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Phil's Beige Book Highlights for Members

Beige Book Highlights:


Reports from the twelve Federal Reserve Districts indicate that the economy continued to improve, on balance, during the reporting period from early/mid-October to mid-November. Economic activity in the Boston, Cleveland, Atlanta, Dallas, and San Francisco Districts increased at a slight to modest pace, while a somewhat stronger pace of economic activity was seen in New York, Richmond, Chicago, Minneapolis, and Kansas City. Philadelphia and St. Louis reported business conditions as mixed.

Manufacturing activity continued to expand in almost all Districts, with relatively strong growth seen in metal fabrication and the automotive industries. Reports also showed steady to increasing activity for professional and nonfinancial services. Two Districts noted a decline in demand from government agencies due to budgetary shortfalls. Reports on consumer spending tended to be positive. Nonetheless, several Districts noted that households remain price sensitive and focused on buying necessities. Expectations for the holiday shopping season weregenerally positive, with several Districts expecting higher sales when compared to year-ago levels. Sales of new cars and light trucks were largely higher than in our last report. Tourism improved in all reporting Districts.

So forward-looking expectations with couching language on consumer spending.  Keep in mind this report is anecdotal and you have to pay attention to what is real reporting of activity and what is HOPE and what is SPIN!  

Housing markets remain depressed, with several Districts reporting further weakening during the past six weeks. Conditions in commercial real estate were mixed, and activity stayed at low levels. Agricultural conditions were generally favorable, with several Districts reporting yields nearing historic highs. Agricultural sales to off-shore buyers increased. Overall activity in the energy sector continued to expand.

Is depressed really a word you associate with Market Rally?  

Lending activity remained stable across most Districts. Credit quality has been steady to improving for most of the Districts that commented on it. Prices for final goods and services were fairly stable, despite rising input costs, especially for agricultural commodities, metals, and fuel. Hiring activity showed someimprovement across most Districts. Wage pressures were contained.

Manufacturing
Manufacturing activity continued to expand in most Districts. New York was the only District where manufacturing activity was reported to have weakened, while Dallas reported that manufacturing was mixed. Metal fabrication increased in Chicago, Kansas City, Dallas, and San Francisco. Contacts in automotive industries reported gains in Boston, Cleveland, Richmond, Atlanta, and Chicago. The Boston, Kansas City, and San Francisco Districts reported increased sales for high-technology manufacturers, though Dallas noted that growth in orders and production in high-technology industries had slowed from earlier in the year. Steel producers and service centers in the Cleveland District reported that volume was either flat or improving, while Chicago noted some temporary softening in steel demand. Refiners in the Dallas and San Francisco Districts noted reduced production levels. The Philadelphia and Dallas Districts indicated little improvement in demand for manufacturers with ties to residential housing and construction. The Philadelphia, Cleveland, and Kansas City Districts reported that capital spending or spending plans had increased. On net, manufacturers in the St. Louis District reported they planned to expand operations.Contacts in Boston, New York, and Richmond commented on increasing input costs. Several Districts noted an optimistic outlook from manufacturers. Boston and Richmond described manufacturers as upbeat; New York and Chicago reported contacts as more optimistic; and Philadelphia and Minneapolis manufacturers expectincreases in activity in the near term. However, several contacts in Dallas expressed concern about a decline in demand from government agencies, as budget shortfalls continue.

Always keep in mind there are 12 districts so when they say 4 reported good stuff – we don’t care unless it’s more than 6.  Pretty obvious actually.  

Nonfinancial Services
Activity was steady to increasing for professional and nonfinancial services across most Districts. The exception was the St. Louis District, which reported a decline in service sector activity. Boston, Philadelphia, Minneapolis, and San Francisco noted growth in information technology services. Accounting demand remained stable in the Dallas District, bolstered by consulting and merger and acquisition work. The healthcare sector was said to be expanding in reports from Philadelphia and St. Louis, though Richmond noted no change in demand. Firms that provide services to governments in the Philadelphia District indicated that their clients were using less of their services because of the tight budget environment. Demand for transportation services increased in several Districts. Freight companies in Cleveland noted that volumes increased slightly during the past six weeks, and contacts in Atlanta said freight volumes had improved from a year ago, with both Districts recognizing gains in chemical shipments. Regional rail contacts in Dallas noted strong increases in volume. Contacts in Dallas said that intermodal transportation firms experienced increased cargo volumes, buoyed by demand from international clients, as well as a rise in international container trade volumes. Kansas City reported that the transportation sector stabilized but noted a shortage of qualified drivers.

