Wall Street’s Latest Bounce – Ostrich Economics At Work – David Stockman’s Contra Corner 10-20-15

Salient to Investors:

David Stockman writes:

The price of financial assets is now artificial and wildly inaccurate. $300 trillion of global finance cannot remain stable much longer.

Bulls believe the Fed is on hold until at least next March, while Wall Street is projecting S&P 500 earnings of $130 per share on an ex-items basis for 2016, and which will never happen. The S&P is overpriced at 21 times earnings, and at 30 times trailing earnings or more when honest GAAP earnings for Q3, 2015 come in at $95 per share or less, versus the peak $106 per share in Q3 2014. More than $5 trillion of current cash flow and new debt is now allocated to corporate stock buybacks, M&A deals and LBOs.

Alan Blinder and Mark Zandi admit QE has possible negative side-effects, but say that for the most part they have yet to materialize. All the while the global economy heads into a deflationary conflagration.

This mother of all bond market bubbles will bring down the entire financial system when it inexorably bursts: central banks have vast powers, but they cannot repeal the law of supply and demand. $19 trillion of central bank bond-buying during the last two decades has dominated debt pricing on the margin for most of this century. Last week’s 60 basis points for 2-yr treasury notes or 210 basis points for 10-yr money do not reflect a surfeit of private savings or business and household hoarding of cash but a giant surplus of credit.

Real net business investment is still 17% below its 2000 level. Junk debt has risen from $1.3 trillion at the 2007 peak to more than $2.5 trillion today driven by yield-starved money managers and homegamers.

Debt-crippled, junk-rated Dell is buying EMC for $67 billion, or 17 times free cash flow for 1% annual growth, funded almost entirely with junk debt and tracking stock on EMC’s major asset, a public company that pays it no dividends or other regular cash returns. In a PC industry which is disappearing at a rapid rate.

China is headed for massive economic and financial conflagration, which will spillover into the rest of the world because the entire emerging market economy was built on China’s runaway economy and investment bubble. China’s insane accumulation of foreign exchange reserves over two decades of massive and blatant currency pegging could not continue indefinitely which is why it has seen $850 billion capital outflow of the last 4 or 5 quarters and a $500 billion drop in FX reserves since late 2014. There is no way to manage a $28 trillion house of debt cards, which grew by 56 times in less than two decades, to a soft landing.

The bubble is bursting in socialist Brazil, in Australian mining, in Canadian real estate, in the North Dakota Bakken, and in the German export machine, as China and its EM suppliers are being forced into liquidating dollar and euro credit, and stop buying luxury cars and engineering machinery on borrowed money.

Read the full article at http://davidstockmanscontracorner.com/wall-streets-latest-bounce-ostrich-economics-at-work/

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Debt Ceiling Wall of Worry Another Reason for Investing – Bloomberg 10-01-13

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Since 1976, the S&P 500 has risen 11 percent on average in the 12 months following a government shutdown versus an average return of 9 percent over 12 months. There have been 17 shutdowns since 1976, with 5 occurring within 3 months of each other – in all the cases, the Index was higher by the end of the next 2 years. The S&P 500 declined an average of 0.59 percent during the shutdowns.

While the S&P 500 has fallen seven of the past eight days on concern the political deadlock over the U.S. budget and debt limit will hurt the economy, investors at Raymond James & Associates and PNC Wealth Management say equities will recover as profits rise.

Analysts expect Q4 earnings for S&P 500 companies to rise 9.1 percent, the most since Q3 2011, and will continue to grow in 2014 and 2015, when they rise more than 10 percent.

Jeff Saut at Raymond James said he is a buyer on weakness, and once we are past the debt ceiling, the market will focus on improving economic numbers and improving earnings.

Martin Leclerc at Barrack Yard Advisors said going back to the 1990s and the last one, shutdowns were actually good for the stock market.

Kristina Hooper at Allianz Global Investors said stock swings will widen during the shutdown because the majority of the market was not expecting it as late as last week. Hooper said the longer-term picture is positive and we will work through this relatively quickly.

Kevin Caron at Stifel Nicolaus said stocks need to fall further before they become bargains because we have not seen a significant correction and the market is at fair value.  The S&P 500 is at 16.1 times earnings.

Mark Zandi at Moody’s Analytics said a 3-to-4 week shutdown would cut growth by 1.4 percent – without a shutdown Q4 growth would have been 2.5 percent annual.

E. William Stone at PNC Wealth said the gridlock in Congress won’t weaken the overall economy and investors should take advantage of these kinds of sell-offs as the fight does not harm the long-term market or the underlying economic picture.

