A Real Issue with Data – How to Measure the GDP or is it GDI
From the Wall Street Journal:
. . . . To be precise, they (the Fed) wonder if the U.S. economy grew 3.1% in the fourth quarter last year from a year earlier, as the government's gross-domestic-product data suggest, or a more robust 4.1%, as measured by the lesser-known gross domestic income.
It isn't an idle exercise. If the stronger number is right, it would help explain why unemployment has remained so low. It would also suggest that productivity growth has remained relatively robust rather than slowing sharply, as the regular data imply. Strong productivity growth means the economy can grow faster without pushing up inflation.
Unfortunately, a closer examination of the data suggests the stronger number is misleading. The reason: Employees are reaping big gains on stock options, but the cost of those options probably isn't fully reflected in corporate profits.
The Commerce Department's Bureau of Economic Analysis measures the nation's economic output two ways: total spending, or GDP, and total income, or GDI. In theory the two should be equal, but in practice they seldom are, because they are drawn from different sources and are subject to differing sampling and measurement challenges.
Occasionally, the divergence signals something important. In the 1990s, former Fed Chairman Alan Greenspan posited that the fact GDI was growing faster than GDP was a clue that productivity, or output per worker, was growing faster than official data suggested. People were producing and earning more, he figured, but GDP wasn't capturing it. More recently, a study by Fed staff economist Jeremy Nalewaik argues that GDI is better than GDP at identifying recessions, and "an increased focus on GDI may be useful in assessing the current state of the economy.". . . .
. . . . Because measuring both GDP and GDI is so complex, it is difficult to pinpoint the source of the discrepancy, and it may never be resolved. One possible explanation is that GDP has been underestimated and will be revised higher; that would help explain why the U.S. job market is so strong. But a more likely explanation is that GDI has been overestimated, and may be revised lower.
Here's why. Stock options are a growing and highly volatile part of employee compensation. Suppose an employee has an option to buy his company's stock at $20, and the stock is trading at $30. If the employee exercises that option and buys the stock, the $10 profit -- even if the stock isn't sold -- is treated as income both by the Internal Revenue Service and the BEA, and as an expense to the company.
Option income, however, is hard to measure. It's not included in the Bureau of Labor Statistics' monthly wage figures. The BEA has to estimate it, and it may undercount it when a rising stock market increases the profits from exercised options.
Four months after the end of each quarter, the BEA does get more comprehensive labor-income figures that include options. A year ago, that led to a big upward revisions in first-quarter income; last week, it led to a similar upward revision in fourth-quarter income.
The data don't tell the BEA where the extra income came from; the evidence suggests options: Figures from Thomson Financial suggest those were the first and fifth most lucrative quarters ever for corporate officers, directors and other "insiders" cashing in options.
In theory, that added option income should have reduced corporate profits by an equivalent amount. But quarterly shareholder reports, an important source for the BEA's quarterly profit calculations, deduct far less than the entire value of an exercised option as an expense. The BEA gets its first look at that value a year later when companies file their annual reports, and it takes up to another year for the final figures to come from the IRS. There's a good chance that later this year, the BEA will revise down last year's profit data, shrinking GDI. Until that happens, the additional options income is, in effect, double-counted: in employee income, and in artificially high profits.
There is a good chance that later this year, the BEA will revise down last year's profit data, shrinking GDI. Until that happens, options income is, in effect, double-counted: in employee income, and in artificially high profits.
A BEA official concedes such double-counting is a "possibility," while adding, "We've learned from experience it's difficult to understand all of the factors that affect corporate profits."
Tuesday, June 5, 2007
The Fed Chairman Admits Housing Is a Problem for Economic Growth
From CNN.Money.com
Elevated levels of inflation excluding food and energy may not recede as weakness in the housing sector is likely to restrain economic growth for longer than expected, Federal Reserve Chairman Ben Bernanke said Tuesday.
"Although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside," Bernanke said in remarks to a monetary policy conference in Cape Town, South Africa.
"The adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected," he said.
