Japan and U.S. Offer More 'Stimulus You Can Believe In'

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The mainstream media on Monday was hyping a Japanese expansion of a low-interest loan program to financial institutions after talking up Fed Chair Ben Bernanke's statement on Friday that the Fed "will do all that it can" to support the economy. Japanese stocks and U.S. stocks respectively rallied strongly on these essentially negative news items.

The Japanese have been trying to fix their economy for twenty years. They have engaged in one stimulus program after another after another after another after another and it's still dead in the water. Despite the repeated failure of the approach they have taken, this doesn't deter them from engaging in the same behavior again. There is no reason to believe things will be any different this time. Nevertheless, the mainstream media cues the cheerleaders and dutifully reports this as good news, instead of pointing out that the need for a new stimulus program indicates all the previous ones have not worked. That sounds like bad news to me.

The U.S. monetary and fiscal authorities seem to be doing their best to imitate the Japanese. The Fed though has only had three years to follow them on their road to perpetual economic failure. Bernanke's statement on Friday was made from the Fed's annual meeting at Jackson Hole, Wyoming, which the media described as a 'confab' (confab is short for confabulation, which in psychiatry means 'the replacement of a gap in a person's memory by a falsification that he or she believes to be true' - unquestionably an important concept when dealing with establishment economists). What exactly was Bernanke implying when he said that the Fed would be doing all that it can to support the economy? Does this mean that it wasn't doing all that it could have done previously? In at least one sense the answer to that question is yes. The Fed could have opened the floodgates of uncontrolled money-printing and Bernanke was intimating that this is what is going to be happening in the future.

While the Fed and its cohorts in the economic community continue to maintain that there will be no double-dip recession, Intel threw some more cold water on this assumption on Friday. The tech bellwether sharply lowered its third quarter earnings expectations after raising them only a month earlier. PC sales have been running below previous forecasts. This is a strong blow to the U.S. economy since computer and software sales were up 24.9% in the second quarter GDP report. A drop to a negative number for this category could turn the entire third quarter GDP negative. But don't worry, Ben Bernanke will be handling the situation and we all know what an excellent job he's done previously in fixing the economy. Wait, isn't that a confabulation?

Disclosure: No positions

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Reconciling Bad Economic Data and Good Earnings

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


So far this earnings season, company reports indicate that business is going gangbusters. U.S. economic reports are painting exactly the opposite picture however. This may not be as contradictory as it appears on the surface.

As for earnings, Intel reported record numbers yesterday, after Alcoa upgraded its forecast for global aluminum sales and U.S. railroad company CSX said shipments were up considerably. This morning however U.S. retail sales numbers disappointed again, falling 0.5% in June following a 1.1% drop in May. Mortgages for home purchases fell to a 14-year low. According to the non-farms payroll reports, close to a million people net left the U.S. labor market in May and June because jobs were so scarce that they simply gave up looking.  Later today, the Federal Reserve is expected to lower its expectations for second half U.S. economic growth.

One of the important things to note is that both Intel and Alcoa are global companies. While many people assume that the U.S. is Intel's major market, it isn't. East Asia dominates Intel's sales. Strong Intel numbers generally indicate a robust East Asian economy. Growth has indeed been strong there. Intel's biggest growth sector by far was servers, which were up 170%. These are used for the Internet. Intel also cited cloud computing as a driver of sales. It is possible for a new technology to grow while the economy declines. The best example of this is the growth of radio during the Great Depression 1930s.

As for Alcoa, its projections may prove to be much too bullish. Industrial metals appear weak across the board and this indicates global manufacturing could turn negative in the next few months. CSX's good numbers were dependent on auto shipments. That market in the U.S. peaked in the third quarter of 2009 because of the Cash for Clunkers program. In the June retail sales report, autos were the weakest component.

Investors should not make judgments for the U.S. economy based on figures for global companies, especially when the U.S. is only a minority of their business. The U.S. economy can be much weaker than Asian economies. Asia was in the driver seat pulling the world out of the Credit Crisis recession and the U.S. followed. The U.S. may lead once again though bringing the world into the next recession.

Disclosure: No positions

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.

Intel's Earnings: Not Much Has Changed in 10 Years

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The French saying, 'the more things change, the more they remain the same' tells the story of the last decade of semiconductor giant Intel's earnings. While media commentary was gushing with enthusiasm about Intel's first quarter earnings of 43 cents this morning, it went unmentioned that Intel had also reported earnings of 43 cents per share ten years ago in the first quarter of 2000.  Intel's stock price reached the $75 level in 2000; it is under $24 today.

While Intel's earnings have finally recovered to what they were at the top of the tech bubble, gross revenues have increased by more than 25% in the last decade. In the first quarter of 2000, Intel sold almost $8.0 billion in products, but last quarter it sold $10.3 billion. This improved Intel's operating income from $2.5 billion ten years ago to $3.4 billion today. Quarterly Income Before Taxes was $3.2 billion in 2000, but $3.5 billion last quarter. Whatever Intel earns today has a more significant impact on its per share earnings though. There were 6.7 billion shares of common stock outstanding at the end of the first quarter in 2000, while there are only 5.5 billion today. Stock buybacks during the lean times have paid off for the company.

Some things that haven't changed are the importance of Asia for the computer market and Intel's microprocessor sales. North America ceased to be Intel's largest market long ago. The CFO's commentary today on first quarter earnings noted that Asia Pacific, Japan and Europe performed better than seasonal patterns would have predicted. The Americas experienced a larger than seasonal revenue decline from the fourth quarter. So if Intel's first quarter results indicate economic recovery, as many in the media suggested, that recovery is taking place in Asia, not in North America.

