Market Talk

Fed tries to put its best foot forward in the latest Beige Book report, noting “continued growth in national economic activity,” while still acknowledging “widespread signs of a deceleration” compared to preceding periods. It’s a forty-three page report, so in an attempt to cut to the chase and distill the key message, we took an admittedly unscientific but hopefully insightful shortcut.

We counted how many times the report mentioned the word “weak” or other derivation (weakness, weaker, weakening, etc), and compared it to other recent BB reports.

In this latest report, the bank used “weak” or other derivative 65 times. That compares to 53 times in the July report and 45 in June. Obviously an uptick in “weakness,” but down from 84 mentions in March, and 94 in July of last year. On the precipice of recession in November 2007, the Beige Book mentioned weak etc 61 times.

Conversely, the Fed mentioned the word “improve” or some other derivation 54 times in today’s report. That’s down from 68 in July and way down from 107 mentions in June.

It’s no deep-dive into the nitty gritty, folks, but seems suggestive of the economy’s direction, at least.

Also interesting to note, the Fed increased its use of the adverb “quite” for added emphasis to some of its observations, as follows:

Demand for commercial real estate remained quite weak but showed signs of stabilization in
some areas.

Upward price pressures remained quite limited for most categories of final goods and services, despite higher prices for selected commodities such as grains and some industrial materials.

Most Districts reported little or no change from existing low levels of commercial and industrial lending, as businesses remained quite cautious about expansion plans.

A recent flurry of refinancing activity spurred increased demand for residential mortgages in the New York, Cleveland, Chicago, and Kansas City Districts, but new-purchase mortgage originations remained quite sluggish in general.

With builders holding off on new construction, inventories have gotten quite low,
though prices still seem to be drifting lower.

Think we’ve seen quite enough.

- Hewlett-Packard’s (HPQ) suit against former CEO Mark Hurd looks “very much like it was filed in a fit of passion after hearing that Hurd had signed on with Oracle,” Reuters blogger Felix Salmon says. “There’s no tactical or strategic rationale for this: it’s just petulance, really.”

- “Hurd’s knowledge of H-P’s server and data storage-systems business will undoubtedly come in handy at Oracle, which has been aggressively moving into that very space ever since its acquisition of Sun,” Digital Daily blogger John Paczkowski says. “In that sense, Hurd’s hiring is a real coup for Oracle. Who better to put the screws to a rival than a former CEO with a bone to pick?”

- There are currently 161 potential IPOs on file that are hoping to raise $56B. Staggering numbers but, as Josh Brown points out at The Reformed Broker, not necessarily as great as they appear. “Between LBO retreads and the previously bankrupt, it remains difficult to get excited about the initial public offering dealflow, robust as the pipeline seems to be in dollar terms on the surface.”

- Former OMB Director Peter Orszag makes his debut as a columnist for the New York Times by advocating an extension of the Bush-era tax cuts for two years for the middle class, and even for the upper class if that’s what’s needed to get a bill through Congress. “Higher taxes now would crimp consumer spending, further depressing the already inadequate demand.”

- The labor force had little to celebrate this Labor Day, Robert Reich says. Organized labor is down, and non-organzed labor is facing joblessness and underemployment. “Face it: The national economy isn’t escaping the gravitational pull of the Great Recession.”

- If the market has been overly bearish lately, paving the way for relief rallies and such, it’s not really showing. John Hussman notes the VIX, which remains in relatively placid territory. “It’s difficult to look at the evidence and conclude that investors are excessively bearish, much less terrified here.”

- FCIC hearings revealed how reliant Lehman was on daily, short-term funding to cover longer-term costs. “It was a recipe for disaster, a trailer park in search of a tornado,” Barry Ritholtz writes at The Big Picture.

- “The truth is that the trouble in housing is not, for the most part, a demand-side issue,” Ryan Avent writes. “The problem is the millions of homeowners stuck in houses they can’t afford to sell. These households represent a significant shadow supply of foreclosures-in-waiting. I agree that it would be silly for the administration to try to support housing prices by offering more goodies to potential homebuyers. But it doesn’t follow that letting prices go their own way will magically get housing markets moving again.”

