It was Friday Night Smackdown last Friday when retail sales reached their highest level in 4 months, one factor propelling the markets higher that day. At almost the same time it was announced that consumer confidence has plunged to its lowest level since 1980. If consumers aren’t confident / optimistic about their future, why are they buying at the highest levels since early spring?
I’m not certain they really are. It pains me to accept this, but I don’t believe I can any longer trust the federal government’s release of economic statistics and indicators. Whether some keepers of the reporting flame are purposely misleading us, or whether they are hiring people less competent, or whether it’s all just gotten too big to comprehend and make meaningful, or some combination of the three.
I’m not certain when the Fed decided it was their job to ensure the stock market keeps going up. I can find nowhere in their charter any such directive. Maybe it was just prior to or coincident with Wall Street brokerages becoming “banks” so they could get taxpayer funds that otherwise might have gone to something they consider frivolous in comparison to their payouts, like health care or defense or rebuilding our crumbling infrastructure. Yet every time the market begins to look shaky, the Fed and the Bureau of Labor Statistics and the Council of Economic Advisors, et al, ad nauseum, rush to provide statistics that show we are doing better than the markets reflect.
Until a couple months have gone by, anyway. Was it coincidence that the Friday before last, when the market had plunged 635 points the day prior, the unemployment numbers, expected to show only a slight improvement, came in just good enough to reflect healthy improvement, but not so much as to elicit skepticism?
How about the first quarter GDP figures that showed a remarkable recovery – only to be revised three months later when even the massive decline evident in the revision was considered old news. “OK, the first quarter wasn’t nearly what they said it was. But that was then; it must be improving by now!”
I’m increasingly concerned, too, by the constant re-jiggering of what is even considered to be reportable. You may recall that, until 1983, the Consumer Price Index included housing costs. But then, in an attempt to show that the insane inflation of the most recent reporting numbers (in the 4th quarter of 1982, the 30-year fixed home mortgage rate hit 15.8% and Fed funds were pushing 20%) rather than take concrete steps to change the credit dynamic, the government simply changed what it reported!
No longer would home prices make the index look so bad, even if it was accurate. Instead, the Bureau of Labor Statistics came up with a fiction they still use today: “owners’ equivalent rent,” which is based on the trend of costs to rent a home, not to buy one. The current approach, the B.L.S. says, “measures the value of shelter to owner-occupants as the amount they forgo by not renting out their homes.”
The (unanticipated?) effect of the change, of course, was to dampen reported inflation rates and understate the size of the housing bubble. It is at possible that many homeowners and investors would have acted differently had the change never been made.
Further, the subjectivity in government numbers renders them even more useless. The decision to exclude food and energy because they are too “volatile” for instance – well, isn’t that the point? Wouldn’t we want to measure when the most volatile components that would affect us the most were changing? Then there is the subjectivity associated with what BLS employees decide are product improvements. For instance, if cell plan prices rise, you and I, having to shell out the additional dollars every month, might think prices have gone up.
Not so in the nether world of government bureaucracy, however! If the BLS employees decide that, yes, cell phone plan prices have risen, but instead of giving you 3,000 free minutes a month, they now give you 10,000 free minutes, why, the actual cost of your plan has actually gone down, so they apply a deflator to that component! (Never mind that 10,000 minutes a month would mean you’d have to talk on the phone 5 ½ hours a day every day just to use the minutes. Most adults don’t use 3,000 minutes a month, so what “value” is there really in adding another 7,000 minutes?)
Why is all this of interest to you and me? Is there some advantage to the government to manipulate CPI, PPI, employment figures, retail sales, etc.?
A lower CPI provides two large benefits to the federal government:
- Since government transfer payments like Social Security and the return they pay on TIPS are linked to the level of the CPI, a lower CPI translates into lower payments - and lower government expenditures.
- Not to put to fine an edge on it or over-simplify, but: a lower inflation rate makes the economy look better than it really is.
So, about those retail sales numbers. How come, in the CPI, food and energy are excluded – but in retail sales, they are included? Could it be because that makes inflation look less severe but the health of the economy look better than it is?
While the financial press dutifully parroted words like sales at “retailers marks a bright spot amid a sea of mostly negative economic data over the past month…the willingness of consumers to spend — the single biggest contributor to economic growth — is a critical bulwark against a potential downturn.”
Sounds pretty good, huh? So what did we buy that pushed up retail sales? Mostly – gasoline. It’s “gain” in retail sales was 1.6% for the quarter. So it cost us more to commute to work. That’s the biggest component in the “stellar retail sales” that show the consumer is returning to the marketplace! General merchandise was unchanged, building materials were down big, and clothing and groceries were up less than a third as much as was gasoline. To me, this doesn’t portend a “willingness of consumers to spend;” given a choice, I think we’d all rather spend less on gasoline, not more!
The subjectivity of measuring added to the clear government benefit to under-stating some numbers and over-stating others leads, buttressed by the amazing propensity to revise the good ones down and the bad ones up later when most people have forgotten about them, lead me to trust far more in gauges like consumer sentiment gauge, which is compiled independently by the University of Michigan and Thomson Reuters. That’s the indicator that came out on the same day showing the lowest level of consumer confidence in the future since 1980.
A separate consumer confidence survey from another private organization with no benefit to be derived from massaging the numbers, the Rasmussen polling firm, showed that just 4% of investors thinking the economy is good or excellent, and two-thirds saying it’s poor. They also note that only 37% have confidence in the stability of the U.S. banking system — the lowest on record ever!
If you share my concerns, you may want to consider doing as we are doing for ourselves and our clients. Given the scare of the last couple of weeks, I figure the government will unleash the spin doctors this coming week. I expect lots of “good news” to be reported for our consumption. If that happens the markets will rally. But that “good news” won’t change the underlying dynamics one bit. And when that realization sinks in and more private data show the deterioration, I believe we’ll resume the drifting sideways-to-down bias that often accompanies the Dog Days of summer. So we are placing tight trailing stops under the inverse ETFs we established early on (see articles beginning June 28th here, here, here and here.)
These include SH, SBB, RWM, and SEF, among others. We’ll keep our UUP intact but expect a pullback in the metals, represented by GLD and AGQ. We’re out of both or hold covered calls against them so we’ll take no special action there. But as optimism returns to the marketplace, many investors will pull money from their bonds, so we’ll also place trailing stops under our TLT. We’ll leave our orders to sell puts below current prices on a number of value stocks we like for purchase but like even more if we can collect the premiums for selling wasting assets to the ever-hopeful who buy options. And we’ll take advantage of any significant rise to trim our longs, even our preferred stock and senior loan funds like HPS, JPS, JTP, BHL, HPF and VTA.
We’ll raise that most valuable of all commodities in what looks like a weak summer – cash – so we have plenty of powder to buy our favored companies like XOM, BTU, NRP, PVR, WY, PCL, et al much cheaper and prepare to hold them through the up-move we expect at the end of the summer. If I’m correct – always an “if” in this business! – you’ll see me writing articles in a few months about which of these we are then writing covered calls against to increase our profits even more…
Disclosure: We, and/or those clients for whom it is appropriate, are long SBB, RWM, SEF, TLT and UUP, as well as some steady income in closed-end funds like HPS, JPS, JTP, BHL, HPF and VTA. We are now placing trailing stops on some portion of our position. We are in the process of placing limit orders to sell puts on XOM, BTU, TOT, PCL, NRP, PVR, and WY, among others. We are looking to raise cash and possibly re-initiate our short ETF positions within the next few weeks.
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