Professional Investment Services

PRESENTING: Our Favorite Economic Report In The World

Joe Weisenthal — Sat, 04 Feb 2012 23:59:06 +0000

It’s obvious that we get pretty excited about the monthly jobs report around here — especially when the numbers are awesome like they were on Friday.

But while employment may be the most important aspect of the economy, it’s still only one part of the picture.

So we’d like to introduce you to our favorite economic report of the month: The Rail Time Indicators Report from the Association of American Railroads.

Every month the AAR puts out a 36-page report detailing headline rail volume (how many carloads there were in the month) and also rail activity by specific sector: Grains, petroleum products, car parts, coal, and gravel, and so on.

And what makes it even cooler is that the report does a great job discussing the broader economic picture, and how the rail data fits into it. It really is a fantastic read.

January 2012 was slightly better than 2011, but WAY below January 2006.

On a year over year basis, rail carload growth was just 0.1%, way slower than the month before.

Here’s a look at coal volume. It’s actually below January of last year.

See the rest of the story at Business Insider

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GREECE: WE HAVE 24-HOURS TO STRIKE A DEAL

Joe Weisenthal — Sat, 04 Feb 2012 21:11:37 +0000

Just like old times: Will they get a deal done before the Asian markets open?

REUTERS:

Greece has just one day left to strike a deal with impatient lenders and reluctant political party leaders on a 130 billion rescue plan before the country is pushed towards a chaotic default, its finance minister warned on Saturday.

…

In an apparent warning to Greek political leaders opposing key reforms, Finance Minister Evangelos Venizelos said the patience of European partners and the International Monetary Fund footing the bill for Greece’s bailout was wearing thin.

“There is great impatience and great pressure not only from the three institutions that make up the troika but also from euro zone member states,” Venizelos said after what he called a “very difficult” conference call with euro zone counterparts.

The most remarkable thing about this is the the indifference of the market to all this. We keep trying to imagine what the market would be doing if these headlines had come from last November.

(Via @alea_)

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MAULDIN: The US Still Faces Huge Problems, And In Just 3 Years We’ll Be Italy

John Mauldin — Sat, 04 Feb 2012 20:30:00 +0000

Here’s The Real Problem With Investing In The Carlyle IPO

Ben Walsh — Sat, 04 Feb 2012 20:18:17 +0000

The big news in the Carlyle IPO story is that the private equity firm and its founder David Rubenstein dropped a plan that would have prohibited shareholders from filing class-action lawsuits.

Great news, right! Buy, buy, buy on Carlyle shares?

Not so fast.

There’s a fundamental problem with investing in public equity private equity firms — and it’s not just Carlyle.

And it’s not just the awful historical track record these investments have displayed. Take Blackstone’s much hyped IPO. Share performance since offering? Down 52%.

There’s something more basic going on that makes the public equity of PE firms bad news—at least if you don’t know what you’re getting into.

There are three ways to get economic exposure a specific private equity firm:

1) Be an investor in a fund. In recent weeks this has been the subject of intense scrutiny on the impact of PE to society and employment broadly.

In terms of returns, most rigorous academic analysis shows that private equity funds, net of fees, return about what the S&P 500 does.

So for group #1, economic return is not terrible but probably not worth the fees.

2) Be a manager of the fund(s) and own controlling equity in the private LLC. Speaking of fees, these are the guys that get the fees. The benchmark is a 2% asset management fee and a 20% performance fee, which generally has some hurdle before it kicks in (say, 8%). These same managers also tend to own some type of controlling equity in the corporate entity itself as well as the funds.

Group #2 makes a killing, especially at the biggest PE firms. We all know their names, how much they’re worth, how many houses and planes they have, etc.

They have access to performance fees, management fees, invest in the funds themselves and if all goes really well, they get to sell some of the equity they hold at the corporate level to the public. It’s a great business model for the managers. Maybe one of the best ever created.

