First off, sorry for the recent lack of updates to the three people that read this every now and then. Life caught up and I've been too busy with more serious (read: no fun) work projects to bother writing a good, blog-worthy article. Some interesting events have been happening over the past two weeks, mainly involving GM filing for bankruptcy protection, the continued spike in Treasury yields, and the feeding frenzy in commodity markets. However, I'm not talking about that today because the most anticipated yearly event in every videogame nerd's calendar, E3, started this week! Rejoice!
I do not have any particular bias towards Microsoft, as in I do not own any stake in the company. While I do own an Xbox 360, I have never participated in any acts of Xbox fanboyism. Having said that, and having watched both the Sony and Nintendo press conferences closely, I really think that Microsoft is making the other two members of the videogame Big Three look like total n00bs. (Yeah, I went there.)
Early during their press conference on Monday, Microsoft revealed a brand-new motion sensing control system that has been garnering more attention from international news sources than all other news releases coming out of E3 put together. Codenamed Project Natal, the system is a “fully hands-free control system that will use face recognition and motion sensors to allow users to play games." (Watch BBC Project Natal coverage here.)
Natal will be compatible with the current generation Xbox 360 and will be fully integrated into the system’s online component, Xbox Live. According to respected insider news sources (i.e. nerd blogs), Microsoft is planning to extend the life cycle of the 360 through the use of technology that allows them to expand on current generation hardware without the need to release an updated, more expensive system such as the oft-rumored Xbox 720. The version of Natal demoed at E3, which Microsoft confirmed is still in early stages of development, already looks far more advanced than the current king of motion sensing technology, the Nintendo Wii.
For instance, Natal does not require an input device a-la Wiimote, it maps every inch of the players body and reads every movement without the need for a controller. Because of this, Natal allows for multiple input sources to be read simultaneously. If a player delivers a punch and a kick at the same time, Natal registers both. This is one area where the Nintendo Wii is severely limited, as it only allows for a single input per Wiimote. Natal also integrates voice and image recognition in real-time. During a video showcased on Monday, a young woman interacts with an AI personality named “Milo” who replies to voice cues in an eerily realistic fashion. Near the end you can see the woman’s reflection on a pond of water being rendered in real-time through Natal. Microsoft claims that the voice recognition software is going to be advanced enough to detect changes in a person’s tone and mood, and react accordingly. Ambitious, yes, but definitely promising.
Natal wasn’t the only sign that Microsoft is aiming for total living room dominance by next year. In an effort to improve and expand on the growing success and user base of Xbox Live, Microsoft will be adding integrated Twitter, Facebook, Last.fm, and BSkyB connectivity to their service. According to a press release, the Live network will pull in status updates, photos and friend lists from Twitter and Facebook. Users will have the option to display tweets to their Xbox friends, while Facebook Connect will “allow players to post game footage, high scores and achievements directly to their profiles.” (source: TechTicker)
Last.fm will offer free streaming radio to Gold account members, while Silver members will likely have to pay a fee.
Integration with BSkyB, the UK-based broadcaster, will allow UK users to stream on-demand and live TV shows and movies much in the same way that US users have been doing since Netflix was integrated into Live some three months ago.
In addition, Microsoft plans to expand the Xbox’s Netflix service this fall by improving network connectivity and adding features such as a full browsable database and the ability for user to add movies and TV shows to their queues directly from their Xbox.
The big announcements from Microsoft did not stop there, either. In a separate, smaller press luncheon, Microsoft revealed plans for Games on Demand, a service that will allow games to be bought from Xbox Live for direct download onto the system’s hard drive. The service is expected to begin in August with 30 games with more added on a regular basis. Even though the announcement was swallowed up in the media frenzy following the Natal demo, it was big enough to cause shares of GameStop to plummet 6.6% in Tuesday trading, and with good reason. If Games on Demand takes off as a viable and accessible digital distribution medium for games along the same vein as iTunes, it could take a substantial chunk out of the brick and mortar videogame retail business.
