Consumer Confidence Game and Housing's False Bottom

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Signs of a "resurgent economy" are everywhere - at least if you believe the reporting of the mainstream media. The "recession appears to be over" and "the U.S. economic ship is finally righting itself" according to one 'expert' after another quoted in news articles. Examination of the data backing up these claims indicates the truth might be quite different. While there was supposedly 'good news' on consumer confidence and housing prices yesterday (as long as you didn't look too closely at the numbers), it was little noticed that the White House raised its projected budget deficits to a total $9 trillion between 2010 and 2019. The budget deficits for the next decade will only be this good as long as the economy is growing at a robust pace and inflation remains unusually low. This is the most optimistic possibility imaginable, with imagine being the key concept here.

The Conference Board released its monthly consumer confidence survey yesterday. It came in at 54.1 and was up from 47.4 in July. The results are very different form the University of Michigan survey which had consumer confidence plummeting only a couple of weeks ago. What caused the big rise? Consumer's view of the current economy are still highly negative, but they see a rosier future - especially after hearing how the economy is recovering every time the turn on the TV or open a newspaper. Surprisingly after being bombarded (perhaps brainwashed is a better term) with news about an improving economy, more survey respondents when questioned whether they thought the economy was going to get better said yes. To put the 54.1 number in context, the average number over time is 95. A robust economy has a number well over 100, so we are about at half that level.

According to Case-Shiller, U.S. housing prices have now gone up two months in a row - May and June. This got huge coverage in the mainstream media yesterday. Did this actually happen? Well, not exactly, if you're a stickler for details. The Case-Shiller numbers are not seasonally adjusted and late spring is usually the strongest part of the year for home sales. If you seasonally adjust the numbers, it turns out May was actually negative. June was still positive, but you would need a magnifying glass to see the number it was so small. Suppose you adjusted the numbers for the $8000 tax credit the federal government was giving first time buyers? Well, the June number would sort of be negative too. What about year over year numbers? Well for the entire U.S. they're down 15%. From the peak there has been a 30% drop so far. The 20-city index, which is the one that was up in May and June has fallen 45.3% since the 2006 top. Yeah, those numbers really scream recovery.

The underpinnings for a housing recovery are also just not there. Colonial BancGroup just filed for bankruptcy. It was closed down by the FDIC about two weeks ago and was the sixth largest failure in U.S. bank history. A lot of bad mortgages did it in. The bank is under criminal investigation for accounting irregularities (you should wonder how many other banks may have engaged in similar behavior, but have not yet been found out). Bank of New York is its biggest creditor. Yes, the big banks have exposure to these medium and small banks. Taylor, Bean & Whitaker Mortgage Corp., one of the largest independent mortgage companies in the U.S. was also forced into bankruptcy as well because it relied on Colonial for its funding. Bank failures can have a lot of collateral damage. So far this year we are at 81 and counting. Despite the 'resurgent' economy and 'bottomed' real estate market, I have a feeling there's going to be a lot more.

NEXT: Enron Accounting and GDP; FDIC's Money Shortage

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Canary in the Coal Mine, the Foxes Guarding the Chicken Coup

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The government in Iceland collapsed yesterday. Severe economic decline combined with rising prices (a combination that the U.S. press constantly says can't exist together, but which reality indicates can) did the present administration in. The government received sweeping powers, which included potentially unlimited control of every business in the country, in an attempt to fix it. This approach never worked in communist countries and certainly wasn't going to work in Iceland either. Government policies in Iceland, just as in other developed economies, made the financial crisis possible. Since it was the government that allowed the economy to get beyond repair, it is not surprising the same government couldn't fix it.

