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Ed Yardeni
O Ed Yardeni είναι διεθνούς φήμης αναλυτής και σύμβουλος επενδύσεων
29 Αυγούστου 2011
MAJOR TOPICS: Hurricane Season
BULLET POINTS: (1) September can be stormy too. (2) Why is the DAX so BAD?
(3) European banks are the new storm center. (4) Trichet’s half-hearted rescues. (5)
As he runs out of tools, Bernanke admits he can’t fix it all. (6) Lagarde is on guard
and wants to recapitalize European banks with European TARP. (7) Everyone agrees
that US housing still needs to be fixed. (8) New Homestead Act is under construction.
(9) Profits growth outpaces GDP. (10) “Sarah’s Key” (+ +).
BLOG: Our latest post on blog.yardeni.com focuses on the DAX and European bank
shares.
NOTICE: Our Morning Briefings are now available on FactSet.
I) STRATEGY, ASSET ALLOCATION, & PERFORMANCE: August has been a
turbulent month, but it’s almost over. Then again, September has a long history of
both hurricanes and financial storms. In the Atlantic, the hurricane season officially
begins June 1 and ends November 30. Yesterday, I was near the eye of Hurricane
Irene that barreled up the East Coast. Actually, by the time it reached Long Island, it
was a tropical storm and did much less damage than was widely feared. Last
Wednesday, I was near the epicenter of the magnitude-5.8 earthquake that rattled the
East Coast. I’ll keep you posted on my whereabouts just in case you want to avoid
minor natural disturbances.
During August, stock investors were disturbed around the world. For example, the
DAX is down 22.6% so far this month and 19.9% ytd. It is down 26.4% since it
peaked on May 2. And this happened in the strongest economy in Europe, and maybe
in the world. It hasn’t been quite as bad in the US, where the S&P 500 is down 8.9%
mtd, 6.4% ytd, and 13.7% from its April 29 peak. The DAX is now near its lowest
level since February 2010, and in the middle of its “Lehman gap” of 2008. The S&P
500 is still 15.1% above last year’s low on July 2. The DAX tends to be highly
correlated with Germany’s IFO Business Climate Index, and suggests that the
financial crisis in Europe may be depressing Germany’s economy (see our blog).
Why has the S&P 500 outperformed the DAX so far this year? In 2008, the US was
the epicenter of the financial crisis. This time, it is Europe. The FTSE Eurofirst 300
banks euro index is down 26.6% mtd, 31.6% ytd, and 41.1% since it peaked this year
on Febuary 17 (see our blog). The S&P 500 Bank stock index is down 15.2% mtd,
23.2% ytd, and 28.5% since it peaked this year on February 14. Clearly, there isn’t
likely to be much upside for stocks in general until bank stocks start to perform better,
especially in Europe but also in the US. So what are top policymakers doing to avert
another financial meltdown and to shore up the banks? Not much, so far, but they may
be starting to think about it. Let’s review:
(1) Trichet is retiring. Compounding Europe’s misery has been the extraordinarily
bull-headed incompetence of ECB President Jean-Claude Trichet and his colleagues.
Raising the ECB’s official rate on April 7 and again on July 7 was insane given
Europe’s sovereign debt crisis. Furthermore, the ECB has resisted cooperating with
rescue plans floated by Europe’s political leaders. When Trichet did sign on, it was in
reaction to emergencies, and with the bare minimum of support. Trichet’s attitude has
been that Europe’s problems can’t be fixed with monetary policy, yet when push
came to shove, he could be shoved.
In reaction to the latest crisis, on Thursday, August 4, following the monthly meeting
of the ECB’s policy committee, Trichet said the central bank would begin buying
eurozone bonds while also making unlimited six-month loans available to the region's
banks as part of the effort to improve liquidity. With the bond market shut off to all
but the strongest lenders, the ECB’s unlimited loans are keeping the weakest banks in
Greece, Portugal, Italy, and Spain afloat. Given the drop in bank stock prices,
investors obviously don’t see this as a long-term solution. In any case, Trichet will
retire on October 31. Let’s hope that the ECB will behave more willingly as the
eurozone’s lender of last resort when he is gone.