Consumer Spending and Tourism
Retail spending showed improvement across most Districts, with the exception of Boston, Cleveland, Richmond and St. Louis, where results were mixed. A return to more seasonably cool weather was credited for boosting sales in the New York and Dallas Districts. Grocers reported rising sales in Cleveland and Richmond, while sales dropped off in San Francisco. Purchases of apparel improved in the Philadelphia, Chicago, and Dallas Districts. Expectations for the holiday shopping season were positive across Districts; however, in Richmond, retailers expected holiday shopping to be restrained. Reports from the Philadelphia, Cleveland, Atlanta, and Chicago Districts indicated that consumers remained value conscious and tended to focus on buying necessities. Purchases of big ticket items were soft in Richmond, St. Louis, and Kansas City.

Sales of new automobiles and light trucks rose in nine Districts during the reporting period, with several Districts indicating that vehicle inventories are now at appropriate levels. Dealers expect new vehicle sales to continue rising through year-end in the Philadelphia, St. Louis, and Kansas City Districts.

This is pretty good stuff!

Tourism was characterized as stronger or improved in the Boston, New York, Richmond, Atlanta, Minneapolis, Kansas City, and San Francisco Districts, while business travel to destinations in the New York, Atlanta, and San Francisco Districts increased. Occupancy rates at hotels in Manhattan and Atlanta’s major markets were higher than a year ago. The Richmond and Atlanta Districts noted a pickup in international visitors. In Boston, increased tourism was attributed to generous travel incentives and perceived value, while Richmond noted that discretionary retail spending by tourists was lower.

Real Estate and Construction
Residential real estate and construction activity remained at a low level in all Districts. The Philadelphia, Atlanta, St. Louis, and Minneapolis Districts reportedsome further weakening in home salesBoston, New York, and Richmond characterized the market as soft; while Cleveland, Kansas City, Dallas, and San Francisco described the market as sluggish. The Chicago District reported that high inventories of unsold homes continued to be a drag on new residential construction and home prices. Residential house prices were mixed. Price declines were observed in New York, Philadelphia, Atlanta, and Kansas City; prices were flat to up in Minneapolis, and prices edged up in Boston. The Dallas District reported that home prices increased on a year-over-year basis. The rental market continued to offer incentives to tenants in New York, while strong demand for rental units was reported in Richmond and Dallas. Outlooks for 2011 were mixed.

This may be my new favorite Fed spin ever!  4 districts say "further weakening," 3 districts say home sales are "soft," and Chicago says it’s a "drag."  That’s 8 of 12 with very negative comments and the other 4 say they are only declining.  No wonder the Fed is scared to death – if housing drops another 10% then we have another 200 banks that will probably turn insolvent.   Not only that but Case-Shiller just told us that EVERY district sucks so the ones who say anything less than sucked are just hopeless optimists…

Conditions in the commercial real estate industry were mixed during the reporting period. Several Districts reported flat demand and high vacancy rates, which translated into limited nonresidential construction activity. The New York, Atlanta, and Kansas City Districts noted some weakening in nonresidential activity, while the Boston and Dallas Districts indicated some modest improvementin commercial real estate. Reports from Cleveland and Chicago noted that most new projects fell generally into the infrastructure category. Contacts in Boston, Richmond, Kansas City, and Dallas expressed some optimism about the near-term outlook in their Districts, but contacts in several other Districts expressed a more cautious outlook.

Banking and Finance
Banking conditions remained stable across most Districts. Lending activity was reported as steady or unchanged in New York, Philadelphia, St. Louis, Kansas City, Dallas, and San Francisco, while a slight improvement was noted in Cleveland, Richmond and Chicago. The Atlanta District reported constrained credit conditions and weak loan demand. Contacts in Chicago and Dallas said that increased competition for high-quality borrowers resulted in more aggressive loan pricing. Demand for commercial and industrial loans was generally stable, though several Districts noted improvements in specific loan categories. The Cleveland and Chicago Districts reported increased lending for mergers and acquisitions, and access to credit by small businesses in Atlanta improved slightly. Consumer lending has remained stable at weak levels in most Districts. The San Francisco District reported that loan demand declined slightly as a result of households’ desire to deleverage, while Chicago saw a small pickup in consumer lending. Several Districts reported increases in lending related to residential real estate, and, in particular, to refinancing activity. Reports on changes in credit standards were mixed. Bankers in New York reported a tightening in credit standards across all loan categories, Kansas City contacts indicated no change in lending standards, and Atlanta reported an easing in standards for small firms. Contacts in the Cleveland, Richmond, and Chicago Districts reported improved credit quality, but San Francisco bankers noted ongoing struggles with credit quality. The Cleveland and Richmond Districts both reported declines in delinquencies.

