"Economists are pessimists: they've predicted 8 of the last 3 depressions."
--Barry Asmus

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Friday, July 15, 2011

World News!

European Union
  • Mount Lokon, a volcano on the Indonesian island of Sulawesi, has begun to erupt.  A two-mile evacuation zone has been established around the volcano, but only 4400 of the 28,000 people who live within the zone have been evacuated.
  • The Mexican army has found a 300 acre marijuana plantation in Baja California, the biggest ever found in that country.    The street value of the crop is estimated at $160 million dollars (that's roughly $9.53 fillion dollars, or a $533,333.33 per acre).
United States
  • In the wake of yesterday's announcement by Moody's, Standard & Poor's has warned that there is a 50% chance it will cut the US sovereign debt rating this month if there is no agreement on the debt ceiling.  Substantive agreement.  "If you get a small agreement," said John Chambers, the chair of S&P's sovereign ratings committee, "that will lead to a downgrade."
  • The Pentagon has acknowledged having suffered a significant breach in security as the result of a hacker attack in March.  Deputy Defense Secretary William Lynn said they have "a pretty good idea" who launched the attack, but did not name names.  Some of the stole data was "mundane, like the specifications for small parts of tanks, airplanes, and submarines.  But a great deal of it concerns our most sensitive systems, including aircraft avionics, surveillance technologies, satellite communications systems, and network security protocols."


Who wants some inflation?
Realistically, nobody.  But everybody talks about it, and everybody worries about it, and everybody is waiting for the floodgates to open for the massive quantities of liquid cash injected by the Federal Reserve to begin driving inflation up and up.  The Street worries about inflation because, if it begins to go up, the Fed will have to start tightening and that would mean the end of the (comparatively) easy credit environment.  Also, inflation grinds away at the domestic purchasing power of the dollar, causing consumer spending and to dry up and corporate spending to slow down, both of which cripple GDP.
So nobody wants inflation, and everybody watches the CPI-U.  And last month, we watched the May numbers with dread in our hearts as we completely missed expectations.  CPI-U (also known as "headline inflation") was up 0.2%, with the core CPI-U (the inflation the Federal Reserve watches) up 0.3%.  For the rolling year, CPI-U was up 3.6%, core CPI-U was up 1.5%, food CPI was up 3.5%, and energy CPI was up 21.5%.
Undaunted, the Econoday-surveyed analysts predict great things for the month of June.  They're calling for a 0.2% decline in headline inflation, and "only" a 0.2% increase in core inflation.  Are they right.  Let's check the Consumer Price Index Summary from the Bureau of Labor Statistics, and find out.
And it turns out that they were half right.  CPI-U declined 0.2% in June, but the core CPI-U increased 0.4%.  It's reasonable to assume that the overall decline in headline inflation derives from food and/or energy, and it turns out that this is an accurate assumption.  Food CPI increased 0.2%, but energy CPI declined 4.4%.  This puts the annual CPI-U at 3.6%, core CPI-U at 1.6%, food CPI at 3.7% and energy CPI at 20.1%.
To put this in perspective, here's an interesting accounting trick.  If you divide 72 by an annual rate of increase, you find out how many years it takes to double something.  If you're looking at an investment, it's roughly how many years it takes your investment to double.  If you're looking at inflation, its how many years it takes costs to double.  So, based on the rule of 72, the fixed basket of goods and services measured by CPI-U should double in cost every 20 years.  Food costs should double every 19-20 years, and energy costs should double every 3.5 years (with gasoline doubling every 2 years).

Thursday, July 14, 2011

Producer Price Index News Release

The latest Producer Price Index news release (http://www.bls.gov/news.release/pdf/ppi.pdf) was issued today by the Bureau of Labor Statistics. Highlights are below.

The Producer Price Index for finished goods decreased 0.4 percent in June, seasonally adjusted. This decline followed increases of 0.2 percent in May and 0.8 percent in April. Prices for finished goods less foods and energy moved up 0.3 percent.

