Rutherfordian-Economics

RSY: Options...

2012-01-12T08:31:00.000-08:00

A new year creates new possibilities and RSY is suggesting a few covered calls to enhance returns. The RSY portfolio is still suggesting to hold onto the current positions as none have been lowered in the Sabrient ratings to Sell or Strong Sell. Currently the portfolio has 4 Strong Buys and 4 Buys including KRO which was recently picked for Sabrient’s 2012 Baker’s Dozen. Here are some suggestions for writing call options if you have not already sold some for tomorrow's opening (GTC):
KRO: MAY-12 $25.00 CALL 4 @ $1.45
TAL: JUL-12 $35.00 CALL 4 @ $2.50
ARLP: JUN-12 $80.00 CALL 1 @ $3.95
DLX: JUL-12 $25.00 CALL 2 @ $1.65

If it is good enough for Carl Icahn it should be good enough for Rock Solid Yield investors. Well actually we don't follow individual investors, no matter their track record at Sabrient. RSY does find common interest with Icahn in CMC...
CMC facts:
AuditIntegrity: 78
StockScouter: 8
Insider Buying *

Two or more executives, directors or major shareholders purchased a large number of shares recently. Very positive

Basic Materials : Iron & Steel
Dividend: .12 for date of 1-18
Icahn also increased his bets in Commercial Metals (CMC)
Carl Icahn's Top Undervalued Q3 Picks - Seeking Alpha
An Open Letter to Carl Icahn.

TAL: APR-12 $30.00 CALL 4@ $2.00
KRO: MAY-12 $20.00 CALL 4@ $1.65
ARLP: JUN-12 $80.00 CALL 1@ $2.95 or JUN-12 $75.00 CALL 1@ $5.2
CODI: Sucks
DLX: JUL-12 $25.00 CALL 2@ $1.55
Or: JUL-12 $20.00 PUT 2@ $2.00
IVR: Sucks
STM: Sucks

AMERISTAR CASINOS INC COM ASCA in Baker's Dozen. Ex-dividend Feb 25???

Record Dividends in 2012 Should Help Consumers - Real Time Economics - WSJ

A Macro View: ISM November/December, Haters and Lovers

2012-01-11T11:09:00.000-08:00

The MacroView has discussed the Institute for Supply Management (ISM) reports and explored the relationships between the reports and the general health of the economy over the last two years. After first exploring the December reports, this post will explore a new area of research along with some stock suggestions related with the ISM research.

Good but is that Good Enough?
Both headline indexes increased month over month for December reports although non-manufacturing did not make up the ground it lost in November. The non-manufacturing increased .6 to 52.6% in December from a loss of .9 in November. The manufacturing index continued its rise of 1.2 to 53.9% in December after the gain of 1.9% which was on the high side of the consensus range of 52.5 to 54 with consensus point of 53.2%. The non-maufacturing was below the consensus of 53.4 but with-in the consensus range of 52 to 57.5%.

Although the economy is still apprehensive about the European debt crisis, there has been some recent good news on jobs and the unemployment rate with ADP reporting strong job growth in December and the unemployment rate dropping to 8.6%. The employment index in manufacturing continues to be the stronger of the two indexes and last month showed a strong increase of 3.3 to 55.1%, but non-manufacturing continued to be sub-50 at 49.4 even with an increase of 0.5% last month. Respondent comments are also not very encouraging on the jobs front.

Comments from respondents include: "Retirees not being replaced" and "Still in holding pattern; positions are available, but are not being filled."

Respondents' comments are mixed and vary by industry and company. Economic growth continues to be slowed by the lag in employment."

"Continued conservative hiring, with tight discretionary spending controls due to slower growth expectations for 2012, driven by Euro zone sovereign debt concerns and lack of viable U.S. legislative process through the 2012 election." (Computer & Electronic Products)

This just shows that there is still economic uncertainty and the European situation along with a divided government has not helped to increase positive expectations. A hindrance with economic growth has shown signs of finally fading away for the moment, that is prices. The converging direction of the price indexes is good on both sides. After the dramatic drop in the manufacturing price in index in October 2011 by 15 points, last month continued its upward trend with an increase of 2.5 to 47.5%. While rising prices can hinder economic growth by raising uncertainty, declining prices does not necessarily translate to stable growth either. Stable prices over time is more consistent with maximum economic growth. The non-manufacturing price index was lower by 1.3 to 61.2% last month.

Along with the price indexes in the reports, the Macro View has also been interested in the total number of commodity prices going up and commodities that have multiple months of increasing prices. Nothing unusual about the non-manufacturing numbers with 3 multiple month commodities and 9 in total, but for manufacturing there were more commodities going down in price for both categories. Multiple month higher price commodities was 3 and 7 for lower prices and total number of prices going up was 9 compared to 10 in commodities with prices going down.

"Haters" and "Lovers" of the ISM Manufacturing Index
One of the tools we use at Sabrient to development trading models is regression analysis. We find sets of stocks that through back-testing perform better than the comparable index. One set is the lovers that, like the name implies, love the independent variable(s) as it goes up and the other set is a group of stocks that perform well when the independent variable is low (haters). In other words we find stocks that perform well when the economic index is high or rising and also stocks that perform well when the index is low or declining.

With a simplistic model, the non-manufacturing group performed badly in the lovers group and the haters beat the index. But since the data only goes back to the spring of 2005 and overall the manufacturing performed better, let me use that model to provide a few stock ideas based on a regression back test over the last 11 years. Since these results are independent of our ranking system, I also filtered for Strong Buy ratings by Sabrient on the lovers side and Strong Sell along with Sell ratings on the haters side. These results take into account the latest releases by the ISM which were positive as noted above. If the upward trend of the indexes and the overall manufacturing sectors continues to perform well then the lovers group would be expected to outperform the markets.
Lovers:
SCSC Strong Buy
VCI Strong Buy
RHT Strong Buy
GPOR Strong Buy
GCI Strong Buy
LAD Strong Buy
LNC Strong Buy
SNX Strong Buy
HIG Strong Buy
AGCO Strong Buy
PRU Strong Buy
Haters:
HCP Strong Sell
LLTC Sell
VRSN Sell
CTXS Sell
SHAW Sell
T Sell

Disclaimer: The Rock Solid Yield portfolio newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

Position None:
Full disclosure: The author does not personally hold any of the stocks mentioned in this edition of Rock Solid Yields.

ISM - Media Release: December 2011 Manufacturing ISM Report On Business®

Econoday Report: ISM Mfg Index January 3, 2012

ISM - Media Release: December 2011 Non-Manufacturing ISM Report On Business®

Econoday Report: ISM Non-Mfg Index January 5, 2012

Calculated Risk: ISM Non-Manufacturing Index indicates slightly faster expansion in December

MarketWatch December Forecast:
Manufacturing: 53.0%
Nonmanufacturing: 53.3%

Calculated Risk: Weekly Initial Unemployment Claims decline to 372,000

Calculated Risk: ADP: Private Employment increased 325,000 in December

Want a Job? Go to College, and Don't Major in Architecture - NYTimes.com

Environmental Economics: Chronicle: Unemployment Varies by College Major

Good News On The Jobs Front?

The Capital Spectator: ADP: Job Creation Surged In December

CARPE DIEM: Jobless Claims End 2011 at 3.5 Year Low; And ADP Reports 325K Private Job Gain in December

Strong ADP Jobs Gain Needs Grain of Salt - Real Time Economics - WSJ

David Smith's EconomicsUK.com: Good news from UK manufacturing

Calculated Risk: ISM Manufacturing index indicates faster expansion in December

Calculated Risk: ISM Non-Manufacturing Index indicates slightly faster expansion in December

Vital Signs: Port Traffic Muted - Real Time Economics - WSJ

Vital Signs: More Hotel Rooms Filled - Real Time Economics - WSJ

Vital Signs: More Homes Going Into Contract - Real Time Economics - WSJ

Outside the Bubble, Public Investment Is Disappearing « Multiplier Effect

Personal finance: A layaway to save | The Economist

CARPE DIEM: ND Oil Boom Fuels Real Estate Sales in Arizona

Stumbling and Mumbling: Entitlements & ratchets

Kahneman, Greed and Success, Bryan Caplan | EconLog | Library of Economics and Liberty

The President’s Suspect Statistics We have too little upward mobility, but it has not declined.

Worthwhile Canadian Initiative: The concrete impacts of taxes

Leading Indicators Index Gets Overhaul - Real Time Economics - WSJ

Still in the Woods

*************************************
ISM - Media Release: November 2011 Manufacturing ISM Report On Business®

Econoday Report: ISM Mfg Index December 1, 2011

ISM - Media Release: November 2011 Non-Manufacturing ISM Report On Business®

Econoday Report: ISM Non-Mfg Index December 5, 2011

World-Wide Factory Activity, by Country - Real Time Economics - WSJ

MarketWatch November:
ISM: 52
Non-Manufacturing: 53.9%
U.S. manufacturing lightly accelerates: ISM

The Capital Spectator: Will Manufacturing's November Revival Last?

Calculated Risk: ISM Manufacturing index indicates slightly faster expansion in November

Calculated Risk: Construction Spending increased in October

Misc Links:
Calculated Risk: Employment Summary, Part Time Workers, and Unemployed over 26 Weeks

Calculated Risk: Seasonal Retail Hiring, Duration of Unemployment, Unemployment by Education and Diffusion Indexes

The U.S. Unemployment Rate Falls to 8.6%: Has America Avoided a Double-Dip Recession? - The Curious Capitalist - TIME.com

Mish's Global Economic Trend Analysis: Charts of the Day: Labor Force and Unemployment Rate Adjusted for Population Growth Since 1948 Show Falling Unemployment Rate is "Statistical Mirage"

The Tax Foundation - Overreaching: Time to Reconsider FATCA

What Does The Decline in Labor Force Participation Tell Us « Modeled Behavior

Mankiw: We Need Fiscal Hawks, Monetary Doves, Arnold Kling | EconLog | Library of Economics and Liberty

In Praise of Dirty Energy: There Are Worse Things Than Pollution and We Have Them « Modeled Behavior

Are These Recessions All the Same?, Arnold Kling | EconLog | Library of Economics and Liberty

CARPE DIEM: We Should Thank China for Its Currency Policy

Quotation of the Day…

Judith Scott-Clayton: Student Loan Debt: Who Are the 1%? - NYTimes.com

If there is a recipe for growing too fast forever, I have yet to see it « Modeled Behavior

New evidence that being underwater on your house limits labor mobility — Marginal Revolution

Economist's View: "The Facts about Small Businesses and the Millionaire Surcharge"

Judith Scott-Clayton: Student Loan Debt: Who Are the 1%? - NYTimes.com

Macro Musings That Drive Me Nuts « Modeled Behavior

Soros: World Financial System on Brink of Collapse - Real Time Economics - WSJ

CARPE DIEM: One-Year ARMs Fall to Historical Low

CARPE DIEM: How Terrible: Walmart Plans to "Dump" Six Stores, 1,600 Jobs and $21 Million in Charity on Wash. D.C.

Stumbling and Mumbling: Why stagnation matters

TaxVox » Blog Archive » Top Income Tax Rates and Revenue: A Historical Perspective

Vital Signs: Strong Private Hiring - Real Time Economics - WSJ

Time to Demand Transparency and Accountability at the Fed « Multiplier Effect

Calculated Risk: LPS: Mortgages In Foreclosure Process at an All-Time High

Thinking About CEO Pay, Arnold Kling | EconLog | Library of Economics and Liberty

Top Marginal tax rate of 70% ? | Angry Bear - Financial and Economic Commentary

Who’s Dropping Out of the Labor Force « Modeled Behavior

Mish's Global Economic Trend Analysis: Daily Show on "Free Money"

Calculated Risk: ISM Non-Manufacturing Index indicates slower expansion in November

David Smith's EconomicsUK.com: Service sector growing

RSY: Tall TAL

2011-11-21T14:04:00.000-08:00

Sabrient rates TAL a Strong Buy for its superior value and growth profiles, which indicates a stock that should outperform the market. TAL International Group, Inc. boasts an outstanding value growth of 80.4 (out of 100) and more outstanding is its 100 score on growth. Rigorous backtesting reveals that stocks with similar growth profiles outperform the market in the long term especially if they continue to exceed expectations. Just last month it beat consensus estimates for the 3rd quarter by 10 cents to $1.01 per share. Even though the pay out ratio is above 50%, with strong performances like last quarter, that should be a minor concern.

Underlying TAL's excellent value scores is its earnings score of 70.1 and outstanding fundamental score of 86.9. TAL's forensic accounting score is average, which indicates its level of risk going forward. With these strong fundamental scores TAL is expected to significantly outperform the market over the near term.

TAL's next ex-dividend date is coming up on November 29 with a dividend of $0.52/share. The dividend yield is a very decent 7 1/2% and each quarter the ratio is 1.85%. Adding this position will increase exposure in the services sector but unique in the rental and leasing of transporters. RSY recommends a buy limit order of TAL 400 shares at a limit price of $26.99 for tomorrow's opening (GTC). Today's market weakness will probably reverse some at the opening, but still down over a dollar from Friday's close.

Update
Since the last update, dividends provided almost $650 of gains in the model portfolio. RSY also closed out the call option on ARLP for a gain of $267 and the put option on DLX expired with a gain of $239. Below is all the transactions in the model portfolio since inception. (Click to enlarge.)

Optional Options
ALLIANCE RES PARTNER L P UT LTD PART JUN-12 $75.00 CALL @ $6.05
COMPASS DIVERSIFIED HOLDINGS SH BEN INT MAY-12 $15.00 CALL @ .75 Loss
DELUXE CORP COM APR-12 $22.50 CALL @ $3.40 <>
KRONOS WORLDWIDE INC COM MAY-12 $20.00 CALL @ $5.00
STMICROELECTRONICS N V NY REGISTRY APR-12 $7.50 CALL @ .95 -----

WSTG 11-17-2011 AI 47 SS 4 {Insiders nominal.}

TAL 11-29-2011 SS 7 AI 53 {Insiders nominal.}:

TAL International: A Terrific Company - Seeking Alpha

Yahoo! Message Boards - TAL International Group, Inc. - EPS $ .54?
They made .54 vs .38 last year after adjustments for swaps
last quarter .70 vs .17.

Cash increased recently/

Depreciation creates a non cash charge.

Dividend is .52 vs .5 last quarter and .3 last year.

Company does not foresee major recession risk or default of a major customer.

Sales increased from Dec 10 alot more than the increase in Accounts Receivable. ( Positive) -- unless I am reading something wrong?

Company expects flat to down results from this quarter with the next.

Last year 4 th quarter they made 1.15 vs op income of .76 due to gain on swaps.
TAL says flat to down next quarter pre tax op income of $1.56.
As long as Europe and the US experiences no hard landing recession, TAL's payout of .52 a share will hold up.
People sold this one off anticipating recession.

I sold out months ago at 28.5 and 27.5 but did not buy back at 23 or higher. Spooked by the macros. TAL in 08 09 ELIMINTED the div! Stock went to 9 or less.

MACRO looks better, high dividend of 7.5 % plus looks good, but don't expect much capital appreciation from this point.

Macro View: ISM October,

2011-11-01T12:10:00.000-07:00

While the newest ISM reports did not indicate the start of a double-dip recession, both reports were weaker than expected. The Manufacturing ISM Report announced a drop of 0.8 to 50.8% which was below the consensus estimates of 52 and a range of 50.9 to 53% (Econoday Report: ISM Mfg Index). The Non-Manufacturing ISM Report announced an insignificant drop of .1 to 52.9% so that it fell into the consensus range of 52.2 to 54% but was below the consensus point 53.5% that signified that economists were expecting the index to raise 0.6% (Econoday Report: ISM Non-Mfg Index).

Even though the recent reports have shown continued weak and anemic economic growth, there was some surprises in the underlying indexes that could indicate positive news going forward. It was expected that the price pressures would continue to subside indicated by the number of commodities up in price declining along with the price indexes. In fact, the manufacturing report showed more commodities with prices down than up for both multi-month commodities and total commodities. Multi-month commodities up in price was 3 and 6 for commodities down in price, and the numbers for total commodities are 5 and 12 respectively. Thus the price indexes also dropped, for example the significant drop of the non-manufacturing index by 4.8 to 57.1%. Even more surprising was the manufacturing price index dropped an amazing 15 points to 41%. Also the net percent of respondents stating that prices were lower minus those responding higher changed from a positive 12 to a negative 18. This is even more significant drop since it plunged below the break even point of 50 (more precisely 49.4%). The report noted the significance of these events below along with the graphs for commodities with rising prices for manufacturing and non-manufacturing.

This is the sixth consecutive month the prices index has registered below 80 percent since December 2010, and is the first month of contraction since May 2009 when the index registered 43.5 percent. The last time the Prices Index decreased more than 15 percentage points was in June 2010, when it registered 57 percent compared to the prior month's reading of 77.5 percent.

Picking up steam or grasping at straws?
One bit of good news was that the manufacturing index for new orders reversed from negative territory to expansion after 3 months of contraction. The index rose by 2.8 to 52.4%. This may be a positive sign going forward but it seems too little and too late to be an important factor in the recovery. On the other hand, new orders dropped 4.1 to 52.4 for non-manufacturing index.

The biggest surprise from the reports was the non-manufacturing employment index reversed its short term declining trend below the break even point of 50, and the index jumped a descent 4.6 points to 53.3%. I certainly expected it to stay under 50 even if it was expected to increase over last months low of 48.7%. Below is a graph showing the non-manufacturing index since December 2009.

Looking forward
Even with the few positive signs, the problems the US economy faces is much larger than a one month expansion in new orders or reversal of short term employment trends. The biggest problem is arguably unemployment staying stuck in the 9% range. And only heaven knows how the Euro-crisis will be resolved. Greece may be small potatoes for the world economy, but if the financial problems topple over other unstable governments and financial institutions, then it will be hard to predict how far the contagion will grow.

MarketWatch:
ISM: 52.1
Services: 53.5

The Capital Spectator: Major Asset Classes | Oct 31, 2011 | Performance Update

Calculated Risk: ISM Manufacturing index indicates slower expansion in October

Calculated Risk: ISM Non-Manufacturing Index indicates expansion in October

Misc. Links:
Calculated Risk: Preliminary Vehicle Sales for October

David Smith's EconomicsUK.com: GDP calm in the storm

Mish's Global Economic Trend Analysis: GM Sales Barely Rise, Chrysler's Up 27%; What Does It Mean?

Calculated Risk: Construction Spending increased slightly in September

The euro crisis: Eurodoom | The Economist

Economist's View: "How My Taxes are Raised Matters"

Economics - Australia lowers interest rate to 4.5%

Bruce Bartlett: A Close Look at the Perry Tax Plan - NYTimes.com

UK economy: Pretty Q3; ugly Q4 | The Economist

Economists React: U.K. Data No Cause for Celebration - Real Time Economics - WSJ

Class War Within a Class War

Payday Loans - Thomas Sowell - Townhall Conservative

Political Calculations: Projecting Fourth Quarter 2011's GDP

Midwest Economy: District Economy Update

Fiction Made in America

Class War Within a Class War

Environmental Economics: Blaming economists for our current economic situation is like blaming psychologists because people are crazy

Division of Labour: November 2011 Archives

Mish's Global Economic Trend Analysis: Bank of America Employees Flood Rivals with Resumes; BNP, ING Book Charges on Greek Debt, Slash Jobs; "Project New BAC" on Rip-Roaring Start

Tea Party vs. OWS: The psychology and ideology of responsibility | The Moral Sciences Club | Big Think

Consumers Remain Pessimistic - Real Time Economics - WSJ

Tax Burden for the Rich...2008

2011-10-19T14:38:00.001-07:00

The categories are:
$1 under $5,000
$5,000 under $10,000
$10,000 under $15,000
$15,000 under $20,000
$20,000 under $25,000
$25,000 under $30,000
$30,000 under $40,000
$40,000 under $50,000
$50,000 under $75,000
$75,000 under $100,000
$100,000 under $200,000
$200,000 under $500,000
$500,000 under $1,000,000
$1,000,000 under $1,500,000
$1,500,000 under $2,000,000
$2,000,000 under $5,000,000
$5,000,000 under $10,000,000
$10,000,000 or more
If you really blew it up, you might see the $153 that the tax filers under $5000 pay.
153
200
368
665
1,166
1,710
2,376
3,373
5,246
8,037
16,903
55,984
163,513
299,480
429,877
739,377
1,638,990
6,247,810
Information from link at: Open thread: Can you spot the wrongness in this tax graph?

A Macro View: ISM September, Trends Ending, Now What

2011-10-06T13:18:00.000-07:00

The reports on Business by the Institute of Supply Management (ISM) showed overall positive news even with a marginally lower headline NMI for the non-manufacturing sectors by 0.3 to 53%. Both headline numbers came above consensus of 50.5 & 50.6 with actual number of 51.6% for manufacturing, and consensus of 52.7 & 52.9 with actual number of 53% for non-manufacturing. Both were within the consensus ranges provided from Econoday with a range of 49 to 52% for manufacturing and 51.3 to 54.2% for non-manufacturing.

Comparing the US manufacturing index to World-Wide Factory Activity indexes shows that the US was among the minority that experienced growing expansion of the manufacturing index. Over two-thirds of the sample countries experienced a drop in the month-over-month index. The positive news of the US manufacturing increasing the index by 1% even inspired economist Dan Greenhaus of BTIG LLC to conclude that the "United States was not in a recession in the third quarter". Considering that the manufacturing sectors of the economy is minority share of the US economy, I would not be so confident of such declarations.

Trends are Over
Technically, there may be little possibility of a double dip recession coming now, but with unemployment stubbornly staying above 9%, then hardly anyone will be considering the US economy being healthy. That opinion would be widely agreed to from Tea Party members to Occupy Wall Street (OWS) crowds.

A major concern of this blog, the Macro View of the Markets, is the price indexes in the ISM reports and commodities with rising prices. The price index for manufacturing increased slightly to 56% by 0.5 and dropped 2.3 to 61.9% for non-manufacturing. From a macro perspective on the economy, price indexes in the mid fifties to low sixties might be good for now considering the overhanging threat of deflation. This blog also has been tracking and graphing the number of commodities up in price and commodities that have multi-months with rising prices. (Below are the two graphs of manufacturing and non-manufacturing respectively.)

Until the economy starts heating up again, or more precisely the world wide economy, then worries about commodity prices and price levels is of secondary concerns compared to the unemployment rate and this has been at least partially derived from business confidence. Recently we have seen the numbers in both categories on a downward trend. This trend ends when it is no longer reasonable to decline further and in this case zero bound limit. There was a trend up for all four indicators until around April or May of this year and now it has declined to reasonable levels.

The other index of great importance to the Macro View is the employment index of the non-manufacturing sectors. Below is a graph of that index that clearly shows the upward trend we were seeing has ended and is now in a downward trend line. Not only do we have visual confirmation of the shift in the trend line but the R squared statistic has dropped dramatically from its high of nearly 0.75 to under 0.49 last month and from 0.63 the previous month. Statistically both trends have p values of less than one percent, indicating that both trend lines are significant and separate. The trend line is drawn just to show the dramatic shift from the previous trend line.

Respondent's Uncertainty
Pundits of the US economy often point to reports that state business have more concern about lack of demand than regulations or just general financial uncertainty. One such prominent pundit is Paul Krugman where he stated the following at the article The Fatal Distraction .

O.K., I know what the usual suspects will say — namely, that fears of regulation and higher taxes are holding businesses back. But this is just a right-wing fantasy. Multiple surveys have shown that lack of demand — a lack that is being exacerbated by government cutbacks — is the overwhelming problem businesses face, with regulation and taxes barely even in the picture.

For example, when McClatchy Newspapers recently canvassed a random selection of small-business owners to find out what was hurting them, not a single one complained about regulation of his or her industry, and few complained much about taxes. And did I mention that profits after taxes, as a share of national income, are at record levels?

Below is a sample of quotes from respondents in the reports. There is no way to know how widespread these feelings are, but it is reasonable to assume that the ISM picks these quotes to try and capture the general sentiment of their members. The first quote is a damning critique of Krugman's assertions and that is reiterated by the second quote from the issuer of the manufacturing report.

Manufacturing:
"The economy continues to be a drag on our business outlook. We are trying to deal with new and additional FDA regulations which are costing significant dollars. It is hard to recoup any of these additional costs in our pricing levels without losing significant sales volumes." (Chemical Products)

Comments from respondents generally reflect concern over the sluggish economy, political and policy uncertainty in Washington, and forecasts of ongoing high unemployment that will continue to put pressure on demand for manufactured products." Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee

"Japan supply chain issues are over, but exchange rates and raw material prices are hurting our profit." (Transportation Equipment)

Non-Manufacturing:
Respondents' comments reflect an uncertainty about future business conditions and the direction of the economy. Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee

"It appears everyone is waiting to see what happens next. No trust in the economy or the federal government to do what is needed." (Accommodation & Food Services)

"The 2012 outlook is not optimistic; though we keep hoping for a rebound, we see little sign of an improved economy — nothing at least that will spur growth, investment or expansion. Improved investment performance in early 2011 caused us to begin several large capital projects, and although we have broken ground, we cannot help but question if our timing was right." (Educational Services)

"Third and fourth quarters appear to be slowing down in order volumes. Uncertainty over U.S. and European economy is causing clients to hold off on new orders." (Professional, Scientific & Technical Services)

Conclusion
This might be the start of the business communities changing attitudes and concerns. That being, that government is clearly the hindrance to business expansion and greater investment levels. It is hard to think how the OWS movement will increase business confidence and willingness to take on greater risks through expanded investments.

The positive trend upward for the employment index in the non-manufacturing report has officially been defeated. Not a good sign for the unemployment rate going forward. Even though new orders in that same report showed greater expansion with a rise in the index of 3.7 to a healthy 56.5%, the percentage of respondents stating higher growth in new orders actually fell last month. The index rose because those reporting contraction in new orders fell greater. Thus the number of respondents stating that new orders maintained the same level rose to 60% from 50%.

