Is the Recession Over?

The world wants to know! But more importantly, we want to know what you think!

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With third quarter GDP reported +3.5%, can we finally write off "The Great Recession?" Some have asked (including "The Greek") if government stimulus simply produced synthetic growth in Q3. After all, Motor Vehicle Sales made a 1.66 percentage point impact to GDP, and "Cash for Clunkers" was partly behind that. Since the end of the clunkers program, auto sales have tanked back to their nothingness. Christina Romer, the Chair of the Council of Economic Advisors to the President, indicated during an interview Saturday that the clunkers program probably added 0.4% to GDP.

Meanwhile, the First-Time Homebuyer Tax Credit is slated to expire at the end of the year. More importanly, history tells us that after an initial growth spurt on inventory build post recession, the economy often backtracks into economic decline for a quarter. Given the degree of initial economic decline this time around, and the fact that unemployment is flirting with double-digits and under-employment is nearing 20%, maybe it is still premature to sound the all-clear sirens to spend!? Consumers are not spending by the way, so how can a consumer driven economy grow while folks are hiding in their basements? Is a jobless recovery possible? Here's your chance to tell the world what you think:

Is the Recession Over?

DEBATE TOPICS ARCHIVE

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GDP & Home Sales Confound

Hold Your Horses!

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GDP, Home Sales Confound

Investors were stumped this past week by mixed messages on the economic front. However, upon closer inspection, a common theme ran true. A duet of unsustainable economic drivers pushed both GDP and recent positive existing home sales data. The market seems to have caught on though, and investors are pulling on the reins. The Dow Jones Industrials (^DJI, NYSE: DIA, NYSE: DOG) pulled back by 2.6% on the week, while the S&P 500 Index (^GSPC, NYSE: SPY, NYSE: SDS) dropped 4%.

New Home Sales were reported down 3.6% in September, and measured well below economists' expectations. The report offered confounding information for those who have been following the housing market. The New Home Sales slump contrasted vividly against the prior week's report of strong Existing Home Sales (+9.4%) for the same month. So which data point is telling the truth? Is housing stabilizing or is it about to take another shot to the gut?

The clear difference between Existing and New Home Sales is of course foreclosures, or the absence of them within the New Home Market. Their existence in the much more significant pre-owned home market has pushed overall pricing downward, while also speeding the recent sales pace within the segment.

When reported, most interpreted the sharp increase in Existing Home Sales as the beneficiary of the expiring incentive provided by the First-Time Homebuyers Tax Credit. The theory goes that those who could afford a home purchase now, were rushing to enjoy the tax benefit before its end of year expiration, and we are sure this is the case to some degree. However, first time homebuyers are allowed to buy new homes just as soon as existing properties, so why the drop in new home sales then? Well, that question tells us something more.

Maybe government incentives are losing their punch. Perhaps we should face the fact that in the end a new normal is going to rule the day. Credit standards have tightened, and so the growing American home ownership rate, which characterized recent times, might stall for a long while to come. I do not believe a jobless recovery is possible when the jobless rate is as high as it is now. The unemployed and under-employed are certainly not qualifying for mortgages anyway. At the very least, any economic growth in the short-term should not be robust.

GDP Robust?

Most "gurus" would not venture out on a limb like that given Friday's GDP report that showed a return to economic growth in the third quarter (+3.5%), and a sharp bump up at that. But, while GDP looked good for Q3, "cash for clunkers" will not a recovery make, in my view. Motor Vehicle Output added 1.66 percentage points to GDP in Q3, and auto sales have evaporated since. Inventory build, a more important driver, was not significant in Q3; and that factor would be expected to provide a quarterly kicker, before a step back into recession (or rather negative change in GDP) for another quarter. Given consumer spending appears to be giving way to consumers hiding in their basements for the winter, economic recovery might lag a bit longer than the President might expect.

In conclusion, a boost in sales that is supported by foreclosure activity, and a drive in GDP that is supported by unsustainable stimulus, is not making me jump for joy given still deteriorating unemployment.

Note: Housing stocks took an especially big hit last week, with Toll Brothers (NYSE: TOL) dropping 9.7%; Hovnanian (NYSE: HOV) down 9.1%; Lennar (NYSE: LEN) -10.8%; D.R. Horton (NYSE: DHI) -11.8%; K.B. Homes (NYSE: KBH) -10.3%; and Beazer Homes (NYSE: BZH) off 13.1%.


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New & Existing Home Sales

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The Distinguishing Characteristic

New & Existing Home Sales

New Home Sales were reported down 3.6% in September, and measured well below economists' expectations. This unexpected disappointment sank stocks on October 28th, as one would expect it might. The Dow Jones Industrials Index slumped 1.21%, while the S&P 500 moved 1.95% lower on the day. Housing stocks took an especially hard hit, with Toll Brothers (NYSE: TOL) slipping 5.5%; Hovnanian (NYSE: HOV) down 5.4%; Comstock (Nasdaq: CHCI) off 9.5%; Pulte (NYSE: PHM) -3.8%; D.R. Horton (NYSE: DHI) -4.0%; Lennar (NYSE: LEN) -4.0%; and K.B. Homes (NYSE: KBH) off 2.2%.

Still, for those who noticed a conflict in the data and did not quite understand why it exists, the report offered confounding information. After all, the New Home Sales slump contrasted against last Friday's reported strong Existing Home Sales pace (+9.4%) for the same month. So which is it then? Which data point is telling the truth? Is housing stabilizing or is it about to take another shot to the gut?

