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US Economics Week Ahead: Jobs to the Rescue?

November 28th, 2009 Michael McDonough Comments off

This week investors face a barrage of data in addition to Chairman Bernanke’s Senate confirmation hearing.  On the economic front, Friday’s employment report should steal the show followed closely Tuesday’s manufacturing ISM release. Both the manufacturing and non-manufacturing ISM reports have indicated expansion over the past three months, and should again in November, albeit at a potentially slower pace due to some weakness in the Fed districts’ manufacturing surveys during the month.

Leading up to Friday’s employment report investors will be paying close attention to the ADP and both the ISM and Non-ISM employment indices, which have the potential to sway the current market consensus forecast of a -100K decline in payrolls. Other notable indicators this week include Monday’s Chicago PMI; Tuesday’s motor vehicle sales, construction spending, and pending home sales; Wednesday’s Beige Book; Thursday’s jobless claims and non-manufacturing ISM release; and finally Friday’s factory orders.

Other potential headline drivers this week include Fed talk from Charles Plosser and Jeffrey Lacker, the start of the Senate’s debate on healthcare, President Obama’s job’s forum, and Treasury Secretary Timothy Geithner’s testimony before the Senate Agriculture Committee Wednesday.

Here is the rest of this week’s US calendar:

Monday, Nov. 30

*9:45 a.m. EST: November’s Chicago PMI (Risk: Neutral, Market Reaction: Moderate): The Chicago PMI measures business activity in the mid-West, and is released one business day prior to the ISM. *I should note that the Chicago PMI is released several minutes early to subscribers, so the market could react at 9:42 a.m. on the news.  This index is considered a forward looking indicator to the national ISM, so any large unexpected shifts in the Chicago PMI could impact trading.  The current Bloomberg consensus forecast is for a reading of 53.0, versus to 54.2 in October.  The PMI could experience some upward momentum stemming from a 15 point increase in the new orders index.  The PMI covers both the manufacturing and non-manufacturing sectors.

10:30 a.m. EST: November’s Texas Manufacturing Outlook (Risk: Neutral, Market Reaction: Moderate): This index is not highly publicized, and tracks manufacturing activity within the Dallas Feds jurisdiction.  Last month’s survey suggested, “Texas factory activity declined in October, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index—a key indicator of current manufacturing activity—edged further into negative territory, suggesting output in October contracted after remaining stable in September.”

3:00 p.m. EST: Farm Prices (Risk: Neutral, Market Reaction: Marginal): Given the relationship between farms prices and food prices, this index could have significant implications on future headline CPI.

Tuesday, Dec. 1

November’s Motor Vehicle Sales (Risk: Neutral, Market Reaction: Moderate): Motor vehicle sales will likely edge down slightly in November, which is historically a weak month for auto sales.  Auto sales climbed 17.2% in October.  The current Bloomberg consensus forecast is for auto sales of 7.75 million compared to 7.90 million in October.  However, it should be noted that if this forecast is realized, then auto sales would finish positive for the first time on an annual basis since November 2007.

7:45 a.m. EST: ICSC-Goldman Store Sales (Risk: Neutral, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales.  Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure.  Last week’s number indicated no change in store sales compared to a decline of -0.1% a week prior.

8:55 a.m. EST: Redbook (Risk: Negative, Market Reaction: Marginal): The Redbook is a weekly measurement of chain stores, discounters, and department store sales.  This indicator tends to be less significant than the ICSC-Goldman Store Sales in forecasting retail sales.  According to the Redbook store sales were rose 2.8% last week on a year over year basis.

10:00 a.m. EST: November’s ISM Manufacturing Index (Risk: Neutral, Market Reaction: Significant): The ISM could face some downward pressure during the month after other manufacturing indices including the NY and Richmond Fed indices experienced declines in November.  It will also be important for investors to pay close attention to the forward looking new orders index, along with the employment index for clues towards Friday’s payroll release.  The current Bloomberg consensus forecast is for a reading of 55.0 versus 55.7, a month prior.  The forecast range is from 53.8 to 56.0.

10:00 a.m. EST: October’s Construction Spending (Risk: Neutral, Market Reaction: Marginal): Construction spending will likely decline modestly after rising 0.8% in September.  Construction spending was revised down in August from +0.8% to -0.1% after experiencing a surprise gain in September.  The current Bloomberg consensus forecast   is for a decline in spending of -0.4%.

10:00 a.m. EST: October’s Pending Home Sales (Risk: Neutral, Market Reaction: Moderate): Pending home sales have been on a tear providing plenty of momentum for existing and new home sales.  Pending home sales rose 6.1% in September, which was the index’s 8th consecutive month of gains for the index—the longest streak in the index’s history.

12:20 p.m. EST:  Charles Plosser, the Philadelphia Federal Reserve Bank President, will discuss the economic outlook.

Wednesday, Dec. 2

7:00 a.m. EST: MBA Mortgage Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index.  Applications fell 4.5% last week after dropping 2.5%% a week prior.  Refinance applications dropped 9.5%, while purchase applications rose 9.6%.  A wave of buyers, filling out multiple mortgage applications, that were looking to take advantage of the first time home buyer tax credit–originally set to expire on Nov. 30th–have already completed their transactions, and have recently reduced the demand for mortgages.    However, the recent extension of the first time home buyer tax credit should eventually bring a new set of buyers into the market, which could help support the purchase index over the coming months.