- “Newspaper advertising revenues are on track this year to dive to a 25-year low of approximately $26.5 billion, or 47% of the record $49.4 billon in sales achieved by the industry as recently as 2005,” Alan Mutter notes.

- What’s up with Google’s logo today?

Gluskin Sheff’s David Rosenberg rips apart the Obama administration’s latest “emerging program to jolt the economic recovery from its stall,” as the NY Times characterizes it (don’t you dare call it stimulus.) I can’t recall seeing Rosenberg this overly political before; usually he keeps to purely economic themes. It’s safe to say he isn’t a fan of the latest ideas.

I’d argue that the Bush tax cuts didn’t have nearly as much to do with the Aughts rally as the Fed’s low interest rates did, and the booming business in unregulated derivatives, but that’s a quibble.

My great problem with the Obama administration is that the President didn’t go full-bore at the economy the day he got into office. Sure, he pushed the $800 billion stimulus program. But while the price tag was massive, the effort itself was lazy. About the easiest thing in the world for a government to do is to throw money at a problem. I’d rather have seen some creative solutions. Something, anything. Instead, we got a rush job with the stimulus program, and then the White House moved on to more “important” matters, like healthcare.

Anyhow, the latest raft of proposals, which add up to a second stimulus program no matter how they are characterized, are likely to have the same temporary, sugar-rush effect of the first program, if they have any effect at all. As Rosenberg points out, the biggest problem for corporations isn’t exactly a lack of cash.

Aren’t businesses sitting on a record cash hoard right now? In other words, “money” is not an impediment towards business investment growth, say, as much as the regulatory policy backdrop.

This is again one in a long list of quick fixes aimed at boosting domestic spending and is likely to have muted impact, in our view. Even if it does have an impact, it will merely bring forward spending that would have occurred in any event and merely distort the quarterly flow of GDP data much like ‘cash for clunkers’ and the housing tax credits did for the household sector.

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- Considering the “uncomfortably uncertain” mood heading into this morning’s jobs data, the report wasn’t that bad. “The overall picture is of a labor market that continues to chug along in the right direction, albeit far too slowly,” Ryan Avent notes. “The pace of employment recovery implies several long, hard years ahead for American workers. But given the mood on markets and around dinner tables lately, one has to appreciate the continuation of the upward trend.”

- Stocks popped Friday on the jobs data, but Capital Gains and Games blogger Andrew Samwick says the report merely represents “more of the same” for the labor market. “There is nothing in here that merits joy,” he writes. “Expect the spinmeisters to focus on the rise in private sector employment (up 763,000 since the low in December 2009) and the upward revisions (to smaller job losses) from the two prior months.”

- The positive vibe (at least for stocks) generated from nonfarm payrolls data can’t be sitting well with former labor secretary Robert Reich. “The Great Jobs Depression continues to worsen,” Reich writes on his blog. “The last time we saw anything on this scale was in the 1930s…The practical choice we face is this: Either major action to reverse the jobs emergency or years of intolerably high unemployment coupled with demagoguery and scapegoating.”

- August jobs report offers a “small sigh of relief,” but the big takeaway is the labor market remains essentially flat, Reuters blogger Felix Salmon says. “Flat, then, is the new up — which only goes to demonstrate just how worried the markets are about a double-dip recession,” he writes. “We’re not remotely in full-bore recovery mode yet.”

- August auto sales, released earlier this week, were portrayed as worst sales in 27 years. But that’s not best way to interpret the data, James Hamilton writes at Econbrowser. “The story for autos remains pretty much what it has been for some time — we’ve bounced off the bottom, but remain stuck at a point far below what would normally be expected. Double dip? Not here, not yet. Disappointingly sluggish growth? Very much so.”

- “The outlook for subpar growth and weak job creation — although superior to a new recession — is a real and present danger, and today’s employment report doesn’t offer much reason to dismiss the danger,” James Picerno writes at The Capital Spectator. “If the economy continues to struggle, eventually the risk of a recession will become more than a low-probability prediction.”