The Difference

The clear difference between Existing and New Home Sales is of course foreclosures, or the absence of them within the New Home Market. Their existence in the pre-owned home market has impacted pricing (pushing prices downward), while also speeding the recent sales pace within the segment. When reported on Friday, most interpreted the sharp increase in Existing Home Sales as the beneficiary of the expiring incentive provided by the First-Time Homebuyers Tax Credit. The theory goes that those who could were rushing to enjoy the tax benefit before its end of year expiration, and we are sure this is the case to some degree. However, first time homebuyers are allowed to buy new homes just as soon as existing properties, so why the drop in new home sales then? Well, that question tells us something more.

"I just do not believe a jobless recovery is possible when the jobless rate is as high as it is now."

Maybe the impact provided by government incentives is losing its punch. Perhaps we should face the fact that a new normal is going to rule the day. Credit standards have tightened, and so the growing American home ownership rate, which characterized recent times, might stall for a long while to come. I do not believe a jobless recovery is possible when the jobless rate is as high as it is now. The unemployed and under-employed are certainly not qualifying for mortgages anyway. At the very least, any economic growth in the short-term should not be robust.

Most "gurus" would not venture out on a limb like that just ahead of a GDP report that is expected to show a return to economic growth, and a sharp bump up at that. But, while GDP will likely look good for Q3, "cash for clunkers" will not a recovery make beyond the quarter, in my view. Heck, I do not even expect to see much inventory build benefit yet, and that factor would be expected to provide a quarterly kicker, before a step back into recession (or rather negative change in GDP) for another quarter. Given consumer spending appears to be giving way to consumers hiding in their basements for the winter, economic recovery might lag a bit.

A Closer Look at the Report

While the annual pace of home sales slipped to 402,000 from a revised August rate of 417,000 (from 429K), the trend was not consistent across geographical regions. The Northeast held steady against August sales, and the Midwest experienced a 34% increase in the pace. The South (-10%) and West (-10.6%), where development is predominant and where prices ran most ramped, drove the monthly slowdown. Foreclosures are also most common in those same important regions, and so, they likely put distance in the variation between market segments as well.

Inventory of New Homes for sale stuck at 7.5 months in September, versus the same in August, but was much improved from the 10.9 months stock available last September and the peak inventory of 12.4 months seen in January. Still, inventory did not change this last month, which may be showing us an inflection point toward forward deterioration.

In conclusion, a boost in sales that is supported by foreclosure activity is akin to A-Rod's batting statistics, supported by performance enhancing drugs. Eventually the beneficial effects wear off, replaced by troublesome side effects and a good look at reality - drug addiction. So, as foreclosures thin out, we expect the Existing Home Sales pace will better match its New Home cousin. In the meantime, I would suggest trusting the new home sales figures a bit more. After all, they don't cheat.

Go Phillies!


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Business News Summary 10-27-09

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Business News Summary

The day's business news summary offered a mixed report, but the remnants of economic decimation threaten a second impact and controlled the day's trading. Most importantly on the day's business news, consumer sentiment disappeared in October. Needless to say, nascent stabilization of home pricing might be gone soon as well if demand dries up without a First-Time Homebuyer Tax Credit renewal. Thus, the day's good news was drowned out, and the S&P 500 Index and Nasdaq Composite fell while the Dow inched fractionally higher.

S&P Case Shiller Home Price Index

Last week's Existing Home Sales Report showed prices continued to decline on average across the country. The data out of the National Association of Realtors (NAR) showed the median price of a home fell 8.5% in September when compared against the prior year. The price of the average American home (including all types) fell to $174,900, influenced of course by foreclosures and reversion to non-criminal market drivers.

Unfortunately, S&P Case Shiller produces its data on a two month lag. Published today, it shows an improvement in the annual rate of home price decline in August. Shiller's 10-City and 20-City Composite Home Price Indices fell 10.6% and 11.3%, respectively, when matched against last year's data. When compared against July's price data, sales rose across composites and across 17 of 20 MSAs. Only Cleveland posted year-over-year price decline.

Judging by the NAR's up-to-date report, pricing should firm even more in Shiller's September data, which is due toward the end of NOVEMBER... However, Case Shiller rightly points out the pending expiration of the homebuyer tax credit, though we expect that to be renewed BECAUSE IT SIMPLY MAKES SENSE.

In case you were wondering, Shiller reports the peak-to-trough price decline in housing, as measured by the 10-City Composite, was 33.5%.

Consumer Confidence Sinks

The Conference Board reported a steep drop in Consumer Confidence in October. Deepening unemployment led the index to 47.7, down from 53.4 in September. American worry may be reaching a breakpoint at a critical time, just before holiday shopping season. Last year, spending was impacted by fear. This year, spending is threatened by tangible reason, empty pockets and prospects.

Investor Confidence Also Falls

State Street's (NYSE: STT) Investor Confidence Index fell 10 points in October. The index slipped to 108.4, from 118.1 in September. Valuation concern, as the economy runs through its own after-burn at the same time it runs down on fuel, has institutions perhaps reconsidering "jobless recovery" prospects.

Same-Store Sales

The International Council of Shopping Centers reported on weekly same-store sales this morning for the week ended October 24. While they might not be spending much, consumers still spent significantly more than they did last year at this time. Sales increased by 2.4% over the prior year period, which was consistent with last week's 2.8% increase. Sales only moved 0.1% over its sequential predecessor, versus a 0.2% rise the week before that.

Shortly this week, GDP is expected to be reported significantly improved in the third quarter. However, the boost may be unsustainable, as "cash for clunkers" is seen as the key driver. As we all know by now, auto sales have dropped off a cliff since the incentive program was allowed to expire. Thus the same may be in store for GDP, and more likely for stocks, especially given government debate over renewing the First-Time Homebuyer Tax Credit.

