In the face of horrible economic news and bailouts galore, it was reported this weekend that AIG plans to spend hundreds of millions of dollars on bonuses – even after it was the beneficiary of Billions of bailout dollars.
I really wonder how much longer it will be before the people say “Enough is Enough”.
By the way, only one month after California approved its much delayed budget, its already $ 8 Billion in the hole. Considering my home states economy is big enough to rival many countries in the world, this is not a good sign.
Oh and before I forget, Meredith Whitney, the single lone dissenting analyst who in 2007/2008 pointed to the coming financial melt-down in the sub-prime area, has an article in the Journal that explains how personal credit lines will be the next big credit crunch we have to face. And since our economy needs credit like we need oxygen you can imagine what will happen.
Here are some of the latest figures and numbers as they developed last week. The data was pulled together by David Rosenberg (bac / merrill) who has been consistently on the money for the past 18 months in his assessments.
(At the time of this post the S&P just had a 1 week rally from 666 low to 760. At the same time a number of analysts w Goldman, UBS and various other houses restated their estimates for this year and peg the S&P at about 560. )
I hate to say it but this is scary stuff.
TOP TEN MACRO THEMES OF THE LAST WEEK (Mar 8-15)
1) Unprecedented plunge in household wealth
Households ran for the safety of guaranteed deposits amid the worst financial crisis since the 1930s. However, the mere $200 billion they stowed away in that haven fell far short of protecting them from the massive $5 trillion in losses they incurred on equities and real estate. Real estate net worth fell by $670B in 4Q for a $4.6 trillion total decline since the sector rolled over in 2006. Equity losses totaled $8.5 trillion for the year, and $3.9 trillion of that was incurred in just the fourth quarter alone. The slide in the equity market inflicted considerable damage to pension funds and mutual fund shares, which collectively lost $2.2 trillion in 4Q. The aggregate loss in household wealth is now an eye-popping $12.9tn (and now roughly up to $20 trillion in 1Q): This constitutes a 20% decline in household wealth since the peak was put in back in mid-2007. Wealth destruction of this magnitude is unprecedented in the post-WWII era. The 2001 tech-wreck saw a 9.6% decline in net worth while the 1975 equity asset deflation yielded close to a 4% decline in wealth. So far in the first quarter of 2009, we’ve already seen a 20% decline in the value of the S&P 500. History suggests a strong correlation between falling wealth and rising savings and this 18% year-over-year plunge in net worth is highly deflationary.
2) Meanwhile, consumer deleveraging continues
The household debt-to-income ratio dropped to 134% in 4Q from 136% in 3Q. What this confirms is that a 20-year secular expansion has now come to an end. At its peak, this ratio was as high as 139% and nearly a 40ppt increase from 2001 levels. US consumers levered up so much that they tacked on more debt in the last seven years than in the prior 40 years combined. With equity and real estate values plunging, households are being forced to rely less on rising asset prices and more on their paychecks to fund living expenses. In other words, frugality has come back into fashion and we would expect this ratio to continue coming down – adding to deflation pressures.
3) Most sources of borrowing are drying up
The Federal government is expanding its balance sheet at its second fastest rate in recorded history – debt has exploded by 24% year-on-year as of the fourth quarter of 2008. But the Federal government does not operate in a vacuum – other sources of borrowing are drying up rapidly. From nearly 7% growth a year ago, the annual trend in household credit has vanished. Corporate borrowing growth has gone from 13.5% a year ago to a YoY trend of 4.7% currently. State/local governments have sliced debt growth to 2.2% in 4Q from 9.3% a year ago. All in, domestic credit growth, even with the Federal government surge, slowed to an 8-year low of 5.8% YoY in 4Q, down from 6.3% in 3Q and 8.6% a year ago. All the surge in Washington has done is slow the overall descent – it has certainly not prevented overall credit growth from subsiding. Panacea, not an antidote.
4) Retail catches a tailwind
The Fed’s Beige Book actually hinted that consumer spending was no longer falling off a cliff in the past couple of months and that anecdotal view was backed up by the data that came out for February. Not only was January revised up to +1.8% (from +1.0%), but the gains held in February as the headline came in at – 0.1% versus expectations of -0.5% (and ex-autos were +0.7% on top of a 1.6% spurt in January). It seems strange to be seeing such a pickup in view of the fact that we lost 651,000 jobs in February and 655,000 in January, not to mention the collapse in consumer confidence to all-time lows. Be that as it may, the data are the data and many economists now are going to be headed back to the drawing board and revising their first quarter GDP numbers to be somewhat less negative than they were before (we had been at -6.5% SAAR for 1Q). Here are some possible explanations:
1. Income tax refunds have been huge so far this year – up 40% YoY in Jan- Feb (a record $105 bln in Feb).
2. There has been a refinancing boomlet that has left money in people’s pockets – up 17% YoY in Jan-Feb.
3. The seasonal factor for February was also very aggressive (0.878 – i.e. looking for a 12% slide in the raw data) – in fact, it was the most aggressive SF in 12 years. The RAW data actually showed that retail sales slid 3.9% in February, which was the weakest sequential change on record (and half the time, in any given February, sales manage to rise before the seasonal adjustment is applied). We estimate that retail sales would have DECLINED 1.5% if a more normal seasonal factor had been deployed – so tread very
carefully in interpreting this data.
