Hurricane Sandy Could Catalyze Recession

Widespread destruction and disruption is expected across the most widely populated part of the nation, the Northeastern United States, starting this weekend. Hurricane Sandy will meet a deep arctic low cold front at the Jet Stream to perhaps generate the storm of the century for the Northeast Region of the United States. Imagine “The Perfect Storm” but over land instead of the Atlantic Ocean. Power outages are likely, tree falls should be commonplace, flooding widespread and high winds will strike areas unaccustomed to it, perhaps resulting in severe structural damage. A four to eight foot storm surge is expected as a full moon lifts tides as well. A foot of rain may fall in some areas, as high winds batter the East Coast.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Hurricane Sandy Recession

Northeastern U.S. residents will not likely leave home for a day or two or more depending on how well power holds up, and so discretionary spending at Macy’s (NYSE: M), Darden Restaurants (NYSE: DRI) and the like will be impacted. Though fast food providers like McDonald’s (NYSE: MCD) and Yum! Brands (NYSE: YUM) and supply stores like Wal-Mart (NYSE: WMT), Costco (Nasdaq: COST) and Sears (Nasdaq: SHLD) perhaps benefit ahead of the battle. Overall, while there will be a surge of spending for emergency items and groceries, such non-discretionary spending should be followed by a lull in shopping for similar items in the weeks that follow, leveling out the impact to the quarter.

Public sector spending will fill the pockets of emergency workers putting in overtime hours and fill up the tanks of fuel and equipment suppliers. Construction materials suppliers should benefit as well, including the likes of retailers Home Depot (NYSE: HD) and Lowes (NYSE: LOW), and other construction materials companies like USG (NYSE: USG) and Builders FirstSource (Nasdaq: BLDR).

Still, business will come to a halt generally for a day to a week or more across a vast and important region of the U.S. That means fewer hours billed by lawyers, less frozen yogurts sold at the local shop, land bound fishermen with empty nets, unfilled barbershop chairs, and increased absenteeism across all business sectors. Thus, the net result should be a significant negative impact to fourth quarter GDP, and perhaps a catalyst for recession, given the vulnerable state of the economy. The broader markets have not had an opportunity to price in this quickly developing event, and so the SPDR S&P 500 ETF (NYSE: SPY) could take a hit next week as well, which strikes at the pockets of all Americans. Yes, Hurricane Sandy, potentially the storm of the century for the Northeast, could be a catalyst for recession.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Merkel Hypocrite!

Germany’s Finance Ministry warned in a monthly report Monday that Europe’s largest economy would mark a significant slowdown in the fourth quarter. In an attempt to mitigate the economic issue, German Chancellor Angela Merkel last week suggested opposing German political party members stop blocking her proposed tax cuts. Merkel indicated that the German economy needed economic stimulus, and that tax cuts should help domestic economic growth by giving her countrymen more money to spend. Likewise, she is promoting pension contribution cuts to help German prosperity, and advising companies to give more lucrative pay increases to their employees. Sounds sensible no?

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Now imagine the perspective of a Southern European onlooker. The hypocritical divergence of the two directives being issued to the various groups must fill Greeks with disgust. European leaders, at the nudging of Germany, have pushed the complete opposite strategy for Greek and Spanish prosperity than those being promoted in Germany today. So which is the true path to prosperity, the one being promoted by the Germans for the Germans or the one being promoted by the Germans for the Greeks?

Obviously, the issue is more complex than that, given the debt and management problems of the Greeks versus the smooth operating German economic machine. The Greeks must adhere to the prescription of their emergency creditors in order to receive desperately needed funds. Still, why does the economic prescription contrast so sharply to the pill being recommended by Merkel for the Germans? It is after all for the same ultimate purpose, the betterment of the economy, and in Greece’s situation, the ensuring of debt repayment.

