The Profit Motive September 3 

Stocks look set to finish the week in fine form following a string of gains. The DOW is on track to close up almost 300 points or a little less than 3% while the NASDAQ is ahead nearly 100 points or just about 4%.

Today’s data is mixed. The ECRI Weekly Leading index slipped to 120.6 as the smoothed annualized growth rate fell below –10% again, hitting –10.1%, the 6th week out of the last 7 that signals recession. For the record I don’t buy the double dip recessionary thesis, not because I don’t think the economy is slipping back into recession. But because the last recession never ended as per the NBER and they are the ones charged with officially dating these things.

The ISM Services Index fell a much larger then expected 2.8 points to 51.5 in August, Weakness was seen across the board, employment went negative at 48.2, New Orders slipped to 52.4 while Business Activity fell to 54.4. The service sector continues to show expansion, but only just as the trend is going in the wrong direction.

The August payrolls report fell less than expected, with just 54,000 jobs lost last month. Prior months were revised to show losses of 54,000 and 175,000 from 131,000 and 221,000 as reported last month. The average work week increased .1 hours to 33.5, average wages gained .2%, while the official unemployment rate edged up to 9.6%. Certainly this report is better than expected, sadly the trend of job losses continues and it should be noted that about 150,000 jobs need to be created each month just to keep up with demographics or population trends.

The Profit Motive September 2 

Stocks enter the final hour about even on little news. Friday’s economic calendar is a busy one with the ISM Services Index and official Employment Report amongst other releases.

Productivity was revised down to –1.8% in the 2nd quarter, the original figure was -.9%. Unit labor costs were revised up from +.2% to +1.1%. This suggests that labor based cost control may have reached its limit. While 1-month does not make a trend if this continues it will have a negative impact on profits going forward and also market valuations.

Light vehicle sales fell .5% in August to 11.47 million units annualized as per Autodata Corp. Sales are down 18.9% from a year ago, the peak cash for clunkers month. Which demonstrates that like housing, tax credits can be used to induce people to buy things. This pulls demand forward and results in substantial declines after the fact.

Its not all bad news, the Pending Home Sales Index increased 5.2% in July so we may get a small bounce off the bottom in the sales figures next month, as per the NAR. While Personal bankruptcy fillings slipped 8% in August as per the American Bankruptcy Institute to 127,028. That said personal bankruptcies are on track to break 1.6 million this year.

The Profit Motive September 1 

Stocks jumped to large gains in morning trade on mixed news. The ISM Manufacturing Index gained .8 to 56.3 in August bucking expectations despite a decline in New Orders to 53.1. Construction spending slipped 1% in July, a 3rd consecutive decline, all categories fell except non-residential which gained .8%.

Announced Job Cuts hit a 10-year low of 34,768 in August as per the Challenger Report, breaking a recent string of increases. That said the ADP Private Payrolls Report slipped 10,000 last month, a significant miss from expectations for a gain of 40,000 as the labor market continues to show stress. The official employment report will be released Friday and expectations are for a loss of 120,000 additional positions.

Despite a fall in the 30-year contract rate to 4.4% the MBA Association activity index only gained 2.7 points to 893.8, Purchase Apps increased 1.8 points to 173.6 while refi activity added 2.8 points to 5,085.3. Despite record low interest rates mortgage activity remains moribund as does real estate sales, which really tells you everything you need to know about the future of the sector.

A lot of talk is making the rounds regarding Quantitative Easing 2.0 or another big Federal Stimulus Package. I guess this is the reason for today’s huge market jump but honestly who knows. The sad reality is that the first package did little in the way of promoting real organic economic growth despite goosing the GDP figures, primarily because most of it was horribly misdirected. Various programs to encourage people to assume more debt by purchasing cars and houses when they were already choking on too much debt, as these effects fade the economy shows increasing signs of slipping back into reverse.

Despite the official forecasts of positive 3rd quarter GDP growth, increasingly it is looking like it will in fact be a negative number because incomes are essentially flat, personal spending is anemic, housing starts and sales have both plunged by about 30% while construction spending is week and business capex falters.

The Profit Motive August 31 

Stocks enter the final hour with small losses on mixed news. The FDIC 2nd Quarter Banking Profile is out. Problem banks increased by 54 to 829 involving 403 billion in assets, a decrease of 28 billion from the first quarter. This puts the FDIC on pace for 1,000 problem banks by the end of the year. Through the 2nd quarter the FDIC Deposit Insurance Fund or DIF is overdrawn some 15.2 billion which is an improvement on the –20.7 billion seen at the end of the 1st quarter. That said the fund is actually ok due to last years pre-paid assessments.

The Case/Schiller Home Price Index for June shows a nice gain of 4.2% from a year ago. Some notable standouts include San Francisco +14.3%, San Diego +11.2%, Los Angeles +9.2%, Washington +7.3% and Boston + 3.2%. This report marked the 5th consecutive increase in prices from a year ago. I could stop here and just provide the positive spin ala the mainstream media. But I’m rather fond of the truth and you seem to be as well based on your kind words, comments and feed back over the years that I really appreciate, thank you very much. First up is the usual warning about undue seasonal factors skewing prices that Case/Schiller have warned about for the last few months. Of much greater significance is how the price index itself is calculated. Which is a 3-month moving average, so June’s figure is actually an average of the data for April, May and June. Now this helps smooth the data and provides a more accurate picture, the downside is that it introduces a significant lag in reporting of true price action. This is why some of the other price indexes are already showing negative numbers. Home sales were strong through June due to the tax credit and the roughly 60-day closing period for existing home sales that make up about 85% of the market. As is well documented, sales collapsed in July and remain under pressure, but this won’t be reflected in the Case/Schiller Index until the end of October when we get an average price based on the months of June, July and August.

The minutes of the previous FOMC are out, expectations of economic growth have been lowered but the Fed governors and chairman still think 2nd half GDP growth will be positive and that the recovery will improve in 2011. Inflation was noted as being very low. Well I certainly hope they are correct, that said their track record of seeing this train wreck coming, and predicting what would happen next doesn’t inspire confidence in their forecasting ability.

Once again William Black hits the nail on the head. During the interview he covers the systemic fraud that is the US Banking Industry. Noting that there has not been 1 single criminal referral from either the OCC – Office of the Comptroller of the Currency, or the OTS, Office of Thrift Supervision. As an aside the S&L crises netted 1,000 criminal prosecutions for a financial fiasco that is dwarfed by the current crises.

The deliberate perversion of the FASB, Federal Accounting Standards Board, accounting rules so as to subvert the PCA, Prompt Corrective Action, act of 1991, allowing the banks to hide losses by maintaining assets on their books at grossly over inflated values. Hence the delay in foreclosure that has now hit 14-months and the huge “shadow inventory” of properties foreclosed but not sold. Yet another example of what can be achieved with the judicious of some lobbying. The result will be that markets don’t recover which means the economy wont recover as we pursue an extend and pretend strategy just like the Japanese, despite roundly criticizing them for it at the time. Like the Japanese who experienced a lost decade, now two, and declines of 70-90% in their real estate prices and 75% in their stock market along with a 20- odd year battle with deflation, we seem destined to follow the same path

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Thanks to Max Keiser over at the Keiser Report for doing the Interview

The Profit Motive August 30