Market Talk

It's just an extended pause. But we'll have to operate immediately.

Wall Street loves to come up with euphemisms for “crappy.” Remember Goldilocks? Back before the housing implosion, before the credit crisis, back when everybody really knew things were coming unglued but nobody wanted to admit it, the big theme was Goldilocks — not too hot, not too cold. The Street convinced itself that Ben Bernanke could glide the economy into a “soft landing.”

People actually believed that.

So today, as the economy teeters on the edge, talk of deflation and the Hindenburg is in the air, as even the bulls are having to concede that the right-hand side of the V in their V-shaped recovery has collapsed, the Street’s coming up with another batch of euphemisms, as our colleague Kristina Peterson writes in today’s Journal.

For a time the market was worried about the possibility of a “double dip” recession. But those worries were kept in check by advocates of a simple “soft patch” in the economy.

Now, even optimistic investors seem to be settling in for what they are calling an “extended pause” in the recovery. They worry than an economy on hold could keep the market trapped in its trading range or drag it down further, adding more losses to the benchmark indexes’ year-to-date declines.

Extended pause. You know, a coma’s an extended pause, when you think about it.

Lastly, one of the posters on Kristina’s article online linked (gratitously as it turns out, since it’s a link to his own article, but still, sort of interesting) to a blog post about how generational shifts are largely behind the shift in the economy.

The big fear among traders yesterday, Friday the 13th on your Gregorian calendar, wasn’t Jason Voorhees, it was the “Hindenburg Omen.” Steve and Tomi Kilgore penned a piece for today’s Journal that discusses the omen, the mathematician who created it, and what it might, or might not, mean for the stock market.

It’s a good read, although judging by some of the comments on the story on WSJ.com, some people are taking it a bit too seriously. But go read the whole thing yourself (subscription required, it’s behind the paywall.) At the least, you’ll get a sense of what’s preoccupying the market these days. It ain’t those “stellar” second-quarter earnings.

Forget about Friday the 13th. Many on Wall Street took to whispering about an even scarier phenomenon—the “Hindenburg Omen.”

The Omen, named after the famous German airship in 1937 that crashed in Lakehurst, N.J., is a technical indicator that foreshadows not just a bear market but a stock-market crash. Its creator, a blind mathematician named Jim Miekka, said his indicator is now predicting a market meltdown in September.

Wall Street has been abuzz about whether the Hindenburg Omen will come to bear, with some traders cautioning clients about the indicator and blogs pondering all the doom and gloom.

The tidbit I love is that a partner of Miekka’s coined the name – because “Titanic” was already taken. I have to admit, I hadn’t heard of the “Titanic Syndome” before, but here’s a post at Safehaven dated Oct. 22, 2007, that discusses both it and the Hindenburg Omen.

The all-time high for both the DJIA and S&P 500 was recorded on Oct. 9, 2007, incidentally. A few of the comments on WSJ.com asked how the Omen did during that time frame. Pretty good, right?

Now, even Steve’s article makes it clear the Omen isn’t a lock predictor; nothing is. All of these kinds of things are just people trying to uncover patterns that could point to one possible direction stocks might travel in the future. But it is a red flag. Plug it into your thinking, along with everything else you’re seeing out there, and make your own decisions.

(Photo: Wikimedia Commons)

Falling prices aren't the same as sale prices.

Remember that scene in the first “Die Hard” (and the best one (well, the only really good one, I mean, the others are passable, except for that fourth one, but really, the first is a top-rate action movie, the others are just rehashed leftovers,) where John McClane throws the dead terrorist out of the window and the body plops down on the hood of the police cruiser that’s passing by, and McClane leans out the window, already a dirty, bloody mess with a machine gun in his hands, and screams “Welcome to the party, pal!”

That was the first thing that came into my head when I saw this Phil Izzo story (and that probably says something about me, but let’s leave that for some other blog) hit the Tape.

It appears that Wall Street economists, by a two-to-one margin, now believe that deflation is a bigger threat than inflation. So, for all the jawboning the Fed’s been doing about inflation, a con game they are likely to maintain this afternoon, Wall Street’s not buying it anymore.

A Wall Street Journal survey found that by a two-to-one margin Wall Street economists see deflation as a bigger threat to the U.S. economy over the next three years than inflation.

“Deflation is dangerously close,” said David Resler of Nomura Securities, one of 53 economists surveyed by the Wall Street Journal. Among economists who answered the question, nearly two-thirds said that deflation poses the bigger risk to the economy over the next three years; the remainder said inflation is the bigger threat. That compares to an April survey, when the economists were split 50/50 over whether inflation or disinflation posed the bigger risk over the next year.