- Mark Thoma uses the central valley in California as a metaphor for economic recovery. “It’s narrow east to west, but very long north to south,” he notes at Economist’s View. “We went down into the valley as we went into the recession, and the question for me has always been whether we are heading east to west so that we will climb out of the valley relatively quickly, or north to south as we trudge along at the bottom of the valley for considerable time…The fact that we’ve had essentially no growth for a year now, and no hint of change any time soon, makes the north to south fear very real.”

- Barnes & Noble’s (BKS) battle with activist investor Ron Burkle is symbolic of a “big fish swallowing a small fish only to be itself swallowed by an even bigger one,” Josh Brown writes at The Reformed Broker. “Founder Len Riggio built the largest bookseller on earth by putting thousands of mom & pops under his sword across the country,” Brown notes. “Now he himself is facing his own possible destruction from the twin threats of shareholder activist Ron Burkle and the disintermediation of the digital age.”

- With Dell pulling out of the 3Par (PAR) bidding war, Robert Cyran wonders if Dell shareholders are on Xanax. Dell investors “displayed neither much concern about overpayment nor relief about the deal being dropped,” he says. “After a decade of scandals, missed opportunities and dismal performance, they may have stopped caring.”

- Just your typical brawl at the US Open.

I've been here a year, Jack; when do you think the jobs are coming?

Here’s your takeaway from the jobs report: The jobs market isn’t getting any worse. It isn’t getting any better either.

Nothing much changed in August for the nation’s work force, and nothing much has changed in the past year either. The Bureau of Labor Statistics reported 54,000 people lost their jobs in August, with 114,000 temporary Census Bureau workers coming to the end of that gig, while the private sector added 67,000 jobs.

Now, the stock market is reacting because the numbers were the proverbial “better than expected.” Consensus was for an overall slide of 110,000, with private sector adding 28,000 jobs. That’s all the market cares about, and seeing as it’s in rally mode anyway, it’s set to extend that rally.

This is such a middling report, it can probably be spun any way you’d want to spin it, so it’s best to try and look at the biggest picture possible. I’ll frame it this way: we’re eight months into 2010, and the economy has added a net total of 723,000 jobs. Job growth rose the first five months of the year, and has fallen the past three months. That averages out to 90,000 jobs a month, which is not even enough to keep up with population growth, forget starting to whittle down that 15 million-strong sea of unemployed people out there.

So this report is nothing to get all hot and bothered over, even though the stock market undoubtedly will.

There were some positives, let’s not kid ourselves. The revisions to July and June narrowed the losses in those months, which is a good thing. The number of people out of work for more than six months slipped to 42% from 45%; still a distressingly high number, but still a slight improvement.

However, the official unemployment rate edged up to 9.6%, and the broadest measure of unemployment, the U-6, rose to 16.7%. A year ago this time, the official rate was at 9.7% and the U-6 was at 16.8%, and haven’t changed dramatically during the entire time, so we’ve gone essentially nowhere in a year. If you believe the recession ended in July 2009, as so many do, then you’re talking about a year that was supposed to be a year of recovery for the economy. The jobs market didn’t get that memo.

“It will take many years before ‘full employment’ is re-attained,” Steven Wood of Insight Economics wrote. In August, there were 14.7M people unemployed (according to this table; in the actual release, BLS says it’s 14.9M); in August of 2009, there were 14.8M people unemployed.

- Soaring currency trading volume won’t have a happy ending. “It is a Fool’s Goldrush and will end horribly for most,” Josh Brown writes at The Reformed Broker. “The good news is, you can take the cautionary tales of the stock game, the mortgage game and the real estate game and figure out how you want to be positioned when the inevitable boom-bust-hatred cycle shifts into high gear.”

- Former Lehman CEO Dick Fuld was given a “surprisingly sympathetic ear” from the FCIC at yesterday’s hearing. “This is a deeply disturbing development,” Barry Ritholtz says at The Big Picture. “It leads to the unfortunate suspicion that the FCIC does not have the slightest clue as to the causes of the housing collapse, recession and market crash…I now fear the FCIC report is going to be an ideological farce.”

