootview.com/?p=643#comments Sun, 10 Jan 2010 21:07:55 +0000 Pat http://fiftythousandfootview.com/?p=643

The WSJ reports tha Venezuela’s socialist dictator, Hugo Chavez, has, with the stroke of a pen, cut the value of his nation’s currency, the bolivar, in half, relative to the U.S. dollar. This is the fourth time in his ten year reign that Chavez has devalued Venezuela’s currency. The article states:

“-Venezuela’s devaluation of its currency and the imposition of a dual-rate foreign exchange system will certainly give a short-term boost to the fiscal situation of President Hugo Chavez’s government.

The government, of course, is assured of immediately getting the VEF4.3 rate, which means that starting Monday the tens of millions of dollars oil-rich Venezuela earns on a daily basis from its petroleum sales – mostly to the U.S. – will be worth double when converted into bolivars.

The extra money will allow Chavez to restore spending on social programs that saw cutbacks last year as oil prices plummeted. He said Saturday that more spending was indeed a key reason for the devaluation.

Critics say Chavez’ strategy is clear: the extra cash will allow him to essentially buy votes from the poor ahead of September congressional elections, where the president’s socialist party hopes to retain a majority.

Chavez saw his popularity ratings dip under the crucial 50% level a few times last year, a rarity during his 11 years at the helm of this South American nation. A grinding recession and rising power and water shortages that many blame on him are also hurting.

Some say his support could suffer if the currency measures spark more inflation, which devaluations often do. The government is betting that the potential benefits will outweigh the risks.”

So, in an effort to stem inflation brought about by such an action Chavez now says he’ll seize any business that raises prices after this currency move. Bloomberg reports:

” Jan. 10 (Bloomberg) — Venezuelan President Hugo Chavez said that businesses have no reason to raise prices following the devaluation of the bolivar and that the government will seize any entity that boosts its prices.

Chavez said he’ll create an anti-speculation committee to monitor prices after private businesses said that prices would double and consumers rushed to buy household appliances and televisions. The government is the only authority able to dictate price increases, he said.

“The bourgeois are already talking about how all prices are going to double and they’re closing their businesses to raise prices,” Chavez said in comments on state television during his weekly “Alo Presidente” program. “People, don’t let them rob you, denounce it, and I’m capable of taking over that business.”

Chavez devalued the bolivar as much as 50 percent on Jan. 8 for the first time in almost 5 years, as last year’s decline in oil revenue caused the economy to contract an estimated 2.9 percent, its first recession since 2003. The government set a multi-tiered currency system that Chavez says will stimulate national production by making imports more expensive.

Inflation Outlook

The devaluation may add to inflation by 3 percent to 5 percent this year, Finance Minister Ali Rodriguez said. The government forecast an inflation rate of 20 percent to 22 percent this year, after consumer prices rose 25 percent, according to the National Consumer Price Index.

The government also will “attack” the so-called parallel exchange rate, which Chavez called “illegal.”

Venezuelans turn to the parallel rate when they can’t get government authorization to buy dollars at the official exchange rate. The bolivar traded at 6.25 per dollar on Jan. 8, traders said.

“They put the value of the dollar at more than 6 in an arbitrary and illegal manner,” Chavez said. “We have to organize to reduce and attack that speculative, illegal dollar that hurts the Venezuelan economy so much.” “

I guess it’s good to be the king…but, as usual, its his subjects that will suffer. Inflation will be much worse than the government forecasts, he may keep prices from doubling with his threats but, like Cubans (who have the added challenge of our embargo), Venezuelans will not be able to import anything, as the government has not allowed the purchase of dollars in the multi-tiered system that Chavez has operated previously. So the black market or “parallel rate” becomes the going rate. Having been at 6 to 1 that rate will go to 12 to 1 and will be the only way businesses and ordinary citizens can get dollars. So the official rate goes from 2.15 bolivars to 1 dollar to the new rate of 4.3 bolivars to 1 dollar. But the rate at which you can actually get dollars goes from 6 to 1 to 12 to 1. This is a disaster for Venezuelans. However, Chavez will shower social programs on the large numbers of poor in the hopes of getting re-elected in the fall.

Did I mention talks of more stimulus are heating up in Washington?

This afternoon the Federal Reserve announced that consumer credit had tumbled 8.5% in December, the largest drop since 1979. Revolving credit such as credit card debt dropped a whopping $17.5 billion or 18.5% on an annual basis, the largest drop since recordkeeping began. Good news is that consumers are repairing their balance sheets and acting in a more rational manner than we’ve seen in a long time. As we’ve discussed previously, the bad news is that recovery will be difficult without robust consumer demand.

Calculated Risk provides the following graph and commentary:

“This graph shows the year-over-year (YoY) change in consumer credit. Consumer credit is off 3.9% over the last 12 months – and falling fast. The previous record YoY decline was 1.9% in 1991.

Consumer credit has declined for a record 10 straight months – and declined for 13 of the last 14 months and is now 4.5% below the peak in July 2008. It is difficult to get a robust recovery without an expansion of consumer credit – unless the recovery is built on business spending and exports (seems unlikely).

Note: The Fed reports a simple annual rate (multiplies change in month by 12) as opposed to a compounded annual rate. Consumer credit does not include real estate debt.”

The fact that the stock market is up a tad as we head into the close appears to bode well for the near term trend. With unemployment coming in materially worse than anticipated and ditto for consumer credit (economists’ consensus estimate of revolving credit decline was $5B vs. $17.5B actual) and the market closing up, momentum appears with the bulls. In a bearish environment you would have expected to see a 3 digit decline in the Dow. The bulls likely remain on top due to the perception that employment difficulties continue to stay the Federal Reserve’s hands relative to raising interest rates and low interest rates are tinder for stocks.  Focus will be on earnings announcements beginning in the next few weeks. They are anticipated to be positive due to continued expense discipline and some top line recovery, potentially carrying the indices higher over the near term.

