Top 10 Economic Indicators

He is a list of the the top 10 economic indicators that according to YChars.com have the most significance based on there potential to move equity markets and impact investors decisions.

1. Employment Situation Report - Currently at 9.6% http://www.bls.gov/news.release/empsit.toc.htm
2. ISM Manufacturing Index - Currently at 56.9 (any reading above 50 indicates expansion, below 50 indicates contraction) http://www.ism.ws/ismreport/mfgrob.cfm
3. Weekly Initial Claims for Unemployment Insurance - Currently at 439,000 http://www.dol.gov/opa/media/press/eta/ui/current.htm
4. Consumer Price Index - Currently at 1.2% http://www.bls.gov/cpi/
5. Producer Price Index - Currrently at 0.4% http://www.bls.gov/ppi/
6. Retail Sales - Currently at $373.1bn http://www.census.gov/retail/
7. Disposable Personal Income - Currently at $11.37trn http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm
8. Personal Consumption Expenditure - Currently at $10.37trn - http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm
9. Durable Goods Report - Currently at $199.2bn http://www.census.gov/manufacturing/m3/
10. GDP (Gross Domestic Product) Currently at 2.0%  http://www.bea.gov/national/index.htm#gdp

Original Ariticle can be found at http://ycharts.com/analysis/story/937455266/10-key-economic-indicators-that-impact-equities

A book that I can personally recommend is The Trader's Guide to Key Economic Indicators by Richard Yamarone, which details how each report influences the markets, their importance and crucially how to stay ahead of the curve.

Also you can keep a track of what report is due to be released and when at: http://mam.econoday.com/

Roubini "kicking the can down the road" in Europe

Today saw Nouriel Roubini aka Dr Doom on CNBCs Squawk Box speaking about the on-going Sovereign debt crisis in Europe regarding Greece, Ireland, Portugal and what he refers to as the elephant in the room Spain. He highlighted that the 'bond vigilantes' have woken up to the European debt issue again after the first warnings were sounded back in the Spring of this year regarding Greece. Roubini then draws to attention America's growing debt crisis as states such as Florida, Illinois & Arizona are technically insolvent. 

Furthermore, reading between the lines Roubini goes as far as comparing Spain to California in regards to both been too big to fail and consequently too big to save. Spain which he calculates has approximately 2trn Euros ($2.7trn, £1.7trn) in liabilities, California on the other hand represents 1/7 of US economy.

In reference to US, he states the 'bond vigilantes' have not yet to woken up to the financial storm brewing in the US specifically in relation to its debt to GDP (currently at 94%) ratio and current account deficit (currently at $123bn. However this could be beginning to show up elsewhere such as the weakness of the US dollar, capital outflows from the US to emerging markets and/or the strength of the gold market. All of which draws attention to the weakening financial health of the US economy.

 




He is also critical of the IMF and the European Union in regards to their handling of the Sovereign debt crisis, since if you keep bailing out these smaller economies i.e. Greece, Portugal and Ireland then eventually you'll end up with a situation whereby Spain is the next country in line. 

This has created what he coins 'Super Sovereigns' which has the potential to generate far greater problems down the road, since if the crisis continues to deepen then the EU and IMF will eventually reach a stage where it is required to bailout the likes of Spain. Given the overall size of Spain's liabilities this will be practically impossible given the fact the IMF and EU does not have enough official money to carry this out.

That's unless of course either someone from Mars or the Moon underwrites the debt of the IMF and the EU.

Roubini's latest book 'Crisis Economics' can be purchase from Amazon.com http://www.amazon.com/Crisis-Economics-Course-Future-Finance/dp/1594202508/ref=sr_1_1?ie=UTF8&qid=1290218705&sr=8-1

His website: http://www.roubini.com/

Google's Android Making its Mark in the Smartphone Market

It would appear that 2010 was the year of the Android operating system, that's if Q3 2010 sales are anything to go by.

Google's Android operating system has made significant inroads into the smartphone market during the past 12 months, so much so that almost a quarter of smartphones sold globally now run on the Android operating system. Nokia's market share has taken the biggest hit as a result of this dropping from 44.6% a year ago to 36.6% in the most recent quarter.

This growth in popularity for Google has also helped the little know smartphone maker HTC, based in Taiwan come to the forefront of this lucrative market. Additionally the most recent earnings announcement by Google reflected the increase prominence of the Android system as the company has managed to monetise the mobile market at a time when its pay-per click advertising was flagging. This has led to renewed optimism on behalf of investors as its share price has reflected since its earnings release back on October 14th.