4. There is some ‘noise’ around the data because in the three months to December, sales plummeted at a 26% annual rate. So we could also just be seeing a bit of a bounce from extremely depressed levels.
Areas that look better are clothing (which we highlighted in our Beige Book piece last week), electronics, pharma and e-tailing. All have posted back-to-back gains. Building materials, food and autos have been quite soft by way of comparison.
5) Total pool of unemployed surges
What gets lost in all the commotion in the trading pits over the headline payroll number is what happened to the total pool of unemployed. It soared 851,000 in February to a record 12.5 million, up 5 million or a huge 68% from a year ago. It’s a good thing we have an elaborate social safety net that includes unemployment insurance or else we would be talking more about the 1930s. The headline unemployment rate jumped to 8.1%, the highest since December 1983, from 7.6% in January, 7.2% in December, 6.8% in November, 6.6% in October and 6.2% in September. At that rate, we could be breaking above the post-WWII high of 10.8% established back at the depths of the 1982 recession, by September of this year. Keep in mind that there is a significant correlation between the unemployment rate and consumer delinquency rates in the banking system. This is not merely a comment on what the jobless rate data imply for consumer discretionary and homebuilding stocks, but for financials as well. And, just as the financials led the peak in the S&P 500 by six months in 2007, we would expect to see a recovery in this vital sector first before expecting to see a bottom in the overall market.
The number of full-time jobs sagged 940,000 in February after more than 1 million lost in both December and January – 3.5 million full-time jobs lost in just three months and 6.7 million since the recession began in late 2007. In a normal recession, we tend to see around 2.5 million full-time employment losses and currently we are nearly triple that and counting. These are jobs with benefits and because of their permanency, they have a tremendous impact on the household budget.
6) Why Treasuries look so attractive
After last Friday’s employment report let’s not kid ourselves any longer that we do not have a major deflationary backdrop on our hands. In this environment, income is king. Now, if it weren’t for the fact that default rates are soaring and the move into high-grade corporates has become a mainstream view, we would be big fans of the credit market. That is a crowded trade. Treasuries are generally underowned and unloved. We do see that the equity culture is not dying as much as we would have thought, but insofar as the stock market can generate cash flows, the ability to do so with consistency is in question. Wells Fargo became the latest to cut its dividend – by 85% to a nickel per share in a move that will save the bank roughly $5 billion per year. So far this year, the amount of dividends that has been cut has totaled $40.78 billion (financials now represent 11% of total dividend payouts, down from the 2006 peak of 30%). In less than three months, the dividend cuts have already exceeded the $40.6 bln in all of 2008. According to S&P, dividends are on track to decline 23% this year, the most since 1938. According to the folks at S&P, the sharp curtailment of dividends (but the yield is 3.1%!! Hey – ever heard of a ‘value trap’?) is the equivalent of a 26% pay cut to the average retiree.
7) Is gold at a critical juncture?
We are amazed at how many people believe gold is in some sort of bubble. Is it an over-owned investment? Not in our view. Is it talked about incessantly like oil was last year or tech in the late 1990s? No. Has the bull market been premised on leverage? No. Some bubble. In any event, gold is still in an uptrend, and that does not mean that it will never correct hard. It will, and it has already – this latest corrective phase is the 15th of this 8-year-old bull market. The key is to time your purchases as closely as possible to these tests of the 50-day moving averages – which is the process the gold price is now in technically. And the history of this bull market has shown that after gold touches the 50-day m.a. in these corrective phases, it has gone on to rally by an average of 12% in the coming year (median too). When an article shows up like this on page 20 (20!) of Wednesday’s FT, it suggests to us that this is not a bubble just yet (“UBS Bullish On Gold Price Nearing $2,500”). Call us when it hits the front page.
Small business sentiment at a new 28-year low:
• The NFIB index sagged to 82.6 in February from 84.1 in January, the lowest print since April 1980 (and the second lowest ever). The difference, of course, is that in April 1980 the funds rate was 18% as opposed to 0% today (at least the Fed back then still had bullets in its chamber).
• The net share of companies reporting that credit was tough to secure stayed at +13, the highest in three decades. Just prior to the Fed’s move to cut the funds rate to 0%, this metric was running at +11, and before the TALF was announced, it was +12, so clearly monetary policy, whether in a traditional or nontraditional sense, is pushing on a string.