On the subject of Sony and Nintendo, I have to admit I was a little underwhelmed by both their press conferences.
The Sony conference was typical E3 fare featuring the announcement of big-name exclusive titles such as God of War 3 and the new Team Ico game, The Last Guardian. The lack of a PS3 price drop was somewhat surprising considering that Sony has been hinting towards a cheaper PS3 for some months, and the unveiling of the PSP Go was met with mixed reactions. In addition, Sony showcased its own take on motion sensing technology, which uses both a camera (the Playstation Eye) and a controller setup very reminiscent of the Wiimote. While interesting in theory, the setup looked awkward and outdated coming a day after the Natal demo.
As for Nintendo, their conference was met with confused reactions from journalists who claimed to feel like they accidentally fell through a wormhole to last year's E3. On display were the new updated WiiSports and WiiFit, a sequel to Super Mario Galaxy (shocker), and a new Super Mario Bros. game that looked like a straight port from the Nintendo DS version with added support for four players. The most exciting (almost exciting enough to make up for an otherwise meh conference) announcement was the announcement of a Metroid game under development by Team Ninja.
So there you have it folks! That's my take on Microsoft and the Big Three from E3 (no pun intended) so far. Stay tuned for more later.
-C
Tuesday, June 2, 2009
Friday, May 15, 2009
A Sobering Dose of Realism
Friday is finally here, bringing closure to a week of topsy-turvy trading and mixed (if not somewhat irrational) reactions to fresh economic data releases. Early morning data was once again on the negative side, and it seems like Wall Street might have caught a case of uncertainty fever.
Initial jobless claims were up 637,000 last week from a previously revised figure of 605,000, prompting fears that the worst is not over yet for the labor market. The 4-week moving average sat at 630,500, an increase of 6,000 from the previous week’s revised average of 624,500. On top of that, the unemployment rate is set to spike this summer due in large part to the combined effect of Chrysler plant closings and GM dealership shutdowns. Earlier this week the markets reacted positively to news that the economy had shed only a half a million jobs. However it seems that economists and investors are now starting to realize that bad news are bad news, even when they’re considered to be “less bad.” On a side note, is there really such a thing as “less bad”? To me that would be like saying that someone is only “a little bit pregnant.” Anyways, moving on…
According to the Cleveland Fed, the median Consumer Price Index rose 0.2% in April. The 16% trimmed-mean Consumer Price Index increased 0.1%, and the CPI less food and energy rose 0.3% on a seasonally adjusted basis. In other words, prices are up but wages remained flat. Aggressive Fed action might have staved off a hyperinflation scenario, but the Treasury’s printing press is still cranking out dollars like it were candy. For the rest of us this means that garden-variety inflation is not quite out of the cards yet.
Industrial production decreased 0.5% in April according to Federal Reserve statistics. This is a slight improvement over the 1.7% drop seen in March, and I dare bet that this will serve as nothing more than fuel for the bulls’ “green shoots” chorus. However, if you look closer you will see that the 1.2% improvement is actually a 12.5% decrease from the same period last year. The rate of decline might be slowing down, but how exactly is a substantial year-over-year drop considered good?
Click to enlarge:
On a positive note, the Index of Consumer Sentiment was up 65.1 in the April survey from 57.3 in March: a 7.8-point gain. More importantly, the index increased from the 62.6 reading in April of last year, marking the first positive year-to-year change since mid-2007. No doubt this had a lot to do with the approximate $70 billion that came in the form of government transfers and lowered tax payments. The same Reuters/University of Michigan survey showed that four out of every ten consumers thought the policies put in place by the government would be effective in improving their own financial situation. The outlook may still be grim, but at least some Americans are feeling “less bad” about it. (Sorry, I couldn’t help it.)