Data Source: http://www.ft.com/cms/s/0/c3f4954c-ecd3-11df-88eb-00144feab49a.html#axzz15JV2x1Sz

The Eurozone's Periphiral Problems - Short to Medium Term Obstacles

There are some key events to watch out for regarding the fate of the so called 'PIGS' countries in the Eurozone over the short to medium term.

P - Portugul: Current 10-Year Government Bond Spread = 7.01%

Short Term: - 

• Nov 20 - State Deficit data for Jan-Oct 2010 published
• Nov 26 - Final vote in parliament on 2011 austerity budget
• Dec 1 - Debt auction of 12 months bills

Medium Term: -

• Jan 1 - Public sector pay cuts, state pensions freeze and value added tax increase come into force
• Jan 23 - Presidential election

I - Ireland:

Short Term: -

• Nov - Four-year budget plan to 2014 is expected to be annouced, Ireland cancelled bond auctions this month after also cancelling them in October
• Dec 7 - Budget for 2011 will be annouced

Medium Term: -

• Feb/Mar - The IMF Article IV consultatition is expected
• July - Ireland must return to the capital markets to raise funds
• Nov 11 2011 - A 390m Euro bond is set to be redeemed. Ireland has no debt due until the end of 2011

G - Greece: Current 10-Year Government Bond Spread = 11.62%

Short Term: - 

• Nov 15/16 - Eurostat will annouce revised figures for Greece's 2009 budget deficit, expected to be 15.4% of GDP
• Nov 16 - Debt auction of 26-week bills
• Nov 18 - 2011 budget
• Dec - Next 9bn Euro instalment of 110bn Euro EU-IMF loan expected to be taken

Medium Term: -

• Jan 2011 - Greece returns to the capital markets with an auction of short-term bonds under its regular monthly borrowing programme
• April 23 - First anniversary of Greece's decision to seek a rescue package from the EU and IMF

S - Spain: Current 10-Year Government Bond Spread = 4.58%

Short Term: - 

• Nov 18 - Debt auction of 10-year and 30-year bonds
• Nov 28 - Regional elections in Catalonia
• Dec 2 - Debt auction of three-year bonds
• Dec 16 - Debt auction of 10-year and 15-year bonds

Medium Term: -

• May 2011 - Municipal elections and regional polls held in 13 of the country's 17 autonomous communities

10-Year Government Bond Spread Benchmark  2.53% (Germany)

Note that the wider the bond spread over the German 10-year benchmark is the higher degree of risk of investing in that bond due to the increased likelihood of default (as a rule of thumb).

Bond Yield information Courtesy of Thomson Reuters at http://markets.ft.com/markets/bonds.asp
Source of Infomation: Financial Times, UK Edition, Wednesday November 10th 2010.

QE2 Creating Unintended Consequences

The impact of the latest round of quantitative easing by the Federal Reserve is already having unintended consequences. Going back to last Friday 5^th November, we saw the Labor Department publish better than expected non-farm payroll figures *1, this led a spike in the dollar, which consequently led to a decline in equity prices.  The same happened again this week on the 10^th November when better than expected employment figures *2 were released. The dollar reacted positively to this news, where as the equity market went in the other direction.  This is the effect of QE2, better than expected economic data is greeted with a decline in equity markets due to fact investors fear that this will limit how much quantitative easing will be used. Worse than expected economic data leads to a rise in equity markets due to investors believing the economy is recovering less quickly than expected thus the Federal Reserve will plough more money into the economy through the process of QE i.e. buying a range of treasuries with varying maturities.

Notice the month of November towards the far right of the chart showing a gradual rise in the US Dollar Index and compare it with the chart below showing a steady decline in the S&P 500 - the benchmark US equity market. 

 

This reasoning behind the Federal Reserve use of QE is because it pushes longer term interests down still further, thus pushing investors towards higher yielding asset classes i.e. the equity market (stocks) commodities (gold & silver been the prime targets).

However perhaps the most worrying consequence of Quantitative Easing is that it inflates commodity prices to extreme levels. Commodities such as Sugar, Cotton, Corn and Coffee have soared to new highs since the Federal Reserve hinted it would use further measures to sure up the economy during the Jackson Hole summit back in late August. This has consequences for the consumer who will be forced to pay higher prices at the checkout as a result of soaring commodity prices since companies will have to push the costs onto the consumer. As a result this will have a negative impact on the general population of the US, more specifically the poor whom it will effect the most. ( see charts - http://www.finviz.com/futures_charts.ashx?t=SOFTS&p=d1 & http://www.finviz.com/futures_charts.ashx?t=GRAINS&p=d1 )

In some cases companies such as Walmart in the US and Tesco in UK will be able to absorb these prices, due to the pricing power these giant retailers have, thus limiting the extent to which they have to hike up prices.

