Alan Moore Commentary

My subsequent comments during the month on current events.
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WASHINGTON 8-24-11(MarketWatch) — “Orders for U.S. durable goods jumped 4.0% in July, mainly because of higher demand for autos and commercial aircraft, the government reported Wednesday. Yet orders for most other durable goods fell, reflecting continued softness in broad swaths of the U.S. economy.”

My comment: At first blush 4% looks good, at second glance it looks like the US economy is headed for a recession, considering the lack of hiring, decline in consumer sentiment and continued fall in housing prices. The positive durable goods number was due to a 43% increase in airplane orders at Boeing and an increase in car production, which was a rebound caused by the under production in June and July due to the Japanese parts shortage. Orders for core capital goods fell 1.5% and reflects the core of the problem; companies aren’t investing in new plants and equipment, preferring to hold cash on their balance sheets in order to weather the next downturn. Uncertainty is a killer of economic progress and we have lots of it.

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MarketWatch -10:06AM, 8/23/2011 "Richmond Fed gauge at worst level since June 2009. The Richmond Fed said Tuesday that its manufacturing index slumped to -10 in August from -1 in July, as shipments and new orders declined sharply. The Richmond Fed gauge wasn't as bad as the -30.7 reading of a similar Philadelphia Fed indicator but was still the worst reading since June 2009"

My comment: The bright spot of the economy has been manufacturing and manufacturing is collapsing. The Kansas City Fed reports on their region on Thrusday the 24th; if that is as bad as Philadelphia and Richmond, it is a country-wide collapse, which is what you would expect in a recession; even if the Fed doesn't expect one yet.

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8-19-2011; Existing home sales declined 3.5% in July and the median home price fell another 1% in one month. There is a backlog of 260,000 foreclosures in the Florida courts alone and real estate is still going down with no recovery in sight. In addition, average credit card debt per household dropped from $7700 last July to $4400 this July, meaning consumers are paying down debt quickly and not spending as much. All this tells me there is another recession coming, or already here.
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Thrusday 8-18: 11AM; Me: The market was already down several hundred points this morning due to bad news out of Europe on the debt bailout talks between France and Germany; then this hit indicating that manufacturing, the bastion of recovery, was caving in----------and the Dow went down another 200 points in ten minutes. Do you buy the dip? Or will it slip into a crash? Eventually, I think there will be one dip to many.

"WASHINGTON (MarketWatch 8-18-2011) — Factory activity in the Philadelphia region weakened sharply in August to the lowest level seen in more than two years, the Federal Reserve Bank of Philadelphia said Thursday, adding to fears that the economy has ground to a halt. The Philly Fed’s business outlook survey fell to negative 30.7 in August from 3.2 in July. This is the lowest reading since March 2009. Readings below zero indicate contraction in the region’s factories."

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8-11-11 The trade gap widened in July to $53B. The trade deficit is a subtraction from GDP and means the second quarter’s GDP will be revised downward, probably to less than 1% from 1.4%. In other words, we were close to a recession even before August hit. In my opinion, August is the start of a double dip. I say that before August is even done.

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The stock market rose this morning when the retail sales report came out for July.

WASHINGTON (MarketWatch, 8-12-11) — “Consumers spent more money in July on a wide variety of goods, marking the biggest one-month increase in retail sales since the spring. Retail sales rose a seasonally adjusted 0.5% last month, the largest increase since April, the Commerce Department said Friday. Sales for June and May, meanwhile, were revised higher. For June, sales rose by 0.3% instead of 0.1% as originally reported, and sales for May were flat instead of down 0.1%. Over the past three months, retail sales have climbed 8.2% compared to the same period one year ago. “

My comments: Looking past the headline, I see that the biggest increase in sales took place at gas stations, where outlays jumped 1.6% due to the rise in gasoline prices, not the volume of gallons sold. Yet spending on gas is not a plus for consumers since it leaves them less money to splurge on other goods and services. Also on the downside, sales fell at department stores, bars and restaurants, leisure and hobby stores, and building-materials suppliers----- and the mother of all stock market volatility hit in August; so August was not an inspiration to consumers to keep spending. August retail sales, when announced in September, will be a downer, reversing the decent news in July. The future is always more important than the past. As a consumer, ask yourself: do I feel better about the economy today than I did in July? The answer should be clear as a bell.