News releases archives: http://www.bls.gov/schedule/archives/all_nr.htm
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First Time Jobless Claims

And finally, in our bumper crop of market data, we have First Time Jobless Claims.
Last week, I had a little fun with the analyst predictions that there would be 420,000 new claims for the week ending 7/2, pointing out that this same number had been predicted for several weeks in a row.  When we got the actual results, it turned out that the advance figure for seasonally adjusted initial claims for the week ending 7/2 came in at 418,000, beating expectations by 2000.  The actual initial claims for the same week were up 13,514 to a level of 416,798, and the total number of people claiming benefits in all programs for the week ending 6/18 fell 52,052 to a level of 7,459,561.  So, if you don't look at the actual figures, that wasn't too bad.
Also, you want to not think too hard about the fact that the total number of people claiming benefits in all programs fell 52,052 in one week of a month that produced only 18,000 new jobs.  That makes it hard to really get behind the excitement over beating expectations last week.
For the week ending 7/9, the Econoday-surveyed analysts are rather more optimistic.  They aren't predicting 420,000 initial claims for the week.  No, they're calling for "only" 405,000 initial claims.
For the actual results,w e go now to the US Department of Labor's Unemployment Insurance Weekly Claims Report.  Right out of the gate, we see that last week's expectations-beating 418k new claims has been revised upwards - by a substantial 9000 - to 427,000.  That's not great news, and it's the sort of thing that makes you question the accuracy of their report that the advance figure for seasonally adjusted initial claims for the week ending July 9 is only 405,000 (which does nail expectations dead on).  I mean, not to put too fine a point on it, the advance figures have been revised upwards for 16 out of the last 20 reports.  That sort of thing somewhat shakes my faith in their advance figures.
But those figures are the only figures we have to work with, and they're the figures everyone gets excited about.  So lets call this "meeting expectations" and get on with life.  The advance unadjusted number of initial claims for the week ending 7/9 comes in at 470,671 - an increase of 53,873.  Finally, the total number of people claiming benefits in all programs for the week ending 6/25 rose 25,333 to a level of 7,484,894.

Retail Sales

Next in our fine harvest of market data comes Retail Sales - the US Census Bureau report about the changes in total receipts at stores that sell durable and nondurable goods[1].  This is another of those reports that gets the analysts all excited.  The Street likes increasing sales, because that means increasing corporate revenue, which (hopefully) means increasing corporate profits.  The Street also likes seeing the economy working and increasing GDP.  Unless they're short the Wilshire 5000 or something crazy like that.
Anyway, May was anticipated to be soul-crushingly bad.  The analysts proved to be wrong in this, because May was just mixed.  Overall retails sales declined 0.2%, but increased 0.3% ex-auto.  In the wake of that, the Econoday-surveyed analysts have apparently decided to work on the theory that "if you expect nothing you won't be disappointed".  They're calling for a 0.0% change in overall retail sales, with a 0.1% increase in ex-auto retail sales.
So let's hit the Advance Monthly Sales for Retail and Food Services June 2011 report, and see what actually happened.  And what happened is that we beat expectations, with retail sales increasing 0.1%.  That deserves a "yay" for beating expectations by a tiny amount.  We also beat expectations looking at the ex-auto figures, showing a 0.2% increase.  Again, "yay".
I joke, obviously.  It really isn't a huge amount, but it is still better than missing expectations.
Anyway, building material & garden equipment and supplies dealers had the best month, with a 1.3% increase in sales.  That seems to make sense, since a) June is a good month for gardening and building and working outdoors, and b) we've got a lot of areas trying to recover from floods and tornados and wildfires that happened in May and June.  You rather need building materials for that sort of thing.  Furniture and home furnishings stores had the worst month, with a 0.8% decline in sales.
[1]  Physical products.  Things you can touch, handle, manipulate, eat, and so forth.  There are also intangible goods, which are actually services.

