Blimling and Associates Blog

As efforts to again extend unemployment benefits remain stalled in Congress, a dispatch in yesterday's editions of The Wall Street Journal highlighted the struggle some states are having with a surge in fraudulent claims. Seems as though some folks continue to report themselves as jobless even after they have found a new engagement:

Nearly $3 billion was likely lost to unemployment-insurance fraud nationwide in 2009, more than double the 2008 figure, according to early estimates from the U.S. Labor Department..In the most common type of fraud, formerly unemployed people continue to collect checks after finding work. On other occasions, fraud rings bilk the system out of tens of thousands of dollars at a time.The temptation to continue to collect checks after finding a job can be high. Many newly re-employed people accumulated debts during unemployment and took lower-paying jobs than they once had, said Ohio fraud investigator Mickey Ford, tempting them to supplement their incomes with an unemployment check. Potential fraudsters have also been lured by the larger potential take made possible by extended unemployment benefits, which until last month could be collected for up to 99 weeks, said Gary Burtless, an economist for the Brookings Institution. Last month, Park Forest, Ill., resident Reuvean Day admitted she collected $25,398 in benefits while employed as an administrative-support specialist a couple of years ago. Ms. Day was one of 11 people charged in May with taking $255,000 from Illinois's unemployment insurance fund.

Stories along these lines will only add heat to an already hot debate about the pros and cons of extending benefits. Proponents say that beyond the obvious help benefits deliver, the payments are good for the economy because they largely maintain consumer spending potential. Indeed, last week Speaker of the House Nancy Pelosi said that the unemployment benefits program "injects demand into the economy" and "creates jobs faster than almost any other initiative you can name." Opponents cite the need for fiscal restraint at the Federal level and, in some cases, say that by essentially rewarding joblessness you get...joblessness.

Source: The Wall Street Journal

Bank credit remains on the tight side. Consumer spending remains lethargic. Stepping into the void: retailers. A story published in The New York TImes cites several examples of retailers figuring out ways to essentially loan consumers money. Sam's Club, for example, is serving as a portal for SBA loans.

Wal-Mart's Sam’s Club is introducing a program in which it facilitates loans for shoppers of up to $25,000, backed by the Small Business Administration. Target will give its credit card holders 5 percent discounts. Toys “R” Us is instituting a holiday fund program where it adds to shoppers’ savings, and Staples and Office Depot are giving away office products for a penny or at no cost.

Will consumers take the bait? So far, they have been playing things close to the vest. In fact, data published last week showed the personal savings rate back at 4.0% for the first time since last Autumn.

http://www.cnbc.com/id/38093389/

So-called strategic defaults by homeowners have been a source of stealth stimulus. That is not really breaking news -- stories along those lines have been in print for several months. But the phenomenon doesn't cease to amaze...or outrage. So when a new story is published -- especially in the venerable New York Times -- we read it. In part to stay up on the trend. In part to see how high it can drive our blood pressure.

Today's dispatch in the Times comes under the headline "Owners Stop Paying Mortgages and Stop Fretting" and, from the start, it does not disappoint:

For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of.

Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.

“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”

To be fair, the banks are apparently so busy with foreclosures that the process has been significantly lengthened. According to the story,

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

In essence, lenders are helping float the life rafts. In a sense, the borrowers cannot be faulted for grabbing hold. They are basically being incentivized to do so. At the same time, there is hanging on and there is hanging out. It would be one thing for people to take the gift they have been given and sock away money for a fresh start or the next time. It seems like something altogether different to go out for a steak or to the casino (or, in the now infamous rendering by The Wall Street Journal late last year, buying a season pass for Disneyland). As other commentators have pointed out, when the banks are painted as the bad guys, it is less difficult to feel moral compunction about spending the mortgage money elsewhere.

Perhaps this is good for the economy over the short run. But someone, of course, is going to pay -- namely, all borrowers in the future. It may not be a sign of the apocalypse. But neither is it one of our proudest moments.