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Like I just said this morning, don’t think retail sales in July means much: this came out a few minutes ago

NEW YORK (MarketWatch 8-12-11) —“ U.S. stocks dialed back on Friday gains after a gauge of consumer confidence illustrated a sharp fall in sentiment early this month, curbing enthusiasm that came with an encouraging report on the nation’s retail sales. The University of Michigan/Thomson Reuters index of consumer sentiment dropped to 54.9 in August — the lowest in 31 years.”

Market watch 8-11-10

The Treasury Department sold $16 billion in 30-year bonds on Thursday at a yield of 3.75%, well above the level traders expected it to price at but also the lowest level since October.

Bidders offered to buy 2.08 times the amount of debt sold, the lowest so-called bid-to-cover ratio since at least 2009 and compared to an average of 2.51 times at the last four auctions of new long bonds. See Treasury’s page with auction results.

Indirect bidders, a group of investors which includes foreign central banks, bought just 12.2% of the sale, the lowest ever according to CRT Capital Group and versus an average of 40.1%. Direct bidders, including domestic money managers, purchased another 19.5%, compared to 11.5% on average.

My comments: The recent rally in bonds caused by the European debt scare and the debt ceiling crisis is unraveling because the Fed’s low-interest policy for the next 2 years threatens to weaken the dollar causing central banks to want to diversify out of American Treasury bonds. China and Germany are backing away from recycling their surplus trade accounts into dollars, as can be seen in the huge drop in participation in this auction

Alan Moore Commentary 8-1-2011

Deep down, we want to see a crash, caused by Washington’s failure to get a deal. There is an adrenalin rush of curiosity about the effect of a default and the surreal collapse of the government------- Not this time though, there appears to be another can-kicking budget bill to be voted on tonight; but the markets are ignoring the huge risk of a double dip recession as the economy is rolling over. The Fed has got to be thinking QE-3 as soon as the spending cuts hit. The effect of fiscal austerity will be slower GDP growth, and it is already anemic.

The real solvency hurdle is that Congressmen and Senators are not reasonable people, they are politicians indoctrinated in party slogans, tantamount to believing in religious dogma. They have staunch faith in the party line and skip the thinking process entirely, never actually reading a bill they vote on that gets written by a bunch of old guys on a committee. Their only agenda is placing their party in power. In short, America is the victim of its own political system and ignorance----- establishing a budget for the next ten years is fraud; a new president will certainly present a new budget when he is elected and is not legally bound by any previous budget deal. There is only one thing for sure: the national debt will always go up; even with the proposed 10-yr budget compromise, the national dept will grow $7T over the next decade. The Democrats will continue to expand entitlements and spend; the Republicans will continue to spend on wars and tax loop holes.

George W. Bush, in 2007, did a budget that projected a deficit in 2011 of only $54B---it will actually be $1.65 trillion dollars this year, five hundred billion of that deficit is due to a huge drop in taxes collected amounting to only 15% of GDP. In Reagan’s last year in office, tax revenues were 18.3% of GDP, because tax rates were higher then and the economy was growing 6%------- obviously, taxes did not have much to do with creating jobs then and don’t now.