- It’s becoming obvious there is “no magic bullet” to immediately speed up the recovery, Harvard economist Kenneth Rogoff writes. “It took more than a decade to dig today’s hole, and climbing out of it will take a while, too,” he says. “Americans will have to be patient for many years as the financial sector regains its health and the economy climbs slowly out of its hole.”

- Investor demand for US Treasuries has waned over the last few sessions after some better-than-expected economic reports. But the “big test” comes tomorrow morning with the August nonfarm payroll report. “A smaller loss of jobs could stoke more optimism about the economy and raise more questions about how much lower interest rates can or should go in the near term,” LA Times’ Tom Petruno says. “But a bigger loss could re-energize bond bulls.”

- Yesterday was a 90% upside day, “the 13th such so-called panic-buying day since the April 26 high,” Jeff Cooper notes at Minyanville. Meanwhile, there’s been 14 panic-selling days during the same period, he says. “This kind of volatility is a market in disarray. It’s not a sign of a healthy market,” he says. “Risk runs high when frenzy runs deep.”

- Slate’s James Ledbetter wonders why people consistently underestimate Netflix (NFLX). “There is one company that has been more consistently underestimated than any other, whose innovations, growth, and, indeed, survival have been dismissed and denied for nearly all its corporate life. That’s Netflix,” he says. But “while its critics were flailing away, the company has continued to grow steadily and spread its influence well beyond the red envelope.”

- AOL renewing and expanding its search agreement with Google (GOOG) was a “surprisingly quick and even stealthy move,” Kara Swisher reports at All Things D.

- “Summertime, and the living is easy…for many, too easy. This July was the worst on record for youth employment: Less than half of all 16- to 24-year-olds had a job,” WSJ’s Heard on the Street says. “Meanwhile, at the other end of the spectrum, more than 40% of over-55s have work or are looking for it, the highest share since JFK was in office.”

- Housing prices still need to drop by 10% in order for the market to correct itself, Barry Ritholtz tells Tech Ticker.

- For all the runners out there, WSJ’s Nick Wingfield reviews three running apps.

Remember the famous Mexican stand-off at the end of the Sergio Leone Spaghetti Western “The Good, The Bad and The Ugly”? Three cowboys stand in a graveyard, each waiting for one of the others to draw their gun, to make the first move, each trying to outsmart, and maybe kill, the other two and make off with the gold.

That’s kind of what we’ve got going on in the economy right now (excepting for the killing part,)  between consumers, businesses and the federal government. It’s a fight to see who’s going to blink first. But the blink in this metaphor represents who’s going to start spending money, and save the economy. Throw the Federal Reserve in there, too for good measure. They’re in this stand-off as well.

Don’t get me wrong. The United States is a $14.5 trillion economy. Money is being spent. But not the kind of money that will spark real economic expansion, which is what we need to start creating jobs for the 15 million unemployed Americans out there, and juice wage growth for the rest of us. Not just Wal-Mart greeter jobs, either; good jobs that pay good wages that create a stable and growing middle class. Nobody’s spending that kind of money.

Consumers aren’t spending money, because they are — justly so — worried about their jobs, their salaries, their futures. Businesses aren’t hiring because they are — justly so as well — worried about demand levels, their inventories and their cost structures. The feds and the Fed have both spent fantastic sums already, and while there is some urge to spend more, doing so may carry heavy political as well as credibility risks. So everybody’s waiting for somebody else to make the first move.

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- Cisco (CSCO) reportedly makes an offer to acquire Skype before it completes its IPO, Michael Arrington reports at TechCrunch. He cites one of his “more reliable sources,” but hasn’t been able to confirm rumor. “If true this would be one very big acquisition,” Arrington says, as Skype’s hoping for $5B valuation. “Presumably Cisco would have to bid in that range to make it interesting.” Additionally, he notes Google (GOOG) was considering a bid, but antitrust concerns nixed that plan.

