I remain pessimistic over economic and equity market prospects. And with ample reason. But, through Friday, the markets thought otherwise. That will soon change.
Though the Dow and S&P 500 were down slightly for the week, the equity markets nevertheless closed the week on a strong note. This is typically a sign of optimism because of the potential for adverse surprises over the weekend. This is an upbeat indication, as was the decline in the VIX volitilty index. Taken together these measures suggest more market confidence (even if misplaced), that the balance of forces will lift equity prices higher. In reality, the bear-market rally has relatively little room left on the upside. It will soon be time to reset short positions in ETFs, and not just because of the potential adverse consequences of the swine flu. Next week first quarter real GDP is likely to be reported down 6%, with more bad news to follow. The month of May begins a period of market vulnerability. One straw in the wind is a step-up in insider selling, typically an advance indicator of impending equity market declines. Similarly, a reported decline in equity market short positions undermines the market's potential to move higher or just maintain current market price levels.
Also significant was last week's rise in gold prices back above 900, with a current spot price of 913, and a jump in Treasury yields, with the ten-year yield back at 3.0%, the highest level since the Fed indicated its plan to buy Treasury bonds. These developments reflect a number of reports, events and beliefs. There was a report that China has substantially more official gold holdings (76% more)than previously thought. That bullish report on gold helped mitigate the market fear of impending gold sales by other central banks and official institutions to fund their assistance programs and stimulus efforts. Treasury yields are being boosted by the the coming sizable Treasury quarterly auctions usually slated for the second week in May. The so called "Duke of York effect" in which Treasury portfolio holders raise cash for the auction by selling nearby maturities. This raises yields on the new auction issues which effectively makes them more enticing to potential buyers. The reference is to the old English nursery rhyme that I believe goes "The Duke of York had 10,000 men. He marched them up to the top of a hill. Then he marched them down again." That process could push Treasury bond yields higher before they more than reverse the yield rise after the coming auctions. But, there are also likely other important and misleading forces at work in these latest developments.
Among these are erroneous market expectations of an early economic recovery and renewed inflation. These various misguided beliefs were influenced by outright official boosterism and a smattering of seemingly less dire economic reports. Some of these recent economic reports were the result of questionable seasonal adjustments that had the effect of artificially inflating the reports so they appeared less dire or even actually improved. However, if the seasonal adjustments for recent data merely borrowed strength from the presumed recovery later in the year, reports for that later period will only look worse than they deserve. Fed Chairman Bernanke's reference to spotting "green shoots" of recovery and Treasury Secretay Geithner's comparable remarks raised excessively optimistic expectations that had to be subsequently watered down. Secretary Geithner followed with a comment that it is "too early" to say risks have receded and that indeed more action needs to be taken to counter the worst financial crisis in generations. But, not everyone grasped the deliberately mixed message.
The banking system faces major financial distress that will be the source of new profound and deep declines for the US and global economy. Nevertheless, the markets' worries over the still to be released report of the bank stress tests were deceptively lightened by Treasury Secretary Geithner's seemingly offhand remark that all the 19 tested banks have adequate capital. They do not. Also the details of the stress test themselves suggested a low hurdle that all the major banks can pass.
The Administration is trying to have it both ways. They want to be credible. But, that objective can be at odds with their attempt to encourage spending, lending and investing. That explains their efforts to bolster more than warranted confidence in the stability of financial institutions and foster the mistaken belief that the worst of the recession is over and that we are in an economic bottoming process. To those ends the concept of the bank stress test was created. It was hoped that the clean bill of health given to those banks that passed (and all would) could be as effective as the restoration of confidence at the Depression era reopening of banks after the Bank Holiday.
Before you buy into that potential fiction let's look at some of the bank developments that do not get adequate press and their decidedly adverse financial and economic implications. Major banks are rapidly cutting their customers credit card and other lines of credit in their own deleveraging process. By some measures such lines have been cut in half. That critically reduces the availability of credit on which strapped consumers and businesses depend. Indeed, many consumers depend on their unused credit lines as their only emergency funds and reserves. Without access to such funds they will either turn far more cautious in their spending or default on their obligations. It is credit, not money, that is the driving force of the economy. If credit declines and it is, the expansion of the money supply will not make up for it or prevent deflation and economic contraction.
Banks are at the beginning of a new wave of delinquencies and defaults of credit card debt and non-residential commercial real estate debt. Commercial real estate prices are already down some 35%, wiping out owner equity and creating losses for even prudent lenders and certainly for those that lent 80% to 90% or more on overly generous appraised value. The home mortgage forclosure rate at many banks is rising at an accelerating pace after their self imposed moritorium on foreclosures ended. That only adds to downward pressure on home prices, already burdened by a 10-month overhang of unsold homes. Existing home sales fell an additional 3% in March, suggesting the residential market is not stabilizing. It is not likely to do so until next Spring.
Recent bank loss reports only appear less burdensome for many banks because of the favorable change in mark-to-market accounting rules. The improvement in banks' earnings from securites trading was partly due to a preannounced Federal decision to buy Federal Agency securities which allowed banks to stock up on them before reselling at a profit. There were other special factors that helped to artificially boost bank earnings, including a shift in fiscal year that in some instances reportedly omitted a month of unfavorable earnings. The increased yield spead between banks' cost of funds and lending rates is a source of profit. But it will take an extended period before such earnings are sufficient to allow adequate writedowns of losses against even enhanced capital.
Far too many banks missed the opportunity afforded by their exceptionally inflated earnings reports to raise new capital. They will regret it. The IMF estimates US banks will require $275 billion in additional common equity capital to meet or maintain its 4% of assets floor. At the same time the IMF estimates European banks require $600 billion more equity. In aggregate, Eurpean and US banks, it is estimated, will not turn a profit after projected writedowns until 2011. That presumably is consistent with the IMF expectation of a 1.3% GDP contraction in the global economy this year, a significant turnaround from a 0.5% increase previously predicted. Moreover, it does not expect a global recovery until next year. For the US, the IMF forecasts a 2.8% GDP decline this year and no growth next year. In my opinion the IMF could well be optimistic. In either case there is more pain to come.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, N.Y. 11731
Email address: philipbraverman@Gmail.com
This and earlier weekly reports can be accessed by going to internet explorer and typing the following: philipbraverman.blogspot.com
Friday, April 24, 2009
Friday, April 17, 2009
The deep recession will produce further deflation and other economic woes
Be forewarned. There will be major disappoinments ahead. I gave you a timely advance warning of this recession, as well as its pernicious nature and, most recently, an advance indication of the current bear market rally from its 666 S&P 500March 9 low point. I also indicated the probable size of the rally, to 875, just shy of the 879 level indicated by a 32% rise to roughly return that S&P 500 index back to its 200-day trend moving average. Now, with the S&P-500 index closing up at 869.60 on Friday, I am giving you an advance warning of an imminent new bear market nosedive that will at least retest the early March lows or, more likely, set new equity market lows. That will prompt new buying of Treasuries and renewed significant declines in yields. For example, the Treasury ten-year note yield at 2.95% on Friday, should decline to at least 2.5%.