MarketWatch:
ISM: 50.6
Non-Man: 52.7%

Econbrowser: Slow growth continues

Calculated Risk: ISM Non-Manufacturing Index indicates expansion in September

Vital Signs: Slower Service-Sector Growth - Real Time Economics - WSJ

The Great Stagnation in the UK

Mish's Global Economic Trend Analysis: Ben Bernanke Fans Fires of Protectionist Legislation to Senate Joint Economic Committee; Expect Global Depression if Obama Signs On

CARPE DIEM: Intermodal Rail Traffic Highest in Four Years

Mics Links of Interest:
An Economic Bill of Rights, Arnold Kling | EconLog | Library of Economics and Liberty

The Tax Foundation - How Do You Tax a Millionaire? First, You Get a Millionaire

Trickle Down

Mish's Global Economic Trend Analysis: How Ben Bernanke "F*d" the Banks and Fixed Income Savers at the Same Time

How Fast Does the Stock Market Forget False News? About Seven Days « Donald Marron

Are There Too Many Homes in America: Apartment Vacancies and New Units Approaching Record Lows « Modeled Behavior

A Macro View: ISM August, Trendline Friend or Foe

2011-09-12T10:45:00.000-07:00

While the markets had bigger worries than the little ISM reports, both headline numbers of the reports were above consensus expectations. The PMI for manufacturing was three tenths lower than last months number at 50.6% but well above the consensus of 48.5 which was expecting a drop of almost 2 1/2 points. The NMI for non-manufacturing was nicely up .6 to 53.3% which the consensus was expecting a drop of 1.7 to 51%. Both were neatly in the consensus range provided by Econoday with the PMI range of 47 to 51.9% and the NMI range of 49.7 to 56.6%. Looking at the ranges of the consensus, the NMI range as usual is broader. This may reflect that the economists find it harder predicting the non-manufacturing sectors. I do question the one or more economists that thought the NMI would jump nearly 4 points last month.

Overall, the headline numbers were better than expected, but that was based on gloomy forecasts overall. The US was definitely not alone in the manufacturing sectors contracting as noted by World-Wide Factory Activity showed only four countries having higher index numbers in August and 18 countries having negative change month over month.

Trends Are Our Friends ... Or Not
Employment is one of the sub-indexes that the Macro View of the Markets looks at for trends. These are important issues when considering that this weak recovery could be called a "jobless recovery". The graph below is from the Federal Reserve (FRED - Economic Data) which shows two trends. The first starts at February 2009 and peaks at February 2011 with a strong upward trend. The second trend is a downward trend since this February. Whether the second downward pressure persists is the question, and a drop of the latest 1.7 points to 51.8% is a negative indicator for continuing employment growth in manufacturing.

The chart below shows the non-manufacturing employment index with a trend line since December 2009. The slope of the trend line has been declining since at least March 2011. Even before the trend line drops to zero, there is likely to be the start of a downward trend. That is the question we are facing now with the last two months dropping below trend. If the short term trend continues this would mean contraction in the non-manufacturing sectors and the prospect of decent job growth along with it.

The following two graphs shows the number of commodities with multi-month price rises and then total number of commodities rising in price for both manufacturing and non-manufacturing sectors respectively. All four series peaked in April or May of this year creating an upward trend since October 2010 and then a general downward trend since its peak. No trend can continue past the zero-bound limit as in this case. It is important to look at trends since the index numbers are not completely independent events. One month's numbers are likely to follow closely to the last months numbers plus a possible trend factor. The factors and forces causing the respondents attitudes and thus responses in the ISM reports are likely to carry over from one month to another. Even the business cycle theory would have to consider a stochastic process for determining the next stage in the cycle.

The following two graphs, from Fred Economic Data, shows a recent downward trend for manufacturing with the index dropping 3.5 points to 55.5%. But non-manufacturing has reversed its recent down trend and jumped up 7.6 points to 64.2%. Not that it is a perfect correlation, but input prices have shown a positive correlation with the growth of industries. Take this month, the NMI increased and so did the price index for non-manufacturing, while the PMI declined along with the price index in manufacturing.

That correlation was only based on one month observations but I think it is more broadly applicable than that. That as the economy heats up for the US and thus worldwide expansion also then commodity prices start rising dramatically. This then leads to the economy cooling as a result of higher commodity prices. The weak economy then drives down demand for commodities and then the cycle begins again. Another way of describing this phenomenon is at Our Oil-Constrained Future.

If this model is accurate—and if the ceiling on global oil production really is around 90 mbd and can be expanded only slowly—it means that every time the global economy starts to reach even moderate growth rates, demand for oil will quickly bump up against supply constraints, prices will spike, and we'll be thrown back into recession. Rinse and repeat.

Conclusion and Trends
Overall the ISM reports were better than expected, but fall short of dispelling rumors of a second dip recession. Hopefully, the constraints on economic growth caused by slingshot effects of growth and commodity prices will be solved someday. Maybe by increased production in Libya or Iraq. But these constraints will likely persist until the structural rigidity problems of the US are solved.

This post talked about trends in general terms and avoided too much statistical jargon, and we could have explored more about knowing when a trend has structurally changed or was it just slight deviance from the norm or just an anomaly in the data set. These general discussions should be enough to understand that the graph below does not show a trend line but simply the average over the extreme long term data points.

The first reaction from a technical perspective is that the scale should be log at least on the vertical axis. At the least the numbers should have been adjusted by something like the GDP deflator that adjusts for the value of the dollar over time, especially over long periods of time. Even with these adjustments it might not help since the underlying data appears to be nominal stock prices and not total market cap. That is, what is measured is not value but the arbitrary amounts of money traded for a share. A company can control outstanding shares and thus the price of their share through dilution or stock splits or even reverse stock splits. Lastly, a trend line should go through as many points as possible and be close to the data points. This "trend line" only has one point in common with the data set, and the origin point is immaterial.

And I Will Say It Again....: Why David Trainer is an Idiot

MarketWatch:
ISM Man: 49---48.5%
Non-Man: 51.2%

ISM Manufacturing Comes In Better Than Expected, But Still Weak - Seeking Alpha

The Capital Spectator: A Bit Of Good News For The Services Sector

Good News on ISM « Modeled Behavior

Mish's Global Economic Trend Analysis: Manufacturing ISM Dips Slightly, Barely Above Contraction, Saved by Inventory Growth, Much Weaker than it Looks

The Capital Spectator: Manufacturing Growth Weakens In August

ISM Manufacturing Comes In Better Than Expected, But Still Weak - Seeking Alpha

Calculated Risk: ISM Non-Manufacturing Index indicates expansion in August

Economists React: U.K. ‘Bright Spot’ Dims - Real Time Economics - WSJ

Calculated Risk: Texas Manufacturing Activity "Flat" in August

Misc. Links:
CARPE DIEM: More On 3-Year Inflation Being Lowest in 54 Years

Calculated Risk: ISM Manufacturing index declines slightly to 50.6

CARPE DIEM: Real Consumer Spending Up in July to Record High

August Sales: How Retailers Fared - Real Time Economics - WSJ

Calculated Risk: Pending Home Sales decreased in July

The Sabrient Blog » The Fed’s Bazooka: Revealed As Final Policy Firepower in Jackson Hole

Macro and Other Market Musings: Does Higher Expected Inflation Really Spur Spending?

Stephen Williamson: New Monetarist Economics: Has Politics Paralyzed the Fed?

Mish's Global Economic Trend Analysis: Bernanke's Invisible Bazooka Ploy

The Capital Spectator: Jobless Claims Fell Last Week, But So What?

Econbrowser: The CPI, and Some Key Components

Calculated Risk: Weekly Initial Unemployment Claims decline to 409,000

Calculated Risk: Employment Situation Preview: Another Weak Report

Calculated Risk: Construction Spending declined in July

Are There Too Many Homes in America, Ctd « Modeled Behavior

Macro and Other Market Musings: The Fed Gets Schooled Again on Central Banking: the Swiss National Bank Edition

Political Calculations: A Slightly Better Than Zero Jobs Report

The breaking windows fallacy — Marginal Revolution

RSY XXXXV: Buy KRO

2011-09-04T13:28:00.000-07:00

Sabrient rates Kronos Worldwide, Inc. (KRO) a Strong Buy for its superior scores for growth, value and momentum, three important metrics that indicate future market outperformance with scores of 93.2, 85.7 and 83.9 respectively (100 being highest). Tuesday is the day to jump on this company that has shown consistently conservative accounting practices as the next ex-dividend date for KRO is September 7th with a dividend of 15 cents per share. In addition to having high growth, value and momentum scores, KRO has outstanding Sabrient scores in Earnings, Balance and Fundamental scores with scores of 99.8, 65.3 and 91.1 respectively. These are factors that the RSY portfolio looks for with respect to long term investments.

KRO is a producer and marketer of titanium dioxide pigments and thus is considered a basic materials sector stock under the chemical manufacturing industry. This should be a good replacement for our profitable position of LZ that RSY exited after Berkshire Hathaway Inc. offered to buy out LZ. There is no way to know if KRO will be a buyout candidate, but insiders find future prospects encouraging and are buying accordingly. Sabrient has also noted KRO for its outstanding GARP (growth at a reasonable price) attributes and has added it to its top 10 GARP stocks.

RSY portfolio recommends a buy order of 400 shares of KRO at a limit price of $20.99 (good for the day). Hopefully, there will be some weakness in the opening moments to capture KRO at a good price, but if not RSY does not want to chase a gap up in prices or pursue it if we miss it on Tuesday after the ex-dividend date.

RSY XXXXIV: Unload TOT

2011-08-21T11:50:00.000-07:00

Sabrient Systems recently downgraded TOTAL SA (TOT) to Strong Sell from Hold based on its overall inferior scores on important metrics that point to weak future market performance. While TOT maintains above average Value Score of 74.5 (scores out of 100) and exceptional Fundamental Score of 82.9, its Earnings Score measures a measly 3.6 based on its earnings performance and projected outlook.

Unfortunately, the timing to sell TOT now is most inopportune with significant market weakness and that TOT has already declared an ex-dividend date on September 14 with a dividend of nearly 82 cents per share. TOT has provided a net profit of nearly $360 from declared dividends and our doubling-down on May 13th when we recommended More TOT(al) for RSY. RSY recommends a sell order of 100 shares (remaining lot) TOT at limit price of $45.51 (GTC). Hopefully it will gap up, but if not be sure to monitor it closely on Monday morning.

Since the last update, RSY recorded a little over $186 in dividends and bought the covered call option on FL. That netted the RSY portfolio $317. Overall profits, with the loss of half the shares and the dividend payouts, netted RSY $196. Considering the cost basis of $19.16, it would be possible to make profitable trades at the $17.50 call options. Since it has not traded, that seems unlikely. RSY recommends writing the covered call of 2 options of FL at the strike price of $20 for Feb '12 at a limit price of $1.50 (GTC).

RSY XXXIII: IVR

2011-08-14T12:15:00.000-07:00

Sabrient Systems recently upgraded Invesco Mortgage Capital Inc. {IVR is a real estate investment trust (REIT)} to Strong Buy because of its outstanding value profile. IVR should be familiar with RSY portfolio watchers as it was one of the first two positions entered on August 23, 2010. The RSY portfolio had net gains of $1434 (after transaction costs) with nearly a thousand from dividends until it sold out its last lot on June 17, 2011 at the price of $20.96. Friday's price range was $18.28 to $18.90. At that time Sabrient had downgraded IVR to Sell.

IVR has average at best forensic accounting score but has greater potential to outperform the market with lower risks than most stocks at present time according to StockScouter. Insider buying continues to be strong indicator of forward growth. While Earnings Score and Balance Sheet Score is below average, the Sabrient Fundamental Score is 92.7 (out of 100), which measures a company's financial health, including its balance sheet, cash flow, revenue, and earnings quality. With a Sabrient Fundamental Score of 92.7, INVESCO MORTGAGE is substantially higher than the average of its industry group, which carries a Sabrient Fundamental Score of 55.2.

Also of most importance is that Ben Bernanke gave his word that he will continue to shower the banking industry with free money. Not really, but he did promise to keep rates low until at least 2013 as long as the economy continues to show weakness. When evaluating IVR for the portfolio in 2010, it was an issue if interest rates were going to rise, which could hurt highly leveraged firms and industries like REITs. At the time, the Macro View was looking for low interest rates for at least the length RSY was hoping to hold IVR. Now it seems reasonable again that interest rates will remain low for the foreseeable future.

When the buy was recommended last time, RSY suggested buying 400 shares. This time RSY suggests a slightly different approach. First, we want to enter a long position for some exposure on the great upside potential. RSY recommends a buy order of 200 shares of IVR at a limit price of $18.99 (GTC). Second, let us try to capture any future price "dips". RSY recommends a sell of 2 contracts of IVR Jan 21 '12 $17.50 put at a limit price of $1.60 (GTC). Once the long position is taken, looking at writing covered calls is also a possibility. At present time, none look worth the reduced upside potential as most are below even one dividend payout. RSY is expecting the next ex-dividend to be around September 15th.

Bernanke's Zero Interest Rate: What It Means for Your 401K (And What to Do About It) - Seeking Alpha

Increasing Uncertainty Continues to Overshadow Non-Agency Mortgage REITs - Seeking Alpha

Bernanke Buoys mREITs by Removing 'Extended Period' Uncertainty - Seeking Alpha

Agency mREIT Dividends the Obvious Winner After FOMC Interest Rate Announcement - Seeking Alpha

Dividend Yield Should Support Decision to Buy Invesco - Seeking Alpha

Sticking With Proven Agency-mREIT Winners Until Invesco Proves Itself - Seeking Alpha

AGR
Aggressive (30)

INVESCO MORTGAGE CAPITAL INC: STOCK RATING SUMMARY
10
StockScouter

Invesco Mortgage Capital Inc, a mid-cap growth company in the finance sector, is expected to significantly outperform the market over the next six months with less than average risk.

10 is the best possible rating.
IVR : 18.64 +0.32 +1.75% - MSN Money

RSY XXXXII: Update

2011-08-11T11:57:00.000-07:00

It has been a wild ride for the markets lately -- to say the least. One strategy on volatile market days is to “Buy The Dip”. For a prudent investor, it does mean having a strategy in place to know exactly what position to enter and at what seems reasonable for long term investing.

Another strategy is to double down when a favorite takes a dip. On the one hand, no one wants to be catching a "falling knife" but on the other hand if a stock is a good price at a certain price shouldn't a lower price be a better deal. If hamburgers go on sale, do we buy less or more? But for RSY, nothing in our portfolio seemed to scream out to add more to our current positions. Looking at our positions and Sabrient ratings below, most are hold or buy. And the Strong Buys were mostly in positions that RSY was "fully invested" in, that is it did not seem prudent to overexpose on those particular positions. The one exception was DLX, but RSY sold 2 put options, which looks like they might be called out.

Update:

The nice thing about dividend portfolios like RSY is that the dividends keep coming in no matter how volatile the market is. RSY recorded almost $400 in dividends for June and $470 in July.

In earlier posts, RSY had recommended some options at limit prices. RSY only recorded 3 of them at hitting the limit price. Instead of buying the long positions on the dips, buying back covered calls is one way to capture the volatility in the markets. RSY recommends trying to buy back the two covered calls at the following prices.
1. Buy to cover FL Jan 21 '12 $22.50 Call *2 at limit price of $0.70 (GTC)
2. Buy to cover ARLP Mar 17 '12 $80 Call *1 at limit price of $2.00 (GTC)
After either one is transacted, it might be a good idea to look to sell covered calls again at a lower strike price. The FL covered call transactions will bring that position to break-even at current price and ARLP will pocket us some profit.

A Macro View: ISM Reports-July

2011-08-07T15:43:00.000-07:00

This last week has seen wild swings in the markets and certainly the ISM reports did not help the mood of pessimism. Starting Monday, the markets got a significant jump up of almost 140 points on the DJIA, but the mood changed as soon as the July 2011 Manufacturing ISM Report (PMI) was released at 10am. Although Wednesday was up slightly for the day, the July 2011 Non-Manufacturing ISM (NMI) also reversed the up direction at 10am.

The markets were reacting to the headline numbers as both were below the consensus marks of 54.3% versus the actual of 50.9% for PMI and 53% versus 52.7% for NMI. The market also reacted more dramatically on the PMI, presumably because it also missed the consensus range of 52 to 55.4% as numbers reported by Econoday.

Before the two reports came out, leading economics bloggers became gloomy on the economic outlook, and the report said “optimism is out; pessimism is in,”. Professional economists reacted by stating the manufacturing report was Very Weak, Very Disappointing. Plenty of economics bloggers also wrote about the reports like the following linked list.
1. The Capital Spectator: US Manufacturing Activity Slows Sharply In July
2.
Manufacturing Slows In July, Stoking Slowdown Fears
3.
Mish's Global Economic Trend Analysis: Gap-and-Crap it Was; ISM Plunges to 50.9, Lowest Level in 2 Years, New Orders Contract; Key Thoughts; Reaction in Gold

4. Calculated Risk: ISM Manufacturing index declines in July

5. Mish's Global Economic Trend Analysis: ISM says "Business Conditions Flattening Out"; Why Services Number Worse Than It Looks; Unsustainable Conditions

6. Calculated Risk: ISM Non-Manufacturing Index indicates slower expansion in July

7. Manufacturing Weakens, But It's Not a Death Knell - Seeking Alpha/Calafia Beach Pundit

8. A Bright Spot in the ISM Report? - Seeking Alpha/Cullen Roche

Interestingly enough the last two links hint that the time to abandon ship has not yet arrived. Calafia Beach Pundit (CBP) makes an important point that just because the manufacturing sector is slowing in growth, the correlation between GDP growth and PMI is not at the break even point of 50 but is 47%. The last manufacturing report stated:

"The past relationship between the PMI and the overall economy indicates that the average PMI for January through July (57.6 percent) corresponds to a 5.3 percent increase in real gross domestic product (GDP). In addition, if the PMI for July (50.9 percent) is annualized, it corresponds to a 2.9 percent increase in real GDP annually."

But when looking at the chart by CBP (below) it looks like this business cycle has diverged from the expected outputs. The biggest spikes in PMI has not resulted in the same magnitude of spikes in GDP, and more importantly is the divergence between PMI and GDP during this business cycle. Maybe it was a weaker non-manufacturing sector that did not contribute the same magnitude as other business cycles. Looking at the last major spike in the PMI index at around 2004, it still showed a solid growth in GDP with even the lows well above the 2% mark. This time the first two quarter GDP growth has just dropped off during the spike to just above no growth. (Below is a more detailed (esoteric) discussion about correlations between GDP and the PMI indexes.)

Cullen Roche tells us the bright spot in the ISM report is that inflation fears by hyperinflationistas (my word) should go away now. But the other side of the story is that this just means lack of aggregate demand in the economy. Right now we need an economy more like China than Japan as Roche contrasted, that is higher inflation rates and higher growth rates. No way we can achieve that high of growth due the size of the economy and so much structural rigidity built into the system.

In addition to the fact that the manufacturing price index has dropped a 'staggering' 26.5% over the last 4 months, both indexes dropped below the 60 mark with a drop of 9 to 59% and 4.3 to 56.6% for manufacturing and non-manufacturing respectively. It seems reasonable that moderate levels of inflation is good for the economy and thus moderately rising prices for the sectors is fine. Even the Fed targets moderate inflation levels of around 2%. Below is graphs of the manufacturing and non-manufacturing commodities up in price that includes multi-month commodities up in price and total number of commodities up in price. Manufacturing shows the continued reduction in both categories, but there was a slight increase of total commodities up for non-manufacturing. Still nothing to be worried about for now.

Overall there really is not much of a silver lining in either report. The biggest positive in either report was the Business Activity index in the non-manufacturing report with a gain of 2.7 to 56.1%. Even that may not be sustainable as new orders and employment both dropped 1.9 and 1.6 respectively. Imports increased in both reports but big deal. As discussed before, it does not hurt our economy overall but this comes with shrinkage in the non-manufacturing New Exports index by 8 to 49%.

The all important employment indexes were significantly lower last month as manufacturing dropped 6.4 to 53.5% and non-manufacturing eased lower by 1.6 to 52.5%. Below is the updated employment index for non-manufacturing along with its trend line since December 2009. Three other times it has eased below the trend line as drawn, but this looks like a more significant change than previous below trend changes. The whole trend has been tenuous at best. This does not bode well for rapid reduction in the unemployment rate in the short term.

Last month I explored how the ISM headline indexes (PMI, NMI) are calculated. The PMI used 5 sub-indexes of equal weight, and the NMI used 4 which are seasonally adjusted in both reports. According to the ISM web site (Reports On Business: Overview), there is a close correlation between the PMI and growth of the economy or specifically GDP.

An update of research originally done by Theodore S. Torda, the late economist for the DOC, shows a close parallel between growth in real Gross Domestic Product (GDP) and the PMI. The index can explain about 60 percent of the annual variation in GDP, with a margin of error that averaged ± .48 percent during the last ten years. George McKittrick, an economist at the DOC, said "Not only does the PMI track well with the overall economy, but the indication provided by ISM data about how widespread changes are, complements analogous government series that show size and direction of change."

I did not get as significant of correlation when doing linear regression analysis on GDP and the PMI, but this may be due to different data sets or adjustments made to the data sets. The Ordinary Least Squares shows that 52 2/3 of the variance in GDP is attributable to changes in the PMI index. The sign of the slope is of the correct sign (positively correlated) and the T-Ratio probability (p-value) is 0.000. Since this OLS produces a failed test for functional form, I tried the regression on log of the PMI. This resulted in an adjusted R^2 rising slightly to .548 with a better diagnostic test for functional form. Although there is a high degree of correlation between the PMI and NMI, it still made sense to combine the two in a regression. The NMI variable was significant at the 5% level but failed at the 1% while the PMI retained the 0.000 p-value. This increased the adjusted R^2 to .609. Lastly, taking the logs of PMI and NMI gave the same significant levels as the last but increased the adjusted R^2 to .631. Below shows the scatter relationship between GDP growth and the PMI index.

The question then should be is how do the other economic indicators compare with these results? Below is a table of some of the results including what was already discussed.

As observed from the table above, none of the other economic indexes are nearly as correlated with GDP. Even the index of Leading Economic Indicators (LEI) resulted in no significant correlation. Since this is a "leading" indicator, using lags resulted in some significance for 2 to 6 month lags but still not nearly as strong as correlation with PMI. When I regressed GDP on the independent variables of PMI and LEI resulted in higher adjusted R^2 but the slope of the LEI becomes negative. This indicates that as LEI increases it would signify slower GDP growth. Obviously, the opposite sign as expected. Even Housing Starts did not have any significance with as many as 24 lags out. The slope coefficient was of the correct sign (positive) for current index and up to 4 period lags (months) but none are significant at even the 0.1 level.

Back in August 2010, I asked if the ISM is an overrated index? At least with respect to the GDP, it certainly is not. Some further questions for investors is how GDP growth or lack of growth affects the equity markets or at the sector levels of the economy? Can investors use the ISM reports as an investing strategy, and how effective is such models? For further discussions and links on these questions look at the section titled Using the ISM Cycle as an Investment Guide in the May ISM reports post.

MarketWatch:
ISM: 54.3%
ISM Non-manufacturing: 53.3%

Misc. Links:
That Was The Inflation Scare That Was

David Smith's EconomicsUK.com: Where's the manufacturing growth?

FT Alphaville » What price UK QE2?

PMI Reports Show Slowing Global Economy - Seeking Alpha

Mish's Global Economic Trend Analysis: Durable Goods Orders Sink 2.1%, Non-Defense Orders Sink 4.1%

Calculated Risk: Kansas City Manufacturing Survey: Manufacturing activity slows in July

Inflation Still Alive and Well at the Producer Level - Seeking Alpha

Worrying Weak Macro Trends in China, U.S. and Europe

Philly Fed: Regional Manufacturing Remains Weak

China's July PMI: Definite Economic Contraction Underway

Calculated Risk: Fed's Williams: The Economic Outlook

Political Calculations: Changing Perspective on New Unemployment Claims

macroblog: Lots of ground to cover

Calculated Risk: Pending Home Sales increase in June

Mish's Global Economic Trend Analysis: Gap-and-Crap it Was; ISM Plunges to 50.9, Lowest Level in 2 Years, New Orders Contract; Key Thoughts; Reaction in Gold

When Dollar Stores Are Too Expensive You know the economy is in bad shape when customers can't afford to shop at dollar stores anymore.

Calculated Risk: States cutting Unemployment Insurance benefits

Revised GDP Numbers Look A Lot More Like Retail Sales « Modeled Behavior

Phony Debt Limit Discussions II-Monetizing the Debt

2011-08-05T14:04:00.000-07:00

Hopefully, the phony debt limit discussions are behind us, at least for the moment. Along with that, people will start thinking about the basics of economic thought. Two of the more crazy ideas floated was to issue two 1 oz. $1 trillion coins or to sell an "exploding option". The two ideas have been suggested by Jack M. Balkin with relevant portion quoted below.

Sovereign governments such as the United States can print new money. However, there's a statutory limit to the amount of paper currency that can be in circulation at any one time.

Ironically, there's no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds.

The government can also raise money through sales: For example, it could sell the Federal Reserve an option to purchase government property for $2 trillion. The Fed would then credit the proceeds to the government's checking account. Once Congress lifts the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days. And there are probably other ways that the Fed could achieve a similar result, by analogy to its actions during the 2008 financial crisis, when it made huge loans and purchases to bail out the financial sector.

The "jumbo coin" and "exploding option" strategies work because modern central banks don't have to print bills or float debt to create new money; they just add money to their customers' checking accounts.

Agreed that I did suggest before that the Federal Government simply exchange one asset for cash from the Fed and then reverse the transaction after the so-called "crisis" is over. But the suggestions above is nothing more than creating money out of thin air with no exchange of assets. That is simply monetizing the debt, a procedure that all failed states use in the last ditch desperate measures (think Zimbabwe). The two suggestions above simply destroy the option or throw the coin away and do away with the reverse transaction.