7:30 a.m. EST: Challenger Job Cut Report (Risk: Neutral, Market Reaction: Marginal): This index measures the number of announced corporate mass layoffs, but does not take into account the timing of the actual layoffs.  Meaning layoffs announced in November may not actually take place until December, or even take place slowly over an extended period of time.

8:15 a.m. EST: ADP Employment Report (Risk: Neutral, Market Reaction: Moderate): The ADP Employment report is considered a good window into Friday’s critical payroll number.  Any significant swings in this release combined with unexpected shifts in the manufacturing and non-manufacturing ISM employment indices could shift the consensus forecast for Friday’s employment release.

10:30 a.m. EST: EIA Petroleum Status Report (Risk: Neutral, Market Reaction: Moderate): This report measures US domestic petroleum inventories.  Large unanticipated swings in this index could have a significant impact on energy prices.  Last week this report showed an increment of 1.0 million barrels versus a decline of -0.9 million barrels a week prior.

2:00 p.m. EST: Beige Book (Risk: Neutral, Market Reaction: Moderate): Anecdotal evidence toward growth in the Fed’s Beige Book has slowly been turning more positive, which has recently been demonstrated through other economic indicators.  This report is typically released two weeks prior to FOMC meetings.

Thursday, Dec. 3

Ben Bernanke, Federal Reserve Chairman, is scheduled to appear for a confirmation hearing for the Senate Banking Committee.

President Obama will be holding a conference with leaders from the business, labor, finance and the nonprofit sectors.

Monster Employment Index (Risk: Neutral, Market Reaction: Marginal): This survey conducted by Monster Worldwide Inc. measures online job demand.  According to the company, “The rise in the October Index, along with an improvement in the annual rate, indicate a mild expansion in the underlying employer demand for workers” said Jesse Harriott, senior vice president and chief knowledge officer at Monster Worldwide. “While the decline in consumer confidence has likely contributed to reduced job demand in the retail and hospitality sectors, employers are actively recruiting in the healthcare and public sectors, resulting in stability of the overall Index.”

November’s Chain Store Sales (Risk: Neutral, Market Reaction: Moderate): US chain store sales should remain relatively flat to up modestly during the month on the back of mixed retail results.  Relatively strong performance in the ICSC-Goldman Sachs weekly chain store sales index should bode well for retailers, but numerous headwinds still exist, including a weak labor market and wavering consumer confidence reducing spending.

8:30 a.m. EST: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims fell 35K last week to 466K, after showing no change a week prior. This is the lowest level reading since September 2008. But, a portion of this improvement was due to a strong seasonal adjustment factors due to annual deviations in the date of the Thanksgiving holiday—this could add some volatility to the index next week.  Nevertheless, claims continue to trend down and are indicative of fewer job losses in the monthly employment report, however, the job situation will still continue to get worse before it gets better.  The current Bloomberg consensus forecast is expecting claims to come in at 485K, an increase of 19K form last week.

8:30 a.m. EST: Final Third Quarter Productivity and Costs (Risk: Neutral, Market Reaction: Moderate): The recent revision of third quarter GDP to 2.8% from 3.5%, will likely lead to a minor downward revision to last quarter’s stellar productivity number.  The Bloomberg consensus forecast is expecting a revised quarterly increase in productivity of 8.6%, compared to the original release indicating a jump of 9.5%. But, strong gains in productivity could cause employers to delay hiring as they are now receiving more output from fewer workers.  The Bloomberg consensus forecast is also anticipating an upward revision to unit labor costs from -5.2% to -4.2%.

10:00 a.m. EST: November’s ISM Non-Manufacturing Index (Risk: Neutral, Market Reaction: Significant): The ISM non-manufacturing index should experience a modest rise during the month, realizing the third consecutive month of a reading over 50.  It will also be important to monitor the index’s employment component, which could impact Friday’s employment situation forecasts.  The current Bloomberg consensus forecast is for a reading of 52.0 compared to 50.6 in October. 

10:30 a.m. EST: EIA Natural Gas Report (Risk: Neutral, Market Reaction: Moderate): This report highlights domestic natural gas inventories, which could have a significant impact on the energy sector.

4:30 p.m. EST: Fed Balance Sheet & Money Supply (Risk: Neutral, Market Reaction: Marginal): Since the Fed’s shift to quantitative easing, the balance sheet has become one method to measure to the Fed’s effectiveness.  The market will pay close attention to the reserve bank credit component, which measures factors supplying   providing reserves into the banking system.  The Fed’s balance sheet shrank last week to US$2.189trn from US$2.192trn, after ballooning two weeks prior.    The fed’s balance sheet has slowly been shifting away from emergency lending facilities to Treasuries, agency debt, and mortgage-backed securities to help moderate long-term interest rates.