We relish reading the daily economic commentary provided by David Rosenberg of Gluskin Sheff (a Toronto-based money management firm). For several months he has cast a skeptical eye on the prospects for organic, sustained economic recovery. Remember the old Temptations song "My Girl"? It starts of: I've got sunshine on a cloudy day... Rewritten as an ode to Rosenberg, it would begin: He's got clouds for every sunshiny day... But, as depressing as it can be to read, the commentary focuses on real issues. Like this list from yesterday's note:

SCARY MATH

1 in every 10 American homeowners missed a mortgage payment in Q1 (a record)

1 in 6 Americans are either unemployed or underemployed

Over 4 in 10 unemployed Americans have been out of work for at least six months.

1 in 4 Americans with a mortgage have negative equity in their homes.

1 in 10 Americans believe their income will rise in the next six months.

1 in 5 Americans see business conditions improving in the next six months.

1 in 50 Americans plan to buy a home in the next six months.

1 in 8 Americans believe that current government policy is actually helping the economy.

1 in 10 American small businesses have a job opening. 1 in 10 American’s credit card usage is being written off (a record).

There are 5 unemployed workers competing for every job opening (hence downward pressure on wage growth).

Mortgage delinquencies in the U.S. hits a new record high, now over 10%

Outside of these, it’s all good. Lagged impact of gargantuan fiscal stimulus (the longevity of which is now being challenged with Greece the proverbial canary in the coal mine) and inventory-led production gains (the longevity of which is now being challenged by the fact that real final sales since the recession technically ended is running at a pace that is two-thirds weaker than what is “normal” coming out of a “downturn”).

Sell in May and go away started a week early this time around. April 26 was very likely the peak of the bear market rally.

Wal-Mart reported earnings this week. Quarterly performance was solid -- with better-than-expected top-line and bottom-line numbers. But same-store sales were down 1% ex-gasoline, and company officials continue to point to weakness and additional vulnerability on the consumer front. Consider comments made by CEO Mike Duke (as reported in The Wall Street Journal):

"Our customers, particularly in the US, are still concerned about their personal finances and unemployment, as well has higher fuel prices..."

"More than ever, our customers are living paycheck to paycheck..."

Target is perceived to have a more upscale demographic -- and is believed to have lost customers to Wal-Mart during the downturn. But those customers may be coming back. Mike Duke generically acknowledged the possibility during the Wal-Mart earnings call. Targets first quarter results seemed to affirm the notion. From The Wall Street Journal:

Target Corp. sounded decidedly upbeat about what it called a "stronger-than-expected economic environment" as it reported healthy profit and sales gains in its fiscal first quarter.

The company benefited from customers slowly returning to buying more profitable products, such as apparel and home furnishings.

The results were in sharp contrast to the latest performance at Wal-Mart Stores Inc., which on Tuesday reported its fourth consecutive quarter of lower sales at its U.S. stores, citing customers who are still pressured by gas-price increases and high unemployment.

By contrast, Target's profit rose 29% for the quarter ended May 1 as its sales increased 5.5%. Sales at stores open at least a year, an important measure of a retailer's health, rose 2.8%.

Economy bears are, naturally enough, focusing on WMT's comments; bulls, as might be expected, are touting TGT's showing as representing reality. The stocks are trading within a dollar of each other.

Getting a pulse on consumer sentiment and behavior remains as elusive as it is important...

The Euro got roughed up again yesterday as currency markets continue to assess the potential fallout from last weekend's nearly $1 trillion "bailout" package for struggling member states. The reaction in those member states? Hardly enthusiastic. Indeed, The Financial Times is reporting that unions in Spain are planning large-scale strikes. From the dispatch:

“The government has decided to sacrifice the purchasing power of public sector workers and pensioners to the dictates of the financial markets,” Cándido Méndez, UGT leader, said in an article in the El País newspaper. “And it’s very likely that it will be a pointless sacrifice.”

[Finance Minister Elena] Salgado said it was hard to disagree with the unions about the effect of the cuts on growth but made it clear that the government had no choice other than to reduce salaries.

“We would never have started them there, the cuts?.?.?.?We’re a socialist government and therefore cutting salaries and freezing pensions is something we only do because we have to. There is a moment when you have to do it and we did it.”