Perhaps the Europeans have it all wrong with regard to Greece, and instead of ensuring the repayment of their loans, are instead burying their money into a deep depression with the ruins of Ancient Athens. That’s what the esteemed student of the Great Depression now running the American Federal Reserve might suggest, given Ben Bernanke’s comments to U.S. legislators over the years. He would tell you that it was precisely the mistimed budget mindedness of American leaders that led our economy into the Great Depression. It turned an average recession into a once in a generation economic struggle.

A few voices, including from yours truly, have from the beginning warned that growth spurring initiatives for Southern Europe should precede and outweigh a graduated austerity program, and that Greece’s repayment program should have extended terms. We have been happy to see Europe more recently acknowledging the burdensome drag of its initial repayment demands.

Still, while Greece’s public entities reduce workforce, draw back pension benefits and raise taxes, they are constraining the Greek economy. This is something that the Germans can no longer dispute, given their own domestic policy push, though to be fair, Merkel’s opponents are calling her demands irresponsible. The repercussions of the actions in Greece are pushing away private industry, illustrated recently by the move of Coca-Cola Hellenic (NYSE: CCH), which is relocating its headquarters to Switzerland and relisting its shares in London. Merkel does not want to trigger that same sort of flight in Germany, but is asking for companies that face no foreign competition to pay an alternative energy surcharge from which they have long been exempted.

What drives German stocks, like those found in the DAX and the iShares MSCI Germany Index (NYSE: EWG), likewise drives Greek stocks, like those found in the Global X FTSE Greece 20 ETF (NYSE: GREK). For that matter, it’s what drives the iShares S&P Europe 350 (NYSE: IEV) and the SPDR S&P 500 (NYSE: SPY)! The rules of economic prosperity are indifferent to the language spoken or culture found within a given country; they are universal. Thus, the economic policy prescribed to Greece and Spain should be the same as that being recommended for Germany, or at least should stress growth over austerity.

It is ignorant closed-mindedness and ethnocentricity which has kept the groups of people within the euro-zone from fairly and effectively resolving their crisis together. The problem is most clear when the leaders of Europe go home to seek approval of international plans. We understand the cost of this issue through the observance of the most effective action taken to-date, which in my opinion was the brave plan of the Mario Draghi led European Central Bank (ECB) to support sovereign debt in a sterilized manner. When Europe can accept its unity on the streets of Brussels, Paris, Berlin, Athens and Madrid, then it will have the resources and the will to fulfill its brave dream. On that day, it can likewise stop lying to the Greeks and the Spaniards about what’s best today for their economies.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Jobs Report Celebration is Ill-Advised

The stock market is celebrating the perceived strong jobs report today, but I see the rally premature and ill-advised. The gains of stocks broadly, are therefore on poor footing and should retrace after retrospection.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Index ETF	Friday Morning Change
SPDR S&P 500 (NYSE: SPY)	+0.7%
SPDR Dow Jones (NYSE: DIA)	+0.6%
PowerShares QQQ (Nasdaq: QQQ)	+0.6%
iShares Russell 2000 (NYSE: IWM)	+1.1%
Wilshire 5000 (Nasdaq: WINDX)	+0.7%

Stocks gapped open higher, as indicated by the chart of the SPDR S&P 500 (NYSE: SPY) here, on the 8:30 AM EDT release of the monthly Employment Situation Report.


Chart by Yahoo Finance

The market excitement is because if employment is truly improved by three-tenths of a percent to 7.8%, then the economy is on a better track. If more people are employed, consumer spending should improve and America’s companies should see better earnings per share results.

The gain to the bottom line of the P/E equation would not be the only improvement. Confidence would rise in our economy and on our outlook, and so the value given to stocks would expand on expectations of better earnings. Thus, the numerator of the P/E valuation metric would also improve.

Alas, the problem is that the gains in the jobs report are suspect, at least in my view. First of all, the nonfarm payroll gain of 114K for September is nothing to write home about. Furthermore, in an earlier article, I noted that the under-employment rate was unchanged in September, even as unemployment improved. Moreover, its absolute level of 14.7% is still troubling. And the gain in the unemployment rate came on higher part-time employment, not full-time, which would be worth celebrating. Thus, any spending gains would be tempered, since part-time workers make less than full-time employees do generally.

