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- Boring economics
Capital Markets Recap
Market Chart of the Week
The developments in the swine countries, coupled with the grilling of Goldman execs on the American Grandstand show, have produced a spike in the CBOE’s Implied Volatility Index (aka the VIX) as highlighted in the charts below. The first one is a short term view of the action in the index. It has moved up sharply since the beginning of Apri, and that has caused the 21-day moving average to turn up. If we call the 55-day moving average the intermediate-term trend, we can say that the intermediate-term trend is down, but is threatened by the rising 21-day. The VIX, itself, at 22.20, is above all three moving averages, including the long-term 200-day moving average, in red. It’s also above the average since 1995.
A moving average is an average that moves as data piles up. For example, if we were to construct a 5-day moving average of the number of times an economist mutters the words “model, schmodel,” we would include the figures from Monday, the 26th, through today. At the end of Monday, May 4, we’d drop off the figure from Monday, April 26, and so on. So, I’ve indicated another technical issue for the VIX index in noting where the first data point of each moving average is. Note that the 200-day moving average will continue to decline–albeit at a slower pace–since the most recent data is lower than the 200th value. That’s not the case with the 55- and 21-day moving averages. The second derivative of each of those lines is going to be positive (higher bias) since the current data is higher than the 55th and 21st values, which will drop off on Monday.
In short, a simple trend analysis of Market Fear suggests it’s heading higher in the short term. Additionally, a trendline could be drawn connecting the peaks in the chart below. That has yet to be broken, but if it is, that’s another indication of a northward trend.
The second chart is a longer term view of the VIX and shows the derivation of the long-term average.
”Thou shalt not bear false witness,” because it’ll come back to bite you. Maybe Dick Fuld, former CEO of the former Lehman Brothers, missed that one in Sunday School (it’s the ninth one of the ten) or at home. He managed to . . . uh . . . “understate,” according to Bloomberg news, his Lehman compensation by a cool $200 million–probably ought to see that one in numbers: $200,000,000. Now where do you lose that sort of wood?
Of course, Greece can’t seem to tell the truth report their deficit correctly, either, and that’s just one of the problems plaguing that nation. Its debt was downgraded this week by Standard & Poors to junk status, from BBB+ to BB+. Portugal, the next domino, was cut from A+ to A-. Portugal appears, from all initial appearances, to be in far better shape than Greece–and doesn’t look much different from the U.S. for that matter–because its government debt is relatively small when compared to its GDP. On that basis, it’s about on a par with France, and looks better than Greece, Spain, and Ireland. Its private debt, however, dwarfs the government debt, and as an important book, This Time Is Different: Eight Centuries of Financial Folly, by Rogoff and Reinhart, points out, it’s the total debt that matters. In addition, Portugal’s bond market is relatively small and, thus, its bonds are thus tagged with an illiquidity premium.
You may have heard that the Greeks aren’t too happy with the austerity programs being forced upon them, as they see the current crisis as a result of banker bailouts, not their retirement age of 49. Here’s a sampling of Google Images.
Meet Christos Kortzidis, the mayor of Athens suburb Ellinko. He’s begun a hunger strike to “protest a municipal government overhaul.” Apparently, he also went hungry in 2007 to keep access to area beaches free. He apparently, doesn’t fancy the idea of his city being merged with another. Lifted from here. Everyone has to do his or her part.
Here are two charts (click to enlarge) of Credit Default Swap spreads on five-year sovereign debt issues. The one on the left shows the cost to insure against default–the same chart that’s been presented here several times over the last few months. The chart on the right, however, shows the change in that protection pricing since the beginning of the year, and it conveys some of the contagion effect of a default by the PIGS–France up 87%, Germany up 70%. I don’t mean to be all ethnocentric, but take a look at the bottom of the right-hand chart–look at the list of countries that have seen their default risk decrease. The bull case on Greece is that it’s only 2% of the Eurozone’s economy, but Bear Stearns, at its peak, was only 0.18% of the S & P 500.
Since you don’t need anything more depressing, here’s somethin akin to the Jerry Springer show, where Americans can say, my life might be bad, but it’s not that bad. Click to enlarge.
Chalk this week’s results up as boring. Manufacturing looking good. Consumers are depressed. The economy grows a bit.
