The Economy Guy » U.S. Economy

Judge And Jury

admin — Tue, 31 Mar 2009 22:23:04 +0000

Stocks spent the whole day way up, but gave up over half of its gain at the end of the day, ending up 87 points. This was the best month in stocks in a very long time.

Bonds moved sideways.

The Dollar lost some ground today.

Oil and gasoline gained a little.

Gold gained $7 today – a nice day, but I declare it a sideways move.

In the news today…..

President Obama is off to the G20 Meeting in London. What’s going to happen? Well the news so far has been about the disagreements among the various leaders. This is probably mostly grandstanding for their individual constituents. For example, Germany’s leader, Merkel, is saying that stimulus is stupid as it leads to inflation or hyperinflation, and the Germans know more about this than most countries. France’s Sarkosy is telling Obama that he is WAY TOO Socialist – and this coming from France is almost laughable – but he’s serious about it. Is there anything that will be agreed at this meeting? Probably not in the area of economic stimulus. Most countries are just mad at the USA because we started this mess.

But, way back in the shadows of the meeting is something that could get agreed. It’s the international regulation of the financial institutions that caused this mess. And here is where the dirty little secret may be hidden from the public. The idea on the table is for the IMF to regulate international financial institutions, and our FED/Treasury would dance to the tune of the IMF. This is not the same question of whether or not the US Dollar will remain the world’s reserve currency. For now, that question is settled; it will remain the world’s reserve currency.

Are we willing to give up our financial sovereignty???? That’s the secret question being asked, but totally ignored by the press. See if you can find this story in your press readings. The real discussion will be between the idea of the IMF being in charge versus each nation being in charge and harmonizing “how” to regulate within their borders. Conspiracy theorists are saying this could really be a big step toward a “one world government.”

Housing Prices fell 19% in January 2008 to January 2009. And the price fall is ACCELERATING. This is the real bad news. This one measure of the US economy is probably the most important measure today as it drives everything else. I am sorry to say that our economy is still tanking in spite of the fact that this measure is a “lagging” measure of the economy, and not a predictor of the future. It just doesn’t look good. If we were looking for a more positive picture it would include the stabilization of home prices in a few areas, rather than a drop in all areas as was reported.

2009 Predictions

I continue to believe that the economy will have a negative GDP growth each quarter of 2009 with the first quarter being the worst number. 2010 should turn this around, and we will have positive growth in 2010 overall, but probably less than 1% growth. Another way of describing our condition is that we are having an L-shaped recovery, and not a u-shaped or v-shaped recovery as many have predicted. An L-shaped recovery is one where there is little or no recovery when we hit the bottom, and that’s what 2010 will look like.

I continue to predict that unemployment will hit 10% in the 4th Q of 2009, and will stay at 10% throughout 2010.

The stock market has seen a recent “bear market rally” and as the poor economic news continues to disappoint everyone, the market should retest its lows. It probably won’t crash through those lows, but it certainly should hit them again. When it hits those lows, that’s the time to jump back into stocks.

Inflation remain the hardest thing to predict. We have seen no inflation so far in 2009, but have seen the slight increases in prices that could be a precursor to inflation. I’ll continue to watch inflation closely. I am predicting that inflation will hit in the 4th Q 2009.

Bonds are a very complex story. US Treasuries will be controlled by the FED in the foreseeable future, and remain at low interest rates. Corporate bonds are a different story, and depends on the underlying business. Some bond holders will lose some of the capital as they will be asked to take a “haircut”. For example, this will happen to GM bondholders. Why hasn’t this happened to Wall St firm bondholders? I suspect that no one wants to face the fallout of that happening – probably a renewed credit crisis. However, it is definitely “unfair” to ask GM bondholders to take a loss, and not have unsustainable bank bondholders to do the same. How about Citigroup? How about B of A? It depends on the results of the “stress test” that the government is performing right now.

Tonight’s Dinner Conversation…..

I am very grateful my wife suggested having a “Dinner Conversation” part of this article. Here is today’s thought.