A hungry market celebrated this data for two reasons. First and foremost, at least it didn’t show deterioration. Unfortunately, on a fractional basis, the under-employment rate actually deteriorated slightly. Still, with the focus of the market and the nation on the headline figure, an improvement is at least better than deterioration, even given its faults. Second, the report shows improvement on some basis, because one might say, at least more people are working, whether it be part-time or full-time. Unfortunately, on net, the change in employment to part-time also drives lower overall income produced for the economy.

Stocks of cyclical companies like financials and others are higher on the day as well. These stocks have beta ratios above 1.0, indicating their sensitivity to the broader economy and market. They therefore exaggerate the moves of the market, and they are doing so today on this report.

Cyclical Companies	Morning Change
Citigroup (NYSE: C)	+1.0%
Boeing (NYSE: BA)	+1.4%
General Motors (NYSE: GM)	+2.7%
General Electric (NYSE: GE)	+0.9%

Unfortunately, given my view that the gains are suspect and on poor footing, and with a fiscal cliff, slowing global economies, and Iran confrontation ahead of us, I recommend investors sell on rallies at least through October and potentially through the close of the year, depending on the election. Look for a follow up report on my column feed regarding how I believe politics could drive a rally post election or leave stocks in the lurch.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Record Low Mortgage Rates Bear Fruit

The latest mortgage activity report published by the Mortgage Bankers Association (MBA) this morning shows record low mortgage rates are making an impact. The MBA’s data indicates average contracted rates dropped across varying types of mortgage loans last week, driving a surge in refinance activity. Such a change, while occurring simultaneously with housing price rise, offers to lower the cost of housing on net for a great many people. The benefits of lowering the cost of living for Americans should theoretically include increased consumption and GDP growth. So hold the presses, this is really good news.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

The MBA reported that its Market Composite Index increased 16.6% on a seasonally adjusted basis in the week ending September 28. Despite being adjusted, we must note that such adjustment could be imperfect and may matter for the religious holiday filled month of September. That said, my feeling is that it did not likely make a significant impact. The unadjusted rate of increase was marked at 17% against the prior week.

Mortgage rates dropped by significant degree across the spectrum of mortgage loan types. This spurred the MBA’s Refinance Index higher by 20% to its highest level since April of 2009. It also drove the percentage of refinance activity up as a portion of total mortgage loan applications. Refinances made up 83% of all applications in the period, up from 81% the week before.

Loan Type	Average Rate	Change
30-Year Fixed Conforming	3.53%	-0.1%
30-Year Fixed Jumbo	3.82%	-0.05%
30-Year Fixed FHA Sponsored	3.37%	-0.07%
15-Year Fixed	2.9%	-0.08%
5/1 ARMS	2.59%	-0.02%

This is one of few times I believe this report should be supporting stocks broadly, but because of duration of the downturn, it is likely being mostly overlooked. Besides, as I’ve recently discussed, there is much weighing against stocks more broadly today. The SPDR S&P 500 (NYSE: SPY) was up by a half point at midday, but looks to be getting lift since the 10:00 AM reporting of the better than expected ISM Nonmanufacturing Index more so than this data. Still, the shares of major mortgage lenders including Bank of America (NYSE: BAC), Citigroup (NYSE: C), J.P. Morgan Chase (NYSE: JPM) and PHH Corp. (NYSE: PHH) were posting outsized gains of 0.8% to 2.5% through midday, so it appears the news was noticed by smart money.

Mortgage applications filed for home purchases also increased in the reported period. Both the MBA’s seasonally adjusted and the unadjusted Purchase Index increased 4% against the prior week. The index was also higher by 11% over the prior year period. Short-term changes in rates will have a less important impact on purchase activity, due to the relative illiquidity of the housing market and the time involved for the entire process, including decision making. That said, housing supply shortages are being reported in some regions now, and the surge of the publicly traded homebuilders has been well-noted. Lower rates can only help.