Semiconductors have always been a cyclical business. Stock prices for semi companies tend to decline before peak earnings in the cycle. Intel's stock is up nicely today on its earnings news, so it is quite possible business is still heading up. The longer-term picture on the other hand seems to have changed dramatically. Intel was leading a rapidly growing industry in the 1980s and 1990s. The last ten years have been fairly stagnant, although characterized by significant ups and downs. Based on stock price, the market isn't nearly as happy today with 43-cent quarterly earnings from Intel as it was ten years ago.

Disclosure: No position in Intel

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.

What Earnings Are Telling Us

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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In general, company earnings are coming in ahead of extremely lowered expectations this quarter. This is a typical Wall Street game of setting the bar low enough so things look good, no matter how bad they are. The big success stories this quarter are technology firms, such as Intel, Apple, Yahoo and Sandisk. Tech earnings are cyclical however and the big traders tend to sell when earnings look the best. It is not clear yet if we are at that point his quarter. The large majority of tech company earnings come from outside the U.S. and their business picking up says more about the state of the economy in East Asia than it does about the U.S. economy.

In contrast to tech, banks are in increasingly bad shape, even in the cases where they are reporting good earnings. Wells Fargo's earnings were out today. Well Fargo said credit losses rose to $5.1 billion, up from $2 billion a year ago and $4.4 billion in the second quarter. Even though this is the bank's core business, it reported a profit of 56 cents per share last quarter, higher than the 49 cents reported a year ago. Wells is the fourth largest bank in the U.S. The pattern of deteriorating loan portfolios was also seen in Bank of America, Citigroup, and JP Morgan. Loan losses also increased in the second quarter. These numbers don't indicate that U.S. consumers and businesses are in good financial shape, nor that any economic recovery is taking place.

As for the the banking system having been saved, we will have to wait to see what happens when the unlimited flow of federal funds is cut off. TARP is supposed to expire at the end of this year. Today, however, President Obama is going to announce a $5 billion program to bail out community banks. Obama will tout the new program as funding to help these banks increase loans. TARP was supposed to accomplish this goal as well. Available U.S. consumer credit has taken a nosedive in the last year since TARP was implemented. There is obviously no lie too outrageous that Washington won't keep repeating it and the U.S. mainstream media won't print it.

It should also be kept in mind that many large cap firms other than tech get a lot of their earnings overseas. As the dollar falls, earnings made in other currencies increase proportionately. Once again this is not an indication of any U.S. economic recovery, but of U.S. economic weakness. The falling dollar is at least finally getting some coverage in the financial press. Business Week had a story on it in its latest issue. This is going to continue to be a big story for many years to come.

NEXT: Dance of the Declining Dollar Continues

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 Deflation Boogieman, Oil and Intel

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 PPI report yesterday and CPI report this morning both indicated deflation - at least in the headline numbers. PPI was down 1.2% and CPI down 0.1%. The core rates were flat and up 0.2% respectively. Falling energy prices, and falling food prices as well this month, are responsible for the "deflation" that is being reported by the government. NYMEX oil prices meanwhile closed yesterday in New York at $49.41, but were once again above $50 again in European trading this morning (the weekly storage report is out today at 10:30AM New York time). Oil is well off the $33 low being reflected in recent inflation statistics. Tech bellweather Intel released earnings last night and there was actually some good news in the numbers. The CEO also blatantly stated the PC market had bottomed. Apparently traders don't believe him though since the stock had a big drop in the aftermarket.

We have covered many times in this blog how the U.S. government manipulates the inflation statistics to lower the reported inflation rate, so you should always add a few percent to whatever numbers it releases. We have also demonstrated several times how falling oil prices are almost solely responsible for the recent drop in U.S. inflation rates (falling oil along with drops in other commodity prices were the key components of the deflation that took place in Japan in the late 1990s and early 2000s as well, but you will never see this mentioned in media reports). The U.S. government reported this morning that year over year headline CPI is down 0.4% - the first annual decline since 1955 - but the core rate is up 1.8%. Yesterday, the headline PPI was reported down 3.5% since last year, the largest decline since 1950. Gasoline and food prices were down over 13% and even food prices supposedly dropped (something I haven't noticed in the real world).

Considering the light sweet crude oil is already around 50% above its February low, the days of the current "deflation" may be numbered (and of course the U.S. is printing new money at an outstanding rate to make sure they are). During the entire time that oil prices have rallied, the mainstream media has continually stated that the price can't go up until the economy recovers and demand for oil increases (neither has occurred, yet prices have risen) . A quote from an article this morning, "Demand will have to come back before you see the oil price move up from $50 in a sustained way." You can find very similar statements when oil was at $40 and yet the price rose to $50. My guess is you will see similar statements at $60 and probably $70 as well. Interestingly, the people being quoted in the articles today are different from the people that have been quoted, and who have been continually wrong, during the last few months. Is the mainstream financial press actually starting to realize that their credibility is damaged when they continue to quote a source that has been wrong a few dozen times in a row? Perhaps, although you should note that the quotes themselves that contain the inaccurate information are not changing, just the people they are attributed to.

Finally, Intel earnings last night were significant. While they don't exactly indicate that the global economy is running on all cylinders, they do indicate that tech spending is not collapsing. It is also unusual for a CEO of a major company to state so blatantly an opinion of overall market conditions. So why isn't the market giving his bullish comments any credibility? My feeling is that it is because tech spending in the U.S. may not have bottomed. However, the U.S. is not the center of world when it comes to technology spending (and many American traders have yet to realize this). The market for computers in East Asia became twice as big as the market in North America long ago. If demand for tech is picking up in Asia, the market could have indeed be turning around.

NEXT: Economic Statistics are Yesterday, Stock Prices are Tomorrow

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.