Barney Frank, one of the scumbags in Congress who caused our housing mess, has come up with a bill that gives Secretary of Treasury, Geithner, the power to set the pay of ALL employees of companies that receive TARP money or Fannie/Freddie money. Can you imagine what this means?

Total control (prosecutor, judge and jury) of everyone’s salary in that company.
The need to expand the Treasury to establish a department to evaluate everyone’s compensation and establish “reasonableness.”
The ability to SET an employee’s salary.
Oh, by the way, did I mention this power is RETROACTIVE?
This is socialism at its core.

So, the question for you tonight is “Is this the type of CHANGE that you voted for (if you voted for Obama), or is this the type of America you want to live in?”

Don’t get too excited yet. The bill has to pass the Senate before it would go to the President for signature. And, you can bet that Obama would sign it, and not veto it. Would you want our President to sign or veto a bill like this?

Here are the last numbers for today:
Dow Jones 30 Industrial – 7608 (up 87 points)
10 Year Treasury Bond – 2.69% (down 0.03%)
Euro – $1.3287
Gold – $925 (up $7)
Oil – $49.90 (up $1.49)
Gasoline – $1.42 (up $0.03)

2009 Predictions

admin — Tue, 24 Feb 2009 23:00:04 +0000

Stocks retraced their loss from yesterday – almost. The bears are taking their profits.

Bonds moved sideways, and the Dollar lost some ground.

Oil and gasoline moved a little higher, on the higher stock market.

Gold lost $26 today as profit taking hit the market, and people took some of their gains off the table.

In the news today…..

Consumer Confidence hit an ALL TIME LOW in February. It scored an index value of 25, down from the previous month’s index value of 37.4. The numbers have no real meaning, but are only indicative – but hitting an all time low is meaningful in my opinion.

FED Chairman Bernanke spoke today, and here are the highlights:

The US economy is in a “severe contraction.”
It will continue for at least the 1st 6 months of 2009.
The economy could bottom in 2009, and start recovering in 2010 – IF certain conditions exist:
1. The US financial system needs to be propped up. The securitization market is “frozen” today. The banking system needs to be fixed
2. Other countries might have a severe decline, and this would result in reduced exports from the US, thereby reducing industrial demand when we most need it.
3. The “vicious downward spiral” of consumer spending must be stopped. It is caused by 3 things – home values falling, unemployment increasing, and the depletion of individual “nest eggs.”

In my opinion, none of Bernanke’s 3 conditions may come to pass in 2009. If true, this means that the economy will NOT bottom in 2009 as Bernanke – who was spinning the positive – told Congress today. The toxic debt held by banks could be eliminated by government actions, but it may not be eliminated too – we’ll have to wait and see. Exports will decline – the global slowdown led by America is already spilling over in our trading partner nations. And, the “vicious downward spiral” in consumer spending will continue throughout 2009. It may plateau at some new low, but it will not reverse course.

When I combine Bernanke’s opinion with the recently passed Stimulus Bill, my opinion regarding 2009 is unchanged. I believe the US will NOT bottom out of the recession in 2009. Unemployment will continue upward throughout 2009 – ending at about 10%. Housing prices will continue to fall – but could be slowed (but not stopped) by the government’s housing bailout. Stocks will rally sometime in the first half of 2009, and then fall again – and this will now be a technical rally, rather than one pushed by the Stimulus Bill spending which looks like minimal stimulus in 2009.

Tonight’s Dinner Conversation…..

What predictions would you make regarding 2009?

What about the oil price? An increase in oil and gasoline will further slow the US economy.

What about the Dollar? Where will it go, and why? What are the major driving factors behind a Dollar move up or down?

What about Gold? Do you believe, as I do, that gold will be breaking new highs throughout 2009?

What about Bonds? Where will Treasury interest rates go? What will happen in the Corporate bond market? What about Municipal bonds?

Here are the last numbers:
Dow Jones 30 Industrial – 7351 (up 236 points)
10 Year Treasury Bond – 2.80% (up 0.02%)
Euro – $1.2841
Gold – $970 (down $26)
Oil – $39.96 (up $1.52)
Gasoline – $1.08 (up $0.04)

Shrinking Service

admin — Wed, 05 Nov 2008 22:56:40 +0000

Well, the election results are in and Senator Obama will be our next President. Stock celebrated by taking profits from yesterday, and ended down 486 points. Bonds continued their increase in value (lowering of interest rates).The Dollar stayed still, and Gold fell $15 – it’s still a spectacular buy.