Corporate Earnings

Earnings reporters for the day included AGCO (Nasdaq: AGCO), Akzo Nobel (AKZOF.PK), Amkor Technology (Nasdaq: AMKR), Avery Dennison (NYSE: AVY), Baidu (Nasdaq: BIDU), Ballard Power (Nasdaq: BLDP), B.E. Aerospace (Nasdaq: BEAV), Boyd Gaming (NYSE: BYD), British Petroleum (NYSE: BP), Buffalo Wild Wings (Nasdaq: BWLD), Calamos Asset Management (Nasdaq: CLMS), Celanese (NYSE: CE), Ceradyne (Nasdaq: CRDN), Daimler (NYSE: DAI), DreamWorks (NYSE: DWA), E*TRADE Financial (Nasdaq: ETFC), Fiserv (Nasdaq: FISV), Honda Motor (NYSE: HMC), Hospira (NYSE: HSP), Johnson Controls (NYSE: JCI), L-3 Communications (NYSE: LLL), McKesson (NYSE: MCK), Norfolk Southern (NYSE: NSC), Panera Bread (Nasdaq: PNRA), Plantronics (NYSE: PLT), Pool Corp. (Nasdaq: POOL), RF Micro Devices (Nasdaq: RFMD), TD Ameritrade (Nasdaq: AMTD), Under Armour (NYSE: UA), Visa (NYSE: V) and others.


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Railroaded by Burlington Northern (NYSE: BNI)

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Railroaded by Burlington Northern (NYSE: BNI)

The Merriam-Webster Dictionary defines "railroad" as "to convict with undue haste and by means of false charges or insufficient evidence." The definition seems to fit snugly around what happened on Wall Street Friday, while also offering an interesting play on words. Based on popular press reports, investors convicted the market on the earnings data and forecast warnings of a couple key railroad companies. Specifically speaking, Friday's downturn was placed squarely on the engine car of Burlington Northern Sante Fe (NYSE: BNI).

Railroad companies and other shippers of goods, including truckers like J.B. Hunt Transport Services (Nasdaq: JBHT) and shipping companies like DryShips Inc. (Nasdaq: DRYS), are considered barometers of the economic lifecycle. After all, if manufacturers and distributors are moving product, it is going to be visible in the results of the shippers.

So when Burlington Northern reported third quarter results that fell short of analysts' consensus, a call to arms went up. Investors moved even more to the defensive when the popular press pointed out how well Burlington's bad news complemented the dastardly economic diagnosis out of its railroad peer Union Pacific (NYSE: UNP) from just one day earlier. The corporate leaders of both important transportation firms noted a common view for little improvement in the year ahead.

Burlington Northern's shares tanked 6.5% Friday, and while aided by Union Pacific's 5.5% decline, drove the DJ Transportation Average (^DJT) down 3.5% on the day. Lower moves for the Dow Jones Industrials and S&P 500 Index Friday erased a previously established gain for the week. The Dow slipped only fractionally through the period, while the higher-flying S&P 500 Index moved about 1% lower on the week.

Still, we are not so sure you can blame the railroads for the market's re-evaluation. After all, even an overwhelmingly stellar earnings season could not keep Wall Street on track Friday. Microsoft (Nasdaq: MSFT) and Amazon.com (Nasdaq: AMZN) both reported market-pleasing news last week, though Microsoft's lift came from its forward guidance. Amazon's estimate beating result simply aligned the tech giant with 81% of the S&P 500 companies that have bested estimates this quarter, according to Thomson Reuters. We should note that just less than 50% of traded firms have reported results thus far for the third quarter.

The overwhelmingly positive earnings trend, coupled with a less than surefooted recent market response, suggests to us that stocks may be fully valued currently. The S&P 500 Index is up 60% since the closing low set on March 9 of this year. Thus, stocks would need further economic reasoning to move higher in the months ahead. You would think the market might have found its economic reasoning in Friday's Existing Home Sales data though. Sales of pre-owned homes ran at an annual pace of 5.57 million in September. That otherwise dismal rate compared favorably against the economists' consensus for 5.35 million and against August's 5.10 million sales pace. However, the market found a flaw in those numbers, since first-time homebuyers are about to lose their special incentive to purchase when the relative federal tax credit expires at the end of the year. The rush to buy now is attributed to the processing time involved in buying a home and qualifying for the credit. We note, however, that many industry experts expect another extension of this important incentive for 2010.

Given Wall Street's modest reaction to good news at current valuation, and its tendency to run for cover at the sighting of a single cloud, market correction seems possible through the short-term. Unfortunately, a solid support for the market seems about to be pulled away. Paper gains and tax consequences are perhaps keeping institutions and retail investors alike from selling-off stocks. Most stock sales now would lock in taxable profits for the 2009 tax year. Thus, as the fiscal year for many a fund manager concludes, and a significant minority of them will before December, investors are likely to exchange winning holdings for cash or other securities. While that exchange could include perhaps shares in companies better positioned for this point in the economic cycle, short-term market consolidation would still seem likely from November through January.


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Housing 2009

Year of Transition

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Housing 2009

The huge glut of vacant, unsold builder inventory across the nation is almost completely gone. National builders and bank asset managers discounted the existing new homes until the specs were sold, often at huge losses. The land-bank accumulated by anxious builders for future development and sales is virtually gone. The greed driving more and more development gave way to fear of a spinning interest meter attached to the income-depleting vacant land. Unfortunately for most, it was 12 months too late.

The third and fourth quarters of 2008 devastated many local and national builders as the recession took hold and Wall Street disintegrated. Bear Stearns, then Merrill Lynch, and finally Lehman Brothers were effectively dissolved, causing panic as the stock market declined and the Federal Reserve Chairman and Secretary of the Treasury begged for funds. Thousands of speculators and home-buyers refused to close on new home purchases, and walked away from earnest money and deposits held by builders. The inventory of finished homes burned through fully phased construction loans, and that coupled with depleted and fearful banks unwilling to extend lifesaving lines of credit, were the death knell for under-capitalized and over-extended builders.

