Economy: Scary Times or Scary Reporting?

On Thursday morning, the news headlines on was quite frankly frightening. Some of the articles are as follows:

» Treasury 10-Year Tops 4% for First Time Since October on Deficit Concern
» Mortgage Rates Rise to 5.59%, Defying Bernanke Plan to Aid Housing Market
» Fed Overstepped Bounds on Merrill Purchase, House Republican Staffers Say
» Roubini Says Dollar’s Status as Sole Global Reserve Currency May Diminish
» Interest-Only Defaults to Mount on $62 Billion Commercial Mortgage Bonds
» Option ARM Payment Shock Will Hit in 2011 Threatening U.S Housing Rebound

And then, there is the “positive” news both have to be taken with a grain of salt.

» Initial Jobless Claims in U.S. Fall to 601,000 as Deepest Cuts May Be Over
» U.S. Retail Sales Rise First Time in Three Months as Car Bargains Sought

The tops six headlines are all ominous reminders that the economy still has a lot of problems yet to work out. Interest rates are on the rise both of our national debt and individual family debts, an indication that lenders are becoming more skeptical of the ability to pay back loans. Similarly, Dr. Roubini suggests that the dollar’s days as the Global Reserve Currency may be over. If policy makers even had the notion that we can simply inflate our debt problems away should take note of the world’s reaction to the inflationary policies that brought us to this point. If this is not a signal from the markets that government spending must be reduced then what is?

Other headlines speak to the continued trouble in the residential real estate and the growing issue of commercial real estate. The “green shoots” have sprouted around the housing market as there signs that value seeking buyers have been lured back into the market. Much of this can be attributed to the low mortgage rates in place for the last few months because of the Fed’s actions in buying Mortgage Backed Securities from Fannie Mae (FNM) and Freddie Mac (FRE) and thus lowering the risks to lenders which in enabled rates to drop to historical lows. Well, today rates rose to heights not seen since the Fed announced its $1.25 trillion plan to take the debt off the lenders books on March 18th. That hugely expensive investment has worn off in just under 3 months, while the market and the economy were supposed to be improving. Demand for housing loans could start to falter as the Mortgage Bankers Association reported a 7.2% drop in mortgage applications last week.

Even the positive news on the site today, the news that was propelling the market higher was downward movement in jobless claims data. But still there were more than 600,000 new jobless claims in the week to start June, more than 6 million Americans have lost their jobs since the recession officially began in December 2007. A rise in retail sales were also reported for the first time in three months, however the headline claims this is because of increase car buying activity. In looking at the numbers, retail sales rose the same amount sans auto sales, so Auto sales may have improved but are not the reason that retail sales receipts are increasing. The reason for the better results comes down to raising gasoline prices, service stations reported a 3.6% increase in sales which seems to be a much better indication of why sales overall rose .5%. With savings rates at the highest levels since 1995, every dollar spent at the gas pump must be lost somewhere else.

Is this economic landscape really that gnarly or is this a case of “if it bleeds it leads” reporting? It seems to me that Bloomberg tried to be positive on the better than expected jobless claims and retail sales numbers, but the overall tone is overwhelmingly depressing. However, with the markets up today continuing the resilient 3 months rally, it seems that no one has noticed the reports of trouble ahead. Sentiment is sky high, which always makes us ever more cautious.

Scary Times or Scary Reporting?

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

Be the first to comment

Leave a Reply

Your email address will not be published.