In summary if companies begin to push prices onto the consumer this will undermine consumer confidence which could undermine consumer confidence, already dented as a result of the financial crisis and make them think twice about purchasing certain goods that they would have otherwise have done. This could potentially have damaging consequences to US economic growth, due to the size of the consumer base in the US which equates for approximately 70% of the overall economy.

*1/ Increased by 151,000 compared to analysts expectations of a rise of just 60,000.

*2/ Initial Claims 435,000 compared to analysts expectations of 450,000 & Continuing Claims of 4.301 million compared to estimates of 4.350 million.

For a visual explanation of QE courtesy of the FT  Quantitative Easing Explained (FT Video )

Merrill's Successful Integration Undermined by Countrywide's Lingering Liabilities

The acquisition of Merrill Lynch during the financial crisis actually helped #BAC in its recent earnings report. #BAC which brought Merrill Lynch during the height of the financial crisis boosted its revenue by $3.5bn through its fixed income trading division.

The major weakness for #BAC is the lingering toxic mortgage assets that it purchased from Countrywide financial also during the financial crisis. #BAC spent $417m tied to loans that were issued years earlier, which have now been found to be faulty. Were it not for the fixed income trading revenues from #BAC Merrill Lynch its earnings would have been substantially worse.

In actual fact #BAC fixed income trading arm perform considerably better than its rivals #JPM and #GS both of which saw a decline in revenues in this sector. #BAC investment banking unit bolstered by Merrill Lynch boosted its earnings to $1.4bn compared to $900m in Q2.

If it wasn’t for the fact that #BAC had to write down $10.4bn in goodwill impairment charges the bank would have actually earned $3.1bn in the third quarter.

Source: http://topics.wsj.com/article/SB40001424052702304510704575561763244413610.html

One Disgraced Former CEO and a Missed Opportunity for Bank of America

Today (15-10-2010) in a settlement with the SEC it was announced that the disgraced CEO, Angelo Mozilo would pay $65.5m in charges relating to insider trading and alleged profit taking from the doling out risky mortgage whilst at the same time misleading investors about the risks involved. This settlement was reached by both parties to avoid what would have likely been a lengthy civil fraud trail.

The former Countrywide Financial CEO, Angelo Mozilo reaped approximately $406m through selling company stock between 1984 when the company launched its IPO and 2008 when the company was brought by Bank of America (BofA).

Source: http://finance.yahoo.com/news/Countrywide-CEO-Mozilo-apf-1381976931.html?x=0

This agreement demands that Mozilo pays $45m in disgorgement charges and a further $22.5m in civil penalties. After the settlement was reached the SEC Enforcement officer was quoted as saying it’s “the fitting outcome for a corporate executive who deliberately disregarded his duty to investors by hiding what he saw in the executive suite”. This settlement with the SEC represents a meagre 16% of Mozilo’s net worth given the total value of shares he sold whilst at Countrywide. Additionally Mozilo admitted to not wrongdoing.

To add insult to injury it has come to light that BofA the company that brought Countrywide Financial during the height of the financial crisis in 2008 is to pay $20m of Mozilo’s disgorgement charges. At a time when Western financial institutions are in the process of restoring their damaged reputations and tarnished image as a result of the financial crisis seems to defy logic. This act by BofA would seem to go completely against the grain of this given the nature of Angelo Mozilo’s changes. It would seem to me that Brian Moynihan the companies CEO has missed a golden opportunity to alleviate some of BofA tainted reputation by not refusing to pay part of Mozilo’s disgorgement charges.

However, despite all this the public can all breathe a sigh of relief for being safe in the knowledge that Angelo Mozilo is prevented from working for a public company again for life. Maybe there is some justice after all.
 
http://www.nytimes.com/2007/08/26/business/yourmoney/26country.html?_r=1&hp=&pagewanted=all

http://finance.yahoo.com/news/Countrywide-CEO-Mozilo-apf-1381976931.html?x=0

Pessimism Overides Strong Coorperate Earnings

New data compiled by Bloomberg highlights growing pessimism among analysts, which is beginning to worry investors as their attention shifts from strong cooperate earnings to macro-economic data and the potential of a double-dip recession.