From CNN.Money.com
Elevated levels of inflation excluding food and energy may not recede as weakness in the housing sector is likely to restrain economic growth for longer than expected, Federal Reserve Chairman Ben Bernanke said Tuesday.
"Although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside," Bernanke said in remarks to a monetary policy conference in Cape Town, South Africa.
"The adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected," he said.
More on the Gold Market #2
From Bloomberg:
. . . . Gold gained in Asia amid speculation a fall in the dollar will help to boost demand for the precious metal as an alternative investment. Silver also rose.
Gold generally moves in tandem with the euro which gained against the dollar on speculation Europe's inflation rate will quicken, boosting the prospect the European Central Bank will raise interest rates tomorrow. Gold has risen 5.6 percent this year, while the euro gained 2.2 percent.
``The softer dollar is definitely a factor supporting the gold price this morning,'' David Moore, commodities strategist at Commonwealth Bank of Australia said by phone today from Sydney. ``Some people in the market are viewing $675 as a possible point of resistance.'' . . . .
. . . . The ECB, due to meet tomorrow, is expected to increase borrowing costs by a quarter percentage point to 4 percent, all 52 economists forecast in a Bloomberg News survey. . . .
From Bloomberg:
. . . . Gold gained in Asia amid speculation a fall in the dollar will help to boost demand for the precious metal as an alternative investment. Silver also rose.
Gold generally moves in tandem with the euro which gained against the dollar on speculation Europe's inflation rate will quicken, boosting the prospect the European Central Bank will raise interest rates tomorrow. Gold has risen 5.6 percent this year, while the euro gained 2.2 percent.
``The softer dollar is definitely a factor supporting the gold price this morning,'' David Moore, commodities strategist at Commonwealth Bank of Australia said by phone today from Sydney. ``Some people in the market are viewing $675 as a possible point of resistance.'' . . . .
. . . . The ECB, due to meet tomorrow, is expected to increase borrowing costs by a quarter percentage point to 4 percent, all 52 economists forecast in a Bloomberg News survey. . . .
Monday, June 4, 2007
New Lows in Obtaining Credit – Diluting the Value of the FICO Score
Originally found this on The Big Picture. It is a little long, but worth the effort if you are involved in scoring or underwriting. The whole article is on Yahoo.
Only a low credit score stood between Alipio Estruch and a mortgage to buy a $449,000 Spanish-style house in Weston, Fla., a few miles west of Fort Lauderdale.
Instead of spending several years repairing his credit rating, which he said was marred by two forgotten cell phone bills and identity theft, the 37-year-old real estate agent paid $1,800 to an Internet-based company to bump up his score almost overnight.
This is how it works:
Instantcreditbuilders.com, or ICB, helped Estruch boost his score by arranging for him to be added as an authorized user on several credit cards of people with stellar credit who were paid to allow this coattailing. Parents also use this practice when they add their children to their credit cards to help them build solid credit.
For example,
Brian Kinney, 44, a retired Army officer in Glendale, Calif., pulls in more than $2,500 a month by lending out 19 credit card spots on two old Citibank cards with strong payment histories. Kinney, whose FICO score is above 800 on the scale of 300 to 850, quit his job working at a Farmers Insurance agency and uses the ICB income to tide him over until he starts his own insurance agency.
Lenders are worried, however, that they're taking on greater default risks by unknowingly offering lower interest rates than they otherwise would to applicants who artificially boost their credit scores. Their trade group has complained to the Federal Trade Commission and is talking with the credit reporting bureaus in case the practice becomes more widespread.
Estruch paid $1,800 in December for three credit card spots, and by January, his FICO score jumped from 550 to 715. In mid-March, he closed on his four-bedroom beige stucco house after obtaining a 30-year fixed-rate mortgage from a unit of American Home Mortgage Investment Corp. It carried a 7.5 percent interest rate and required no down payment.
Companies like Largo, Fla.-based ICB are sprouting on the Internet with little overhead and no-frills marketing. They post ads on community Web sites like Craigslist and have sponsored links on Google and Yahoo. Competitors of ICB have even reached out to mortgage brokers, lenders and real estate agents, flooding their e-mail with advertisements.