More than one story in recent weeks has noted the similarities between Greece or Spain and some US states confronting serious fiscal issues and large public-sector workforces -- California being the most commonly referenced. George F. Will, for one, offers up his perspective under the headline "Greece and GM: Too Weak To Fail" in the Washington Post.

The general sense is that it is not too late, too far gone for the US. But it is not easy to stay out in front of the issue -- austerity is a bitter pill to swallow here, too. Consider what is happening in New Jersey, where a new governor, Republican Chris Christie, is trying to tackle fiscal issues with alacrity. From "New Jersey Governor Sets The Tone for the US" in The Hill:

Upon taking office Christie declared a state of emergency, signing an executive order that froze spending, and then, in eight weeks, cutting $13 billion in spending. In March he presented to the Legislature his first budget, which cuts 9 percent of spending, including more than $800 million in education funding; seeks to privatize numerous government functions; projects 1,300 layoffs; and caps tax increases. 

Teachers unions are incensed, fighting Christie’s proposal that — in order to avoid cuts to education — teachers accept a one-year wage freeze and contribute 1.5 percent to the generous-by-every-standard healthcare plans they now enjoy for free. New Jersey, which has the highest unemployment in the region and highest taxes in the country, lost 121,000 jobs in the private sector in 2009 while adding 11,300 new education jobs. During the last eight years, K-12 enrollment rose just 3 percent while education jobs increased more than 16 percent. 

Today it is the Euro's turn to earn the forex market's scorn. Who's next?

 "We have successfully emerged from this recession with a healthier balance sheet and better capital disciplines..."

So said Whole Foods CEO John Mackey in a release announcing strong first quarter earnings for the upscale food retailer. How strong? Earnings rose to $0.39/share, just over double the rate seen a year ago and well ahead of the $0.33/share expected by analysts. The company beat on the top-line, too, with revenues of $2.11 billion -- up 11% from last year and better than the $2.05 billion expected. Most impressively, same store sales were up 8.7% in the quarter, with momentum growing to 9.5% through present quarter. The company raised same-store sales guidance for the year to between 6% and 7% (up from 3.5% to 5.5%). 

The Whole Foods numbers may cast light on what some see as an emerging post-recession/new-normal theme: accelerating activity among high-end consumers (generally speaking, Whole Foods' demographic) and continued lethargy among lower-end consumers (think Wal-Mart still lowering prices).

A separate story that caught our eye last evening concerns a group of consumers that cannot be ignored, either: the peoples of emerging Asia. A post on The Financial Times website under the heading "Consumers in Asia Start to Open Their Wallets" notes that,

David Carbon, chief economist of DBS, south-east Asia’s biggest bank, says the increase in consumption is a long-term shift, driven by a surge in sustainable and self-generating domestic demand on the back of economic growth.

“Two big misconceptions about Asia’s recovery are that it has been driven by inventories [restocking by businesses] and that consumption continues to lag,” said Mr Carbon. “In fact, consumption has played the major role in Asia’s recovery, both directly and indirectly via its impact on inventories.”

The effect is most dramatic in China, where domestic demand increased by $180bn (€142bn, £122bn) in 2009, compared with about $90bn in the US, according to DBS estimates. The picture is similar in the rest of Asia, with private consumption in its 10 biggest nations, excluding Japan, more than 7 per cent above September 2008 levels.

“In sharp contrast to all the analysis claiming that Asia does not consume enough, it is buying up a storm,” said Mr Carbon.

The consumer is apparently not dead. At least not all of them.

Over the past week, we have spent a lot of time pondering China's seemingly insatiable appetite for dairy powders. WMP and SMP imports continued to run hot through March. Is it real? Can it continue? What does it mean?

Those questions are difficult to answer without also pondering larger questions about economic health globally and in China. Events over the past week have shaken confidence in a view that all is well (or, at least, all is okay). Robert Samuelson comments on the phenomenon on the Investor's Business Daily website:

The United States and many countries approved "stimulus" programs of tax cuts and additional spending. Panic was halted. A downward spiral of falling private spending and rising unemployment was reversed. The resulting economic slump was awful. But it was not another Great Depression. The worst has passed.