It is inevitable that a recovery will eventually happen, especially considering the Fed’s aggressive quantitative and credit easing maneuvers. Yet realistically speaking, there will not be a return to pre-credit bubble burst USA; wealth destruction has taken place on too big of a scale. The government is essentially broke and there is simply no sustainable way to maintain debt-fueled growth like we have been doing for the past two decades. The US will still be a major player much in the same way that the UK remained a major player after the decline of British Empire dominance in the 19th century. Having said that, the future of the world is shaping up to be much different from what we’ve seen in the 20th century, and it is unlikely that the US will remain the world economic leader for much longer.
The balance of power is shifting. Growth is in China and other Asian countries, and that is where the real wealth will begin to consolidate over the coming years. There’s no telling how soon it will happen but the financial crisis has brought about a fundamental shift in the way the rest of the world looks at the US and the US dollar. Some economists, the ‘realists’ if you may, agree that the status of the US dollar as the world’s reserve currency will begin to wane after the recession unwinds and real global recovery begins. Some are betting on the Chinese yuan as the most obvious candidate to replace the dollar, others believe that a redesign of the so-called IMF special drawing rights is a likelier scenario. Regardless of what comes next, the era of King Dollar is drawing to a close and it is coming faster than some expect.
In a sign of things to come, Temasek Holdings, a Singapore state-owned fund, sold today its 3.8% stake in Bank of America for about $1.3 billion, at a loss of about $4.4 billion. “The belief now is that the world is not so American-centric anymore”, said a Temasek economist. You have to wonder how seriously they must be taking that belief to be willing to incur a $4.4 billion loss. Anybody else see the irony in the name Bank of America yet?
The latest WSJ economist survey predicts that the recession will be over by year-end, and in this I actually agree. I still disagree with their target date of August, but I do believe that the general macroeconomic environment will bottom out sometime near the end of the year. Likewise I also disagree with their absurdly optimistic view that there will be a return to booming American business growth like we’ve been enjoying since the late 1980s. Things will taper off and there will be a return to positive growth, yes, but the era of big-money party time has reached the clearing at the end of its path. Say true, say thankya.
-Carlos J.
Initial jobless claims were up 637,000 last week from a previously revised figure of 605,000, prompting fears that the worst is not over yet for the labor market. The 4-week moving average sat at 630,500, an increase of 6,000 from the previous week’s revised average of 624,500. On top of that, the unemployment rate is set to spike this summer due in large part to the combined effect of Chrysler plant closings and GM dealership shutdowns. Earlier this week the markets reacted positively to news that the economy had shed only a half a million jobs. However it seems that economists and investors are now starting to realize that bad news are bad news, even when they’re considered to be “less bad.” On a side note, is there really such a thing as “less bad”? To me that would be like saying that someone is only “a little bit pregnant.” Anyways, moving on…
According to the Cleveland Fed, the median Consumer Price Index rose 0.2% in April. The 16% trimmed-mean Consumer Price Index increased 0.1%, and the CPI less food and energy rose 0.3% on a seasonally adjusted basis. In other words, prices are up but wages remained flat. Aggressive Fed action might have staved off a hyperinflation scenario, but the Treasury’s printing press is still cranking out dollars like it were candy. For the rest of us this means that garden-variety inflation is not quite out of the cards yet.
Industrial production decreased 0.5% in April according to Federal Reserve statistics. This is a slight improvement over the 1.7% drop seen in March, and I dare bet that this will serve as nothing more than fuel for the bulls’ “green shoots” chorus. However, if you look closer you will see that the 1.2% improvement is actually a 12.5% decrease from the same period last year. The rate of decline might be slowing down, but how exactly is a substantial year-over-year drop considered good?
Click to enlarge:
On a positive note, the Index of Consumer Sentiment was up 65.1 in the April survey from 57.3 in March: a 7.8-point gain. More importantly, the index increased from the 62.6 reading in April of last year, marking the first positive year-to-year change since mid-2007. No doubt this had a lot to do with the approximate $70 billion that came in the form of government transfers and lowered tax payments. The same Reuters/University of Michigan survey showed that four out of every ten consumers thought the policies put in place by the government would be effective in improving their own financial situation. The outlook may still be grim, but at least some Americans are feeling “less bad” about it. (Sorry, I couldn’t help it.)