Jason LaBossiere, who founded ICB a year and a half ago, said his company receives 100 to 150 new leads daily -- a number that has been growing -- and those inquiries lead to 10 to 20 new clients a week.
ICB charges $900 for the first credit card account, with a discount for additional ones. The cardholder allowing the piggybacking on his or her credit history can receive $100 to $150 per slot, depending on the age and credit limit of each card. ICB pockets the rest.
The effect on a credit score can vary depending on what else is in a client's report. But one borrowed credit card account can increase a score between 30 and 45 points, two between 60 and 90 points, and five between 150 and 205 points, according to ICB. That's because the computer program that calculates scores is essentially tricked into believing the credit renter has a better repayment history when it sees the added accounts, and that helps lift the credit score.
Once the credit card company files an updated report to credit bureaus -- leading to a higher FICO score -- the credit renter is removed from the account of the person allowing the piggybacking. However, the credit card's payment history remains on the authorized user's credit report forever, and lenders have no way of knowing how the credit borrower is related to the cardholder.
Kinney, the retired Army officer in California, said those borrowing his good credit history don't get his personal information, full credit card number or credit card expiration dates. Any sensitive data is handled through ICB, and Kinney adds the users himself by calling his credit card company. ICB also destroys any duplicate cards that are issued to the credit renter, according to its contract.
Instead of being worried about risks he may be assuming, Kinney said borrowers are the ones vulnerable to scammers posing as do-gooders. Those seeking a credit hike give the cardholder their names and Social Security numbers, which, in the wrong hands, could lead to identity theft. Kinney said he also receives credit card offers in the mail for the credit borrowers on his accounts, opening up another possibility for fraud, but he throws them away.
"I know the whole thing sounds kind of odd and not very legitimate, but it is for now," Kinney said. "I don't know how long before someone will decide it's illegal. But I'm not counting on this for the long-term."
"These companies are encouraging consumers to commit fraud. On a standard home loan, there's a clause that says the consumer is not omitting pertinent facts that could impact his or her ability to repay the loan," Ferguson said.
The cure for this would be to require all tradelines in the credit bureau that are authorized user accounts be excluded from the analysis. The credit granting company could also require the applicant to give the vitals on the authorized user account such as account number, expiration date, and original card holder. Ultimately, this procedure will have to be tested to determine if it is fraud.
Originally found this on The Big Picture. It is a little long, but worth the effort if you are involved in scoring or underwriting. The whole article is on Yahoo.
Only a low credit score stood between Alipio Estruch and a mortgage to buy a $449,000 Spanish-style house in Weston, Fla., a few miles west of Fort Lauderdale.
Instead of spending several years repairing his credit rating, which he said was marred by two forgotten cell phone bills and identity theft, the 37-year-old real estate agent paid $1,800 to an Internet-based company to bump up his score almost overnight.
This is how it works:
Instantcreditbuilders.com, or ICB, helped Estruch boost his score by arranging for him to be added as an authorized user on several credit cards of people with stellar credit who were paid to allow this coattailing. Parents also use this practice when they add their children to their credit cards to help them build solid credit.
For example,
Brian Kinney, 44, a retired Army officer in Glendale, Calif., pulls in more than $2,500 a month by lending out 19 credit card spots on two old Citibank cards with strong payment histories. Kinney, whose FICO score is above 800 on the scale of 300 to 850, quit his job working at a Farmers Insurance agency and uses the ICB income to tide him over until he starts his own insurance agency.
Lenders are worried, however, that they're taking on greater default risks by unknowingly offering lower interest rates than they otherwise would to applicants who artificially boost their credit scores. Their trade group has complained to the Federal Trade Commission and is talking with the credit reporting bureaus in case the practice becomes more widespread.
Estruch paid $1,800 in December for three credit card spots, and by January, his FICO score jumped from 550 to 715. In mid-March, he closed on his four-bedroom beige stucco house after obtaining a 30-year fixed-rate mortgage from a unit of American Home Mortgage Investment Corp. It carried a 7.5 percent interest rate and required no down payment.