The Sunday Times in the UK reported yesterday that European officials are working
on a “radical plan” to prevent a fresh pan-European credit crunch. Without citing
sources, the paper said officials from the ECB and European Commission are
considering offering central guarantees over certain types of debt issued by banks.
That’s what the FDIC did on October 14, 2008, and it worked (link below).
(2) Bernanke is less armed. In the US, investors seem to believe that Fed Chairman
Ben Bernanke will continue to be much more willing to help fix the US economy than
Trichet has been in Europe. We saw that on Friday, when the S&P 500 closed up
1.5% following Mr. Bernanke’s Jackson Hole speech in the morning (link below). At
first, the market sold off because he didn’t endorse another round of quantitative
easing. But he did say that the Fed has more tools to revive economic growth if
needed.
Then again, for the first time ever, as far as I can recall, he admitted that monetary
policy can’t fix all of our economic problems when he said, “[M]ost of the economic
policies that support robust economic growth in the long run are outside the province
of the central bank.” Wow, what an insight! Too bad he didn’t think so a year ago
when he launched QE-2.0 with great fanfare. It sank even though it pumped $600
billion of liquidity in the form of excess reserves into the banking system. Mr.
Bernanke admitted that “it is clear that the recovery from the crisis has been much
less robust than we had hoped.”
Mr. Bernanke certainly seems more humble and less self-assured about the power of
monetary policy. Actually, he sounded a bit depressed. He ended his speech by calling
on fiscal policymakers “to put the country’s fiscal house in order.” That’s certainly a
depressingly lame way to end a speech on monetary policy.
(3) Lagarde is alarmed. Christine Lagarde, the new IMF chief, also spoke at Jackson
Hole on Saturday (link below). Her talk was also depressing, warning:
“Developments this summer have indicated that we are in a dangerous new phase.
The stakes are clear: we risk seeing the fragile recovery derailed.” So what does she
propose that we do?
Here is the challenge as she sees it: “Fiscal policy must navigate between the twin
perils of losing credibility and undercutting recovery. The precise path is different for
each country. But to meet the credibility test, each country needs a dual focus: a
primary emphasis on durable measures that will deliver savings tomorrow which, in
turn, will help to create as much space as possible for supporting growth today--at
least by permitting a slower pace of consolidation where possible.” Good luck sailing
between Scylla and Charybdis.
Lagarde has a more specific and practical plan for dealing with the European banking
crisis. She wants the EFSF to be converted into TARP. I’ve been promoting the very
same idea for over a year! She says “[B]anks need urgent recapitalization.” Amen!
She adds, “The most efficient solution would be mandatory substantial
recapitalization--seeking private resources first, but using public funds if necessary.
One option would be to mobilize EFSF or other European-wide funding to
recapitalize banks directly, which would avoid placing even greater burdens on
vulnerable sovereigns.” She warns, “If it is not addressed, we could easily see the
further spread of economic weakness to core countries, or even a debilitating liquidity
crisis.”
(4) Obama is back. Both Bernanke and Lagarde agreed at Jackson Hole that the eye of
the financial storm in the US has been, and continues to be, the housing market.
Lagarde wants American policymakers to work on “halting the downward spiral of
foreclosures, falling house prices and deteriorating household spending. This could
involve more aggressive principal reduction programs for homeowners, stronger
intervention by the government housing finance agencies, or steps to help
homeowners take advantage of the low interest rate environment.”
In a long paragraph on the same subject, Bernanke identified the depression in the
housing industry as one of the main reasons why the US economic recovery has been
so weak: “Notably, the housing sector has been a significant driver of recovery from
most recessions in the United States since World War II, but this time--with an
overhang of distressed and foreclosed properties, tight credit conditions for builders
and potential homebuyers, and ongoing concerns by both potential borrowers and
lenders about continued house price declines--the rate of new home construction has
remained at less than one-third of its pre-crisis level. The low level of construction
has implications not only for builders but for providers of a wide range of goods and
services related to housing and homebuilding. Moreover, even as tight credit for some
borrowers has been one of the factors restraining housing recovery, the weakness of
the housing sector has in turn had adverse effects on financial markets and on the flow
of credit. For example, the sharp declines in house prices in some areas have left
many homeowners ‘underwater’ on their mortgages, creating financial hardship for
households and, through their effects on rates of mortgage delinquency and default,
stress for financial institutions as well. Financial pressures on financial institutions
and households have contributed, in turn, to greater caution in the extension of credit
and to slower growth in consumer spending.”