Most disappointing about these suggestions is that educated, well-informed commentators are accepting this flimsy excuse for monetizing the debt. Cullen Roche accepts these ideas in his piece entitled Trillion Dollar Coin Idea Goes Mainstream. He has been one of the more reasonable writers that point out that quantitative easing is simply exchanging two assets on bank balance sheets. It simply swaps out T-bills for cash and eventually the Fed will unload the T-bills in the market or hold. It can only increase the money supply if it does not become excess reserves in the banking system and changes the behavior of market participants. Some behavior has changed, but not from the extra cash but expectations about future prices changed, although with commodity prices dropping again, it was short-lived.

Another person that should know better is Paul Krugman and at Lawyers, Coins, and Money he accepts the basic premise of Balkin's ideas with little critical thought. I maybe highly critical of Krugman, especially when he mixes politics and economic theories, but he should be able to see obvious signs of bad economic policies. His conclusions on the ideas are quoted below.

These things sound ridiculous — but so is the behavior of Congressional Republicans. So why not fight back using legal tricks?
And there is the constitutional option. Ronald Dworkin says that it works — or, at the very least, will put the issue into the courts for a while, which is better than destroying the economy next week.
Outrageous behavior demands extraordinary responses. Over to you, Mr. President.
Update: Stan Collender describes both these options and a possible deal in which Boehner passes a bill with Democrats but not the Tea Party as Lord Voldemort options — names not to be spoken, but always there.

So instead of "destroying the economy next week" let us really frag our economy for the long-run with hyperinflation. One bad by the Tea Party deserves an even greater foolish act by Democrats, got it.

Krugman also proves that he does not pay attention to the markets unless it fits his ideological bent at Where’s My Relief Rally? Since he posted that at 11 am, the market had gotten news at 10am that the ISM manufacturing report was below expectations and nearly slipping into contraction. His relief rally happened at 9:30 to 9:45am and the reality of low growth and the possible start of another recession became more important than what silly politicians are doing. Another way to say it is that the ISM Makes Debt Ceiling Rebound Short-Lived.

Krugman also shows signs of trying to argue both sides of the debate. He claims that there is some urgency in dealing with the debt crisis by stating that the economy will be destroyed next week and then claiming that Obama could actually say no to the deal worked out at If I Were In The House. That post implies that there really is no rush to get something passed now.

Hyperinflatistas Revisited
In my first post at Seeking Alpha, I considered Hyperinflationista Investment Strategies. There I discussed that it would be beneficial for the economy for people to actually invest/consume/save as if there was inflation or hyperinflation coming soon. In monetary terms it would increase the velocity of money and thus create more immediate aggregate demand, thus getting out of the liquidity trap. Dean Baker had a suggestion that a counterfeiter could spread the fake money around for a short time as this increases aggregate demand and most importantly on a short term basis. Even he admits that the phony money has to be eventually destroyed as this part explains.

But the interesting part of the counterfeiter story is that his $2tn of phony money will not create problems even in the long run, assuming that he is eventually shut down. Suppose that the counterfeiter's lavish spending gets the economy back towards full employment around 2012, at which point he gets nailed by the FBI who finally figure out how to recognise the dud notes.

At that point, the $2tn will be grabbed out of circulation and destroyed. Assuming that the economy is strong enough at this point to remain near full employment even as this counterfeit wealth disappears, then there would be no lasting damage from the episode. The fictional wealth had generated demand when the economy needed it, but then was pulled out of circulation at the point when it could have generated inflation and "competed away" goods and services from others.

This is much different than the proposed trillion dollar coins or the exploding options as ultimately the monetary base is reestablished and all illegal activities were reversed or mitigated.

What does this mean for investors?
If it becomes accepted into politics and the consequences of monetizing the debt is ignored by educated economists such as Krugman, then the inflationistas and hyperinflationistas will be right to compare the US to Zimbabwe. Once politicians drink from the endless well of infinite money growth, it is hard to turn back to reasonable policies.

Businesses and thus investors experience less and less reasonable investments as inflation heats up and interest rates rise. The net present value for longer term projects become negative and only projects that can start generating profits quickly can even be considered. Also risks and uncertainties multiple causing many projects to be cancelled as the risk premium rises.

Recently I was looking as some correlations between different measures of inflation and the S&P 500. Over the last 10 years there was no significance in regressing the S&P 500 although core inflation rates not seasonally adjusted tended to do better. On the sector level using iShares sector index funds (IYW IYM IYF IYH IYJ IYK IYE IDU IYC IYZ), I used ordinary least squares to test for any correlation. The best correlations although very weak was financials (IYF) with positive coefficient, and consumer services (IYC) with a negative coefficient. More significant was running the same sectors versus core CPI not seasonally adjusted. Industrial (IYJ) had the highest correlation but with a negative coefficient and second was consumer services (IYC) with a positive coefficient. This tells us that as producer prices rise it helps the financial sector and hurts consumer services sector. When core CPI rises it hurts the industrial sector but helps consumer services sector. It should be noted that I tested this over the past 10 years and it has been a long time since we even experienced double digit levels of inflation. So if we experience hyperinflation or even high levels of inflation the correlations may not hold.

So if something does pass the House, it will demand a constitutional balanced-budget amendment as the price of a second vote next year. I think we can safely say that the political process has failed. Now what?
Well, there do appear to be legal loopholes. Jack Balkin gives us the platinum coin option:
Sovereign governments such as the United States can print new money. However, there’s a statutory limit to the amount of paper currency that can be in circulation at any one time.
Ironically, there’s no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds.
And he also gives us the exploding-option option:
The government can also raise money through sales: For example, it could sell the Federal Reserve an option to purchase government property for $2 trillion. The Fed would then credit the proceeds to the government’s checking account. Once Congress lifts the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days.
These things sound ridiculous — but so is the behavior of Congressional Republicans. So why not fight back using legal tricks?
And there is the constitutional option. Ronald Dworkin says that it works — or, at the very least, will put the issue into the courts for a while, which is better than destroying the economy next week.
Outrageous behavior demands extraordinary responses. Over to you, Mr. President.
Update: Stan Collender describes both these options and a possible deal in which Boehner passes a bill with Democrats but not the Tea Party as Lord Voldemort options — names not to be spoken, but always there.

Default Averted. Poor Returns to Come Debt deal doesn't clear the way for growth and returns. Quite the opposite.

RSY: DLX, Optional Options

2011-07-25T13:12:00.000-07:00

Deluxe Corporation (DLX)-- Sabrient rates DLX a Strong Buy for its solid value profile, which makes it one of the better value stocks in today's market, despite modest growth and momentum scores. The RSY portfolio loves growth at a reasonable price (GARP) stocks but value is more important versus growth rates. Weakness in the projected earnings growth gives it a low Earnings Score from Sabrient. But with a Sabrient Fundamental Score of 98.3 (which measures a company's financial health, including its balance sheet, cash flow, revenue, and earnings quality), Deluxe is significantly higher than the average of its industry group of 57.0.

According to SmartConsensus, DLX and its 5 other peers in the Commercial Printing Services industry all received a hold rating from them. Not a lot of excitement there. DLX's accounting practices are with-in an acceptable range and risk is average. As a solid value stock it should outperform the market over the longer-term and with its dividend yield of over 4%, it pays to hold this one. The middle of August should be its next ex-dividend date.

NakedValue noted that DLX was an Under-the-Radar Low P/E Dividend Paying Stock. That was the good part but then it described the earmarks of a maturing industry with margins increasing but sales decreasing. Like most companies in maturing industries, endeavors into the on-line services is one of their goals. Deluxe recently purchased Banker's Dashboard which give banks daily access to their financial position through on-line tools.

The PE ratio (TTM) is just 8.42 and forward looking it is expected to decline slightly. For a more complete analysis of Deluxe's cash flow check out Why Deluxe's Earnings Are Outstanding.

RSY recommends a buy of 200 shares of DLX at a limit price of $24.09 (GTC). This will be the first buy into the Consumer/Non-Cyclical sector and since this will be less than 5% of portfolio (based on a portfolio of $100,000), RSY also suggests to sell two put contracts of DLX of the Oct 22 '11 at $22.50 at a limit price of $1.25 (GTC).

Juice up Returns with Options.
Let us see if we can juice up the returns with some covered calls on our long positions. RSY presently holds a covered call of Foot Locker Jan '12 at $22.50 which is working out so far. Since RSY diversified across caps including some micro-cap and small-cap stocks, not all long positions have options available or have such shallow trading that it might not be worth the trouble such as BRKL. RSY recommends the following to consider:
1. Alliance Resource Partners (ARLP) Mar 17 '12 $80 Call, 1 option contract at limit price of $5.
2. Compass Diversified Holdings (CODI) Feb 18 '12 $17.50 Call, 2 option contracts at limit price of $0.50.
3. TOTAL S.A. (TOT) Feb 18 '12 $60 Call, 1 option contract at limit price of $2.40.

EV/EBITDA

Checks and Services for Small Business, Banks, and Credit Unions - Deluxe Corp

DELUXE CORP: STOCK RATING SUMMARY StockScouter Rating: 9
Deluxe Corp, a small-cap value company in the consumer services sector, is expected to significantly outperform the market over the next six months with average risk.

The Advantage of Monthly Dividends Over Quarterly Dividends - Seeking Alpha

Smaller unit helps Deluxe post 4% sales gain - Seeking Alpha

Deluxe Corporation (NYSE:DLX)
Industry: Commercial Printing Services
Market Cap: $ 1,269.5mm (Mid Cap)

AGR
Average (48)
*********************
P/E (Trailing 12 mo.) 8.42x
EPS (Trailing 12 mo.) 2.946
Next Earnings Date 7/28/11
Market Cap 1.3 B
Shares Outstanding 51.4 M
Beta 2.0
Dividend Yield 4.08%
Declared Dividend 0.250
Ex-Dividend Date 5/19/11
Dividend Payable Date 6/6/11

(2) A non-binding resolution on executive compensation (or "say-on-pay vote"):

For: 34,792,130

Against: 1,690,330

Abstain: 129,725

Broker non-vote: 5,872,797

(3) A non-binding, advisory vote on the frequency with which we should conduct

future say-on-pay votes:

One year: 30,143,352

Two years: 308,412

Three years: 6,029,103

Abstain: 131,318

Broker non-vote: 5,872,797

Based on a determination of our Board of Directors in light of these

shareholder voting results, the Company has decided to conduct say-on-pay votes

every one year, until such time as our shareholders are next asked for an

advisory vote on the frequency of conducting future say-on-pay votes.

SmartConsensus Peer Ratings Detail:
6 holds; 90days ago: 3,3,1; 1 year ago: 2,2,1.

Phony Debt Limit Discussions about Default

2011-07-15T15:51:00.001-07:00

Politicians and pundits alike often invoke the constraints that individuals and collective groups (e.g., unions, churches, corporations, i.e. "persons") have in regards to how the Federal Government should manage its affairs. That is clearly not the case as the whole is greater than the sum of its parts. One important aspect is the central governments (especially larger countries) have the ability to take on more risk than any single person. This is evident for example when the business cycle heads south, the central government can "stimulate" consumption and investments or collectively called absorption through monetary and fiscal measures. Since it has virtually unlimited funds to draw on, it can alter the state of the economy at any given time.

Another aspect of its ability to take on risks is in investments. When it invests in a wide range of public goods, it has more leeway to invest in long-term projects because of the low cost of borrowing, like in basic research and development. Since it has a broader and deeper range of projects, it is less reliant on any particular project failing or succeeding. The one problem is when a project fails but leaves behind a constituency that is rent-seeking. And without prudence, it can go badly off track like Zimbabwe.

While Fiscal and Monetary policies are not applicable to family budgets or "persons", the debt issues can be translated to a person's budget constraints. No matter what instigates the debt ceiling, persons do not suddenly starve or throw granny out on the street, but reassess their income and spending streams. They also set out to prioritize the bills and consumption streams. Assuming a family with a good credit score, they may choose to pay the "debt holders" first and foremost to continue their lines of credit. Secondly, paring down only the most essential consumption goods to maintain a healthy family. The remainder (like Starbuck's) is eliminated on the short-term.

Next, think about delaying or postponing certain payments. Like if the water/gas/electricity is normally paid on the 5th but is not late until the 20th then delay it two weeks. Sell off some assets that are not being used now, like the old bike or some gold from that place called Fort Knox. Even if the Treasury states no fire sale of gold to delay debt ceiling, the Federal Reserve could swap out the assets like they did for quantitative easing. They simply swap out one asset (gold) for another one (money). After the cash flow improves then reverse the transaction.

Next try to improve receipts by encouraging and cashing income checks as fast as possible. Take on more work and make sure your cousin Vinny pays you back promptly. If you are the government, you improve cash flow operations. Why not have the IRS do a weekend/month sale? Discount for deadbeats on late and interest payments with a $1000 reduction if paid by September 1st. Better yet, why not a telethon? They even have a site dedicated to paying down the debt at Pay.gov. It is often stated that some people think their tax rates are too low, and this seems a perfect time to donate more. All we need is a good "pitch (wo)man" to get market penetration, and there is not a better spokesman than the current President.

Of course the central government is not like individuals. It has the power to "print money" and I am not referring to the Feds ability to increase money supply. An individual can write checks, but that would be slightly different than the government's ability to create actual new money. Its technical term is seigniorage . I would simply define it as the ability to sell a product less than its marginal costs, like any profit seeking business. Not only could the Treasury issue more coins and dollars, it could open the demand for $1000 bills. Certainly that would increase the M1 component of the money supply and thus through seigniorage create a surplus cash flow. Heck it might even increase the velocity of money and thus solve our lack of demand! Supply siders unit!

This discussion is not to say that the Federal Government will not have to eventually raise the debt ceiling. Any person will eventually have to balance their budget and consume less than their income stream. But it is logical to question when someone states that if we don't raise it by a certain date that it means default immediately.

3 ways Obama could bypass Congress - CNN.com
Section 4 requires the president not to put the validity of the public debt into question. If the debt ceiling is not raised in time, there will not be enough incoming revenues to pay for all of the government's bills as they come due. Therefore he has a constitutional obligation to prioritize incoming revenues to pay the public debt: interest on government bonds and any other "vested" obligations.

Misc. Links:
Moronic Monday: Still No Deal? - Seeking Alpha

Sen. Tom Coburn to unveil plan to slash federal spending by at least $9 trillion | NewsOK.com
Sen. Coburn to announce $9 trillion deficit-reduction plan | Tulsa World

Will a debt ceiling deal save America’s AAA credit rating? — Marginal Revolution

Obama Tries to Win Battle for a Debt Deal — and Public Opinion - Washington Wire - WSJ

Governors Demand Quick Debt Agreement - Washington Wire - WSJ

Sovereign debt: A few things to remember about debt | The Economist

Debt Ceiling Thoughts - Credit Slips

Smoke and mirrors

The horrifying AAA debt-issuance chart | Felix Salmon

The Horrifying AAA Debt-Issuance Chart - Seeking Alpha

A Strong 30-Year Bond Auction in the Face of Default - Seeking Alpha

RSY: This Bank (BRKL) Even Washes Your Clothes...Maybe a Window or Two?

2011-07-06T11:11:00.001-07:00

Well, maybe not directly, but they certainly are a facilitator of financing for the coin laundry, convenience store, and dry cleaning industries. Eastern Funding LLC is a division of Brookline Bank (NASDAQ: BRKL) which Powers the Laundry Business. Drycleaning and Laundry Services have suffered from the Great Recession like most other industries, but provides long term growth that should be resistant to demographic and structural economic changes. The first graph below shows the slump since 2008 in revenue per firm, and the second graph shows the projected market forecasts up to 2015.

Sabrient rates BRKL as a Strong Buy despite its modest scores for value, growth and momentum. BRKL exhibits a combination of core attributes that are in favor with today's market. For Rock Solid Yields (RSY) investors, we also are interested in Earnings Score, Balance Sheet Score and Fundamental Score which are below industry average for Earnings Score but above average in the industry and S&P 600 for the other two scores.

While this might not be the most exciting stock out there, it should provide stable earnings for the foreseeable future. The forensic accounting score is above average and mergers and acquisitions appear to be the only flag of significance going forward including the merger with Bancorp Rhode Island, Inc. by the end of 2011. Overall, BRKL should match the market over the next six months with less than average risk. A combination we look for in the RSY portfolio holdings. It also provides a dividend yield of over 3 1/2%.

The one issue we have is that we recently added a couple of regional banks to our portfolio with FNLC and PULB. Along with our two long-term holdings of NGPC and GAIN, we are sitting on over 11% of portfolio in the financial sector presently (based on $100,000 portfolio). The latest ex-dividend dates for FNLC and PULB were the first and sixth of this month and thus a good time to unload a portion of either or both. We can be patient on selling these as there is no pressing need now so both orders will be Good-Til-Canceled (GTC). RSY recommends a limit sell order of 200 shares of PULB (1/2 long position) at $7.49 (GTC), and 200 shares of FNLC (1/2 long position) at $14.89 (GTC).

RSY recommends a buy limit order of 400 shares of BRKL at $9.29 (GTC).

StockScouter Stock Rating System - Brookline Bancorp Inc (BRKL) - MSN Money

Brookline Bancorp Inc, a small-cap growth company in the finance sector, is expected to match the market over the next six months with less than average risk.

The Love of Building

Another $20 plus million spent on building and renovations for a foot print in Boston. Will Perrault next change the franchise name to New Clarendon Bank?
Millions in shareholders equity again gone. Perrault's real design is to be
among Boston's elite banking community on our buck, then bolt for bigger and better.
The Brkl BD's have all lost their minds in this grow to sell mentality in questionable areas of growth.

What's next ? Oh yes, the purchase of a Boston down town parking garage.. for Perraults business car of course.

Eastern Funding Powers the Laundry Business

Audit Integrity AGR:
Average (66)

Econbrowser: Will a Tax Repatration Holiday Spur Investment?

CARPE DIEM: Bastiat's One-Hand Solution to Job Losses

S&P 500 sector pie chart

A Macro View: ISM Reports-Inflation Tamed June P. II

2011-07-05T15:55:00.001-07:00

The last Macro View post was wonkish in regards to how the headline ISM indexes are calculated. While Mish was discovering some of the nuances of the reports, we also explored the inventory index in depth and showed that on a month-over-month basis it is fairly random with no discernible trend. One month it added to the headline index and the next it was just as likely to be negative as positive from the last index number.

The PMI index showed strength in the 5 core categories which reversed the trend and reversed the very bad showing in May when all the categories were negative and very significant. This led to the PMI handily beating the consensus of 52 and above the consensus range reported by Econoday of 51 to 55 with a PMI index of 55.3%.

But unfortunately the non-manufacturing index (NMI) did not provide as much positive news about the direction of the economy. The NMI dropped 1.3 to 53.3% which was below the consensus of MarketWatch and Econoday by 0.7 at 54% but was within the consensus range of 51.2 to 55%. In contrast to the positive 5 core indexes of the PMI, the NMI was negative across the board except for employment that squeezed out a positive 0.1 increase to 54.1%. It continues its trend upward but 0.1 is probably just a statistical anomaly. The underlying percentages also show that weakness with those reporting increase in employment went down from 28 to 27% while those reporting lower employment rose from 9 to 12 last month.

The chart below shows the employment trend in the non-manufacturing sectors showing the trend line since December 2009 when the down trend was reversed to the upside. The slope of the line has been going down but the significance of the trend has been improving.

The Bend in the Road for Inflation or Not?
Overall concerns about inflation has been subdued in this last report. Both manufacturing and non-manufacturing price indexes dropped significantly by 8.5 and 8.7% respectively while still maintaining above 60 for non-manufacturing at 60.9 and high 60s for manufacturing at 68%.

I have been monitoring the commodities reported as being up in price and a category called multi-month commodities since the uptrend started around October 2010. Below is two charts of the two categories for manufacturing and then non-manufacturing.

The manufacturing chart is fairly straight forward that the trend has reversed since April of this year for both multi-month and all commodities. But until this months drop off there did not appear any reversal of the large number of commodities that respondents were reporting as up in price. The percentage of multi-month commodities to all the commodities has trended up recently to last month's 75%. A few of the commodities with long term higher prices are: Fuel at 18 months; #2 Diesel Fuel at 12; Cotton Products at 10; and #1 Diesel Fuel at 9.

Hopefully, overall sentiment is captured by a respondent from Retail Trade stating that, "Commodities coming down in price, which should help stabilize inflation."
Conclusion:
The manufacturing report showed a strong reversal in the downward trend with all sub-indexes being the positive and not insignificant. Non-manufacturing was a disappointment with weakness across the board with only employment being the outlier at an insignificant gain. Going forward, inflation does not seem to be taking hold in the wholesale/input levels. Hopefully that reversal of the trend will hold especially for fuels.

ISM - Media Release: June 2011 Non-Manufacturing ISM Report On Business®

Mish's Global Economic Trend Analysis: Services ISM "Unimpressive"

Calculated Risk: ISM Non-Manufacturing Index indicates slower expansion in June

David Smith's EconomicsUK.com: Decent service sector growth

http://www.clevelandfed.org/research/commentary/2011/2011-04.pdf

Misc Links:
The Department of Food Subsidies - Victor Davis Hanson - Townhall Conservative

The Capital Spectator: Early Economic Indicators For June Are Moderately Encouraging

Mahalanobis

Gallup Job Creation Index Continues Steady March Upwards « Modeled Behavior

The German Recovery « Modeled Behavior

Employment during the economic recovery

The ongoing German recovery — Marginal Revolution

Calculated Risk: MBA: Mortgage Purchase Application activity increases

Skills Shortage Has Australia Tapping U.K., Irish Workers - Real Time Economics - WSJ

Film School Bubble

Political Calculations: Surprising Impotence

Macro View: Inventory Restocking Not the Problem in PMI

2011-07-05T08:53:00.000-07:00

Every month the ISM releases two reports based surveys of purchasing and supply executives in both the manufacturing and non-manufacturing sectors of the economy. Every month, I try to provide another angle to view the reports. This month's prospective is provided by Mike Shedlock (Mish) with his post entitled Manufacturing ISM Weaker Than it Looks; Digging Into the Numbers; Inventory Restocking Accounts for Much of the Rise. The part that is most important in the discussion here is his conclusion under "Addendum - Reply from ISM."

Since it is equal weighted of five components [New Orders, Production, Employment, Supplier Deliveries, and Inventories], the effect of inventories is 5.4 divide by five, or 1.08 (1.1) of the overall 1.8 rise as noted by Goldman Sachs.

Mish is correct that over 60% (technically 1.08/1.76= 61.4%) of the rise is attributed to the predominant increase in the inventory index. But the division by 5 is only correct analysis if all the numbers are of the same sign. And in this case, they all increased, meaning faster rates of growth for each of the factors. Below is the exact formula and index numbers to calculate the difference between consecutive months:

ΔPMI = 0.2*ΔNewOrd + 0.2*ΔProd + 0.2*ΔEmp + 0.2*ΔSupDel + 0.2*ΔInv

1.76 = 0.2*0.6+0.2*0.5+0.2*1.7+0.2*0.6+0.2*5.4

The fact that they all increased shows that reversal is broad across all indexes although not significant in most. As compared to May, this is very welcome news as all components of the PMI were down. Below is the same equation with the May numbers.

-6.88 = 0.2*-10.7+0.2*-9.8+0.2*-4.5+0.2*-4.5+0.2*-4.9 (Reported as -6.9%)

The Macro View has dealt more with the indexes of Production, Employment, and New Orders. They represent: the heart of the issue of economic growth with production; the continuing jobs recovery going forward in employment; and a forward look at production and growth of the economy with new orders. I have also been concerned about the price indexes as this could be a signifier of structural rigidity and portent for inflation, and exports indexes as this could be an exogenous stimulus to the economy.

One problem with using the inventory indexes is that it does not differentiate between planned investments and unplanned investments through inventory changes. A planned increase in inventory levels can signify greater real economic investment and not a potential slowdown in aggregate consumption. All macroeconomic textbooks, I have read, break down investments into the subcategory of inventory investments. The following equation and discussion is derived from Macroeconomics: Theories and Policies second edition by Richard Froyen.

ΔINV(t) = λ(γSexp-INV(t-1)) + λ(Sexp-Sact)

The equation states that changes in the inventory levels are derived from expected sales level (Sexp) times a proportional factor (γ) plus the difference between expected sales with actual sales (Sact). The proportional factor is to adjust inventories to the desired level in a gradual process and not instant adjustment. Since sales in the aggregate is a function of aggregate income, then inventory levels tend to be procyclical to general economic cycles with a lag. As aggregate income increases then general sales levels increase and businesses then increase inventory investments, and conversely as incomes decrease and sales follow then businesses tend to decrease inventory investments.

Putting on the Neo-Keynesian hat, would point out that a central government can possibly counter this effect on the economy. Fiscally it can increase its own investment levels and increase aggregate spending (sales) on the short run. Monetary policy can also counter the effects of the business inventory cycle. Quoting from Macroeconomics:

Higher interest rates would increase the carrying cost of inventories and therefore reduce inventory investment. Monetary policy, by changing the interest rate, could then potentially eliminate the cyclical volatility of inventory investment and thereby lessen the overall cyclical variation in GNP [GDP].

Volatility of the Inventory Index
Since we can not differentiate between planned and unplanned inventory investments, the volatility of the index becomes even more important in determining how much attention we pay to any individual monthly report. Below is a graph showing the changes in the inventory index from the previous month, the percentage differences from respondents reporting higher inventories than those reporting lower inventories (Differences in net), and the PMI index minus 50 to scale it to the other numbers and show the differences between the break even point (zero).

This graph tells that monthly differences in the inventory index appear to be a stochastic variable with no discernible pattern or trend. Inventory levels can be a lagging indicator as restocking occurs. Mish agrees with ZeroHedge on this theory as stated, "If anything, an increase in inventories is a negative for future activity." Or it can be a leading indicator as general business climate has improved; marked by a small but significant increase in 10 year bond rates as noted by Paul Krugman at Interest Rates: A Dowist Perspective.

Even if it was restocking last month, the graph shows that "restocking" is occurring regularly. From February to May of this year, the PMI has been declining but inventory has swung wildly up and down as much as 5 percentage points in each direction.

