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Lance Roberts
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As an active portfolio manager for STA Wealth Management, Lance's primary role is to question the mainstream mantra. Rather than just regurgitating the news of the day, Lance looks at the “raw data” to bring a unique and “un-spun” perspective to the conversation. Lance's deep understanding of... More
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STA Wealth Management
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  • CFNAI - Better But Still Negative
    When I was growing up I had a tendency to want to run faster than my feet could carry me which was generally about the time I would get a good yank on my collar with my dad telling me to "slow down".   Well, the market has been running quite a bit faster recently than the underlying fundamentals will support which was evident with today's release of the Chicago Fed National Activity Index (CFNAI).  In other words, "slow down" a bit.

    While the index did come in at a slightly improved, but still negative, -22 from last month's downwardly revised reading of -59 the 6-month average is still in recessionary territory which tells you a lot about the overall trend.   If you will remember the Chicago Fed National Activity Index (CFNAI) is a monthly index designed to better gauge overall economic activity and inflationary pressure. The CFNAI is a weighted average of 85 existing monthly indicators of national economic activity.  Since economic activity tends toward a trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.   Currently, this index is trending toward a below trend growth rate.

    With Europe's combined services and manufacturing PMI index sliding to its lowest level since July 2009 and with the National Association of Business Economics (NABE) survey showing that U.S. hiring plans have been cut to the lowest levels since December of 2009 there is little to be excited about with the economy going forward.    The underlying weakness in the economy will likely reassert itself in the next couple of months as we move into the retail shopping season.   With real retail sales declining in September, when you strip out the largest seasonal adjustment in the last 3 years, and the brief inventory restocking spurt due to the Japan crisis now behind us; it is likely that consumer "frugality" will present an untimely arrival just when retailers need it the most.

    We said in previous missives that with the market deeply oversold in September that it was likely that the markets could bounce in October.  We also said that when this happened the media bulls would be out in force stating that the recession had been avoided and the buying opportunity for investors was here.   We didn't have to wait long for that to happen.  Already headlines are stuffed with calls for economic recovery.   While in the process of dismissing recessionary calls and focusing on a first estimate of 3rd Quarter GDP at 2.5% what is being overlooked is the massive draw down in personal savings to support the consumption push.    If you strip that out there was virtually no growth in the economy last quarter.

    Also, don't forget that the economy was chugging along at nearly 3% in the 3rd quarter of 2007 just before the recessionary plunge began just one quarter later.   Furthermore, if the economy was doing so well why is the White House in a rush to provide another bailout program for housing, the Fed even discussing asset purchases (QE 3) and Europe scrambling to put together a Eurozone bailout fund?   If the economy was doing so well why are we hiring temporary workers for the seasonal holiday shopping season and holding a 9.1% official unemployment rate and nearly a 20% real unemployment/underemployment rate?   If the economy is doing so well then why are companies still holding off hiring plans and beginning another round of layoffs while more than 45 million Americans are on food stamps? 

    The point here is that it is critical not to confuse a signal economic number or an oversold bounce/short covering rally in the market with an actual economic/market recovery.   As the real economy weakens it will show up in the numbers.  Maybe, this why two thirds of the companies that have released guidance so far this earnings season have reduced them.   Don't take your eye off the ball - the real crisis is in Europe and there is no solution on the table that will stop that crisis from evolving into critical mass.   Since Europe makes up 20% of our exports, and grwoth in the U.S. is already extremely weak, the impact of the fallout from the crisis in Europe will show up quickly on our economic shores.

    Oct 24 11:48 AM | Link | Comment!
  • Philly Fed and LEI Uptick - Economic Weakness Still Ahead
    The Philly Fed saw a slight improvement this month in the numbers which is most likely due to basic inventory restocking needs after two severe down months across the majority of the regions surveyed by the Fed.   The index ticked up to a modest 8.7 which follows two very negative previous months of minus 17.5 in September and minus 30.7 for the troubled month of August.