Producer Price Index

We have a bumper crop of market data today!.
Starting us off (because it's the one I clicked on first - all three reports actually come out at the same time), we have the Producer Price Index.  This is, of course, a measure of inflation as it impacts producers and manufacturers at all stages of the process - raw materials, intermediate goods, and finished products.  Increases in PPI don't always correlate into a 1:1 increase in CPI, there are a number of other factors to consider[1], but it is considered a definite indicator of the direction of inflation.
May's figures weren't bad at all.  PPI for finished goods rose 0.2%, which missed expectations but not by a whole lot, and the core PPI for finished goods rose 0.2% as well.  PPI for finished food fell 1.4% (on a 12.2% decline in fresh and dry vegetable prices) and PI for finished energy rose 1.5% (driven by a 2.7% increase in gasoline prices).  PPI for intermediate goods rose 0.9%, and PPI for crude goods fell 4.1% (mostly on a 4.7% decline in the cost of copper).
For June, the Econoday-surveyed analysts are expecting a 0.3% decline in PPI for finished products, driven by declines in food and/or energy - core PPI for finished products is expected to increase 0.2%.
Are they right?  We turn to the Producer Price Indexes - June 2011 news release from the Bureau of Labor Statistics to find out.  And what we find out is that they are wrong, but in a good way.  The PPI for finished goods decreased 0.4%, beating expectations.  On the other hand, we missed expectations on the core PPI, which rose 0.3%.  All of this was driven by a 2.8% decline in the cost of finished energy (which was driven in its turn by a 4.7% decline in gasoline prices).  PPI for intermediate goods remained flat, with a change of 0.0%, again driven by a decline in energy costs (0.8%, helping offset a 0.4% increase in intermediate foods and feeds costs).  PPI for crude goods fell 0.6%, also driven by energy (which fell 4.1%, helping to offset a 2.1% increase in crude foodstuffs and feedstuffs).
So far, the morning is looking up.
[1]  Like manufacturers asking themselves questions like "If I pass these costs on to my buyers, will they simply stop buying?"

Wednesday, July 13, 2011

World News!

European Union
  • Plans for a special summit on a second Greek bailout ran off the rails on German refusal to participate.  The feeling of the German government is that Greece is funded until September, so why rush?
  • Prime Minister Naoto Kan has called for development of renewable energy sources in an effort to make Japan a nuclear-free nation.
  • Joji Morishita of the Institute of Cetacean Research has announced that their research fleet[1] will be returning to Antarctic waters to study whales[2], taking advantage of the fact that the International Whaling Commission allows member nations to issue "scientific permits" for the killing of a set number of whales.  Typically, the Japanese government issues "scientific permits" for several hundred whales per year.  Presumably, it feels the ICR is being ecologically friendly by recycling the dead whales into convenient single-serving packages.
  • An explosion hit a gas pipeline in northeastern Syria.  Official sources are reporting no casualties and only limited damage, and the cause is currently unknown.
  • Syria has condemned Secretary of State Clinton's remarks (stating that Brutal Dictator[3] al-Assad had "lost legitimacy" to rule and that he was "not indispensable") in the wake of the "completely spontaneous and absolutely not instigated by the Syrian government"[4] attacks on the French and US embassies in Damascus.
United States
[1]  A research fleet with harpoon cannons.
[2]  Specifically, to study how how the ability of whales to survive having harpoons fired into them, whether they taste better as a simple shabu-shabu or marinated in soy sauce, and then the most efficient means of packaging them for resale.
[3]  Oops.  I meant "President'.  Darn those typos.
[4]  Nudge, nudge.  Wink, wink.  Know what I mean?

U.S. Import and Export Price Indexes News Release

The latest U. S. Import and Export Price Indexes news release (http://www.bls.gov/news.release/pdf/ximpim.pdf) was issued today by the Bureau of Labor Statistics. Highlights are below.

U.S. import prices fell 0.5 percent in June, the first monthly decline since June 2010. Declining fuel and nonfuel prices both contributed to the overall decrease. U.S. export prices ticked up 0.1 percent in June after rising 0.2 percent in May.