This is actually disturbing because it’s not the availability of money that is holding things back which means QE2 is wasteful AND dangerous as it’s clearly misallocated.  The problem is there is not bottom-up driven demand, pure and simple and we’re not going to get any with a jobless and homeless recovery.  By the way, extended unemployment benefits begin terminating tomorrow and will be all gone for 2M people as of Monday.  Merry Christmas!

Agriculture and Natural Resources
Mainly favorable weather conditions helped facilitate early harvesting and the planting of winter crops. The Chicago, Minneapolis, and Dallas Districts reportedlarge to record-setting yields for certain cropsAgricultural prices continued to climbboosting farm incomes. Reports from several Districts indicated that higher grain prices were raising feed costs for livestock producers. Nonetheless, contacts in Chicago noted that even with higher feed costs, margins for livestock producers remain positive. Strong global demand and tight supplies pushed cotton prices to near historic highs for growers in Atlanta and Dallas. San Francisco noted that reductions in overseas yields, combined with the lower value of the U.S. dollar, are helping boost domestic farm sales.

Activity in the energy sector was expanding. The number of active drilling rigs increased in the Atlanta, Kansas City, and Dallas Districts. Although producers are interested in returning to the Gulf of Mexico, drilling remains well below pre-oil spill levels as permit issuance lags. Producers in Kansas City expressed concern about future production due to labor and equipment shortages. Cleveland reported an increase in production from Marcellus shale. In the Minneapolis District, wind energy continued to expand, but at a slower pace than a year ago, while mining activity increased.

So plenty of supply of food and energy but they are jacking up the prices anyway.  It’s very encouraging to know that higher feed costs are already being passed down to the consumers (as long as you are one of "us" and not one of "them," of course).  

Labor and Prices
Hiring activity showed some improvement across most Districts, although employers are waiting for clearer signals of expanding business prospects before adding significantly to payrolls. A preference for part-time and temporary workers was reported in the Atlanta and Chicago Districts. Seasonal hiring in retail trade is expected to be higher this year in Chicago and San Francisco than in the previous two years. Employers in the Boston, Richmond, and Minneapolis Districts reported having difficulty finding skilled workers. Employment agencies in the New York, Richmond, and Chicago Districts reported a moderate increase in new job openings, while staffing firms in Dallas said that hiring activity is strong. Boston staffing contacts noted that labor demand has strengthened, particularly in the information technology, medical, manufacturing, and legal sectors. Wage pressures remain subdued across Districts. Contacts in Richmond and Kansas City noted that they expect little change in wage pressures during the upcoming months. However, employers in San Francisco reported significant increases in employee benefit costs.

 

Prices of final goods and services were fairly stable across Districts despite rising input costs, especially for agricultural commodities, metals, and fuel. Companies in the Atlanta, Chicago, Kansas City, and San Francisco Districts reported a limited ability to pass through higher input costs to customers given the relative softness in demand. However, some manufacturers in the Boston, Cleveland, Atlanta Districts have announced plans to raise their product prices in the near future. Retailers in Philadelphia and San Francisco noted price increases on selected products imported from Asian countries. Reports from the Chicago and Dallas Districts indicated that that record-high inventories and forecasts for a warmer-than-normal winter are putting downward pressure on natural gas prices.

Maybe jobs ARE coming back!  Too bad upside down mortgages prevent people from going where the jobs are – another great reason to rent and not own.  This is definitely not going to be Nat Gas’ year it seems…

Overall, not a bad report and we’re up nicely but just 117M volume on the Dow at 2:45.  Still, the market is looking very much like a runaway train and if we get another day of this we break the pattern as well as our break-out levels but the ECB meets tomorrow and if Trichet doesn’t put up, the market will shut up so I am in favor of holding our 1050P shorts overnight unless we do get an opportunity to get them off the table with profits into the close.  

Disclosure: We are generally short into this rally.