These are far from consensus views. Instead, there is unjustified market confidence that the equity market is in a sustainable rally. For example, Ken Fisher, Chairman of Fisher investments expects the S&P 500 rally the past six weeks to be extended, from 870 currently to 1130, another 30% rise, by March 2010. Such views typically stem from an unwarranted hope that the economy is bottoming out, that the credit crisis has been resolved, that the banking system has been mended and that inflation is about to emerge, producing a renewed surge in commodity prices. In German there is an expression which to my way of thinking aptly applies to such views. It loosely translates into living on cloud nine cookooland. In other words, in my opinion, such views are nonsense.
The reality, as I see it, is that the equity market is vulnerable to a renewed and very steep decline. The economy remains mired in a deep recession. Despite the various Fed and Federal government efforts to provide assistance to the credit market and financial institutions,the credit crunch continues in full swing. Banks are still beset by pronounced losses that compomise their capital and restrain their lending. Deflation is already in evidence and is likely to worsen for an extended period. further undermining corporate profitability. That ever more onerous deflation pattern will, of course, keep the threat of inflation from being realized any time soon, most likely for years. A closer look at the forces at work should make the reasons for my views in each of these areas self evident.
The equity market has moved from being oversold at its early March low to being more than fully priced currently. The S&P 500 for example, has a projected income per share of some $40 this year. Even that level could yet prove optimistic. But, at $40 per share, current S&P 500 price levels translate into a price-earnings ratio level of almost 22, an excessively high level at any time and especially in the midst of the worst recession since the 1930s. One of the major driving forces of the rally the past six weeks was undoubtedly short covering, not a projected or realized recovery in earnings. But, now the sizable short position underpining of the rally has been substantially reduced. April is a seasonal period of rising equity prices, while May often ushers in a period of lackluster or disappointing equity price performance. That pattern even in more normal times helped create the dictum of sell in May and go away. That is likely to prove even more prescient than usual coming off a spectacular but unsustainable March-April equity market rally.
It was precisely the various market factors that caused me to predict a major bear-market rally before it ocurred in early March, that, having flip-flopped, now incline me to warn of an imminent reversal of the rally, probably beginning in May, if not before. Extremes of equity market overbearishness has reverted to overconfidence, unjustified overconfidence. The trigger for a renewed decline could be the 6% or so plunge in first quarter real GDP, to be released later this month. Other potential adverse market catalysts include a near 700,000 drop in April nonfarm payrolls and another sharp rise in the unemployment rate to be reported in early May, as well as disappointing corporate or financial institution earnings or the results of the bank stress tests, also to be released in early May, despite the rumored Treasury intention of giving them all a favorable review.
I am not alone in my negative view. A Morgan Stanley analyst went so far as to recommend selling "before it is too late" and Goldman Sachs' decision to issue stock this past week can be seen as a vote of no confidence in an extention of the rally.
The various presumed postive signs of impending or actual economic recovery are fanciful or due to inappropriate seasonal adjustments. This week, for example, initial claims for unemployment benefits fell 53,000 to 610,000 in the week ended April 11. But, that improvement may reflect nothing more than a good Friday holiday shortened week in a volitile series. Other presumed signs of recovery are equally misinterpreted. That is certainly true of supposedly favorable data for housing, which continues in deep distress.
Indeed, a new speed-up of home mortgage forclosures has begun. How can this be happening, especially when a rise in forclosures is not only counterproductive to the effort to stem the drop in home prices, it is contrary to the thrust of the Administration's intentions? It arises because a number of financial institutions have terminated their self-imposed temporary moritorium on forclosures. For example, J.P.Morgan Chase, Wells Fargo & Co., Fannie Mae and Freddie Mac have all reported an increase in foreclosures as their foreclosure moritoriums ended. Though there is still an array of different approches to delinquecies by mortgage holders, on balance, forclosure filings are up sharply. In February, the latest month for which data are available, foreclosure filings were up almost 6% from January and 30% from February 2008. Moreover, foreclosure sales are also rising, as are long-term delinquencies 120 days or longer, a precurser to foreclosure. To make matters worse, mortgage problems are increasingly cropping up in FHA conforming loans, not just in sub-prime loans, as the recession widens its depressing grip. The process of rising delinquencies, foreclosures and forclosure sales will continue to depress home prices as the overhang of unsold homes available for sale not only remains excessive but is destined to rise further. Given persistent housing distress, it is not surprising that housing construction fell 10.8% to an annual rate of 510,000 units, less than one quarter of the more than 2 million peak pace in 2006.
This past week the CPI was down 0.4% in the 12 months ended in March. This is the first such year over year decline in more than a half century. The decline in consumer prices now joins the declines in producer and commodity prices. This deflation pattern is likely to persist in view of the US and global excess of labor and productive capacity, which tends to keep prices for goods, services and commodities under downward pressure.
Despite some favorable bank and financial institution earnings reports, credit losses will persist. The wide yield spread on loans will have to persist for an extended period of time to create earnings sufficient to offset the losses on mortgage related paper, as well as the increasing problems with commercial real estate and consumer and credit card debt.
The bottom line is that there is still a distressing array of economic and financial negatives to contend with that will take a considerable length of time to resolve.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
My email address is philipbraverman@Gmail.com
You can access this and prior weekly reports by going to internet explorer and typing the following internet address: philipbraverman.blogspot.com
These are far from consensus views. Instead, there is unjustified market confidence that the equity market is in a sustainable rally. For example, Ken Fisher, Chairman of Fisher investments expects the S&P 500 rally the past six weeks to be extended, from 870 currently to 1130, another 30% rise, by March 2010. Such views typically stem from an unwarranted hope that the economy is bottoming out, that the credit crisis has been resolved, that the banking system has been mended and that inflation is about to emerge, producing a renewed surge in commodity prices. In German there is an expression which to my way of thinking aptly applies to such views. It loosely translates into living on cloud nine cookooland. In other words, in my opinion, such views are nonsense.
The reality, as I see it, is that the equity market is vulnerable to a renewed and very steep decline. The economy remains mired in a deep recession. Despite the various Fed and Federal government efforts to provide assistance to the credit market and financial institutions,the credit crunch continues in full swing. Banks are still beset by pronounced losses that compomise their capital and restrain their lending. Deflation is already in evidence and is likely to worsen for an extended period. further undermining corporate profitability. That ever more onerous deflation pattern will, of course, keep the threat of inflation from being realized any time soon, most likely for years. A closer look at the forces at work should make the reasons for my views in each of these areas self evident.
The equity market has moved from being oversold at its early March low to being more than fully priced currently. The S&P 500 for example, has a projected income per share of some $40 this year. Even that level could yet prove optimistic. But, at $40 per share, current S&P 500 price levels translate into a price-earnings ratio level of almost 22, an excessively high level at any time and especially in the midst of the worst recession since the 1930s. One of the major driving forces of the rally the past six weeks was undoubtedly short covering, not a projected or realized recovery in earnings. But, now the sizable short position underpining of the rally has been substantially reduced. April is a seasonal period of rising equity prices, while May often ushers in a period of lackluster or disappointing equity price performance. That pattern even in more normal times helped create the dictum of sell in May and go away. That is likely to prove even more prescient than usual coming off a spectacular but unsustainable March-April equity market rally.