Friday, Dec. 4

8:30 a.m. EST: November’s Employment Situation Report (Risk: Neutral, Market Reaction: Very Significant): Continued second derivative improvements in the labor market should help slow the decline in payrolls after last month’s -190K drop.  The current Bloomberg consensus forecast for November’s payrolls is a decline of -100K, with the unemployment rate unchanged at 10.2%.  It will be important to monitor this week’s ADP, ISM employment index, and non-ISM employment index for unexpected swings that could impact the consensus forecast.

10:00 a.m. EST:  Charles Plosser, the Philadelphia Federal Reserve Bank President, will give opening remarks at conference on Policy Lessons from the Economic and Financial Crisis in Philadelphia.

10:00 a.m. EST: September’s Factory Orders (Risk: Neutral, Market Reaction: Moderate): A weak advanced durable goods release could place some downward pressure on factory orders. The current Bloomberg consensus forecast is for a modest increment of 0.2%, compared to a rise of 0.9% in September.

1:15 p.m. EST:  James Bullard, the St. Louis Federal Reserve Bank President, will speak at the Philly Fed’s conference.

Enjoy the weekend!

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Dubai’s Downfall

November 27th, 2009 Michael McDonough Comments off

Here is an excerpt from my Real Money column being published this morning:

Burj DubaiIn 1909 the completion of the Metropolitan Life Building—the world’s tallest building—coincided with the beginning of a two year recession in the US.  Between 1929 and 1931 40 Wall Street, the Empire State Building, and the Chrysler Building were all erected in a bid to build the world’s tallest building; the Empire State Building eventually won this title, but again the construction of these grandiose buildings coincided with the onset of economic strife, in this case the Great Depression.  I think you see where I am going, but I should add the construction of the Sears Tower, the World Trade Center’s twin towers, and Malaysia’s Petronas Towers—all vying for the title of world’s tallest building—culminated in similar economic turmoil.

Coincidence or not the Burj Dubai, the tallest man-made structure ever constructed, is preparing for occupancy in Dubai.  With that said credit markets around the globe were shaken this week on news from Dubai.  Dubai World, a state-owned enterprise and primary investment vehicle, asked banks to allow the organization to suspend debt repayments for six months; the terms are still unclear, but could potentially be considered a default.  According to Standard and Poor’s, “In our view, such a restructuring may be considered a default under our default criteria, and represents the failure of the Dubai government (not rated) to provide timely financial support to a core government-related entity.”

Maybe I am too optimistic, but I believe this situation should lead to some good buying opportunities over the short-term, depending on where markets trade today.  Already investors immediate rush to safety, out of what are perceived to be high risk currencies into safe haven currencies, have created an excellent entry point into a trade I pointed out a couple of weeks ago—shorting the Yen.  The JPY appreciated to a 14 year high against the USD yesterday, increasing speculation that the Japanese government may be forced to intervene in the market, potentially creating a floor for the currency.  I still hold a bearish medium term view on the Yen—please see my piece on how to play Japan—and will likely increase my position in The Yen Ultrashort (YCS) or purchase puts in Long Yen ETF (YCL) depending on how the market opens this morning.

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US Economics Week Ahead: Is There Time for Turkey?

November 21st, 2009 Michael McDonough Comments off

The market will be providing a cornucopia of data this week centered on Tuesday and Wednesday, which you can mull over as you begin brining your turkeys—as an aside here’s the recipe I will be following this year.  Also, I wrote an interesting column on Friday for Real Money titled ‘Talking Turkey on Agricultural Trends’ that I recommend you read.

The market will digest 15 important data releases in just three days.  But here’s what you should be paying attention to; the week’s most critical data will likely come in the form of the FOMC minutes, home sales, personal income and outlays, and the first revision of third quarter GDP, which likely won’t look as rosy as the advanced estimate.  On the housing front we will get the FHFA and Case Shiller Home Price Indices.  The MBA mortgage application index has also been garnering more attention as purchase applications continue to plummet to 12 year lows.  Looking toward the consumer, both the Conference Board’s and University of Michigan’s consumer sentiment indices are schedule for release.  Finally, I should mention that on Wednesday we will be getting October’s durable goods data.

Despite the shortened week we will be hearing earnings from the final Dow Jones Industrial component, HP.  In addition to HP, we can expect earnings from Medtronic, Barnes and Nobles, Borders, and John Deere.  This week the Treasury will be auctioning off a record $118 billion in two-, five- and seven-year Treasury instruments, which could place some pressure on bond markets.  However, so far demand for bonds, despite record issuances has remained in place, partially on the back of higher foreign demand.

Here is the rest of this week’s US calendar:

Monday, Nov. 23

8:30 a.m. EST: October’s Chicago Fed National Activity Index (Risk: Neutral, Market Reaction: Marginal): The CFNAI is an index consisting of 85 separate data sets designed to encompass national economic activity and inflationary pressure. A reading of 0 indicates the economy is growing at the historical trend while a negative or positive result indicates the economy is growing below or above its historical average, respectively. Given the volatile nature of this index, the three-month moving average is typically quoted. This index remains somewhat obscure in the mainstream media and is likely to have a minimal impact on trading. This index has shown improvements over the preceding eight months but is expected to decline slightly in October from its reading of -0.81 in September.