3) Buy publicly traded equity in the manager. Now things get tricky. First of all, the equity you are buying is unlikely to be run of the mill, General Electric-style equity. In Blackstone’s case, you are buying units in a general partnership. But your ‘units’ are generally stripped of governance and voting rights and may even exclude the controlling shareholders (the managers) from necessarily acting in your best economic interests. This is an oversimplification, yes, but a largely accurate one. Please, no angry comments from corporate lawyers.

And a detailed look by the New York Times’ Deal Professor at Carlyle’s share structure makes the case that it’s worse than Apollo, Blackston or KKR in restricting right of owners of public equity. Even with the class action lawsuit prohibition dropped, the fundamental conclusion is stinging:

“Carlyle is taking advantage of IPO [investors' lack of concern for shareholder rights] to push through what can only be described as a shareholder’s corporate governance nightmare.”

In short, you are along for the ride with the management team and they owe you no responsibility to act in good faith.

So you don’t get a lot of things. What do you get? You get the earnings of the corporate entity once performance hurdles have been met and the managers have been paid their fees and other expenses have been dealt with.

The problem is that the best place to be, economically speaking, is in group #2. That’s not too surprising, since group #2 set up this the economics of this whole thing to begin with.

Group #3 is last in line, economically speaking, as is always the case with equity holders. But what’s different about private equity is that what comes before you as an equity holder is not what comes before an equity holder in GE. Far from it.

It’s a much longer journey for economic value to reach you and there are incredibly effective mechanisms set up to capture as much of value for the managers before it gets to you.

So if you’re buying shares in the Carlyle IPO, your ability to file class action lawsuits should be the least of your considerations.

Rubenstein himself said the point of the IPO was for him to ‘liquefy’ his holding in the firm. This is the point of all IPOs, of course.

The key difference is that when he does liquefy his stack, what investors get in return has largely been stripped of earnings power.

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Since The S&P Downgrade…

Joe Weisenthal — Sat, 04 Feb 2012 20:14:46 +0000

Since the S&P downgrade on August 5 of last year… The stock market (red line) is way up, and US borrowing costs (blue line) are way down.

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The Gigantic Conspiracy To Inflate Jobs Numbers In America

Joe Weisenthal — Sat, 04 Feb 2012 20:01:00 +0000

After that strong jobs report on Friday, radio host Rush Limbaugh blasted the “corrupt” data, which he claimed were a total lie.

From Newsmax:

The jobless rate reported today is “corrupt as it can be” because President Barack Obama’s administration has decreased the size of the workforce, Rush Limbaugh said on his radio show.

According to the Department of Labor, employers added almost a quarter of a million jobs in January. According to Limbaugh, it eliminated 2 ½ million positions.

“The number of jobs not available to be filled exploded by an unprecedented, record number of 1.2 million,” he said. “That’s not a typo. That’s part of this 2 ½ million fewer jobs. It is corrupt as it can be.”

There’s just one problem for Rush’s stance.

If the Department of Labor numbers were a lie, then a lot of other organizations have to be lying as well, since so much data is confirming the strong jobs news.

In other words, you’d need to have a conspiracy of epic proportions.

How big?

Well to start, the BLS needs to be in a conspiracy with the private payrolls company ADP, because ADP comes out with its own data, and it pretty much lines up perfectly with BLS.

Also, as we just pointed out, the BLS has to be in a conspiracy with the Institute For Supply Chain Management, since their surveys of employer hiring intentions match up perfectly with the BLS.

Okay, so now the conspiracy is the Department of Labor + ADP + The Institute Of Supply Chain Management.

But wait, there’s more!

You also need to add in the car companies.

Because remember, car sales line up nicely with jobs numbers. (Note that the car data, the red line hasn’t been updated yet, but we know it jumped again, as sales surged 11% from last year).

It’s also worth noting that the car sales are self reported by the various automakers, like Ford, GM, Honda, Toyota, Hyundai, Chrysler, and so on.