That’s a good diagnosis of the problem. Mr. Bernanke has done all he can to push
down mortgage rates to record lows to revive housing. Indeed, QE-1.0 from
November 25, 2008 through the end of March 2010 focused on purchasing mortgagebacked securities to do so. Now he seems to have run out of tools. President Barack
Obama also seems to be running out of ideas to revive economic growth. He promised
that he will have some new ones in September. Meanwhile, I am happy to report that
Congressman Gary Ackerman’s staff is moving forward with the drafting of The New
Homestead Bill, which he intends to introduce in September.
* Global Stock Markets Performance (weekly): How did the S&P 500’s 4.7% rise
last week compare globally? It was well ahead of the MSCI World (3.2) and ranked
first among the 41 stock markets we monitor, 31 of which rose. MSCI World was the
best performer last week with a gain of 3.2%, ahead of MSCI Europe (1.9), MSCI
Emerging Latin America (1.8), MSCI EAFE (1.6), and MSCI Emerging Asia (0.6).
Venezuela is up 11.6% in August, and is still the only gainer of the 41 markets. Only
four of the 41 markets are up so far in Q3, and four of the 41 markets are up ytd. The
S&P 500 ranks 14/41 with a decrease of 10.9% so far in Q3, but ranks a healthy 7/41
in the ytd ranking with a decline of 6.4%. In the 2011 performance derby, the S&P
500 (-6.4%) is ahead of MSCI World (-11.7), MSCI Emerging Asia (-15.5), MSCI
EAFE (-17.2), MSCI Europe (-18.0), and MSCI Emerging Latin America (-19.2). The
best-performing countries ytd: Venezuela (52.9%), Indonesia (3.7), Philippines (2.5),
Thailand (0.4), and Slovakia (-1.5). The worst performers ytd: Greece (-37.8%),
Egypt (-34.5), Italy (-26.6), Brazil (-23.0), and India (-22.7).
* S&P 1500/500/400/600 Performance (weekly): Which S&P cap group performed
the best last week? All three indexes surged higher for the first time in five weeks.
The 6.1% increases for both MidCap and SmallCap outpaced the 4.7% rise for
LargeCap. All 30 sectors rose w/w, and the 10 SmallCap sectors were up for the first
time in five weeks. The best-performing cap sectors last week were MidCap
Consumer Discretionary (9.2%), MidCap Industrials (8.8), SmallCap Industrials (7.9),
and SmallCap Consumer Discretionary (7.9). LargeCap Utilities (2.2) and LargeCap
Consumer Staples (2.1) were the worst performers. LargeCap still leads the 2011
Performance Derby with a decline of 6.4%, followed by MidCap (-7.9) and SmallCap
(-9.1). Just eight of the 30 sectors are up so far in 2011, down from 28/30 sectors in
positive territory on July 22, but up from 4/30 a week ago. The best-performing
sectors ytd: MidCap Consumer Staples (31.4), SmallCap Utilities (6.3), LargeCap
Utilities (4.5), and MidCap Consumer Staples (3.7). The worst performers ytd:
LargeCap Financials (-20.0), MidCap Telecom (-16.5), SmallCap Telecom (-16.5),
and MidCap Tech (-14.9).
* S&P 500 Sectors and Industries Performance (weekly): How did the S&P 500
and its sectors and industries perform last week? The S&P 500 surged 4.7% w/w for
its first gain in the past five weeks. The S&P 500 had been up 8.4% ytd at its cyclical
high on April 29, but has since tumbled 13.9% from that peak and is now down 6.4%
ytd. All 10 sectors and 127 of the 129 industries were higher last week, but all 10
sectors and 112/129 industries are still down so far in August and in Q3. The S&P
500 is down 8.9% so far in August and 10.9% so far in Q3. The best-performing
sectors so far in Q3: Utilities (-2.0%), Consumer Staples (-3.5), and Tech (-7.6).
Seven sectors are beating the S&P 500’s ytd decline of 6.4%, but just three sectors are
up ytd: Utilities (4.5%), Consumer Staples (2.5), and Health Care (2.0). The worst
performers so far in 2011: Financials (-20.0%), Industrials (-11.6), and Materials (11.3).
