The Fed cut rates yesterday, although not as
much as ‘expected’ (read: ‘hoped’) by the ever hopeful stock selling
industry. Nonetheless stocks rocketed higher by a huge amount. Did this
make sense? Not if these data mean anything.
Lots of items are clearly pointing towards recession, which, if true,
*should* be very stock unfriendly. In each case below I am providing
some commentary, a link, and then a snippet from that link (in the
quote box).
Exhibit A:
Tax receipts by the government are one set of data that I trust
because they are not "seasonally adjusted", hedonically adjusted or in
any other way manipulated. They simply are what they are. And taxes are
very sensitive to economic conditions, so they are pretty reliable
indicators of how things are going. In February the government reported that tax receipts were down by 12.1% over the prior year.
That’s a very significant decline and it clearly signals some pretty profound economic weakness if not a recession.
TRIBUNE NEWS SERVICES March 13, WASHINGTON – The federal government
budget deficit widened to a monthly record $175.6 billion in February,
as a weakening economy reduced tax revenue for the second consecutive
month.
Revenue last month fell 12.1 percent, while spending
increased 17.1 percent, the Treasury said Wednesday. The shortfall was
bigger than the $170 billion deficit economists had forecast and
compares with the previous record of $120 billion in February of last
year.
Exhibit B:
I know we don’t manufacture nearly as much as we used to but our
manufacturing base still gives us some indication of how things are
going. Last week the Empire State Index which measures manufacturing
throughout a fairly large region in the NY/PA/NJ area reported a huge
decline, much larger than expectations, to a new all time record low.
WASHINGTON (MarketWatch) — Manufacturing activity in the New York area
plunged for the second straight month in March, the New York Federal
Reserve Bank said Monday. The bank’s Empire State Manufacturing index
fell to negative 22.2 in March, a record low reading. The index had
fallen to negative 11.7 in February from 9.0 in January. Readings below
zero indicate contraction. Economists were expecting the index to
improve slightly to -5.0 in March.
Exhibit C:
Job losses. A net loss of 63,000 jobs was reported for February.
This was the combination of a terrible 89,000 jobs lost in construction
and manufacturing but offset largely by addition of 50,000+ jobs in two
areas; Leisure & Hospitality and Government Hiring. So we’re
producing a lot less but that’s apparently offset by the fact that
we’re taking more vacations and working for the government in ever
larger numbers.
Actually, it’s even worse than that. The government uses a variety of
methods to estimate the rate of job creation and one of the more
suspect items in their repertoire goes by the ear-catching name of "the Birth-Death model".
What this model does is either add or subtract jobs from the actual
data that is sampled from establishments (businesses). For the past
five years the B-D model has only added jobs for 10 out every twelve
months and February is always an "add" month. How many jobs did the B-D
model add? 135,000. Without these 135,000 modeled jobs the reported
employment number would have been closer to negative 200,000 jobs. To
help you understand why I am deeply suspicious of the output from this
model is illustrated by the fact that it calculated that 9,000
construction jobs were added to the economy in February. This brings us
to…
Exhibit D:
Housing. There has never been a big downturn in
housing that was NOT associated with a recession. In fact, history is
quite a burden for anybody who wants to claim that this time will be
different and that we won’t have a recession even though housing
activity is falling off by the largest amounts ever recorded. The most recent data?
WASHINGTON (AP) –
In another sign of
troubles in housing, construction of new homes fell by a larger-than-expected
0.6 percent in February to an annual rate of 1.065 million units.
So, taken all together, we have weak tax receipts, declining
employment, slumping manufacturing, and housing in a free fall but,
thankfully, a buoyant stock market. Don’t fall for it. Something has
broken down. Once the stock market used to be called ‘the great
discounting machine’ because of its ability to rise and fall in advance
of news, either good or bad. Now? It’s so far behind the news that we
can only speculate as to why, or for how long, but we can be sure that
the risks of holding stocks right now are extremely asymmetrical; that
is, the chance of losing 30% is probably equal to the chance of gaining
10%.
But the real cause for concern is not in the fundamental economic data
listed above, but the extremely troubling signs that remain in the
financial arena. The ones that give me the most pause are:
- The TED spread measures how willing
banks are to lend to each other and, when things are healthy, is
usually within 30 ‘ticks’ (30/100 of a percent) of T-bills. Today it
started out at 165 ticks away (yikes!) and shot straight up to finish
the day at 203 (gulp). This tells us that banks are refusing to lend to
each other, that their confidence is at an unusually low ebb, and that
the valiant efforts of the Fed may have reinflated stocks but their
actual target, system liquidity, is not responding as hoped. In times
past, such as in 1987, the TED spread has had an uncanny ability to
blow out (like we saw today) right before a big market crash. I’m not
saying we’re definitely going to have a market crash, but this sign
alone makes me very nervous for anybody holding a lot of their assets
in stocks. - Treasury bonds continue to
get bought, bought, bought. This too is usually a reliable sign that
economic weakness is on the way and is a very strong indicator that a
recession is either here or will be soon. Again it’s not a 100%
certainty, but we can state that either stocks or bonds are making a
colossal mistake here because they are signaling very different things. - Rumors, rumors, rumors. Besides the
vast number of articles indicating that Lehman may be next in line, I
am hearing lots of grumbling about the prospects of a great many banks
and brokerages. Where there’s smoke there’s usually fire. Is it
possible that the problems began and ended with Bear Sterns? Yes, but
it’s not probable.
My bottom line? I consider the mysterious stock buying spree of Monday
and Tuesday to be a gift for those seeking to lighten their stock
positions. My concerns about the viability of the banking system remain
fully in effect and nothing I have seen over the past three days has
done anything but confirm my beliefs about the seriousness of the
underlying situation.
More to come…