• For the first time since 1997 fewer than 29% of ratings for stocks covered by brokerages worldwide are "buys", according to 159,919 recommendations compiled by Bloomberg.
• This flies in the face of strong cooperate earnings, recently announced in the Q2 earnings season
• the reason for this is because investors are becoming increasingly concerned with the global economic outlook, which as recent economic data suggest is looking "unusually uncertain" to quote Ben Bernanke chairman of Federal Reserve.
• This kind of sentiment is summed up perfectly by Paul Zemsky, head of IG Investment Management who says  "Boy theses companies look pretty good, earnings look OK, they have plenty of cash. What if there is a double-dip"
• Also the recent announcement by Intel saying that Q3 earnings will be lower than previous estimates only adds to investor fears.
• Additionally the report also shows that 54% of ratings for companies in the US, UK, Japan & Brazil are holds, clearly demonstrating a market that currently lacks conviction
• This case is highlighted further when investors today (Mon 30th August) gave back most of the gains that were accumulated on Friday - a "sell the rally" approach that seems to dominating the market of late.

Despite all this pessimism, analysts say that profits for companies in the MSCI World Index of 24 developed nations will gain 28% in the next year. This index currently trades at 11.5X forecast earnings, which is historically low given the fact that apart from the six months starting from October 2008 the index has never traded below 12.5X reported earnings.

Main Article at http://noir.bloomberg.com/apps/news?pid=20601109&sid=aJJjeB34wnHs&pos=10

Quants: The Alchemists of Wall Street - An Insight

Gillian Tett Presents the Case to Stress Test America's GSE's

Gillian Tett presents a telling argument as to why the America’s huge Government Sponsored Enterprises should themselves be stress testes.

Picture Source: http://sightsonpennsylvania.blogspot.com/2010/06/fannie-mae-and-freddie-mac-delist.html

• First she highlights that in the entire 2,300 page document relating to the recent financial reform bill there is unbelievably little detail of the mortgage giants Fannie Mae & Freddie Mac.

• This demonstrates a woeful lack of understanding around the origins of the financial crisis itself, but more specifically the US mortgage market, of which Fannie Mae and Freddie Mac make up a staggering $5,500bn of outstanding mortgages in US or approximately 50%.

• Since the 2008 nationalisation of these two institutions, $145bn of taxpayers’ money has gone into propping the GSEs up.

• However these could rise dramatically from this figure with estimates varying from $390bn to a whopping $1trn, which as Gillian Tett puts it makes the “woes of the Spanish savings banks seem almost tame”.

• Doubts remain as to whether there will ever be a stress test for these GSEs , due to fact that they are the only thing keeping the US mortgage market afloat.

• This is highlighted by the fact that 9/10 mortgages last year were underwritten by Fannie Mae and Freddie Mac

• Additionally if the Obama administration were to embark on a radical reform programme, this would inevitably lead to huge conflict between the government and Federal Reserve given the size of their holdings of mortgage backed bonds.

However despite all this, there is momentum building behind the scenes both in Washington and on Wall Street for overhaul of GSEs. With calls for banks to organise a mutual, private sector insurance scheme to guarantee mortgages without state support. However there remains a huge stumbling block, which is that any type of reform at present given the fragility of the US housing market may tip the country back into recession (just look at last week’s housing sales figures, which showed a huge 27% drop in July – a 10 year low)

Given the fact it was the markets that forced austerity on Greece and the Bank Stress Test in Europe, it may again decide the fate of the GSEs and the US mortgage market should the markets repeat the events of May this year.

http://www.bbc.co.uk/news/business-11075006

For the US Gold Reign's Supreme as Emerging Markets Shift away from the Dollar

An article in this weekend (28th/29th August) FT Magazine, shows that according to the World Gold Council 70% of US foreign currency reserves are made up of Gold, substantially more than any other country in the world. (see figures below)

1. US - 8,133.5 Tonnes
2. Germany - 3,407
3. IMF (who recently announced it was selling 160 on the market with just under 3,000 tonnes)
4. Italy - 2,451.8
5. France - 2,435.4
6. Russia after its buying spree last year now has 668 tonnes
7. ECB (European Central Bank) with 501 tonnes
9 UK - 310

As far as China is concerned, which given that it now produces more gold than any other country in the world comes 8th on the list. However that could change depending on US fiscal policy and whether China still continues to believe that US can manage its debt and continues to buy its treasuries.

As emerging market central banks continue to diversify their own portfolios, Rogoff co-author of This Time it’s Different says they “will probably raise the share of gold in their foreign exchange reserves”. This is because their shift from an over-reliance on the dollar to currencies such as the euro is not “sufficient diversification against the risk – which is low, but certainly non-trivial – of a generalised global inflation.

Statistics Show Why Britain's Welfare System Needs A Radical Overhaul

A recent report by the Sunday Times newspaper, published on July 25th highlights the worrying cost to taxpayers of current welfare system, which this year alone will account for nearly £200bn of government spending.

In the last decade under the Labour government welfare ‘benefits’ spending in Britain has spiralled out of control.