- Intel’s (INTC) deal to buy Infineon’s wireless business for about $1.4B “gives Intel a strong foothold in the market for smartphone chips, netting it a customer list that includes the likes of Research In Motion (RIMM), Samsung, Nokia (NOK) and Apple (AAPL),” Digital Daily blogger John Paczkowski says. “The irony, of course, is that Intel was in something close to this position four years ago, but gave it up by selling off its mobile chip business to Marvell.”

- The answer to a true housing recovery is simple — lower prices, the Pragmatic Capitalism blog says. “It should be plain as day at this juncture that the government cannot fix the housing market with their incessant fidgeting,” blog notes. “The market needs to correct further before reaching a sustainable bottom.”

- Analyst community has turned more bearish than usual, Bloomberg reports. But “as we have noted so many times previously, following the Wall Street crowd of analysts is rarely the way to make money,” Barry Ritholtz writes at The Big Picture. “Ultimately, excess pessimism amongst the analyst crowd may be a bullish contrary signal,” he says. “It should make dedicated bears nervous.”

- Fed Chairman Bernanke has repeatedly overestimated the strength of the recovery, so what’s to say he wasn’t being overly optimistic in last week’s speech, Mark Thoma ponders. “The Fed should drop its relatively rosy forecast for the recovery and take more account of the downside risks.”

- Former labor secretary Robert Reich argues Fed can’t save economy by making money cheaper than it already is. “The sad reality is cheaper money won’t work,” he says on his blog, as individuals still face huge debt loads and small businesses aren’t borrowing because they’re afraid to expand in this uncertain environment. “That leaves large corporations,” Reich adds. “They’ll be happy to borrow more at even lower rates than now…But this big-business borrowing won’t create new jobs.”

- “The bottom line for housing is that the bottom will be long — perhaps very long — and bumpy,” John Curran writes at Time’s Curious Capitalist blog. “What’s more, we haven’t yet seen the legions of Baby Boomers who are planning to unload their McMansions in favor of some cute bungalow by the beach. They, of course, are just waiting for the market to improve.”

- Obama administration says it’s too early to say whether homebuyer tax credit will be revived, but Calculated Risk blogger Bill McBride says that’s a discussion that shouldn’t even be taking place. “The problem in housing is there is too much supply,” he says. “Incentivizing people to buy existing homes just shuffles households around — it does NOT reduce the overall supply unless the buyer is moving out of their parent’s basement.”

- Minyanville’s Todd Harrison still sees S&P 500 headed back down to 860 at some point, but it won’t happen in a straight line. “I still believe we have years to go to flush the system and set a stable foundation for future growth,” he says. “I’m just open-minded that a rally (such as we saw Friday) could litter the landscape with false hope and empty promises before the cumulative comeuppance comes home to roost.”

- WSJ’s Ben Levisohn reports on the diminishing value of the P/E ratio.

- Bernanke essentially admitted the economy looks nothing like the growth he was expecting six months ago. “But he argued that 2011 will be better, because…well, it was hard to see exactly why,” Paul Krugman writes at Conscience of a Liberal. “He offered no major drivers of growth…So: I guess this speech marked a small step toward QE2 and all that. But mainly the message was that just around the corner, there’s a rainbow in the sky.”

- Big surprise from Bernanke’s speech? He said “deflation” on six separate occasions, Stephen Gandel notes at Time’s Curious Capitalist blog. “Clearly, Bernanke believes the chances of prices falling is a credible threat to the economy,” he says, although noting the Fed chairman didn’t propose any new strategies to fight deflation. “So again, Bernanke is making the case that deflation is not a problem he is worried about.”

- Intel (INTC) cutting its 3Q revenue outlook gets overshadowed by Bernanke’s speech, but don’t discount this major development, warns the Pragmatic Capitalism blogger. “We could be at a crucial turning point where the economy is slowing substantially and analysts estimates appear high,” blog says. “If Intel is any early indication…we are likely to see more warnings and a lot of analyst cuts in the coming months,” which will put pressure on markets.