For the current deals to work out, Republican and Democrat budget projections, along with the recent Greek bailout, are dependent on restoration of good growth and higher tax revenues hereafter; albeit, I am only here after a decent return and I don’t see one. Currently, I see macro-risk behind every stock and don’t believe there is a potential for profit with slack demand across the entire economy, except maybe in utilities. They use leverage, but utilities have stable, high dividends offering a better return than bonds or other DOW stocks; albeit, after you buy, the price of a stock only matters when you sell it. Despite which investment black box you use, a dividend will set you free to earn a real, cash-in-hand return every quarter. Take note: of the historical return of 9% on the S&P Index over the last 75 years, 50% of that return has come from dividends. Ergo, when you invest, it is nice to have half your return in the bag before you start down your holding period. All said, I currently own only one utility (RWE) because of that sectors sensitivity to rising interest rates and to a general market decline. I just think I can get a better price on many utilities later on, but that doesn’t mean I am not missing the boat now. My wife says that I have waited so long for the boat to come in that the pier has collapsed; and, I have to admit, you really can’t go far wrong buying utilities with a 5% dividend, provided you have no intention of flipping them for a capital gain anytime soon. One sector I am committing to is real estate: I think now is the time to buy. Prices may go down more, so I am not leveraging; but the yields from the rents are too high to ignore, not to mention that the rental market is looking good with the vacancy factor falling to 7.5% nationwide. In any case, housing prices never have a flash crash like the stock market does, and it feels better to lose money slowly rather than all in one hour. This was announced on July 20^th: WASHINGTON (MarketWatch) — “Sales of existing homes slipped in June to a seven-month low, and a real estate trade group attributed the surprise downturn to a weak economy and a spike in cancellations. The National Association of Realtors reported sales of single-family existing homes fell 0.8%, the third consecutive monthly drop, to a seasonally adjusted annual rate of 4.77 million from 4.81 million in May.”

Private sector jobs are created by an increase in grass-roots demand, and neither Republicans nor Democrats have an ideology that can accomplish that feat. Consumers can create jobs by managing their balance sheets better and saving enough spending-power to buy the next round of hot gadgets or to capitalize on a new idea and become a business owner. Looking past the political blame game, people grow the economy and currently they aren’t feeling too powerful.

In 2009, Bernanke flooded the banks with liquidity, which was right out of the Milton Friedman monetary playbook; and Obama used Keynesian fiscal spending to the max in order to take up the slack in consumer demand. Acting together, those policies kept us out of a depression, but they haven’t worked to grow the economy and jobs. Both monetary and Keynesian theories have met their Waterloo in the collapsing housing market and neither have an answer for getting us out of the stagnation; therefore, the economy continues to be at the mercy of home prices. That is the problem old theories can’t solve, and there is no solution short of prices hitting reality at the selling point. In that regard, the Case/Shiller Housing Index will tell us when we are there---Shiller announced on 7/27 that housing prices dropped another 4.5% in May, over May of 2010. Until housing turns, hope trumps math, and the stock market continues to hold up pretty well: maybe you can appreciate the brevity of that statement, because stocks aren’t cheap. The dividend yield on the S&P is just 2% and according to another long-term measure — “Tobin’s q,” which compares share prices with the replacement cost of company assets — shares are now about 60% above average valuations. Furthermore, we have an aging population of Baby Boomers who are heavily in the market, and they will be selling as they near retirement. Overall, there is $4 trillion in 401k plans, meaning the “wealth effect” of the stock market matters to more people than ever before. Another way of looking at it: fifty percent of consumers making over 60k per year are invested in mutual funds, and those folks are the ones that have discretionary income to spend. If stocks head south again, we will surely go into another recession. That is why staying above 11,000 on the Dow is so crucial; below that level for a spell will be a psychological trigger point for feeling not OK if you are an investor----or quite OK if you have cash to invest. However, there are 20 times more people invested in the stock market than are in cash, although money market funds holding European paper (all of them are) don’t look that solid either.

By the way, “OK” happens to be one of most spoken and typed words on the planet, because it has morphed into to so many different languages; even the Chinese use it profusely. You may like to know where the term came from: OK was born to Boston editors in 1839 who thought it was funny to misspell the editing mark, “all correct,” as “oll korrect”, and that rendition became abbreviated with “OK”. So now you know why so many people say everything is OK in error; it was meant to be that way.