Read the full article at  http://www.bloomberg.com/news/2013-10-01/debt-ceiling-wall-of-worry-is-another-reason-for-u-s-investing.html

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U.S. Expansion Poised for Longevity – Bloomberg 06-09-13

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The economic expansion shows signs of lasting almost twice as long as average, with few of the excesses that often presage the start of contractions – inflation is slowing, not quickening, household debt is shrinking, not expanding, and the labor market is slack, not tight.

Robert Gordon at Northwestern University said the expansion last another 4 to 5 years.  (Which would make it the second longest on record, behind the 1990s and versus the average since the end of WWII of 58 months.) Gordon said the cyclical outlook is bright, but the US will be hampered longer term by an aging population, a plateauing of educational achievement, and increased inequality. Gordon said past expansions often were cut short by Fed tightening credit – in 1957, 1960, 1980, 1981 and 1990 – while many previous cycles ended because of too much exuberance in both residential and nonresidential construction – a major cause of the 1929-33 Depression and in 2007-08. Gordon said fortunately during 2008-13, the US is ‘constructing fewer homes and cars than replacement needs.

Allen Sinai at Decision Economics said the S&P 500 may rise to 1,750 in 2013 and 2,000 in 2015.

Goldman Sachs expects economic growth of 2.9 percent in 2014 and 3.2 percent in 2015 versus 1.9 percent in 2013. Jan Hatzius at Goldman said we could see a good growth environment for a long time.

Mark Zandi at Moody’s Analytics said there are no significant imbalances in the private economy, which is in good shape, though possible shocks could knock the recovery off course, including a collapse of the stock market, a sudden spike in long-term interest rates, or a military confrontation between the U.S. and Iran that drives up oil prices. Zandi said policy makers would be hard-pressed to cope with the fallout of a sudden shift because short-term interest rates already are near zero and the budget deficit is still high by historical standards.

Robert Hall at Stanford said the labor market is still very weak so we have a long way to go before any excess will appear in that most important of all markets.

Itay Michaeli at Citigroup recommends auto shares because consumers have been deferring purchases and we are still very early in the auto-sales cycle – he forecasts sales of cars and light-duty trucks will rise to 16.5 million in 2015 from 14.5 million in 2012.

Maury Harris at UBS Securities said younger adults have the most ability to spend after some delayed striking out on their own by living with parents or friends, so housing starts could rise to 1.1 million units in 2013 and 1.35 million units in 2014 versus 781,000 in 2012.

Joseph Carson at AllianceBernstein see many positives and expects another 3 to 4 years of economic growth at least.

Read the full article at http://www.bloomberg.com/news/2013-06-09/u-s-expansion-poised-for-longevity.html

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JPMorgan Sees Home Prices Up 14% as BofA Touts Party – Bloomberg 03-15-13

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JPMorgan Chase now predicts US home prices will rise 7 percent in 2013 and over 14 percent through 2015, and Bank of America predicts prices will now rise 8 percent in 2013 as homebuyers and investors rush to acquire a dwindling supply of properties and the Fed lowers mortgage rates.

Samantha McLemore at Legg Mason says we are in the early innings of a prolonged recovery in housing and the economy.

The NAR say the number of homes for sale are the fewest since December 1999.

John Sim et al of JPMorgan said housing and economic indicators are showing resilience and estimates home prices will increase 3.9 percent in 2014 and 3.2 percent in 2015, while reaching for yield is now firmly grounded in the housing market.

 Freddie Mac says the average rate for a 30-year loan is 3.63 percent, a six-month high, versus the record low of 3.31 percent in November 2012 and 6.8 percent in July 2006.

Michelle Meyer, Chris Flanagan and Justin Borst at Bank of America say low interest rates, a tight supply, and record affordability has triggered a positive feedback loop, where rises in home prices fuels expectations of further rises and easing credit conditions  which stimulates home buying. They expect gains in 2014 will moderate to 6.5 percent and 3.7 percent in 2015.

JPMorgan estimates that by the end of 2013, 10 percent of borrowers will be underwater versus 25 percent in 2011, and demand for non-performing assets will increase.

Bryan Whalen at TCW said if home prices rise anywhere close to these predictions we will see a further rally in non-agency residential mortgage-backed securities – in a more subdued recovery near-term total rates of return could be in the mid-teens but higher rises could see total rates of return of 20+ percent.

Eric Teal at First Citizens BancShares is bullish on homebuilding stocks as construction and new-home building get back to more normalized levels.

Mark Zandi at Moody’s Analytics said everyone knows that housing is kicking into gear but are underestimating the boost to the economy.

Read the full article at http://www.bloomberg.com/news/2013-03-15/jpmorgan-sees-home-prices-up-14-as-bofa-touts-party.html

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Labor Market Gains Help Brighten Americans’ Outlook – Bloomberg 03-07-13

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Mark Zandi at Moody’s Analytics said businesses have shrugged off the effect of the tax increases and the spending cuts and are hiring as job growth has improved, stock prices are aT record-high, housing values are surging, and gas prices have started to decline.

