Archive for October, 2009
Dow Jones Largest Fall Since April of 2009: Current Rally based on V-Shaped Recovery Hopes and Sustained Spending. Credit Card Mail Offers Fall from 2.1 billion in Q3 of 2006 to 391 million in Q3 of 2009.
Oct 31st
The Dow Jones Industrial Average falling 249 points on Friday was a significant turning point in this rally because it came on the back of a 200 point jump just the subsequent day. On Thursday the GDP numbers were released showing a strong 3.5 percent jump. Yet digging into the data, 1.6 percent of this growth was based on front loading auto sales (the 30 year average for the auto sector each quarter is between .1 and .2 percent) and massive government spending. Yet that is what stimulus is for. On Friday however, consumer spending and income fell leading to the reality that without the government, the average American is tapped out and is unable to juice up those credit cards anymore.
Let us first take a look at the biggest down days for the Dow since the rally started in early March:
This was the biggest drop since April of 2009. That is significant. It took us nearly six months to have a down day of over 249 points. And if you really think about it, the news wasn’t all that bad. In fact, the GDP numbers should have kept things going. But again, the reality is setting in that there will be no V-shaped recovery and 27 million unemployed and underemployed Americans benefit little from the current stock market rally. Most don’t get their monthly money from the stock market but an actual W-2 job.
This rally has also seen a significant number of up days:
Since the rally, we have yet to see a 300 point down day. We have seen a nearly 500 point gain right after the low point was reached in early March and a 379 point rally the next day. So nearly 900 points were made up in two days off the low bounce.
The Dow peaked in this rally at 10,081 and we currently stand at 9,712. It will be interesting to see what happens next week with the BLS job report coming out. The market expects a 9.9 percent official rate but there is a strong possibility of going over 10 percent. You can expect a 10 percent unemployment rate to psychologically change the feel of the market. Hard to believe in a rally when the unemployment rate (official) is at 10 percent. Yet even now, we hear more and more people using the U-6 rate in official figures and that is already at 17 percent.
What we saw on Friday is a real true test of this rally. Is this for real or simply a juicing of the markets by Wall Street and the government? The figures coming out on Friday are starting to believe this rally is simply based on fumes. An adrenaline shot from the government and Wall Street won’t sustain an economy since many average Americans are already tapped out on spending.
Notice how you are receiving less and less of those credit card offers in the mail? There is a reason for this:
Source: Paul Kedrosky
Direct mail credit card offers peaked in Q3 of 2006 with approximately 2.1 billion being sent out. In Q3 of 2009 only 391 million have been sent out. In other words, credit card companies definitely don’t believe in the recovery and they certainly don’t believe in the American consumer. On top of this drop, credit card companies are now jacking up fees on good standing customers, adding annual fees for inactivity, and basically acting like your local loan shark. At times they are even charging 79.99 percent interest rates that would make Tony Soprano blush. If we really look at the data, the economy is doing anything but recovering. Actually, it is recovering but for those on Wall Street and the banks. The average American is merely subsidizing their party. By the way, the banks are largely the reason for the decade long housing bubble.
If you really want to see how much insiders believe in this rally, let us look at some details from last week. Insiders for the week with data from Thomson Reuters bought 8.2 million dollars worth of stock during last week. How much was sold? 184 million dollars. This pattern has been occurring the entire rally. Now wouldn’t you think insiders would have a better sense of the true nature of this economic recovery?
Next week will be important and the jobs report number may go over 10 percent because many people hearing this good news, are now back looking for work but very few jobs are out there. In other words, they will move from the shadows of the 2 million workers that have given up into the actual official pool.
How 56.5 Million Households Live: $52,000 Median Household Income in 2009 Crushed by a Decade of Debt. A Decade of Lost Wages and Financial Debt Servitude.
Oct 29th
The recent American Consumer Survey had some thought provoking data regarding the typical American household. Wages over the past decade have been stagnant. At least that is what is propagated in the common datasets but in reality, not only has income not grown it has actually declined. The U.S. dollar during this time has been crushed as well. So incomes moving in a horizontal fashion may appear to be steady for Americans, but in reality the purchasing power has fallen due to inflation (not recently) and the declining dollar. Think of the rising cost of housing, healthcare, food, and automobiles. In the last decade, even after the housing bust, prices are still higher yet incomes still lag.