It was precisely the various market factors that caused me to predict a major bear-market rally before it ocurred in early March, that, having flip-flopped, now incline me to warn of an imminent reversal of the rally, probably beginning in May, if not before. Extremes of equity market overbearishness has reverted to overconfidence, unjustified overconfidence. The trigger for a renewed decline could be the 6% or so plunge in first quarter real GDP, to be released later this month. Other potential adverse market catalysts include a near 700,000 drop in April nonfarm payrolls and another sharp rise in the unemployment rate to be reported in early May, as well as disappointing corporate or financial institution earnings or the results of the bank stress tests, also to be released in early May, despite the rumored Treasury intention of giving them all a favorable review.
I am not alone in my negative view. A Morgan Stanley analyst went so far as to recommend selling "before it is too late" and Goldman Sachs' decision to issue stock this past week can be seen as a vote of no confidence in an extention of the rally.
The various presumed postive signs of impending or actual economic recovery are fanciful or due to inappropriate seasonal adjustments. This week, for example, initial claims for unemployment benefits fell 53,000 to 610,000 in the week ended April 11. But, that improvement may reflect nothing more than a good Friday holiday shortened week in a volitile series. Other presumed signs of recovery are equally misinterpreted. That is certainly true of supposedly favorable data for housing, which continues in deep distress.
Indeed, a new speed-up of home mortgage forclosures has begun. How can this be happening, especially when a rise in forclosures is not only counterproductive to the effort to stem the drop in home prices, it is contrary to the thrust of the Administration's intentions? It arises because a number of financial institutions have terminated their self-imposed temporary moritorium on forclosures. For example, J.P.Morgan Chase, Wells Fargo & Co., Fannie Mae and Freddie Mac have all reported an increase in foreclosures as their foreclosure moritoriums ended. Though there is still an array of different approches to delinquecies by mortgage holders, on balance, forclosure filings are up sharply. In February, the latest month for which data are available, foreclosure filings were up almost 6% from January and 30% from February 2008. Moreover, foreclosure sales are also rising, as are long-term delinquencies 120 days or longer, a precurser to foreclosure. To make matters worse, mortgage problems are increasingly cropping up in FHA conforming loans, not just in sub-prime loans, as the recession widens its depressing grip. The process of rising delinquencies, foreclosures and forclosure sales will continue to depress home prices as the overhang of unsold homes available for sale not only remains excessive but is destined to rise further. Given persistent housing distress, it is not surprising that housing construction fell 10.8% to an annual rate of 510,000 units, less than one quarter of the more than 2 million peak pace in 2006.
This past week the CPI was down 0.4% in the 12 months ended in March. This is the first such year over year decline in more than a half century. The decline in consumer prices now joins the declines in producer and commodity prices. This deflation pattern is likely to persist in view of the US and global excess of labor and productive capacity, which tends to keep prices for goods, services and commodities under downward pressure.
Despite some favorable bank and financial institution earnings reports, credit losses will persist. The wide yield spread on loans will have to persist for an extended period of time to create earnings sufficient to offset the losses on mortgage related paper, as well as the increasing problems with commercial real estate and consumer and credit card debt.
The bottom line is that there is still a distressing array of economic and financial negatives to contend with that will take a considerable length of time to resolve.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
My email address is philipbraverman@Gmail.com
You can access this and prior weekly reports by going to internet explorer and typing the following internet address: philipbraverman.blogspot.com
Friday, April 3, 2009
March's surge in unemployment and other indicators point to a far deeper recession
With the global economy likely to have retreated in the first quarter, as well as for quarters to come, the extended outlook for US and global equities is far more pessimistic than this past week's continuation of the bear market rally might seem to suggest. The rally will soon end, to be most likely followed by a renewed decline amidst disappointing corporate earnings reports and persistent economic declines and financial problems. Expect at least a retest of the previous cyclical lows in both equities and Treasuries. And, hard as it may be to believe, given this weeks rise in equities and sell-off in Treasury prices, new lows in both equity prices and Treasury yields can not be ruled out.
Such views may be percieved as incredible amidst the seeming market positives of recent days. The cut in the European Central Bank's lending rate to 1.25%, rather than the 1.0% widely anticipated, is still considered a market positive. Similarly, the seeming agreement of the G-20 to paper over their differences and promise to implement initiatives to stimulate the global economy out of its Depression (though few as yet recognize the growing threat of that coming realty). It is no small matter that the initiatives are far from being fully funded and are likely to fail even if and when funded. The markets were instead favorably focused on the benefits to financial instutions of the appropriate softening in the needlessly harsh mark-to-market accounting rules. But, that is no panacea for banking's ills. Nor will the alphabet soup of Federal initiatives rescue the banking system and the economy any time soon and without the requisite pain that massive deleveraging will impose. Nor will the initiatives adequately spur renewed lending by institutions still attempting to rebuild their capital in order to survive. Moreover, the economy is far from bottoming out, not withstanding the recent smattering of slight improvement in some fictionalized seasonally-adjusted data. Housing, the hub of the recession-Depression's central cause, is destined to continue to worsen even with low mortgage rates,at least for those with pristine credit, and other incentives. Employment, a critical leading indicator of housing, is still getting worse and is likely to continue to do so until 2010 at the earliest.
The jump to an 8.5% March official unemployment rate from 8.1% in February and 7.6% in January indicates that even by this understated measure, the recession is deepening rapidly. That 0.9% pace of rise every two months in this unemployment rate rise in just the past two months would carry this official unemployment rate into the 10% territory by summer's end. That unemployment rate would be highly significant considering that the preceding post-world war II peak unemployment rate was 10.8% in 1982. But,that prior post-war peak level is likely to be exceeeded this recession, if that is still the appropriate term for it.
If not for the surprise drop in the labor force in March, contrary to the typical trend labor force rise, the March unemployment rate would have been at least 8.6%. And without the fictional, make that imaginary, 114,000 rise in employment attributed to companies that the Bureau of Labor statistics does not sample, the official unemployment would actually be 8.7%.
As if these varients on the official unemployment rate are not already high enough, by other realistic measures, the unemployment rate is in reality already far, far, higher, well into the teens, and well above 15%. Such alternative measures include as unemployed those who are employed only part-time, are in temporary jobs because they can not find the permanent full-time jobs they seek, or have become so discouraged at the lack of employment opportunities that they are no longer actively seeking employment. This unpleasant realty strongly suggests that the official unemployment rate grossly understates the economic and financial pain that the recession is imposing on workers and consumers.
Nonfarm payrolls fell 663,000 in March, after a 651,000 decline in February and a revised 741,000 drop in January. Except for an 8,000 rise in Education and health services employment, every major employment category, including government, declined in March. But the bad employment news is far from over. Weekly initial claims for unemployment benefits jumped to 669,000 in the week ended March 28, from 657,000 the prior week. This data came too late to be reflected in the March monthly employment report. That and a further rise in long-term unemployment suggests the April employment report will be as bad or worse than March.
Even more worrisome than the 663,000 decline in March nonfarm payrolls, the decline in March employment in the household survey, which is typically more reliable in recessions and from which the unemployment rate is derived, was a deep 861,000 for the month.
Still more significant, aggregate weekly hours worked declined 1.0% in March after a 0.6% decline in February. This indicator serves as a prime basis for forcasting real GDP. Its performance implies a steep drop in real GDP in the first quarter. The real GDP decline is likely to at least match or exceed the 6.3% fourth quarter drop.