Oil and gasoline both fell in price as the fight is on whether prices should go lower, or prices should go higher. This fight seems to be a draw so far, as the big money (speculators) are still trying to figure out what the “trend” is going to be. Speculators love trends as “the trend is your friend” is their motto.

In the news today….

The Service Sector of the economy shrank last month. The ISM Index (shown below) is a measure of economic growth or economic contraction in the Service Sector – the breakeven point is 50. The Service Sector consists of those businesses that don’t build anything, but help other companies or serve individuals. 82% of the service sector people contacted said they have reduced their spending because of the economic recession.Take a look at this chart and you can clearly see that the recessionary forces have been at work in the Service Sector for about 3 years. The Service Sector is only about 10% of the GDP calculation equation – so it doesn’t mean as much as the industrial sector or even more importantly, the consumer spending.

Some actually counts the number of jobs that are announced to be cut in any month. For October, the number was 113,000 jobs announced. The actual number of jobs lost is greater than this number as some people don’t do any announcing – just cutting.

Here are Yesterday’s numbers:
Dow Jones 30 Industrial – 9139 (down 486 points)
10 Year Treasury Bond – 3.69% (down 0.07%)
Euro – $1.2948
Gold – $742 (down $15)
Oil – $65.30 (down $5.23)
Gasoline – $1.42 (down $0.11)

Some Current Indicators

admin — Fri, 17 Oct 2008 13:12:01 +0000

Stocks showed amazing volatility starting up several hundred points, falling to negative several hundred points, and ending up 401 points. Wow – how would you like to trade with that much volatility going on? The news wall all negative – so the action was driven by irrational thinking – not facts.

Bonds remained faithful to the negative news, and gained on the news – with interest rates falling. The Dollar moved sideways.

Gold fell $35 and is a massive buy price right now. It could drop as much as another $35 where support should stop the fall.

Oil and gasoline continue to disintegrate in price. You will be seeing such cheap gasoline prices in 2 weeks that you’ll want to drive across the US – just to celebrate. Prices where I live are currently $2.99/gallon, but should be $2.00 given the wholesale price of $1.62.

In the news today…..

The Philadelphia Reserve Bank released its industrial outlook for its region, and industrial activity was WAY DOWN – and this was very scary to the market in the morning. The report points to a recession TODAY in that region. I tend to downplay regional reports, but this one was significant and was a market mover as well.

The availability of Commercial Paper (short term notes that companies use to keep themselves afloat) fell for the 5th week in a row. This is an excellent measure that the Treasury and FED actions are not working at the Commercial Paper level. A continued downward spiral of this market will close down corporate America. Watch this spot for a recovery in our banking system.

Unemployment claims were 461,000 last week. This continues to point to a recession in America.

The Consumer Price Index (CPI) fell 0.1% in August and was LEVEL in September. Great news for the government’s war against inflation – if you believe this number – but, another sign of the recession that’s gripped America.

Social Security benefits will be increased by 5.8% in January – the biggest jump in payments in a very long time. The 5.8% is calculated from the CPI for the past year, and is a much better indicator that inflation has pushed priced much higher than anyone wants.

Industrial Production fell 2.8% across America, but this number is suspect because it is strongly influenced by Hurricanes Gustav and Ike.

Citibank wrote off $4.4 in bad debts last quarter, and had a loss of $2.8B in addition. Not good for Citigroup. Drip, drip, drip.

Merrill Lynch wrote off $12B last quarter, and has a loss of $5.2B in addition. Drip, drip, drip… Merrill Lynch was purchased by Bank of America, so this isn’t very good news for BofA either.

Tonight’s Dinner Conversation…..

Here are some current indicators of our economy. What do think they forebode???