    There was Improvement this month in new orders, at plus 7.8, and in shipments, at plus 13.6.   Again, while this is likely a temporary bounce in an otherwise weak index it did slow the run of monthly contractions in backlogs with a plus 3.4.  Employment, however, showed a sharp contraction from the previous months 5.8 read to just 1.4 which is more indicative of the fact this may be just a temporary bounce in the overall index.   Furthermore, there was a third straight decline in delivery times which points to overcapacity in the shipping sector and hints at economic weakness. Weakness in end demand is also showing up in drawdowns of inventory and price pressures.   

    While this month did bring a nice relief to the last few months of decline it doesn't necessarily mean that the economy is out of danger.   As shown in the chart the 6-month trend is still very negative and in a place where recessions normally occur.   Also, while todays read of 8.7 is certainly nice the survey in September (+5.6),  October (+6.7) and November (+6.2) of 2007 certainly didn't warn of the impending recession at that time.     The same occurred in September (+5.5), October (+1.8) and November (+6.8) in 2000 just before the massive decline into the recession then.  See a pattern there?

    The Leading Economic Indicator Index, which bounced a very slight 0.2 percent today, continues to point to economic weakness on a 6-month change basis.  Today's report was relatively weak with the exception of those items that were directly or indirectly controlled by the Fed and their loose monetary policy which continues to artificially boost the index.

    The latest increase was led by the rate differential between the 10-year T-note and fed funds which contributed 0.2% points.  Positives were also seen in money supply which was due to the flight to safety out of equities and into cash in the stock market.   Negatives were led by a dip in housing permits, which will show up again in the next report, and downward movement in new orders for nondefense capital goods, stock prices, and initial jobless claims. 

    The year-over-year change in the index is coming off of peaks and while not in negative territory yet, which can occur in very quickly, be mindful of the trend rather than the number.   As you can see in the chart a one or two month bounce in the index doesn't give us an all clear sign for the economy.  Furthermore you rarely see the index turn up once a decline has started before it drops below the zero line and only twice since 1959 has the indicator dropped below zero with being in a recession.

    We will continue to monitor the data as it comes in, however, at this point the data still points to further weakness in the economy without further Fed intervention.   Any upset in Europe or continued softness in China could well push the U.S. into further decline.

    Oct 20 3:24 PM | Link | Comment!
  • "Snipe" Hunt In Housing Data
    At one time or another most people have been subjected to a "snipe" hunt.  That fictitious creature that looks like a combination of several different animals that forever roams the world but has only been seen by those instigating the farce upon some hapless sole.   So goes the unabated "snipe" hunt in the housing market searching for the elusive bottom that never seems to come. 

    Jim Cramer has called housing bottoms in 2009, 2010 and 2011 and prices still decline.   Home builders have "hope", which springs eternal, that somehow an over leveraged, over built and bleeding market will somehow began to grow again.  The problem is that household formations are at near record lows, unemployment remains at historically high levels and banks are in death throws with months upon months of supply of foreclosed properties sitting on their books.  The clearing of the excess will take far longer than most imagine. 

    Yet this doesn't deter the "snipe" hunt of the mainstream media clinging to each data point as if it were the last life preserver on the Titanic.  The reality, however, is that the recent uptick in homebuilder sentiment is less reality than it is statistical noise.   The reality is that the housing market has more than a decade of struggles ahead of it as the deleveraging of the excess continues.   With home owners trapped in homes with values below their mortgages this reduces mobility to move where the jobs are.   Banks in an ongoing battle of their own survival sit on massive amounts of delinquent properties rather than pushing them through the foreclosure process as the capital impairment would be too great.   Potential homebuyers are now faced with an economy plagued by high unemployment and lower wage structures and credit is now restricted to them.   Without 20% down and a strong credit rating it is unlikely a loan will be offered to them.

    These are just the realities of the housing market as it exists today.  Unfortunately, new home building is a critical element to the long term prosperity of the economy along with manufacturing.  With manufacturing outsourced to every low cost labor supplier in the world and home starts near historic lows you can only imagine that economic growth going forward is going to be "less than expected" by mainstream economists and analysts.

    However, it certainly doesn't hurt to hunt for the elusive and endangered "snipe" as long as you don't lose sight of the reality of it all and how it will ultimately impact your wealth.   For everyone else who continues to see a bottom every time data bounces along its downward trajectory, if you can't find a "snipe" you can come to Texas and hunt for the "Jackalope".



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Oct 18 12:03 PM | Link | Comment!
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