It is inevitable that a recovery will eventually happen, especially considering the Fed’s aggressive quantitative and credit easing maneuvers. Yet realistically speaking, there will not be a return to pre-credit bubble burst USA; wealth destruction has taken place on too big of a scale. The government is essentially broke and there is simply no sustainable way to maintain debt-fueled growth like we have been doing for the past two decades. The US will still be a major player much in the same way that the UK remained a major player after the decline of British Empire dominance in the 19th century. Having said that, the future of the world is shaping up to be much different from what we’ve seen in the 20th century, and it is unlikely that the US will remain the world economic leader for much longer.
The balance of power is shifting. Growth is in China and other Asian countries, and that is where the real wealth will begin to consolidate over the coming years. There’s no telling how soon it will happen but the financial crisis has brought about a fundamental shift in the way the rest of the world looks at the US and the US dollar. Some economists, the ‘realists’ if you may, agree that the status of the US dollar as the world’s reserve currency will begin to wane after the recession unwinds and real global recovery begins. Some are betting on the Chinese yuan as the most obvious candidate to replace the dollar, others believe that a redesign of the so-called IMF special drawing rights is a likelier scenario. Regardless of what comes next, the era of King Dollar is drawing to a close and it is coming faster than some expect.
In a sign of things to come, Temasek Holdings, a Singapore state-owned fund, sold today its 3.8% stake in Bank of America for about $1.3 billion, at a loss of about $4.4 billion. “The belief now is that the world is not so American-centric anymore”, said a Temasek economist. You have to wonder how seriously they must be taking that belief to be willing to incur a $4.4 billion loss. Anybody else see the irony in the name Bank of America yet?
The latest WSJ economist survey predicts that the recession will be over by year-end, and in this I actually agree. I still disagree with their target date of August, but I do believe that the general macroeconomic environment will bottom out sometime near the end of the year. Likewise I also disagree with their absurdly optimistic view that there will be a return to booming American business growth like we’ve been enjoying since the late 1980s. Things will taper off and there will be a return to positive growth, yes, but the era of big-money party time has reached the clearing at the end of its path. Say true, say thankya.
-Carlos J.
Thursday, May 14, 2009
Looking Forward: Healthcare
Today’s announcement by the Obama administration that they are looking to bring a comprehensive healthcare overhaul bill to vote through the House as soon as July 31st has been garnering a lot of attention to the sector. Wall Street has recently spurred an industry-wide selloff on worries that the plan could undermine the private health care market and therefore hurt profits, but now some investors are betting that the selloff was a knee-jerk response, and that healthcare could be poised to make a comeback.
First, let’s put things into perspective:
The table above (rightfully credited to Bespoke Investment Group) shows the S&P 500 healthcare sector cumulative advance/decline line. The sector bottomed out in 1994 following fears that the Clinton Health Plan would nationalize health care, but since then has bounced back quite nicely. Fast-forwarding to today, investors are now starting to believe that the markets are overreacting in a similar fashion to Obama’s proposed healthcare reform. If anything, the administration’s plans might actually stimulate the industry, not stifle it.
Recent figures show that total US healthcare expenditures are sitting around $2.39 trillion, and are expected to increase to $2.72 trillion by 2010, with annual increases averaging about 7% for the next 10 years. In 2008, federal spending on Medicaid and Medicare accounted for over 21.9% of all federal government expenditures.
Medicare, which currently provides coverage to 44.8 million American seniors, is expected to grow to about 78 million by 2030 due to the massive number of Baby Boomers who will be entering retirement age. Federal Medicare expenditures grew from $432.6 billion in 2007 to $457.5 billion in 2008. Federal government expenditures on Medicaid increased to $203.8 billion in 2008 from $190.6 billion in 2007. Even with reform in place, health spending in the US is expected to grow from about 16.5% of GDP to close to 20% of GDP by 2016.