- Turns out Wall Street analysts predicted Intel’s slashed outlook long before the company finally came clean. In recent weeks, Barron’s Tech Trader Daily blogger Eric Savitz notes JMP Securities, Roth Capital, Bernstein Research, BMO Capital, Barclays and Baird have all slashed estimates on Intel. Savitz ponders: “If they all could see this coming, what took Intel so long to admit there was a problem with its previous guidance?”

- Reuters blogger Felix Salmon calls sluggish 2Q GDP the “best kind of bad news,” as imports surged 32% last quarter, overshadowing 9.1% gain in exports. Relatively healthy exports and strong imports are signs that there’s still plenty of demand.

- GDP downward revision to 1.6% in 2Q, from 2.4%, is bad, but better than economists were expecting. “The revisions can be chalked up to the anticipated factors,” Ryan Avent writes at The Economist’s Free Exchange blog. “Private inventory investment and exports were lower than expected, while imports, which count as a negative to GDP, came in higher. The main bright spot in the report is a slight upward revision to personal consumption expenditures.”

- The bidding bonanza between Dell and Hewlett-Packard (HPQ) over 3Par (PAR) has many market observers wondering what’s the big deal with this previously obscure company. It’s bringing back memories of the “crazed acquisitive days of the dot-com boom,” FT’s Alphaville notes. “Who needs rationality when desperation and blind optimism conspire so well?”

- And as the bidding war between Dell and H-P stays red hot, “the rapid-fire pace could continue,” Brian Caulfield writes on a Forbes blog. “Both HP and Dell need 3Par. Dell needs to expand its presence in the corporate data centers, where it has a strong lineup of server offerings. H-P, meanwhile, already has a storage business, and is eager to grow it.”

- Corporate America couldn’t care less what Bernanke said today, Miller Tabak’s Peter Boockvar says. “They know that interest rates are already at historic lows and the average business person, whether for a big company or small knows that the cost of money at this point is not a factor in the decision of whether to expand/hire or not,” he says. “From the perspective of the consumer, they are only interested in paying down debt and saving and if anything, more ‘easing’ by the Fed just makes saving that much more difficult.”

- It’s US Open season, baby! WSJ profiles one of my favorites — New York’s own James Blake. He’s been so frustrating to watch throughout the years, but here’s to hoping the low-ranked wildcard can turn some heads at this year’s tournament.

This market needs its head examined.

What I’m about to relate is actually beyond anecdotal, because it’s an anecdote the source of which and the majority of the details of which I can’t even remember. But today’s stock market, the rally, the reaction to a literal cavalcade of bad news, reminded me of this quote I’d heard a few years ago.

“Why isn’t the Dow down 1000 points?” That was the reaction of one analyst back in 2008, before Lehman, before AIG, before the panic set in and everybody threw in the towel. It was a day like this, where the news was uniformly bad, but the market was holding up surprisingly well. It made no sense whatsoever. Now, I read that in a market comment from one of the folks I follow regularly, but I can’t remember offhand which one it was; either Art Cashin, or Joan McCullough, maybe it was even Barry Ritholtz. I can’t remember. But I remember the line.

It came back to me today, because this is one of the flat-out just silliest stock sessions I’ve seen in a couple of years. The news is uniformly bad: GDP was revised down sharply. Intel cut its revenue outlook. Boeing delayed the Dreamliner, again. Consumer confidence fell. The ECRI’s weekly leading index remains deep in contraction territory. Ben Bernanke said the Fed’s prepared to go “all in,” but he doesn’t think the Fed will need to go all in. In other words, he said nothing he hasn’t said before.

The market rallied off all that, in one of the screwiest rallies I’ve seen since before the recession started. When you see trading like this, the market rallying sharply on, forget for no good reason, rallying against very good bad reasons, it’s a sign that the “market,” the collective group of traders, speculators, investors, brokers, has lost its collective mind. When you see trading like this, it’s a bad sign, and it makes me think that September, which is historically the market’s worst month, is going to especially bad this time around.

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