In many cases, lenders needed to repatriate the funds from individual new home closings, and demanded all the proceeds to clear the title and to reduce debt on other lines of credit. The fear of loss overcame greed for lucrative fees and interest charges; lenders protected their loans. Many builders were left with no proceeds to continue operating, and were left with no choice but to close the operation. Tradesman, suppliers, superintendents, sales and office staff, as well as owners and directors lost jobs and positions. The fear of expanding capital loss drove banks and lenders to acquire unsold inventory in an unfriendly environment. Primary lenders received partial re-payment, and those further downstream received nothing, resulting in many suppliers and sub-contractors facing financial difficulty. In true "trickle down" fashion, losses mounted.

"Greed gave way to fear!"

In an attempt to anticipate future growth and development, expensive land holdings were acquired during the greedy years of 2005-2007. Many national builders recognized the potential devastation inherent in their leveraged land banks and liquidated early into the down cycle. Some builders refused to sell their holdings, but eventually their lenders sold at huge losses, often for less than the development costs. As the de-leveraging reached crescendo, anyone over-encumbered was financially swept away. Greed gave way to fear!

The financial storm seems to be passing. Fears of a double dip or "W-shaped" recession are not materializing. There has been much damage done to the economy, and there is a huge clean up underway. Unemployment will be high for the next 12 months, but should start to decrease by the spring of 2010. The trillions of dollars earmarked for the recovery have not been fully deployed, and as the capital enters the economy, there should be a very noticeable improvement... possibly soon.

"...the supply of bank foreclosures should dwindle to a trickle, and the financial storm will have been reduced to showers from an epic hurricane."

The surviving home building companies have written down balance sheets and incurred huge losses. They are different organizations now than a mere 12 months ago. They will encounter far less competition going forward. They will have better sub-contractors because the inferior companies are no more, and the surviving builders will get better service and better pricing. New land acquisition will be at a much-reduced cost basis, and lower interest rates will reduce holding costs. Possibly within the next 12-18 months, the supply of bank foreclosures should dwindle to a trickle, and the financial storm will have been reduced to showers from an epic hurricane.

The natural growth of the US population will likely seed pent up demand for new homes; cautious and wiser builders may start to grow again and be profitable. The markets appear to be normalizing; the new business cycle is starting. The cycle will again swing from fear back to greed, but hopefully our experience with excess leverage will not be soon forgotten; nor the ugly face of fear!


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Earnings Reports and Dark Pools

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Earnings Reports & Dark Pools

Wednesday's business news is highlighted by earnings reports from eBay (Nasdaq: EBAY), Boeing (NYSE: BA), Wells Fargo (NYSE: WFC), U.S. Bancorp (NYSE: USB), VMware (NYSE: VMW), Amgen (Nasdaq: AMGN), Eli Lilly (NYSE: LLY), Kinder Morgan (NYSE: KMP, KMR), Northern Trust (Nasdaq: NTRS), P.F. Chang's (Nasdaq: PFCB), Penn National Gaming (Nasdaq: PENN) and Tractor Supply (Nasdaq: TSCO). Oil inventory data also seems sure to stir the market when released at 10:30 ET, and the Fed's Beige Book is due for release in the afternoon. You might also catch the SEC forum on "dark pools" if you can. We cover all these topics here.

Economic Data

Mortgage Activity

The Mortgage Bankers Association (MBA) made its regular reporting of weekly mortgage activity today. After adjusting for Columbus Day, the week ending October 16 proved a difficult one. As the average contracted rate on 30-year fixed rate mortgages inched higher to 5.07% from 5.02% (15-year mortgages to 4.51%, from 4.44%), mortgage activity dropped sharply. The Market Composite Index of mortgage activity volume declined 13.7% on a seasonally adjusted basis. The drop was driven by a steeper 16.8% week-to-week fall in the Refinance Index, and confirmed by the 7.6% fall in Purchase Activity. The decline marks the second straight, and as first time home buyer tax credits expire, without new legislation, housing seems likely to stumble near-term. However, we expect a renewal or extension of the incentive.

Oil Inventory Report

With the nearest WTI Crude futures trading up to approximately $78 now, the weekly oil inventory data gains in its influence of trading. The sensitivity of futures pricing to news of all sorts increases as trader interest intensifies. Trader interest intensifies as price volatility increases, and the viscous cycle is reborn.

Last week's Petroleum Status Report noted an increase in oil stocks of 0.4 million barrels. A sharp draw in fuel stocks combined with a weakening dollar last week to push oil higher. Total motor gasoline inventories fell by 5.2 million barrels in the week ending October 9. Distillate fuel inventories fell by 1.1 million barrels. However, Indian Summer is taking the Northeastern US by surprise this week, which should offset any further draws in heating oil and settle crude oil as well. The Northeast is the most important market in the States for heating oil, and so weather in New England plays a key role in price trend. The dollar is finding support in the words of market gurus, but we expect there's less weight in those words these days than in years past.

Beige Book

The Fed's Beige Book of regional economic indicators is due for afternoon release at 2 PM. This notation of regional conditions might offer insight into future Fed plans. Also on tap, several Fed speakers are due to take podiums around the country. Look for Fed Governor Tarullo to speak in Washington at 1 PM ET. Richmond's Jeffrey Lacker answers questions at 3:45 ET and Boston's Eric Rosengren will kick off the Fed's Cape Cod Economic Conference. The topic of discussion: Re-evaluating regulatory and monetary policy... Timely...