As far as proposed plans go, the government’s economic stimulus package provides several provisions that should prove favorable for the healthcare sector over the coming 10-year period. I will discuss these individually below:
1. The plan will provide the National Institutes for Health, the US medical research agency, with an estimated $10 billion in extra funding which will consist of $9.5 billion for medical research and $0.5 billion for facility repairs and renovations. To quote a report released by S&P market researchers, this basically means that more scientists will be hired, more projects will be funded, and more grants awarded. Companies that sell products and services directly to NIH-funded facilities, such as Affymetrix (AFFX), Illumina (ILMN), Life Technologies (LIFE), Waters (WAT), and Millipore (MIL) are likely set to profit from this.
2. The package also includes approximately $87 billion to states in additional Medicaid funding over a 27-month period through December 2010. This extra funding is expected to reduce cuts on Medicaid reimbursement to hospitals from states facing Medicaid budget shortages. In addition, the bill provides another $25 billion to subsidize 65% of the cost of continuing health insurance coverage via COBRA. This should benefit the hospitals and managed care facilities, as it should limit the increase in the growth of uninsured.
3. Finally, the American Recovery and Reinvestment Act of 2009 (ARRA) is expected to result in the direct hiring of 1.5 million workers for projects financed by the program, one of which is the health information technology (HIT) project which will receive $19 billion in funding. Health-related technology stocks dealing with medical diagnostics lab equipment, digital medical records and medical imaging technologies are set for future gains as a result.
That isn’t to say that there won’t be any hurdles to overcome, particularly in the pharmaceutical and biomed sectors. Dr. Joshua Sharfstein, who was appointed Deputy Commissioner under the Obama administration, has a history of hostility to the pharmaceutical industry. Industry experts believe that Dr. Sharfstein is likely to apply more rigor to pharmaceutical oversight, raising the bar with respect to safety and efficacy in new product approvals and applying increased surveillance of marketed products. This, of course, would have negative implications for branded drug makers, but could potentially prove favorable for manufacturers of generic drugs. In addition, President Obama’s choice to head the Federal Trade Commission is another appointment that is not friendly to branded pharmaceutical interests. Standard & Poor’s recently added the following:
“Mr. Leibowitz is staunchly opposed to deals whereby branded drug makers pay generic companies to delay entry of their cheaper generics into the market for several years. Eliminating these “pay-for-delay” settlements is expected to be a key focus of the FTC under Mr. Leibowitz. These deals have become commonplace in the industry in recent years, and removing them would, in our opinion, hurt profitability.”
As usual this means that caution beats optimism when entering the healthcare sector, especially in such a volatile market. However through careful planning and selection, investors looking into healthcare as an alternative to the financial and retail sectors might find themselves beating the pack when the current rally inevitably dies down.
First, let’s put things into perspective:
The table above (rightfully credited to Bespoke Investment Group) shows the S&P 500 healthcare sector cumulative advance/decline line. The sector bottomed out in 1994 following fears that the Clinton Health Plan would nationalize health care, but since then has bounced back quite nicely. Fast-forwarding to today, investors are now starting to believe that the markets are overreacting in a similar fashion to Obama’s proposed healthcare reform. If anything, the administration’s plans might actually stimulate the industry, not stifle it.
Recent figures show that total US healthcare expenditures are sitting around $2.39 trillion, and are expected to increase to $2.72 trillion by 2010, with annual increases averaging about 7% for the next 10 years. In 2008, federal spending on Medicaid and Medicare accounted for over 21.9% of all federal government expenditures.
Medicare, which currently provides coverage to 44.8 million American seniors, is expected to grow to about 78 million by 2030 due to the massive number of Baby Boomers who will be entering retirement age. Federal Medicare expenditures grew from $432.6 billion in 2007 to $457.5 billion in 2008. Federal government expenditures on Medicaid increased to $203.8 billion in 2008 from $190.6 billion in 2007. Even with reform in place, health spending in the US is expected to grow from about 16.5% of GDP to close to 20% of GDP by 2016.