Gregory Hayes at United Technologies is much more optimistic about the economy and his leading indicator, US residential HVAC business, is very strong.

Read the full article at http://www.bloomberg.com/news/2013-03-07/jobless-claims-in-u-s-unexpectedly-decline-to-a-six-week-low.html

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Housing Packs Punch for U.S. Growth in 2013 and Beyond – Bloomberg 02-04-13

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Climbing home prices are lifting household wealth and boosting the purchasing power of consumers. Declining mortgage delinquencies and foreclosures are giving banks greater leeway to lend. Rising property-tax revenue is alleviating pressure on state and local governments to cut budgets.

Mark Zandi at Moody’s Analytics said the housing recovery will kick into a higher gear as 2013 progresses and juice other parts of the economy. Zandi sees GDP growth of 2 percent in 2013 as rising residential construction will boost add 0.75 percent and offset much of the drag from the fiscal squeeze.

Bloomberg says housing has helped lead the economy out of every recession since 1950 except for last from 2007 to 2009.

James Bullard at the FRB of St. Louis said the psychology has shifted, and good things are happening.

Karl Case, John Quigley and Robert Shiller found that changes in house prices, and in real estate wealth, have a much bigger impact on consumer spending than stock prices and financial wealth. Case says housing has turned from a headwind into a tailwind for the economy – consumption will be boosted $80 billion in 2013 by the recent rise in house prices.

JPMorgan Chase said underwater borrowers fell by almost 4 million in 2012 to 7 million, and could drop to 4 million within 2 years.

Michael Feroli at JPMorgan Chase said banks are benefiting as loan delinquencies and foreclosures decline and add as much as 0.4 percent to GDP in 2014.

Markit said credit-default swaps are the cheapest since July 2011.

Carl Riccadonna at Deutsche Bank Securities said housing could be a major story this year: the housing recovery is gaining momentum and the sector has worked off its excesses.

Michelle Meyer at Bank of America expects property values to increase 4.7 percent in 2013, 7.7 percent in 2014, and 5.2 percent in 2015, while the ripple effects will accelerate in 2013.

Read the full article at http://www.bloomberg.com/news/2013-02-04/housing-packs-punch-for-u-s-growth-in-2013-and-beyond.html

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R-Word For U.S. Economy in 2013 is Rebound Not Recession – Bloomberg 01-31-13

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Nigel Gault at IHS Global Insight said the drop in GDP in Q4 2012 was driven by temporary corrections in defense spending and inventories and is not a harbinger of recession – expects 2 percent growth in Q1 2013.

Mark Zandi at Moody’s Analytics said the expansion will remain on course thanks to a mounting housing recovery, a steadily improving job market, and reviving demand for US exports. Zandi expects 2.1 percent growth in 2013 as an improving job market and rising home prices help offset higher payroll taxes.

Peter Newland at Barclays said the Q4 report ex inventory and defense data was positive – consumer spending growth picked up to 2.2 percent and business investment accelerated.

David Greenlaw and Ted Wieseman at Morgan Stanley expect 1.5 percent growth for Q1 2013.

Michael Feroli at JPMorgan Chase said the reduced pace of stockpiling means companies won’t have to pull back on production as much in Q1 if consumer spending falls in response to the recent tax increases.

Michelle Meyer and Ethan Harris at Bank of America expect household expenditures to take a hit in Q1 due to the increase in payroll taxes.

Carl Riccadonna at Deutsche Bank Securities says housing may lift growth by as much as 2 percent in 2013.

The World Bank predicts developing nations to grow 5.5 percent in 2013, while Europe stabilizes.

Read the full article at http://www.bloomberg.com/news/2013-01-31/r-word-for-u-s-economy-in-2013-is-rebound-not-recession.html

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Sandy Seen Boosting U.S. With as Much as $240 Billion Rebuilding – Bloomberg 11-23-12

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Economic Outlook said Sandy reconstruction and related purchases and hiring may increase US economic growth by 0.5 percentage point in 2013. Bernard Baumohl at Economic Outlook said construction costs will be more than replacement because much of the work will involve fortifying structures.

Goldman Sachs said Sandy may reduce economic growth by 0.25 percent to 0.5 percent in Q4, and most of the reconstruction will take place in Q1  2013, adding as much as half a point to growth.

Jeff Burchill at FM Global said insurance claims payments and government funds typically boost the economy for 18 to 36 months after a natural disaster. Gary Schlossberg at Wells Capital Mgmt said reconstruction following a storm has an effect similar to a government-funded stimulus program.