SEC Reviews Dark Pools

The Securities and Exchange Commission will not be surveying swimming pools around the country for chemical balance, as the terminology implies. Rather, they will be reviewing investment vehicles/methods/systems known as "dark pools," and discussing whether they need special checks and balances. This SEC "open meeting" will hear all sides of the argument, including Wall Street's renewed interest in being left alone.

"But how dark are dark pools?"

Dark Pools allow for anonymity of trading, keeping stocks in check as important players take significant interests in sometimes illiquid stocks incognito. But how dark are dark pools? If some traders have information that the rest of the market is not privy to, then we have a problem. Institutions now use dark pools to trade up to 15% of daily equity volume. It makes sense for institutions that do not want to drive the price of the stock they have interest in owning, thereby forcing a higher cost and sometimes negating opportunity. Still, things have to be kosher boys, and we're not sure you can be trusted anymore. Give us a few more months of gains though and we'll see what we can do...

Earnings Reports

Boeing is off slightly to start the day, as the plane maker posted a $1.6 billion loss on development charges related to its 787 and 747 models. The market was already well-aware of the troubles with the new jumbo jet, so the impact was minimized in today's trade. Still, Boeing (NYSE: BA) was forced to slash its full year forecast to $1.35 to $1.55, from a previous target of $4.70 to $5.00. Analysts were already looking for $1.53 on average, thus the modest decline. Still, with all the delays, one has to wonder if the "big plane projects" project might be better off scrapped. Maybe you just can't fly a plane that big safely. I know I would never board one after all this trouble at Boeing and Airbus.

Wells Fargo (NYSE: WFC) shares are up slightly to start the day, as its solid loan business offers traders safe-haven. Wells' results offered higher loan losses like its peers at Bank of America (NYSE: BAC), J.P. Morgan (NYSE: JPM) and Citigroup (NYSE: C), but it made so much money in interest income from its acquired Wachovia mortgage assets that it about covered charges for an increased level of losses. Without a significant volatile trading business to account for, Wells' income stream seems more predictable, and certainty is valuable these days.

Note though, that there are times when risk is in demand, and coming out of economic trough, that's usually the case. So, while Wells' may be the safest hold over the long-term, it may just as soon underperform its player peers in the near-term. We've already seen low quality stocks lead the way out of the hole though, and so stocks like Wells might be drawing some capital from the sidelines now.


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Same-Store Sales Figures Improving Naturally

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Today's regular reporting of the retail same-store sales figures showed they are improving naturally. Sales are of course coming up against seasonal influences and otherwise soft comparables, so improvement should be expected to continue in the months ahead, despite a still hobbled economic environment.

Same-Store Sales Figures

Weekly Same-Store Sales

The International Council of Shopping Centers (ICSC) reported weekly same-store sales earlier this morning. Growth, any growth, is good news, and the ICSC produced some more of it again this week. Of course, the comparable figures are only going to get easier through the beginning of next year, so expect to see better and better growth despite unhealthy unemployment levels. The panic that characterized last spring stopped all spending and investment at the time, including even from the pockets of the extremely wealthy (as exemplified by Saks (NYSE: SKS) and Tiffany (NYSE: TIF) sales trends). As the environment normalized, renewed confidence offered an initial boost to spending and investment as well.

In the week ended October 17, the ICSC noted sales improved 2.8% over last year's tally, but what's more impressive is that sales improved 0.2% over the previous week. Of course, as we enter the holiday shopping season, those special influences will lead even the sequential weekly growth figures higher.

Last week's reported data (Oct. 10) showed a 0.6% improvement over the week before it. Year-to-year sales improved in that period as well, rising 1.0%.

Retail Sales September

September's retail sales, reported last week, showed surprising resiliency. Sales rose 0.4%, even when excluding autos and gasoline. Gasoline prices had increased in September, providing a positive skew, and auto sales plummeted after the "cash for clunkers" purchase incentive was pulled. Including gasoline, retail sales improved 0.5%, beating the economists' consensus estimate for a 0.3% improvement.

Including auto sales, retail sales dropped like a rock, down 1.5%. Though that compared against economists' expectations for a steeper 2.1% decline. Clearly, autos drove the downhill ride, as those sales fell 10.4%. The monthly tallies for the individual automakers matched their proportional gains from the incentive program. Toyota Motors (NYSE: TM), which got some of the greatest boost from clunkers, saw a September over August sales drop-off of 44%. Honda Motors (NYSE: HMC) experienced a 52% slide, as its in-demand clunker sellers returned to earth. Nissan (Nasdaq: NSANY) sales fell 47%; Hyundai Motors sales sank 47%; General Motors (NYSE: GM) sales dropped 37%; Ford Motors (NYSE: F) fell 37%; Chrysler slipped 33%. For even further illustration of the "Cash for Clunkers" impact, take note of the soft sales changes at these unaffected firms: Mercedes-Benz -1%; Jaguar +1%; Maserati +2%; Porsche +4%; Bentley +30%.

A Retail Data Don't Miss!

The most important American retailer, Wal-Mart (NYSE: WMT), has its annual analyst and investor meeting this Thursday. Catch the call!


Please see our disclosures at the Wall Street Greek website and author bio pages found there.

Balloon Boy

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(Tickers: CSCO, TRV, C, GM, BAC, WDC, ARG, HRL, FSLR, DIA, SPY, QQQQ, NYX, DOG, SDS, QLD, XLF, IWM, TWM, IWD, SDK)

Balloon Boy

The entire nation followed the news story with great trepidation as it unfolded dramatically before our eyes. What harrowing heights he had risen to! With anxious hearts, we feared the little chap might crash down hard after climbing too high too fast. We are, of course, speaking of the Dow Jones Industrial Average, and its burst above the symbolic 10,000 mark. The Dow broke 10,000 this past week, revisiting the mark for the first time in over a year. Like an old pal last seen on October 3, 2008, we greeted our once earthbound friend with affection. Still, just as soon as we had soared to cloud nine with him, acrophobia set in.