So if there’s a conspiracy to lie about the data on behalf of Obama, it involves, the Department of Labor, ADP, the Institute for Supply Chain Management, GM, Ford, Chrysler, Toyota, Honda, Mercedes, Kia, Hyundai, and so on.

It’s possible, but… the real answer is that Rush is probably wrong.

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A Beautiful Reminder Of What It Takes To Create More Jobs

Joe Weisenthal — Sat, 04 Feb 2012 19:14:00 +0000

This week we got fresh ISM survey data for both the manufacturing and non-manufacturing areas of the economy.

Now as we’ve pointed out a billion times, there’s one thing that consistently is shown to be a driver of hiring: More sales.

Regardless of the regulatory climate, confidence, hiring, inflation, credit, etc., businesses hire more people when new orders and increase. It’s as simple as that.

And this chart shows it nicely.

The red line is the average of the employment sub-indices for both sets of ISM surveys. The blue line is the average of the new orders sub-indices. As you can see, they align nicely, and also note that for both series lately, the blue line (new orders) bottom just before hiring bottoms.

Incidentally, this ISM data reveals the absurdity of trying to “debunk” the this Friday’s excellent Non-Farm Payroll’s data from the BLS. You can try to poke holes in the model that’s used, but when other data confirms that hiring signs are robust, why would you assume that the data is wrong?

In fact, here’s the ISM survey data of hiring intentions vs. the monthly change in non-farm payrolls. Absolutely nothing out of the ordinary here.

Finally one last point in favor of the BLS data.

As we pointed out earlier this past week, there’s a remarkable correlation between labor data and car sales. And well, January car sales were awesome.

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THIS Is What A Self-Sustaining Recovery Looks Like

New Deal democrat — Sat, 04 Feb 2012 18:48:00 +0000

Most of the monthly reports released this week were stellar. 243,000 new jobs were added, and the internals, including the leading indicators of manufacturing jobs and workweek, were positive. And no, as my colleague SilverOz pointed out, 1.2 million workers did not suddenly vanish.

In fact, as Calculated Risk has shown, labor force participation increased 0.3% month over month. Factory orders, another leading indicator, also increased. Only consumer sentiment (of enhanced significance in the new LEI regime) fell.

The ISM manufacturing index rose, and the ISM services index strongly so. The Chicago PMI fell slightly, but remained above 60. Personal income rose 0.5% while spending was flat. Auto sales reached a 3 1/2 year high. Construction spending was up. Prices of houses sold in November continued to decline.

Turning now to the high frequency weekly indicators:

Weekly employment-related data was generally up.

The BLS reported that Initial jobless claims fell by 10,000 to 367,000, the third lowest report in close to 4 years. The four week average declined by 1750 to 375,750. This too is close to the lowest level since mid-2008.

The American Staffing Association Index declined by 1 to 86 last week, but remains significantly higher than last year.

The Daily Treasury Statement showed that withholding for the month of January 2012, $158.7 B was collected vs. $152.9 B a year ago. Since there were only 19 reporting days this January vs. one year ago, adding in December 30 to make a 20 day vs. 20 day comparison, $169.9 B was collected this year, for a gain of 11% YoY. (Had I used February 1 instead, the comparison would have been $179.1 B this year vs. last year).

Housing data was once again mixed:

The Mortgage Bankers’ Association reported that seasonally adjusted purchase mortgage applications decreased 4.3% YoY and was also down -1.7% from one week ago. The overall trend remains flat since June 2010. Refinancing fell -3.6% in the last week. Mortgage applications have trended down for the last several months, although the overall flat trendline since May 2010 is still intact.

For the eighth week in a row, YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker were positive, up +3.8% YoY. This is the best reading in close to 5 years. The number of metropolitan areas with YoY positive sking prices increased to 32. The number with YoY declines of greater than 5% remained at 7.

Sales and transportation were weak or mixed:

The ICSC reported that same store sales for the week ending January 28 increased 3.9% YoY, and were up a slight +0.1% week over week. Shoppertrak, did not report, however, Johnson Redbook reported a 2.0% YoY gain, the weakest in 6 months.