10:00 a.m. EST: October’s Existing Home Sales (Risk: Neutral, Market Reaction: Significant): Existing home sales could gain some upward momentum in October following a sharp rise in September’s pending home sales index, which rose 6.1%–this index has been up for eight consecutive months.  The current Bloomberg consensus forecast is for existing home sales of 5.70 million 5.57 million a month prior.

Tuesday, Nov. 24

7:45 a.m. EST: ICSC-Goldman Store Sales (Risk: Neutral, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales.  Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure.  Last week’s number indicated a weekly decline of -0.1% in store sales compared to a decline of -0.1% a week prior.

8:30 a.m. EST: First Revision of 3Q09 GDP (Risk: Neutral, Market Reaction: Significant): It is likely that the BEA’s advanced 3Q09 GDP estimate of 3.5% will be revised down significantly due to a higher than anticipated trade deficit, lower non-residential investment, slower than expected inventory rebuilding, and a small markdown due to worse than anticipated personal consumption data.   The current Bloomberg consensus forecast is for the 3Q09 first revision GDP growth to come in at 2.8%.  This revision, especially if below the market consensus, could cause some market participants to start questioning the overall strength of the US economic recovery, however, the 4Q09 growth pace is still on pace to finish around 3.5%.  Looking ahead, stronger than anticipated inventory liquidations during the quarter will likely be made up during 4Q09 and the first part of 2010 helping buoy growth.  Looking further into 2010, growth should remain stable, but below trend.

8:30 a.m. EST: Third Quarter 2009 Corporate Profits (Risk: Neutral, Market Reaction: Marginal): The importance of this release is somewhat muted given its timing toward the end of the 3Q09 earnings season.  However, since these profits tie into GDP growth they do not always move lock step with individual corporations’ aggregate earnings data.  In 2Q09 corporate profits reportedly grew around 5.7%.

8:55 a.m. EST: Redbook (Risk: Negative, Market Reaction: Marginal): The Redbook is a weekly measurement of chain stores, discounters, and department store sales.  This indicator tends to be less significant than the ICSC-Goldman Store Sales in forecasting retail sales.  According to the Redbook store sales were rose 2.0% last week on a year over year basis.

9:00 a.m. EST: September’s S&P Case Shiller Home Price Index (Risk: Neutral, Market Reaction: Moderate): The S&P Case Shiller HPI has demonstrated four consecutive months of gains, during which it gained 5%.  However, on a yearly basis both the 10 and 20 city indices are still down roughly 11%.  Nevertheless, according to August’s data 19 of 20 cities reported improvements on their year over year declines.  We can expect to see some continued improvement in September.

10:00 a.m. EST: November’s Consumer Confidence (Risk: Neutral, Market Reaction: Marginal): The Conference Board’s measure of consumer confidence should remain relatively steady after plunging to 47.7 from 53.4 in October.  Last month’s sharp decline was mostly due to concerns over the labor market.  The Bloomberg consensus forecast for November’s release is a marginal decline to 47.0, but I should mention that individual forecasts range from a low of 44.0 to a high of 47.0

10:00 a.m. EST: Third Quarter 2009 and September’s Monthly FHFA Home Price Index (Risk: Neutral, Market Reaction: Marginal): The Federal Housing Finance Agency (FHFA) monthly/quarterly house price index is compiled by using loan data provided by Fannie Mae and Freddie Mac, which means all the data within the index consists of conventional mortgages within the limitations of the GSE’s. According to the FHFA’s second quarter report housing prices fell 0.7%on a quarter over a quarter basis, or 6.1% on a yearly basis.  The FHFA’s monthly price index fell for the first time since April in August by -0.3%, but should turn positive again in September. 

10:00 a.m. EST: November’s Richmond Fed Manufacturing Index (Risk: Neutral, Market Reaction: Marginal): The Richmond Fed manufacturing activity index has been in positive territory since May, but showed some signs of weakness in October falling from 14 to 7.   The new orders index, which tends to be a forward looking component, has fallen for three straight months this could potentially place some additional downward pressure on the headline index.  Aggregate changes in the Fed district’s manufacturing surveys could be a good indicator not only for the country’s economic health, but also ISM performance.

10:00 a.m. EST: State Street Investor Confidence Index (Risk: Neutral, Market Reaction: Marginal): The State Street Investor’s Confidence Index measures investors’ tolerance to risk. According to the State Street report, “[Last] month’s, institutional investors have paused to take stock,” commented Froot. “The Global Index reading of 108.4 remains comfortably above the neutral level of 100 for a seventh consecutive month, but underlying flows have been tempered somewhat from the very strong levels of July and August. While the US earnings season has been relatively robust so far, the number of positive surprises that have been observed in employment, retail sales, manufacturing and trade figures has diminished considerably, and this may be influencing investor risk appetite.”

2:00 p.m. EST: FOMC Minutes (Risk: Neutral, Market Reaction: Marginal): Despite only modest changes in the FOMC’s statement, analysts will likely be looking very closely at the motivation behind these nuances.  In any case, it is unlikely these minutes will provide any groundbreaking new information for market participants.

