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But the editorial board at the FT won’t be surprised — see U.S. States Face a
Fiscal Crunch on page 10 of today’s paper): “Undue budget tightening will
jeopardize recovery whether applied at federal level or lower down … The
squeeze is now upon them; the federal stimulus is fading away, and the
gimmicks are all used up. For state finances, the year of reckoning has arrived,
and the timing could hardly be worse.”
Wow, talk about hard-hitting stuff. See what the current drag looks like below on
the economy and how important state/local government spending is — second
largest contributor to GDP.
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January 20, 2011 – SNACK WITH DAVE
4%
7%
6%
3%
5%
4% 2%
3%
1%
2%
1% 0%
0%
-1%
-1%
-2% -2%
'90 '93 '96 '99 '03 '06 '09 '90 '93 '96 '99 '02 '05 '08
Housing
Comm' Construction
Consumer
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January 20, 2011 – SNACK WITH DAVE
EARNINGS RESULTS
Another interesting feature of yesterday’s market action was that it took place
with most of the news coming in positive. Perhaps not housing starts or the
weekly chain store sales data, but most of the earnings results are being spun
very positively. We have 24 S&P 500 companies reporting thus far and 17 have
topped consensus views on the bottom line and — get this — 18 have topped on
the top-line too (though the banks look pretty shaky in terms of revenue growth).
I see that S&P’s investment committee just lifted its 12-month target on the S&P
500 to 1,370 from 1,315, basically stating that $95 on operating EPS this year
is a lock. Unlike March of 2009 when the bar was extremely low, the bar has
now been set very high for the year and that is likely the largest hurdle for Mr.
Market as far as 2011 is concerned — it is going to be tough to generate upside
surprises in earnings from where the consensus is right now.
With policy rates at zero for over two years now, the Fed feeling the necessity of
having to embark on QE2 after it hinted loudly a year ago of an exit strategy, and
then the government feeling compelled to extend a tax-rate cut that was brought
in a decade ago to fight a recession two cycles ago, are rather telling. Maybe
Wall Street and Main Street can stay divorced forever. Somehow, we doubt it.
Perception and reality will meet up once Wile E. Coyote starts to look down.
All the bulls in the past four months were saying to buy the dip. Well, in all
honesty, there was no dip to buy. It was a straight line up as the shorts got
squeezed in an unprecedented fashion. Maybe now we'll see if this is a dip to
buy, now that we actually saw one — for a single session.
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January 20, 2011 – SNACK WITH DAVE
STARTS FINISHED
U.S. housing starts slid 4.3% MoM in December to 529k units at an annual rate, According to the National
which was short of the 550k mark that the consensus had penned in. This was Association of Home Builders:
the lowest reading since October 2009 when the economy was struggling to We can look forward to
emerge from the recession. ongoing weakness in new
sales activity and construction
What was even more disconcerting was the 9% plunge in new single-family
construction (multi-family is more prone to sharp fluctuations and popped 18%)
to a mere 417k annualized units — this was the second decline in the past three
months. The past weakness in single-family starts is also filtering into units
under construction, which sank 1.1% MoM in December, and down seven of the
past eight months. This spells bad news for the residential construction
component of the GDP accounts.
With four million foreclosures widely expected this year and next, an already
enormous backlog of six million homes in serious delinquency and four million
housing excess units already sitting vacant for sale, we can look forward to
ongoing weakness in new sales activity and construction, as the National
Association of Home Builders revealed yesterday.
Yes, yes, building permits did surge 17% MoM in December but consider that to
be a one-month wonder because of a builder rush to get applications in ahead
of some building code changes that were going into effect on January 1 in New
York, Pennsylvania and California. This is why permits soared 81% in the
northeast and 44% in west. In the rest of the country, building permits sagged
5%.
Housing has always been the quintessential leading indicator for the broad
economy — on the way up, and on the way down. It is the proverbial canary in Housing has always been the
the coal mine. While its direct share of GDP has always been small, the quintessential leading
multiplier impact through the rest of the economy is huge. So, as everyone indicator for the broad
seems to think that some semblance of normality has returned, the answer is economy — on the way up, and
“no” ... nothing is normal. We merely have a central bank that has decided for on the way down
the greater good (for those that reside in the here and now) that jeopardizing the
sanctity of its balance sheet is a good thing and a federal government that has
continued to probe the outer limits of deficit finance in order to keep the
spending psyche alive.
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January 20, 2011 – SNACK WITH DAVE
The business cycle has miraculously been repealed, and the shorts have been
scared off for good. But you can’t tinker with human nature for very long. What Go back to every other post-
people should put in their back pocket is how surreal this so-called recovery war recovery, and never before
really is. With yesterday’s data, housing starts are now down 9.3% since the were housing starts still down
recession apparently was stopped in its tracks in June 2009. Go back to every from the point that the
other post-WWII economic recovery, and never before — 18 months into it —were recession ended… Until now
housing starts still down from the point that the recession ended … until now,
that is. On average, starts were up 33% at this juncture, with the median
increase at +29%. If housing starts being negative 9% at this stage of the cycle
is not a “new normal”, then frankly, I don’t know what is.
1600
1200
800
400
0
60 65 70 75 80 85 90 95 00 05 10
Shaded regions represent periods of U.S. recession
Source: Census Bureau / Haver Analytics
In another sign that January sales will likely be soft, the ICSC reported that it
expects that only 36.3% of gift cards will be redeemed this month, down from
45% last year and 46.4% in 2009.
Page 5 of 9
January 20, 2011 – SNACK WITH DAVE
60.0
52.5
45.0
37.5
30.0
95 00 05 10
Source: American Institute of Architects/Haver Analytics
CANADA UPDATE
We received a mixed batch of Canadian economic data. Today’s wholesale
sales were better than expected. We focus on real wholesale sales (which feeds
into the monthly GDP accounts) and on that score, they were up 1.3% MoM in
November. This helps temper yesterday’s very disappointing manufacturing
shipments, which on an inflation-adjusted basis collapsed by 1.4% MoM, the
second such decline in three months. It’s worth noting that real manufacturing
sales are at the lowest level since February 2010 — so it’s clear that the strong
loonie is taking a toll on the manufacturing sector. All in, we continue to track
fourth-quarter GDP at below 2%, slightly off from the Bank of Canada’s (BoC)
new (downwardly) revised Q4 GDP forecast of 2.3%.
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January 20, 2011 – SNACK WITH DAVE
The BoC also provided some more colour to its thinking after Tuesday’s press
release (where it kept interest rates on hold as expected) in yesterday’s
Monetary Policy Report. For this year and next, we saw major upgrades to
forecasts outside of Canada especially in the U.S. They now expect U.S growth
to come in a full percentage point higher than expected a few months ago at
3.3% for 2011. And it wasn’t just the U.S. that was updated. It was across the
board, with forecasts for the Euro area (now 1.5% growth), Japan (1.4%), China
(9.3%), and the rest of the world (4.0%) all being lifted. Even with the material
increase of U.S. growth prospects, Canadian GDP was increased by a scant 0.1%
to 2.4% for this year (in other words, underperforming the U.S. by nearly 1%).
We continue to believe the BoC will be on hold for some time, especially after
the Federal Government announced more restrictive mortgage lending
measures, which takes some of the pressure off the Bank to hike rates.
Page 7 of 9
January 20, 2011 – SNACK WITH DAVE
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Notes: macroeconomic view.
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