Companies like Largo, Fla.-based ICB are sprouting on the Internet with little overhead and no-frills marketing. They post ads on community Web sites like Craigslist and have sponsored links on Google and Yahoo. Competitors of ICB have even reached out to mortgage brokers, lenders and real estate agents, flooding their e-mail with advertisements.
Jason LaBossiere, who founded ICB a year and a half ago, said his company receives 100 to 150 new leads daily -- a number that has been growing -- and those inquiries lead to 10 to 20 new clients a week.
ICB charges $900 for the first credit card account, with a discount for additional ones. The cardholder allowing the piggybacking on his or her credit history can receive $100 to $150 per slot, depending on the age and credit limit of each card. ICB pockets the rest.
The effect on a credit score can vary depending on what else is in a client's report. But one borrowed credit card account can increase a score between 30 and 45 points, two between 60 and 90 points, and five between 150 and 205 points, according to ICB. That's because the computer program that calculates scores is essentially tricked into believing the credit renter has a better repayment history when it sees the added accounts, and that helps lift the credit score.
Once the credit card company files an updated report to credit bureaus -- leading to a higher FICO score -- the credit renter is removed from the account of the person allowing the piggybacking. However, the credit card's payment history remains on the authorized user's credit report forever, and lenders have no way of knowing how the credit borrower is related to the cardholder.
Kinney, the retired Army officer in California, said those borrowing his good credit history don't get his personal information, full credit card number or credit card expiration dates. Any sensitive data is handled through ICB, and Kinney adds the users himself by calling his credit card company. ICB also destroys any duplicate cards that are issued to the credit renter, according to its contract.
Instead of being worried about risks he may be assuming, Kinney said borrowers are the ones vulnerable to scammers posing as do-gooders. Those seeking a credit hike give the cardholder their names and Social Security numbers, which, in the wrong hands, could lead to identity theft. Kinney said he also receives credit card offers in the mail for the credit borrowers on his accounts, opening up another possibility for fraud, but he throws them away.
"I know the whole thing sounds kind of odd and not very legitimate, but it is for now," Kinney said. "I don't know how long before someone will decide it's illegal. But I'm not counting on this for the long-term."
"These companies are encouraging consumers to commit fraud. On a standard home loan, there's a clause that says the consumer is not omitting pertinent facts that could impact his or her ability to repay the loan," Ferguson said.
The cure for this would be to require all tradelines in the credit bureau that are authorized user accounts be excluded from the analysis. The credit granting company could also require the applicant to give the vitals on the authorized user account such as account number, expiration date, and original card holder. Ultimately, this procedure will have to be tested to determine if it is fraud.
Future Interest Rates - How Would You Bet?
From Bloomberg:
. . . . In the options market where the savviest investors take apart conventional wisdom, the Federal Reserve is facing growing pressure to consider raising interest rates as soon as December.
Options on Federal Fund futures at the Chicago Board of Trade indicate a 41 percent chance the central bank will lift its target rate for overnight loans between banks to 5.5 percent from the current 5.25 percent, according to data compiled by Bloomberg. A month ago, they showed no expectations for an increase.
While the economy expanded at the slowest pace in more than four years in the first quarter, inflation remains at the top of the Fed's comfort zone, business activity has rebounded, the jobless rate is near the lowest in six years and stock indexes are setting record highs. Just three months ago, options traders speculated the weakest housing market in 16 years would force the central bank to cut interest rates to 4.5 percent by January.
. . . . The chance of at least one cut in the overnight lending rate between banks has fallen to 29 percent from 83 percent since the start of May, options prices show.
Federal Reserve policy makers ``have started to tell us in pretty consistent language they're not satisfied at being at the upper band'' of their inflation target. . . .
. . . . Options more accurately reflect changes in monetary policy than futures contracts, the most widely used barometer, because they include the widest array of wagers, according studies by the Federal Reserve Bank of Cleveland in 2005 and the Federal Reserve Bank of St. Louis in 2006.
. . . .The CBOT first listed the options in 2003 and began offering contracts in July that allow bets on the Fed's target rate. The so-called binary options pay $1,000 if an investor bets correctly on the Fed's interest-rate decision at regularly scheduled meetings. Investors get nothing if they bet wrong.