Conclusion:
Overall the ISM manufacturing report is robust as the 5 indexes that make up the PMI reversed direction and increased at a faster rate of growth. May's report was the downer and hopefully June's report signifies that was just a slow patch in the economic recovery. It would have been better if the new orders index was stronger than the weak 51.6% and production was above the mid-50s range, but growth is growth at anything above 50%. Thus we should not lament the gyrations of the inventory index but look at the total picture of the reports.

Mish could have also found out the information about weighting of the indexes from the ISM website at Frequently Asked Questions. The two breakdowns for manufacturing and non-manufacturing indexes are:

Q: How is the PMI calculated, and what does it mean?
A: The PMI is a composite index based on the seasonally adjusted diffusion indexes for the following five indicators at equal weights:
New Orders 20%
Production 20%
Employment 20%
Supplier Deliveries 20%
Inventories 20%
Q: Which index in the Non-Manufacturing Report On Business® is a composite index or equivalent to the PMI?
A: Beginning in January 2008, ISM began calculating a composite index for the Non-Manufacturing sector. The new Non-Manufacturing Index, NMI, consists of:
Business Activity 25%
New Orders 25%
Employment 25%
Supplier Deliveries 25%

Note that inventory is the one index not included in the NMI. The obvious answer is that services industries hold less inventory, but I suspect that it has more to do with reliability as an indicator of business activity and the subsequent lack of being statistically significant at least for the services industries.

ISM - Media Release: June 2011 Manufacturing ISM Report On Business®

Econoday Report: ISM Mfg Index July 1, 2011

Market Watch:
ISM: 52%
Non-Manufacturing: 54%

ISM Survey Beats Expectations - Seeking Alpha

ISM Manufacturing Index: The Panic Over a Slowdown Is Overblown - Seeking Alpha

Upside Surprise for ISM Manufacturing Index - Seeking Alpha

Calculated Risk: ISM Manufacturing index increases in June/This was above expectations of 51.7%.

World-Wide Factory Activity, by Country - Real Time Economics - WSJ
World-Wide Factory Activity, by Country - Real Time Economics - WSJ

Misc. Links:
Political Calculations: 2011: The Number of Pages in the U.S. Tax Code

China PMI on the Verge of Contraction - Seeking Alpha

Mish's Global Economic Trend Analysis: China PMI Lowest Since February 2009, on Verge of Contraction; 18-Month Low in Europe; US ISM Unexpectedly Rises; US an Outlier?

IMF:
I.M.F. Offers a Different Take on U.S. Growth - NYTimes.com
IMF Forecasts Slow U.S. Growth, Warns on Debt - Real Time Economics - WSJ
Another Reason for China to Go Slow on Yuan Revaluation - Real Time Economics - WSJ

Political Calculations: Chinese, U.S. Economies Both Decelerating

Trade Picture Looking Good - Seeking Alpha

Jobless Claims: Much Ado About Nothing - Seeking Alpha

ISM Manufacturing: Mean Reversion Overshoot? - Seeking Alpha

Bernanke on Why QE2 Didn't Hurt the Economy - and Why He's Wrong - Seeking Alpha

Misc. Links:
CARPE DIEM: A New Age of Energy Abundance in the U.S.

Mish's Global Economic Trend Analysis: Rosenberg Says 99% Chance of Another Recession by 2012
S&P 500 Historic and Expected Quarterly Dividends per Share, 2009Q1 through 2012Q2, as of 14 June 2011

Making Hiring Cheaper - NYTimes.com

Radical Republican plan could cause double-dip recession

Environmental and Urban Economics: Challenges for Macroeconomists

Calculated Risk: Retail Sales declined 0.2% in May

Nevertheless, the global economy is strong
IMF Survey: Global Growth Hits Soft Patch, Expected to Rebound

IMF sees global growth, but red flags abound - The Globe and Mail

IMF warns of global economic crisis - Americas - Al Jazeera English

Calculated Risk: Construction Spending declined in May

RSY XXXX: Sell 1/2 Total, Buy FNLC

2011-06-30T12:49:00.000-07:00

Although, just recently I put my eye on Pulaski Financial Corp. (PULB), I like what I see. One very positive signal to start with is that insider buying is greater than selling with 17 transactions of insiders buying to one selling according to Yahoo Finance (at PULB Insider Transactions), and number of shares is nearly 5 buying to one selling. On forensic accounting scores, PULB scores acceptable with a near "conservative" rating. They did have one issue with a late filing in May 2010, but since that time no major issues have arisen. Sabrient Systems has this to say on the SmartStock Reports:

Sabrient Analysis
PULB is rated a Strong Buy for its outstanding profile as a value stock, combined
with strong growth attributes.
• Value: A Sabrient Value Score of 89.4 indicates that PULB's stock price does not
fully reflect recent and projected earnings results. This implies that the stock holds considerable potential for price gain together with reduced downside risk.
• Growth: A Sabrient Growth Score of 77.8 suggests the stock has good potential as
a growth stock.

Another fine GARP (Growth At a Reasonable Price) stock that should be well suited for long-term value investors. In addition to our all important value score and good growth potentials, PULB also shows outstanding Balance Sheet Score (measure of comapany's liquidity and debt issues) of 92.6 and Fundamental Score (broad measure of a company's financial health) of 90.5 (out of 100 scores).

The next question becomes how many shares will enhance the RSY portfolio for the long-run. This is a good time to look at our portfolio and compare the percentage holdings of each position as well as sectors. The table below shows the current holdings of the RSY and their respective percentages of the total portfolio which includes the cash on hand.

RSY recently added FNLC which is another regional bank like PULB. Since RSY has over 8% in financial sectors, and PULB is a micro-cap stock, RSY recommends a purchase of 400 shares of PULB at a limit price of $7.19. Good-til-close is recommended but if it does not trade by the close of July 5th then close the order as the ex-dividend date is July 6th.

The table also shows a concentration of stocks in energy with over 18% of the portfolio. TOT is still rated a buy by Sabrient. Since the next ex-dividend date is in November and we just got $1.61 per share on June 17th, RSY recommends a sell order of the last lot purchased of TOT for a small gain and hold the other half for now. RSY recommends a sell of 100 shares of TOT at a limit price of $57.51 (GTC).

RSY XXXIX: Buy FNLC

2011-06-21T13:45:00.000-07:00

Last month, I was Questioning the QE Monetary Transmission Mechanism, and used MyStockFinder tool to find a selection of GARP regional bank stocks. Today, I want to look at one in particular, First Bancorp, Inc.(FNLC).

FNLC shows plenty of attributes we look for in a value, dividend portfolio. Some of the most appealing are: good insider buying by directors, a near perfect forensic accounting score, and most importantly a good dividend yield of nearly 5 1/2. Sabrient Systems states the following about its buy rating of FNLC:

FNLC's exceptional value profile earns it a Buy rating.
• Value: With a Sabrient Value Score of 84.6, FNLC is one of the more desirable stocks with regard to valuation. At its current price, the stock is a superior candidate for value-minded investors who seek high potential gains with low downside risk.

In addition to the good Value Score, it boast above average Earnings and Balance Sheet Scores and an exceptional Fundamental Score of 81.7. The Sabrient Fundamental Score is the broad measure of a company's financial health, including its balance sheet, cash flow, revenue, and earnings quality.

"We continue to post good earnings and our capital ratios remain strong," stated Daniel R. Daigneault, the Company's President & Chief Executive Officer. "Many of our shareholders invest in The First Bancorp because of our generous dividend, and good earnings and strong capital are the two major factors enabling us to maintain the ability to pay dividends at this level."

Certainly music to our ears as they declared a dividend for July 1st ex-dividend date of 19 1/2 cents per share.

RSY recommends a buy order of 400 shares at a limit price of $14.41 (GTC-close before end of month).

Paul Krugman, Taylor Rules (Wonkish)

2011-06-21T09:00:00.000-07:00

My last post discussed Taylor rules and how Paul Krugman gets it wrong in thinking that the European Central Bank (ECB) is raising its rates (tightening) when "only Germany even arguably needs it". Aside from Finland and arguably France, the "core" countries seem to need monetary restraint before the economy overheats next year. This conclusion was based on the NAIRU and standardized unemployment rates being below what is the normal range or close to full employment, and the gap between potential output and real output is quickly closing as shown in the output gaps. This post will continue its wonkish discussion of the Taylor rule and use some actual numbers for the core Eurozone countries as labeled by Fernanda Nechio of the San Franciso Fed.

The Taylor Rule formula used below is from the paper Taylor Rules by Athanasios Orphanides (pdf, page 7):
i = 2 + π + 1/2*(π - 2) + 1/2*(q - qe)
where i is the nominal target rate for short-term interest rates, π is the rate of inflation, q is output, and qe is desired level of output. The expression (q - qe) becomes simply the output gap. Both series data are derived from the OECD Economic Outlook using Table 10. Output gaps and Table 18. Consumer prices indices. Core inflation would have been preferable as Krugman points out, but since Taylor used headline inflation anyway and using an average for the year should prevent as much volatility in food and fuels to affect the outputs. Also the factors used above may not be the best for this situation or in technical terms it may be a misspecified model.
(Click to enlarge charts)

It is worth noting that raising rates now seems appropriate according to the graph with a target around 2 1/2% which is significantly higher than it is now at close to 1%. The Taylor rules index drops off for all countries since the inflation rates drop across all countries shown for 2012. As we saw last time, this drop is not due to the output gap dropping.

The results are fairly robust for other Taylor factors like the one suggested for the US with 1.5 for inflation gap and .5 for output gap. These results for 2012 are very similar to the one above with around 2.5% average for the 7 core countries (equally weighted). During this year the Taylor rates are suggesting even higher for the core with almost a 5% rate.

‘Structural Rigidity’ or a Flexible Economy?
Before addressing the issues brought forth concerning structural rigidity in the Eurozone and the US, this would be a good time to review the theory of structural rigidity. The theory of a "flexible economy" is most attributed to Tony Killick who works for the Overseas Development Institute (ODI) and wrote the book entitled "The Flexible Economy: The Causes and Consequences of the Adaptability of National Economies". His definition of a flexible economy is:

Broadly expressed, we can define a flexible economy as one in which individuals, organizations and institutions efficiently adjust their goals and resources to changing constraints and opportunities.

Structural rigidity is simply the presence of impediments to a flexible economy, whether this be social, economic or political constraints on people to adjust their goals and resources. So the goal is to have a flexible economy, as much as is possible.

Historically, economic models assumed capital was the biggest constraint on an economy and with no regards to labor inputs. Now that unemployment is the greatest concern for the growth of the economy then it has become natural to think in terms of labor markets being inflexible and structurally rigid. That has been loudly rejected by leftest economists such as Paul Krugman. Overall, they might be right, but macro views may hide the individual sectors or job classifications that could use more workers. This is especially true since the labor markets are marked by more heterogeneity, which is more and more division of labor with increasing specialization in each job category.

It is also important to emphasize that the resources, Killick is talking about, are not merely labor, but all the inputs to creating goods and services. As noted in previous posts, energy and natural resources could be one of the constraints for the present economy. It is the one area that is expanding employment even given the slow permit processing by the present administration. One recent example of this structural rigidity is discussed at The EPA and Mining Jobs.

Structural Rigidity: Eurozone, US
The divergence of core and peripheral countries observed in the last post shows the structural rigidity of the Eurozone. Some of this is obviously attributed to language barriers and social customs. But whatever the cause, this makes monetary policy all the more likely to not fit the needs of all constituent countries, but not like Paul Krugman states that it only helps one possibly. This divergence in needs from the central bank and European Council could be a negative signal going forward for investors. With overheating economies with inflation of the core and stagnant, slow growth in the peripheral countries, this spells out weakness in the Eurozone going forward.

Their losses are not necessarily our gains just as the tragedies in Japan have not helped the US or Europe. The US does not have many of the structural rigidity problems that the Eurozone has, but it is far from being at an optimally flexible economy. Anecdotally housing appears to be one constraint preventing labor from moving either to another city or state, and this is a continuation of the historical trend toward less labor migration. One factor that helps the US out is the large pool of immigrant workers. Immigrant workers through both documented and undocumented routes will congregate in locations and jobs that in most demand. Whether it was in New Orleans construction or IT firms in the Silicon Valley, immigrants went where the jobs were first and foremost.

Not that other countries don't have byzantine rules for hiring and firing workers, but it is worth considering what would be the cost and benefits from less restrictions in labor markets. Some of the costs of these rules and regulations along with all other business regulatory costs are demonstrated by the difficulty in starting small businesses.

Warren Meyer discusses Where Have All The Small Businesses Gone? Warren does a good job showing examples of how raising the fixed costs of businesses leads to less competition which is marked by increasing monopoly market power for the firms that do survive. Monopoly market power is also enhanced by the licensing process. This is one of the most pervasive methods of raising fixed costs while not necessarily raising social benefits.

Is a Bad Housing Market Reducing Worker Mobility? - The Curious Capitalist - TIME.com

The Tax Foundation - New Podcast on the State of California's Business Climate with Joseph Vranich

Japanese Central Planners at Work, Arnold Kling | EconLog | Library of Economics and Liberty

Political Calculations: The Unintended Consequences of High Payroll Taxes

Unemployment Rate Unlikely to Fall Below 8% - The Curious Capitalist - TIME.com

RealClearMarkets - California's Plan to Electrocute the Automobile Industry

Economic Divergence of the Eurozone & Paul Krugman wrong on One Size Fits One

2011-06-19T12:37:00.000-07:00

As usual, Paul Krugman is at it again with a simplistic macroeconomic view of the economy to justify his hell bent desire to increase Fiscal and Monetary expansion at any costs at his blog post entitled One Size Fits One. He brings out plenty of good points about Taylor rules (rules that help the central bank to maintain a stable economy based on the output gap and inflation). Let me jump right to his conclusions.

...In short, the ECB has no business raising rates.

What is true, however, is that the rule might still point to a rate rise for Germany.

So the point is that while the ECB could suffer from a one-size-fits-all problem, the fact is that it isn’t even doing that; it’s tightening when only Germany even arguably needs it.

He links to an economic letter from the San Franciso Fed entitled Monetary Policy When One Size Does Not Fit All (pdf). He seems to be basing his conclusion on the following graph from the letter showing unemployment gap and core inflation.
Click to enlarge charts

So he is right that Germany is the one that is significantly below "full employment" or more technically the Non-Accelerating Inflation Rate of Unemployment (NAIRU), but all the "core" European countries (Austria, Belgium, France, Finland, Germany, Italy and the Netherlands) are close to NAIRU or even marginally below it. Using the NAIRU standardizes the "coefficients" across countries and thus Krugman has it wrong when he states a need for different coefficients on the two sides of the Atlantic.

Also more importantly, this is a static analysis of the core and peripheral countries. Since the lag time for the effects from any change in the central bank policy to the general economy takes about 18 months, the analysis clearly should be on forward looking gap rates. The next graph of standardised unemployment is from the European Central Bank as part of its Statistical Data Warehouse.

The chart above shows that for the core countries unemployment rates have been declining since late 2009, and are for the most part are below their individual median rates over the periods. For example, Germany has the lowest unemployment rate since 1992 with a downward trend since 2006. From the graph it is also worth noting the significant differences in unemployment rates between countries over the long-term basis as well as short term trends. These differences of standardized unemployment rates and also NAIRU among the countries (under the same monetary union) shows that there is much structural rigidity between the countries still. The Fed letter concludes with the following that provides a few reasons for these differences.

Nevertheless, the tensions over monetary policy in a union of many separate countries are likely to be greater than tensions in a single country. The United States can rely on its relatively high labor mobility and on fiscal policy to counter economic weakness, for example, options that may not be fully available to the euro area’s heavily indebted peripheral countries.

Output Gaps and Taylor Rules
Krugman might have a point that the Taylor rules should use output gap as opposed to unemployment gap used in the letter. The two graphs below show the output gaps for the core and peripheral Eurozone respectively along with the US output gap in both. The data comes from the OECD Economic Outlook in table 10. Output Gaps which measures deviations of actual GDP from potential GDP as a per cent of potential GDP. It includes forward looking estimates for 2011 and 2012, which is helpful for considering medium-length effects from monetary policy. There is a divergence between the core and peripheral countries with the core as a group quickly reducing the gap to zero or in the case of Germany surpassing the break even point in 2012. Given the expected growth in output as compared to potential GDP, it does not seem overly early to consider raising interest rates in the core countries. On the other hand, the peripheral countries show weakness in growth and have a much longer path to eventual full employment of resources.

The graphs also show that the US has done much better than the peripheral countries but compared to the core countries it is a lager of the group around the level of France with even Finland making up the gap at a very fast rate. So while it is possible to say they are "similar" in appearance in growth, as Krugman implies, the US will be a lager in getting to break even output gap. This trend for the US does imply that within the next few years the output gap will be significantly reduced to zero. Unemployment will still be above NAIRU at that time, but the Fed may be required to start unwinding the extra monetary tools like quantitative easing if output gap is zero or above.

Conclusion
Based on the data above, it showed that Paul Krugman missed the mark on unemployment gaps with respect to the use of the Taylor Rules. The data from the output gap also confirms that soon, if not right now, might be a time that the EMU (European Monetary Union) will need to raise interest rates. This is at least in regards to the core countries. Structural rigidity is causing most of this divergence. If labor was completely mobile then standardized unemployment rates would converge and stay stable between regions (nations of the European Union).

The letter from the Fed provides one more graph that is important in discussions about which country benefits and which country gets hurt in any monetary policy going forward. Since the economic weights of various countries determine the amount of contributions to the central bank and thus political weight, you would not expect perfect balance between the various interests. But a reasonable compromise would represent conditions where the target rates lied between the core and peripheral Taylor rules rates. The graph below shows that since the lines all crossed in 2008 that the target rates used were in between the Taylor rules indicator of the core countries above and the Taylor rules indicator of the peripheral countries below. It could be argued that the rate used should have been lowered to like near zero in the US and Japan, but overall it seems to be a good compromise.

Given the data we looked at regarding output gap, I think it is upon Krugman to provide a Taylor rule or some other rule to determine what the target rates should be for the EMU going forward.

The data above, and thus implications of what the EMU may do in the future, bodes negative for investors looking for gains in the European region. The core is basically heating up and inflation may take hold especially with a lot of power in labor unions. On the other hand, the peripheral countries could suffer economic stagnation from too high of rates along with austerity measures. In an alternative universe, the problem would be easily solved by all the unemployed in Spain, Portugal, and Greece would pack up their bags, learn German quickly and get jobs in the hot sectors of Germany including high technology areas. Also capital would flow from the center/core to the peripheral. In other words, no structural rigidity.

Where Have All The Small Businesses Gone?

standardised unemployment

RSY XXXVIII: Sell IVR.

2011-06-16T10:51:00.000-07:00

Despite a respectable showing for Sabrient's key value measure, IVR is rated a Sell. It appeared among Sabrient's shorting filters as a stock with characteristics that are being avoided by the current market.

RSY recommends selling off the remaining half of the initial position of 400 shares (based on a portfolio of $100,000). Sell 200 shares of IVR at a limit price of $20.81 (GTC). This is a most opportune time to unload as the last ex-dividend date was on June 15th with record date of tomorrow. This will net us a small capital gain from our original purchase on August 23rd, 2010 but a huge dividend of $3.94 per share.

Below is an update of the portfolio transactions since inception. Since last update, we have added capital gains of $225 from selling EGAS and $207 in dividends.

Home Bias - Fama/French Forum

Political Calculations: The Return of Order in the Stock Market?

More Signs Wall Street Is Preparing For Debt Ceiling-Related Problems | Capital Gains and Games

S&P 500 Historic and Expected Quarterly Dividends per Share, 2009Q1 through 2012Q2, as of 14 June 2011

Macro View: ISM May Rose Flowers or Thorns?

2011-06-05T13:54:00.000-07:00

At some time the negative news surprises are going to be supplying the bears with all the nutrients they need to roar back to life. Over the past week, David Brown noted that the markets were thinking “What? Me worry?” over the triple whammy of bad news from housing, business conditions and consumer confidence. Obviously these three segments are most important for the economy to get back on the right tract and unemployment to decrease from present high levels. This could be a harbinger of a vicious circle forming through negative outlooks spreading throughout the economy. The next day Scott Martindale noted the bearish indicators were showing signs of trouble where he stated that Financials are a drag.

While the VIX (a measure of market volatility) has remained subdued, some of the negative news this week has been: Case-Shiller home prices are contracting; consumer confidence was significantly below expectations; ADP employment report was reported as a measely 38,000; ISM manufacturing report confirmed the downdraft reported by the Chicago PMI with a drop of nearly 7%; motor vehicle sales was below expectations; Factory Orders were down; and to top it off, the unemployment rate rose slightly to 9.1%. The SPY showed weakness this month with a drop of around 2 1/4% on June first, marginally lower on the second and nearly a 1% drop on Friday. One bit of good news was that the Non-manufacturing ISM report was above expectations with an increase of 1.8 to 54.6%.

The WSJ's World-Wide Factory Activity by country shows that most countries have turned to slowing rates of growth with a general convergence toward the mid-50s range. The two outliers are Spain and Greece that are contracting at a faster significant pace -- as expected.

As noted above, the ISM manufacturing headline index dropped 6.9 to 53.5% which was below MarketWatch consensus of 57.1 and Thompson Reuters of 57.5% with a range of 55 to 59.5%. While the manufacturing was a surprise to the downside which was below the consensus range, the non-manufacturing index was a surprise to the upside at 54.6% versus the consensus from MarketWatch and TR both at 54 and a TR consensus range of 52 to 55%.

Jobs, Jobs, Jobs
The manufacturing employment index has continued its downward trend since February 2011 with a high of 64.5 and a most recent drop of 4.5 to 58.2%. This drop below the 60 mark might signify slower employment growth in reports like the ADP employment report for manufacturing. Since manufacturing has less share of total employment than the services sectors, the non-manufacturing employment index has been of more interest to us. The graph below shows the non-manufacturing employment index since December 2009. Worth noting is that the drop from April was reversed and May just about reached the trend line as it did this March. (Click on charts for clearer images.)

Prices and Commodities
Mish noted that the Manufacturing ISM plunged along with backlog of orders and new orders with the later barely above contraction. He also notes that all the indexes dropped in the table by ISM, but not all indexes are bad news when they drop, especially prices. Both price indexes went down with the manufacturing dropping a sizable amount of 9 to 76.5% and non-manufacturing declining slightly to 69.6 by .5%. This trend might be a good sign, but it seems to accompany soft economic growth indicators, which is not necessarily good news overall.

More troubling is the number of commodity prices rising along with commodities that have risen for consecutive months. The two graphs below show the number of multi-month commodities with price increases and total number of commodities with rising prices since November 2010 for the manufacturing and non-manufacturing sectors respectively.

While both categories for manufacturing decreased in May, non-manufacturing continued the upward trend with both hitting new highs. Mish concludes about the price pressures and I agree with:

Either commodity prices plunge, or manufacturers get hit in a price and profit squeeze with falling customer demand.

Which will happen? I think both.

Using the ISM Cycle as an Investment Guide
Hat tip to Cullen Roche with the above linked titled article that uses the ISM manufacturing index as an investment strategy developed by Goldman Sachs. A partial explanation for the strategy is available at "Weekly Kickstart" (premium pdf report at: https://360.gs.com/gs/portal/?st=1&action=action.binary&d=10967056&fn=/document.pdf) And we are seeing that the manufacturing index has continued its decline since this February's peak with a sharp decline in May. If this trend continues it will certainly mean contraction in the coming months, and possible signs of a "double-dip" recession.

Mr. Roche links to an article about headline non-manufacturing sector declining in April to confirm the reversal of the faster growth rates, but the May report for the non-manufacturing sectors actually reversed course and increased the rate of growth. GS specifically states the manufacturing ISM reports are the basis for the strategy, and if this is a proxy for growth of the economy then the manufacturing is more strongly correlated with GDP growth. This correlation is confirmed from the statements from the ISM reports, reports from Martin Evans from the National Bureau of Economic Research in a paper entitled "Where Are We Now? Real-Time Estimates of the Macroeconomy", and my own regressions done on the data. I would expect that this correlation with manufacturing and GDP growth would become weaker in the future as the manufacturing portion of the economy continues to decline. Just as the US no longer sees any correlations between agricultural production and GDP, but in India the monsoons and weather patterns are highly correlated with economic growth.

The GS investment strategy using ISM data is summed up by the following graph. If the manufacturing index continues its downward spiral then the length of this lag has been shorter than the median of 11 months with only 5 months. As they say, "Every cycle is unique and return distributions are wide." Caution should be practiced at trying any new strategy, but it does add to the plethora of business cycle investing strategies.