Through the close of trading Friday, the Dow's heroic climb had taken the poor balloon boy 55% above the intraday low he marked on March 9. Year-to-date, the index is up 13.9%, which clearly illustrates the V-shaped market turn from those shaky days we survived in February and March. What is disturbing though is that despite lessons learned, the naive child has seemed to gain courage from his own momentum, rising 377 points the week before last. Yes, he's come quite far, but also quite fast. Therefore, we must ask, is his strange vessel sturdy enough to survive the harsh conditions of the upper atmosphere?

As we admired the great heights our little friend had so boldly reached, we could not help but feel terrified at how high he was, and without a safety net. Even when taking into account the favorable changes to the component companies within all the indexes, where the worst of losers have been replaced by up and comers, the economic environment does not seem to offer enough lift for the high flyer Dow. We expand for the war-beaten: the companies that had been most decimated by the economic catastrophe just endured, would have offered little earnings per share now to justify the index's valuation. Though, when replacing that troubled lot with the next generation of industrialists, we raise the denominator in the Price-to-Earnings equation. Thus, we reduce the P/E ratio and offer foundation for the numerator to grow (read make you money).

So by replacing the old broken down General Motors (NYSE: GM) and Citigroup (NYSE: C) in the Dow with new names like Cisco Systems (Nasdaq: CSCO) and Travelers (NYSE: TRV), the index gods fortified the Dow's wings. Of course, changes like these were more prominent in the more encompassing and actively managed S&P 500 Index, and so the earnings comparison between old and new components is much more prominent there. The Dow's valuation based on estimated earnings for calendar year 2009, as compiled by First Call/Thomson Financial, show a P/E ratio of approximately 16. That is not so expensive when compared against the index's value dating back to 2005, but there is of course a new factor in valuation these days... risk. And in the case of the S&P 500, we compare today's apples to yesterday's oranges.

Now given the fly boy's swift rise, many Wall Street guru types (Greek included) warned of impossible expectations heading into the "show me" third quarter earnings period. Thus, as the season wore through this past week, we were shown the door. Even while most stocks have beaten EPS estimates thus far in Q3, those that did not have been punished in trade, versus little gains posted for those companies that beat their numbers.

Banks, and others claiming to be stalwart institutions of consumer finance, offered disturbing bad debt data last week that also threatens the important holiday shopping season. While credit card charge-offs generally stabilized in September, rising delinquencies of 30 days or more portend deterioration in bad loan numbers in the months ahead. Bank of America (NYSE: BAC), the nation's largest lender that recently lost its chief to the guillotine, reported the most troubling data, with charge-offs representing 14.25% of its representative debt outstanding.

So even as the ballooning Dow rose above 10,000 on Wednesday, the wind was being sucked right out of it. The index teetered around the mark both Thursday and Friday, before closing the week at 9,995.91. With more earnings reports threatening to deflate our high-flying friend over the next few weeks, we suspect he's hoping to find a safe place to crash.


Please see our disclosures at the Wall Street Greek website and author bio pages found there.

Credit Card Defaults Are Rising

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(Tickers: COF, C, JPM, AXP, DFS, BAC, WFS, DIA, SPY, QQQQ, NYX, DOG, SDS, QLD, XLF, IWM, TWM, IWD, SDK)

Credit Card Defaults Are Rising

Capital One Financial (NYSE: COF) today reported its credit card defaults jumped in September. In its monthly reporting of charge-off and delinquency statistics to the SEC, Capital One showed a marked increase in the percentage of its bad loans. However, COF's data did not reflect the norm in one respect, as many other major lenders posted improved charge-offs. Still, an increasing level of delinquencies of 30 days or more characterized the broader credit card market in September. This, in turn, portends deterioration in future charge-off rates.


Capital One Financial

Month	Charge-Offs	Delinquencies
September	9.77%	5.38%
August	9.32%	5.09%
July	9.83%	4.83%

The three month trend shows a logical rise in payment delinquency of 30 days or more, but the rate jumped up significantly in September. This seems to portend that October's charge-offs should surpass July's mark of 9.83% of loans outstanding. In Capital One's case, charge-offs are already running away, and so the stock's retrenchment today has solid reasoning (-3.7% at hour of publishing).

It, of course, makes perfect sense that bad loan debt should increase while unemployment does. The unemployment rate touched 9.8% in September, and looks destined to peak somewhere near our prediction (way back in 2008) of 10%. Borderline borrowers who live paycheck to paycheck seem to be Capital One's target market. So when unemployment increases and those folks barely have money to pay the electric bill, guess who is going to take a hit...

We say blue-to-no collar "seems" to be Capital One's target market based on its aggressive and broad sweeping advertising campaigns. Its bad loan comparison to other lenders seems to confirm that as well. Where Capital One's troubles are deteriorating, others are seeing improvement. American Express (NYSE: AXP), for instance, today reported better charge-offs and stabilized delinquencies.

American Express

Month	Charge-Offs	Delinquencies
September	8.4%	4.1%
August	9.0%	4.1%
July	9.2%	4.2%

Discover Financial Services (NYSE: DFS) reported improved charge-offs, but also showed higher delinquencies of 30 days or more. This is a trend that accurately characterizes the broader credit card issuance industry.