• Up until the summer of 2008, when oil was surging toward $150/bbl, the top concern by small businesses was inflation. Now it is the sales backdrop – one in three cite this as their top worry.
• Corporate pricing as per the NFIB plunged in February to a record low -24 from -15 in January and -6 in December. Now as for ‘plans to raise prices’, a more forward looking indicator, this too fell to +1 in February from +2 in January and +22 a year ago – again, an all-time low.
• Not only that, but the index measuring wages collapsed to a record-low of 7 in February from 9 in January and 23 a year ago. Note that the last time the unemployment rate was over 8%, this metric was running north of 20, which goes to show that in today’s much more competitive and less regulated labor market, an 8%+ jobless rate actually represents much more dramatic excess capacity than was the case two or three decades ago. Company plans to raise wages stayed at an all-time low of +3 as well.
9) Nothing is quite like the Fed cutting the rates to zero
We think Bernanke et al better soon stop talking about quantitative easing and embark on the program to buy coupons: The financial markets are becoming unglued and monetary policy appears to be, in a word, impotent. Since the funds rate was taken to near-0% on December 16th, the yield on the 10-year note has surged 50 basis points. Mortgage rates have come down an insignificant 40 basis points. New car loans rates have jumped 25 basis points. Rates on homeequity lines of credit haven’t budged. Three-month Libor is back above 1.3% and has risen 8 bps in the past week. And the Dow has lost 2,400 points – since the Fed went to ZERO. We think it’s time for some dramatic action out of the Fed – not just to bring credit spreads in, which has been met with some but not a whole lot of success, but to take the whole yield curve lower and further ease debtservice strains for the overall economy (investors yanked a net $911 million out of high-yield funds last week, the most since early October; the junk bond market is down 3.3% so far this month; the US CDX is index is back trading at a 250 bp premium over Treasuries, the widest spread for the year).
10) Foreclosures on the rise
Foreclosure data out of the USA showed a 6% MoM rise and +30% on a YoY basis in February, so the growth rate is slowing but the base level is still uncomfortably high and still rising. The banks are saddled with 700,000 properties on their balance sheets as well (the ‘shadow inventory’), according to RealtyTrac. And, according to the Mortgage Bankers Association, a record 11.2% mortgage borrowers are at least one payment past due or in the foreclosure process. Since the housing rescue plan only goes so far as to cut debt-servicing burdens for certain homeowners to 31%, but does not address the negative net equity position many still face, it is an open question as to how successful this initiative is going to be – we recall all too well that Hope Now and FHA Secure were supposed to be the saviors ages ago. California, Arizona and Nevada are the main culprits – in fact, 1 in every 70 Nevada homes received foreclosure filings last month (and the total number is up 156% over the past year). California foreclosures were up 5% MoM (and +134% YoY) – and this is with the lowest mortgage rates on record, all the bank efforts for loan modifications and all the moratoria on foreclosure activity. So yes, it is impressive that home sales in the Golden State have doubled from a year ago, but from what we can see, we estimate up to 60% of that activity is foreclosure based.
As a programmer / consultant I always work on improving my skills. Except for the past year or so. I coasted a little bit. Consequently I am faced with two technologies that I need to study up. MS MVC and Silverlight. My personal feeling is that Silverlight will grow into the larger market over time. But at the moment its still lacking a lot of tools that a normal developer (not a bleeding edge addict) would come to expect in a platform. On the other hand MVC is slated to take off like a rocket. There is sooooo much pent up RoR envy in the .NET developer community its ridiculous. 
Wow, I really have been leading a pretty sheltered life as a consultant. There is a toolset I have used for a number of years that has predictably delivered results. When it comes to projects where you deliver or you dont eat its pretty important that your tools work. Along the way I was fortunate enough – with the help of one important friend ( Dan ) – to produce some pretty good tools. We had a version of MVC in 2006 – 3 years before MS had theirs.
In my experience project estimates are all over the place and often do not have any relationship to reality. Depending on any number of subjective factors the same amount of work gets turned into very untenable estimates.
I grew in a country where little kids were educated in the idea that a revolution is a good thing. That capitalism is bad and that there are times when the working class just has to stand up and take over. I dont advocate this notion but I wonder if there will come a time when the people in the US say “ Its enough “, and decide to throw all the bums out. I doubt that time will ever come because it strikes me that people are continually told their individual freedoms outweigh the good of society. And when you have a country of unorganized individuals, who are to self absorbed with their own individuality , its pretty easy to run roughshod and basically get away with the equivalent of corporate rape and pillage.
We are undergoing the worst economic crisis in modern history. It is world-wide and will cause severe difficulties for many businesses. On a personal note, I have seen business drop off a cliff as of November 2008. Our pipeline of projects, usually derived by servicing larger consulting companies, has shrunk to a dribble.