MarketWatch:
ISM: 57.1%
Non-Manufacturing: 54.0%

World-Wide Factory Activity, by Country - Real Time Economics - WSJ

ISM - Media Release: May 2011 Manufacturing ISM Report On Business®

Econoday Report: ISM Mfg Index June 1, 2011

ISM - Media Release: May 2011 Non-Manufacturing ISM Report On Business®

Econoday Report: ISM Non-Mfg Index June 3, 2011

Calculated Risk: ISM Non-Manufacturing Index indicates slightly faster expansion in May

The Capital Spectator: The New Decline In The Inflation Forecast

Chicago PMI Tanks in May - Seeking Alpha

Calculated Risk: ISM Manufacturing index declines to 53.5 in May

David Smith's EconomicsUK.com: Manufacturing growth weakens

American government debt: Mining the safe harbour | The Economist

Mish's Global Economic Trend Analysis: Case-Shiller Nominal and Real Housing Declines Since Peak; Home Prices Best in 25 Years, Better Prices Still Coming

The Capital Spectator: Two More Warning Signs For The Economy

Calculated Risk: Chicago PMI shows sharply slower growth, Manufacturing Activity Expands in Texas

Chicago Business Barometer Shows Weakening Recovery - Real Time Economics - WSJ

The Unkillable Yield Curve Fallacy (Wonkish)

Inflation and Debt (Wonkish)

Inflation Notes

Calculated Risk: Arizona Lands sells for 8 percent of peak price

Misc. Links:
Using the ISM Cycle as an Investment Guide - Seeking Alpha

U.S. Manufacturing Trade (Wonkish){PK}

Supercore! (Wonkish) Two questions about inflation: {PK}

Questions for Minimum Wage Supporters, Bryan Caplan | EconLog | Library of Economics and Liberty

Mish's Global Economic Trend Analysis: Retail Sales Plunge in Italy, Dip Elsewhere in Euro-Zone

Worthwhile Canadian Initiative: Subsidies on Interest Income to increase Aggregate Demand

Bad News In Preliminary Jobs Data

Calculated Risk: ADP: Private Employment increased by 38,000 in May

Why do Depressions Occur?, Arnold Kling | EconLog | Library of Economics and Liberty

Calculated Risk: Employment Summary, Part Time Workers, and Unemployed over 26 Weeks

GOP, Democrats Point Fingers Over Rising Unemployment Rate - Washington Wire - WSJ

Nearly 1 in 3 Unemployed Out of Work More Than a Year - Real Time Economics - WSJ

Video: Weak Jobs Report for May - Real Time Economics - WSJ

Job numbers disapoint and the unemployment rates rises: Is it Time for more stimulus? - The Curious Capitalist - TIME.com

The Capital Spectator: Job Creation Slows Sharply In May

More political misapplication of demand and supply analysis--almost

2011-06-01T08:38:00.000-07:00

More political misapplication of demand and supply analysis
I suppose the idea is that expectations of low prices will cause suppliers to sell more now at high prices to avoid losing out when prices actually fall. The ECON 101 analysis is impeccable. Yet, new supplies won't do much to bring down prices (0% to 3%). The mistake is shifting the demand and supply curves too much.

At least you are recognizing the effects of expectations -- and I assume taking into account the discount rate. But even ANWR is supposedly only reduce oil prices by 3% WORLD WIDE, we are still talking about an inelastic demand curve as noted here: Environmental Economics: Is the own-price demand elasticity for gasoline increasing?

If Newt is for "all-out", then do you think we can increase oil production another 1 million from off-shore drilling? Just doing what the Cubans are doing is one thing we could do: Oil Updates: Cuba Discovery. And increasing on-shore continental drilling another million per day. Before long, we might have something there considering inelastic demand curves in the future as well as supply curves...

"Shale Boom in Texas Could Increase U.S. Oil Output"

RSY XXXVII: No More Gas {EGAS}

2011-05-23T14:10:00.001-07:00

Sabrient downgraded EGAS to Sell and thus RSY recommends unloading the remainder of the holdings. Sabrient's analysis states that, "EGAS's weak showing for Sabrient's key growth and momentum measures earns it a Sell rating." Those are troublesome enough facts but also EGAS's Earnings Score and Balance Sheet Score are subpar. RSY recommended opening an initial position of 400 shares based on a $100,000 portfolio on November 15th, and then recommended unloading half on January 13th. RSY suggests placing a sell limit order of the 200 remaining shares of EGAS at $11.19 (GTC) at the opening bell. That should net us a couple of hundred of capital gains for this transaction and around $111 for the last sell and $72 in dividends including the one scheduled for distribution at the end of the month.

QEII: The Hyperinflationistas United for the Revolution!

2011-05-15T12:36:00.000-07:00

Questioning the Quantitative Easing Monetary Transmission Mechanism or something like that...

A lot of attributes have been assigned to the actions of the Fed, especially with regard to their policy of Quantitative Easing (QE), including but not limited to the rise in commodity prices worldwide, equity markets taking off, worldwide inflation especially in lower income countries, decline in the value of the dollar, domestic inflation rising, and finally reaching the ultimate in a misery index with stagflation. But in all the theories I have read about, there is no mention as to how the money gets from the Fed to the various markets. This might be called the monetary transmission mechanism as Ben Bernanke wrote about in 1995 in a paper entitled Inside the Black Box: The Credit Channel of Monetary Policy Transmission.

Less formally we could at least say how QE transfers the money from a commercial bank to either highly volatile assets like commodities and stocks to simply speculative instruments like futures and derivatives. We do know that the first transfer is that the Fed purchases long-term financial instruments especially government bonds. But then what happens? Do the bankers hand it over to their cousin Vinny to go bet at the Merc? That seems highly unlikely.

Even if there is More Good News as Bank Lending Continues to Rise, that is still a leap to confirm that the monies are ending up in the hands of speculators or investors in the stock markets.

The fact that Commercial and Industrial Loans are increasing at an 8.6 annualized rate is certainly good news for the economy overall. The important question here is where does the money go after the Fed exchanges cash/money for the government bonds? The last phase of quantitative easing dubbed QE2 started in the later part of 2010 and was officially announced in the early part of November. (Graph: Excess Reserves of Depository Institutions (EXCRESNS))

That graph certainly shows a huge increase in reserves since QE2 came about and in the same magnitude of the total amount of QE2 at around $600 billion. Since the first QE started in late 2008 let us look at a longer term graph.

That is probably not every dollar put into the system from QE1 and QE2, but the rise from near zero to over 14,000 billions (1.4 Trillion!!!) of excess reserves covers the majority of the easing as reported. So what are these reserves doing there if not lent out to prospective borrowers? (Interest Rate Paid on Excess Reserve Balances)

I honestly can not answer why the Fed is paying interest on excess reserve balances. But one thing is clear, quantitative easing is mostly or completely absorbed by the excess reserves, thus it is not a monetary transmission mechanism that is causing some markets to expand.

What is the Transmission Mechanism Then?
The most logical transmission is not a transmission of monies but just a simple change in expectations. If prices are to rise in the future then selling in the future is a better option and interest rates will need to rise accordingly now.

Cullen Roche that blogs at Seeking Alpha provides some cogent discussions about QE2. Commodities react almost instantaneously to new information and adapt accordingly, and at "Fed Contributing Directly to Speculative Behavior" he shows how the commodity prices spiked over the Fed Chief’s press conference. Even though he thinks that QE2 was mostly a flop, he states that "A QE3 Would Only Exacerbate Commodities Speculation, Further Curtailing Real GDP Growth". He may have a point going forward and his biggest complaint about QE2 was that it targeted the amount of transactions and not an explicit interest rate target as normal monetary policy is pursued. In other words, long-term bond rates should have been targeted and amount of transactions ignored which would use more of a signaling to the markets than specific transactions in the market.

Hyperinflationistas...
While most of the recent events can be explained by rising corporate earnings or simply supply and demand, I can not help to think that some of the Inflationistas and Hyperinflationistas took their own advice by buying up commodities and investing more in equity markets. The investments in the stock markets is overall a good thing. Commodities might be pushed higher from this frenzied buying, which could in fact create the necessary political will to reduce the structural rigidity this blog has been talking about. And sure enough with gas costs high, Obama to speed oil production.

Why QE2 Was Hardly a 'Non-Event' - Seeking Alpha

The Bond Market's Inflation-Forecasting Abilities - Seeking Alpha

Bank Lending Update: Economic Building Blocks Start Stacking Up - Seeking Alpha

http://krugman.blogs.nytimes.com/2011/05/15/money-1937-slightly-wonkish/

Impact of Fed Stimulus Debated

Federally Funded Friday - Bernanke Says More Free Money! - Seeking Alpha

GDPhursday - Reality Check - How Much is that Priced in Euros? - Philip Davis - Seeking Alpha

The Bernank Says He Is Responsible For Higher Stocks Not Higher Commodity Prices - InTheMoneyStocks.com - Seeking Alpha

The Transmission Mechanism for Quantitative Easing (Wonkish) - NYTimes.com

Quantitative easing and the commodity markets | The Great Debate

Analysis: Fed's QE2 raises alarm of commodity bubble | Reuters

POMO Thursday: Bernanke Serves Up Another Round - Seeking Alpha

Reserves - FRED - St. Louis Fed

Graph: Excess Reserves of Depository Institutions (EXCRESNS) - FRED - St. Louis Fed

FRED Graph - St. Louis Fed

Interest Rate Paid on Excess Reserve Balances (Institutions with 2-Week Maintenance Period) (INTEXC2) - FRED - St. Louis Fed

Excess reserves - Wikipedia, the free encyclopedia

The Fed initially announced a $600 billion program in November 2008, but then four months later, increased that to $1.8 trillion, when it wasn't enough.

QE1: Nov. 2008-June 2010
QE2: Nov. 2010-June 2011 (estimation)

From RDRutherford:
QE2's Failure and the Housing Market - Seeking Alpha

An Event Study on the Fed and QE2 - Seeking Alpha

The Impact of the Fed's Stimulus Is Debated - Seeking Alpha
Impact of Fed Stimulus Debated

Fed Survey: Big Banks Ease Lending Standards - Real Time Economics - WSJ

Quote:

�The most often cited reason for stronger demand noted by larger banks was greater demand for financing merger and acquisition activity,� the Fed said.

Banks, citing increased competition, eased standards on commercial and industrial loans. �Some banks that had eased standards and terms also pointed to a more favorable or less uncertain economic outlook,� the Fed said.

Demand for commercial real-estate loans also increased, the Fed said.

Structural Rigidity: War, Counterror Act Like Sand in Economic Gears - Real Time Economics - WSJ

Calculated Risk: Fed: Banks more willing to make consumer loans

Fed�s Hoenig: Rates Should Start Rising - Real Time Economics - WSJ

Fed�s Rosengren Says Recovery Weak, Policy Just Right - Real Time Economics - WSJ

The Fed's Language Problem on Inflation - NYTimes.com

RSY XXXVI: Are You Getting 100%? More TOT{al} to RSY.

2011-05-13T12:28:00.000-07:00

As the title asks, "Are You Getting 100%?"-- of Total. On the other hand, TOTAL S.A. (TOTAL) has been taking it on the chin from nearly $64.5 recently to a low today below $57 even though their next ex-dividend date is quickly approaching on May 18th with a sizable dividend of $1.577 per share. Although oil prices are sagging somewhat lately, it is still maintaining above average prices at close to $100/barrel. And TOT has not stopped venturing into all energy sources including taking majority stake in SunPower that "designs, manufactures and markets high-performance solar electric power technologies." Sabrient recently upgraded TOT from Buy to StrongBuy.

Overall, there seems to be no reason to back away from this long-term investment. Since there is nothing to discourage our faith in the company and even one commentator has recently labeled TOT as the Perfect Safe Haven, then RSY is recommending adding more to the current recommended position of 100 shares with 100 more (based on $100,000 portfolio). RSY recommends a limit order at $57.51 good for the day. You may want to adjust that price if it does not trade in the opening minutes.

This may turn out to be a short-term trade. Having multiple lots does provide more flexibility to hedge and trade with swing movements.

RSY XXXV: Optional Options

2011-05-10T13:08:00.000-07:00

Just as selling into a strong market is good, selling covered options in a strong bull run is beneficial. Before we look into some possible choices for selling covered calls on our portfolio, let us look at the latest Sabrient ratings for our rated positions.

Since there is no rush to unload any specific position, RSY portfolio would like to pick longer term contracts to make it worthwhile. Some of the positions do not have options available. Just like the adage says to make money by selling high and buying low, we want to pick out options to sell that are above their theoretical value and buy back below their theoretical value. RSY rejected Total (TOT) for that reason.

Just as RSY recommends good-til-cancelled (GTC) limit orders for buys and sells, RSY suggests the same for option orders. Some of the possible options that could be fruitful are:
1. STMICROELECTRONICS (STM) OCT-11 $12.50 CALL, 6 option contracts at limit price of $1.20.
2. FOOT LOCKER INC COM (FL) JAN-12 $22.50 CALL, 2 option contracts at a limit price of $2.45.
3. COMPASS DIVERSIFIED HOLDINGS (CODI) NOV-11 $17.50 CALL, 2 option contracts at a limit price of $0.75.
4. INVESCO MORTGAGE CAPITAL (IVR) OCT-11 $30.00 CALL, 2 option contracts at a limit price ofoption contracts at a limit price of $0.45.

Macro View: ISM April, Downers but Net Up For Manufacturing

2011-05-08T02:41:00.000-07:00

While the Manufacturing ISM Report showed general weakness in the indexes and an overall drop in the PMI, the Non-Manufacturing ISM Report showed a significant drop in the headline NMI index as well as a dramatic drop in new orders. Mike Shedlock {Mish} noticed that Manufacturing ISM Prices Paid Hits Another High, Up 22nd Consecutive Month and that Non-Manufacturing ISM Plunges Below Prediction of All 73 Economists, New Orders Collapse, Prices Firm.

Both headline numbers dropped with the NMI dropping 4.5 and the PMI decreasing 0.8%. The manufacturing was above the consensus with MarketWatch and Econoday Report {ISM Mfg Index} both at 59.5 and Econoday stating the consensus range of 58 to 60.5%. So while the NMI stayed on the high side of expectations, the PMI was significantly below the consensus of MarketWatch at 57.8 and Econoday {ISM Non-Mfg Index} at 57% with a range of 54.5 to 60%. Whenever the actual is outside of the consensus range, then that is a significant event. Either the basis of the analysis is faulty or unexpected events were not considered in making the estimates.

Spin or Happiness Pills?
The non-manufacturing report noted some strong negative index numbers such as: a 6 point drop in business activities index to 53.7%, a dive in the new orders index by 11.4 to 52.7, employment index approaching the 50% mark also by dropping 1.8 to 51.9%, and new export orders dropping 5.5 to 53.5%. Thus it is curious as to how Anthony Nieves of the ISM stated the following about the report.

Respondents' comments are mixed about overall business conditions; however, they are mostly positive. Respondents' comments also indicate concern over rising fuel costs, commodity costs and the lingering uncertainty about the economy. {Emphasis added.}

As Mish noted above in the manufacturing sectors, prices paid for inputs are rising and getting much worse. The one bright spot was that the non-manufacturing sectors index dropped 2 points but still maintained above 70 at 70.1%. Manufacturing added a little more fuel to the fire with a 1/2 point increase to the highest level since July 2008 at 85.5%. Last month all 18 industries from both reports reported increases in prices. This month is not much better as all 18 in non-manufacturing and 17 in manufacturing reported higher prices. The lone exception was one industry reporting no change in prices. Also the percentage of respondents reporting higher prices to those reporting lower prices continues to climb. For non-manufacturing it is 57:2 ratio and for manufacturing it is 72:1 ratio. Meaning that for every manufacturing respondent that said they were paying lower prices there were 72 others stating they were paying higher prices. That clearly is an unsustainable path.

Let us look at some of the published comments from respondents that Anthony mentions above.

Non-Manufacturing:
# "Fuel prices continue to be challenging and in addition to shipping, are influencing the cost of materials." (Public Administration)
# "We are seeing price increases in many areas, and the lead times are stretching out. Our business activities are improving at a moderate rate." (Wholesale Trade)
# "Looking forward with reserved caution. Cost of goods by this fall are a big worry." (Accommodation & Food Services)
Manufacturing:
# "Rapidly rising raw material costs putting extreme pressure on profits." (Food, Beverage & Tobacco Products)
# "Plastic resin product prices are climbing so fast that [suppliers] are attempting to increase prices on orders already accepted but not [yet] delivered." (Chemical Products)
# "Customers are rebuilding safety stock levels of inventory, and also trying to buy ahead of material price increases." (Plastics & Rubber Products)

The last comment above should be a red flag in regards to growth of the economy or inflation going forward. While on the one hand this increases aggregate demand and increases production for inputs especially, but on the other hand this could be a sign that inflation expectations are unmoored. It certainly is not the time to scream HYPERINFLATION, but not sure that Paul Krugman can continue to be so sanguine about inflation expectations.

Looking at commodity prices also paints the continuing concerns about inflation. No commodities had lower prices in either report. Non-manufacturing had slight reductions in total commodities rising in price at 38 and commodities with consecutive months at 19. Manufacturing continued going up for both categories with 39 total commodities reported as rising in prices and 30 having consecutive months which was a rise from 22 in March up from 21 in February and 15 in January.

Norbert J. Ore {ISM Manufacturing Report} also seems to be smoking whatever Nieves was when he wrote the following.

Ore stated, "The past relationship between the PMI and the overall economy indicates that the average PMI for January through April (61 percent) corresponds to a 6.5 percent increase in real gross domestic product (GDP). In addition, if the PMI for April (60.4 percent) is annualized, it corresponds to a 6.3 percent increase in real GDP annually."

But the U.S. Commerce Department’s Bureau of Economic Analysis stated that real GDP grew 1.8 percent at an annual rate. If the non-manufacturing sectors were also maintaining above 60% levels like manufacturing then maybe the above analysis might be closer to the truth.

The Bright Spot...Manufacturing
Even though the important index numbers of new orders, production, and employment showed weakness with a decrease of 1.6, 5.2, and .3 percentage points respectively, the "net" percentage of respondents increased in all three indexes. For new orders the percentage of respondents stating that it was better was 49 versus 8% worse with a net of 41% and the month before saw numbers of 43 better off and 10% worse off with a net of 33. That trend has been continuing since November 2010 when the net was 5% (30 to 25). Last month's percentages for production were 43 better and 5 worse for a net of 38. This trend also started in November 2010 with a net of 6 divided between 26 better and 20% worse. And lastly, employment index trend started in December with a net of 10 and 22 higher and 12% lower. Last month employment was 34 higher and 5 lower for a net of 29%.

The importance of this is that even if the index contracts some, this might be beneficial in the long run as the economy needs as broad a base to absorb all the excess labor currently. Of course without non-manufacturing this will still be hard for the economy to get back on a productive employment path. This brings us to one of the most important indexes in the reports {at least for now}: non-manufacturing employment index. As noted already, the index dropped 1.8 to 53.7% and the trend seems to be headed back down below the 50% mark. The nets are improving {March 22-13=9, April 26-11=15} but with lower levels of expansion then this is not likely to be of much benefit in employment numbers. Below is what the recent trends show since the index lows of December 2009. (Click on charts for clearer images.)

The trend line slope declined almost 11% for last month and over 14% for the past two months. This could be a new downward trend in employment for the non-manufacturing sectors indicating contraction in employment. Let us hope not.

More about the Demise of Manufacturing Myth
With the upcoming Presidential election season starting soon enough, there is bound to be candidates that espouse how to save the manufacturing sectors of the US economy. Trump's China-bashing is one example we have already. Mark J. Perry at Carpe Diem presents some important graphs in some of his recent posts to dispel the fear of the "manufacturing demise". Below is value added by industry over time {CARPE DIEM: Service Sector Inflation Remains Mild}.

That just confirms that the manufacturing sector is adding less to the US GDP over time, but he also brings up some important points that the services sectors of the economy has not been creating a vicious cycle of inflation in the economy and are unlikely to in the future. His conclusions are as follows.

MP: I've made some of these same points before. In the inflationary 1970s, almost every measure of prices was increasing: food, energy, core inflation, wages, services, interest rates, etc. We now have a wide mix of inflationary, deflationary and flat inflationary forces, along with decelerating wage increases and low interest rates, and that's not a formula that results in overall inflationary pressures. At least not yet. And since inflation for services has been below 2% for almost two years now, there's not inflationary pressure there.

That seems to be the case for now, but it is doubtful that when every industry in both manufacturing and non-manufacturing are experiencing increases in the commodity inputs that there will be no eventual pass-through price increases, even if wage inflation is low or non-existent for now. {CARPE DIEM: The "Decline or Demise" of U.S. Farming?}

The US and the world economy has already experienced the demise of agriculture. One way to describe the graph above is that we are past the agricultural society which took humans around 10,000 years to accomplish. Now we are in the dying days of the industrial society. What develops from now is anyone's guess. It is defined above graphically as a services society but that is likely to be broken down into specific components like finance, health, education etc.

The last graph above most importantly shows that it is not the US lagging in manufacturing production but in fact we are the leader to the new economies of the future. The US is at the "undiscovered country" and there is no turning back, even if we wanted to. {CARPE DIEM: "Decline of Manufacturing" is Global Phenomenon: And Yet the World Is Much Better Off Because of It}

To be, or not to be - Wikipedia, the free encyclopedia

Star Trek VI: The Undiscovered Country - Wikipedia, the free encyclopedia

Calculated Risk: Weekly Initial Unemployment Claims sharply higher

Economics - What America makes

MarketWatch Forecasts:
ISM: 59.5%
Non-Manufacturing: 57.8%

David Smith's EconomicsUK.com: Three in a row as service sector slows

Calculated Risk: ISM Non-Manufacturing Index indicates sharply slower expansion in April

This was well below expectations of 58.0%.

Calculated Risk: ISM Indexes and BLS Payroll Employment

David Smith's EconomicsUK.com: Slower manufacturing growth, modest retail sales

Calculated Risk: Texas Manufacturing survey shows slower expansion in April

Calculated Risk: ISM Manufacturing at 60.4 in April

Inflation: The commodity-price speed limit | The Economist

Calculated Risk: Household Formation and the "Big L"

The Capital Spectator: The March Rebound

Mish's Global Economic Trend Analysis: Gallup: U.S. Job Creation At Post-Recession High; What's Next? How Congress Can Spur Job Creation

Real Time Economics - Search Results

Calculated Risk: ADP: Private Employment increased by 179,000 in April

CARPE DIEM: Michigan, Rust Belt States Lead Economic Recovery

CARPE DIEM: Jobless Claims Spike Due to Seasonal Adjustment?

Calculated Risk: Clear Capital Home Price Index shows Double Dip

The Capital Spectator: Initial Jobless Claims Surge To 8-Month High

Calculated Risk: Q1 2011 Details: Investment in Office, Mall, and Lodging, Residential Components

Calculated Risk: LPS: Mortgage Delinquency Rates declined in March, Foreclosure pipeline "Bloated"

Calculated Risk: Consumer Sentiment increases slightly in April compared to March

Calculated Risk: Construction Spending increased in March

Economic Indicators: Is Three a Trend? - The Curious Capitalist - TIME.com

Misc. Links:
Calculated Risk: Survey: Small-Business Lending Is Increasing

The Impact of the Fed's Stimulus Is Debated - Seeking Alpha

Trade: Boeing, Boeing, gone | The Economist

Calculated Risk: Home Sales: Distressing Gap

New Home Sales: Slightly Better Than Horrible - The Curious Capitalist - TIME.com

Whatever Happened To The Housing Recovery?

After the Fall(s) - NYTimes.com

Mish's Global Economic Trend Analysis: Ron Paul asks "When is Bernanke Going to Admit Fed Policy is a Total Failure"

Q&A: IMF’s Anoop Singh on Inflation in Asia, China Trade and Dangerous Capital Flows - Real Time Economics - WSJ

The Two-Track Recovery (or 'Depression'?) - NYTimes.com

Calculated Risk: Restaurant Performance Index increases in March

Let’s Talk Ham and Eggs « Modeled Behavior

How Can Retirees Determine a Sustainable Withdrawal Rate? - Fama/French Forum

Mish's Global Economic Trend Analysis: Silver Plunges 12%, What's Going On?

Dow Jones Sentiment Indicator Rebounds - Real Time Economics - WSJ

Inflation: Are commodity prices heading down? | The Economist

Reckonings - That Sinking Feeling - Op-Ed - NYTimes.com

The Plight of the MBA Generation - Doug French - Mises Daily

Hard Keynesianism - NYTimes.com

Economics - How to beat Dr Evil Unemployment!

http://krugman.blogs.nytimes.com/2011/05/01/money-talks-regulation-walks/
http://krugman.blogs.nytimes.com/2011/05/01/faminedeath-2012/
http://krugman.blogs.nytimes.com/2011/05/02/a-commodity-peak/
http://krugman.blogs.nytimes.com/2011/05/01/on-not-reading-keynes/
EconoSpeak: Did Keynes Support Having a "Central Plan"

RSY XXXIV:Update, More Alpha from Changes in Dividend Policy?

2011-04-29T08:50:00.001-07:00

The table below is a summary of the RSY trades and dividend payouts since inception. Since the last update we added 100 shares of TOT at $61.07 on March 31st, and today added 600 shares of STM at $11.82 which was below our bid price of $11.99 along with 400 shares of TESS at $11.62. Hopefully, if you had an order in the morning it executed at the bid of $11.51, but if not and went with a market order you got it for $11.62. The RSY portfolio also recorded $367 in dividends for the month. This was led by $200 for IVR and $72 for CODI. (Click on tables for clearer images.)

The RSY portfolio has been holding onto the positions since last month as Sabrient has not downgraded any to Sell or Strong Sell. The table below shows the Sabrient ratings along with their respective growth, value, and momentum scores. Of course as discussed yesterday, the two new stocks are Strong Buys and the rest being mostly Hold with ARLP and TOT maintaining Buy ratings.

Can Dividend Policy Changes Yield Alpha?
Capital IQ asked the question above, that links to a PDF, about how policy changes with regards to dividends can yield alpha. Lots of interesting things for any dividend investor in the paper. For RSY, it shows that we are picking stocks that not only provide us with a steady stream of dividends but most of the older ones are increasing their payout dividends as the report says is a good thing. The stocks that have been increasing dividends lately are (in alphabetical order): ARLP increased their dividend from 79 cents in May 2010 to 81 to 83 to 86 to 89 cents this coming May 4th each quarter; GAIN recently increased their monthly dividend to 4.5 cents from 4 cents; CODI increased their dividends from 34 cents in January to 36 in March; FL increased their dividends from 15 cents in January to 16.5 cents paid out today; IVR increased it back to $1 from 97 cents; NGPC increased their dividend since purchasing it from 17 cents to 18 cents; TOT has been less consistent over time but the three most recent payouts have been $1.39, $1.54 and one set for May 18th of $1.577.

For dividend investors, there are two important points I wanted point out from the paper. First, the gains from stocks that initiate dividends is greater than those that increase dividend payouts. RSY has been focusing on consistent dividend paying stocks over at least a 3 year period. Secondly, stocks that have negative EPS that increase their payouts do the best overall in gaining alpha. That is another factor that the RSY portfolio avoids. It is also interesting to note that small cap stocks tend to gain more than large-cap stocks when changing their dividend policy. Overall we already knew that small-caps do better in the long-run.