The week started off with a manufacturing report from the Dallas Federal Reserve, the Dallas Fed Manufacturing Survey. It was followed later in the week by the Richmond Fed Manufacturing Index, and the Milwaukee Purchasing Managers . Each showed the regional economies in various states of repair, as shown in the chart below and at right. The Richmond Fed index is sporting a new 10-year, while the others are preched below similar high levels. As the GDP report, below, indicates, inventory rebuilding is continuing apace, and the manufacturing sector should seem to be in high spirits.
In like fashion, we were treated to three consumer confidence series this week, from the Conference Board, ABC News, and University of Michigan. While the chart below is only two years long, even on a longer basis, it shows a fairly depressed consumer, and this is the one area of sentiment that says that enthusiasm is not widespread. Apparently, consumers haven’t been listening to economists and the White House, where such an eminence as Vice President Joe Biden said, at an April 23 fundraiser, that,
I’m here to tell you, some time in the next couple of months, we’re going to be creating between 250,000 jobs a month and 500,000 jobs a month
When that happens you can be sure that consumer confidence will skyrocket, but it’s very difficult to envision that happening, especially in the next couple of months. Meanwhile, the consumer is down in the dumps.
Initial Jobless Claims fell modestly this week, from an upwardly-revised 459,000 to 448,000.
The week’s biggest report, it seems to me, was the first incarnation of First Quarter Gross Domestic Product, which came in at 3.2%, in line with the consensus forecast of 3.3%. From initial reports, it seems that inventory rebuilding is still a significant portion of the growth. Eventually, that will have to give way to Real Final Sales. In Q1 they–GDP minus inventory changes–rose by 1.6%. This isn’t to dis inventories. They’re real dollars, which go toward paying real workers, but eventually if sales don’t pick up, the inventory will pile up on shelves, companies will cancel orders and . . . can you say W or double dip? because we’ll be looking at one.
Only one report matters next week, and that’s Friday’s Nonfarm Payrolls report.
Monday - Personal Income, Saving, and Spending are reported. While it looked like the U.S. consumer–admittedly, a nebulous term–after the shock and aftershocks of 2008, was going to begin to retrench and save more, but that was a short-lived phenomenon. Are you surprised. We appear to be back to our profligate ways, and this release should confirm that. Personal Income is expected to have risen by 0.3%, while Personal Spending is expected to have exceeded that at 0.7%. You do the math. We are likely to have dipped into savings in March.
We get a broader look at the manufacturing sector–broader than this week’s Fed regional activity reports–in the form of the ISM Manufacturing report. It’s a diffusion index–scale of 0 – 100, 50 being expansion/contraction line–and is expected to come in at 59.8. Like the regional manufacturing surveys, though, it’s likely to have been influenced strongly by inventory growth.
Tuesday – there is just one housing data point this week, Pending Home Sales. It’s expected to show that they grew by 3.1% in March. On a year-over-year basis–as of February; this report is for March–they were growing at a 17.3% pace.
Wednesday - the ADP Employment Change index is sure to give us a feel for Friday’s big report. ADP’s version, which excludes government payrolls, is expected to have shown an increase of just 30,000 job additions. ‘Better than negative, but not significantly different from zero in terms of population and workforce size. Later in the morning, we get the ISM Service Sector report. It’s expected to have ticked up slightly, from 55.4, to 56.0. Again, 0-100 scale; 50 demarking contraction/expansion.
Thursday – Nonfarm Productivity is reported. It’s expected to have moderated its growth from a heady 6.0% increase in the fourth quarter, to a modest 2.3%. Productivity growth is the bane of the unemployed, as it suggests the existing workforce can make more with fewer workers. Initial Jobless Claims are announced, and while it’s an important weekly release, it will pale in comparison to Friday’s biggie. We’re pretty confident that the pace of firings has slowed–although claims remain stubbornly above 400,000–but it’s the hiring that’s missing. Economists expect that 443,000 new claims for unemployment benefits were made.
Friday – economists expect the release of the Nonfarm Payrolls Report will show that 176,000 jobs were added in the month of April; 100,000 from the private sector, and 15,000 in the manufacturing sector, which suggests that 76,000 government jobs were added. Average Hourly Earnings are expected to have grown by 0.1%, offsetting March’s (-)0.1% loss. Weekly Hours Worked are expected to have grown by a similar fraction, 0.1.
Here’s an interesting depressing chart showing the number of workers in select cities relative to job openings in those cities. It’s listed in terms of least depressing to most depressing.
Come on, Mr. Veep!
Graig Stettner, CFA, CMT
Vice President & Portfolio Manager
Tower Private Advisors