There are other significant adverse elements in the economic and financial picture that also indicate a deeper and prolonged recession ahead, even with the increasingly expensive global economic stimulus and financial salvage operation. For example, there may be a further $1 trillion in loss charge-offs yet to be taken by financial institutions despite the huge volume of charge-offs of losses already taken by these institutions and the moderation of the mark-to-market accounting requirements. There is as yet relatively little advance fall-out from the losses still to be realized in consumer credit and commercial real estate, in addition to the persistent losses in residential real estate related paper.
In view of the coming holidays, the next weekly report will be dated Apri 17. Given that I was among the first to call this a bear market rally, even before it developed, as I was among the first anticipate this recession, as well as earlier recessions, keep my bearishness in mind. The rally will not persist. The economy and profits have much further to fall.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address: philipbraverman@Gmail.com
Access this and earlier reports by going to internet explorer and typing the following: philipbraverman.blogspot.com
Such views may be percieved as incredible amidst the seeming market positives of recent days. The cut in the European Central Bank's lending rate to 1.25%, rather than the 1.0% widely anticipated, is still considered a market positive. Similarly, the seeming agreement of the G-20 to paper over their differences and promise to implement initiatives to stimulate the global economy out of its Depression (though few as yet recognize the growing threat of that coming realty). It is no small matter that the initiatives are far from being fully funded and are likely to fail even if and when funded. The markets were instead favorably focused on the benefits to financial instutions of the appropriate softening in the needlessly harsh mark-to-market accounting rules. But, that is no panacea for banking's ills. Nor will the alphabet soup of Federal initiatives rescue the banking system and the economy any time soon and without the requisite pain that massive deleveraging will impose. Nor will the initiatives adequately spur renewed lending by institutions still attempting to rebuild their capital in order to survive. Moreover, the economy is far from bottoming out, not withstanding the recent smattering of slight improvement in some fictionalized seasonally-adjusted data. Housing, the hub of the recession-Depression's central cause, is destined to continue to worsen even with low mortgage rates,at least for those with pristine credit, and other incentives. Employment, a critical leading indicator of housing, is still getting worse and is likely to continue to do so until 2010 at the earliest.
The jump to an 8.5% March official unemployment rate from 8.1% in February and 7.6% in January indicates that even by this understated measure, the recession is deepening rapidly. That 0.9% pace of rise every two months in this unemployment rate rise in just the past two months would carry this official unemployment rate into the 10% territory by summer's end. That unemployment rate would be highly significant considering that the preceding post-world war II peak unemployment rate was 10.8% in 1982. But,that prior post-war peak level is likely to be exceeeded this recession, if that is still the appropriate term for it.
If not for the surprise drop in the labor force in March, contrary to the typical trend labor force rise, the March unemployment rate would have been at least 8.6%. And without the fictional, make that imaginary, 114,000 rise in employment attributed to companies that the Bureau of Labor statistics does not sample, the official unemployment would actually be 8.7%.
As if these varients on the official unemployment rate are not already high enough, by other realistic measures, the unemployment rate is in reality already far, far, higher, well into the teens, and well above 15%. Such alternative measures include as unemployed those who are employed only part-time, are in temporary jobs because they can not find the permanent full-time jobs they seek, or have become so discouraged at the lack of employment opportunities that they are no longer actively seeking employment. This unpleasant realty strongly suggests that the official unemployment rate grossly understates the economic and financial pain that the recession is imposing on workers and consumers.
Nonfarm payrolls fell 663,000 in March, after a 651,000 decline in February and a revised 741,000 drop in January. Except for an 8,000 rise in Education and health services employment, every major employment category, including government, declined in March. But the bad employment news is far from over. Weekly initial claims for unemployment benefits jumped to 669,000 in the week ended March 28, from 657,000 the prior week. This data came too late to be reflected in the March monthly employment report. That and a further rise in long-term unemployment suggests the April employment report will be as bad or worse than March.
Even more worrisome than the 663,000 decline in March nonfarm payrolls, the decline in March employment in the household survey, which is typically more reliable in recessions and from which the unemployment rate is derived, was a deep 861,000 for the month.
Still more significant, aggregate weekly hours worked declined 1.0% in March after a 0.6% decline in February. This indicator serves as a prime basis for forcasting real GDP. Its performance implies a steep drop in real GDP in the first quarter. The real GDP decline is likely to at least match or exceed the 6.3% fourth quarter drop.
There are other significant adverse elements in the economic and financial picture that also indicate a deeper and prolonged recession ahead, even with the increasingly expensive global economic stimulus and financial salvage operation. For example, there may be a further $1 trillion in loss charge-offs yet to be taken by financial institutions despite the huge volume of charge-offs of losses already taken by these institutions and the moderation of the mark-to-market accounting requirements. There is as yet relatively little advance fall-out from the losses still to be realized in consumer credit and commercial real estate, in addition to the persistent losses in residential real estate related paper.
In view of the coming holidays, the next weekly report will be dated Apri 17. Given that I was among the first to call this a bear market rally, even before it developed, as I was among the first anticipate this recession, as well as earlier recessions, keep my bearishness in mind. The rally will not persist. The economy and profits have much further to fall.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address: philipbraverman@Gmail.com
Access this and earlier reports by going to internet explorer and typing the following: philipbraverman.blogspot.com
Friday, March 27, 2009
Warning: The bear market rally in equities is running out of breathing room
The equity market rally still has has some room to extend its gains, but not a great deal.
As I indicated in my weekend report before this bear market rally began, the equity market's prior oversold condition, some 32% below the 200-day trailing price average, indicated a rise back to that downtrend line. For example, the S%P 500 stock index hit a low of 666, which indicated a 32% potential rise back to the area of 875 to return the index back to its 200-day average price downtrend. As of this Friday, the S%P 500 stock index closed at 814, after a Friday decline of 17 points. While a bear market rally can overshoot on the high side, it can also undershoot.
Based on the tendency of the market to return to its 200-day moving average (after moving more than 30% above or below that average), there are only some 60 points or some 9% comfortably left in the bear market rally before the overwhelming risk of a renewal of the cyclical decline swamps the market's new-found bullishness. Can I be wrong? Of course. But, the broad array of market and economic evidence suggests otherwise.
Among the most serious risks to the sustained extension of the rally is the prospect of a continued deepening of the recession. The very few positive economic signs of late are highly suspect. That is certainly true of retail sales, home sales and durable goods orders, which are either the product of inflated seasonal adjustments far beyond those appropriate or unsustainable, temporary aberrations. The continuing decline in the economy is reflected in the decline in consumer confidence, personal income, both nonresidential and residential investment,industrial production, the capacity utilization rate, as well as the high level of initial claims for unemployment benefits. Real GDP plunged 6.3% in the fourth quarter, with declines as large or larger virtually assured in both the first and second quarters. Coming reports will create strong headwinds for the rally. The March employment report to be released next Friday is likely to include a drop in nonfarm payrolls as large or larger than the 651,000 February decline and a rise in the unemployment rate to an horrendous 8.5% or higher from 8.1%.
Perhaps even a greater threat to the equity market rally is the prospect of disappointing first quarter corporate earnings reports. Expect surprise declines in earnings from a number of key companies that will force dividend reductions and an erosion of stock prices.