. . . . Economists at Barclays Capital Inc., JPMorgan Chase Inc. and Bear Stearns Cos. have been predicting higher rates since the Fed left its target unchanged last August. They forecast at least one increase this year and another by the first quarter of 2008. . . . .
. . . . ``We are definitely seeing more and more people moving away from the Goldman and Merrill argument that the Fed is going to cut multiple times.''
What is the real concern, inflation or the housing market? That determines how you vote. My vote is for a rate increase.
From Bloomberg:
. . . . In the options market where the savviest investors take apart conventional wisdom, the Federal Reserve is facing growing pressure to consider raising interest rates as soon as December.
Options on Federal Fund futures at the Chicago Board of Trade indicate a 41 percent chance the central bank will lift its target rate for overnight loans between banks to 5.5 percent from the current 5.25 percent, according to data compiled by Bloomberg. A month ago, they showed no expectations for an increase.
While the economy expanded at the slowest pace in more than four years in the first quarter, inflation remains at the top of the Fed's comfort zone, business activity has rebounded, the jobless rate is near the lowest in six years and stock indexes are setting record highs. Just three months ago, options traders speculated the weakest housing market in 16 years would force the central bank to cut interest rates to 4.5 percent by January.
. . . . The chance of at least one cut in the overnight lending rate between banks has fallen to 29 percent from 83 percent since the start of May, options prices show.
Federal Reserve policy makers ``have started to tell us in pretty consistent language they're not satisfied at being at the upper band'' of their inflation target. . . .
. . . . Options more accurately reflect changes in monetary policy than futures contracts, the most widely used barometer, because they include the widest array of wagers, according studies by the Federal Reserve Bank of Cleveland in 2005 and the Federal Reserve Bank of St. Louis in 2006.
. . . .The CBOT first listed the options in 2003 and began offering contracts in July that allow bets on the Fed's target rate. The so-called binary options pay $1,000 if an investor bets correctly on the Fed's interest-rate decision at regularly scheduled meetings. Investors get nothing if they bet wrong.
. . . . Economists at Barclays Capital Inc., JPMorgan Chase Inc. and Bear Stearns Cos. have been predicting higher rates since the Fed left its target unchanged last August. They forecast at least one increase this year and another by the first quarter of 2008. . . . .
. . . . ``We are definitely seeing more and more people moving away from the Goldman and Merrill argument that the Fed is going to cut multiple times.''
What is the real concern, inflation or the housing market? That determines how you vote. My vote is for a rate increase.
GOLD!!!
The gold market is one of the more interesting markets to watch, mostly because it has so many emotional supporters that often times cloud the issues. But alas, the gold markets succumbs to the law of supply and demand just like everything else. As a recent article on CNN.Money.com demonstrates.
Probably the biggest issue on the supply side is the sale of gold by central banks in Europe. The ECB said it had sold 37 tons of gold from its reserves over the past two months and had no plans for further sales in the current year of the central bank gold agreement.
European central banks pledged to cap their total sales at 2,500 tons in the 2004-2009 period, or 500 tons a year. The third year of their five-year agreement runs until Sept. 26.
. . . . the ECB's announcement had lifted sentiment, but other central banks were expected to continue selling gold from their reserves.
When gold is denominated in dollars it will be fairly dependent on the value of the dollar, just like oil.
. . . . "[Gold] will probably continue to be fairly dependent on the dollar," . . . .
"There are various different influences in either direction but at the moment none of them look to be heavily dominant."
On the demand side, for example:
Gold imports by Turkey, one of the world's top consumers of the metal, fell around 12 percent in the first five months of the year to 74 tons from a year earlier.
Don’t forget that is still subject to speculative moves.
. . . . short covering emerged after confirming solid buying interest below $650 this week.
The gold market is one of the more interesting markets to watch, mostly because it has so many emotional supporters that often times cloud the issues. But alas, the gold markets succumbs to the law of supply and demand just like everything else. As a recent article on CNN.Money.com demonstrates.