* Commodities Performance (weekly): What did commodities prices do last week?
Eleven of the 16 commodities that we follow rose, up from nine rising a week earlier.
The best-performing commodities last week: Corn (5.8% w/w), Lead (5.6), Wheat
(4.3), and Soybean (4.0). Silver (-3.5) was the worst performer, followed by Gold (3.0) and Platinum (-2.8). Eight of the 16 commodities are up so far in August, and
eight are up in Q3. Seven are also up so far in 2011, but that’s down from 2010 when
14/16 commodities rose. Gold is down 5.0% from its record high early last week, and
Corn is 4.4% below its record high on June 10. CRB Raw Industrials and CRB Metals
are down 11.0% and 12.3%, respectively, from their record highs in April, and
Copper is down 11.3% from its record high in February. The best performers ytd:
Silver (32.5%), Gold (26.2), Corn (19.6), Brent Crude Oil (18.5), and Heating Oil
(18.3). Cotton is having a hard landing after being up as much as 48.6% ytd through
early March. The worst performers ytd: Cotton (-28.2%), Tin (-11.4), Natural Gas (10.8), Zinc (-8.5), Copper (-7.7), and WTI Crude Oil (-6.6).
* Assets Sorted By Spread w/ 200-dmas: How are the 200-dmas for stock indexes
and commodities trading relative to their price indexes? The 200-dmas rose w/w for
13 of the 19 commodities indexes, eight of the nine global stock indexes, and all 44
US stock indexes. Commodities traded at an average of 1.5% below their 200-dmas,
up from -2.6% last week. The average 200-dma for US stock indexes was up to -8.6%
from -13.0%, and the average for the global stock indexes was up to -10.8% from 12.3%. Just five of the 44 US market indexes traded above their 200-dmas, up from
one a week ago and led by MidCap Consumer Staples (13.9%) and LargeCap Utilities
(1.7). Just one of the nine global stock market indexes is above its 200-dma, led by
Indonesia’s Jakarta (3.1%) and China’s Shanghai-Shenzhen 300 (-6.7). Germany’s
DAX (-21.1%) and Brazil’s Bovespa (-17.4) are the lowest. Eight of the 19
commodities indexes are above their 200-dmas, up from seven a week ago and led by
Gold (20.9%), Silver (16.7), and Corn (10.4). Cotton (-33.1), Tin (-15.1), and WTI
Crude Oil (-10.7) are the lowest.
* Commitments of Traders: What were Large Speculators doing in the futures pits
on August 23? They were very bearish on the S&P 500 and neutral on the 10-year
Treasury Note. They were neutral on the Pound, the US Dollar, Canadian Dollar, and
the Euro. They still had a big net long position in Gold. They are bullish on the Yen.
They are still net long the following, though less so than a few weeks ago: Aussie
Dollar, Crude Oil, Gasoline, and Soybeans. (For more details see our Commitments of
Traders chart book linked below.)
II) US GDP & PROFITS: During Q2, nominal GDP rose only 3.7% y/y. Yet, over
the same period, pre-tax profits of all US corporations rose 8.3% to a record $1,934
billion (saar). Debbie reports that profit margins rose significantly during Q2:
(1) Profits share of national income soared. During Q2, the share of pre-tax corporate
profits in national income rose to 14.4%, the highest since Q4-1950. On an after-tax
basis, this share rose to an all-time record of 11.3%.
(2) Profit margin in GDP at an all-time record high. The after-tax profit margin of all
corporations, based on the GDP data, rose to 17.7%, the highest ever. This well
surpasses the previous high of 14.7% during Q1-2006. It’s an amazing rebound from
the cyclical low of 9.6% during Q4-2008. (These figures are based on profits from
current production, i.e., on a cash flow basis.)
(3) Record rebound in profit margin of nonfinancial corporations. The after-tax profit
margin of nonfinancial corporations rose to 11.4%, the highest since Q1-1966.
* GDP (Q2, revision): A double dip? Probably not, but growth should remain subpar.