The volitility index, the VIX, remains above the danger level of 40, suggesting equity market vulnerability. And while market sentiment was overwhemingly bearish before the rally began, a contrarian market positive, much of that bearishness has since been replaced with optmism, a contrarian market negative.
The equity market has already priced in a number of potential market positives that are anticipated to begin in April. These include the expected reintroduction of a form of the uptick rule and a modification of the mark-to-market requirement, giving institutions with losses the opportunity to substitute an alternative to extreme distress prices on problem assets. Thus, the announcement of those changes is unlikely to be a spur to buying.
There are unlikely to be any further Federal government announcements ahead that match the stock market positives of the details of the stimulus program, the various efforts to bail out the financial system, the Fed purchase of Treasuries and the consequent reduction of mortgage rates. These are all already in the market. Unfortunately, even with all these efforts and proposed spending, it remains an open question as to whether these efforts will be effective in stemming the recession and the credit crunch any time soon.
The equity market has benefited both from the covering of short positions (leaving a smaller underpinning of shorts still to be covered)and a shift from the bond market.That has not prevented an improvement in the bond market, in Treasuries as well as corporates. For example, Moody's cut the rating on GE Capital bonds to Aa2 from Aaa, a two grade ratings reduction, versus S&P's one grade reduction to AA+ from AAA. But, the rating reductions had been previouly reflected in the exceptionally wide quality yield spreads from Treasuries. That helps explain
why even with the ratings cut and the shift to equities, the yields on long term GE bonds have been declining from a high of 9.5% just a few weeks back to 8.125% currently. This and other distressed corporate bonds remain attractive buys with a view to declines in the excessive default risk reflected in their yields at the first realistic sign of eventual economic recovery.
A growing positive for the bond market, especially distressed credits, is a growing recognition that the rise in the price of credit default swaps, the insurance against debt default, has been partially manipulated higher by short sellers with an eye to driving equity and bond prices lower. It requires only a relatively modest cost to drive the price of a credit default swap higher, thereby creating an exaggerated impression that there is substanially more risk in that company's bonds and stocks than warranted.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email Address: philipbraverman@Gmail.com
To access this and earlier reports go to internet explorer and type in the following: philipbraverman.blogspot.com
As I indicated in my weekend report before this bear market rally began, the equity market's prior oversold condition, some 32% below the 200-day trailing price average, indicated a rise back to that downtrend line. For example, the S%P 500 stock index hit a low of 666, which indicated a 32% potential rise back to the area of 875 to return the index back to its 200-day average price downtrend. As of this Friday, the S%P 500 stock index closed at 814, after a Friday decline of 17 points. While a bear market rally can overshoot on the high side, it can also undershoot.
Based on the tendency of the market to return to its 200-day moving average (after moving more than 30% above or below that average), there are only some 60 points or some 9% comfortably left in the bear market rally before the overwhelming risk of a renewal of the cyclical decline swamps the market's new-found bullishness. Can I be wrong? Of course. But, the broad array of market and economic evidence suggests otherwise.
Among the most serious risks to the sustained extension of the rally is the prospect of a continued deepening of the recession. The very few positive economic signs of late are highly suspect. That is certainly true of retail sales, home sales and durable goods orders, which are either the product of inflated seasonal adjustments far beyond those appropriate or unsustainable, temporary aberrations. The continuing decline in the economy is reflected in the decline in consumer confidence, personal income, both nonresidential and residential investment,industrial production, the capacity utilization rate, as well as the high level of initial claims for unemployment benefits. Real GDP plunged 6.3% in the fourth quarter, with declines as large or larger virtually assured in both the first and second quarters. Coming reports will create strong headwinds for the rally. The March employment report to be released next Friday is likely to include a drop in nonfarm payrolls as large or larger than the 651,000 February decline and a rise in the unemployment rate to an horrendous 8.5% or higher from 8.1%.
Perhaps even a greater threat to the equity market rally is the prospect of disappointing first quarter corporate earnings reports. Expect surprise declines in earnings from a number of key companies that will force dividend reductions and an erosion of stock prices.
The volitility index, the VIX, remains above the danger level of 40, suggesting equity market vulnerability. And while market sentiment was overwhemingly bearish before the rally began, a contrarian market positive, much of that bearishness has since been replaced with optmism, a contrarian market negative.
The equity market has already priced in a number of potential market positives that are anticipated to begin in April. These include the expected reintroduction of a form of the uptick rule and a modification of the mark-to-market requirement, giving institutions with losses the opportunity to substitute an alternative to extreme distress prices on problem assets. Thus, the announcement of those changes is unlikely to be a spur to buying.
There are unlikely to be any further Federal government announcements ahead that match the stock market positives of the details of the stimulus program, the various efforts to bail out the financial system, the Fed purchase of Treasuries and the consequent reduction of mortgage rates. These are all already in the market. Unfortunately, even with all these efforts and proposed spending, it remains an open question as to whether these efforts will be effective in stemming the recession and the credit crunch any time soon.
The equity market has benefited both from the covering of short positions (leaving a smaller underpinning of shorts still to be covered)and a shift from the bond market.That has not prevented an improvement in the bond market, in Treasuries as well as corporates. For example, Moody's cut the rating on GE Capital bonds to Aa2 from Aaa, a two grade ratings reduction, versus S&P's one grade reduction to AA+ from AAA. But, the rating reductions had been previouly reflected in the exceptionally wide quality yield spreads from Treasuries. That helps explain
why even with the ratings cut and the shift to equities, the yields on long term GE bonds have been declining from a high of 9.5% just a few weeks back to 8.125% currently. This and other distressed corporate bonds remain attractive buys with a view to declines in the excessive default risk reflected in their yields at the first realistic sign of eventual economic recovery.
A growing positive for the bond market, especially distressed credits, is a growing recognition that the rise in the price of credit default swaps, the insurance against debt default, has been partially manipulated higher by short sellers with an eye to driving equity and bond prices lower. It requires only a relatively modest cost to drive the price of a credit default swap higher, thereby creating an exaggerated impression that there is substanially more risk in that company's bonds and stocks than warranted.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email Address: philipbraverman@Gmail.com
To access this and earlier reports go to internet explorer and type in the following: philipbraverman.blogspot.com
Friday, March 20, 2009
Fed steps up efforts to spur economy
The Fed plan to buy at least $300 billion in Treasury bonds (forecast in earlier blogs)and its increased support for the mortgage market, along with the wide array of Federal government stimulus efforts, will eventually soften the economic and financial pain. But, unfortunately, not for some time. The recession will probably not end until next year or even 2011. The recession is still worsening faster than government efforts to buoy the economy.
The Fed induced decline in Treasury bond yields will help bring mortgage rates down, thereby shortening the length of the housing recession. But there is no end to any aspect of the recession in sight.