The key to solving the Credit Crisis is to stop rewarding people for failure and instead punish them for it. Leaving the foxes in charge of the chicken coop is a guarantee that nothing will be fixed. A new study came out this morning showing that at least 90% of the top executives at banks and brokers that are receiving U.S. government bail out money are still at work. The very same people who made the bad decisions that have destroyed the financial system are being rewarded for doing so. In many cases, they are still receiving bonuses, paid by the U.S. taxpayer, for their 'excellent' performance. Why should anything get better under such circumstances? The newly appointed Treasury Secretary, tax cheat Timothy Geithner, is a strong advocate of government bailouts, so don't expect much change on that front. Based on his own personal behavior, he also obviously thinks there should be one set of rules for the people in charge and another for everyone else. How effective is he going to be in showing the corrupt and incompetent Wall Street elites the door?

Under such circumstances, it is not surprising that consumer confidence hit a new all time low of 37.7 in January. The present situations index, which measures how consumers feel about the current economy, declined further to only 29.9. The gloomy mood of consumers is translating to lower retail sales in the last many months and will create increased unemployment and bankruptcies in the retail sector in the not too distant future. Consumers are not only being hit by the threat of unemployment, but the two major pillars of wealth in the economy, the stock market and home prices, have pulled the rug out from under them. Just today, the Case Shiller home price index for November declined 18.2% year over year. A separate report a few days ago indicated house prices in California had dropped 38%.

While tiny Iceland can be bailed out by the World Bank, who is going to bail out Great Britain or the U.S.? The collapse phase of the Credit Crisis showed up first in Iceland because its small economy doesn't have the same degree of buffers and interdependencies that protect larger economies (at least in the short term). Iceland looks like the canary in the coal mine that expires first when exposed to toxic gas and warns the bigger miners to get out before the same thing happens to them. In our current economic situation, the bigger miners are just not taking the appropriate action to save themselves.

NEXT: The Latest from Davos Switzerland

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

A Black (Plague) Friday for Retail

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Profit for most U.S. retailers is determined by sales from the day after Thanksgiving (known as Black Friday) to the end of the year. There is an old saw in the trade that retailers actually lose money up to Thanksgiving day, and that shopping the next day determines the tone for the holiday season. As of now, that tone looks like it's going to be pretty cacophonous. Retail sales are being hit by a negative wealth effect caused by declining home and stock prices and a reduction in employment and available consumer credit. Without a good holiday shopping season, a wave of retail bankruptcies should be expected next spring - and this is one industry the Fed is not likely to bail out.

This past spring there were eight mostly mid-size retailers that went under, including Sharper Image, Levitz, Fortunoff and Linen 'n Things. In July the department store chain Mervyns declared bankruptcy and on November 11th, Circuit City. Crushing debt levels accumulated during the credit craze days in the early 2000s is what led to the first bankruptcy filings. The high debt load, which is common throughout the industry, combined with a tanking U.S economy will be responsible for the much bigger number of retail failures next year. The set up for Black Friday is bleak. In October, the consumer confidence figures were the lowest on record, literally falling off a cliff. Consumer spending plunged 1%. Same store sales were the worse in 35 years, with apparel retailers generally suffering the most. Discounters, such as Walmart did well however.

Don't expect relief from home prices or the stock market either. The just released Case-Shiller report has U.S. home prices falling 16.6% year over year in the third quarter. The stock market may close the year with the biggest drop on record, although it's too early to make that call. S&P 500 earnings were estimated to be down 21% in October, with financial and consumer discretionary firms bearing the brunt of the losses. Amazingly, brokerage analyst earnings estimates for 2009 have S&P profits increasing 17%, even though many of their own companies are only surviving because they are on the government dole. Recent reports have also indicated hefty outflows from mutual funds, close to 20% of the total so far this year, with investors increasingly losing confidence in the U.S. stock market.

Historians estimate that there was a 35% chance of surviving the bubonic form of the Black Plague during the Middle Ages. Hopefully, the survival rate in U.S. retail will be higher than that. Even healthier chains are closing large numbers of stores however. This pattern is likely to accelerate further and not just because of the bad economy. Rising real estate values have increased rents and have made the break even point for profit much higher than it used to be, just as sales are falling. The Internet of course, offers a cheaper alternative. Expect a lot of empty stores in the future. Also a lot less jobs in the industry. This in and of itself has major implications since retail is the largest employer in the private sector.

NEXT: When Silence Isn't Golden

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.