Wednesday, Nov. 25

7:00 a.m. EST: MBA Mortgage Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index.  Applications fell 2.5% last week after gaining 3.2% a week prior.  Unlike the week prior which saw a precipitous drop in purchase applications while refinance applications remained positive; last week’s data was negative all around, despite lower interest rates.  Refinance applications dropped 1.4%, while purchase applications fell and additional which 4.7%.  A wave of buyers, filling out multiple mortgage applications, that were looking to take advantage of the first time home buyer tax credit–originally set to expire on Nov. 30th–have already completed their transactions, thereby reducing the current demand for mortgages.    However, the recent extension of the first time home buyer tax credit should eventually bring a new set of buyers into the market, which could help support the purchase index over the coming months–don’t forget buying a house can be a long drawn out process.   Nevertheless, increased lending standards for FHA loans, due to the organizations worsening finances, could place some headwinds on the purchase index’s recovery.

8:30 a.m. EST: October’s Durable Goods Orders (Risk: Neutral, Market Reaction: Significant): Durable goods should experience a modest increase in October after gaining 1.4% in September on the back of relatively strong machinery and transportation equipment orders.  Weakness in October for civilian aircraft orders should place some pressure on index, with the current Bloomberg consensus forecast expecting a rise of only 0.5%.  It will also be important to keep an eye on the less volatile ex-transport index.

8:30 a.m. EST: October’s Personal Income & Outlays (Risk: Neutral, Market Reaction: Significant): An increment in auto purchases—after dropping sharply upon the expiration of the ‘Cash for Clunkers’ program–should help bolster consumer spending, which fell -0.5% in September.  This release will be important because it will be the first look into the consumer’s fourth quarter spending habits leading into the holiday season.  Personal income is expected to show a modest gain for the month, but still remain down around -2% on a year over year basis.  The current Bloomberg consensus forecast is for an increment in spending of 0.5%, and an increase in income of 0.2%.  At the same time, analysts are anticipating a modest jump in Core PCE of 0.2% after rising 0.1% in September.

8:30 a.m. EST: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims remain unchanged last week at 505K, after falling 12K a week prior. I should note there is again the potential for initial jobless claims slip below the psychological barrier of 500K this week, which could have the potential of at least temporarily influence trading.  Nevertheless, despite second derivative improvements these levels still indicate continued losses for monthly payrolls—albeit at a slower pace—coupled further deterioration to the unemployment rate, which has already exceeded 10%. The current Bloomberg consensus forecast is expecting claims to come in at 504K, essentially unchanged from last week.

9:55 a.m. EST: November’s Final Consumer Sentiment (Risk: Neutral, Market Reaction: Significant): After a disappointing preliminary November release of 66.0, consumer sentiment will likely finish the month up only marginally to what the Bloomberg consensus forecast anticipates will be a level of 67.0.  Like the Conference Board’s measure a weakening job market—albeit at a slower pace—continues to weigh on consumer attitudes.  Also interesting to note is the fact that in every month since June final number has finished higher than the preliminary release.

10:00 a.m. EST: October’s New Home Sales (Risk: Neutral, Market Reaction: Significant): Like existing home sales, new home sales should continue to climb in October, but at a more modest pace.  The primary reason behind this is likely the fact that existing home sales can be bought at a more attractive price compared to their new home counterparts.  The current Bloomberg consensus forecast is for the rate of new home sales to increase to 410K from 402K a month prior.

10:30 a.m. EST: EIA Petroleum Status Report (Risk: Neutral, Market Reaction: Moderate): This report measures US domestic petroleum inventories.  Large unanticipated swings in this index could have a significant impact on energy prices.  Last week this report showed a decline of -0.9 million barrels versus a gain of 1.8 million barrels a week prior.

12:00 p.m. EST: EIA Natural Gas Report (Risk: Neutral, Market Reaction: Moderate): This report highlights domestic natural gas inventories, which could have a significant impact on the energy sector.

Thursday, Nov. 26

Thanksgiving Markets Closed

Friday, Nov. 27

Black Friday

4:30 p.m. EST: Fed Balance Sheet & Money Supply (Risk: Neutral, Market Reaction: Marginal): Since the Fed’s shift to quantitative easing, the balance sheet has become one method to measure to the Fed’s effectiveness.  The market will pay close attention to the reserve bank credit component, which measures factors supplying   providing reserves into the banking system.  The Fed’s balance sheet ballooned last week to US$2.192trn from US$2.117trn a week prior on the back of higher agency and mortgage-backed securities holdings.    The fed’s balance sheet has slowly been shifting away from emergency lending facilities to Treasuries, agency debt, and mortgage-backed securities to help moderate long-term interest rates.

Enjoy the weekend!

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Talking Turkey on Agriculture Trends

November 20th, 2009 Michael McDonough Comments off

An excerpt from today’s column on RealMoney…

“In tune with the Thanksgiving spirit–eating–I want to discuss a budding topic that’s garnering more attention lately from a growing number of my clients: food, or more specifically, agriculture. There are many ways to tackle this topic, but what I wanted to highlight today is the growing caloric intake of the developing world, especially China.

