U.S. Retail Figures Pull a Fast One by Kate Incontrera Baltimore, Maryland Bill is traveling for the rest of the week, but fear not - we will muddle through without him. A good bit of activity in the markets since yesterday. The financials rallied in pre-market trade on the news that Goldman Sachs reported $1.8 billion first-quarter profit, and set plans to raise $5 billion through a sale of stock in order to repay its Troubled Asset Relief Program (TARP) loan. (More about this, below.) Also happening today: President Obama is set to speak on the economy this morning, and Helicopter Ben is delivering a speech on "Four Questions about the Financial Crisis" this afternoon. Hmmm...he should have called our emergency hotline we have set up for Treasury Secretaries and Fedheads. We could have helped him out with some of the answers to those questions... CNNMoney.com reports that in the prepared remarks for his speech, Bernanke said, "Recently we have seen tentative signs that the sharp decline in economic activity may be slowing." The 'signs' he is referring to include recent upticks in home sales and new home constructions, as well as improvements in consumer spending, especially new vehicles. "A leveling out of economic activity is the first step toward recovery," said Big Ben. "To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets." Bernanke may have wanted to wait until the retail numbers were released before preparing those remarks. Nearly every expert that has been surveyed on this topic believed that U.S. retail sales, which count for half of consumer spending, rose in March, mainly due to the auto industry incentives that began last month. However, it turns out that retail numbers pulled a fast one - and showed a drop in sales for last month. Two months of gains has boosted hopes that March's numbers would follow suit, building a rebound in consumer spending. But, not so much. The Commerce Department showed that March's retail sales were down for almost every type of store except necessities, such as food and drugs. MarketWatch reports: "Retail sales in the first quarter were down 1.2%, compared with the fourth quarter of last year, raising the possibility that real consumer spending may have fallen again for the first three months of 2009 after plunging at a 4% annual rate in the final six months of 2008. "Economist David Rosenberg of Bank of America's Merrill Lynch said he expected consumer spending to decline at a 3.7% annual pace in the April through June quarter." "The retail sales figures indicated incentives and promotions by car dealers and clothing stores such as Gap Inc. failed to draw customers hurt by a lack of credit and the highest jobless rate in 25 years." In other words...outlook not so good for the economy. Americans have clearly been spooked by the high jobless rate. It seems that everyone knows someone who has been laid off, or had hours cut back...and the possibility of it happening to you becomes very real. So you cut back. You make dinner instead of going out...make do with last year's summer clothes instead of going on a shopping spree. You want to make sure you have cash in the coffer...just in case. This behavior begins to add up, as these numbers show. It makes you wonder: is it possible we are witnessing the taming of the American consumer? We'll have to wait and see. Now, we turn to Addison, with a report on what news has investors in a tizzy: "The U.S. stock market dodged another bullet yesterday," writes Addison in today's issue of The 5 Min. Forecast. "Goldman Sachs announced late in the day that it had pulled off a $1.8 billion profit in the first quarter. "That's $3.39 a share, more than twice as much as the market had anticipated.
"Investors are now wildly confident that Goldman Sachs will be one of the best performing financials of 2009. "The Dow managed to end the day with less than a percent loss. The S&P 500 and NASDAQ both pulled off small gains. "Curious how the markets work, though, isn't it? "In reality, Goldman benefited from a quirk in its new reporting schedule. 'Its fourth quarter ended in November 2008,' reports the Financial Times, 'but after converting to a bank holding company last year, Goldman adopted a calendar-year earnings period starting in 2009. As a result, the company did not have to include December in its first quarter earnings, a month in which it sustained $1.3bn in pre-tax losses.' "So Goldman actually made $0.5 billion in the first quarter. But who really cares? The investment bank is up 54% year to date! "And since their stock is so 'strong,' Goldman bigwigs confirmed that they would move forward with a $5 billion secondary stock offering... the proceeds of which will be used to pay back TARP loans. Work it. "Oh boy, 'buyer beware,' warns our short side specialist Dan Amoss. 