Even the new three part Federal program now reportedly being prepared for announcement to buy bank toxic assets in conjunction with the private sector is not likely to be sufficient to turn the tide of progressive recession and financial strain. The new plan presumably will involve an FDIC backed fund to invest in a portfolio of loans along with public-private partnerships. The major problem in buying toxic assets from financial institutions remains deciding on their price. Too low a price that may be sufficient to eventually generate a profit for the new entity would create a loss for the selling institution that would reduce their capital and even put their survival in jeopardy. Too high a price that insures survival of the selling instution would produce losses for the new Federal buying institution. Mortgage-backed debts are threatened by the continuing and prospective decline in home prices. The rising unemployment rate, destined to top 10% or even 11%will create more housing distress, and much lower home prices, as will the continuing rise in foreclosures and huge overhang of unsold and unoccupied homes.
Until the plunge in home prices is arrested, there will be no end to the pronounced financial distress. The primary answer to the decline home prices is to find new buyers for the available overhang of unsold homes. A Federal program to buy vacant the homes, refurbish them and make them available on favorable terms to would be home buyers would help. Offering fast track citizenship to foreign investors who purchase homes would also help stabilize the housing plunge. These approaches would add new home buyers. A moritorium on foreclosures and an end to required bank sales of foreclosed properties would slow the rise in the inventory of unsold homes. As if the continuing residential real estate crisis were not enough, there is a rapidly deepening problem developing in commercial real estate, both in offices and retailing, that together with increasing credit card delinquencies and defaults, will significantly worsen and widen the credit crunch.
Despite the harsh economic and financial reality, the bear-market equity rally still has further to go. But it is not the beginning of a cyclical rise in equity prices. The recession is still deepening, inevitably bringing with it more reductions in earnings, more losses, and more cuts in dividends than the market expects.
Though stock market prices retreated on Friday, they still rose marginally for the week, not only keeping their strong prior week rally intact, but slightly adding to it. The equity market has been up for six of the past nine days. It is not surprising that the market gave up ground on Friday. There is always the risk of adverse market surprises over the weekend, which still far exceeds the potential for surprise gains. However, the market should add to its temporary rise over coming weeks,reversing its still oversold and excessively bearish extremes. But, once it returns to its 200-day moving average, with its decided downward slope, the rally is likely to end amid continuing negative market, economic and financial news. While individual investors put money into the equity market the past two weeks,it is a decided market negative that there is no parallel rise in companies buying their own stock.
The rise in near-term inflation concerns related to the broadening Federal deficit (stemming from the Federal stimulus)and Fed expansion is grossly overblown. Even with a US Federal budget deficit currently estimated at an astronomical 13.7% of 2009GDP and expected to rise further (versus 11.3% for the UK, 3.6% for China and 5.6% for Japan),the major near-term US and global threat is deflation. Inflation will eventially return as an over-riding concern. But not for a number of years. Timing in investment is everything. Despite bouts of inflation concerns, US Treasury bond yields will stay low for years to come. Though it is not sufficient, it is a necessary prerequisite to economic recovery. Thus, it is far too early to expect a recovery in commodities, the main focus and benefit of rising inflation concerns. There is a massive overhang of excess global productive capacity and labor that precludes it.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address: philipbraverman@Gmail.com
Access this and earlier reports at the following internet explorer address:
philipbraverman.blogspot.com
The Fed induced decline in Treasury bond yields will help bring mortgage rates down, thereby shortening the length of the housing recession. But there is no end to any aspect of the recession in sight.
Even the new three part Federal program now reportedly being prepared for announcement to buy bank toxic assets in conjunction with the private sector is not likely to be sufficient to turn the tide of progressive recession and financial strain. The new plan presumably will involve an FDIC backed fund to invest in a portfolio of loans along with public-private partnerships. The major problem in buying toxic assets from financial institutions remains deciding on their price. Too low a price that may be sufficient to eventually generate a profit for the new entity would create a loss for the selling institution that would reduce their capital and even put their survival in jeopardy. Too high a price that insures survival of the selling instution would produce losses for the new Federal buying institution. Mortgage-backed debts are threatened by the continuing and prospective decline in home prices. The rising unemployment rate, destined to top 10% or even 11%will create more housing distress, and much lower home prices, as will the continuing rise in foreclosures and huge overhang of unsold and unoccupied homes.
Until the plunge in home prices is arrested, there will be no end to the pronounced financial distress. The primary answer to the decline home prices is to find new buyers for the available overhang of unsold homes. A Federal program to buy vacant the homes, refurbish them and make them available on favorable terms to would be home buyers would help. Offering fast track citizenship to foreign investors who purchase homes would also help stabilize the housing plunge. These approaches would add new home buyers. A moritorium on foreclosures and an end to required bank sales of foreclosed properties would slow the rise in the inventory of unsold homes. As if the continuing residential real estate crisis were not enough, there is a rapidly deepening problem developing in commercial real estate, both in offices and retailing, that together with increasing credit card delinquencies and defaults, will significantly worsen and widen the credit crunch.
Despite the harsh economic and financial reality, the bear-market equity rally still has further to go. But it is not the beginning of a cyclical rise in equity prices. The recession is still deepening, inevitably bringing with it more reductions in earnings, more losses, and more cuts in dividends than the market expects.
Though stock market prices retreated on Friday, they still rose marginally for the week, not only keeping their strong prior week rally intact, but slightly adding to it. The equity market has been up for six of the past nine days. It is not surprising that the market gave up ground on Friday. There is always the risk of adverse market surprises over the weekend, which still far exceeds the potential for surprise gains. However, the market should add to its temporary rise over coming weeks,reversing its still oversold and excessively bearish extremes. But, once it returns to its 200-day moving average, with its decided downward slope, the rally is likely to end amid continuing negative market, economic and financial news. While individual investors put money into the equity market the past two weeks,it is a decided market negative that there is no parallel rise in companies buying their own stock.
The rise in near-term inflation concerns related to the broadening Federal deficit (stemming from the Federal stimulus)and Fed expansion is grossly overblown. Even with a US Federal budget deficit currently estimated at an astronomical 13.7% of 2009GDP and expected to rise further (versus 11.3% for the UK, 3.6% for China and 5.6% for Japan),the major near-term US and global threat is deflation. Inflation will eventially return as an over-riding concern. But not for a number of years. Timing in investment is everything. Despite bouts of inflation concerns, US Treasury bond yields will stay low for years to come. Though it is not sufficient, it is a necessary prerequisite to economic recovery. Thus, it is far too early to expect a recovery in commodities, the main focus and benefit of rising inflation concerns. There is a massive overhang of excess global productive capacity and labor that precludes it.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address: philipbraverman@Gmail.com
Access this and earlier reports at the following internet explorer address:
philipbraverman.blogspot.com
Friday, March 13, 2009
The current bear market rally in equities has much further to run
The aggressive bear market rally in equities, that I predicted would begin last week, has substantially further to run. That prospect reflects a number temporary, but powerful forces.
The equity market still has a sizable underpinning of short positions that serve as the tinder for an explosive extension of the rally. Those short positions are made increasingly vulnerable by a continued rally. Accordingly, those shorts will be increasingly pressured into covering, which as many of you know involves buying back the borrowed stock previously sold "short". The consequence, is of course a run-up in market prices. Though the data is lagged, the market's short positions were still rising at the end of February.