The Bureau of Economic Analysis says economic output in the New York City region in 2010 was 8 percent of GDP and greater than Mexico’s economy.

Mark Zandi at Moody’s Analytics said the rebound after Sandy isn’t a sure thing because airlines flights and restaurant meals are lost forever.

Read the full article at http://www.bloomberg.com/news/2012-11-23/sandy-seen-boosting-u-s-with-as-much-as-240-billion-rebuilding.html

Americans Say Europe’s Austerity Lesson Means Act Now – Bloomberg 11-11-12

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Alice Rivlin at Brookings said the lesson of Europe is, don’t wait until you’re in a crisis to act and austerity is not a good prescription for weak economies. Rivlin said the US has the luxury the Europeans don’t, no pressure in the financial markets.

Mohamed El-Erian at Pimco said the fiscal cliff would be a self-inflicted, disorderly contraction that would push the US into recession. El-Erian said policy makers need to promote growth as well as curbing deficits.

Laurent Fransolet at Barclays said belt-tightening is a big theme globally and there will be more focus on the US, which has done very little fiscal consolidation.

Publicly held debt is 67 percent of GDP versus 36 percent in 2007, while the deficit for the fiscal year ended on Sept. 30 was 7 percent of GDP.

The EC estimates Greece will run a budget deficit of 5.5 percent of GDP in 2013 versus 15.6 percent in 2009: Ireland’s will fall to 7.5 percent of GDP versus a peak of 30.9 percent in 2010; and Portugal’s will be 4.5 percent from 10.2 percent in 2009. The EC predicts the Greek economy will shrink for a sixth straight year in 2013, contracting 4.2 percent after 2012’s 6 percent slide, Portugal will lose 1 percent, and Ireland will grow 1.1 percent.

Mark Zandi at Moody’s Analytics said the experience of Europe’s peripheral countries shows that US policy makers should tackle America’s swelling debt before investors force them to do so.

The EC said Britain’s GDP will grow 0.9 percent in 2013 versus shrinking 0.3 percent in 2012. Nariman Behravesh at IHS said Britain learned the hard way that you can do a lot of damage if you don’t phase in fiscal consolidation, especially when the economy is weak. The EC says Greece’s debt will rise to 188.9 percent of GDP in 2014 from 176.7 percent in 2012.

The IMF review of recent austerity measures in 28 countries found that the steps have had a bigger negative impact on their economies than traditional macroeconomic models had predicted.

Carl Lantz at Credit Suisse sees the 10-yr yield at 1.75 percent at year-end and 2 percent in 2013 on a pragmatic resolution of the budget battle.

Read the full article at http://www.bloomberg.com/news/2012-11-12/americans-say-europe-lesson-means-act-now-as-austerity-will-fail.html

Obama’s Economy Seen Gaining in New Term Regardless of Policies – Bloomberg 11-08-12

Salient to Investors:

A strengthening economy will boost the president’s second term.The easy-money policy of the past four years is likely to continue throughout Obama’s second term.

Job growth will increase tax revenue and help shrink the budget deficit while keeping taxes low and preserving essential spending – all without any magic from the President. Banks have stronger balance sheets, most household debt is back to normal through a frugality and default. Housing prices have gone from falling to rising, buoying confidence, with pent-up demand for residential and commercial construction. Increased consumer spending induces business investment in a virtuous circle.

Most economists say the influence of any president over an almost $16 trillion economy is smaller than commonly believed. Robert Shapiro at Sonecon said knowing who’s going to be president takes you only about 10 percent of the way. Austan Goolsbee said almost all of the economy has nothing to do with the government.

Harm Bandholz at UniCredit said the economy needs less support from the government in the coming four years than in the past four.

Mark Zandi at Moody’s Analytics said the economy is operating well below potential, and there’s a lot of room for growth. Zandi said upper-income households’ balance sheets are as pristine as they’ve ever been, though mortgage debt remains a heavy burden at lower-income levels. Obama’s fiscal policy was critical to avoiding a depression.

Blue Chip Economic Indicators says the average forecast of economists is for growth of 3 percent a year in 2014, 2015 and 2016, with the unemployment rate sinking over the period from 7.4 percent to 6.9 percent to 6.5 percent but not going below 6 percent until 2019.

Ben Herzon at Macroeconomic Advisers said self-correcting forces in the economy will prevail.

The CBO says that even if the Bush tax cuts are extended in full, federal revenue will soar by 2016.

John Silvia at Wells Fargo Securities said job growth will be constrained by globalization as US companies continue to satisfy growing foreign demand by building factories abroad.

Read the full article at http://www.bloomberg.com/news/2012-11-08/obama-s-economy-seen-gaining-in-new-term-regardless-of-policies.html