Probably the biggest issue on the supply side is the sale of gold by central banks in Europe. The ECB said it had sold 37 tons of gold from its reserves over the past two months and had no plans for further sales in the current year of the central bank gold agreement.
European central banks pledged to cap their total sales at 2,500 tons in the 2004-2009 period, or 500 tons a year. The third year of their five-year agreement runs until Sept. 26.
. . . . the ECB's announcement had lifted sentiment, but other central banks were expected to continue selling gold from their reserves.
When gold is denominated in dollars it will be fairly dependent on the value of the dollar, just like oil.
. . . . "[Gold] will probably continue to be fairly dependent on the dollar," . . . .
"There are various different influences in either direction but at the moment none of them look to be heavily dominant."
On the demand side, for example:
Gold imports by Turkey, one of the world's top consumers of the metal, fell around 12 percent in the first five months of the year to 74 tons from a year earlier.
Don’t forget that is still subject to speculative moves.
. . . . short covering emerged after confirming solid buying interest below $650 this week.
Saturday, June 2, 2007
An Interesting Point on the GDP Numbers That Requires a Further Look
This tidbit, which came The Big Picture, requires some thought:
Here are the facts: The U.S. economy grew last quarter at the slowest pace in more than four years. The initial GDP report of 1.3% was actually more than double twhat the updated data showed, and was 25% below economists consensus. Housing, slack capex investment, declining consumer activity all are responsible for part of the slowdown.
Also included in the Commerce Department Data was that consumer spending was revised upward, to 4.4% from 3.8% (using quarter over quarter calcualtions). Note that if not for this revision, we would be talking about a sub 0% GDP. That would be the first quarter of 2 needed for the official measure of a recession.
How is it possible that consumer spending rose, when 80% of retailers have been missing numbers? Easy: Rising prices (not sales) in food and energy. You know, those elements the Fed hates to measure when it comes to inflation.
This tidbit, which came The Big Picture, requires some thought:
Here are the facts: The U.S. economy grew last quarter at the slowest pace in more than four years. The initial GDP report of 1.3% was actually more than double twhat the updated data showed, and was 25% below economists consensus. Housing, slack capex investment, declining consumer activity all are responsible for part of the slowdown.
Also included in the Commerce Department Data was that consumer spending was revised upward, to 4.4% from 3.8% (using quarter over quarter calcualtions). Note that if not for this revision, we would be talking about a sub 0% GDP. That would be the first quarter of 2 needed for the official measure of a recession.
How is it possible that consumer spending rose, when 80% of retailers have been missing numbers? Easy: Rising prices (not sales) in food and energy. You know, those elements the Fed hates to measure when it comes to inflation.
Friday, June 1, 2007
Not So Fast on the All the Positive News on Jobs for April
As a friend of mine from Kentucky used to say, “Its all accordin’ to the way you look at it”.
From CNNMoney.com:
The day's leading report was the Labor Department's job report, which showed employers added 157,000 jobs to payrolls in May, up from a revised 80,000 gain in April.
The unemployment rate stayed at 4.5 percent, in line with forecasts. While the number of those listed as unemployed crept up by 18,000, that was outpaced by the gain of those with jobs.
The report showed average hourly wages rose 6 cents, or 0.3 percent, to $17.30, also in line with forecasts. The average hourly wage is now up 3.9 percent from a year earlier, above the 2.6 percent gain in prices for the 12 months ending in April.
When I look at average hourly wages for production workers I follow the lead of Joe Ellis and look at real average hourly wages for production workers on a year over year (YOY) basis. From this perspective the growth in real average hourly wages has been declining since the peak in October 2006. The monthly growth rate starting with October has been 2.42%, 2.26%, 2.00%, 2.12%, 1.76%, 1.61%, and 1.46%. Of the 6 recessions since 1965 a decline in the real average hourly wages for production workers led the recession 5 times. Also of the 10 major bear markets since 1965 a decline in the real average hourly wages for production workers led the bear market 7 times. The real average hourly wages for production workers could be a good leading indicator.