In the recent past, decreases in mortgage rates have had a subdued impact on housing and the cost of living, because a great many Americans purchased homes at the height of the housing boom from 2005 through 2007, and remain underwater today. However, if home prices continue to rise, an increasing number of homeowners will get their heads above water. This group of homeowners would benefit substantially from today’s record low rates, because the change incurred in their cost of homeownership and living could be substantial. Such change should also benefit the economy, since it would free up capital for consumption, investment and savings. Thus, it appears the Federal Reserve’s actions might finally bear significant fruit.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

The Show Me Stock Market

The market is fluctuating even after the Fed’s QE Infinity program and the ECB’s bond buying plan, but not because those efforts can’t help. It’s because the hope for those measures has already been priced into the market. Stock market gains preceded the news and ran through the announcements, leaving us today with a “show me market.” Investors now want to see the impact of the measures they so surely swooned.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

The problem is that as American companies report earnings this quarter, the news is not likely to be great. Analyst expectations are for total corporate earnings to decline in Q3, marking the first such drop since The Great Recession. Specifically, expectations are for a 3.2% year-to-year EPS contraction for the third quarter. So the news for corporate institutions is not likely to be good, and yet the SPDR S&P 500 ETF (NYSE: SPY) is sporting a third quarter appreciation of 6.3%, after adjustment for dividends and splits. The Dow Jones Industrial Average ETF (NYSE: DIA) was up 5.0% in Q3, and the PowerShares QQQ (Nasdaq: QQQ) gained 7.2%. Those paper profits will now be tested, and so stocks must show the market they’re worth their while.

Meanwhile, just when we thought Europe was resolved, the people of Greece and Spain took to the streets and reminded financial markets of their pains. With fear that social unrest could still undo governments supportive of austerity, bond yields rose against the tide of potential ECB purchases. Then came evidence of further economic damage caused by that same harsh austerity served up to the Greeks, as their GDP contraction was reported worse than expected. Thus, the iShares S&P Europe 350 (NYSE: IEV) made a sharp reversal.

The market, she is an impatient dame, and she is not happy with what she is seeing in the traditional earnings warning season. Yesterday it was Caterpillar (NYSE: CAT), and today it was Mosaic (NYSE: MOS) and Express (NYSE: EXPR) offering up bad news. Add to this, an ominous fiscal cliff here at home, costs mounting for Germany to bear in Europe, incredible acts of class warfare waged in France, clouds over Iran and an unstable geopolitical scene generally, and you have the makings of a bad fourth quarter. The market will not move higher now unless and until she has reason to.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Healthy Skepticism of ISM Manufacturing Strength

Monday’s reported improvement in the ISM Manufacturing Index confounded the popular wisdom of the day, which sees manufacturing on the downslide. The critically important data point offered a message that seemed to counter many other manufacturing and related data points, including last week’s Durable Goods Orders data. It also countered the negative tone still emanating from the Philadelphia and New York Fed regions, but truth be told, data from Chicago and other Fed regions had hinted at stabilization. Still, I think there may be a fly in the ointment not yet noticed, and that is the impact of higher pricing on the overall PMI and on New Orders. Because the index is created through survey of purchasing managers, who are bottom line oriented, I believe higher prices paid are being passed through to end product and presenting an improved image in the clouded minds of managers.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

It’s also important for investors to remember that this is one month’s data which counters the trend of the prior three months; it also reflects gains over those downtrodden periods (softened base). Finally, the global macroeconomic environment is still slowing in Asia and deteriorating further in Europe. With today’s interdependence of economies, it would be naïve to assume foreign havoc cannot do more damage here at home, where we remain underemployed and where price matters most among consumer decision factors.