News releases archives: http://www.bls.gov/schedule/archives/all_nr.htm
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FW: Consumer Financial Protection Bureau Outlines Bank Supervision Approach

CFPB Will Begin Its Examination Program for Large Banks on July 21
WASHINGTON – The Consumer Financial Protection Bureau (CFPB) today outlined the agency's approach to supervising large depository institutions to ensure compliance with federal consumer financial protection laws – a supervisory process that will begin on July 21, 2011.
"The new consumer agency is here to make sure that markets work for American families, and our bank supervision program is a big part of that," said Elizabeth Warren, Special Advisor to the Secretary of the Treasury on the CFPB. "Starting on July 21, we will be a cop on the beat – examining banks and protecting consumers."
Scope of Bank Supervision Program
Leading into the recent financial crisis, consumer financial protection authorities were spread among seven different federal agencies. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) streamlined consumer protection oversight authority into the CFPB – promoting greater efficiency and accountability for American consumers.
The consumer agency will conduct examinations to help ensure that consumer financial practices at large banks conform with consumer financial protection legal requirements. The CFPB's bank supervision program will oversee the 111 depository institutions that have total assets over $10 billion.  Subsidiaries and all other affiliates of these institutions also fall under the CFPB's authority.  These institutions collectively hold more than 80 percent of the banking industry's assets.
Staffing and Training
A diverse and talented team of examiners throughout the country, managed out of satellite offices in Chicago, New York, San Francisco, and Washington, D.C., will form the front line in the CFPB's supervisory efforts.   Each of these satellite offices will be the nexus for CFPB supervision in their respective areas of the country.  Having examiners and field managers focused on these regions will help ensure that the CFPB understands the business practices and dynamics in different markets throughout the country.  The examiners working in those regions will spend much of their time on-site at depository institutions and at other consumer financial services companies. 
A large part of the CFPB's supervision staff will be made up of experienced examiners: By the end of July, the CFPB supervision team will include more than 100 staff members transferring directly from the Federal Deposit Insurance Corporation, the Federal Reserve System, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. The CFPB expects eventually to have several hundred examiners on board, coming from a variety of backgrounds, including state regulatory agencies and industry.  Experienced examiners will sharpen their skills in workshops before being deployed, and examiners new to consumer financial protection will receive extensive technical and professional skills training. 
Supervision Process
CFPB supervision will be an on-going process of pre-examination scoping and review of information, data analysis, on-site examinations, and regular communication with regulated entities, prudential regulators, and as well as follow-up monitoring. For most depository institutions supervised by the CFPB, periodic examinations will be conducted.  For the largest and most complex banks in the country, the agency will implement a year-round supervision program that will be customized to reflect the consumer protection and fair lending risk profile of the organization. 
Monitoring will be a constructive process, ensuring that, where required, consumer risks are addressed and compliance programs are strengthened. Analyzing information that is unique to the institution – for example, lending activities, fee structures, and marketing practices – as well as assessing product trends at the market level, will also allow the CFPB to detect and address risks to consumers as they develop. Institutions will generally be advised of upcoming examinations and receive status updates throughout the supervision process.
During an examination, the CFPB will assess each institution's internal ability to detect, prevent, and remedy violations that may harm consumers by reviewing the institution's internal procedures and conducting interviews with personnel. Examiners will look at the products and services the institution offers, with a focus on risk to consumers. The institution's compliance with requirements during the entire life cycle of the product or service will be reviewed, including how a product is developed, marketed, sold and managed.  Fair lending reviews will be conducted to detect and address potential discriminatory practices, and, more generally, the institution's policies and practices will be evaluated to ensure compliance with consumer financial protection laws and regulations. 
If a company is not fully compliant, the CFPB will seek corrective actions, including strengthening the company's programs and processes to ensure that such violations do not recur and, where appropriate, that remedies are instituted. When necessary examiners will coordinate and work closely with CFPB's enforcement staff to implement appropriate enforcement actions to address harm to consumers.
Next Steps
On July 21, the CFPB will reach out to banks and their affiliates to establish channels of communication and to introduce them to the agency's supervision and examination process. The CFPB has already made great strides in reviewing information received from federal and state regulatory agencies about the depository institutions for which it will assume responsibility.  In the weeks following July 21, CFPB examiners and managers will:
  1. Become familiar with the structure, business strategies, operations, and risks of the organizations they will be supervising;
  2. Communicate and coordinate the CFPB's efforts with federal and state regulatory agencies;
  3. Finalize the CFPB's plans to supervise and examine the organizations under its jurisdiction; and
  4. Begin conducting the agency's first round of on-site examinations.
This process will begin remotely in most instances, and CFPB examiners will then begin on-site reviews at the supervised institutions to continue their work.  Over the next several weeks, the CFPB will conduct further outreach to banks that fall under its jurisdiction. The CPFB will provide additional information via letter to the 111 institutions, and will conduct informational roundtables starting in early August.
The CFPB will post on its website the initial phase of its Examination Manual, which is the field guide for examiners supervising both banks and other consumer financial services companies. The publication of the manual will be accompanied by a general invitation for feedback and suggestions for improvements from the banking industry, nonbank financial services companies, federal and state agencies, consumer and community groups, and the general public.  