Also in spite of all the “controversy” on whether or not the unemployment rate is useful in predicting recessions, the data clearly indicates that the unemployment rate is a lagging indicator.
As a friend of mine from Kentucky used to say, “Its all accordin’ to the way you look at it”.
From CNNMoney.com:
The day's leading report was the Labor Department's job report, which showed employers added 157,000 jobs to payrolls in May, up from a revised 80,000 gain in April.
The unemployment rate stayed at 4.5 percent, in line with forecasts. While the number of those listed as unemployed crept up by 18,000, that was outpaced by the gain of those with jobs.
The report showed average hourly wages rose 6 cents, or 0.3 percent, to $17.30, also in line with forecasts. The average hourly wage is now up 3.9 percent from a year earlier, above the 2.6 percent gain in prices for the 12 months ending in April.
When I look at average hourly wages for production workers I follow the lead of Joe Ellis and look at real average hourly wages for production workers on a year over year (YOY) basis. From this perspective the growth in real average hourly wages has been declining since the peak in October 2006. The monthly growth rate starting with October has been 2.42%, 2.26%, 2.00%, 2.12%, 1.76%, 1.61%, and 1.46%. Of the 6 recessions since 1965 a decline in the real average hourly wages for production workers led the recession 5 times. Also of the 10 major bear markets since 1965 a decline in the real average hourly wages for production workers led the bear market 7 times. The real average hourly wages for production workers could be a good leading indicator.
Also in spite of all the “controversy” on whether or not the unemployment rate is useful in predicting recessions, the data clearly indicates that the unemployment rate is a lagging indicator.
Valuations in the Stock Market and M&A Activity - A Few Comments
From Bloomberg:
Valuations seem more realistic then during the internet bubble:
The (Standard & Poor's) index's 500 members are 45 percent less expensive relative to historical profits than when the index last peaked, and 30 percent cheaper than when it fell to a decade low in October 2002. . . .
``The market is definitely much more fairly priced than it was back in 2000,'' said Michael Mullaney, who helps manage $10 billion at Fiduciary Trust Co. in Boston. ``It's on a much more solid fundamental footing . . . .
. . . . The flood of money into the U.S. stock market helped boost the average price-earnings multiple for S&P 500 shares to 32.8 in March 2000. That compares with a 25.7 average earnings multiple when the market fell to a low in October 2002 and an 18 multiple today.
For those of you that have forgotten (or never knew) how bad it was:
The S&P 500 plunged 49 percent between March 2000 and Oct. 9, 2002, dragged down by an 82 percent decline in computer- related shares. Those stocks had surged more than 12-fold during the 1990s and led the S&P 500's record-breaking rally.
Looks like the money moved overseas. Let's hear it for diversifying your risk.
Shares in Asia and so-called emerging markets have also outperformed the S&P 500 since 2000. The Morgan Stanley Capital International Asia-Pacific Index has jumped 26 percent since 2000 and is valued at 19.2 times historical profits. The MSCI Emerging Markets Index has soared 94 percent and trades for 15.2 times past earnings.
. . . . ``Lingering nervousness'' about the market's plunge from the 2000 peak spurred many investors to reduce their holdings of U.S. stocks even as the S&P 500 rallied, said Kevin Bannon . . . .
. . . . Total hedge fund assets ballooned to $1.6 trillion last quarter from $490.6 billion in 2000. Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.
M&A activity is still strong in the US:
Mergers and acquisitions totaled about $1.7 trillion in 2006, breaking a record set in 2000, according to data compiled by Bloomberg. Announced deals this year amount to more than $1.1 trillion, 61 percent ahead of last year's pace.
The surge in acquisitions was spurred in part by the widening gap between what companies yield in earnings and the cost of borrowing, said Sean Clark, chief investment officer at Clark Capital Management.
Estimated profit at companies in the S&P 500 represented a yield of 6.53 percent at the end of the first quarter, when 10- year U.S. Treasuries yielded 4.65 percent. The 1.88-percentage- point advantage was the biggest since at least 1986. . . . .
. . . . ``One reason why there's been so much M&A activity with the private equity firms is because valuations are so palatable right now,'' said Clark, who oversees about $1.2 billion in Philadelphia. ``The market is more reasonably priced, especially compared to bonds.''