RSY Current Holdings
The table below shows the current stock positions of RSY along with unrealized gains/losses. It shows a nice gain today and nearly $3500 in unrealized gains. ARLP accounted for most of it today and represents the largest unrealized gains stock. It did take a dive this last month dipping as low as just above $72. Sabrient continued to rate it a Strong-Buy or Buy during this time, so RSY held its position. It is also worth noting that FL has the second highest dollar gains, but back on February 1st the RSY portfolio took a $250 loss on half of the position.

The next table shows the percentage of each position held as compared to the whole portfolio including cash (assuming $100,000 portfolio to begin with). With 10 positions the RSY portfolio is starting to be more diversified, and with plenty of cash on hand we could easily add another 10 positions.

12 Favorite Oil & Natural Gas Dividend Stocks - Seeking Alpha

Gas Natural: Small Cap Roll-Up Utility Paying Monthly Dividends - Seeking Alpha

RSYXXXIII: Two for Technology and Two Almosts for Material

2011-04-24T17:32:00.001-07:00

This seems about time to seriously try adding more to our RSY portfolio. The economy seems to be gaining strength and international events have not scared the bulls enough to have them hiding in the barn. For the selection of stocks today, I used a modified RSY in MyStockFinder and selected only Strong Buys and selected only sectors that the RSY was not already heavily invested in. This was to diversify the portfolio more.

One of the best looking one for overall good Sabrient scores is STMicroelectronics N.V. (STM). Although STM is an ADR, it has more information available than many ADRs including enough information to evaluate a forensic accounting score. Along with a decent forensic score, Sabrient notes that it has excellent scores in momentum (90.7), earnings (93.2), balance sheet (75.6), value (73.4) and the rest being average or above average (based on 1 to 100 scores). This will get RSY into the important technology sector with semiconductors. RSY recommends a buy order at the limit price of $11.99 {GTC} for 600 shares.

The second one on our list is another technology sector company in communications equipment. Sabrient analysis states that TESSCO Technologies, Inc. (TESS) is rated a Strong Buy for its outstanding profile as a value stock, combined with strong growth attributes. The value score is 85.4 which is nearly double the score of its industry. The Sabrient Fundamental Score is the broad measure of a company's financial health, including its balance sheet, cash flow, revenue, and earnings quality, and is 88.2 for TESS. Today it spiked up to over $12.50 but settled down to a decent 5 1/2%. Again we do not like chasing a rocket but let us try to enter a long position of 400 shares of TESS at a limit price of $11.51 {GTC}.

Two others that almost made it into RSY, were Olin Corporation (OLN) and Companhia Siderurgica Nacional (SID). Even though Sabrient rates all the stocks today as Strong Buy, I decided not on OLN since its score on earnings, balance sheet and fundamentals were low and below the industry average. RSY wants at least one of these scores to be outstanding before deciding on the long-term investment. And SID since the dividends are not consistent over time and the dividend payout is based on the declared dividend for May 3rd. Since we would just want to be long for a short period then the deciding factor was that the timeliness score was too low. Sabrient's timeliness score measures a "stock's short and long-term price strength as determined by various chart-based indicators and measures of group momentum and relative price performance." A courageous investor could jump in now and purchase an Undervalued Brazilian Basic Materials Dividend Stock With High Option Yields.

DPL, ARLP, LGCY.

3 Undervalued Brazilian Basic Materials Dividend Stocks With High Option Yields - Seeking Alpha

A Macro View: ISM Reports March

2011-04-01T12:05:00.000-07:00

Labor Markets
The most recent ISM reports (March 2011) were overshadowed by the Employment Situation Summary from the Bureau of Labor Statistics. Calculated Risk provides graphs that show the long-term statistics on unemployment rate, participation rate and employment to population ratio. Interestingly enough, the employment participation rate was unchanged at 64.2% last month but still shows the trend is downward and well below the normal rate of around 66 to 67%. But the employment to population ratio increased slightly and clearly on a sideways trend.

Even economists that normally do not follow the jobs reports were giddy with excitement. Like Arnold Kling recalled Fed statements from the early 1980s when Fed Governor Lyle Gramley stated that, "When recovery comes, it really comes!" Kling's predictions before the release of the report stated the following:

Here is how I would judge the economy, based on how that average job growth comes out:

< 50,000 jobs per month: really bad news, the economy is still stuck in the doldrums
between 50,000 and 150,000 jobs per month: slightly positive
> 150,000 jobs per month: finally, a recovery is here!

Based on following the ISM reports, it was reasonable to expect at least 150k increase, but the rise in the private sector by 230,000 is much appreciated.

Both of the ISM reports showed slower growth in the employment index by sliding 1.5% and 1.9% to 63 and 53.7 percentages points for manufacturing and non-manufacturing respectively. The manufacturing employment index is still strong at above 60 but since non-manufacturing is the bulk of any increase in employment then its drop of 1.9% is of serious concern if we expect continuing good job reports. To get America back to work we need job reports of over 300k, especially considering how many discouraged workers are on the side-lines as well as the vast pool of immigrants that desire to work in the US. Below, shows the monthly non-manufacturing employment index along with the trend line. (Click on tables for clearer images.)

Over the last 16 months, the trend line changed only marginally down at .02%, but last months drop was disappointing nonetheless. This could translate into lower employment report numbers.

The manufacturing employment section had the usual couple of industries reporting decreases in employment and the dozen or so with growth in employment. The unusual aspect this month was that the two were in Wood Products, and Petroleum & Coal Products. These areas have shown continuous increases in employment over the long-term as some of the reports we looked at showed. They were some of the strongest employment sectors in the economy consistently.

Headline Numbers and Expectations
The headline numbers for both the Manufacturing ISM Report {PMI} and the Non-Manufacturing ISM Report {NMI} showed a slower rate of growth with a drop of 0.2 and 2.4 percentage points respectively. Manufacturing maintained its above 60 respectable range at 61.2%, non-manufacturing {NMI} had significantly declined 2.4% to 57.3%. Thus it missed MarketWatch's NMI consensus by almost 3% at 59% and was even below the consensus range that Econoday reported for Thomson Reuters of 57.7 to 68.8%. The consensus they gave was the exact number as last month which meant they expected no change.

The consensus range for the NMI by T-R is usually broad and skewed as is the manufacturing consensus range also. This month, T-R reported the consensus range for PMI as 59 to 62.5% with the "mean" consensus as 61.2% showing a negative skewness as the mid-way point should have been 60.75%. NMI had a wider range of over 11% reported as in 57.7 to 68.8% and the mean as 59.7% and thus a large positive skewness.

Concerns Going Forward
One new concern going forward is what are the effects of Japan's crisis going to have on the economy and markets here and globally. As I have noted before, this can be opportunities for new and existing businesses to gain market share, but this comes with costs. While this crisis can only result in a net loss, it does provide opportunities for the first movers and those not affected by the events. The fist signs of the effects of the events in Japan have surfaced in the Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) as it fell to 46.4 last month from 52.9% in February. Other numbers were just as bad by falling under the 50% mark that signified contraction instead of growth. For example, the output index dropped drastically to 37.7 from 53.9%, new export orders dropped under 50 at 49.5 from 54%, and also new orders dropped drastically from 54.3 in February to 39.6 last month. {Japan Economy: Japan March Manufacturing PMI Hits 2-Year Low After Quake - CNBC}

Anthony Nieves, who issued the Non-Manufacturing ISM report summed up some of the major concerns in the following portion of his statement, along with some of the comments from respondents.

Anthony Nieves: Respondents' comments reflect concern about the recent natural disasters in Japan and the associated supply chain ramifications. Additionally, there is concern over rising costs, most notably for fuel and fuel products. Overall, most respondents remain confident about the direction of the economy.

Non-Manufacturing Respondents:
"Business is steady. Very concerned about high fuel costs and the speed of any Japanese recovery." (Agriculture, Forestry, Fishing & Hunting)

"The catastrophe in Japan is severely affecting supply chains for magnetic media." (Management of Companies & Support Services)

"Stockpiling Japanese products due to anticipated loss in capacity." (Responses to Inventory Questions)

Manufacturing Respondent:
"What will be the impact to the U.S. supply chain after the devastation caused by the Japan earthquake?" (Chemical Products)

Prices are the other major concern going forward as the above passages allude to. While it is good that the price index for non-manufacturing declined 1.2%, it remained above the 70 mark at 72.1%. And the manufacturing price index continued its upward trend rising 3 points to hit 85% which was the highest reading since July 2008. The most recent local trend started in November 2010 at 69.5, but the longer trend started in June 2010 at 57%. Even more significant is that all industries in both reports are reporting higher prices! The ratio of respondents noting higher prices to those reporting lower prices is also majorly tilted toward higher prices with non-manufacturing being 51 to 2 and manufacturing comes in as 72 to 2. In June 2010, for example, manufacturing ratio of those experiencing higher prices to those with lower prices was 32 to 18.

Along with the index being high and crimping profits and thus hampering economic expansion, the sections on commodity prices in the reports also portend greater levels of inflation. Most of the numbers I watch on this section of the reports are on an upward trend. The only exception is that the total number of commodities up in price for the non-manufacturing report was 37 instead of 41 from February's report. Manufacturing continued to get more consecutive months commodities at 22 up from 21 in February and 15 in January. Total number of commodities with rising prices was 37 last month compared to 30 the month before. Consecutive month commodities for non-manufacturing continued to increase its number to 23 last month up from 19, 14, and 7 for the months of February, January and December respectively.
Conclusion and Tinbergen's Instrument Targets Rule
There were two major concerns that the latest ISM reports highlighted for the US economy, which are the effects of the events happening in Japan, and the price levels and thus inflation. The first one, we can only to and try to create opportunities for everyone including the Japanese in rebuilding their society and economy. The second one, must be managed in the US by the various actors especially government officials.

It would be nice to live in Paul Krugman's world where once in a liquidity trap, we never, ever have to worry about inflation. Our one and only concern should and must be unemployment. Certainly that is important, but if we are to tackle more than one problem at a time we should consider what policy instruments most likely to accomplish that task. Or as the Mundell's principle states it as, "Policies should be paired with the objectives on which they have the most influence."

Unemployment is a major concern now but inflation as noted in these reports could become an issue here shortly. The Tinbergen's instrument targets rule tells us under this criterion, the US needs to use monetary tools to control inflation and Fiscal tools to help reduce unemployment. But at the same time if the inflation is headed higher and UE is being slowly reduced then the instruments may need to be more in sync and be more coordinated. Going forward, even under the Paul Ryan plan would ensure a fiscal stimulus for years to come, and well beyond the business cycle downturn. Ultimately, this might be the time to start to reign in spending.

PS: The one component that is preventing the vicious cycles of inflation are that wages are not rising significantly.

Price index: M11-85, Feb11-82, Jan11-81.5, Dec10-72.5, Nov10-69.5, Oct10-71, Sep10-70.5, Aug10-61.5, Jul10-57.5, Jun10-57, May10-77.5

Market Watch:
Manufacturing: 61.3%
Non-Manufacturing: 59.0%

Econoday Report: ISM Mfg Index April 1, 2011

Econoday Report: ISM Non-Mfg Index April 5, 2011

David Smith's EconomicsUK.com: Manufacturing growth slows

David Smith's EconomicsUK.com: Service sector strong, Chambers of Commerce downbeat

Economics - Prospects for the UK Economy - Madrid Presentation

Calculated Risk: ISM Non-Manufacturing Index indicates slower expansion in March

U.S. Service-Sector Growth Slows - Real Time Economics - WSJ

The Transmission Mechanism for Quantitative Easing (Wonkish) - NYTimes.com

Links to Sources:
Economic Calendar - Bloomberg

ISM - ISM Report - Report on Business

Economic Calendar

Economics Roundtable

Misc. Links:
Germany is competitive on a relative basis as measured by productivity, standard of living or prices | Angry Bear

Calculated Risk: FOMC Minutes: Some Disagreement, Worry about Oil Prices, No Tapering of QE2

CARPE DIEM: Housing Affordabilty Reaches New Record High

Eight Years to Get Back to Full Employment? - Real Time Economics - WSJ

Economists React: Upside Potential for Jobs Is ‘Tangible’ - Real Time Economics - WSJ

Growth: The manufacturing fetish | The Economist

America's recovery: The pieces are falling into place | The Economist

More Jobs Doesn’t Necessarily Mean More Good Jobs - Real Time Economics - WSJ

5 Questions About Today's Jobs Report - NYTimes.com

The Missing Sense of Urgency for Jobs - Real Time Economics - WSJ

CARPE DIEM: 15-Mo. Job Growth Returns to Pre-Recession Level

EMPLOYMENT SITUATION | Angry Bear

Stumbling and Mumbling: The Liz Taylor economic policy

The Capital Spectator: Private Sector Jobs Rise by 230k In March

Mish's Global Economic Trend Analysis: BLS Jobs Report: Nonfarm Payroll +216,000, Unemployment Rate 8.8%; Thoughts on the Jobs Report

Average Length of Unemployment Rises Again - NYTimes.com

Comparing Recoveries: Job Changes - NYTimes.com

5 Answers From Today's Jobs Report - NYTimes.com

Calculated Risk: Employment Summary and Part Time Workers, Unemployed over 26 Weeks

Hidden Bad Signs in a Good Jobs Report - Real Time Economics - WSJ

Video: Some Good News on Jobs Front - Real Time Economics - WSJ

Unemployment Rate Drops, Again, to 8.8% for March and that has some economists worried - The Curious Capitalist - TIME.com

Labour markets: Good but not great job growth continues | The Economist

CARPE DIEM: Female Gains Dominate Today's Jobs Report

Unemployment And Politics

Economics - Timetric: Unemployment in the US Economy

Unemployment And Politics

Women’s Earnings Are Stagnating - Real Time Economics - WSJ

Mish's Global Economic Trend Analysis: Rasmussen Poll: 57% Okay With Government Shutdown If It Leads to Deeper Budget Cuts

Even at March's Pace, Jobs Recovery Will Be Slow - NYTimes.com

Economics - Timetric: Unemployment in the US Economy

Welcome momentum in the labor market—but we need more

Econbrowser: The March Employment Situation Release

Why Investors Stopped Worrying About Japan - SmartMoney.com

RSY XXXII: No COP needed now but order TOTal

2011-03-30T13:58:00.000-07:00

After the RSY success in its position of LZ, I wanted to get back into the same or a related sector and industry. Current events have shown the need for energy and chemical production for worldwide economic growth and the rebuilding of Japan including petcoke which the US supplies to Japan.

I first used a modified RSY in MyStockFinder with only the Basic Industries checked for sectors. Nothing got me excited enough to recommend. I then expanded the search for Basic Industries and Energy sectors with only Strong Buys. As the title said, COP {ConocoPhillips} was a close contender for adding to the RSY, but I think that TOT {TOTAL S.A.} provides a better choice for now. In addition to having strong chemical divisions that would replace the LZ chemical position, it also provides a better dividend of over 5% dividend yield compared to COP with around 3 1/4%. TOT already has declared a nice dividend of $1.577 for May 18th.

Both COP and TOT have exposures to Libya and if Qaddafi stays in power this could hurt Western oil companies. COP was already thinking about exiting from Libya, Nigeria and 3 other countries. According to the article 5 Best Positive Cash-Flow Oil Companies, TOT has 2.6% exposure of revenue and COP was at 3.3%.

As my last post mentioned, this uncertainty to recent world events {especially Libya} provides opportunities. Here, oil companies could benefit from a freer and more open society. The Economist magazine recently suggested the "West should recognise the council {interim national council} as a traditional government provided that it promises to hold multiparty elections." Even if Qaddafi stays in power in the west, the majority of oil production is in the East and a split Libya could provide opportunities for production also even in a civil war situation.

RSY recommends a limit buy order of 100 shares of TOT at a limit price of $60.91 {GTC} for the opening on March 31st.

Update: TOT gaped up and never hit our price target. RSY recommends raising the limit order to $61.11.

RSY XXXI: Update

2011-03-18T14:54:00.000-07:00

It is about time for an update on RSY's positions and trades since the last update. Since our last update: RSY has unwound its position in MRH in two trades as Sabrient downgraded it to sell for profits of around $978; RSY unwound its position in LZ by first buying back the covered call at $14.30 and selling LZ for around $133.83 netting a little over $1500 profit; and LZ provided a dividend of $36. The time premium for the June calls narrowed to around 50 cents. That did not give enough justification to hold it any longer as even the remote possibility that Buffett would walk away would expose us to losing all the gains from the offer. Below is the summary of trades for the RSY portfolio with $5230 in realized gains. (Click on tables for clearer images.)

RSY also recommended a bid for DLN but it gaped above our limit price and since we were going to miss the next ex-divended date, RSY decided to wait on adding an ETF to the portfolio for now. One of the reasons for choosing an ETF is to diversify the portfolio more than just select individual stocks can do. Below shows the RSY portfolio positions and the relative percentages of each stock to the total portfolio.

Even with holding some of the partial positions, this does show a fairly lumpy portfolio. The table below shows the same portfolio with cash holdings assuming a $100,000 portfolio.

The last table we should look at is the performance of our positions in the portfolio.

David Brown suggest a "Craziness Index"
RSY was designed to capture good solid dividends by investing in stable growing companies, and as such it is long positionally with options as a way to increase gains. Given that, current global events have not built up confidence that the economy has turned the corner. Like Brown, I also wonder if the markets are not seeing the risks and uncertainties that US and worldwide equity markets are exposed to. He ponders this in the following passage:

All that, despite yesterday’s report of a very sharp decline in durable goods that was totally unexpected, interest rates that are inching higher, and oil prices that are at a two-week high. All that, despite the imponderables in Japan and Libya, as well as most of the Middle East. All that, despite Wednesday’s vote by Portugal to eschew austerity in favor of a bailout by the European Union, which does nothing but aggravate the global markets.

You may find this as hard to believe as I did, but both the short-term and long-term “fear indicators” – the VIX and VXX -- have dropped seven consecutive days in a row and are almost back to their levels before the global chaos began in late January.

What is this market on, anyway? Xanax? Maybe there should be a craziness index. If there were, it would be off the charts.

While it is true that jobless claims continue to drop and GDP was revised upward, it is difficult to imagine the market equating what few positives we’ve had recently to the economic environment I just described.

Is there a logical reason behind this ‘irrational fearlessness”?

All risks and uncertainties presents opportunities and there may be positive outcomes out of the current global events. For example, Japan may be changing fundamentally as they adapt and face the tragedies they must now coop with. This may reduce and adapt their structural rigidity in their society, politics and of course economics to more flexible structures and more open to change.

Also the unrest in the Middle East and Northern Africa could be beneficial for not only those countries but also the world economy. If these revolutions result in the formation of more liberal democracies and thus more freedoms for their citizens then this would create better and more stable trading partners. While the claim is often that big business like autocratic regimes, the reality is that they prefer liberal democracies as contracts are more likely to be protected as overall private properties are protected and defended. But all those prospects are under great uncertainty and are not a simple process that third parties can easily determine the outcomes. For example, Libya could just as easily end up like Algeria or Iran rather than Israel or India.

Archived Pictures:

RSY XXX: Buffett makes a call, Unload LZ. Buy DLN 200 @ $47.01

2011-03-17T14:04:00.000-07:00

The events in Japan has shown that there are always risks and uncertainties in any investment. Just think what the value of time-share condos at Ōkuma near the Fukushima Dai-ichi Nuclear Power Plant is about now. While insurance can compensate individuals for these risks and uncertainties, they do not negate the costs to society when tragedies do occur. And of course no costs can be completely analyzed without understanding the full extent of human lives lost and the damaged/destroyed lives of the survivors.

Along with the risks associated with any tragedy, they also provide opportunities as the economy changes to adapt to new demand structures. One area that could be lucrative potentially, as Japan reconstructs much of their coastal cities, is commodities and basic materials. With the nuclear industry getting hit on all sides then it is logical that our holdings of ARLP is doing nicely since March 11.

Irregardless of the timing, Berkshire Hathaway has decided to purchase our holding of LZ for cash of $135.00 per share. If you held it long, without writing a covered call, it certainly seems to be the time to unload with a large capital gain now. Interest rates being low then the arbitragers have narrowed the gap between offer price and market price to as low as 70 cents difference. Not withstanding the ambulance chasers and their delusional investors (Law Office of Joseph Klein, Faruqi & Faruqi, Law Offices of Vincent Wong, Ryan & Maniskas, Law Offices of Howard G. Smith, Law Office of Abe Shainberg, etc.), most recognize this as a solid deal that is not likely to be adjusted up or to fall apart. That is, investors are not bidding above the offer price as it did at times with other mergers, and shorts are backing off of it also as recognized by Kapitall at 20 Stocks Seeing Unusually High Trading Volume, Decreasing Shorts. S&P also recognized the value as being close to realistic as they downgraded LZ from a Buy to a Hold.

Forgive my ranting, but if investors really thought that LZ was worth $148/share (as Thompson/First Call stated) then there is no way any rational investor would allow it to drop to below $104 last Friday, March 11th. Any rational investor seeing a discount of nearly 30% should jump at the chance as soon as possible with as much gusto as possible.

Selling the covered call has limited our upside potential, but during the down days it limited our losses and for that it was good. Now we need to unwind our trades while maintaining the gains as much as possible. Along with the decreased interest by the short players, option players have dropped the price so that the time value of the options are nearly zero. When RSY recommended the sell of the covered call, the theoretical value was below what we sold it for and now the selling price is about half the theoretical value at $30.86. The JUN-11 $120.00 CALL has been trading in the $14.10 to as high as $15.80. So the plan is to enter a buy to cover, limit order at a price of $14.10 which signifies a loss of around $5.50 per share before transaction costs. As soon as that trades, RSY recommends a sell of LZ at a limit price of $134.01 or whatever seems reasonable at the time. Good luck.

Even before this recent spat of selling for the RSY portfolio, we were looking to find ways to diversify our holdings across market caps and segments of the economy. One way is to use ETFs since they are a basket of equities. They are much more diversified than individual investors normally get that hold stocks of independent companies. For our Silver Level subscribers, we offer ETF Ratings Reports on hundreds of ETFs. Two that are promising candidates are LargeCap Dividend Fund (DLN) and Total Dividend Fund (DTD) both provided by WisdomTree, and both are rated by Sabrient as Attractive with a score of 69 and 59 respectively. Taking a look at the chart below for DLN of sector concentrations, we see a fairly well diversified portfolio to start with.

This fund is underexposed to three sectors: Basic Industries, Consumer Durables, and Transportation. While being somewhat diversified across sectors, there are also some gaps here. On the other hand, this fund is not overexposed to any particular sector and is therefore not unduly weighted toward any particular segment of the economy. While this fund is not significantly overexposed to any particular sector, it does have some sectors that are underrepresented in its holdings. This means that there is a degree of sector based diversification, but also some expectation of increased risk due to the missing components.

The passage above was from the DLN ETF report about diversification. This does provide areas that we may want to get more exposure in especially the basic industries. Not mentioned above, but important for RSY is that both ETFs are more weighted toward "mega caps" with more exposure to quality blue chip stocks. This should contrast nicely with Sabrient's emphasis on small-cap and mid-cap choices so far for RSY.

RSY recommends a buy order of 200 shares of DLN at a limit price of $47.01 (good for the day).

Did Buffett Overpay for Lubrizol?

Investors Finally Taking Note of Contagion From Japan

Market Tumbles on Misplaced Japan Fears

What the Japanese Quake Means for Stocks

RSY XXIX: Sell MRH @ $18.01

2011-03-13T11:24:00.000-07:00

David Brown last week noted that the week was nasty for the equity markets and this next week can certainly continue its nastiness. It not only has the same problems as he stated below but we also have the ongoing tragedies happening in Japan. We all pray for the safety of all their citizens and visitors and that they will recover quickly from the damage that has been the worst disaster since the end of World War II.

It has been a nasty week. The crisis in Libya and escalating oil prices continue to pummel the market, and today, two other global giants joined in the fray. China announced a significant trade deficit, and Japan revised its 4^th quarter GDP downward by 1.3%. Then U.S. jumped in, announcing a widening trade deficit and initial jobless claims that were worse than last week’s (though still within the expected range). Nothing else out of the ordinary happened, but all this was enough to send the market to its knees. The S&P 500 dropped below its 50-day moving average for the first time since August 31, 2010. That, we consider a bearish sign.

The RSY portfolio is not significantly exposed to international affairs but any plunge in production in one country can create contagion effects on world-wide production and thus economic growth.

RSY recommends a sell of MRH of the remaining 200 shares (out of the original 400) on Monday at limit price of $18.01. Sabrient had recently changed the rating on MRH from Hold to Sell and the current events only solidify the need to sell off one of our best performing stocks in the RSY portfolio. One important article to read is at Japan Disaster Shows Coverage Gaps, But Quake Still Costly For Insurers. RSY hopes that the limit price of $18.01 is low enough to cover any short term drop, but RSY also recommends to closely follow it on Monday morning and make adjustments accordingly.

DEMOCRACY, GDP AND NATURAL DISASTERS

2011-03-11T20:24:00.000-08:00

Amartya Sen won the Nobel Prize in economics in 1998 with the observation that there has never been a famine in a nation that has a democratic form of government and a free press. A similar relationship exists for natural disasters: Deaths associated with natural disasters are lower for nations with democratic forms of government and the associated higher national income, or Gross Domestic Product (GDP). In general, the World Bank’s Democracy Index, a measure of how strong a democracy is, and a nation’s GDP are stronger predictors of a natural disaster’s humanitarian impact (as measured by deaths) than either the size of the event or the population density in the area of the disaster. Global increases in democracy and GDP may therefore partially explain the apparent paradox of the generally decreasing death toll associated with natural disasters despite the increased population density in high-risk areas.
DEMOCRACY, GDP AND NATURAL DISASTERS

A Macro View: ISM Reports February 2011

2011-03-07T10:01:00.000-08:00

Even before the national ISM Manufacturing report came out, the regional reports were strong. For example, Calculated Risk says Chicago PMI Strong in February and Cullen Roche noted a Strong Reading for Chicago ISM Report. Also from Calculated Risk comes Dallas Fed: Texas Manufacturing Activity Picks Up where they show the strong correlation between average all Fed surveys and ISM PMI index (manufacturing).