The American Association of Railroads reported mixed weekly rail traffic for the week ending January 28, 2012, with U.S. railroads originating 283,654 carloads, down 2.8 percent compared with the same week last year. Intermodal volume for the week totaled 235,028 trailers and containers, up 5.5 percent compared with the same week last year.

Money supply and Credit spreads were also mixed:

M1 increased +0.5% last week, and +3.0% month over month. It is also up 19.0% YoY, so Real M1 is up 16.0%. This is about 5% off peak YoY gain at the end of last summer. M2 was flat week over week, and up +1.4% month over month, and up 10.1% YoY, so Real M2 was up 7.1%. This is about 3% less than its YoY reading at the crest of the tsunami.

Weekly BAA commercial bond rates increased .09% to 5.29%. Yields on 10 year treasury bonds rose .05% to 2.01%. The credit spread between the two had a 52 week maximum difference in October but tightened slightly in the last month.

Gasoline usage in particular continues to be much lower YoY:

Oil fell about $2 this week to close at $97.84 a barrel. This is slightly below the recession-trigger level calculated by analyst Steve Kopits (adjusted for general inflation). Gas at the pump rose $.05 to $3.44. Measured this way, we are slightly above the 2008 recession trigger level. Gasoline usage, at 7967 M gallons vs. 8549 M a year ago, was off -6.8%. The 4 week moving average is off -7.3%. Since last March the YoY comparisons have been almost uniformly negative, and substantially so since July. This week features one of the biggest declines in the 4 week average since then.

Now let’s turn to new high frequency indicators designed to track the global slowdown/recession:

The TED spread is at 0.456 down from 0.500 week over week. This index is now back below its 2010 peak, and has declined from its 3 year peak of 5 weeks ago. The one month LIBOR is at 0.261, down .009 from one week ago, below its 12 month peak of four weeks ago, remains below its 2010 peak, and is approaching its typical level of the last 3 years.

The Baltic Dry Index at 726 continued to plummet, although at a lesser rate, -79 ti 647, and drastically off its October 52 week high of 2173 (although this is nothing even remotely close to its decline during the Great Recession). The Harpex Shipping Index declined two to 392 in the last week, but is above its 52 week low of 389 four weeks ago. Please remember that these two indexes are influenced by supply as well as demand, and have generally been in a secular decline due to oversupply of ships for over half a decade. The Harpex index concentrates on container ships, and has been leading at recent tops and lagging at troughs. The BDI concentrates on bulk shipments such as coal and grain, and has been more lagging at the top but has turned up first at the 2009 trough.

The Dow Jones Bond Index increased .10 to 116.37. The JoC-ECRI industrial metals index declined from 126.84 to 124.41, reversing most of the gain of one week before. The former is a positive, the latter a negative for the calculation of ECRI’s weekly leading index.

While some of the weekly reports were mixed, the big picture is that, just like one year ago, the US economy is attempting to attain escape velocity for a self-sustaining recovery. Although like one year ago the Oil choke collar remains engaged, consumer conservation and increased production are weakening its hold. Global worries have continued to abate. There remains no sign of any present or imminent downturn in the economy right now. If there is a caution flag, it remains that wages have not kept up with prices for the last year, and this is manifesting itself in consumer spending and some weakening in same store retail sales.

Have a good weekend.

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Hey! Look What’s Getting Close To A 4-Year High

Joe Weisenthal — Sat, 04 Feb 2012 18:30:00 +0000

XHB, the homebuilder ETF, had another monster week, breaking out to a new multi-year high.

This uber-beaten down sector is close to surpassing levels from Spring 2008.

Remarkable.

SPDR S&P Homebuilders ETF

And just so you can see things more clearly, check out this one-year chart.