The 30 Year Fixed Rate Mortgage is now 6.70%. That a massive jump in one week – and makes MORE houses unaffordable as potential buyers would have to pay BIGGER mortgage payments.
GMAC is now requiring a FICO score of 700 to give a potential auto buyer an auto loan. This cuts out 40% of potential GM buyers.
One of the provisions of the 529 Student Savings Plan is that you cannot reallocate the investment more than once per year. If you have already reallocated once this year, you are stuck in this lousy market – watching the college money evaporate. There is one loophole you should know about – if you change the beneficiary of the plan, you can reallocate at that time.

Here are Today’s numbers:
Dow Jones 30 Industrial – 8979 (up 401 points)
10 Year Treasury Bond – 3.93% (down 0.08%)
Euro – $.3471
Gold – $805 (down $35) – a Buy with Both Hands Signal – price support at $770.
Oil – $69.85 (down $4.69)
Gasoline – $1.62 (down $0.16)

The Market Speaks

admin — Thu, 16 Oct 2008 00:14:35 +0000

The stock market has spoken. Everyone was so happy last Monday when stocks surged – so fast, and so far – a record amount. In the last two days, the stock market has lost over 800 points. This is tragic news for people who are depending on increasing stock prices to maintain their retirement, or provide enough to retire. However, my point here is that the market has spoken – the US economy ig going into the toilet – and stocks (as a future projection of value – sometimes) is saying that stock prices must go down to reflect that future value.

Bonds barely moved today – and that’s great news. In fact, the 10 Year Treasury Note fell 0.01% in its interest rate – and that very slight reversal in course is nice to see – as a top in interest rates of the 10 year duration could be near.

The Dollar and Gold both moved sideways in a well worn track.

Gasoline and Oil fell again, and this time to near term lows. The Oil price is saying that a recession is going to happen, and it will hit not only the US, but the entire world – therefore demand will drop significantly, and the price is anticipating that right now. Naturally, this price action is fairly irrational, but it is nice to see at the same time. As humans we like seeing prices decline when they help us, and hate seeing prices go up when they hurt us. That’s our feeling about Oil and Gasoline right now.

In the news today….

The wholesale price index – the PPI, or Producer Price Index – dropped 0.4% in September. Great news. It’s caused by declining energy prices, and declining commodity prices. The core PPI (the one without energy and food) actually increased 0.4%. The Core year over year increase is 4%, and the total PPI year over year is 8.7% – the highest since 1991. That is a sign of coming inflation – and the bond market is reacting accordingly.

JP Morgan wrote off $3.6B in bad loans – mortgage loans, credit card loans, and all other types of loans – across the board. This tells me two things: (1) that the drip, drip, drip of bad news will continue – as JP Morgan is one of the strongest banks in the US (what about those other banks??), and (2) we are beginning to see reasons other than real estate mortgage losses creating losses in banks.

Retail sales were down 1.2%, and this is the third monthly fall in retail sales. Three months in a row is enough for me to declare that the general public is voting with their pocket book. This is a sure sign that a recession is here – as consumer spending is about 3/4 of the GDP calculation.

Oil fell below $75/barrel today, and that’s about half of its peak. Isn’t that amazing? Do you think this is “negative irrational exuberance?” Or, do you think this is just what it’s worth in today’s environment?

Tonight’s Dinner Conversation….

The housing market is the primary cause of the illiquidity, banking sector meltdown and bailout actions. So, what’s the housing market doing? Where is the bottom of this market? When will prices stop dropping? One key measure in this complex equation is the number of people buying houses. Here is a graph of the number of mortgages and refi’s that happened historically to date:

Look at the RED line going down strongly for the last year. It is currently still falling, and that’s not a good sign. This means there are fewer and fewer people willing to purchase a home in the US. REFI’s, on the other hand, are increasing slightly, and I believe this is because some people are getting some tremendous real estate buys (buying for little money, or for cash), and are putting mortgages on these properties after they buy them.

Here is your question for tonight. How low will the number of purchase mortgages go before the market turns around? I know, this is a tough question, but some of you are very close to this situation, and probably have an answer.

Here are Today’s numbers:
Dow Jones 30 Industrial – 8578 (down 733 points)
10 Year Treasury Bond – 4.01% (down 0.01%)
Euro – $1.3500
Gold – $839 (down $1)
Oil – $74.54 (down $4.09)
Gasoline – $1.78 (down $0.10) – another major drop in wholesale gasoline price.