Developing-world diets have started a path of convergence with their developed-world counterparts, meaning that as disposable incomes within these countries have risen, consumers have begun to demand more complex proteins: meat. To help put this into perspective, if the present trend were to continue and if Chinese and Indian meat consumption were to converge with that of the U.S., global caloric intake could double by 2050.”

I go on to recommend the ETF DBA as a good play on this theme as well as a good hedge against inflation.  Please see the entire column here.

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Claims Unchanged

November 19th, 2009 Michael McDonough Comments off

Initial jobless claims came in unchanged this morning at -505K, while its overall downward trend continues to indicate that fewer people are losing their jobs.  This should help decelerate the climb in the unemployment rate and decline in payrolls, until they eventually peak some time during the first half of 2010.  It is very likely initial claims will drop below the psychological barrier of -500K over the next couple of weeks.  Presently, I anticipate that we will see a smaller decline in payrolls for November than we did in October. In fact there is a possibility the decline in payrolls for November could be fewer than 100K, which has not happened since Jan. 2008.

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Housing Pains & Inflation Creep

November 18th, 2009 Michael McDonough Comments off

October’s Housing Starts disappointed the market finishing at an annual rate of 529,000 (-10.6%), while September’s release was revised up to 592K from 590K. Permit’s in October declined -4.0%, to 552K. Single-family starts fell -6.8%, while multi-family homes plummeted by -34.6%. The Bloomberg consensus forecast was for starts at 600K, with forecasts ranging from 570K to 630K.  This release was indicative of a housing market that is struggling rather than in the midst of a strong recovery.

Additionally, the level of mortgage applications continued to decline,–purchase applications hit a 12 year low–likely due what would have been the expiration of the first time home buyer tax credit.  Meaning, those looking to take advantage of the tax credit already have; it will take some time for a new group of buyers to enter the market on the back of the the tax credit’s extension.

October Consumer Price Index rose +0.3% after rising +0.2% in September. This compares to a Bloomberg consensus forecast of +0.2%. The core CPI increased by +0.2% during the month after rising +0.2% a month prior.  The main culprit behind the month’s larger than anticipated jump was a 1.7% increment in vehicle prices, which if factored out would have led to a flat core CPI number.  As expected, energy prices climbed 1.5%, adding momentum to the headline release.  Surprisingly, food prices were relatively stable during the month rising only +0.1%.  Despite adding some ammunition for inflation hawks, I do not believe this report indicates any significant inflation concerns over the near-term, but of course should be monitored as an eventual uptick inflation is inevitable.

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Industrial Production Shows Modest Gain due to Utility Output

November 17th, 2009 Michael McDonough Comments off

Industrial Production rose +0.1% in October, versus a Bloomberg consensus forecast of +0.4%.At the same time September’s reading was revised up from +0.6% to +0.7%.  As I warned in my US Economics Week Ahead, manufacturing production lost -0.1% during the month while utility output more than offset this decline by climbing 1.6%, on what was likely a cold October–without this increment IP would have finished the month slightly negative.  Mining output fell -0.2% during the month.  Nevertheless, IP has finished in positive territory for four consecutive months.  Capacity utilization finished the month at 70.7%, compared to 70.5% in September.

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October’s Retail Sales: The Devil’s in the Details

November 16th, 2009 Michael McDonough Comments off

As I mentioned in my week ahead, retail sales would likely set the pace for the week, and we received the data this morning. Retail sales rose +1.4% in October, compared to a revised -2.3% change in September (originally -1.5%). This was well above the latest Bloomberg consensus forecast of +0.9%,however, this good news was at least partially offset by the prior month’s revisions.

Retail sales x-autos climbed only +0.2% during the month, after rising a revised +0.4% in September (previously reported +0.5%). This was below the Bloomberg consensus forecast of +0.4%.

The good news is that the ex-auto’s index has gradually continued to trend higher since its collapse the end of last year.  The not so good news is that most all of October’s gains came from auto sales, which were recovering from a sharp drop in September caused by the expiration of the US government’s ‘Cash for Clunkers’ program-it is very unlikely these type of increments will be sustained.  Additionally, downward revision to past sales data will likely cause 3Q09 GDP to be revised down 0.1%, which combined with last week’s wider than anticipated trade deficit should lower 3Q09 GDP to 3.0% from 3.5% indicated by the advanced estimate.

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US Economics Week Ahead: Retail Sales will set the Pace

November 13th, 2009 Michael McDonough Comments off

The last full week in November brings with it its fair share of economic data, Fed talk, and a few important earnings stragglers.  The general themes of the week will be housing, manufacturing, inflation, and the consumer.  On the economic front, October’s retail sales—released on Monday—should steal the show, followed up by October’s industrial production data on Wednesday.  Other important indicators include Monday’s empire state manufacturing survey and business inventories, Tuesday’s PPI and TIC data, Wednesday’s CPI and housing starts report, and finally Thursday’s jobless claims and leading economic indicators release.  On the earnings front we can expect to hear from Home Depot, Lowes, Dell, GM, Gap, and Target.  Bernanke will be providing the week’s most critical ‘Fed chatter’, with his speech to the Economic Club of New York on Monday, which some believe could have implications for the dollar.