I honestly don’t have much new to say about this; well, anything actually. We’ve been banging the drum on this topic for a long time. It’s just sort of, well, satisfying to see Wall Street coming over to our way of thinking. Even if the thoughts themselves are frankly depressing and even frightening. But you’ve got to face up to reality before you can start dealing with the situation.

Listen, I know what you’re thinking. Utilities? You start falling asleep somewhere between the first t and the third i. But the utilities industry is a reflection of consumer and industrial demand for power, which in turn is a reflection of the relative economic strength of the nation. Given that, today’s Upshot column is actually quite an interesting look at what the electric companies are saying about their business, and what that says about the state of our economy.

From today’s Upshot:

Second-quarter earnings season has been strong overall, and very good for some sectors, such as financial and industrial companies. It hasn’t been as strong for a group that in many ways helps America go, and that’s utilities.

Utilities keep the lights on for the nation’s homes, factories and small businesses, and as such offer a particular insight into the state of the economy’s rebound. The image emerging from the utilities’ second quarter is of a patchwork recovery and generally cautious tone from the industry.

“Consumer confidence is low. Retail spending is low and many of the things that we look at and control, those decisions are telling us let’s be Midwest conservative, and that’s exactly what we intend to do,” said Michael Morris, chief executive at American Electric Power Co., during a conference call last week.

Ah-HEM!

So the Journal’s got a big, splashy story in the paper today, highlighting how some big-shot investors like Bill Gross are worried, seriously worried, like adjust your portfolio worried, about deflation. So I’m looking at this thing, and I’m, like, really? Really?

Now we’re all worried about deflation?

Look, you know your correspondents here at Market Talk have been warning you about the dangers of deflation long before Bill Gross. We’ve been working this story for more than a year. Deflation isn’t like a stock market selloff; it’s a slow motion dynamic, and it’s been building all this time. The scary thing is, too, that it hasn’t even fully lodged itself in the public mind yet.

“Deflation isn’t just a topic of intellectual curiosity, it’s happening,” the Journal quotes Gross, the “Bond King” who runs Pimco, as saying. “It’s an uncertain world that’s tipping toward deflation.”

These guys are buying Treasurys and corporate debt and dividend-paying stocks as a hedge against deflation, understanding how hard it will be for companies to generate profits if prices are falling across the board.

Deflation is the nightmare scenario of every central banker. It’s something that once it takes hold is apparently very hard to fight. Not that they won’t try, they most certainly will, and you can bet your debased dollar the Helicopter Ben will resort to the money drop before he lets demon deflation loose upon the land.

Listen, I’m not getting too deep into this this morning; for one thing, we’ve got another column to write for the paper. But, really, I just wanted to make the point that we were riding these rails long before Bill Gross hopped on board.

Today’s Upshot takes a look at buybacks, a once-again growing trend among companies looking for something to do with all that money they’ve suddenly got (what’s that you say? Invest in the business? Hire some new people? Ah, you beautiful dreamer.)

From The Upshot:

Whether it’s energy industry blue-chip Exxon Mobil Corp. or little known financial products seller Artio Global Investors Inc., more companies are ramping up their stock-repurchase activity.

It’s another outgrowth of the stellar profit growth corporate America is enjoying for the third quarter in a row. Higher profits have led to copious cash flows. But all that money isn’t making executives more confident about future prospects. Instead of investing in new markets or expanding existing businesses, many see stock buybacks as a better option for now.

“It’s a pretty easy decision,” Artio Global Chief Executive Richard Pell said on a conference call last week. “I buy back the stock this cheap—it’s accretive to [earnings per share] and existing people [who] hold the stock are basically benefiting from that.”

Toward the end, we also noted that having less shares outstanding helps boost earnings per share, which prompted a quick note from Legg Mason’s Michael Mauboussin. “I can’t resist pointing out that buybacks don’t automatically increase EPS,” he wrote. He then highlighted this paragraph from a paper he wrote back in 2006.

Whether a buyback program increases or decreases earnings per share is a function of the price/earnings multiple and either the company’s forgone after-tax interest income or the after-tax cost of new debt the company uses to finance the buyback. More concretely, when the inverse of the price/earnings multiple—often called the earnings yield—is higher than the after-tax interest rate, a buyback adds to earnings per share. When the earnings yield is less than the after-tax interest rate, a buyback reduces earnings per share. The relationship between the earnings yield and the after-tax interest rate has little or nothing to say about value.

In other words, it’s complicated.

It's beautiful, and if I had some money I'd buy it.

It’s a story we’re written about before, and we’ll probably write about again: corporate profits look good, and the corporate sector seems to be back on its feet, but so far at least it’s not helping the average American, who remains mired under stagnant wages, a weak jobs market, massive debt and a grim assessment of his future.

From today’s Upshot:

Second-quarter earnings, up 21% from a year ago so far this season, are heading to a three-quarter string of spectacular gains. But double-digit increases from companies including AT&T Inc., Coca-Cola Co., and Lockheed Martin Corp., are in sharp contrast to consumer worries.

