Dear Clients and Friends,
McVean trading will be participating in a Global Interdependence Center conference in Buenos Aires, Argentina on November 1st. The conference, co-sponsored by the Argentinian stock exchange, was planned to examine what lessons the European periphery might glean from Argentina’s default and subsequent experience without access to global credit markets. Given the recent turn of events in Argentina with nationalization of their oil industry and fears of pesification of their economy, we expect a vibrant discussion. Add in the parabolic markets in corn and soybeans, and the discussion on the outlook for next year’s South American crops will be center stage.
We hope that your travel plans allow you to attend. Registration and a preliminary agenda are available at GIC’s website:http://www.interdependence.org/programs-and-events/event-registration/programs/argentinas-economic-experience-lessons-for-europes-periphery/.
It was another week full of evidence of slowing economic growth and devoid of fresh policy moves which might forestall the global recession from spreading into the US. With the doldrums of August, augmented by the two week diversion of the Olympics, followed by the party biased rhetoric of the conventions, it is clear that nothing will happen soon to reduce the fiscal cliff. There will be lots of promises from everyone about how it should be avoided, but none of them are likely to occur – and businesses are unlikely to move from their highly defensive positions until the election clears some of the fog of uncertainty that has frozen hiring and investment over the past three months. Current estimates for real growth in the second quarter are now running between 1.0% and 1.5%. Moreover, momentum still seems to be slowing. The sanctions on Iran over its nuclear program are raising tension again in the Gulf of Hormuz and adding back a premium to oil prices. Spanish ten year yields are back over 7% and Italian yields over 6% — with French yields now making record lows as the list of safe havens has widened due to short rates moving negative in most of Northern Europe. Meanwhile, China is still slowing despite several shots of stimulus, indicating that more is too come – but that the lag for infrastructure spending to spur growth is in quarters not weeks. Late 2013 is starting to look pretty good – primarily because virtually everyone will be recovering from recession by then. The question is how bad it will get before a fresh recovery begins. Most businesses and investors are willing to wait and keep their powder dry rather than risk a triple bogey by taking chances.
Third Time, No Charm
This week’s data produced a third negative month for retail sales –which account for roughly one third of GDP — an event historically associated with recessions. True, the slump is partially due to the surge in retail activity during the mild weather of January, February and March and year on year retail activity was 3.8% higher in June. However, growth from December to June has been at just a 1.8% annual rate. The primary cause of the slowdown has been a flattening in auto sales, which was
the driver of the strength late in 2011 as car sales recovered from the effects of the Tsunami. Motor vehicle retail sales have been basically flat since December, while unit sales have run plateaued at just over the 14 million unit annual rate. Meanwhile, we remain concerned that with health care retail sales in the second quarter were up a meager 1.7% over the past year. The critical medical care industry, which employs one out of every six people in the US remains under tremendous pressure from cost control.
The chimera of a housing recovery is belied by the weak performance in building material sales, which are up just 4.2% from a year ago. New housing activity only looks like a recovery is you start the chart in late 2007. True, in the second quarter single family starts were up almost 25% from a year ago, but so far just 2% more homes under construction. Established home builders, including those listed on the stock exchange, are benefitting from the fact that small builders are still barred from access to credit. These are the type of builders that buy their days supplies at Home Depot and Lowe’s. Moreover, even if production swells 25% over the next year to match sales, that is a mere $30 billion in inflation adjusted single family construction, barely 0.2% on real GDP. Multifamily construction is so small at $16 B that it would take a doubling to add another tenth. Additions and alterations are now a bigger part of residential construction than new housing activity and there are signs that some of the strength in starts is from people shifting to buy bigger homes at these record low interest rates rather than improving their existing house. Meanwhile, existing home sales are still soft, falling 5.4% in June, and stuck at the 4 million unit level in the second quarter. The reduction in the inventory of foreclosed homes is curtailing low end buyers, as foreclosures dropped from 22% of the market in January to just 13% in June. Short sales remained 12% of the market down only fractionally from 13% in January, indicating that it is the banks, not owners, that are throttling back the low end inventory.
Perhaps more critical to the third quarter, is the fact that the Philadelphia Federal Reserve index also came in negative for a third month in a row – and all the details point to further weakness in the economy ahead. Delivery times turned negative five months ago, as production outstripped new orders. The back log of unfilled orders has been negative in four of the past five months, including the last three in a row. New orders themselves turned negative three months ago. Now, production is down for its second month, and finally employment has dropped into negative territory this month. The slump in employment was signaled when the average work week slid into negative figures four months back. Meanwhile, the six month outlook for both new orders and capital investment are at their lowest level this year. The only redeeming feature in the report is the fact that new orders were only half as negative in July, -8.6, than it was in June, -16.6, but that is damning with faint praise. We remain on recession watch, wondering if enough economic weakness before the election will advance the agenda of the winner – whoever he is — once the voters make up their minds. Right now polls still indicate a dead heat.