Congress Rejects Bailout Plan

admin — Wed, 24 Sep 2008 23:10:44 +0000

All markets moved sideways today waiting with baited breath to see what’s going to happen with the bailout.

In the news today….

The main news today was that Congress rejected the Paulson/Bernanke $700B bailout plan. Sen. McCain stopped his campaign to work on the bailout exclusively – even cancelling Friday’s debate. Sen. Obama said he would work to get a bailout plan through Congress – but wants the debate on Friday. At least politics continue. Pres. Bush will be talking about this issue tonight to get pressure on Congress to pass something.

Is this a serious issue? Yes. You probably heard that McDonald’s can’t get a loan to put new coffee machines in its stores across the US. Why? Banks won’t loan money to anyone for any reason. This is very serious. My bet is that Congress will pass something – there is just too much at stake. When? Next week.

Here are Today’s numbers:
Dow Jones 30 Industrial – 10,825 (down 29 points)
10 Year Treasury Bond – 3.77% (down 0.07%)
Euro – $1.4621
Gold – $895 (up $4)
Oil – $105.73 (down $0.88)
Gasoline – $2.59 (no change)

Personal Income Dropping

admin — Sat, 30 Aug 2008 13:36:12 +0000

Stocks corrected from yesterday’s big up by having a big down, down 171 points. All other markets moved sideways.

In the news today….

Personal Income in July was down 0.7%, and this is a bigger deal than the number would suggest. Personal Income has been falling over the past 3 months, and this is bad news for personal spending. Personal spending is the largest component of US GDP, and will reflect badly in the 3rd Quarter. Oh, by the way, the Personal Income was biased Upward by the rebate checks that came out during the 2nd Quarter – so without those checks, the Personal Income would have been LOWER.

Here are Today’s numbers:
Dow Jones 30 Industrial – 11,544 (down 171 points)
10 Year Treasury Bond – 3.81% (up 0.02%)
Euro – $1.4671
Gold – $835 (down $2)
Oil – $115.46 (down $0.13)
Gasoline – $2.85 (down $0.01)

Exports Pushing GDP

admin — Fri, 29 Aug 2008 12:50:08 +0000

Stocks jumped up 213 points today on the GDP report for the 2nd Quarter. As usual stocks were acting irrationally, but what do you expect. You cannot count on rational stock movement day to day. Bonds moved slightly in sympathy with a slight upward bias in interest rates.

Gasoline and oil jumped up as the oil traders didn’t see the two hurricanes in the Gulf of Mexico as causing any great damage to their industry. (But, if you look at a projected map of the ‘G’ Hurricane, it’s headed straight at New Orleans)

The Dollar moved mostly sideways with a slight up ward bias.

Gold countered all the trends and rose in price. Nice!!!

In the news today….

The US Government reported the 2nd Quarter 2008 GDP today. It was up 3.3%, and this is a very nice number in a normal economy. In fact, the number shows a good economy, or at least a flat, healthy economy.

Where is the truth in this report? The jump in 2nd Quarter GDP was caused primarily by an increase in exports. I’ve been reporting that export increases are the saving grace of the economy, and help blunt our economic weakness. Also, the weak dollar helps exports enormously – and that’s what happened.

The second driver of this 2nd Quarter GDP was caused by the “rebate checks” sent out to all US taxpayers. That was a one time event, and the kick in the economy will dissipate in future quarters. So, from an economic viewpoint, this kick in the economy is a false sense of growth – it will go away – it is not sustained as you would want in a true economy.

My last point is that GDP numbers are revised from time to time. Today’s number was the first revision. They can go up and they can go down. This one went up because of exports. So, how good can this number be? My point is that you must accept all government statistics with a grain of salt – not just blindly accept them because they came from the government.

