Tuesday, March 30, 2010

Thinking about confidence

Here's a conundrum: consumer confidence is still at very depressed levels, yet there is no shortage of pundits calling for a double-dip recession and/or another major stock market decline.

Market bears cite evidence of overvaluation in stock prices and overbought conditions, while economy bears point to another wave of residential and commercial mortgage defaults, high unemployment, massive deleveraging, trillion-dollar deficits, and rising tax burdens, among other things.

A quick look at this chart, however, tells you that consumers are always worried about an economic relapse in the wake of a recession (once burned, twice shy, as the saying goes), but they are never worried about the future in the months just before a recession. I would wager that the same holds true for most pundits.

Very low consumer confidence has traditionally been one of the best buy signals for stocks. Why should it be any different now?


John said...

I'll never forget 'Stewart' the young red headed daytrading hotshot prodding the tentative, middle aged man into a 100 share online stock purchase in a CNBC TV commercial back in the late 1990s. All the 'soccer moms' were talking about their $1000.00 morning stock flips in another.

If you compare today's environment with that one you get a real night and day look. I would much rather be investing today than then. Glum consumers says prices are generally low. Giddy ones? Look out.

Benjamin Cole said...

I guess the 1990s will the apex for many of us. Jobs--you could get one. Profits--you could make them. The DJI tripled on Clinton watch. The federal budget ran surpluses.

Sad to see the decline.

Gary said...

Scott -- in all those historical market buying opportunities:
- there was P/E compression, usually leaving P/E's in single digits
- stock prices were low on other accounting measures
- banks had fixed their balance sheets
- consumers had fixed their balance sheets
- consumer savings rates had reverted to historical "norms" of 8-9%
- the government wasn't in debt 90% of GDP and planning on endless 10% GDP deficits

None of these things holds true today. -Stocks have a "V" recovery already priced in.
- P/E ratios are near historical highs, not lows
- the quality of earnings is cr@p. Banks have no earnings except the steep yield curve subsidy.
- leverage is still very high for consumers, about average for corporations, and off the charts for government

There hasn't been any real fall (a couple months last year doesn't count); no mea culpa; no restructuring of economic activity

We are having a Fed induced sugar high, which is not the same thing as a recovery

Consumers understand this much better than bankers -- that is why they are glum

The economy will recover -- but not until after there is some mea culpa and after balance sheets are cleaned up FOR REAL (not just with accounting tricks)

That hasn't happened yet.

Gary said...

I forgot to mention... rather substantial tax increases are coming in the next year.

ObamaCare will raise the cost of hiring labor substantially, and probably cause shortages and price spikes in health costs

The Bush tax cuts (whether or not you supported them at the time) are expiring at the end of this year. At the margin, that means a big tax increase

Add in some blatantly protectionist policies against China and Japan, and union make-work nonsense ...

The FASB accounting shenanigans last year fooled no one.

These are not the makings of an honest recovery.

John said...

The 1990s were very good to me. I was fortunate. I think BC was an overall good president although his morals were in the sewer. He could have done so much more but he basicly wasted his opportunities. GB had the misfortune to have his presidency shaped by the 9/11 tragedy. If you want to blame the bad times on something I think a better target would be the Wahabbi Arab Muslim radicals. Just as FDR's presidency was impacted by Hitler and Tojo, GB's was impacted by the swamp that was the middle east. Draining it was brutally expensive in lives AND treasure. Both you and I probably would have done it differently than GB but the job was his and the decisions were his. Today the swamp is gone (for the most part)and the moderates are generally in chagre. Its a good thing.

I don't like politics. I like discussing it even less, so I won't continue this. I understand your leanings and agree with many of them. What I believe isn't going to move any needles in the grand scheme of things. I prefer to hide, watch, and try to protect what's mine while making a shekel or two. I only have one vote and where it goes is no one's business but mine. I love America and I love our democracy. Somehow, the brilliant system our forebears devised will see us through. It always has. God Bless America.

Scott Grannis said...

Gary: I see low PE ratios using NIPA profits, which over time are better behaved that GAAP profits. There has been lots of balance sheet adjustment, lots of price adjustments. Bank earnings are probably better than reported, due to strong price appreciation of securities that were earlier classified as impaired. Savings rates are meaningless in my book, and rising savings are no reason to expect economic weakness anyway. Same for deleveraging.

Government debt and the threat of high taxes are a problem, but I suspect everyone knows about this by now.

The Fed is not inducing a sugar high, they are mainly providing money that is in high demand. Short rates are very low because people are terrified.

We are not on the verge of a genuine recovery; it's going to be a moderate recovery and it will be many years before we get back to trend growth.

Lots of different ways to spin the facts...

Gary said...

Scott- a lot of what you said is misleading and some is just wrong:

"I see low PE ratios using NIPA profits, which over time are better behaved that GAAP profits"

P/Es of 15+ are not low by any historical standard except compared to recent bubbles.

Much of the "earnings" came from layoffs, which cannot continue.

"Bank earnings are probably better than reported, due to strong price appreciation of securities that were earlier classified as impaired."

Bank earnings are non-existent. Without a yield curve subsidy, non of the money center banks have a profit.

Strong price appreciation? Check your facts there Scott. FASB allowed banks to stop marking assets to market -- marking assets back up to cost does not mean any willing buyer (except the Fed) would pay those values

"The Fed is not inducing a sugar high, they are mainly providing money that is in high demand. "

Come on Scott. Not even the Fed believes that. Fed Funds are all parked at the Fed.

Non financial businesses cannot borrow at the artificial zero rate. Companies with FAR better credit than any bank you name (Exxon, Pfizer, IBM, etc) are all paying 250 basis points or more above the insolvent banks.

Sorry Scott -- normally I agree with you on most of what you write on your blog. But here, you are not "spinning the facts", you are completely out of touch

Maybe you need to stand a little further away from Pelosi

Scott Grannis said...

I'm only paraphrasing the arguments I have brought up in posts over the past year in support of a stronger stock market and a recovering economy.

Benjamin Cole said...

Consumer confidence?

I just wish I was more confident.

There might be a positive break-out. Huge piles of investable capital are being generated globally all the time. This is what Anthony Downs called a "Niagara of Capital."

It is piling up everywhere, and drives down yields. Indeed, the chronic low yields are part of what drives investors to take risks.

But if you are buying debt, get ready for low yields for the rest of your life. You will not be rewarded. Supply and demand determine price, and there is a Niagara of capital generated, especially in good times.

The question become does the US stock market/property market rally again? Asia for sure, and for generations ahead. Thailand looks good.

If the US can show itself a reasonable haven, it will rally. It sure would help if we could balance the federal budget, and make sure our financial system does not collapse again.

But remembermwhen you invest going forward: Capital is not scarce. Expect low returns on passive investments. Owning operating businesses might be a better way to go.

Besides that, being a shareholder in a publicly held corporation is something of a chump's game. You can't even put up your own slate of candidates for election to the board.

brodero said...

According to Ned Davis Research....
the stock market has superior returns when Consumer Confidence is below 66....

Gary said...

Here's an even better indicator than consumer sentiment:

Beware the naked man selling underwear

When the market is already up 50+% YoY and the sell side is telling everyone to buy -- just remember, as long as the music is playing YOU gotta get up and dance. I would dance, but I am busy finalizing my severance contract so that I get paid millions no matter which way the market goes.

The market is up, but the economy is not. Accounting earnings are up, but only after you exclude "one time" charges that happen every single year.

brodero said...

Worry... when the S&P 500 divided by
NIPA corporate profits after tax times year over year CPI inflation rate hits 5.....