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Tuesday, July 12, 2011

World News!

  • Canada has withdrawn from the UN Conference on Disarmament, a permanent 65-member-nation conference on nuclear disarmament.  North Korea is the current chair of the conference, and Foreign Affairs Minister John Baird has stated "North Korea is simply not a credible chair of a disarmament body.  The fact that it gets a turn chairing a United Nations committee focused on disarmament is unacceptable, given the North Korean regime's efforts in the exact opposite direction."
European Union
  • Supporters of the Syrian government stormed the US and French emgassies in Damascus, and then the residence of the US ambassador.  One building was damaged, but there were no injuries to embassy personnel and Marine Corp guards were able to disperse the - shall we say it? - "armed terror mob".[1]
United States
  • Cisco Systems Inc has announced plans to eliminate around 10,000 jobs - about 14% of it's work force - to revive profit growth.  The company plans to release more details during its August 11 earnings conference call.
  • Anonymous is back in the news, this time for hacking Booz Allen Hamilton, a US military contractor that offers "cybersecurity solutions".  They plan to release some 90,000 military email logins.
  • In "gun control fail" news, Arizona state Senator Lori Klein made news when she carried a loaded handgun into the state Capitol - which is, by definition, an illegal action.  Her attempts to become a flash point for handgun rights may have been hampered when she later pointed the loaded handgun (which has a laser sight but no safety) at a reporter, while stating "Oh, it's so cute."  She then said the reporter didn't need to worry because "I just didn't have my hand on the trigger."
[1]  Of course, given the general lack of response from Syrian security forces, and the general popularity of Brutal Dictator[2] Assad, it is probably not irrational to assume that the "supporters" were Syrian security forces.
[2]  Excuse me.  That was a typo.  Clearly, I meant to type "President".

US International Trade In Goods And Services, May 2011

"International Trade" is, in this context, the technical term for the US trade deficit[1].  Analysts really like to look at this figure, because trade deficits are directly subtracted from GDP.  If the deficit shrinks, there is joy all around.  If it expands, despair.
April's results were surprisingly good, showing the trade deficit narrowing to $43.7 billion - beating expectations $5.3 billion.  Most of it was driven by increases in exports in industrial supplies and materials, and in capital goods, and by a decrease in imports of automotive vehicles and supplies and of industrial supplies.  The Econoday-surveyed analysts are feeling more optimistic for May, and are looking for a further $1 billion drop to a trade deficit of $42.7 billion.
For the details, we turn to a joint release by the US Census Bureau and the US Bureau of Economic Analysis.  A joint release that puts the boot in, so to speak, on that optimism.  Far from declining $1 billion, it ballooned $6.5 billion to a $50.2 billion deficit.  This was driven by a decrease in industrial supplies and materials exports and by an increase in imports of industrial supplies and goods and of capital goods.
[1]  Technically, it's the measure of whether we have a surplus or a deficit, and how much of one or the other we have.  But really.  We haven't run a trade surplus since 1975.  So why pretend?