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Navarro's Market Rap: Gauging the Net Effect of Katrina
Hurricane Katrina will reduce employment by 400,000 people in coming months while trimming economic growth by as much as a full percentage point in the second half of this year, according to a Congressional Budget Office assessment.
The Modesto Bee
The initial reaction of analysts and pundits to Katrina was that it would be the recessionary shock to finally knock the economy and markets off track. Ironically, with the Bush Administration's colossal mishandling of the crisis, Katrina may turn out to be a net stimulus. The reason: The Bushies and Republican Congress facing an unhappy electorate are going to throw gobs of money at the beast. Initial estimates of the Fed funds top $60 billion and will likely exceed $100 billion roughly equal to a year's expenditures on the war in Iraq. But guess what: at least the money will be spent here.
Look for the markets to benefit from this in the short run. But a burgeoning budget deficit will eventually be inflationary
. Right now: The Bulls are running.
The Week Ahead:
The big reports this week include the PPI, CPI, trade numbers, auto sales, and consumer sentiment. It's unlikely that there will be any surprises in any of these reports so whatever moves the market this week, it likely won't be the data.
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Peter's Portfolio:
Penny Stock of the Week: Crossroads Systems (CRDS) provides data routing solutions for storage area networks. For a change, the insiders are buying and not selling the stock. I've got a big position and see this as a longer term proposition.
Bulls of the Week: EGHT as a VOIP play whets my whistle. I'm in and looking to add shares.
Long term holds: ASTM and STEM are both losing air from their tires but these are long term holds. Still like VION. Sold TMTA for a nice chunk of change.
Options:This is a fascinating little story. I've got 2007 Leaps on CHIR with a strike price of $45. Last week, when Novartis bid to buy CHIR, the stock shot up to $44$ and quess what. My leaps went nowhere. The reason: the bid was below my strike price. How about dem apples.
I'm glad CHIR execs told Novartis to take their own leap. Look for a higher bid. But I'm going to lose a nice little chunk of chain if the bid comes in at $44.99 or less. That's a harsh little lesson in how many different ways you can lose playing the options game. No worries though. CHIR is worth more than $45 so maybe it will turn out all right.
Hedging Your Bets With Matt Davio: The Big Picture -- literally
NOTICE:
Just as companies report their earnings, so does my Red Rock Fund. If you are an accredited investor and would like a copy of the latest report, please contact me at redrock@peternavarro.com. We are very pleased with our results year to date and would be happy to share them with qualified investors.
I would like to start our refreshed weekly chat with a little chart. I think we are all tired of Katrina and her terrible aftermath. That will play itself out in a long and slow recovery. However, I would like to address a favorite subject of mine again, and that is real estate as an asset class.
Note the two scales are very different. The chart doesn't specify, but I am assuming that its in 1,000s. The key takeaway is the ongoing shift -- now in its 3rd decade -- away from a manufacturing economy and towards a services based one.
BOOO---YAHHHHH
the US Unemployment Rate fell to 4.9% during August, matching the 'all-time' low of 4.9% set in August of 2001. INDEED, there are several macro-points worthy of note herein: First, we can CLEARLY see the polarization of wealth/income within the combined facts noted above, as per the sharp DECLINE in those Employed who hold less than a High School Diploma
AND the decline in 'production' and 'administrative support' jobs, usually lower paying fields requiring less specified and intense 'academic' skills
especially, in the era of highly-efficient, cutting-edge productivity gains generated by the automation of production facilities, and office administrative support tasks.
This is EXACLTY what we have been talking about for YEARS
symptomatic of the FACT that it takes LESS human labor/time input to create the same, or increase, output of goods and services
and
for less labor input cost.
VOILA
it's the 'missing-link'
as pertains to the COMPLETE LACK of wage-income reflation. Continuing in this vein, we also note the areas of actual 'strength':
- Business and Financial Operations Management
payrolls rose 1,175,000 in the last 12 months
- Construction jobs rose 513,000 in last 12 months
- Natural Resource and Mining jobs soared by 855,000 in last 12 months
What makes this all the more interesting, other than noting the gains in monetarily REFLATED sectors
is the fact that these same sectors revealed the strongest numbers in terms of Hours Worked, and Average Earnings
against which, we note that the MAJORITY of other sectors, posted outright DECLINES along three data-points, Employment, Hours, and Income:
- Hours Worked, Natural Resource and Mining
46.1 hours in August, up from 45.9 hours in July, 45.6 hours in June, and up big from the 44.4 hours worked per week posted last August-04.
- Hours Worked, Motor Vehicle Industry
43.1 hours, up HUGE from the 41.4 hours per week posted in May
- Average Weekly Earnings, Construction
$769.89 in August, up significantly from the $758.93 posted in July, and up $14.09 year-over-year.
- Average Weekly Earnings, Natural Resource and Mining
$871.88 in August, up HUGE from $851.76 in July, and a monstrous $67.22 per week rise compared to August of 2004, representing a sizable reflation of +8.4% yr-yr.
- Employment, Specialty Contractors
posted the LARGEST percentage increase during the month of August, of ANY industry sub-sector, by creating 18,300 new jobs during the month. Indeed, an increase in Real-Estate jobs was the second largest, by sector.
Yet, when we look at the broader picture, not including the monetarily reflated financials, construction, or natural resources and real-estate, we see a LOT of NEGATIVE numbers. For example, noting the large increases in Hours Worked posted above, we note the following sectors that posted DECLINING hours worked during August:
- Leisure and Hospitality
- Warehousing
- Transportation
- Apparel
- Wholesale Trade
- Private Service Production
Indeed, we could make a case to suggest that even in the LABOR market, reflation is disinflationary, in terms of natural resource and financial paper reflation, versus disinflation in the discretionary-consumption sector. So, where IS the
reflation.