'The most responsibly managed banks should survive this downturn because cash flow from good loans should roughly offset the losses from souring loans.' "'Regulators will probably grant forbearance, meaning that they'll look the other way while they allow bank capital levels to get dangerously low in 2009 and 2010. But just because many banks will avoid FDIC receivership doesn't mean the stocks will be good investments.'" Want more from Dan? There's plenty of insight from where that came from...learn how you can get his newsletter, Strategic Short Report by clicking here. In doing so, you'll also receive The 5 Min. Forecast in your inbox daily - free to subscribers to Agora Financial's paid publications. Every day, Addison brings readers The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less. And back to Kate, reporting from a blustery Baltimore: "I hear that the government's turn around on tax returns are up this year, which gets money back in the hands of consumers at a faster pace than previous years," writes our good buddy Chuck Butler in today's issue of The Daily Pfennig. "And we all know what happens when consumers get money in their hands: they spend it!" Very true...but will the American consumer have anywhere left to spend their tax return? A new report shows that strip malls, neighborhood centers and regional malls are losing stores at the fastest clip in over ten years. In addition, consumers are keeping a tighter grip on their wallets, causing retailers to trim down on the amount of merchandise available in the store, in order to stay afloat. The report, done by New York-based real estate research firm Reis, shows that "In just the first quarter of 2009, retail tenants at these neighborhood centers have vacated 8.7 million square feet of commercial space. This number exceeds the 8.6 million square feet of retail space that was vacated in all of 2008." The report goes on to show that "vacancy rates at malls rose 9.5% in the first quarter, outpacing the 8.9% vacancy rate registered in all of 2008, marking the largest single-quarter jump in vacancies since Reis began publishing quarterly figures in 1999. Are we still surprised at the disappointing March retail figures? Now back to Goldman Sachs, which managed a major bounce back from its worst quarter since it became a public company in 1999. Reporting their results a day early, Goldman said yesterday that it earned $1.8 billion, or $3.39 a share, for the quarter ending March 31. But as Addison pointed out, above, Goldman did benefit from a 'quirk' in their new reporting schedule. "Leave it to the clever boys at Goldman Sachs to turn dross into gold," says our friend Barry Ritholtz in a post on his blog, The Big Picture today. "The bulk of their profits had come from AIG transfer payments - the AIG 100% payouts funded via bailout monies that saw Goldie as one of the largest recipients. Floyd Norris notes that most of the AIG effect was in December. 'For the first quarter, the total A.I.G. effect on earnings was, in round numbers, zero.'" Wondering how this is possible? Well...that's where the beneficial 'quirk' comes into play... From the NYT: "Goldman's 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman's news release, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ending in February. "The orphan month featured - surprise - lots of write-offs. The pre-tax loss was $1.3 billion, and the after-tax loss was $780 million. "Would the firm have had a profit if it stuck to its old calendar, and had to include December and exclude March?" "Truly astounding," writes Barry, "the word Chutzpah simply does not do it justice." Until tomorrow, Kate Incontrera The Daily Reckoning ---------------------- Special Offer -------------------------- Don't Miss Out on Your Chance to be a Part of History Early this month, science once again became a national priority...and this is just the tip of the iceberg. If you play this change right, you could quickly accumulate three generations of wealth. Real wealth. Wealth the markets can't touch. What you are about to read is so lucrative, we could only offer it to a limited amount of people. There are only 50 spots left...and we fully expect to sell out - and soon. Don't let this once-in-a-lifetime opportunity pass you by. 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| The Daily Reckoning PRESENTS: Sifting through the financial data, its clear that our country is still in the grips of a deep recession - or even, perhaps, a depression. The Richebächer Letter's Rob Parenteau agrees that the message continues to be one of a still sharp recession in the United States, but he sees mounting evidence that the most violent portion of the downdraft is behind us. Read on... Nose Above Water by Rob Parenteau San Francisco, California During this recession, the spike in U.S. wholesale inventory/sales (I/S) ratios has proven to be the largest since the 1981-2 recession. Despite just-in-time inventory systems, the demand shock this time around was simply too sharp and swift for firms to adjust orders and production quickly enough. Wholesale I/S ratios tend to peak during recessions, with the bulk of the drawdown accomplished in the early recovery phase of the business cycle, when wholesale shipment growth revives. The inventory adjustment does not need to be complete to end a recession - the I/S ratio merely needs to peak, which appears under way.
Consumer credit growth remains moribund. Ratcheting up of minimum payments and interest rates is reducing the willingness and ability of households to substitute these sources of credit for housing-related credit. Bucking the trend is nonrevolving credit growth provided by saving institutions, although this has proven a very volatile source of funding for households. We do not see the private deleveraging theme ending anytime soon, as discussed in prior monthly letters. Policy to force banks to escalate lending in the face of the new frugality evident among U.S. consumers is likely to be thwarted, just as it was in the early 1930s.