We’re forecasting real GDP growth of 2.0% for the second half of this year through
2012. Q2 real GDP grew a revised 1.0% (saar), slower than the preliminary estimate
of a 1.3% gain. That followed a 0.4% (saar) advance during Q1. That’s the slowest
six-month growth since the recovery began in June 2009. One bright spot in the latest
GDP report was the widespread upward revision to real nonresidential fixed
investment from 6.3% (saar) to 9.9%. Investment in structures was revised from 8.1%
to 15.7%, while spending on equipment and software was revised up from 5.7% to
7.9%. Real personal consumption expenditures (PCE) growth was also revised higher,
but growth was still very weak at 0.4% (saar). Consumer spending accounts for 71%
of GDP and will likely remain anemic well into next year given the weak labor
market.
* Contributions to GDP Growth: Which components were the biggest contributors
to GDP growth last quarter? Capital spending and personal consumption expenditures
(PCE). Real nonresidential fixed investment contributed 0.94pps to Q2 growth, with
spending on equipment and software adding 0.55pps and structures adding 0.38pps.
Real PCE contributed 0.30pps to Q2 real GDP, with positive contributions from
services (0.64pps) and nondurable goods (0.07pps) consumption more than offsetting
the 0.40pps negative contribution from durable goods spending. Trade was also a
slight positive, with real net exports of goods and services adding 0.09pps, with a
positive 0.41pps contribution from exports partially offset by a 0.33pps negative
contribution from imports. Real residential investment was also a slight positive
contributor to Q2 growth (0.08pps) after being a slight negative contributor during
Q1. Real government spending was a drag on growth (-0.18pps), with state & local
government spending subtracting 0.34pps and federal spending adding 0.16pps. The
change in nonfarm inventories subtracted 0.22pps from Q2 growth, a reversal of the
0.19pps positive contribution in the preliminary estimate.
* Corporate Profits: Will corporate profits and cash flow continue to set new highs?
Most likely. Q2 corporate cash flow rose for the eighth time in ten quarters during Q2
to a new record high, up 65.6% from its recent low at the end of 2008. “Cash” profits
from current production increased for the tenth straight quarter, more than doubling
since Q4-2008. S&P 500 operating and reported earnings both surpassed their Q22007 highs last quarter, rebounding sharply from their respective 2009 lows. And
what about profit margins? During Q2, pre-tax profits from current production
accounted for 14.4% of National Income, up from 7.9% at the end of 2008, surpassing
the previous cyclical high of 13.7% during Q3-2006. The after-tax nonfinancial
corporate profit margin climbed to 11.4% last quarter, the highest since the start of
1966.
* Profits from Abroad and of Domestic Nonfinancial & Financial Corporations:
Will the rebound in profits remain widespread this year? Profits of domestic
nonfinancial industries and profits from abroad should remain robust. Profits of
domestic financial industries will likely weaken further. During Q2, profits of
domestic nonfinancial industries rose for the seventh time in eight quarters, up
$84.4bn during Q2 and $510.6bn over the eight-quarter period. Overseas profits rose
for the ninth straight quarter, up $36.1bn q/q and $192.7bn the past nine quarters.
Domestic financial profits fell $54.2bn last quarter after a $38.7bn drop during Q1.
Overall domestic profits rose 7.2% y/y during Q2, with nonfinancial up 14.2% y/y
and financial down 7.4%. Receipts from overseas rose 14.5% y/y, up from the 8.8%
pace at the end of 2010. They accounted for 33.5% of total profits during Q2,
increasing from 31.4% during Q3 of last year. The growth rate of foreign profits of
US corporations is highly correlated with the growth of OECD industrial production
and US exports, which are still growing briskly, though at a slower pace than last
year. It is inversely correlated with the trade-weighted dollar, which remains weak.
III) MOVIE: “Sarah’s Key” (+ +) is about a reporter who pieces together the
harrowing experience of a young Jewish French girl who was rounded up along with
her family and other Jews in Paris by the French police during World War II. One
memorable moment: When she asks one of her colleagues what he would have done if
his Jewish neighbors were rounded up, he said that he would do the same as he is
doing now about the atrocities in the world today. In other words, nothing.
IV) UPDATES & LINKS: We have updated National Income Shares; GDP; Profits,
Productivity, Prosperity; US Business Surveys; US Commercial Banks; Money; and
Commitments of Traders on our website. Questions, comments, downloading
problems: [email protected] or call 480-664-1333.