There is a growing consensus that the first half of the year will be good for both earnings and stock prices with vulnerability appearing in the second half. As you know I’m skeptical but playing along a bit. Caution and vigilance remain paramount but the market’s resilience in the face of bad news today was impressive.

The Employment Situation Report was released this morning by the Bureau of Labor Statistics and the numbers disappointed. With estimates ranging from a loss of 100K jobs to gains of as many as 300K there was great uncertainty around the December number, but the consensus was for a gain. The actual loss of 85,000 jobs in December was a real letdown:

“Establishment Survey Data: Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs.

Household Survey Data: In December, both the number of unemployed persons, at 15.3 million, and the unemployment rate, at 10.0 percent, were unchanged. At the start of the recession in December 2007, the number of unemployed persons was 7.7 million, and the unemployment rate was 5.0 percent.”

The Obama administration was rumored to be preparing a round of cheerleading appearances today but we suspect the script is being rewritten to skew towards more stimulus rather than celebration.

As we’ve said before the employment numbers are the real magilla as it relates to determining the strength of the real economy and the recovery. Today’s indication is not a good one for that but we suspect that corporate earnings will benefit, at least short term, as employers continue to focus on expense reduction as evidenced by the continuing employment reductions.

OK, one could find themselves in the middle of June still sifting through the prognostications for the coming year of all of the prognosticators who have a voice in today’s cacophonous market chatter. This, dear readers, is the last post on such matters as this new year has kicked off with such a flurry of activity and news as to render such views an ever more perishable luxury. Nonetheless it is always good to reestablish bearings at the start of the year and calibrate our way-finding gear and these views from market analysts and pundits serve to assist in that process.

So, the first of the last two things I’ll offer up is a somewhat tongue-in-cheek quick review of the standout predictions for 2010 courtesy of Business Insider.Just click through using the arrows at the upper right of the slide show starting at 1/28.

Finally, for those looking for a compendium of predictions to refer to over time or to dig deeper on any of your favorite firms or analysts we refer you to this excellent link summary to a large collection of 2010 forecasts as compiled by the industrious folks at The Pragmatic Capitalist in their The Ultimate Guide to 2010 Investment Predictions and Outlooks.

The glories of technology

It is amazing that all of that information is available to the masses free of charge and at the click of a button. When I started in the investment banking business in the late 1980s such information would have only been available to the largest institutional investors, only in cumbersome paper form, and at a dear price in commissions or direct fees. The democratization and “freeing” of such data is real progress but may render such information of less value as anything relevant and material gets imputed into prices so much faster these days. Perhaps that is another reason for all of the focus on predicting black swans, which by their definition may be unpredictable.

Such is the value of technology. Speaking of which, I have never been an early adopter of technology devices but I uncharacteristically jumped on the new Google phone early…and am I happy. Called the Google Nexus One, it is, quite simply, a great device. To be clear, I’m shifting from a Blackberry Curve 8900 to the Google phone not having experienced the joy that appears to be the iphone, so I’m new to things like a good browser, real apps, healthy screen size etc. I must admit, I miss my tiny keyboard but know I will master the touchscreen keyboard as I’ve gotten better at it in the last 24 hours.

I was watching CNBC’s coverage of the launch on Tuesday in my office when I got the bug and hopped online to order it from Google. The online Google storefront was the most elegant I’ve seen and the process was quick and flawless. They offered free engraving but said that would add 72 hours to when they could ship. They also offered free FedEx shipping, I suppose as an inducement to the early buying nuts like me who were willing to shell out $500 for the unproven device. I took both and hit the send button on my order at about 3:00pm on Tuesday, expecting to take possession in a week or so. The device showed up at my office at 10:00am the next morning, yesterday. Ever since I’ve been smitten with this device. Anyway, you’ll hear both positive and negative about it in the coming days and months. So far, consider me a big fan…until otherwise notified.

(1) The Last Post is a novel by Ford Madox Ford which is part of his tetralogy (four related novels)  called Parade’s End and published between 1924 and 1928. It is set in England and on the Western Front in World War I, where Ford served as an officer in the Royal Welch Fusiliers, a life vividly depicted in the novels. The compilation was ranked at number 57 on the Modern Library’s 100 Best Novels list. The novel chronicles the life of Christopher Tietjens, “the last Tory,” a brilliant government statistician from a wealthy land-owning family who is serving in the British Army during World War I. Much of the novel is spent following Tietjens in French trenches as he ruminates on how to be a better soldier and untangle his strange social life. For more on Ford Madox Ford see wikipedia here.

Before you think I’ve gone all bullish on you, let me present some thoughts from the great David Rosenberg, formerly of Merrill Lynch and now of Gluskin Sheff.

In short, as The Business Insider puts it his 2010 themes can be summed up as: “The Consumer Is Still Toast, Housing Is Down, And Everyone Is Delinquent On Everything”. In neat tabular form, courtesy of Zero Hedge, here are his views:

So, between this post, and our prior post we’ve presented two of the infinite views on 2010 that are out there. We like both of these guys. Wien missed the housing crisis but was spot on with last year. Rosenberg saw the iceberg and blew the horn but kept blowing it as we sailed past last year. Put it all in your pipe and take a big drag, see what you think.

You can page through a breakfast presentation of Rosenberg’s views courtesy of TBI here.

(1) Fractals are self-similar and repeating patterns. Ultra Fractal fractal art takes from the Mandelbrot Set, a selection known as Julia Dust for parameter iterations into these self-similar and repeating patterns.