Prior to last week's rally, the market sell-off had carried market pessimsm to unsustainable extremes. When an index of market participants with bullish sentiment, for example, falls below 20% out of a hundred, and pessimistic sentiment rises above 80%, at least a temporary reversal of that one-sided market trend and sentiment typically ensues. The same type of clear contrarian market buy signal message was conveyed by stock index levels that fell more than 30% below their 200-day moving average. A complete reversal of that excess sell-off suggests the potential for as much as a 30% price retracement in this bear-market rally, while still maintaing its bear market status. The Dow, after hitting a new 12-year low on Monday, rose 9% over the past four days. Thus, another up to 20% plus rise remains possible before the cyclical Dow price downtrend line is reached. This is not a cyclical market rise.
Recent and prospective key market developments add increased buying confidence to this temporary rally's potential. Perhaps chief among these was a report that the uptick rule, which puts a road block in place before a stock can be sold short, is reportedly scheduled to be reintroduced in April. That rule will prevent a continuous price decline based on short sales. Instead, under the uptick rule, the price of a stock has to rise from the prior sale before a short sale can take place.
Also adding to equity market confidence is a reported official review of the current mark-to-market accounting rule requirement. This unreasonable requirement requires financial companies in particular, to write down the value of their assets, whether they intend to sell the asset or not, if there has only been a sale of that asset by some other company at distressed prices or worse still there is no active market. That accounting write-down is required even for mortgage-related assets which are current (on which mortgage payments are up to date). Such write-downs require charge-offs of the institution's capital, even if that process pushes them to the point of technical bankruptcy. There is an unrealistic hope that this pernicious accounting rule will be permanently cancelled or at least temporarily suspended. Those expectations appear unrealistic. While there continues to be unwarranted support for a continuation of the mark-to market rule by the SEC and other Federal regulatory agencies, there is a willingness to at least soften the burden imposed by mark-to-market requirement. A compromise that is being suggested would give the institutions the latitude to substitute a model based estimate of ultimate value. Even that compromise would be a major improvement.
Other equity market positives include a report by Citibank that it was profitable thus far this year (which does not include end of quarter losses due to write-downs of assets. There was similar reassurance of profits for J. P. Morgan Chase and Bank of America. Also a plus for the market, were comments by President Obama and other US government officials that reaffirmed the Administration's intent to maintain the capitalist system and avoid a permanent nationalization of the banking system, thereby reassuring many with concerns to the contrary.
After this bear maeket rally inevitably runs its course, the downtrend in equity prices will reassert itself. That will reflect the continued global economic contraction,which will likely persist into next year. That will bring with it more intense domestic and international competition. As a consequence, expect declining corporate earnings, further reductions in dividends, outright deflation, and the consequent loss of business's ability to raise prices without a pronounced loss of market share for their product or services.
In a probable continuing trend for many beleagered credits, this week GE's credit rating was reduced. As was widely expected and more than fully reflected in its market yields, General Electic debts were downgraded one step to the top AA rating from triple A by Standard & Poor's. In addition, the rating agency charaterized the rating as stable. Though it is unclear what Moody's, which still has a Aaa rating on GE, will do, GE bond prices rallied this week. After briefly exceeding 9.5% for some long term GE capital bonds, market yields receded to roughly 8.7% and below as considerable buying demand surfaced. The still wide quality yield spread from comparable maturity Treasury yields reflects the percieved but exaggerated risk of default. Treasury bond yields will decline anew as deflation takes holds. And the yield spread from Treasuries to lesser credits, including GE capital, will also narrow as the economy eventually shows signs of recovery and the risk of default evaporates.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northpot, New York 11731
Email address: philipbraverman@Gmail.com
The equity market still has a sizable underpinning of short positions that serve as the tinder for an explosive extension of the rally. Those short positions are made increasingly vulnerable by a continued rally. Accordingly, those shorts will be increasingly pressured into covering, which as many of you know involves buying back the borrowed stock previously sold "short". The consequence, is of course a run-up in market prices. Though the data is lagged, the market's short positions were still rising at the end of February.
Prior to last week's rally, the market sell-off had carried market pessimsm to unsustainable extremes. When an index of market participants with bullish sentiment, for example, falls below 20% out of a hundred, and pessimistic sentiment rises above 80%, at least a temporary reversal of that one-sided market trend and sentiment typically ensues. The same type of clear contrarian market buy signal message was conveyed by stock index levels that fell more than 30% below their 200-day moving average. A complete reversal of that excess sell-off suggests the potential for as much as a 30% price retracement in this bear-market rally, while still maintaing its bear market status. The Dow, after hitting a new 12-year low on Monday, rose 9% over the past four days. Thus, another up to 20% plus rise remains possible before the cyclical Dow price downtrend line is reached. This is not a cyclical market rise.
Recent and prospective key market developments add increased buying confidence to this temporary rally's potential. Perhaps chief among these was a report that the uptick rule, which puts a road block in place before a stock can be sold short, is reportedly scheduled to be reintroduced in April. That rule will prevent a continuous price decline based on short sales. Instead, under the uptick rule, the price of a stock has to rise from the prior sale before a short sale can take place.
Also adding to equity market confidence is a reported official review of the current mark-to-market accounting rule requirement. This unreasonable requirement requires financial companies in particular, to write down the value of their assets, whether they intend to sell the asset or not, if there has only been a sale of that asset by some other company at distressed prices or worse still there is no active market. That accounting write-down is required even for mortgage-related assets which are current (on which mortgage payments are up to date). Such write-downs require charge-offs of the institution's capital, even if that process pushes them to the point of technical bankruptcy. There is an unrealistic hope that this pernicious accounting rule will be permanently cancelled or at least temporarily suspended. Those expectations appear unrealistic. While there continues to be unwarranted support for a continuation of the mark-to market rule by the SEC and other Federal regulatory agencies, there is a willingness to at least soften the burden imposed by mark-to-market requirement. A compromise that is being suggested would give the institutions the latitude to substitute a model based estimate of ultimate value. Even that compromise would be a major improvement.
Other equity market positives include a report by Citibank that it was profitable thus far this year (which does not include end of quarter losses due to write-downs of assets. There was similar reassurance of profits for J. P. Morgan Chase and Bank of America. Also a plus for the market, were comments by President Obama and other US government officials that reaffirmed the Administration's intent to maintain the capitalist system and avoid a permanent nationalization of the banking system, thereby reassuring many with concerns to the contrary.
After this bear maeket rally inevitably runs its course, the downtrend in equity prices will reassert itself. That will reflect the continued global economic contraction,which will likely persist into next year. That will bring with it more intense domestic and international competition. As a consequence, expect declining corporate earnings, further reductions in dividends, outright deflation, and the consequent loss of business's ability to raise prices without a pronounced loss of market share for their product or services.