As far as proposed plans go, the government’s economic stimulus package provides several provisions that should prove favorable for the healthcare sector over the coming 10-year period. I will discuss these individually below:
1. The plan will provide the National Institutes for Health, the US medical research agency, with an estimated $10 billion in extra funding which will consist of $9.5 billion for medical research and $0.5 billion for facility repairs and renovations. To quote a report released by S&P market researchers, this basically means that more scientists will be hired, more projects will be funded, and more grants awarded. Companies that sell products and services directly to NIH-funded facilities, such as Affymetrix (AFFX), Illumina (ILMN), Life Technologies (LIFE), Waters (WAT), and Millipore (MIL) are likely set to profit from this.
2. The package also includes approximately $87 billion to states in additional Medicaid funding over a 27-month period through December 2010. This extra funding is expected to reduce cuts on Medicaid reimbursement to hospitals from states facing Medicaid budget shortages. In addition, the bill provides another $25 billion to subsidize 65% of the cost of continuing health insurance coverage via COBRA. This should benefit the hospitals and managed care facilities, as it should limit the increase in the growth of uninsured.
3. Finally, the American Recovery and Reinvestment Act of 2009 (ARRA) is expected to result in the direct hiring of 1.5 million workers for projects financed by the program, one of which is the health information technology (HIT) project which will receive $19 billion in funding. Health-related technology stocks dealing with medical diagnostics lab equipment, digital medical records and medical imaging technologies are set for future gains as a result.
That isn’t to say that there won’t be any hurdles to overcome, particularly in the pharmaceutical and biomed sectors. Dr. Joshua Sharfstein, who was appointed Deputy Commissioner under the Obama administration, has a history of hostility to the pharmaceutical industry. Industry experts believe that Dr. Sharfstein is likely to apply more rigor to pharmaceutical oversight, raising the bar with respect to safety and efficacy in new product approvals and applying increased surveillance of marketed products. This, of course, would have negative implications for branded drug makers, but could potentially prove favorable for manufacturers of generic drugs. In addition, President Obama’s choice to head the Federal Trade Commission is another appointment that is not friendly to branded pharmaceutical interests. Standard & Poor’s recently added the following:
“Mr. Leibowitz is staunchly opposed to deals whereby branded drug makers pay generic companies to delay entry of their cheaper generics into the market for several years. Eliminating these “pay-for-delay” settlements is expected to be a key focus of the FTC under Mr. Leibowitz. These deals have become commonplace in the industry in recent years, and removing them would, in our opinion, hurt profitability.”
As usual this means that caution beats optimism when entering the healthcare sector, especially in such a volatile market. However through careful planning and selection, investors looking into healthcare as an alternative to the financial and retail sectors might find themselves beating the pack when the current rally inevitably dies down.
Wednesday, May 13, 2009
On Stress Tests and Reality Checks
I just finished reading an excellent article by professor Nouriel Roubini over on RGE Monitor concerning the validity of the stress test results on the 19 largest US banks that were released last week. For those unfamiliar, Mr. Roubini was one of a handful of economists who accurately predicted the economic meltdown that began in 2007, earning him the moniker "Dr. Doom." Recently he's become famous for maintaining a cautiously bearish stance during the (sucker's) rally that took hold of the markets in March.
On a side note, the rally looks like it's losing steam. Surprise, surprise!
In any case, the article breaks down the reasons why the stress tests are a sham and should by no means be taken as a sign of bank health. It's kind of a long read, but it's definitely worth it. Without any further ado:
On a side note, the rally looks like it's losing steam. Surprise, surprise!
In any case, the article breaks down the reasons why the stress tests are a sham and should by no means be taken as a sign of bank health. It's kind of a long read, but it's definitely worth it. Without any further ado:
Ten Reasons Why the Stress Tests are "Shmess" Tests and Why the Current Muddle-Through Approach to the Banking Crisis May Not Succeed
-By Nouriel Roubini
What shall we make of the recently announced results of the stress test? Are they credible? Will they restore confidence in our battered financial system? Will the current approach to resolving the financial crisis work, be effective and minimize the fiscal costs of the financial bailout?