From Bloomberg:
Valuations seem more realistic then during the internet bubble:
The (Standard & Poor's) index's 500 members are 45 percent less expensive relative to historical profits than when the index last peaked, and 30 percent cheaper than when it fell to a decade low in October 2002. . . .
``The market is definitely much more fairly priced than it was back in 2000,'' said Michael Mullaney, who helps manage $10 billion at Fiduciary Trust Co. in Boston. ``It's on a much more solid fundamental footing . . . .
. . . . The flood of money into the U.S. stock market helped boost the average price-earnings multiple for S&P 500 shares to 32.8 in March 2000. That compares with a 25.7 average earnings multiple when the market fell to a low in October 2002 and an 18 multiple today.
For those of you that have forgotten (or never knew) how bad it was:
The S&P 500 plunged 49 percent between March 2000 and Oct. 9, 2002, dragged down by an 82 percent decline in computer- related shares. Those stocks had surged more than 12-fold during the 1990s and led the S&P 500's record-breaking rally.
Looks like the money moved overseas. Let's hear it for diversifying your risk.
Shares in Asia and so-called emerging markets have also outperformed the S&P 500 since 2000. The Morgan Stanley Capital International Asia-Pacific Index has jumped 26 percent since 2000 and is valued at 19.2 times historical profits. The MSCI Emerging Markets Index has soared 94 percent and trades for 15.2 times past earnings.
. . . . ``Lingering nervousness'' about the market's plunge from the 2000 peak spurred many investors to reduce their holdings of U.S. stocks even as the S&P 500 rallied, said Kevin Bannon . . . .
. . . . Total hedge fund assets ballooned to $1.6 trillion last quarter from $490.6 billion in 2000. Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.
M&A activity is still strong in the US:
Mergers and acquisitions totaled about $1.7 trillion in 2006, breaking a record set in 2000, according to data compiled by Bloomberg. Announced deals this year amount to more than $1.1 trillion, 61 percent ahead of last year's pace.
The surge in acquisitions was spurred in part by the widening gap between what companies yield in earnings and the cost of borrowing, said Sean Clark, chief investment officer at Clark Capital Management.
Estimated profit at companies in the S&P 500 represented a yield of 6.53 percent at the end of the first quarter, when 10- year U.S. Treasuries yielded 4.65 percent. The 1.88-percentage- point advantage was the biggest since at least 1986. . . . .
. . . . ``One reason why there's been so much M&A activity with the private equity firms is because valuations are so palatable right now,'' said Clark, who oversees about $1.2 billion in Philadelphia. ``The market is more reasonably priced, especially compared to bonds.''
Ultimately, there is nothing like cheap money (a lot of liquidity in the credit markets) to drive the M&A business. It is always interesting when it is cheaper to buy the profit then to make it yourself. Let's face it you would do it as well if you were in charge.
Thursday, May 31, 2007
Q1 Real GDP Was Revised Downward by the US Department of Commerce
As anticipated real GDP was revised downward by the Bureau of Economic Analysis. The revision shows a significant drop from the first estimates released in late April. Using year over year (YOY) calculations the real GDP dropped from a 3.13% growth rate in Q4 2006 to 1.90% in Q1 2007. The segments causing the large drop were primarily changes in private inventories and residential construction. Although neither of these segments comprises a large proportion of GDP the declines relative to last year are quite large.
It should be noted that personal consumer expenditure (PCE) remained relatively strong with a YOY real growth rate of 3.50%.
As anticipated real GDP was revised downward by the Bureau of Economic Analysis. The revision shows a significant drop from the first estimates released in late April. Using year over year (YOY) calculations the real GDP dropped from a 3.13% growth rate in Q4 2006 to 1.90% in Q1 2007. The segments causing the large drop were primarily changes in private inventories and residential construction. Although neither of these segments comprises a large proportion of GDP the declines relative to last year are quite large.
It should be noted that personal consumer expenditure (PCE) remained relatively strong with a YOY real growth rate of 3.50%.
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