In a probable continuing trend for many beleagered credits, this week GE's credit rating was reduced. As was widely expected and more than fully reflected in its market yields, General Electic debts were downgraded one step to the top AA rating from triple A by Standard & Poor's. In addition, the rating agency charaterized the rating as stable. Though it is unclear what Moody's, which still has a Aaa rating on GE, will do, GE bond prices rallied this week. After briefly exceeding 9.5% for some long term GE capital bonds, market yields receded to roughly 8.7% and below as considerable buying demand surfaced. The still wide quality yield spread from comparable maturity Treasury yields reflects the percieved but exaggerated risk of default. Treasury bond yields will decline anew as deflation takes holds. And the yield spread from Treasuries to lesser credits, including GE capital, will also narrow as the economy eventually shows signs of recovery and the risk of default evaporates.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northpot, New York 11731
Email address: philipbraverman@Gmail.com
Friday, March 6, 2009
The 8.1% February unemployment rate is still far from its coming double-digit peak
The economic outlook is turning even more pessimistic. Expect real GDP in the first quarter to decline even more steeply than the 6.2% fourth quarter plunge, perhaps reaching 7%. Even an 8% first quarter real GDP decline cannot be ruled out. That is the inference of the 0.7% decline in the index of aggregate hours worked in February, following a 0.6% January drop. This series, released with the employment report and utilized to predict real GDP, fell at a 2.1% rate thus far in the first quarter. That is a worrisome acceleration from a 1.9% fourth quarter pace. This is just the latest indication that the US and global economic and financial distress continues to deepen. Nevertheless, there is potential for an aggressive bear market rally. More about that later.
The official Bureau of Labor Statistics February unemployment rate soared to 8.1% from 7.6% in January. Before the cyclical rise in the unemployment rate tops out this recession, probably in 2010, the unemployment rate is likely to exceed the previous post World War 11 recession peak of 10.8% in 1982. Indeed, the 10% level is likely to be reached before this year is out.
The number of those currently counted as unemployed in the Household survey, from which the unemployment rate is derived. now totals 12.5 million, up 851,000 from January and up 1.4 million from December 2008. Since the recession began in December 2007, job losses total 4.4 million,including 2.6 million,or more than half, in just the past four months alone. Thus, it is clear that the pace of job loss is accelerating rapidly.
Though the official unemployment rate is bad enough, it nevertheless understates the severity of the problem. The unemployment rate does not count those who have been forced by the adverse economy to accept part-time work, temporary work, positions far below levels for which their training qualifies them or who have become so discouraged by the absence of suitable employment opportunities that they are no longer activly seeking employment. The u-6 unemployment rate, which attempts to reflect some of these problems, reached 14.8% in February. This is the highest level in the 15 year history of this series.
Nonfarm payrolls fell 651,000 in February in the more familiar establishment survey, extending the steep 655,000 downward revised January decline. This series also significantly understates the actual nonfarm payroll job loss. This is because the reported February decline comes after deducting an unrealistic estimated 134,000 rise in payroll employment at new firms that are not being sampled. After removing this phantom employment gain, the February nonfarm payroll drop increases to 789,000. Judging by recent related reports, the March declines in employment will be at least as severe as in February and more likely larger.
The equity market is overdue for a temporary bear market rally. Indeed, I am surprised that one has not begun recently. President Obama has weighed in with a recommendation that equities should be purchased. The value in his comment does not lie in the merit of his analysis, but in the importance he appears to be placing on the equity market. That helps mitigate market concerns that he is anti-capitalist. A number of noted technical and fundamental equity market analysts have lent support to the notion that the equity market is primed for at least a bear market rally. From a contrarian point of view it is bullish that pessimism and short positions have reached extremes that often serve as the catalysts for a market bounce. For example, the Dow and other equity indicies are at extremes below their 200 day moving averages from which even dead cat bear-market bounces typically ensue. Considering the market broke to new cyclical lows and still managed to end the week on a positive note despite the horrendous employment report should also be viewed as a short-term market positive.
Despite the potential for a near-term stock market bounce, longer-term equity market prospects still appear bearish. That seems merely realistic considering the negative outlook for the US and global economy and financial system. The stimulus package and other efforts to preserve the financial system here and abroad may well prevent the recession from turning into a depression, but they do not appear likely to significantly shorten what is destined to prove to be a very deep and prolonged recession. Expect no recovery this year. While an economic recovery next year is possible, it is by means assured. And when it comes it is likely to be feeble. That suggests continued weak business sales and investment, deflation, a persistant erosion of corporate profits, and further pronounced cuts in dividends. Despite the sharp decline in equity prices already experienced, the broad array of market negatives points to eventual new lows in equity prices, as well as continued low Treasury yields fueled by consumer savings, and a persistent credit crunch reflecting pronounced lending caution.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail address: philipbraverman@Gmail.com
The official Bureau of Labor Statistics February unemployment rate soared to 8.1% from 7.6% in January. Before the cyclical rise in the unemployment rate tops out this recession, probably in 2010, the unemployment rate is likely to exceed the previous post World War 11 recession peak of 10.8% in 1982. Indeed, the 10% level is likely to be reached before this year is out.
The number of those currently counted as unemployed in the Household survey, from which the unemployment rate is derived. now totals 12.5 million, up 851,000 from January and up 1.4 million from December 2008. Since the recession began in December 2007, job losses total 4.4 million,including 2.6 million,or more than half, in just the past four months alone. Thus, it is clear that the pace of job loss is accelerating rapidly.
Though the official unemployment rate is bad enough, it nevertheless understates the severity of the problem. The unemployment rate does not count those who have been forced by the adverse economy to accept part-time work, temporary work, positions far below levels for which their training qualifies them or who have become so discouraged by the absence of suitable employment opportunities that they are no longer activly seeking employment. The u-6 unemployment rate, which attempts to reflect some of these problems, reached 14.8% in February. This is the highest level in the 15 year history of this series.
Nonfarm payrolls fell 651,000 in February in the more familiar establishment survey, extending the steep 655,000 downward revised January decline. This series also significantly understates the actual nonfarm payroll job loss. This is because the reported February decline comes after deducting an unrealistic estimated 134,000 rise in payroll employment at new firms that are not being sampled. After removing this phantom employment gain, the February nonfarm payroll drop increases to 789,000. Judging by recent related reports, the March declines in employment will be at least as severe as in February and more likely larger.
The equity market is overdue for a temporary bear market rally. Indeed, I am surprised that one has not begun recently. President Obama has weighed in with a recommendation that equities should be purchased. The value in his comment does not lie in the merit of his analysis, but in the importance he appears to be placing on the equity market. That helps mitigate market concerns that he is anti-capitalist. A number of noted technical and fundamental equity market analysts have lent support to the notion that the equity market is primed for at least a bear market rally. From a contrarian point of view it is bullish that pessimism and short positions have reached extremes that often serve as the catalysts for a market bounce. For example, the Dow and other equity indicies are at extremes below their 200 day moving averages from which even dead cat bear-market bounces typically ensue. Considering the market broke to new cyclical lows and still managed to end the week on a positive note despite the horrendous employment report should also be viewed as a short-term market positive.
Despite the potential for a near-term stock market bounce, longer-term equity market prospects still appear bearish. That seems merely realistic considering the negative outlook for the US and global economy and financial system. The stimulus package and other efforts to preserve the financial system here and abroad may well prevent the recession from turning into a depression, but they do not appear likely to significantly shorten what is destined to prove to be a very deep and prolonged recession. Expect no recovery this year. While an economic recovery next year is possible, it is by means assured. And when it comes it is likely to be feeble. That suggests continued weak business sales and investment, deflation, a persistant erosion of corporate profits, and further pronounced cuts in dividends. Despite the sharp decline in equity prices already experienced, the broad array of market negatives points to eventual new lows in equity prices, as well as continued low Treasury yields fueled by consumer savings, and a persistent credit crunch reflecting pronounced lending caution.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail address: philipbraverman@Gmail.com
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