Americans leveraged debt in this decade to make up for their lost purchasing power. Access to debt is now being limited. But let us first look at a crucial aspect of the typical household that seems to be missing from the mainstream financial press, household incomes:
This is the latest data we have and we should spend some time on the above chart. 20 percent of American households make more than $100,000 per year. The median income is $52,029. In other words over 56,500,000 households make due with $52,029 or less per year. This is the average American consumer and also helps to explain why things are still in a troubled state. I put together a budget before for someone making the median income and given the updated income figure, things haven’t changed much.
Keep in mind the above data reflects the 2008 year. A troubled year no doubt, but we have yet to factor in the increased unemployment brought about in 2009. This data will be reflected in September of 2010 and we already know that incomes are going to fall yet again. With 27,000,000 Americans unemployed or underemployed, we know the recession is deep and pervasive. But what is usually missed, is even the employed in those 56.5 million households are struggling with rising costs of healthcare and education. Housing costs may be going down but not because of a healthy economy. What we are seeing is debt destruction.
Now try to factor this out with a real world budget:
We’ll go with the state of Georgia just as an example. After taxes the median household is netting roughly $3,200 per month. In August, the median home price in the United States came in at $177,700. Now run the numbers on a FHA insured loan here with a 3.5% down payment:
Home Price: $177,700
Down payment: $6,219.50
30 Year Mortgage Amount: $171,480.50
PITI: $1,235
We’ll leave aside the $8,000 tax credit for the moment. So let us run a simulation on this budget since this on the face seems to workout:
Before you start picking the budget apart, keep in mind this is only a sample. If you look around your own neighborhood, how many people do you see with two relatively new cars? A flat screen TV? Designer clothes? The above budget doesn’t allow for that. And that is why we are seeing bankruptcies also rising in the current environment. The spending was done outside of the budget via credit cards and other forms of revolving and non-revolving debt.
Credit card companies are quickly jacking up fees, putting onerous terms, and decreasing credit available to a consumer that is losing income. You can see how quickly things can get out of hand. Take for example the budget above. What happens if one spouse loses their job? The net income will fall but expenses will stay the same most of the time. Or what about a medical emergency? One night in a hospital can wipe out one or two years of an emergency fund without insurance and millions fall in this category. What if the car busts the transmission? There goes $2,000. Things can escalate quickly without access to the easy debt machine that hid a decade of lost income.
But a sector that did do well in this time is the financial sector:
Source: New York Times
The financial sector has cannibalized a large part of our economy. After decades of bubbles and mismanagement, what have they left the average American with aside of the mountains of debt? We have $3.5 trillion in commercial real estate debt to contend with. Household net worth in the U.S. has fallen by over $12 trillion since this crisis started. It is hard to see what benefit the financial sector has brought to the typical American family. It gave people the illusion of wealth through debt but as we are now seeing, is quickly taking it away via bankruptcies, foreclosures, and yanking credit cards away. I agree that many Americans over spent and now many are paying the price. But what price does Wall Street pay? In fact, they are rewarded with bailouts.
The notion that things are getting better is hard to understand. If we mean that things are better because Wall Street is up, then yes, things are better. But jobs are still not on the horizon and most people associate employment with a healthy economy:
During this earning season what is rarely reported is that the jump in profits with many companies is coming from one time inventory replenishment and also, by cutting your largest cost. Employees. Look at the above chart. For every job opening you have six people trying to fill it. And job openings are below levels at the start of the decade and we have more people in raw numbers plus, we have the 27 million unemployed and underemployed Americans. Just to replenish the lost jobs since December of 2007 we would need to find 8 million jobs. Even if we added 150,000 jobs per month starting in November (not happening) it would take us over 4 years just to get back to where we were at the start of the recession.
Even after all the debt destruction, household debt is still weighing like an albatross on the American household balance sheet:
The above chart is important because it shows the stickiness of debt. That is, unemployment has been going up since December of 2007 but debt goes down slowly. The amount of workers in the U.S. economy is seeing a sort of lost decade. But look at the financial obligations above. We are only back to 2005 levels. The bubble started much further back. Why is that? As we now know, a foreclosure takes a very long time while being laid off can happen in one day. Those mortgage payments keep coming in while the income from work is cut off. It isn’t like the mortgage suddenly adjusts to reflect the real economy. The obligation is still there. So is the auto payment. And the credit card bill and everything else. So debt that was once seen as a supplement to income is now a massive drain on your monthly balance sheet.
Just looking at this data I’m not convinced of this job less recovery. We are still losing jobs at a rate of 3 million per year. In fact, just to keep at a normal pace we need to be creating 150,000 jobs per month. Until we get there, the average American is going to feel this as the deep recession that it is.