Figures compiled by the Treasury, DWP (Department for Work & Pensions) and Civitas show that between 2000 and 2010 welfare spending went from £132bn to £192bn. Perhaps what is more concerning is the amount of people as a percentage of the population that rely on the welfare system; in 1960, 5% of population received benefits in stark contrast to today where a shocking 29% of the UK population receive benefits of some kind. A breakdown of the figures show the £30bn alone in spent on jobseekers allowance, housing benefit and income support, which represent the three most common forms of welfare payments. The yearly cost to the taxpayer of people claiming disability benefits is £11.5bn, which is larger than the entire budget for the Home Office. Also highlighted in the figures is the amount of people that are currently unemployed which currently stands at 5.9m. An alarming trend in these figures is that 1.4m of these have claimed 9 out of the last 10 years.

Also highlighted in the Sunday Times report is that over 3,000 families are claiming benefits of £26,000 a year. A rising trend seems to be where three generations of families are living on benefits, which is now creating a substantial strain on government spending in a time of austerity. This is making life increasingly difficult for policymakers who are trying to wean entire generations of families of benefits. As a consequence of this, is that they are becoming accustomed to a life of idleness, which then creates its own set of problem; one is that they as a result of spending long periods out of work become increasingly unemployable as a result of their physical condition and secondly they rapidly lose the skills necessary to carry those jobs in today rapidly changing job market.

Labour’s Sure Start scheme was designed to give children in deprived areas of Britain’s communities a better start in life a so called ‘early intervention’ program; however this was criticised as an expensive political piece of social engineering. The Conservatives proposed in their manifesto a ‘big society’ approach, which has also received criticism.

A more effective approach that has been proposed is the possibility of getting private businesses to invest money in projects for children at an early stage in the hope of getting returns on their initial investment at a later date. A report was published by Smith Institute and the Centre for Social Justice, which was founded by Ian-Duncan Smith with the purpose of mending a ‘broken Britain’. A comparative study was also carried out in the US back in the 1960s titled the Perry pre-school study focusing on African-Americans, with positive results.

John Bird, the founder of the Big Issue presented research to David Cameron that demonstrated that among his homeless magazine vendors that it has cost the state more to keep them in care as children as it would have cost to send them to Eton. Showing that simply throwing money at the problem isn’t necessarily the answer.

Perhaps the financial crisis will have one lasting positive effect on the Britain’s welfare system. The reason being is that in the ‘age of austerity’ weaning over-reliant people of benefits will have to speeded up since Britain can no longer afford to maintain its current rate of spending in this area. This will in turn bring forward the increased activity from the private sector in helping alleviate Britain’s social problems, which have positive long term impact on Britain’s economy. As Allen has stated “early intervention is not only cheaper but more effective”.

Historians Deliver Damming Verdict on Brown's Premiership

In a poll of 100 academics, former Labour leader Gordon Brown comes in as the third worst Prime Minister in post-war Britain. This is the first poll of its kind to be released since the Labour party were defeated in the May general election.

Gordon Brown comes in 10th out of the 12 post World War 2 Prime Ministers in the UK. The reasoning behind the outcome in this poll was as a result of the huge amount of debt that was left behind when he left office. The poll does however look favourably on the role Brown played in the financial crisis. More bad news for the former PM and chancellor is that his rival Tony Blair came in as the third most successful Prime Ministers, with Margaret Thatcher coming second and Clement Attlee coming the top of the list, deemed to be the most successful PM in over the last half a century.

Picture Source: http://www.dailymail.co.uk/news/article-479780/Im-conviction-politician-like-Maggie-Brown-taunts-Cameron.html

Clement Attlee who came in top was PM between 1945-1951 and was a key architect in the establishment up the NHS and the Welfare State, both of which still remain today.

Harold Macmillan the leader during the "never had it so good" period of post-war Britain came in fourth place.

While Winston Churchill was in sixth place in this poll, it must be noted that it only takes into account his Prime Ministerial role in peacetime from 1951-1955. Winston Churchill remains in the vast majority of polls/studies and surveys carried out the most popular and successful PM in British history during his tenure in office during WWII.

Picture Source: http://priceofoil.org/2009/07/08/gore-invokes-spirit-of-churchill-to-fight-climate-change/

The role of the miners also played a deciding factor in the outcome of this poll, since Edward Heath came lower down the list than James Callaghan who governed during the "winter of discontent".

Finally in last place and voted as Britain's worst PM in post-war Britain was Anthony Eden who's catastrophic invasion of Suez, had long lasting implications on Britain's foreign policy and effectively ended Britain's prominence in world affairs.

Picture Source: http://www.mentalfloss.com/blogs/archives/21653

Kevin Theakston of Leeds University, who compiled the poll said a determining factor behind the outcome was the length of time the person had served in office. Pointing out that each of the top five PMs served at least six years in Number 10.