The World-Wide Factory Activity list provided by WSJ shows expansion in most industrial countries and most increasing production at an increasing rate. This fact is borne out by 17 countries expanding faster and only 5 expanding slower. Australia jumped from contracting to expanding with a jump of 4.4 points to 51.1%. International comparisons are always wrought with non-comparable data and noise in the data, so while PMI indexes deal mostly with business sentiment, it is not likely these figures can be so precisely ranked from top to bottom. More than likely it should be grouped into segments like ones under 50 indicating contraction and countries over 60 indicating rapidly expanding sectors. The US was not top overall but was in the top 6 over 60 in the index.

The manufacturing indexes for the US and UK converged last month with the UK dipping slightly and the US expanding. David Smith notes the strong showing that signifies a 10% growth in manufacturing at Manufacturing doing very nicely, and he states, "After years in the doghouse, Britain's manufacturing sector is doing well, on the back of global economic revival and a competitive pound..." But on another blog post he sees anemic growth in the services sectors that will produce overall ‘flattish’ GDP growth over the last 6 months at Service sector bows to manufacturing.

China is marked by anemic growth in the manufacturing sectors as noted in the earlier link to the WSJ article on factory activity with a decrease of 0.7 last month to 52.2%. Although Cullen Roche states different PMI indexes for China (February at 51.7, down from 54.5 last month) he still indicates that the manufacturing sector is increasing but at a much slower pace (China Flashing Warning Sign: PMI Shows Sharp Declines). On his link to the article 5 BULLISH AND BEARISH CHARTS FOR 2011 he considers China's rising inflation as a bearish sign for the world economy. First, I am not certain that the world is so dependent on their growth for worldwide growth, especially considering that most of the world was contracting while the Chinese claimed their economy suffered only modestly. Many developing nations have missed the latest opportunities to get on the development escalator and would jump at the opportunity to take up any slack in manufacturing that China leaves behind. Secondly, if inflation is the main concern then weak manufacturing should tame that beast. So not sure what his point is unless he thinks the world is so dependent on China that only a Goldilocks economy (not too hot, not too cold, just right) will prosper the world.

That's fine about the world, we want to know about the US!
Although a minor increase in the index for both headline numbers, it was a surprise to the upside for both Econoday and MarketWatch. Econoday expected slight decreases in the indexes of a 0.4 for ISM Non-Mfg Index to 59% and 0.3 for ISM Mfg Index to 60.5% while WarketWatch expected the same number as last month for non-manufacturing at 59.4% and a slight increase of 0.2 to 61%. The actual numbers reported by the ISM was 59.7% for the Non-Manufacturing ISM Report and 61.4% for the Manufacturing ISM Report . Both numbers easily fell within the consensus range for Econoday with a range stated of 58.7 to 62% for manufacturing and a wide range of 57.8 to 65.1% for non-manufacturing. The strength in both sectors have been noted by Mark Perry at Carpe Diem noting that the ISM Non-Manufacturing Business Activity Index Surges To 7-Year High and to get a higher reading on the ISM manufacturing index you would have to go back to 1983 and meeting the same level as in May 2004.

Beyond the headline numbers being in the respectable 60sh range, the individual components of the ISM reports also showed considerable strength. Business activity/production increased 2.8 to 66.3% for manufacturing and 2.3 to 66.9% for non-manufacturing. New orders maintained its very acceptable levels in the mid-60s with a small drop of 0.5 for non-manufacturing and a slight increase for manufacturing of 0.2 which resulted in index number of 64.4% and 68% respectively. New export orders increased nicely for non-manufacturing of 3 points to 56.5% and a smaller increase for manufacturing of 0.5 to an outstanding 62.5% which portents continued strength in the economy.

Jobs, Jobs, Jobs
The all important employment indexes with respect to this economic recovery also showed considerable strength with the index raising 2.8 to an outstanding 64.5 in manufacturing. While a smaller increase of 1.1 to an index of 55.6% for non-manufacturing was reported, this signifies the continued upward trend of the biggest driver in the economy for employment. This is a good time to see the index for the employment non-manufacturing index since December 2009 along with its trend line. Since last posted for the December report the slope of the trend line increased 0.1 to about a 0.6 increase per month and the R^2 rose to under 0.73 from just over 0.58. This means that the trend line is increasing and that even with more months the significance of trend is greater. (Click on tables for clearer images.)

Along with the good employment news from the ISMs, last weeks initial unemployment claims dropped significantly and got plenty of economists to note that this might show signs of an improving labor market. Calculated Risk stated it best at Calculated Risk: Weekly Initial Unemployment Claims decline sharply, 4-Week average below 400,000.

There is nothing magical about the 400,000 level, but breaking below 400,000 is a good sign. The sharp drop in weekly claims suggests improvement in the labor market.

Indeed, as I have stated before nothing is magical about one number or another although there may be infliction points. Others statements are: 1. Andrew Samwick hopes it is good news that Initial UI Claims Cross 400,000; 2. The Capital Spectator asks Is The Stalled Decline In Jobless Claims Really Over This Time?; 3. Mark Perry thinks that "labor market is gradually stabilizing" at CARPE DIEM: Jobless Claims Fall to 2-1/2 Year Low.

Same Structural Rigidity and More of It

...Hayek's contention that 'the economic problem of society is mainly one of rapid adaptation to changes...'

While at a Macro View of the Markets blog posts talk in terms of structural rigidity, the scholarly understanding is often in terms of flexibility which is just the absence of structural rigidity. This concept of flexibility is defined by Tony Killick in the following quote.

Broadly expressed, we can define a flexible economy as one in which individuals, organizations and institutions efficiently adjust their goals and resources to changing constraints and opportunities.

Given that we can still see structural rigidity in both reports, the price index continues on increasing at an even faster rate. Non-manufacturing price index moved up 1.2 to 73.3% maintaining its strong above 70 mark, and manufacturing increased less at 0.5 but still maintaining its astronomical above 80 mark at exactly 82%. Along with high levels of the price indexes, the ratio of firms reporting rising prices is very high to firms reporting lower prices. Non-manufacturing had 4% of firms reporting lower prices while 46% reporting higher prices. Manufacturing as before had an even higher ratio of 66% reporting higher prices and only 2% reporting lower prices.

Last month showed continued number of commodities with rising prices. Manufacturing showed not much change in total number of commodities with prices rising at around 30 but multi-months rose to 21 from 15 last month. Non-manufacturing showed the more dramatic changes of commodity prices with multi-months rising to 19 from 14 and 7 the month before. Also the number of commodities that have rising prices is 41 up from 28 last month and 23 the month before that. Clearly the trend is that more commodities are having prices rise and then multi-months as the secondary effect.

What Respondents are Saying?
Just like the reports showed increasing business activity but growing price pressures, respondents also spelled this out in detail.

Manufacturing:
# "Our plants are working 24/7 to meet production demands." (Fabricated Metal Products)
# "Capital projects moved from inactive to active" and "Award of long-awaited contracts."
Non-manufacturing:
# "Business environment is generally improving." (Management of Companies & Support Services)
# "We are seeing strength in our business both from the perspective of new business and expansion with our existing customers." (Finance & Insurance)
# "Strong demand; capacity crunch all around." (Transportation & Warehousing)
# "Major uptick in business activities." (Accommodation & Food Services)

But prices of inputs are constraining business growth.

Manufacturing:
# "A continued weak dollar is increasing the cost of components purchased overseas. It is going to force us to increase our selling prices to our customers." (Transportation Equipment)
# "We continue to see significant inflation across nearly every type of chemical raw material we purchase." (Chemical Products)
Non-manufacturing:
# "Commodities are once again putting significant pressure on prices and capacity." (Retail Trade)

Conclusion:
Good news is coming out about the labor markets and the ISM reports confirm this trend. The reports continue to show signs of structural rigidity and more broadly in the markets. At some time the Fed will need to start on a contractionary monetary policy or at least to unwind its positions. This seems to be an exceptional time to tackle the deficits although even modest proposals by the Republicans have generated quite a backlash even among right of center institutions {supposedly}. For example John B. Taylor says that Goldman Sachs Wrong About Impact of House Budget Proposal. Where GS claims that "the House proposal would reduce economic growth in the second and third quarters of this year by 1.5 to 2 percent if enacted into law next month." My question would be what would GS expect if the budget was actually balanced? Something like a contraction of 20-30%?

Misc. Links:
Recession's Over, Economy's in Recovery: It's Time for Some Gloom and Doom from Time Magazine

Market Watch Forecast:
Manufacturing: 61.0%
Non-manufacturing: 59.4%

Calculated Risk: ISM Non-Manufacturing Index indicates expansion in February

Calculated Risk: ISM Manufacturing Index increases in February

Chicago Manufacturing Data Indicate ‘Pervasive Growth’

Calculated Risk: Private Construction Spending decreases in January

More Strong News From the Manufacturing Sector - Seeking Alpha

RSY XXVIII: Sell MRH

2011-02-22T12:06:00.001-08:00

Lots of geopolitical activity has been driving the markets lately, including whether the man with many names (Muammar al-Gaddafi) has finally lived past his sell by date as an authoritarian dictator. His thoughts seem to be more along the lines of: Do not go gentle into that good night. Recent events did affect our returns today as shown below. (Click on tables for clearer images.)

Our last post recommended a sell of 200 (out of the original 400) shares of FL and the market opened on February 1st at $18.00. This resulted in a loss of almost $250 (including transaction costs). Since that time it has hit highs above $19.50. CODI has taken it on the chin after a downgrade which was incorrectly reported by Dow Jones Newswires as an upgrade and the CEO, Joe Massoud, was taking a leave of absence. Massoud was highly praised by investors but if management is broad and deep then this should be a minor setback to a solid performing company. Just last month, Steven Kiel was praising Massoud's abilities at My Top (Relatively Safe) Holdings. In addition to the recorded loss, RSY noted the following dividend payments of: EGAS providing $18 dividend, GAIN providing $8 dividend, and ARLP providing $86 dividend. Below is a summary of transactions since inception.

RSY has been sitting on a full 400 shares of MRH since September 17, 2010. Sabrient has downgraded it to hold, and as such, RSY recommends a sell of MRH of 200 shares at $20.31. It never is good to be selling into a weak market but this seems to be the time to partially harvest some of our spectacular returns. It closed today at $20.35, so this should leave some leeway from the oversold position today, but investors should monitor this closely tomorrow morning.

A Macro View: A Fair Proposal For Social Security, Inspired by Paul Krugman

2011-02-21T18:14:00.000-08:00

This post is a continuation of discussions on Social Security with the last one at Paul Krugman Wrong Again. There, I discussed the Old-Age and Survivors Insurance Trust Fund {Social Security} and what the report from 1945 said about projections going out to the year 2000. Along the way we saw that Paul Krugman skimmed over the material to confirm that they had a very good prediction on percentage of population 65 and over to population aged 20 to 64, but failed to notice that they assumed less percentage receiving benefits for retired individuals. This goes to the heart of the Social Security's Demographic Challenge. The following graphically shows the ratio of "covered workers" (i.e. payroll tax payers) to beneficiaries.

From the last post, we saw that up to a third of people over 65 were not expected to receive benefits, and adding in the fact that over a quarter of new "reward" recipients is based on disability, then it seems clear that the ratio above would not be nearly as hard on younger taxpayers without these two factors added to their burden.

In this post, I want to further explore his main points from Paul Krugman's blog post at Live Long And Prosper.

This is a really terrible idea, for at least three reasons.
1. The retirement age has already been increased to 66, and is scheduled to rise to 67. So any further increase would mean pushing retirement back to unprecedented ages. Yes, a lot of people live to 70; how many of them are really able, easily, to work that late into life?
2. While life expectancy is rising, life expectancy at age 65 — which is what is relevant here — isn’t rising nearly as fast.
3. Finally, disparities in life expectancy have been rising sharply, with much smaller gains for disadvantaged socioeconomic groups and/or those with less education than the average. Yet these are precisely the people who depend most on Social Security.

According to Krugman, the really terrible idea was to raise the age for the full Social Security benefits to kick in. He does raise some important issues with regards to what is just and fair, but to claim that something is "unprecedented" does not indicate that it is not the most logical thing to do. There are many unprecedented facts that make these unprecedented actions necessary. Longevity is now unprecedented as more people born today can expect to live longer including to retirement age and then beyond. Thus the pool of beneficiaries is unprecedented now and will only get more dramatic as the baby boomers retire. In fact, the demographic chart of the US is quite unique in that a group of cohorts are larger than the groups of older as well as younger cohorts. The chart below shows that bulge from the web site AGE DISTRIBUTION. It is easy to see the two largest bands are in the range 35 to 44.

Here Are "Just The Facts", Obama (Paul Krugman)
Let us now look at some the graphs that are provided by Social Security Administration at Fast Facts: Figures About Social Security, 2010.

New Benefit Awards, 2009
Benefits were awarded to about 5.7 million persons; of those, 48% were retired workers and 17% were disabled workers. The remaining 35% were survivors or the spouses and children of retired or disabled workers. These awards represent not only new entrants to the benefit rolls but also persons already on the rolls who become entitled to a different benefit, particularly conversions of disabled-worker benefits to retired-worker benefits at full retirement age.

The table that accompanies the above passage and pie chart gives the total percent of new recipients as 57% for retired workers and dependents. Thus 43% fall under the other two categories of disabled workers and survivors of deceased workers. Also new awards for disabled recipients are growing at a faster rate than simply retiring recipients at a rate of 2.6% vs. 1.9% respectively as the growth trends are shown below.

Looking at the facts in the Supplemental Security Income (SSI) program is even more lopsided with respect to retired vs. the other categories. On top of this, benefits for non-retiring recipients is actually higher that retiring recipients.

Are Social Security taxes regressive?
The Economist magazine brings up some important points about the progressivity of payroll taxes. The first being the obvious fact that payroll taxes are taxed on the first $106,800 per year and afterwards are not taxed, thus the percentage of payroll taxes to income decreases. The second point being based on marginal utility from the last dollar earned. This takes some value judgments of what the value of various cohort groups are. But once this theory is used then how would any tax policy be anything other than regressive? How high of tax rate would it have to be on the top 400 American earners to the bottom one percent so that both marginal utilities would equalize? But more importantly, for our discussion here, is whether the tax and benefit structures are fair and equitable. In this regards the Economist provides some important points.

But the folks who claim the payroll tax is regressive do not take into account that it is not so much a tax, but a contribution to a forced saving/social-insurance scheme. Over 12% of payroll taxes fund Social Security (this includes old age and disability). The amount of payroll taxes paid during your working years determines your benefit. The benefit formula for Social Security is highly progressive. The lower your average earnings the higher a benefit you get relative to your contribution.

The Economist goes on to summarize two studies from the National Bureau of Economic Research. The first showing that the actual return on investments from payroll taxes for "low earners earn a 5.19% internal rate of return on their contributions to Social Security, while high earners get just 0.54%." The second points out that the rates look more progressive when factoring in disability benefits and survivorship benefits, and they also question the assumptions that the poor get less benefits because they die earlier and start work earlier. Reasons for shorter life expectancy should also be evaluated for factors attributed to less disposable income along with occupations that they participate in and those that are "lifestyle choices". For example, the trend that higher income social groups have reduced consumption of cigarettes while lower income groups have been slower at reducing consumption where even higher taxes and costs have not diminished this trend as significantly.

Policies that Redistribute Income
It is quite difficult to give a summary of all the aspects of redistribution but some aspects are shown through the calculations of expected benefits by Social Security Online at Your Retirement Benefit: How It Is Figured. The first and second steps are to record the yearly taxed income over the taxable income history of a group of cohorts by age and adjust the earnings based on the Indexing Factors which are derived from the Average Wage Indexing Series. The link to indexing factors produces a vector of indexes for each year of workers born including future dates based on expected growth of average wages. Simply add 62 to the year born to determine which is the year of "eligibility". This indexing factor gives more weight to earnings early in the working career than later. Although maybe small in the grand picture, it does provide more return on dollars invested for entering the work force earlier.

The third step is to pick the top 35 adjusted income years and add them up. This results in individuals that work more than 35 years pay into the system with no additional benefits in SS. It is difficult to know ahead of time which years will be more beneficial for the calculations. So starting early, may not be such a great advantage since more years working with no more benefits. This does seem to open up the possibility of the program being changed to make eligibility not strictly on age but by number of years paid into the system above a minimum threshold in income. Most pension systems work this way, so why not the biggest pension plan out there? So somewhere between 40 to 45 years working seems reasonable. Take for example the minimum for this program is 45, then the person that starts working at 17 retires in 62, while the person that finishes schooling at age 28 retires at 73.

The fourth step is to divide the total adjusted income by 420 which is number of months in 35 years, which results in the average monthly wage adjusted income. Step five is the key to how the whole system provides more returns on investments (i.e. taxes) for low income workers than high income earners. The first $761 is multiplied by 90% and then has further kinks in the benefits per dollar taxed at 32% for between $761 and $4,586, and another kink above $4,586 with a multiplier of 15%. Thus for example to get the most return on the payroll tax a worker would need to earn $9,132 but since indexing the worker needed to earn just over $618 in 1951. Step 6 is just to add up the individual calculations on benefits and step 7 to reduce this amount by 25% which is the expected SS benefits.

What does this all mean?
Those that have the greatest needs from Social Security look to be getting more benefits over time from the disability and survivorship benefits allotments. This then calls into question whether raising the age of full retirement benefits for Social Security will help that much, or whether it just limits the growth in the secondary aspects. Those factors could be such things as dependents not getting stipends as early in both Social Security and SSI, increased number of years of work over the 35 years for maximum benefits under SS, and delayment in receiving health benefits.

If the system was suppose to be designed as to be a non-discriminatory benefits package then providing two ways to become eligible seems reasonable. One based on age that may need to be adjusted based on life expectancy like it currently is designed, and the second way is through longevity in the work force like pensions.

Social Security Is Important to Women

How "precommitment devices" will force you to lose weight, stop drinking, and not sleep with that jerk on a first date.

The Means-Testing Mirage - NYTimes.com

Misc. Links:
Social Security and Retirement around the World: Historical Trends in Mortality and Health, Employment, and Disability Insurance Participation and Reforms

Live Long And Prosper
Social Security and the Federal Deficit

Social Security's Demographic Challenge

Social Insurance History

Income And Life Expectancy

Social Security History

Social Security & Medicare Tax Rates

Program Cost and Size

Your Social Security Statement

http://www.ssa.gov/history/reports/trust/1945/1945a.pdf

Social Security benefit calculator

Social Security (United States) - Wikipedia, the free encyclopedia

Population pyramid

AGE DISTRIBUTION

How has the Average Age at Marriage Changed Over Time?

Egypt

PK: The Great Abdication

2011-02-16T14:57:00.000-08:00

Paul Krugman is at it again...and it is hard to keep up with all his distortions, like the lies of Keith Olbermann. Let me start with his his own words.

The Great Abdication
The important thing, I think, is that he has effectively given up on the idea that the government can do anything to create jobs in a depressed economy. In effect, although without saying so explicitly, the Obama administration has accepted the Republican claim that stimulus failed, and should never be tried again.

What’s extraordinary about all this is that stimulus can’t have failed, because it never happened. Once you take state and local cutbacks into account, there was no surge of government spending. Here’s total (all levels) government spending over the past 10 years:

Obviously a little over the top that Obama considers that Fiscal Stimulus will never be tried again. Wasn't there already the back door stimulus plans and now he frames it as "investments" into our future. Not to say there is not room for more investments in our infrastructures and public goods, but high speed rails and broadband access is hardly something that will create synergies and produce a positive cost benefit analysis.

On the one hand he is right that the "surge" never really showed up in this chart in early 2009. But first, the stimulus was slow in getting started and there were very few "shovel ready projects" out there. Secondly, the growth rate {that is the slop of the line} was steeper than average after the slump in mid to late 2008. I suppose some of that was TARP and other fiscal measures including automatic stabilizers before the states started cutting back.

It is true that Keynesian economists often talk in terms of the G in the equation Y=C+B+G+X-M as total government spending, but when Keynes talked about fiscal measures he was talking in terms of a central government and its autonomous budget process. Individual states are under different constraints and thus are not set up to do fiscal stabilizers for the economy, although it is prudent that they each have a rainy day fund for down turns in the economy. Under Krugman's theory, the G would increase consumption for any shortfall in income, no matter the cause.

More importantly, there was a surge in government spending and fiscal policy stimulus on a massive scale. It was so massive that Krugman clearly can not see it. Other than the dip during mid 2008, government has been continuously surging forward. If he wants to see massive surges in fiscal spending during high unemployment and stagnating economic times, then there needs to be times of "contraction". If government is to control and mitigate the violent swings in the macro-economy, then it must balance its finances over the business cycle.

Although it is hard to see if the UK will meet the following guidelines when dealing with the current worldwide recession, it certainly provides constraints on spending over the long term.

Fiscal policy in the UK
The Government has also specified two key fiscal rules that accord with the principles. These are:
• the golden rule: over the economic cycle, the Government will borrow only to invest and not to fund current spending; and
• the sustainable investment rule: public sector net debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level.

Governments Abdication of Fiscal Contraction
This also leads us to conclude that if "surges" are not really surges because states and localities are reducing consumption at the same time, then where is the fiscal contractions that never have occurred when states and local governments have expanded? Will Krugman alter his Keynesian fiscal policies to reflect his inclusion of all levels of government when considering "surges" and of course contractions?

I wouldn't count on it...

Paul Krugman laments Living Without Discretionary Fiscal Policy.

Alex Tabarrok makes an interesting point: recent experience seems to suggest that Keynesian policies, even if appropriate, turn out not to be politically feasible when you need them. I don’t think we need to take that as an immutable fact of life; but still, what are the alternatives?

They would be more politically feasible if when the economy was below the full employment level and the economy was overheated {by historical standards} there was some sign of fiscal contraction. I was always taught that Keynesianism worked best when balanced over the business cycle and not meant as a tool for ever expanding central government control.

Note: he does have a good point about setting a higher inflation target. The IMF has studied this quite extensively and higher rates of inflation for many countries can net higher growth rates. Below 10% rates is considered acceptable without harming growth rates and so the target being changed to 4 to 5% sounds reasonable.

The Means-Testing Mirage - NYTimes.com

ISM January: Much of the Same but More of It.

2011-02-07T10:15:00.000-08:00

Worldwide Growth in Manufacturing
The US and much of the world's manufacturing base has maintained its growth this last month with many growing at a faster rate like the US. World-Wide Factory Activity, by Country is provided by the WSJ. Out of the list, only Greece and Australia are contracting. Last month Japan changed from contracting to expanding with the index jumping 3.1 to 51.4%. The top two with fastest growing manufacturing sectors was the UK and the US with 62 and 60.8% respectively. David Smith noted that the UK is also turning around the services sectors and should signify economic growth continuing although low at
Strong services completes January rebound.
More of the Good News
Most of the consensus data thought that the indexes would maintain approximately its last months pace, but in fact far exceeded it. Both indexes jumped a solid 2.3% with non-manufacturing rising to 59.4% and manufacturing to 60.8% which was the highest level since May 2004 or nearly 7 years. The non-manufacturing consensus from Econoday was 57% with an extremely wide consensus range of 53.4 to 63.5% and from MarketWatch it was 57.3%. Econoday reported a consensus of 57.5% with a consensus range of 56.5 to 59.5%. The ISM had revised its last month's data (seasonal adjustment according to non-manufacturing report) from 57 to 58.5% which is one reason that MarketWatch took the revised numbers to come up with a consensus of 58.5%. Either way, it still far exceeded expectations and reasons why many have given the reports glowing praise.

And beyond the headline numbers also deserved praise. Business activity/Production increased .5 to 63.5% for manufacturing and 1.7 to 64.6% for non-manufacturing. Not only is the heart of the economy is in production, going forward the indexes showed strength in new orders with non-manufacturing growing a solid 3.5 to 64.9% and manufacturing having an outstanding 5.8 increase to 67.8%. Also looking forward for the manufacturing sectors showed strength in new export orders with a huge jump of 7.5 to 62%. Most trade is on the manufacturing sectors, so the drop in the services sectors new exports of 2.5 to 53.5% is not as significant. The import index for manufacturing rose 4.5 to 55%. As I have stated before, it is important that the export sectors grow as this provides an autonomous increase in absorption for the economy that increases aggregate income. But the import index and export index are not necessarily correlated to total import and export aggregates and most importantly imports are the inputs to the production process and exports are the end process in production. Robert Oak provides a good analysis of the ISM manufacturing report at Manufacturing ISM for January 2011 - 60.8% where he states the following.

Exports & imports increased, exports up 7.5 percentage points, and imports 4.5. That's always good news when exports exceed imports, especially since the deceleration of imports was the reason we had reasonable Q4 GDP growth.

This portion I disagree with because the increased in percentage points is rate of change not absolute levels and the indexes ended up at 62% for new export orders and 55 for imports. Thus even if the difference in rates of growth were different, new export orders would have probably maintained its percentage lead. And secondly, imports and exports for the GDP is merely accounting for the GDP and are not the true strength of the economy.

Because of structural rigidity shown up in higher and rising prices for commodities, then this is no time to be worrying about imports to the productive sectors of the economy. It is nice to think that some of the shortages are solved by import substitution but in reality that is not likely to happen over the short term due to legal and economic structural rigidity. We should instead be embracing these imports as much as we embrace worker productivity.

Most importantly in the so-called Great Recession, we are concerned about employment. The employment index for manufacturing continued its nice accent to above 60 to 61.7% with an increase of 2.8%. Econoday notes that this is the first plus 60 for employment in 7 years. Although the index did not increase as much for non-manufacturing employment, it did an acceptable level of increase with a rise of 1.9 to 54.5%. Maybe this will signify a break out of the stagnant labor market that trended around the break even point of 50. But with employers adding only 36,000 jobs last month the US will need a lot more strength in employment markets to get back to full employment.

More of the old Structural Rigidity.
The manufacturing price index jumped up a massive 9 percentage points to an rating of 81.5% which is the highest the reading has been since July 2008. Even more striking is that firms reporting higher prices is 64% to just 1% reporting lower prices. While not as dramatic, non-manufacturing price index rose significantly at 2.6 to 72.1%. The December index was reported as 70 but was later seasonally adjusted down to 69.5%.