Discover Financial

Month	Charge-Offs	Delinquencies
September	8.69%	5.57%
August	9.16%	5.35%

J.P. Morgan Chase (NYSE: JPM), the nation's largest credit card issuer, reported a $700 million third quarter loss in its credit card unit Wednesday. JPM noted things might get worse for the segment in its fourth quarter. J.P. Morgan wrote off 9.41% of its credit card loans in Q3, up from 8.97% in Q2. The nation's largest bank also had some bad news to note today. Bank of America (NYSE: BAC) reported a lower charge-off rate in September, but it still stood at 14.25% (14.54% in August), significantly higher than the names above.

In short, while charge-offs stabilized or improved at many financial services firms in September, the general trend of rising delinquencies coincides with still increasing unemployment, and portends higher charge-offs in the next few months.

"The bump up in charge-offs in July may have come due to lenders' forcing borrowers to accept higher annual percentage rates or to close accounts."

The bump up in charge-offs in July may have come due to lenders' forcing borrowers to accept higher annual percentage rates or to close accounts. This was inspired by the time cushion between the passing of credit card reform legislation and its effective date. Lenders are doing all they can to position themselves best for the new playing field. Still, no matter the case, a troubling trend is clearly getting worse. Defaults and charge-offs will continue higher in coming months, and with many borrowers forced out, and credit more difficult to attain, consumer spending should also sink further. Happy holidays to ya!


Please see our disclosures at the Wall Street Greek website and author bio pages found there.

Foreclosure Overhang

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Foreclosure Overhang

Foreclosures will be affecting the housing industry through the end of 2010. The rate at which the mortgages in America become foreclosures is at a record; reported to be approximately 4.35% as of the 2nd quarter of 2009. This rate has increased from 3.85%, reported in the 1st Quarter of 2009. The historical foreclosure rate just 10 years ago hovered around 1% for all mortgages. With the advent of sub-prime loans, option-arms, and the worst recession since the Great Depression, the rate was destined to go higher.

The question most asked now is: how many foreclosures will need to be absorbed before recovery?

Many factors affect the reason a property goes into foreclosure. However, the two main ingredients have been the steady and relentless decline in home prices and high unemployment. In recent days, almost all regions of the US are reporting that home prices have turned to the upside. Due to the nature of these indexes, the data is always slightly behind "real-time" data, and are telling us what took place a few months ago.

The Real Estate Market is getting better; inventory is being cleared and prices continue to rise. Home prices should have bottomed and a slow and steady rise should be underway. Many economists and analysts, myself included, believe the recession has ended; and as the economy improves, employment will improve. A case can be made for a surprising recovery based on the current improving conditions, with trillions of dollars poised to give the economy a push. These are mitigating factors that in my opinion should bring down the foreclosure rate, which has probably peaked. If the rate would hold steady, how many foreclosures are left?

The US Bureau of Statistics claims 48,394,000 homes had mortgages in 2005. New construction added 1,051,000 homes in 2006, 776,000 new homes in 2007, and 485,000 in 2008; most would have been financed. Mortgage rates have been good, and would have been an incentive to add a mortgage to an unencumbered property; but most free and clear properties seem to stay free and clear. Another additional 2 million would seem reasonable, if not perhaps overly generous. No one has exact data as it is always changing, but approximately 52,700,000 homes in the US have mortgages. Simple math would state there is a potential of 2,292,000 foreclosures in the next year. This is 50% more than the 1.5 million foreclosures estimated prior to the triggering event of the Lehman Brothers Bankruptcy, which seems to have accelerated the decline. Many believe this total will not be reached.

Four states are driving the delinquency and foreclosures!

Four States are driving the delinquency and foreclosures. Florida, Nevada, Arizona, and California account for 46% of ALL foreclosures. The housing markets in these troubled MSAs are improving. Furthermore, the US Government is developing a policy to prevent foreclosures and reduce lender losses through loan mitigation. Another factor to consider is the increasing use of "Short Sales," whereby a seller can remain in their home while it is being sold, rather than bearing the painful and EXPENSIVE process of foreclosure. This procedure to sell and accept a lower mortgage payoff is being streamlined and becoming much more effective. Once again, the use of loan mitigation and "Short Sales" will save enormous amounts of capital and vastly reduce the collateral damage of vacant foreclosed homes scattered throughout neighborhoods, and thus allow for a return to historic prices.

In conclusion, as the economy rebounds, prices of assets, particularly homes, will start to rise. Employment is a lagging factor and will not mitigate until well into 2010. As trillions of dollars pour into an economy that has already begun a new business cycle, surprises to the upside are very possible. As the economic stress on individuals abates, the foreclosure rate and the delinquency rate should drop significantly. By the end of 2010, the Housing Crisis will be winding down and the foreclosure rate should return closer to its historic rate of approximately 1%. Just a 1% decrease in the foreclosure rate will reduce the total homes foreclosed by 500,000. As new construction has been severely constrained, the additional foreclosures will not increase the supply of properties; the continuing absorption of excess housing which has been underway for the past 12 months will not be impeded. As the US Demographics imply, through population growth, there still exists a scenario of a future housing shortage. Beyond 2010, there is a potential for rising inflation, and housing would hugely benefit.


Please see our disclosures at the Wall Street Greek website and author bio pages found there.

Bear Market Rally Peak - Are We There Yet?

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Bear Market Rally Peak

Are we there yet?

As the market continues to rise on very light volume and suspect fundamentals, readers may ask in reference to the potential top for the current bear market rally: "Are we there yet?" So far, there seems to be no resounding answer. But with the near limitless supply of money from the FED at 0% interest, market-manipulating computer algorithms at GS (Government-Sanctioned Goldman Sachs - NYSE: GS), and an administration that openly promotes stocks, many are beginning to wonder whether the major indices will ever drop more than a few percent!