For a number of reasons these results are a significant underestimate of the capital/equity needs of these 19 large US banks. Also this underestimate of the losses and the current “muddle-through” approach to the banking and financial crisis may accelerate the creeping partial nationalization of the US financial system, exacerbate moral hazard distortions, not resolve the too-big-to-fail problem, increase the fiscal costs of this financial crisis, make the credit crunch last longer and lead some near insolvent financial institutions to become zombie banks. Let me explain in ten points why I hold such views (see also my two recent op-eds with Matt Richardson in the WSJ and the FT):
Keep an Eye on the Bigger (Still Ugly) Picture
There are indicators that the general sentiment has turned bullish over the past two to three months. A quick search on Google Trends for “green shoots” reveals the search volume index (a measure used by Google to calculate the amount of people searching for a specific topic) has skyrocketed in recent weeks from near zero, to well over a hundred (on a 0 to 100 scale). For those that watch CNBC for more than just entertainment, you’ve probably noticed that the same experts who two months ago were heralding the impending economic apocalypse are now claiming they were the first ones to call the latest “recovery." Kind of ridiculous, if you ask me, considering the big picture has not improved one bit since the beginning of 09’. Sure things have been somewhat less bad than they were at the end of 08’, but they’re still pretty damn bad overall.
Investors all over Wall Street are clinging to just about any bit of positive news, in most cases completely disregarding the general context of the news. Take the latest readings on unemployment for example, released earlier this week: according to the Bureau of Labor Statistics the number of people employed in the US actually rose by 120,000 in April. However, the number of unemployed rose a lot faster, by 563,000 to 13.7 million. Headline unemployment rose to 8.9%, the highest level since 1983. If you count those who are working part-time but want full-time work, as well as those who are “marginally attached” to the workforce (individuals who wanted and were available for work and had looked for a job sometime in the prior 12 months), the unemployment rate is a much higher (and much uglier) 15.8%.
The markets reacted positively to news that only 539,000 jobs were lost in April, down from a negatively revised 699,000 in March. To me it seems irrational that anyone would react positively to half a million lost jobs. The numbers might not be getting any worse, but they're still pretty ugly. To make matters worse, 66,000 jobs were temporary workers hired for the 2010 census, and the BLS estimated that the birth-death ratio added 266,000 jobs as a result of new business creation. This means that there will likely be a major revision downward at some point in the future.
Worldwide, there are signs that the economy has yet to put the worst behind it. Exports from mainland China dropped 22.6% in April from a year earlier, a larger drop than economists expected and a substantial decline from the 17.1% drop seen in March. In India, industrial output went down by 2.3% in March versus a year earlier, again worse than economists expected. Exports in the Philippines were down 30.9% (!!!) compared to last year.
In the US, the trade gap grew to $27.6 billion in March, the first time in eight months, as oil imports jumped and weak overseas demand took a toll on exports. It doesn’t take an expert to see that global trade is drying up. If a 23-year-old amateur analyst can pick up on this fact, then how exactly are the so-called expert bulls claiming a return to positive growth by the end of 09’?
Thankfully, there are still investors out there who do not have their heads up in the clouds (or up their asses, depending on how you look at it). In a recent Reuters interview, CEO of top bond fund Pimco, Mohamed El-Erian, said that higher unemployment and slow global growth will become the new norm as the result of a sluggish US economy. “Global growth will be lower and unemployment higher, notwithstanding the continued rotation of dynamism away from industrial countries and toward emerging economies.” The firm’s three- to five-year “baseline” investment strategy favors the front end of government yield curves in many countries, as central banks will opt to keep negative real interest rates. The firm favors international investments based on their view that the US dollar will fall in value in the long run. If you ask me, I think they're on the right track.