The past four weeks have shown some stabilization in initial unemployment claims, right around the same spikes of the 1982 recession. Initial claims tend to peak as a recession is closing out. While employment is generally a lagging indicator, initial unemployment claims have more of a coincident or slightly leading indicator tendency at cycle turning points. Since the maximum growth shock appears to be loaded into Q4 2008, it would make sense that the layoff response would peak one quarter later. A peak in the pace of layoffs is not to be confused with a peak in the unemployment rate, which we do not anticipate until Q2 2010 at the earliest. Still, if the high for the recession is developing in initial unemployment claims, and active fiscal stimulus is about to hit, this combination should help equity investors regain their nerve.
Refi applications continue to climb to their prior highs despite a slight rise in mortgage rates. While bank acceptance of mortgage refinancing applications remains restricted, this is an important channel for households to reduce their expenses and rebuild their savings. It also adds to fee income at banks. Purchase applications remain subdued, although they have picked up a bit in recent weeks. The monthly U.S. trade deficit is shrinking at a dramatic pace as imports implode faster than exports. Falling oil prices are part of the import reduction, but with consumption cratering, imports are off nearly 30% versus a year ago. The turn in trade is clearly more than just price effects. In fact, U.S. export price deflation is running close to a 7% year-over-year pace as producers struggle with a collapse in global trade. From a financial balance point of view, the more dramatic the turn in the U.S. trade balance, the easier it will be for the U.S. private sector to return to a net saving position. However, that poses serious challenges to production in the export-dependent economies abroad, and we continue to see harsh production cuts coming out of Asia. We would much rather see the U.S. trade balance turning with export growth remaining robust - instead, we have global trade collapsing because so many countries geared their growth strategies to an ever-indebted Western consumer. While many institutional equity investors have piled back into emerging equity markets over the past month because they are perceived to be the highest beta play, we remain concerned that excess capacity will prove to be a serious challenge for these nations as the globalized economy adjusts to a less-leveraged Western consumer.
All in all, the message continues to be one of a still sharp recession in the United States, with mounting evidence that the most violent portion of the downdraft is behind us. Evidence of a peak in I/S ratios, a peak in initial unemployment claims, improved refi activity and a dramatic reversal in the U.S. trade balance are all consistent with a recession that is still challenging, but not as overwhelming as the free-fall state that gripped the United States in Q4 2008. This is a better setup for the fiscal package to get some traction, although we continue to believe the earliest we might expect a positive U.S. real GDP result is in Q4 2009. Technical measures of U.S. equity indexes continue to flag an extremely overbought condition. Given the run-up in the face of "less bad is good" news, we suspect equity investors have gotten ahead of themselves as they discard disaster scenarios. As mentioned last week, weak Q1 earnings results should be a catalyst for a pullback, although we are not convinced the prior lows will be violated, as too many institutional investors want to get onboard the rally train. We also are becoming increasingly concerned about the Fed's gambit with regard to Treasury yields. Once again, 10-year U.S. Treasuries approached 3% last week, which we would suggest is the informal yield ceiling the Fed is likely to impose. The catch, as we see it, is as follows: If the Fed is forced to accelerate its Treasury purchases to keep yields from climbing above 3%, bond investors will tend to view the subsequent expansion of the Fed's balance sheet as "monetizing" the fiscal deficit. Foreign investors are likely to be especially wary of this, and the weakness in the currencies of nations with central banks pursuing quantitative easing has been conspicuous in the past few weeks. In addition, to the extent the Fed is suppressing interest rates, and that successfully pushes investors into riskier asset classes like equities in order to earn adequate returns, Treasury bonds become a less attractive investment. Either way, the success of the Fed in these operations strikes us as making it harder for the Treasury to sell new bond issuance to private investors. The Fed could be unwittingly setting itself up to become the largest buyer of Treasuries, which we believe would aggravate the monetizing fears mentioned above. The movement in platinum, palladium and copper of late suggests monetization fears are present even in the face of outright deflation appearing in a number of final product price measures in many countries. Best regards, Rob Parenteau for The Daily Reckoning Editor's Note: Rob Parenteau is the new editor of The Richebächer Letter and the mind behind the Richebächer Society. Mr. Parenteau, an avid disciple of Dr. Richebächer, continues the legacy. Parenteau, in his own right, digs into the mind-numbing details of public financial information and macro-economic data to extract the precious insights that lead to intelligent investing - both avoiding risk and seizing opportunity. Based on his latest analysis, Mr. Parenteau believes the current credit crisis has not yet run its course. But he is not panicking; he is preparing...and is helping his subscribers to do the same...just as the Good Doctor did. So if you'd like to get The Richebächer Letter on your side, learn how here. | |||||
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