Perhaps as earnings season comes into full swing, with concomitant forward guidance, we may gain some clarity going into the fourth quarter. But even this may not help as we have yet to see any of the transparency from banks or from the FED, despite promises from the Obama administration. And while commercial real estate losses threaten to create another asset collapse, banks continue to hide these losses on their balance sheet with their mark-to-magic accounting. Meanwhile, back in the real Midwest economy, green shoots seem to be withering in the unseasonal cold.

In light of all this uncertainty surrounding market fundamentals, we continue with the article series we commenced in July, and examine various approaches to technical analysis in search for an answer. This article will look at where we stand with a closer review of the current Elliot Wave count.

From a previous overview of Elliot Wave Analysis, we know we are in the final stages of Wave (B), which constitutes the bear market rally that began in March. As a counter-trend rally, wave (B) up is divided into three sub-waves (see A-B-C in the figure below), where we are also in the final sub-wave C of three based on Elliot Wave rules for pattern identification.

Elliot Wave Count

Thanks to Stock Charts at StockCharts.com for the chart above, a wonderful resource for stock charting.

This final sub-wave can be even further subdivided into 5 smaller waves (a-b-c-d-e) which show up more clearly on intra-day charts. Sub-wave "a" began on August 17th and initiated the rise through 1047 that we anticipated on September 8th. We are presently in the final wave "e" of that subdivision.

While subsequent waves b through e have penetrated resistance levels at 1054 and 1062, the index has yet to reach the widely-expected 1100 mark, and looks to be running out of steam on ever-decreasing up volume. Couple the low buying pressure with the high volume distribution days that ushered in the month of October, and it is easy to see why wave "e" looks to be terminal.

We should note that the Elliot Wave Analysis method examines many more factors than the wave count illustrated above when identifying market tops and bottoms. Readers are highly encouraged to investigate the complete methodology at the Elliot Wave International website.

From a classic technical charting point of view, we find that this final move up is also forming a classic "bearish rising wedge"pattern. The rising wedge is very likely a terminal pattern for this bear market rally, and yields an initial correction price target of around 992.

Lastly, we should point out that this rally continues to defy gravity and has already dumbfounded technical traders and fundamental analysts alike. One has to wonder whether it is still a free market or whether stock prices have taken on so much political importance that we should all tap into every available line of credit and join Wall Street in the creation of yet another bubble.

My guess is that our government will be faced with the choice of allowing one of two bubbles to deflate: Equities or Bonds. In light of the current economic reality, which is seen to require an easy monetary policy for many, many years to come, my guess is that the bond bubble will continue to grow in record proportion while equities will be range-bound at best for some time to come.

In light of this, readers are again encouraged to look at the upside reward in comparison to the downside risk. While we may reach yet another high on major indices (e.g. 10,000 on the DOW), the potential for a more significant increase, at least without some interim correction coupled with signs of real economic growth, seems rather limited. More importantly, the time to make related decisions seems to be growing short, at least from the perspectives offered above.


Please see our disclosures at the Wall Street Greek website and author bio pages found there.

Large Vessel Markets Recover

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MIRAL SHIPPING MARKET REPORT

Authored October 8, 2009

(Tickers: BC, MPX, OSG, ISH, TOPS, SEA, EGLE, GNK, BDI, DSX, NAT, SINO, PRGN, XSEAX, DIA, SPY, QQQQ, NYX, DOG, SDS, QLD, XLF, IWM, TWM, IWD, SDK)

Large Vessel Markets Recover

Due to a month long trip to Europe and the Middle East, I have not been able to write my report recently. However, the trip provided me the opportunity to reflect on the momentous changes that have occurred in the last year, and consider various views and opinions from a different part of the world on the state of the global economy and the future of dry bulk shipping.

As we stand now in early October, 2009, those in dry bulk shipping can look back on a year that has seen rates and vessel values drop significantly from record levels achieved last year. Though the drop in rates was considerable, the dry bulk sector has still fared better than other areas of shipping including most tankers and container vessels. Most owners can operate their ships well above their operating costs, whereas owners of other vessel types have seen freight rates at or below OPEX during several months of this year.

The BRIC countries, led by China, have experienced a strong economic recovery, which has supported the dry bulk sector more than most could have thought possible. Many reputable economists believe that China and the rest of Asia plus Brazil, and possibly Russia, will continue to lead global growth while the U.S.A. and Europe will grow only slowly at best. There is evidence that the credit crisis and global recession has started China on the path of rebalancing their economy by stimulating domestic consumption and continuing to rapidly develop their infrastructure. Trade with other Asian countries is also increasing.

All this is positive for the demand side of the dry bulk sector. China will continue to increase production, and of course, its inputs such as iron ore. The supply side, however, is problematic with a still huge order-book of new dry bulk vessels, of which, a large percentage is over 40,000 tons dead weight, particularly Capesize. It is hard to say at this moment whether the demand from the developing countries will absorb so much tonnage into the large vessel markets. From here, we have to look at shorter-term trends.

Last week, the Capesize market had a strong recovery after bottoming out approximately two weeks ago. The index stands today at 3990, and has room to move higher by 15 – 20 percent or so before it should hit some resistance. The Panamax market, which lagged, has moved up sharply today and will most likely break nearby resistance and also potentially move higher by another 15% or so. The Baltic Supramax and Handysize sectors have been softening the last few days, but their day rates did not fall during August - September as Capesize and Panamax tonnage have. I expect the recent firming in dry bulk freight rates to continue over the next month or two, as the North American grain export season is in full swing; thermal coal shipments increase in advance of winter in the Northern Hemisphere; and the iron ore trade stays firm.


Please see our disclosures at the Wall Street Greek website and author bio pages found there.