Here is the rest of this week’s US calendar:

Monday, Nov. 16

8:30 a.m. EST: October’s Retail Sales (Risk: Neutral, Market Reaction: Significant): After dropping 1.5% in September, primarily due to the expiration of the ‘Cash for Clunkers’ program, retail sales should have experienced a modest jump in October, partially on the back of higher auto sales.  Vehicle sales likely picked up during the month after falling 10.4% in September. The current Bloomberg consensus forecast for retail sales is an increment of 0.9%, while retail sales ex-autos is expected to rise 0.4%, after rising 0.5% in September.

8:30 a.m. EST: November’s Empire State Manufacturing Survey (Risk: Neutral, Market Reaction: Moderate): The New York Fed manufacturing index will likely experience a modest pullback after reaching a five year high in October.  Nevertheless, the index should remain well above its breakeven point of 0.  The current Bloomberg consensus forecast is for a reading of 29.0, versus 34.6 in October.  As always I recommend paying close attention to the forward looking new orders index, along with the employment and prices paid index for hints toward the labor market and inflation story.

10:00 a.m. EST: September’s Business Inventories (Risk: Neutral, Market Reaction: Marginal): The rate at which businesses are reducing inventories is anticipated to decline in September, albeit remain negative.  September will be the 14th consecutive month business inventories have decline.  Inventories declined -1.5% in August, but should be down a more modest 0.8% in September.  Auto inventories could be up slightly for the month as car dealers complete a limited restocking due to a jump in sales from the ‘Cash for Clunkers’ program

12:00 p.m. EST: Ben Bernanke, Fed Chairman, speaks to the Economic Club of New York

1:15 p.m. EST: Richard Fisher, Dallas Fed President, will discuss US economy and central bank at a community forum hosted by the District Bank in Dallas, TX

6:15 p.m. EST: Donald Kohn, Fed Vice-Chairman, will be participating in Northwestern University’s Kellogg Distinguished Lecture Series discussing “Federal Reserve Policy Challenges.”

Tuesday, Nov. 17

7:45 a.m. EST: ICSC-Goldman Store Sales (Risk: Neutral, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales.  Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure.  Last week’s number indicated a weekly decline of -0.1% in store sales compared to a gain of 0.1% a week prior—this was the first decline in six weeks.

8:30 a.m. EST: October’s Producer Price Index (Risk: Neutral, Market Reaction: Moderate): Rising food and energy prices during the month will likely lead to a significant increment in headline PPI.  Factoring out these volatile components the core-PPI should experience a more modest gain of around +0.1%.  The current Bloomberg consensus forecast for headline PPI is an increment of +0.5%, versus a decline of -0.6% a month prior.

8:55 a.m. EST: Redbook (Risk: Negative, Market Reaction: Marginal): The Redbook is a weekly measurement of chain stores, discounters, and department store sales.  This indicator tends to be less significant than the ICSC-Goldman Store Sales in forecasting retail sales.  According to the Redbook store sales were rose 1.7% last week on a year over year basis.

9:00 a.m. EST: September’s Treasury International Capital (TIC) Data (Risk: Neutral, Market Reaction: Moderate): This report highlights the flow of financial instruments to and from the U.S. It indicates foreign demand for U.S. financial instruments and thus tends to have a stronger impact on the dollar and the bond markets than it does on equities.  But, given the recent record levels for treasury auctions, it will be interesting to monitor foreign demand for US debt.

9:15 a.m. EST: October’s Industrial Production (Risk: Neutral, Market Reaction: Significant): After rising 0.7% in September, industrial production could face some pressure in October due to weakness in manufacturing, however, this weakness could be at least partially offset by utility output during the month.  On the manufacturing side, the expiration of the ‘Cash for Clunkers’ program should continue to adversely impact auto manufacturing, while manufacturing hours worked during the month also fell.  The current Bloomberg consensus is for an increment of +0.4%, compared to September’s growth of 0.7%.

10:00 a.m. EST: Jeffrey Lacker, Richmond Federal Reserve Bank President, is giving a speech on the economic outlook in Richmond.

1:00 p.m. EST: November’s Housing Market Index (Risk: Neutral, Market Reaction: Marginal): The extension of the first time home buyer tax credit should help bolster the NAHB/Wells Fargo housing market index, which fell to 18 in October.  This release could also provide a good lead in for the housing starts and permit data being released a day after.

12:30 p.m. EST: Sandra Pianalto, Cleveland Fed President, will give a speech at the 11th Annual Ohio Housing Conference

Wednesday, Nov. 18

7:00 a.m. EST: MBA Mortgage Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index.  Applications rose last week 3.2% after gaining 8.2% a week prior.  Last week’s overall increment was due entirely to a jump in refinance applications, which rose 11.3%, while the purchase index fell 11.7%.  A wave of buyers, filling out multiple mortgage applications, that were looking to take advantage of the first time home buyer tax credit–originally set to expire on Nov. 30th–have already completed their transactions, thereby reducing the current demand for mortgages.    However, the recent extension of the first time home buyer tax credit should eventually bring a new set of buyers into the market, which could help support the purchase index over the coming months–don’t forget buying a house can be a long drawn out process.   Nevertheless, increased lending standards for FHA loans, due to the organizations worsening finances, could place some headwinds on the purchase index’s recovery.