A recovery may well be in store by year-end, but it will be a slow and protracted recovery, with very limited (if at all positive) growth. All things considered, I really doubt that this rally is the turnaround the consensus is claiming. I think it’s unlikely there will be a retesting of the lows, but I do think this rally will falter sometime during the early summer months and we will see a muddle through of the markets before things start to (hopefully) pick back up again as the year comes to a close. Call me a pessimist, but I think the summer doldrums are going to be quite literal this year.
-Carlos J.
Disclosure: no positions
Investors all over Wall Street are clinging to just about any bit of positive news, in most cases completely disregarding the general context of the news. Take the latest readings on unemployment for example, released earlier this week: according to the Bureau of Labor Statistics the number of people employed in the US actually rose by 120,000 in April. However, the number of unemployed rose a lot faster, by 563,000 to 13.7 million. Headline unemployment rose to 8.9%, the highest level since 1983. If you count those who are working part-time but want full-time work, as well as those who are “marginally attached” to the workforce (individuals who wanted and were available for work and had looked for a job sometime in the prior 12 months), the unemployment rate is a much higher (and much uglier) 15.8%.
The markets reacted positively to news that only 539,000 jobs were lost in April, down from a negatively revised 699,000 in March. To me it seems irrational that anyone would react positively to half a million lost jobs. The numbers might not be getting any worse, but they're still pretty ugly. To make matters worse, 66,000 jobs were temporary workers hired for the 2010 census, and the BLS estimated that the birth-death ratio added 266,000 jobs as a result of new business creation. This means that there will likely be a major revision downward at some point in the future.
Worldwide, there are signs that the economy has yet to put the worst behind it. Exports from mainland China dropped 22.6% in April from a year earlier, a larger drop than economists expected and a substantial decline from the 17.1% drop seen in March. In India, industrial output went down by 2.3% in March versus a year earlier, again worse than economists expected. Exports in the Philippines were down 30.9% (!!!) compared to last year.
In the US, the trade gap grew to $27.6 billion in March, the first time in eight months, as oil imports jumped and weak overseas demand took a toll on exports. It doesn’t take an expert to see that global trade is drying up. If a 23-year-old amateur analyst can pick up on this fact, then how exactly are the so-called expert bulls claiming a return to positive growth by the end of 09’?
Thankfully, there are still investors out there who do not have their heads up in the clouds (or up their asses, depending on how you look at it). In a recent Reuters interview, CEO of top bond fund Pimco, Mohamed El-Erian, said that higher unemployment and slow global growth will become the new norm as the result of a sluggish US economy. “Global growth will be lower and unemployment higher, notwithstanding the continued rotation of dynamism away from industrial countries and toward emerging economies.” The firm’s three- to five-year “baseline” investment strategy favors the front end of government yield curves in many countries, as central banks will opt to keep negative real interest rates. The firm favors international investments based on their view that the US dollar will fall in value in the long run. If you ask me, I think they're on the right track.
A recovery may well be in store by year-end, but it will be a slow and protracted recovery, with very limited (if at all positive) growth. All things considered, I really doubt that this rally is the turnaround the consensus is claiming. I think it’s unlikely there will be a retesting of the lows, but I do think this rally will falter sometime during the early summer months and we will see a muddle through of the markets before things start to (hopefully) pick back up again as the year comes to a close. Call me a pessimist, but I think the summer doldrums are going to be quite literal this year.
-Carlos J.
Disclosure: no positions
First Blog Post (OMG!)
How to start...
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Allright hi, I guess, and welcome to my first ever trek into the magical realm of the blogosphere! I'm going to use this space to post some of the stuff I do for a living, which is to say writing about market trends and stuff.
Like I said I'm new to this whole thing, so please bear with the layout looking totally noobish while I get the hang of it.
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Allright hi, I guess, and welcome to my first ever trek into the magical realm of the blogosphere! I'm going to use this space to post some of the stuff I do for a living, which is to say writing about market trends and stuff.
Like I said I'm new to this whole thing, so please bear with the layout looking totally noobish while I get the hang of it.
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