This article was originally published in the UKs Daily Mail newspaper on August 3, 2010

Relief Rally Monday and then Back Down to Earth Tuesday

(02/08/2010)

OK. So can someone explain to me what has changed so dramatically in the last 24hours to spark a 2-3% gain across global stock market indices?

1) US employment is still at stubbornly high levels

2) Weak economic data continues to point to subdued growth

3) Economic data that came out of China on Monday indicates their economy is also slowing, so why the substantial rise in mining stocks BHP (BHP Billiton), RTP (Rio Tinto) & VALE etc...

4) Europe’s financial system is still weak, despite what the stress test may indicate. As Jim Rogers highlighted last week on CNBC it was all just a PR campaign.

5) Weak housing and retail figures i.e. Home Starts/Construction/Sales & Consumer Confidence are both extremely weak.

6) Europe’s sovereign debt problems are still in background

7) Also what happened to Ben Bernanke’s comments last week saying the outlook for the US economy is “unusually uncertain”?

8) Lastly did investors just forget about the worst than expected GDP figures last week

+ the rather strangely the continuing rise in copper and oil prices, given subdued growth in both the US and Europe.

So taking all this into account. What I ask is reason for today’s rally, I get the funny feeling this is just a relief rally and that we will stay in this trading range for a while yet.

That is somewhere between 10,000-10,500 on the DOW JONES and 1080-1120 on the S&P 500.

Disclosure:
I continue to hold SDS (SPDR Ultra Short S&P 500( in my portfolio
Also have short positions in FXE (Currency Shares Euro Trust), ITB (iShares Dow Jones Home Construction & RTH (Retail HOLDERs)

(03/08/2010)

It’s amazing the difference a day makes in the financial markets.

Noticed a rare event today in the market, that is oil prices and thus energy stocks traded inversely to the market despite a string of bad economic reports. Most likely due to the continued pressure on the dollar.

Negativity seemed to burst back to life today as a couple of important companies missed analyst earnings estimates. They include #P&G, which shed some light on the weakness of the US consumer as they move away from named brands and switched to lower priced alternatives. Additionally #DOW missed earnings expectations, the biggest US chemical company.

Another round of negative economic data also stopped yesterday’s rally in its tracks.

1. Personal spending came in at 0%
2. Personal income again came in flat
3. PCE prices were also at 0%
So few positive signs there of a strengthening economy

Dan Cook an analyst at IG Markets put it perfectly in my opinion when he said that “it’s the same battle between positive earnings and negative underlying fundamentals in the real economy”. He also went on to say that the “outlook is pretty dark... It’s not dire, but growth will be slow and investors are starting to wonder where these companies will draw profits from next year”. It is not surprising that investors are worried by this when the likes of Factory Orders come in well below expectations falling 1.2% compared to a projected fall of 0.5%.

These two articles were originally published on the Community Board on the TradeFields application website. This can be viewed from the link to the right of this post.

NB: Any mention of holdings are purely fictional and refer specifically to my TradeFields account. However these holdings do represent my views on the overall economy.

A Warning From History - According to Warren Buffett

Upon the recommendation of Warren Buffett to his friends this book, previously out of print (now available on Amazon) has become a cult among financiers, businessmen and investors alike. It describes how political weakness in post World War 1 Germany led to a massive failure in economic management that resulted in the economy spiralling out of control. Adam Ferguson, 78 the author of this book says today "if you are trying to decide whether to go for quantitative easing or high unemployment, in the end you'll have both".  The reason why this book has become a such a huge hit is because it describes in detail the devastation that is brought about as a result of hyperinflation and the effects it has on ordinary people. Ferguson goes on to say "if you destroy the value of money, you destroy the cornerstone of society.

A Week of Negetive Economic Data Points to a Weak Payrolls Number

During the past week the US has released one piece after another of negative economic data that points to the likelihood of a weaker than expected Non-Farm Payrolls number that is release tomorrow at 08.30 New York time or 13.30pm GMT.