8:30 a.m. EST: October’s Consumer Price Index (Risk: Neutral, Market Reaction: Significant): Consumer prices in October likely experienced a modest rise on the back of higher food and energy prices, after rising 0.2% in September.  Core-CPI should remain relatively tame, with increasing auto prices potentially placing some upward pressure on the index.  Interestingly, residential rent and owners’ equivalent rent both declined by -0.1% in September—according to the BLS this is only the second time a decline of this magnitude has occurred.   The current Bloomberg consensus forecast is for an increase of 0.2% in the headline number and 0.1% for the core.

8:30 a.m. EST: October’s Housing Starts (Risk: Neutral, Market Reaction: Moderate): Housing starts and permits should continue to gain some momentum as the inventory of homes for sales continues to moderate.  It will be important to monitor multi-family housing starts, which has been a volatile component compared to single family starts—single family starts have been positive for every month since March, excluding August. The current Bloomberg consensus forecast is for an increase in starts to 600K from 590K a month prior.

9:15 a.m. EST: James Bullard, St. Louis Federal Reserve Bank President, will discuss the US economic outlook at the Commerce Bank Economic Breakfast in Clayton, MO.

10:30 a.m. EST: EIA Petroleum Status Report (Risk: Neutral, Market Reaction: Moderate): This report measures US domestic petroleum inventories.  Large unanticipated swings in this index could have a significant impact on energy prices.  Last week this report showed a gain of -1.8 million barrels versus a decline of -4.0 million barrels a week prior.

Thursday, Nov. 19

Charles Plosser, Philadelphia Federal Reserve Bank President, will be speaking at the Global Interdependence Center conference on food and water in Singapore.

8:30 a.m. EST: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims fell last week by 12K to 502K, after falling 20K a week prior. I should note there is a potential for initial jobless claims slip below 500K this week, which would assuredly invoke numerous headlines.  Nevertheless, despite second derivative improvements these levels still indicate continued losses for monthly payrolls—albeit at a slower pace—coupled further deterioration to the unemployment rate, which has already exceeded 10%. The current Bloomberg consensus forecast is expecting claims to come in at 505K, essentially unchanged from last week.

10:00 a.m. EST: October’s Leading Indicators (Risk: Neutral, Market Reaction: Moderate): October’s leading indicator index will likely show its seventh consecutive month of positive readings.  The current Bloomberg consensus forecast is expecting a +0.4% rise for the month, compared to a +1.0% increment in September.  The biggest positive contributions for the index will likely come from the yield curve, initial jobless claims, and stock prices, while the University of Michigan’s consumer expectations index should be the largest negative factor.

10:00 a.m. EST: November’s Philadelphia Fed Survey (Risk: Negative, Market Reaction: Moderate): Recent weakness in the Philly Fed’s expectations index may catch up with the current conditions index potentially placing some pressure on November’s headline number.  Nevertheless, the current Bloomberg consensus forecast is for a reading of 12.0 compared to 11.5 in October.

10:30 a.m. EST: EIA Natural Gas Report (Risk: Neutral, Market Reaction: Moderate): This report highlights domestic natural gas inventories, which could have a significant impact on the energy sector.

4:30 p.m. EST: Fed Balance Sheet & Money Supply (Risk: Neutral, Market Reaction: Marginal): Since the Fed’s shift to quantitative easing, the balance sheet has become one method to measure to the Fed’s effectiveness.  The market will pay close attention to the reserve bank credit component, which measures factors supplying   providing reserves into the banking system.  The Fed’s balance sheet fell slightly last week to US$2.117trn from US$2.147trn a week prior.    The fed’s balance sheet has slowly been shifting away from emergency lending facilities to Treasuries, agency debt, and mortgage-backed securities to help moderate long-term interest rates.

4:45 p.m. EST: Richard Fisher, Dallas Federal Reserve Bank President, will give the closing address to the Cato Institute’s annual monetary policy conference in Washington

Friday, Nov. 20

Charles Plosser, Philadelphia Federal Reserve Bank President, will be speaking at the Global Interdependence Center conference on food and water in Singapore.

Enjoy the weekend!

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Coal in Your Stocking: Hypocrisy, Senility or Common Sense?

November 13th, 2009 Michael McDonough Comments off

An excerpt from “Coal in Your Stocking: Hypocrisy, Senility or Common Sense?”

Joe, a retired coal miner in WV

Joe, a retired coal miner in WV

At lunch last week with former colleague and Wall Street writer/editor Bill Johnsen, the topic du jour was Warren Buffett’s Berkshire Hathaway (BRK.A) purchase of Burlington Northern Santa Fe (BNI). Bill wanted to know if I thought the acquisition was an act of hypocrisy, senility, or common sense.

I said it was the latter, Bill agreed, and we held forth on how history should eventually prove Mr. Buffett has made another wise investment. Not only is Buffett betting on the resilience of the U.S. economy, but on an energy source arguably taking as much heat as it provides in Washington, coal.

For the remainder of the piece please visit TheStreet.com’s Real Money site by clicking here:

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