Is there reflation
in savings ?? Is there reflation
in income ??
Ooooops, guess NOT, since 'real' income is DEFLATING, as is consumer savings, which sits at a RECORD LOW, and, is NEGATIVE. Prior to grabbing the scalpel and dissecting the data, we note the visual aid on display below, revealing the PLUNGE into NEGATIVE territory, and, a new RECORD LOW, in the US Savings Rate (as a percent of disposable income).
GEE, it was NOT long ago that US consumers SAVED ten percent of their disposable income
indeed, it was as recently as 1994.
Carving the data provides an even MORE OMINOUS picture. Note the data-details extracted from the Commerce Department's report on US Income and Consumption Expenditures:
-
Personal Spending
up +1.0% during the month of July, coming hard on the heels of June's equally large increase of +1.0%.
-
Personal Income
up +0.3% in July, on the back of June's increase of +0.5%
In other words
the two-month, nominal, cumulative increase in Spending, at +2.0%
is MORE than TWICE the increase posted by Income, at +0.8% for the two months combined.
The details are WORSE YET.
-
Rental Income
down (-) $3.3 billion
the second monthly decline, for a total erosion of (-) $ 7.6 billion
-
Non-Farm Proprietors Income
deflated by (-) $3.0 billion during the month, a major shift from June's income increase of + $15.5 billion
And, perhaps most disturbing, given the US consumer's over-reliance on ASSET reflation, for INCOME
-
Personal Income, Receipts on Assets
up only + $7.8 billion, or LESS than HALF the rise posted in June, at + $18.0 billion
representing a single-month a decline of (-) 56.7%.
AND, if NOT for a CUT in income taxes
the DISINFLATION posted in Disposable Income would have been MORE pronounced. Note:
Indeed, BEFORE taxes, the monthly decline in Income was (-) $25.4 billion, after taxes it was (-) $18.7 billion.
INDEED, with the hurricane re-construction costs putting even more pressure on the fiscal front, at a time when the fiscal front is in full retreat
does ANYONE seriously believe, that tax cut support for the US worker/consumer will be maintained, into 2006 ???
NOT.
Thus, there is little reason to seek a turn-around in savings
UNLESS
consumption deflates dramatically !!!
Note the dour-data-details on US Savings:
-
Disposable Income, Less Outlays = Savings
NEGATIVE (-) $58.8 billion, during July, swinging into the red versus the barely positive + $0.9 billion in savings posted for June.
YES folks, the decline in 'savings' is TWICE the size, in billions of dollars, as is the increase in ALL after-tax income
in July alone.
Folks, we are talking about an annualized pace of decline in Savings, equal to nearly a TRILLION DOLLARS over a twelve month period, pegged at (-) $708 billion over 12 months.
Clearly, this is unsustainable, and just as clearly, consumption MUST take a 'hit', for this dynamic to 'correct'. It is NOT going to do so, via any expansion in wage-income, as can be concluded via a perusal of the labor market statistics detailed in the first few pages of today's Monitor.
We SPOTLIGHT the following commentary offered within the TEXT of the report issued last week by the Commerce Department
Negative personal saving reflects personal outlays that exceed disposable personal income. Savings from current income may be near zero, or negative, when outlays are financed by borrowing, or selling investments or other assets.
YES, it is that last passage that piques our macro-interest, ala the thought, that IF debt-creation were to become more difficult for the average consumer (ie: if the Fed goes to far, with rate hikes)
then
in order to maintain consumption patterns
the consumer might be tempted to SELL his ASSETS
which of course, offer the ONLY source of 'income reflation' currently available, AND, the only places in which US wealth has been 'stored'.
Thus, we note some other OMINOUS statistics related to Savings:
-
Savings has now declined by a WHOPPING (-) $106.4 billion in just the last two months.
-
Savings has declined in six of the last seven months
-
Savings has DEFLATED by a monstrous (-) $462.2 billion over that seven month period, covering the year-to-date since January 1st.
YES, savings being depleted at a HALF TRILLION over the last seven months, also, like the month-month rate, equal to a near ONE TRILLION DOLLAR PER YEAR PACE, pegged at (-) $792 billion.
In total, on an annual, year-to-year basis
the US Savings Rate has plunged from +2.1% in 2002
to +1.8% in 2003
to +1.2% in July of last year
and has collapsed in 2005, now pegged at just +0.3%.
And, worse still:
In other words
'real', non-monetized, Disposable Personal Income has DEFLATED by nearly a QUARTER TRILLION DOLLARS in the year-to-date (minus $221 billion to be exact).
And, the icing on the cake comes in the form of a disinflating Personal Consumption Expenditure Core Deflator, which has slipped back below the 2% level over the last two months, and in the process, has broken down, by violating the low seen in early 2004
and
as can be seen in the chart visible at the top of the next page, the core PCE Deflator appears to have PEAKED, in line with previous secular peaks, in the 2.5% region. This is perhaps the MOST influential inflation indicator, in terms of monitoring the prospects for further Fed tightening, basis inflation vigilance, and, it has just turned from 'red'
to 'yellow'.
AND, the Income and Spending report covers JULY
long before the word Katrina had become one associated with death and destruction. We cannot imagine, given the $4.25 per gallon price for gasoline charged this weekend in NYC
that consumers will be SO willing to spend MORE than they earn, in September.
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