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Thursday, April 08, 2010

Discerning Trends and Fluctuations From Direction and Volatility

There is a cornucopia of objective and subjective data flowing into the marketplace 24/7. Once out there, it’s twisted and molded into supporting or rejecting whatever narrative is being presented. It’s this world that we must employ all our analytical skills and investment experience to discern trends and fluctuations from direction and volatility.

On April 6th, it was reported in the New York Times from a story entitled “Upbeat Signs Revive Consumers’ Mood for Spending” the following statement:

The mood has gone from panicked to cautious, and now, as Mark Zandi, chief economist for Moody’s put it, some consumers are “almost a bit giddy.”

On April 7th, The Federal Reserve Statistical Release G.19, Consumer Credit reported the following:

Consumer credit decreased at an annual rate of 5-1/2 percent in February 2010. Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent.

Econoday published this analysis to explain the report:


Well the rebound for consumer credit lasted only one month. Consumer credit fell a steep $11.5 billion in February, sinking hopes that January's increase would mark the end of the steepest consumer credit contraction on record. A $5.6 billion upward revision to January, to plus $10.6 billion, does take some of the sting out of February's contraction as do preliminary indications for strong retail sales in March. But February's data are bleak, showing a $9.5 billion contraction for revolving credit and a $2.0 billion contraction for nonrevolving credit. Tight credit standards together with the consumer's mood to save are not helping the economic recovery. Stocks showed little initial reaction to the report.

Market Consensus Before Announcement

Consumer credit outstanding in January rose $5.0 billion, breaking a record of 11 consecutive months of decline. The gain was led by a $6.6 billion rise in non-revolving credit (car loans, mobile homes, education, boats, trailers, vacations). But revolving credit (credit cards) still declined by $1.7 billion.

Finally, add into the mix, auto sales that were reported on April 1st, and again Econoday explains:


Vehicle sales in March proved much stronger than February, the first solid indication of what looks to be a strong month for retail sales. Sales of domestic-made cars and light trucks rose to an annual unit rate of 8.8 million, up more than 15 percent vs. February's 7.6 million rate. Improvement was broad based among manufacturers but was centered at Toyota (TM) where aggressive incentives led to a major jump for the troubled manufacturer. New car sales make up about 12 percent of total retail sales. Gasoline sales, which make up about 10 percent, also look to be strong in March given gains for demand, seen in the weekly EIA petroleum inventory data, and gains in price, also posted weekly by the EIA. Chain stores will round out the retail picture for March when they post results next Thursday.

Market Consensus Before Announcement

Sales of domestic-made light motor vehicles in February dipped 2.2 percent to a 7.7 million unit annualized pace, largely on severe snow storms cutting into showroom traffic. Imports, however, fared worse, dropping 7.9 percent to 2.7 million units. The import share was hurt by Toyota's recall-related stoppage of sales on certain models. Combined domestics and imports were down 3.7 percent to 10.4 million units from 10.8 million in January. Deal making by competitors going after Toyota market share could boost overall sales in March.

Question: Why did the market tank at the close Wednesday, after the release of the G.19 report, when it was already known February was a poor month for consumer credit? Between 3:00 pm and 4:00 pm Wednesday, this was the most significant news to come out?

Also, how do you square Ben Bernanke’s testimony before congress explaining the to keep U.S. interest rates low because of a fragile economy when the day before Australia’s central bank increased their benchmark interest rate, by a quarter percent to 4.25%, the fifth time in six months, over fears of inflation, following China’s changing position on inflation and rising commodity prices?

Are the Feds conflating a residential real estate inventory problem with GDP growth? Can we see a further drop in home prices, an expansion in the economy, and miss the beginnings of a cyclical turn in inflation? Will policy and politics interfere with sound but tough economic choices in Washington DC? What warning signal is the debacle in Greece sending to the U.S.? Will Paul Volcker be heard by the administration on banking reform and will Larry Summers be leaving the circus through the revolving door to Wall Street?

Man, and you thought the Duke/Butler NCAA basketball final was a cliffhanger.

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