Monday, May 24, 2010

Another V-sign

It seems the world continues to fret that recoveries are fragile things, and that something like a Greek default could bring down the euro. While it's clear that the recoveries in Europe and in the U.S. are less vigorous than prior recoveries have been, there are still so many signs of a substantial recovery that I think it is very premature to worry about another relapse. This chart of the Chicago Fed's National Activity Index is just one more of the indicators that suggest this recovery is the real thing.


John said...

This number appears to be at its highest level since the end of the recession. While the markets are clearly expecting a slowdown in this year's second half, growth is not expected to end. There are two or three relatively new issues that could help the economy going forward:

1) Gasoline prices could see a significant decline this summer during the peak demand season. Traveling vacationers should have a few extra dollars to spend.

2) Mortgage rates should see another drop due the 10yr treasury's yield decline below 3.4%. WSJ says this is twice the benefit of the expiring tax credit. Coupled with slightly rising home prices in many SMSAs and a large selection of existing homes the incentives to buy are high.

3) Banks have done a lot in the last year to repair their balance sheets. Many have raised new capital (some more than once), paid back TARP money and bolstered loss reserves to record levels. Excess reserves are high and CDs are rolling over at lower rates. Add in the fact that credit losses have peaked in many areas of the country and one can imagine banks looking to lend more frequently to qualified borrowers.

The list of negatives, particularly in Europe, is large. Most investors are highly focused on them. As time passes and no restructurings or euro bank crises develop, investors may begin to refocus on the positive factors in our economy again. They are many and they are largely ignored. Negative news always get the headlines.

Benjamin Cole said...


Right-o, right-o.

I expect mortgage rates to keep sagging, as capital seeks a home. There is a global glut of capital.

If the wayward ratings agencies can get serious, and convince investors that RMBS are really, really AAA, we could see even cheaper housing money.

I will say it again: We are entering a period in which investors who seek security are going to have to accept negative real returns. There is too much supply chasing too little demand.

This should augur well for property markets in the long-run, especially if rating agencies somehow repair their tattered reputations (and when I say tattered, I am being extremely polite).

But prolonged long interets artes should be good for property.

Monetarists are going to be confused by the low rates and high gold prices, and think the money is loose. Both are caused by high global savings rates and prosperity, not easy money.

As another poster pointed out, MZM is negative of late.

BTW, tight money may be over-rated. Japan has folowed tight money for 20 years, and the yen has appeciated far more rapidly than gold. Still, the J-economy is ever in the doldrums.

alstry said...


It is always a V when you are loaning and spending trillions, even if you are just becomes an ^ when the lending stops.....

remember real estate?

John said...

This is an example of how bad news rules the headlines. Fox 'fair and balanced' News is reporting this afternoon on the headline banner of their website, "Dow Plunges 127 points to close at lowest level in more than three months". Now it is certainly true they are reporting a fact. However, the Dow is not the only index, and it is increasingly NOT the one used by most professionals. The S&P 500, the Russell 3000, the NASDAQ, the Dow Transportation Averages are all used as fairly broad measures of market levels. Of all the above indexes, guess which one is the ONLY ONE to close at the 'lowest level in more than three months'?

Yep. The DJIA.....the only one.

I'm NOT saying they all won't go there. They all well may.

Fox needed a headline. Bad news won.

Benjamin Cole said...


It is ugly time over at BP. Now yielding more than 8 percent, and selling a commodity the cash-rich Chinese want.

A hole blowing 10,000 barrels a day onto our shorline? Oh that?

Maybe one more shoe will drop on BP. but getting close.....

John said...


If they plug the hole, the stock goes up.

JMCO (just my cheap opinion)

John said...


This needs saying: If they DON'T plug it successfully, and it is AUGUST ot later before the relief well is completed before the leak is stopped, the stock will go A LOT lower, IMO.

ALL integrated oils are down, some of it due to the gulf spill. If BP plugs the well, I think there will be a rally in all the integrated oil stocks. A lot safer play may be one of the others... Conoco (COP), Exxon (XOM), Chevron (CVX), should all play but with less volatility.

I think oil is near a bottom. Futures (oil priced six months from now) are $5 or so more than spot. Producers have a powerful incentive NOT to sell at these prices but to store it. The price has been run down by the speculators. That can change VERY quickly...but we don't know when. You are right about emerging markets' thirst for oil. At some point the price will rise again. COP, CVX, XOM, will all pay you to wait.


randy said...

he top 10 holdings and yields of the iShares SP Global Energy (IXC):

Exxon 2.9
Chevron 3.9
BP 7.7
Tot-SA 6.5
Royal-Shell 6.4
Conoco 4.3
Schlumber.. 1.5
Royal-Shell-B 6.8
Occidental 2.0
ENI-Spa 7.0

Those securities add up to 53% of the total. The weighted avg yield for those is about 4.7%. Yet somehow the yield of IXC is just 2.0%. It sure would be easier to buy the ETF, but in this case doesn't make much sense.