My perspective of the current state of the economy is one of issue, and of higher forward concern. Make no mistake about it, the fiscal cliff issue and election uncertainty will put a hold on business activity over the next month or three. Also, war with Iran is highly likely over the next 1 to 6 months, in my view, and should be factored into economic and investment scenarios. I believe it is negligent to completely ignore the issue at this point.

The Manufacturing ISM Report on Business showed its Purchasing Managers Index improved by 1.9 points, enough to take it above 50.0, to a mark of 51.5. The news had the SDPR S&P 500 (NYSE: SPY) up more than half of a percentage point through midday. The SDPR Dow Jones Industrial Average (NYSE: DIA), whose components would seem to be better represented by this data, was up nearly a full point. The Industrial Select Sector SPDR (NYSE: XLI), which is definitely represented by the data, was up to a lesser extent, by 0.6%, which I believe is quite telling. See today’s market report for more on this.

The ISM data showed its New Orders Index, a forward looking measure of interest, moved up by a sharp 5.2 points to 52.3, and into expansionary territory. The Production Index improved as well, rising 2.3 points, though it remained in contraction territory at 49.5. We might say the production index is less reliant on prices, where the orders index can be measured by dollars or units, but is likely thought of in dollar terms by managers. Purchasing managers indicated a renewed propensity to hire, with the Employment Index up 3.1 points to 54.7.

Despite the above listed improvements, there was more than enough reason provided by the report to temper enthusiasm on manufacturing and the economy. Leaving the most important factor for last, we noted Customer Inventories only improved slightly by a half point, and stuck in territory reflecting contraction, at 49.5. Also, Order Backlogs were deeply mired in the mud at 44.0 (+1.5). The Export environment remained difficult as the index improved by 1.5 points to just 48.5. Imports edged up only 0.5 points to a still insufficient 49.5 mark.

Finally, a key factor that could have played an important role in the rise in both new orders and in the overall PMI, may reveal a misleading index. A great many more purchasing managers reported increases in prices paid in September. The Prices Index rose by 4 points to 58.0, which indicates a faster rate of price increase in September than in August. If you survey industrial commodities, you find that some industrial metals declined in price, which reflects poorly for goods demand. Meanwhile, prices for important food components, gasoline, and packaging materials rose, which weigh on manufacturers, increased. Of the 18 manufacturing industries, 10 reported paying increased prices during the month of September in the following order: Food, Beverage & Tobacco Products; Plastics & Rubber Products; Printing & Related Support Activities; Wood Products; Chemical Products; Primary Metals; Furniture & Related Products; Machinery; Fabricated Metal Products; and Miscellaneous Manufacturing.

The indexes are based on survey, and purchasing managers are bottom line driven. They want to meet budgets, and they are of course acutely aware of sales activity in dollar terms. In my view, the increase in prices paid is probably being passed through to some extent, and is directly inflating the new orders and overall PMI data found here. Also, I believe they are indirectly affecting the employment perspective of managers. The other data reported, which was not as dramatically improved, seems to offer a different message.

I suspect the tempered enthusiasm of the XLI offers a check on the gains of the broader indexes today. Investors in this sector will not soon forget the warnings of major players, including Caterpillar’s (NYSE: CAT) of just a week ago. It’s noteworthy that after an early lift, Caterpillar’s shares are lower nearing the close of trading. Though, the shares of most other major industrials are still celebrating the data. This is because capital will not find the sector representative which reported issues. Rather, it will drive in a hopeful manner into the stocks of others, many of which I believe will also eventually report issues.

Company & Ticker	Monday’s Change 2:30 PM
GE (NYSE: GE)	+0.8%
Ford (NYSE: F)	+0.8%
FedEx (NYSE: FDX)	+0.5%
Boeing (NYSE: BA)	+0.8%

It’s my view that this celebration will be short-lived because it is disproportionate to the improvement of September over August and being misled by the price factor. A realistic view of the state of the economy and manufacturing should offer only tempered support to the manufacturing segment. Investors should be skeptical of this data and its staying power given all other information.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.