Monday: Personal Spending up 0.4% compared to an expected 0.5% (previously 0.5%)

Tuesday: Consumer Confidence plunges to 52.9 versus analysts estimate of 62 (previous month 62.7)

Wednesday: ADP Employment Change was 13,000 versus an expected 61,000 (previously 57,000)

Thursday: Continuing Claims rose by 472,000 versus 451,000 that was expected (previously 457,300)
                 
ISM (Institute for Supply Management) Index declined to 56.2 versus 59.0 (previously 59.7)
                 
Pending Home Sales took a nose dive, plunging to -30% compared to a decline of -10.5% that was expected (previous month +6%)

Source: http://finviz.com/calendar.ashx

Additionally during trading hours in New York on Thursday the US Dollar saw broad based declines against its major competitors the Yen, Pound Sterling & the Euro. This could be seen as investors pricing in a very negative jobs number since the Dollar is traditionally seen a safe haven play. However with weakness in US manufacturing as in ISM data indicates and a rapidly deteriorating US housing market the dollar is now been sold in part because of the underlying fundamentals of the US economy. If we do see a worse than expected jobs figure tomorrow it could set the tone for a heavy day of selling as investor already jittery after a flurry of bad economic data this week will ratchet up the rhetoric of a 'potential' double-dip recession. This was given more credence when economist at JPMorgan Michael Feroli cut his growth forecast for the third quarter to 3% from 4%.

The latest estimate for the Non-Farm Payroll figure tomorrow is a decline of 100,000 with the unemployment rate ticking up slightly by 0.1% to 9.8%.  Crucially this months figures will not include census workers, which accounted for 411,000 of the 431,000 in the previous months report.

BP Gulf of Mexico Oil Spill Tracker Map

Here is a very useful map to keep track the Gulf of Mexico oil spill, with additional interactive features.

http://gomex.erma.noaa.gov/erma.html#x=-90.42000&y=28.03000&z=6&layers=3023+497+3796

Caterpillar's Sales Report Highlights Europe's Flagging Economic Recovery & Weakness in the US Housing Market

Caterpillar's Sales Report

For the three months ending the month of May this year Caterpillar machine sales rose 11% worldwide from the same period this time last year. Additionally sales to Asia saw a substantial increase of 38%, while at the same time North American sales were up 15%. However the report demonstrated that the economic recovery in Europe may be trailing the rest of the world since Caterpillar's sales to the continent saw a decline of 8%.

In a separate note the Wall Street Journal said that it was the first period of global growth for Caterpillar since September 2008, and the first period of growth for the US since 2006. However it must be noted that it unclear as to how much this increase in sales is as a direct result of the US government stimulus program, a sizeable amount of which is still unspent.

Despite this strong set of figures analyst caution against reading to much into this, since the growth in North American sales is from an extreme low bottom, which saw an 80% decline from its 2006 peak. Furthermore the report lowered its 2010 outlook for the US housing starts by 20% from 1m to 800,000 citing a weak labor market was the main reason for some lingering pessimism about the US recovery.


Caterpillars shares closed up 90c or 1.39% at 65.85

(for a more detailed overview of this report, place the mouse cursor over the 'Caterpillar's Sales Report' title at the top of this post for a direct link to the report)

An alternative take on the BP oil spill

Source: http://www.ucbcomedy.com/

Port traffic indicates robust economic growth

The port of Long Beach, which is the largest port complex in the US has release preliminary figures showing that it has seen a 25% increase in container shipping traffic from May versus a year ago. Additionally the figures highlight this is the sixth straight month of growth, which is seen to be accelerating. (see below for further details)

• Imports up 27%

• Exports up 15% (the highest level in two years)

• Empties that leave the port up 35% from a year ago. This indicates that Asia needs US ships to bring goods to the US.

Also the port of LA has seen a container traffic increase by 20%, including a massive 58% increase in empties.

This report not only highlights a surge in demand for US goods from Asia, it also shows that the global economy is continuing to show robust growth as demand for goods increases.

A terrifying prospect for UK pension funds – A BP BANKRUPTCY?

The Daily Telegraph (UK) has today reported that Barack Obama’s ‘excessive’ criticism of BP in recent days caused severe damaged to the future of pension funds in the UK. As a result of Obama’s comments the share price of BP plunged 4% in London. Investors in London today said his comments were putting the pensions of millions at risk; this comes on a day when the total value wiped of the shares of BP now totals £49bn.

As a result of BPs position at the top of the London Stock Exchange almost every pension fund in the country relies on the company’s reliability, which has been severely undermined as a result of the Gulf Oil spill, which has now dragged on for 51 days. It is the company’s dividend which accounts 1/6 of UK pension fund or £7bn a year that is under serious threat. A White House spokesman said it was the Presidents job to keep his ‘boot on the throat’ of BP, which has led the President to put additional pressure on BP to cut or abandon is dividend payment altogether. This ‘excessive’ rhetoric from the US administration has prompted business in the UK to say that a continuation of this rhetoric could damage transatlantic relations.

