Over the course of any month there is a heap of economic data that is released by various governmental and quasi-governmental organizations. The data can come so quickly that it’s often difficult to keep track of what has shown strength or weakness and which indicators are beating or missing Wall Street estimates. To try and help summarize what was released in July, below is a list of 32 of the more important economic releases last month. Of these 32 releases, 14 (~44%) missed expectations.
Back in late 2007 and early 2008 when commodity markets were really humming, the Baltic Dry Index was a closely followed indicator of economic activity (especially in emerging markets). It measures the daily cost of chartering a dry bulk ship to move commodities across the ocean. In late 2008 it collapsed in the financial crisis and has never recovered as a glut of newly built dry bulk ships flooded the market. It’s interesting to see the the index is back to its lowest levels.
Ever since 2007, when the market started to do whacky things, many investment managers have been looking for a “stock picker’s market” in which correlations recede and alpha can be generated by picking a better group of stocks than the next guy rather than being at the whims of beta.
In order to gauge whether 2012 is finally a stock picker’s market, below are some histograms of the performance of S&P 500 components grouped by buckets of return. Perhaps one might expect that a stock picker’s market would show a relatively even distribution among the buckets rather than a concentration in any single bucket. To the extent that hypothesis is correct, 2011 looks slightly more like a stock picker’s market than 2012.
Yesterday’s post about the S&P 500 priced in Euros got me thinking about other markets that might be interesting to view priced in foreign currencies. Below is a chart of the Nikkei priced in dollars. Because the Yen has generally appreciated against the dollar over the course of Japan’s (somewhat mythical) lost decades, the Nikkei’s fall is a little softer when viewed in dollar terms.
Even as the Dow looks like it could post back to back 200 point increases, there are signs that equity markets are still structurally quite ill. Aggregate volume in S&P 500 component stocks continues to decline. While summer is always a light volume period seasonally, each of the last three summers have seen lower lows. Price doesn’t necessarily need volume for confirmation, but it is worrisome that there are fewer and fewer participants in the equity markets.
Today the S&P 500 was up 1.65%, but considering that the dollar was down 1.26% vs. the Euro, if you were a European investor in the US market, you hardly realized any gains–such is the power of currency. Much like how perception of physical motion is defined by one’s frame of reference, motion in financial markets only meaningful relative to the value of the currency of reference. Gains and losses in markets, measured in currency, can be completely illusory based on the change in value of the currency itself. To illustrate the point, the chart below is a chart of the S&P 500 as viewed by a European investor, measured in Euros. It’s a completely different picture than the one that we’re used to seeing, primarily because 2007 never reached the peak of 2000. Bull and Bear markets happen over different time frames. Technical levels become completely different. Simply rebasing the unit of measurement can alter the interpretation completely. YTD the S&P 500 is up 15% in Euro terms compared to 8% in USD.
One indicator that we pay close attention to is the monetary base, the sum of currency and reserve balances at the Fed. Over the last two weeks the base has grown by $43B, about 1.5%. The base is important to us because of the relationship that it has had with commodity prices over the last several years. If the relationship holds, it might suggest that commodity prices like oil and gold will trend sideways rather than down.
As far as Fed Balance sheet trends go, it’s also worth noting that reserve balances continue to fall. The “reserve balances” line is a perennially misunderstood line-item, which is often used as evidence that excess liquidity is just being stored at the Fed rather than entering the economy. In actually the high level of excess reserves is just a symptom of QE because in the aggregate all of the reserves in the system must return to the Fed even if different banks hold them. At any rate, these reserves are now starting to be converted more rapidly into hard currency, which should render the argument over excess reserves moot.
Fed Liabilities Portion of Balance Sheet:
An interesting take on the world economy from Rick Goings, CEO of Tupperware, an extremely global company:
ACE Runs a crop insurance book. Evan Greenberg, the CEO had this to say about the drought conditions:
Sandy Weill, former CEO of Citigroup caused a stir today by commenting that Glass Steagall should be reinstated. Since he is the person who pioneered the integrated banking model, the comments are shocking. The comments are puzzling too because even if one thinks that separating commercial and investment banks would create more stability in the long term, it’s not entirely clear that the financial crisis stemmed directly from the integration.
Empirically, not a single integrated bank failed in 2008/2009. Lehman and Bear were not commercial banks, and Indymac and WaMu weren’t investment banks. AIG, Fannie and Freddie were not banks of any sort. In fact, Goldman and Morgan Stanley (along with some insurance companies) were saved by converting to bank holding companies so that they could access liquidity at the Federal Reserve.
The argument for a separation of commercial and investment banking activities perhaps stems from the belief that depositors (“main street”) need to be protected from the volatility of securities markets. However in today’s economy, only a tiny portion of household savings is held as deposits anyways, so the savings of main street are far from insulated from a collapse of an investment bank (even if it were separated from the commercial banking system).
Below is a list of bank failures in 2008. Note that Lehman, Bear, AIG, Fannie and Freddie are not on the list. In all, 447 banks have failed between 2008-2012. The vast majority were community banks that were in “less risky” lending businesses. The fact is that banking is risky business in any form.