Here are Today’s numbers:
Dow Jones 30 Industrial – 11715 (up 213 points)
10 Year Treasury Bond – 3.80% (up 0.03%)
Euro – $1.4733
Gold – $837 (up $3)
Oil – $115.59 (down $3.56)
Gasoline – $3.02 (down $0.05)

A Long Way To Go

admin — Thu, 14 Aug 2008 01:39:40 +0000

Stocks continued their slide downward today by shedding another 110 points. Bonds sort of made up for yesterday’s crazy rally by giving up a little value, and increasing interest rates. The Dollar went sideways except against the Yen where it lost value.

Gold gained back $17 – but, I think there will be further falls in its price in the near future. We’ll see if my prediction is right or wrong.

Oil and gasoline increased in price significantly for the first time. International tensions are pushing the price.

In the news today…..

Consider this international news. Japan’s GDP fell 2.4% in the 2nd Quarter on a year over year basis. The first Quarter 2008 was up 4.0%. It looks like Japan is slipping into a recession, and this measure is a sure sign that a global recession (in the second largest economy of the world) is started.

A recent survey of bankers said that 70% of financial institutions think another investment bank (think Bear Stearns) will collapse in the next 12 months.

1/3 of homeowners who bought in the last 5 years have negative equity in their house (their house value is less than their mortgage size.) In some areas of California, the percentage is 90% – think about that for a second. This means that if the homeowner doesn’t care, it pays to just walk away from the house, and give it back to the bank. This will have a continuing downward pressure on house prices in selected areas.

The total writedowns in banks around the world for subprime mortgages investments is $500B. (half a Trillion Dollars for you who like to think in Trillions.) I predict that this housing crisis won’t be over until the writedowns hit somewhere between $1Trillion to $2Trillion. So, we have a long way to go.

Here are Today’s numbers:
Dow Jones 30 Industrial – 11,533 (down 110 points)
10 Year Treasury Bond – 3.95% (up 0.03%)
Euro – $1.4920
Gold – $832 (up $17)
Oil – $116.00 (up $2.99)
Gasoline – $2.93 (up $0.09)

CDS Market

admin — Sat, 09 Aug 2008 13:35:09 +0000

Stocks fell as the pundits thought the financial sector performance looks rather bleak. When the market sees a glimpse of the truth, it reacts correctly. Bonds fell in interest rates. Oil and gasoline rose a little, gold fell, and the dollar gains a little ground.

In the news today…..

AIG, the world’s largest insurance company announced its 2nd Quarter loss of $5.56B (now we’re talking about a lot of money there. Why was it only $5.56B?? You see they had to write off $25B in Credit Default Swaps (CDS) plus $15B in other losing investments. That adds up to $40B. A CDS is an insurance policy that pays when the writer of a bond defaults in paying. AIG wrote those CDS’s on mortgage securities, so they are caught up in the melee of the meltdown. And as housing values continues to fall, they (and a lot of their friends) will have to continue writing down their portfolio value. Conclusion – AIG is struggling. When the biggest insurer sneezes, the rest of the industry must have a cold. It might be time to question the stability of your insurers. I wonder if any of them will fail. It could happen, but I don’t think so.

I’ve raised the spectre of a problem with the CDS market in the past, and Warren Buffett said the CDS market will survive okay in the US. I certainly wouldn’t bet against Warren, so let’s just keep our fingers crossed that this Trillion Dollar market doesn’t catch a cold.

The statistics on the mortgage market shows that mortgages written in 2007 are far likelier to default than mortgages written in 2006. What can we conclude from this??? Well, first of all, it is logical, as people buying a house in 2007 would have paid a higher price than if they had bought it in 2006, so the house price meltdown has caught them more than the 2006 purchasers. Basic conclusion – watch out – there is still no bottom in sight for the housing market. Remember, I’m saying the bottom will not be reached any sooner than 2010 – and prices will continue falling this year and all of 2009.

Jobless claims came in at 455,000 last week – the highest number in the last 6 years. This is a fairly good indicator that the economy is getting worse, not better.

Here are today’s numbers:
Dow Jones 30 Industrial – 11,431 (down 225 points)
10 Year Treasury Bond – 3.94% (down $0.11)
Euro – $1.5323
Gold – $878 (down $5)
Oil – $120.22 (up $1.44)
Gasoline – $3.00 (up $0.05)