All this was made worse when highly respected energy analyst at Simmons & co Matthew Simmons commented that BP may not be a public company by the end of the summer. This sent the ADR listed shares of BP listed in New York plummeting 15%, which puts them at a 14 year low. This will no doubt have knock on effect when the London markets open again later today.

http://www.telegraph.co.uk/news/worldnews/northamerica/usa/barackobama/7815713/Barack-Obamas-attacks-on-BP-hurting-British-pensioners.html

http://www.ft.com/cms/s/0/ca63d0c8-73e8-11df-87f5-00144feabdc0.html

Quantity of waste provides better correlation to GDP than coal or copper – Bloomberg data shows

http://www.bloomberg.com/insight/trash-gdp-indicator.html

Global Market Data

Data compiled by CNBC
Source: Bythenumbers.cnbc.com

Trade the weaker Euro with this ETF

Companies mentioned in this report:-

Allianz

E.On

Fresenius Medical Care

Merk KGaA

Siemens

SAP

UBS

This is my first piece of research carried out into to stock/etf for over a year. I will separate it into two sections; firstly I will lay out a brief overview of the current economic environment in Germany and also its stock market. Secondly I will present the argument that at present Germany represents a fantastic investment opportunity at this time.

Part 1.

Germany, the economic powerhouse of Europe with a population of around 80million, which combined with its first class infrastructure, is the world’s second largest exporter. However as the Sovereign debt crisis has escalated in recent weeks culminating in $1trn finance package for the Eurozone countries [specifically, Portugal, Ireland, Spain and Greece], German equity markets have suffered in my opinion unjustifiably.

Germany economy was hit hard by the recession as a consequence of Germany’s overreliance on exports. However Germany has come out of this recession continuing to be the driving force in Europe both politically and economically. The latest export figures for March show that Germanys export led economy is stronger than ever, when exports posted their biggest monthly increase in 18 years, substantially beating analyst estimates. German exports rose 10.7% month-on-month to 79bn Euros, the largest jump since 1992 according to the Bundesbank data. It is as a result of this that Germany’s economy accounts for roughly 20% of GDP of the whole of Europe’s GDP.

Consequently the main bourse in Germany the DAX, reflects the dominance of the export led German economy. The weightings are 15% in consumer goods; 18% in basic materials & 14% in utilities. The German stock market is the 7th largest in the world with the bond market been the 5th largest. In conjunction with this other reasons for investing in Germany are that it tops innovation and research in so far as billion of Euros spent. Additionally, German companies excel in registration for patents with Germany the number one in world. Also earlier this year the German union Verdi agreed a pay raise of just 1.2% for around 2m public sector workers this year compared to the 5% previously agreed, secondly the largest union in Germany agreed to pay freezes that help protect jobs. Both of these a major examples of how in times of crisis Germany can help protect stakeholder interests as well as maintain jobs.

Part 2.

As a result of the recent sell off in Germany equities as of consequence of rising Sovereign debt concerns, German stocks on a price-to-earnings ratio represent a buying great opportunity according to analyst at UBS and Credit Suisse. On this basis Germany is the third cheapest country in Europe and as the world second largest exporter should benefit greater the depreciating value of the Euro. According Karen Olney, analyst at UBS the amount of money involved in the bailout is not enough to disrupt the growth of the German economy going forward. This fact is proven in the export figures highlighted above.

UBS on that basis recommend investors look at German stocks that derive more than 25% of their sales from outside Europe. It is this factor that will greatly benefit future earnings of major German corporations when those sales from outside Europe are then converted into Euros. Among the stocks that should benefit from the decline in Euro are Siemens, with 47% of its sales outside of Europe as well as healthcare companies such as Merck KGaA and Fresenius Medical Care of which 51% and 78% of their sales come from outside Europe respectively. As on their list are insurance giant Allianz and tech company SAP, which have 31% and 50% of their sales outside of Europe respectively. Finally they also look at E.ON as a possible buy even though it growth prospects are more questionable. Disclosure: UBS has a buy rating on Merck KGaA and Fresenius Medical Care.

Based upon the following companies that match this sales criteria the Exchange Traded Fund provided by iShares is the best way the gain exposure to this with the all the companies mentioned above making up over 32% of the total portfolio of this fund. Finally with a healthy exposure to the dominant sectors in the German economy: 15% in Industrials; 13% in Materials; 13% in Utilities; 13% in Consumer Discretionary stocks and 10% in Healthcare, all of which make this etf an great buy, especially since it 15% decline from it 52 week high.

Special Note: Siemens recent earnings report showed a surge in profits of 54% and also said to investors that it was raising its outlook for the full year. Total sector profits were 2.14bn Euros with a profit margin of 12.3% both of which beat analyst estimates of 1.98bn Euros profit and a profit margin of 11.8%. I mentioned this because as the largest holding this etf at 10.34% it has a significant on the price movement of this etf.

Disclosure: No Position