Or has it? Greece's plight challenges this optimistic interpretation. It implies that celebration is premature and that the economic crisis has moved into a new phase: one dominated by the huge debt burdens of governments in advanced societies. Comparisons with the Great Depression remain relevant — and unsettling. Now, as then, we may be prisoners of deep and poorly understood changes to the world economic system.

It should not escape notice that China's equity markets have been under pressure for several weeks. The government seems intent on tightening in an effort to fight inflation. It seems reasonable to wonder about export prospects into a weak Eurozone. More to the point, will fallout from tighter credit conditions or a cooling economy put the brakes on dairy product imports? We don't yet know enough to know for sure...and there are other germane lines of inquiry to explore. At the same time, we get the sense that it would be a mistake to simply assume that everything is okay and conditions tomorrow will resemble those prevailing today or in the first quarter.

Yesterday's rally in the domestic equity markets was, on it's face, heartening. European leaders seemed to reach for "shock and awe" measures over the weekend, restoring a measure of confidence for the short-run. As the day wore on, however, we couldn't help but notice that what began as a concurrent rally in the Euro largely fizzled. After bouncing all the way back to the 1.3000 level versus the US Dollar (up from about 1.2750 on Friday), the market faded back to close at 1.2731 -- making for slender 0.2% gain on the day. This could be a cause for concern in some circles considering that the rhetoric out of the EU over the weekend included a pledge that the Euro would be defended.

Count the analysts at Morgan Stanley as unimpressed. A post on "The Money Game" blog site quotes the Wall Street bank as commenting:

Overall, while fiscal policy might be on a more credible path the biggest threat to the euro is now coming from monetary policy. We believe we are not far away from a point in time when the ECB starts printing and effectively monetising euro area debt. We revert back to our “punish the printer” theme, where quantitative easing remains negative for a currency.

The above comes at a time when the US economy is in good shape and growth is surprising to the upside. While the Federal Reserve used the printing press a year ago we expect them to begin reversing this process through the summer, while it might be that the ECB is boosting its money supply.

It is likely that any rally in the EUR will be relatively shallow. The combination of fiscal credibility and a likely move to quantitative easing should put pressure on EUR to depreciate. Near term, there may be a relief rally, due to positioning and a removal of the extreme negative tail risk, but the lower trajectory remains in place.

As the financial crisis began to spin out of control late in 2008, we occasionally had the feeling that the speed at which markets can be accessed was  contributing factor. In the computerized trading era, people (and firms) can act quickly and, arguably, impulsively in a way that wasn't possible 20 or 30 years go. Long gone are the days where executing a stock or commodity transaction required the involvement of a broker at a desk who would then call a broker on a trading floor. Gone, in other words, are the human circuit breakers. Our sense: at any given time, we could trade ourselves into oblivion. 

Those feelings were reawakened today when seeing US equity markets implode in a 20 minute span -- a downward move of more than 500 points. Within an hour, that ground had been regained. The talking heads on CNBC almost immediately began to speculate that some sort of an error was responsible. Nothing else, it seems, would explain some of the movement (more than a few stocks traded to near zero during the swoon). There was talk about a "fat finger" error -- perhaps some poor soul typing in sell billions in stock value rather than millions. Alternatively, various commentators thought it was possible that an algorithmic/black box type trade went awry -- that an uptick in something here created massive selling there. In any case, there is going to be a lot of talk in the coming days about somehow slowing down the trade execution process. (What kind of speed are we talking about? Legendary fund manager Mark Fisher, in a rare appearance on CNBC's Fast Money, said that in the time it takes someone to "tap your desk" electronic trading systems can initiate 10,000 discrete orders...)

Meanwhile, as everyone sifts through the carnage, the Euro endured another day of ritualistic abuse. Today's low was just over 1.25 versus the US Dollar -- a level not seen since last Spring. In a week, the Euro has lost more than 4% of its value....likely creating some upheaval in the valuation of US dairy commodities in the world markets.