Not OK will be corporate earnings going forward. Most analysts predict $95 earnings for the S&P index this year, which is a 13 price-earnings multiple, and 16% EPS growth over last year. Until now, margins have been improving since 2008 due to downsizing and outsourcing, but that trend is waning. When a company like Motorola decides to move production of the Droid to China, they get to skip the cost of capital and interest on the debt to buy the equipment needed to produce in America. EBITDA-earnings is the cash flow measure people have been using to determine the value of stocks (Earnings before interest, taxes, depreciation, and amortization). Depreciation is the cost of equipment and the Chinese have been investing in plants to produce our stuff. What if depreciation and investment interest costs are added to corporation income statements? What do you think that will do to earnings growth in the future? If we produce more here, costs go up and profits go down. If we don’t, supply lines get stretched and the unemployed stay structurally unemployed for a long time. This seems like a “Hobson’s choice” and another reason why the economy is going nowhere, not to mention the sustained debt liquidation going on (In the 1920s, Henry Ford was said to have sold the famous Hobson's choice of "you can have any color... so long as it is black"---he kept his production costs down that way). Paul Volcker, the most astute economist I know, had this to say about the situation:

“LONDON (MarketWatch 7-14-11) -- Former Federal Reserve Chairman Paul Volcker said Thursday that the combined impact of a business crisis with a financial crisis means the economy faces a "considerable period of time of sluggish activity." Speaking at an Official Monetary and Financial Institutions Forum event in London, Volcker said the economy "has been through a crisis of excessive debt creation right around the world and all the evidence reflects the fact that the excesses in leverage are still with us and the de-leveraging process takes a long time." Volcker said the same trend could be seen in the sluggish growth that has plagued Japan for years. "We're in that box and it's very hard to get out of," he said.”

In the debt game, who’s on first base? Dividing total sovereign debt by tax revenues per country yields a profligacy ratio: Greece with a ratio of 7 is currently ranked number one, the USA with 6 is in second place; Ireland at 5.8 is third and Italy is 4^th with a 4.1 ratio The United States is too big to fail, so our “6” is mostly symbolic, given that we can print dollars to pay off the debt with inflation. The others are hamstrung by the EURO, which is controlled by Germany, so they must eventually leave the EU to keep their deficits going.

Over the next five years, the whole world will continue to deleverage, led by sovereign fiscal austerity and a consumer trend to save more and get out of debt. The housing market may continue to fall another 10 to 15%, but rental property will be good, particularly in medical and food-market real estate, not to mention apartments. As far as the stock market is concerned, stay away from banks, bonds and everything else except dividend paying utilities, drugs and telecoms. I would move into those sectors if the market takes a dive. However, I think the current “soft patch” will turn into a prolonged soft stretch, due to political wars and waning consumer demand. I predict that the Fed will launch another quantitative easing next winter, and the markets may rally again; but the economy is stuck in the mud for the next five years, in my humble opinion. In that scenario, I have an investment plan that will work. It requires patience, focusing on risk containment and yield fishing; not on an unrelenting faith in the American capitalistic system. The system is broken and a fix is not coming from Congress, the Fed or the business sector. People simply have too much debt to increase their spending, not to mention federal and state governments.

Compounding the national debt problem, private debt is 260% of GDP, and only in 1929 and 2000 has that ratio ever been higher. The biggest portion of that debt is mortgages and a quarter of those are under water. Another drop in housing will make the deleveraging even worse. Sorry, but that is my story of woe, and my portfolio is allocated where my mouth is: 87% in money market funds, 4% utilities, 4% short, and recently--- 5% in foreclosed real estate: that portion is climbing with multiple offers pending to buy more. The REIT funds are overvalued, so you must bid for individual properties one at time to find bargains, but there is no hurry: the early bird gets the worm, but the second mouse gets the cheese.
Alan Moore

My subsequent comments during the month on current events.

I am posting almost daily now, giving my take on the news causing the huge market swings. I tack them on day by day. Here is the latest.

Tuesday: 11AM; The market was already down several hundred points this morning due to bad news out of Europe on the debt bailout talks between France and Germany; then this hit indicating that manufacturing, the bastion of recovery, was caving in----------and the Dow went down another 200 points in ten minutes. Do you buy the dip? Or will it slip into a crash? Eventually, I think there will be one dip to many.