The profit recovery isn’t something that consumers, coping with stagnant wages, a weak jobs market and flat to declining housing values, feel. And it shows in their mood and in recent retail spending declines.

“Without consumers on board, the economic recovery is looking dangerously vulnerable,” Capital Economics’ Paul Dales wrote Tuesday, after the latest dour reading on consumer confidence. July confidence slipped to 50.4, below the 51.9 from July 2008, indicating consumers are as worried about the economy and its prospects as they were as the recession took root. One consequence: consumers are saving more again. Personal savings rate in May increased to 4%, its highest level since September.

We’ve said this before, and it’s starting to get noticed in other quarters as well: the money that the federal government threw at the economy provided a brief sugar high, but not a lasting spark, and now that it’s fading, nothing is coming on the scene to take its place.

Continue reading…

The lousy jobs market is good for one group: staffing agencies. Big temp agencies are seeing strong demand for their services as companies, despite rising profits, remain reluctant to hire full-time staffers, as we note in today’s Upshot:

Despite rising profits, big businesses remain hesitant to hire permanent employees, a reluctance that is fueling demand and higher profits for the companies providing temporary staffing services.

Manpower, TrueBlue Inc. and Robert Half International reported second-quarter gains in their businesses as employers continue to prefer the flexibility that temporary workers provide while awaiting more tangible signs that the budding recovery won’t stall.

TrueBlue, a Tacoma, Wash., blue-collar temporary staffer that operates Labor Ready, Spartan Staffing and other staffing outfits, last week said profits more than doubled, aided by a 15% rise in revenue and an income tax benefit.

Chief Executive Steven Cooper said manufacturers are hiring more temps now than during similar points in prior economic recoveries. “It feels like they’re hiring back full shifts full of temps,” he said during an call with analysts.

Boy, there’s a money quote for you, huh?

Continue reading…

For today’s Upshot, we look at one of our favorite real-world indicators, the transports, in this particular case the trucking companies. Like most other industries, truckers have seen some measure of turnaround in their business. But like most industries, it’s come on cost cutting and slicing capacity. A good number of smaller, independents truckers have just sold their rigs and moved on.

This leaves truckers still reluctant, like most, to get too aggressive about expanding, and given the way the economic tea leaves are pointed, who can blame them?

From The Upshot:

Similar to airline and railroad companies, trucking firms are churning out improved earnings on the back of large cuts in capacity, an uptick in demand and better pricing.

J.B. Hunt Transport Services Inc. said second-quarter demand had “increased fairly dramatically,” and called evidence of the industry’s tighter capacity “quite pronounced.” Second-quarter revenue increased 22% from a year earlier, while operating income rose 34%, excluding an asset write-down last year. Average pricing, while still below year-ago levels, was up 2% from the first quarter, the company said.

Bob Costello, chief economist at the American Trucking Association said truckloads fell 24% from a peak in March 2008 to an April 2009 trough, while the number of trucks on the road fell 14%. Since then, loads have rebounded about 9%, he said, eliminating a good chunk of overhanging capacity.

Even as demand perks up, some truckers don’t seem to be in any hurry to add capacity, particularly as pricing, while improved, still wallows at low levels.

What happened to our customers?

The nation’s banks are certainly in a better place than they were a year ago. Varied and myriad government backstops have erased the threat of imminent collapse and given them breathing space to recapitalize themselves. There was even a nifty little stock-market rally to help things out. But one little nagging problem remains: the demand side of the supply-demand equation is still lacking.

From today’s Upshot column:

Amid signs of increased second-quarter demand among companies including airlines, trucking and heavy machinery, there’s at least one place where demand is a no-show so far—banks.

The reasons are manifold. Some corporations remain reluctant to invest heavily in new business because they’re uncertain the spring uptick will continue. Others are sitting on a veritable mountain of money as profits have soared. Meanwhile, consumers remain fixated on paying down debt, rather than adding more.

Wells Fargo & Co.’s total consumer loans were down about 2.6%, or almost $12 billion from the year-ago quarter. Commercial loans were down 14%, or $48 billion. Finance chief Howard Atkins said the bank “began to see signs” of increased loan demand in the second quarter from businesses and “to a lesser extent” consumers. Chief Executive John Stumpf said business clients’ use of credit lines was “relatively unchanged” from the first quarter and still at “historic lows.”

Other large banks are seeing the same. “As we look on the loan demand side, it continues to remain weak as the consumers continue to delever,” Bank of America Corp. Chief Executive Brian Moynihan said on a conference call last week. “There’s no loan demand, because there’s no demand for the [client's] products,” Mr. Moynihan said, referring to a dearth of commercial lending.