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With Pensions Like This, No Kidding Providence Rhode Island Faces ‘Bankruptcy By June’

Mike "Mish" Shedlock — Sat, 04 Feb 2012 14:07:00 +0000

Untenable pension promises made by corrupt politicians to corrupt unions in an unholy alliance is about to sink another city.

Please consider Providence is facing bankruptcy from WPRI:

Rhode Island’s capital city will be in bankruptcy by June if it doesn’t get help resolving its financial crisis.

That was the dire warning from Providence Mayor Angel Taveras during a Thursday morning news conference at City Hall. With five months left before the end of the fiscal year and the capital set to run out of cash by the start of summer, the city still faces a $22.5 million deficit in its budget for the current fiscal year, which ends June 30.

The budget shortfall was projected at $110 million last March, when Taveras declared a “category five” financial emergency in Providence. It was reduced after he negotiated new contracts with unions, laid off workers, cut spending and won increased state aid…

Taveras said the city’s retirees must accept reduced pension and health care benefits to save the city from financial ruin. A decree signed in 1991 by Mayor Buddy Cianci pushed the city’s pension liability “into the stratosphere” by giving annual cost-of-living increases of 5% and 6% to more than 600 retirees, he said.

Unions, Politicians to Blame

Check this out: The entire budget is $619 million, and the city has a shortfall of over $2 billion.

Taveras is barking up the wrong tree arguing “Our firefighters, police officers, teachers and taxpayers have all sacrificed in the last year and helped Providence avoid catastrophe“.

It is the firefighters, police officers, and teachers unions (and of course corrupt politicians willing to buy votes) that are responsible for this mess. The only group that can claim to have sacrificed is non-union taxpayers. However, much of the rest of Taveras’ comments ring true.

Absurd Benefits

This statement says it all “Fire Chief Gilbert McLaughlin, now receives an annual pension of $196,813 a year. He retired with an annual salary of $63,510. At the current rate of growth, McLaughlin’s pension will total roughly $796,871 [annually!] if he lives to the age of 100.

To double-check my $796,871 annually claim, I used this Compound Interest Calculator.

At 6% per year, it would take about 24 years to grow to a benefit of $196,813 a year to $796,882.97. Thus I conclude McLaughlin is 76 years old. If he lives another 10 years, his annual pension would be $352,462.11 based on an career ending salary of a mere $63,510.

With this kind of absurdity, it is foolish to attempt to resolve this mess outside of bankruptcy. Those pension contracts should be declared null and void.

Restoring Equity

I would like to see a bankruptcy judge reduce McLaughlin’s pension to the average of his last 10 years’ salary. Teachers and others on the low end of the benefit scale should be the hit the least. That would be reasonably equitable.

Spare me the sap about legal contacts and promises. Those contracts and pension benefits were bought with bribes and dishonesty with no one looking out for the taxpayer. Fraudulent, self-serving contracts with no one representing the taxpayer should not be legally enforceable (and indeed they weren’t for Central Falls).

More Cities, Major Cities Will Follow

Without even looking at the details, it’s easy to speculate East Providence, Woonsocket, and Pawtucket are going to follow Central Falls and Providence into the bankruptcy gutter.

Moreover, it’s only a matter of time before Oakland, Huston, LA, San Diego, Newark, Cincinnati, etc, go under. Bankruptcy is the only way to wipe out preposterous pension benefits, so expect to see more of them.

As with Detroit, Michigan (see Deal Reached to Prevent Michigan Takeover of Detroit; Really? No, Not Really; What’s Best for Bankrupt Detroit?) bankruptcy would be the best possible outcome for taxpayers.

Bankruptcy is the only way to shed absurd union contracts and pension benefits.

Thus, taxpayers should be rooting for Taveras to ask for concessions so big the unions say “no deal”. It is taxpayers’ best hope of settling the mess in one shot without devastating tax hikes.

Inquiring minds might also be interested in American Airlines Went Bankrupt in November; Are Taxpayers on the Hook for Pension Benefits? What is the Equitable Solution?

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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