These data points have again re-emphasized the fact that Manufacturing continues to face higher prices of commodities. Multiple months of rising prices had 16 commodities which was marginally higher than the 15 last month but total commodities rising in prices rose to 30 from 23. Non-manufacturing also showed increased total number of commodities to 28 from 23 and even more significantly was 14 commodities with multiple months up from 7 last month. A couple of respondents in the manufacturing report stated the following about rising costs.

* "Continued weakness in the dollar is having a negative effect on the components we purchase overseas and increasing our material costs." (Transportation Equipment)
* "Lead times are increasing significantly, and commodity pricing is starting to increase." (Chemical Products)

The Myth that Never Dies
Manufacturing continues to roll right along but surprisingly many politicians and even some economists think that the US has lost its edge in manufacturing to China. For example, Don Boudreaux made a post entitled On Fletcher and the False Assumption of U.S. Manufacturing Decline, where he takes to task Ian Fletcher's remarks regarding manufacturing output in the US. Although, I am not so certain that it is unusual that democratic socialists like Harold Meyerson and Bernie Sanders would be anything other than anti-trade and clinging to the height of industrialization that led to expansion of unions.

Mark J. Perry states that The Demise of America’s Manufacturing Sector Has Been Greatly Exaggerated and that it was the Increased Worker Productivity {that} Has Destroyed Millions of Jobs and ultimately We Should Take More Pride in Our Manufacturing Dominance. I include two of the most important graphs that he uses to explain the reason not to fear the "post-industrial" economy. The first graph is manufacturing output for the top 8 producers. (Click on graphs for clearer images.)

The next graph shows the percentage of workers engaged in farming out of total workers. This happened over many generations, and many groups and individuals resisted this trend, but for us to become the developed nation we have become, it was necessary for this structural changes to have transpired. Even in the 1980s, there was weeping and gnashing of teeth with the decline in family farms. Regional credit crisis created some of the impetus for the changing economy.

MarketWatch:
Manufacturing Forecast: 58.5%
Non-Manufacturing Forecast: 57.3%

CARPE DIEM: Manufacturing Continues as Recovery's Shining Star

Calculated Risk: Daily Color: D-List Data

Misc. Links:
Calculated Risk: Chicago PMI Strong, Dallas Fed Index Weak

There's Hope: Online Job Demand Rises Above Pre-Recession Levels: Highest Since June 2007

CARPE DIEM: More on The U.S. Poor Getting Richer, And Being Envy of the World's Poor

Calculated Risk: Inflation in China

American Samoa: The real story 60 Minutes missed

Mish's Global Economic Trend Analysis: Bernanke Reports "Good News" on Inflation Targets; Treasury Selloff Continues on Strong ISM; 2-30 Yield Spread at Record

About

Econbrowser: An improving economic outlook

CARPE DIEM: The Amazing Gains in Worker Productivity = Record Output in Q4 2010 With 7 Million Fewer Workers

The Capital Spectator: ADP EMPLOYMENT REPORT: MODEST JOB GROWTH IN JANUARY

The Capital Spectator: THE JOBLESS RECOVERY ROLLS ON

Calculated Risk: ISM Non-Manufacturing Index showed expansion in January

The Capital Spectator: STILL WAITING (AND HOPING) FOR A STRONGER LABOR MARKET

Don’t Stop That Growing Feeling « Modeled Behavior

Monetary policy: Is QE2 working? | The Economist
EconomistMom.com » Blog Archive » It’s That Damned “Holey” Tax System

Macro and Other Market Musings: Bernanke Acknowledges Risings Yields a Sign of Success

CARPE DIEM: Structural Shifts in the U.S. Labor Market

RSY XXVII: Update, Sell FL 200 @ $17.89

2011-01-30T11:10:00.000-08:00

Let us update some of the cash transactions since our post on January 12th. On the 13th, Alliance Resource Partners (ARLP) dipped down to $70 at the opening bell (The RSY portfolio recorded the buy as 100 shares at $70 exactly.) but has since dropped to below $62.50 on January 20th. Most of this drop has been attributed to a short mine closer by Warrior Mine which is a wholly-owned subsidiary of ARLP. Given that all operations are back to normal and Sabrient still has ARLP as a Strong Buy, RSY recommends to continue to hold this position. Obviously there was an opportunity to "buy on the dips" -- or dives, but to maintain a balanced portfolio RSY did not consider this move. Today, it hit a high of over $72 but settled back to $70.25, slightly over entry price.

The bright side of the portfolio is our continuous stream of dividends. As the chart below shows, RSY recorded dividends of $40 for MRH, $194 for IVR, $60 for FL and $68 for CODI, for a total of $362. I added the two right most columns to show the number of stocks in the transactions and prices of the dividend per share. (Click on tables for clearer images.)

No lumps of coal to sell, but time to sell some of our smelly sneakers.
Foot Locker (FL) has been downgraded to a hold by Sabrient. Just like when other ratings changes are dropped to hold, RSY recommended a reduction in exposure. RSY recommends a limit order sell of 200 shares (out of the original 400) at $17.89 (GTC). This will result in a loss of around $250. And now for a look at the current holdings:

WEITW Part II:Paul Krugman, Worst Economist in the World {WEOTW}

2011-01-20T10:37:00.001-08:00

Paul Kruman is at it again with a post entitled Early Social Security Projections. This got me to exploring some of the issues about Social Security also, and for that I am grateful. This is his attempt at setting up his straw man argument.

You see, in discussions of Social Security it’s often argued that in the program’s early years, nobody could have imagined the increases in life expectancy that have actually occurred, so nobody could have imagined that we’d have as many beneficiaries relative to the number of people of working age. And I thought I knew that this was wrong — that people in the 30s and 40s did know about rising life expectancy, and expected it to continue.

When declaring that "nobody could have imagined", then it seems pretty easy to refute such comments as someone, somewhere must of at least thought about it. And sure enough he uses the 1945 Social Security Trustees’ report {PDF}. But a bigger question is whether the people (Congress and President) that were suppose to make decisions about how to maintain the fund and thus benefits for future generations were even aware of such information (or even read it) and whether they made any corrective action early enough. Several passages of the report paints a different reaction than what Krugman could be imagining.

Two estimates, based on lower and higher assumptions, of the level premium cost of the benefits now provided by the system are 4 percent and 7 percent of covered pay rolls. This means that if pay-roll taxes of this magnitude (employer tax and employee tax combined) had been levied from the beginning of the program and were continued indefinitely, the system as a whole would be self-supporting if the assumptions eventuate. But Congress has now maintained old-age and survivors insurance tax rates at 1 percent each on employees and employers for 9 years instead of permitting the scheduled increases of the act to become effective, although in the war years economic conditions have imposed little obstacle to such increases. {Page 28}

The report's conclusion goes on to ask for clarification on "its short-run and long-run financial policies for the program" considering the 1 percent rate then currently used and whether the fund should be decreased until it is "three times annual benefits". That last portion seems like not much financial backup in the trust fund if allowed to drop to that low. Even if the rates were to increase to 6% total of taxable pay rolls that still only provides positive cash flows during the 1950s and 1960s.

Rising Life Expectancies?

This is Table 9 that Krugman references in his post. It is interesting to note that while the populations of those 65 and older is increasing every time period including for both men and women, adults in the 20 to 64 age group decreased for both low assumptions and high assumptions over the period 1980 to 2000. The low assumptions table even has a decrease in this age group in 2000 that is below even the 1955 estimate with men sliding back to the same spot and women decreasing more in numbers. The two estimated sequences are derived from two reports and not from the SSA/Trust Fund. The two reports are: 1. the 1935 report by the Committee on Economic Security, and 2. the 1938 report by the National Resource Committee.

The low assumptions ratio result as Krugman pointed out was amazingly close considering all the other factors that turned out wrong like total population and immigration patterns. His ratio of adults and the elderly of the low assumptions estimate was 20.8% and the 2000 census data showed 21.1%. But he should have read the report to see that the high assumptions were not given equal consideration to the low assumptions results. The following is from the report on page 20.

(b) Mortality --- Mortality rates by sex and age have been steadily improving since the turn of the century for both sexes and virtually all ages up to 60, with very little change at ages above 60. ... In the low-cost assumptions discussed in this section, very little improvement in mortality rates is assumed. In the high-cost assumptions some improvement is assumed but their assumption of improvement beyond age 65 is believed by many to be too optimistic.

Thus, the report is saying that it is better to go with the low-cost assumptions and only to use the high-cost for the extreme possibility. It was not, like what Krugman is assuming, that the low and high are of equal value and came from the same set of data points and assumptions. The ironic aspect is that Krugman already knows that longevity is not increasing that much for the older population than it is for the younger living longer.

Live Long And Prosper
While life expectancy is rising, life expectancy at age 65 — which is what is relevant here — isn’t rising nearly as fast.

"Damn it, it is not electron shells, we are talking about electron configuration!"
That small quote was from my college professor in Chemistry, but for Krugman it should not be the demographics of age groups that matter as much as participation rates. Table 10 below shows the expected number of recipients of "old-age insurance" up to the year 2000. The difference to note from Table 9 is that even adding up all the columns does not equal the total for the population over 65. The participation rate from these two tables is just over 58% for the low assumptions scenario and 71% for the high assumptions scenario. According to the Social Security Administration, "Nine out of ten individuals age 65 and older receive Social Security benefits." That means as much as a fifth to one-third of the elderly were not suppose to receive the benefits according to these scenarios. Even with this data, it does not tell us how many of the "wives of primary beneficiaries" are 65 or older. Since husbands still tend to be older than their wives, then at least some of that pool of recipients was under 65 making the non-participation rate lower than what I calculated.

It looks like a variety of social attitudes changed since the 1945 report and possibly work/leisure incentives. Although the following quote is related more to the "reconversion" of a war time economy to a consumer economy, it does point out the writers' attitude in the report, "It is assumed, nevertheless, that a rather large number of persons eligible for retirement benefits remain in employment." Another indirect demographic trend that they completely missed is women participation in the work force. On page 23 of the report they discuss greater woman participation because of the depression and subsequent war, "Moreover, the labor market was increased by many married women seeking employment to reinforce what they hoped might be only a temporary inadequacy in their husband's income."

Confirmation Bias
From the analysis above, it shows that Paul Krugman found some shred of evidence that confirmed his political bias and then failed to fully understand the information he was sharing. He, of course, has a great burden defending big government entitlement programs and Keynesianism at all economic and political cost. I close with another quote from the report that shows they understood that the program as designed could have some major flaws that will have to be addressed at some time in the future.

In fact, for demographic reasons alone, as discussed earlier in this section, the system cannot be expected even eventually to level out to a fixed relationship between contributions and benefits.

RSY XXV: Less (e)Gas and more Lumps of Coal in the Stockings.

2011-01-12T13:36:00.000-08:00

Gas Natural Inc. (EGAS) has been downgraded to hold by Sabrient Systems and today was its latest monthly ex-dividend date. As such, let us take a little bit of profits from our position at the opening bell tomorrow. There looks to be some upward constraint above the $10.60 mark and thus RSY recommends to sell 200 shares of EGAS (half of the 400 position) at a limit price of $10.59 {GTC}. We should also note that NGPC provided us a dividend of $36.00 from our 200 shares on the 7th of this month.

If you didn't get a lump of coal in your stockings, then maybe buying some coal is a good idea now. Alliance Resource Partners, L.P (ARLP) supplies coal predominantly to utilities (91.8%) and the rest for industrial users in the US. The Motley Fool noted that they Always Raise Their Dividend. I find it more important that regular dividends are paid consistently than insistence on having the dividends increase every time but it certainly is a positive aspect of this stock. ARLP's accounting practices are quite good with a high forensic accounting score. Kapitall noted that ARLP is a company with Conservative Accounting Practices.

On the macro side of the equation, coal does not seem to have as many problems as it did a few years ago. One reason that I shorted RAIL back then. With unemployment high, the attention to pollution from coal has taken a back seat. The BP oil blowout did not help oil drilling and production here, and thus conversely electricity companies will continue to rely on coal for the foreseeable future. The Macro View of the economy has picked up and thus energy consumption will be part of this increased demand including commodities. Paul Whitfield thinks that ARLP is too thinly traded, but overall rates it and its partner Alliance Holdings (AHGP) as excellent choices.

This stock has options available for it. RSY recommends a buy of 100 shares of ARLP at a limit price of $70.39 {GTC}. The recommended moves today reduces the share of natural gas utilities and increases exposure in the production of energy...dirty coal industry.

Misc. Links:
Alliance Resource Partners: Coal and Dividends Are a Good Mix

Steelmakers expect prices to rise with Australian floodwaters

Australian Flood a Boon to US Producers?

Retiring Soon? Here Are 3 Stellar Dividend Picks

Six Consumer Stocks Paying Sustainable Dividends to Own in 2011 - Seeking Alpha

The Most Outstanding Dividend Portfolio I Know

A Macro View: ISM Reports December.

2011-01-11T10:41:00.000-08:00

Sunshine on a Cloudy Day..
ISM Manufacturing index shows expansion, as stock markets open the year in strong fashion, and the service industries expanded in December at the fastest pace since May 2006, showing the U.S. economic recovery is picking up and broadening beyond manufacturing. Econoday also stated the following summations about the reports:

ISM Mfg Index
All in all, this is a very positive report, one confirmed by strength in regional data and one pointing to New Year strength for the nation's manufacturing sector.

ISM Non-Mfg Index
The nation's businesses, at least based on the ISM's sample of roughly 350 companies, continue to do more with less. Today's report points to strong growth for the economy that will, hopefully sooner than later, trigger new hirings. There's little initial reaction to this report.

What's the Good News?
There were certainly plenty of things to be upbeat on both reports. The headline numbers came in well above the 50% break even point with manufacturing (PMI) showing 57% and non-manufacturing (NMI) at 57.1%. This last month signified near complete convergence as the NMI gained 2.1% and PMI of just .4%. The NMI showed consistent growth since last August with a low of 51.5%. The manufacturing index was just short of the consensus by .2% for Econoday and .5% by MarketWatch, but well within acceptable levels for the consensus range of 55.5 to 58.6% for Econoday. Non-manufacturing index was significantly above the consensus of 55.6 for MarketWatch and 55 for Bloomberg News and 56% for Econoday, and also beating the consensus range of 55 to 57%.

Not only did the headline numbers grow last month but even larger increases came in the new orders index and the business activities index. For manufacturing, the production index jumped 5.7% to 60.7% and the new orders jumped 4.3% to 60.9%. For non-manufacturing, the business activities index made significant gains of 6.5% to 63.5% and the new orders jumped 5.3% to 63%. All numbers were above 60 and showing broad strength especially in the non-manufacturing sectors as 14 out of the 18 reporting industries showing growth in both categories.

Dr. Mark J. Perry at Carpe Diem noted that "The 63.5 percent reading for the ISM Non-Manufacturing Business Activity Index in December was the highest monthly level since August 2005, more than five years ago."

Raindrops Keep Fallin' on My Head.
Structural rigidity is still of major concern as the converging of price indexes is occurring at such a high level, over 70. Manufacturing bumped up 3 to 72.5% which was the highest since May 2010s reading of 77.5%. Also scary is that no manufacturing industries reported lower prices and 14 out of 18 reported higher. The percentage of respondents reporting lower prices was 3% and higher was 48%, thus signifying like 16 respondents reported higher prices for every one reporting lower. Non-manufacturing made a larger jump of 6.8 to 70%. A high not seen for a long time. The ratio of respondents with lower costs to higher costs was 1 to 7.

Commodities in short supply was not a significant problem last month, but industries are reporting more commodities are rising in prices. Non-manufacturing sectors had no change on the multiple months of specific commodities (7) but the total number of commodities rose to 23 from 16 in November. The big concern going forward is that the manufacturing sectors showed a large increase in new commodities with rising prices of 23 commodities from 16 in November, and multiple months nearly doubled from 8 in November to 15 in December's report.

A business may be able to compensate for price anomalies of a single month, but multiple months will lead to margins being reduced and eventually prices being passed onto the consumer. So far, the US has not experienced inflation in the last decade, but these are not positive signs. One other factor is that as the US dollar continues its long term trend downward in value, then at some point the "pass-through" costs of this currency devaluation will affect importers and they will begin raising prices. Both domestic and foreign competitors will know this and be more willing to raise prices as margins are squeezed.

New export orders also showed weakness on both reports with manufacturing dropping 2.5 to 54.5% and non-manufacturing dropping 3.5 to 56%.

Working in the Coal Mine
Most disappointing of all was the non-manufacturing employment index as it dropped 2.2 to 50.5%. We had seen a growth trend and possible breakout from the stagnant 50% line, but it failed again at maintaining a steady growth trend. (Click on tables for clearer images.)

The trend line during December 2009 until December 2010 was very close to 0.5% per month with a R-squared of 0.5825. This meaning that the majority of the rise was related to later months than earlier months with an increase of almost one-half percent increase per month. But if we are expecting the services industries to bring us back to full employment then this is clearly too low, even if the trend continues.

Manufacturing employment index also dropped 1.8 but still maintained its mid 50s range at 55.7%, and the trend set since a high in October of 57.7% is trending down. Surprisingly, Mike Shedlock just discovered that, "The long-term trend suggests it would be a mistake to expect too many jobs out of manufacturing." Mish provides a chart of employment in manufacturing (2000-2010), and for a longer time frame I include the following chart (From Manufacturing Employment.)

'Where Do We Go From Here' {Employment}
First came news that the ADP report says 297,000 jobs added last month which is the highest gain on record. And this led to increased estimates for the BLS report for last Friday to the "median forecast rising to 150,000". But there were caveats behind the strong ADP report.

But there is a seasonal quirk in the ADP number that may have inflated the December number. ADP and Macroeconomic Advisers do a seasonal adjustment that takes into account a typical December purge, where employers who have fired workers over the course of the year but don’t remove them from officials payrolls right away clear the rolls.

Ben Herzon of Macroeconomic Advisers explains: “If companies were laying off fewer employees throughout 2010 than had been the case in recent years, the amount by which the seasonal adjustment process subtracted from [ADP National Employment Report] growth last year through November was too great. Following the same logic, fewer layoffs through November implies fewer December purges than in recent years, so the boost to December employment growth to offset the normal December purge may have been too large.”

Then sure enough the BLS stated the following in their report at THE EMPLOYMENT SITUATION – DECEMBER 2010 {PDF}.

The unemployment rate fell by 0.4 percentage point to 9.4 percent in December, and nonfarm payroll employment increased by 103,000, the U.S. Bureau of Labor Statistics reported today. Employment rose in leisure and hospitality and in health care but was little changed in other major industries.

Even with the latest drop in the employment rate, it did not reach my prediction last January. At that time I stated, "I think headline unemployment percentage will slowly creep down over the next year to 9% and continue on that trend for the next couple of years." at Hawks Eating Humble Pie.

Mike Shedlock provides a jobs growth forecast for 2011 from Calculated Risk vs. Mish . Their predictions are as follows:

Calculated Risk:
This suggests to me that private payroll employment will increase by over 2 million jobs next year, maybe as high as 3 million jobs! My guess is around 2.4 million jobs as shown on the following graph.
Mish's Global Economic Trend Analysis:
I come up with +127,000 private jobs a month in comparison to Calculated Risk's estimate of +200,000 jobs a month. That is quite a difference.

I have total nonfarm jobs at +106,000.

Mish thinks that government employment will shrink by about 21,000 per month, or he is just dreaming a little about "hope and change". Mish comes to those conclusions mostly based on general trends over 2010. This might be good for a rough estimate but it may underestimate expanding sectors as they become the engine of growth in a turnaround economy. Paul Krugman takes a different approach by considering what growth rates would be needed to lower unemployment levels at The Long Road Ahead.

Roughly, it takes two point-years of extra growth to reduce the unemployment rate by one point.

So, suppose that US growth is accelerating. Even so, it will take years of high growth to get us back to anything resembling full employment. Put it this way: suppose that from here on out we average 4.5 percent growth, which is way above any forecast I’ve seen. Even at that rate, unemployment would be close to 8 percent at the end of 2012, and wouldn’t get below 6 percent until midway through Sarah Palin’s first term.

Interesting set of data points and also shows one of Krugman's deepest fear; that the business cycles will go against the Democrats and the Obama administration over the next few years with the Sarah Palin crack. That is, the economy will be still down and thus Palin wins the 2012 election and then during her first term provides growth prospects that insure reelection of her in 2016.

"Karl Smith" counters this line of reasoning by considering that high levels of unemployment now could easily translate to higher growth rates than what the US has been traditionally at Unemployment and Growth. This higher growth rate is derived from the "massive reservoir of untapped labor which could be easily mobilized". But the US has always had a massive reserve of untapped labor and that has been traditionally fulfilled by larger participation rates and immigration. This immigration has come from both legal as in the case of H1B visas and other special visas, and of course illegal immigration. The bigger problem is a matching problem of the skills that the massive reservoir of unemployed have presently and the skills of the new work force. Of course the structural rigidity of the US could prevent quick changes in the movement of capital from one sector to another.

Conclusion:
I am not certain that the time to panic about rising prices is upon us yet, but clearly there are signals that the Fed should be considering a change in the direction of monetary policy going forward. They need to be proactive and plan well in advance of changes in price levels. Even if unemployment is too high, they may need to start unwinding the monetary stimulus instruments. Under normal economic environments, fiscal and monetary policies should coordinate. But under situations like stagflation, then there may be a need for divergence between the two. Much as the early 1980s saw very restrictive monetary policy along with what could be considered fiscal stimulus.

Not only is manufacturing expanding in the US, and in the UK with a new 16-year high of 58.3 (more at UK Economy 2011), and in China where PMI expands, but momentum slows, but also "global manufacturing ended the year on a strong note". Only Japan and Greece were contracting out of the 23 countries listed, and 15 countries were experiencing raising index levels including Japan by 1%. While this is of course good for worldwide economic growth, it does portend that commodity prices could start to rise even more this year.

References:
ISM - Media Release: December 2010 Manufacturing ISM Report On Business®

ISM - Media Release: December 2010 Non-Manufacturing ISM Report On Business®

MarketWatch Data:
Manufacturing ISM Forecast: 57.5%
Non-Manufacturing Forecast: 55.6%

Supply Chain News: Are Manufacturers Really bringing Back Work to US? Anecdotes and some Data Say Yes – Even as Trade Deficits with China Rise; US Now has Total Cost Advantage in Some Areas, GE Executive Says

ISM Non-Manufacturing Index showed expansion in December

Misc. Links:
Fed Watch: A Solid Start To 2011

Manufacturing activity rises to 7-month high

The Plight of American Manufacturing Since 2001, the U.S. has lost 42,400 factories -- and its technical edge.
ManufacturingEmployment-1-1-1 ABQtom

Unlike Immigrants, Robots Will Permanently Drive Down Real Wages

Labor Market Commentary Arnold Kling
The Recalculation Story: A Summary Arnold Kling

ADP: +270k Jobs in Dec., Largest Gain on Record

Trade innovation: Invented threats | The Economist

An Interview with Robert Barro: "The Lessons from the Great Depression"

The Risk of Rising Oil and Gas Prices

Sci-Fi:
Robin Hanson on the technological singularity

Time to Read "Less Than Zero"
http://www.iea.org.uk/sites/default/files/publications/files/upldbook98pdf.pdf

Migration wages: more evidence

I reckon there are three policy implications here.
1. A cap on highly skilled immigration is a stupid idea.
2. Insofar as emigration reduces the wages of stayers, there is more reason to worry about the possibility that higher incomes taxes might encourage high earners to migrate. Fortunately, there is - so far? - little sign of them doing so, but this weakens a little my prior support for higher taxes.
3. It’s important to ensure that the capital stock can adjust upwards in response to immigration. Exactly how to do this is of course a matter of debate: is it more important to maintain aggregate demand and get banks lending, or to reduce red tape and capital taxes and barriers to entrepreneurship? Whatever the answer, the question becomes a little more important.

http://www9.georgetown.edu/faculty/ludemar/Wage%20effects_ozden.pdf

RSY XXIV: Update,

2011-01-03T13:20:00.000-08:00

Since the last post, RSY recommended a sell of TSH at $32.99. On December 21st it nicely gaped up and thus RSY noted an opening price point of $33.23. RSY is also recording three dividend deposits distributed from EGAS of $18, GAIN of $8, and TSH of $35.50. The chart below gives a detail of the transaction history so far with realized gains of nearly $2300. (Click on tables for clearer images.)

The next table is a little busy, but the important aspect is it shows each of the positions held and are now holding and the realized and unrealized gains so far. All the picks so far are have produced gains except for LZ. Since we are planning on holding this position, then over time the option should expire worthless and we would pocket the premium.

It may be a long 3 months to hold the current positions of MRH, IVR and CODI until the next ex-dividend date. MRH is still rated a StrongBuy by Sabrient and CODI at Hold. IVR has been upgraded to Hold from Sell and has been maintaining stable prices after the ex-dividend date along with finishing their public offering of 10 million shares for a net proceed of $214 million. RSY recommends further holding of these positions. And now for a look at the current holdings:

Compass Diversified's Unchanged Q4 Dividend

RSY XXIII: Sell TSH, LZ Dividend

2010-12-20T11:36:00.000-08:00

Not much activity for the month of December in the RSY portfolio. Could almost say it is starting to be a lazy portfolio. LZ did provide a dividend of $36 for the 100 shares of LZ which was recorded on December 10th. RSY has not yet found another stock to add to the portfolio.

As mentioned in the last post of RSY, we should exit out of TSH gracefully, especially considering this is a lightly traded micro-cap stock. Given that it has been topping over $33 to $33.25 for brief periods, we should be able to exit at $32.99 if we are patient enough. RSY recommends a Sell 100 shares of TSH at a limit price of $32.99 {GTC}.

Also worth noting is that IVR, MRH, and NGPC all have their next ex-dividend date on the 29th of this month, and as such any further recommended rebalancing will probably occur after the first of the year. CODI shows some weakness in the charts, but RSY is still recommending a hold on the current 200 shares.