Gold vs. The Adjusted Monetary Base

Created this using data obtained from Kitco regarding the yearly gold price, and the Adjusted Monetary Base from the St. Louis Fed.  Unfortunately I don't have longer term data to work with, but the general point is that the historical average ratio implies a gold price at $2,000 per once, and a parity price implies ~$2,700 per ounce.  It is currently hovering around $1,800 per ounce, implying that gold is still trading at a discount in US dollar terms.  

The True Profit of College Football and Basketball

I'll get right to it.  Source data:  http://ope.ed.gov/athletics/

Football:
Average Net Revenue:  $9.35 million
Average Net/Player:  $81,126.27
Net Margin:  42.8%

Basketball:
Average Net Revenue:  $2.57 million
Average Net/Player:  $167,233.81
Net Margin:  38.6%

If we're ever going to get to a system where corruption scandals like what we've seen with the University of Miami football program are a thing of the past, we have to get real about fairly compensating players for their efforts.  I am of the mindset that players should be getting any revenue in excess of cost + 10% (ie., 10% net margin).

Average Player Compensation (Proposed Model):

Basketball:  $140,603.28
Football:  $70,304.51

Given that the expenses column referenced above already included the cost of education for the players, I think these compensation numbers should be in addition to the cost of education.

Net Revenues

Just wanted to post up a relatively simple chart with the following parameters:

1.  Chained 2005 dollars, in order to show a neutral comparison across time.
2.  Net revenues, which is simply total federal tax revenue minus total federal spending for that fiscal year.

The purpose of this is primarily to cut through the noise and show a yearly measure of just how much debt we've taken on in the 2008 - 2011 (annualized) time period.  It is truly unprecedented.  Some like to point out that we've taken on more debt as a percent of GDP during WWII, which is true, but GDP is entirely different from revenue.  While the two have historically been highly correlated, that correlation broke down dramatically in the 2000-2010 decade  (going from 95%+ correlation down to 37%).  As we continue to listen to people in the news talk about this issue, and focus tremendously on the GDP and efforts to juice it, please keep the important fact in mind that juicing the GDP doesn't mean anything if it doesn't increase actual revenue, nor does it imply that any revenue increase necessarily will keep pace with spending.

(click on the image to see the full chart)

The Real S&P 500 Story

There is a common though that the market peak occured in October of 2007, which is true from a nominal perspective.  The odd thing to me is that, unlike bond investing, people seem to magically forget that inflation exists and is constantly eroding their dollar value, hence the need for a yield in excess of inflation in order to increase net worth expressed in real terms.  The financial media focuses a great deal on bond investments having "significant risk" due to the possibility that their fixed rate securities may not keep pace with inflation, yet, this issue tends not to be brought up in regards to stocks.  In fact, many point to stocks as being an "inflation hedge", with the idea that, as the value of the dollar erodes, nominal earnings go up at an equal or greater pace.  This would be great if it was actually true, but it is unfortunately not, as demonstrated below:

In order to hit the market peak in real terms, the S&P would nominally need to go to ~2425.  It's currently hovering at around 1300.

Full-Time Workers: We're $100 Billion Dollars Poorer.

http://i51.tinypic.com/1h9zio.png

Chart I did using BLS data combining total full time wage and salary workers * average weekly earnings.  CPI adjusted to 1982-1984 chained dollars.  From the 2007 peak, the total basket of people in full-time jobs are making exactly $100 billion dollars less, in real terms, than in 2007.  They are making $20 billion less than last year.

May help explain in part why we're having budget issues.  Less income = less income tax and less income available for expenditures = less sales tax.

Why $137 Million is Peanuts.

http://www.jsonline.com/news/statepolitics/115726754.html

Obviously it's been in the news lately, and the wrangling over the $137 million dollar deficit facing the state has been pretty epic, as it should be.  However, it's important to realize just what this money really means from a budgetary perspective.

http://www.doa.state.wi.us/capitalfinance/pdf_files/2010_WI_AFR.pdf Budget surplus fiscal 2010:  $70,980,000 Debt service fiscal 2010:  $652,063,000 The thought would naturally arise:  "Why in the hell is Wisconsin paying that much in debt servicing?" Great question, reader.  After all, per this: http://www.doa.state.wi.us/capitalfinance/pdf_files/2010CAFR.pdf The ratio of principal to interest + expenses is greater than 1:4.  Pretty dumb to be throwing $488 million right out the window for no good reason, right?  So what is the reason then? Back to this one: http://www.doa.state.wi.us/capitalfinance/pdf_files/2010_WI_AFR.pdf Interest and Investment income: Fiscal 2008:  -$4.4 bln (total $28.7 bln revenues) Fiscal 2009:  -$14.9 bln (total $20.3 bln revenues) Fiscal 2010:  +$8.6 bln (total $46.2 bln revenues) Three year return:  -$10.7 bln Yes friends, as a result of the stock market crash, a gigantic bazooka was leveled into the state budget, and because those budget items are mostly non-discretionary (and the state workers already took a hit through salary freezes, reductions, and hiring freezes meaning more work for the remaining workers), the state had to borrow so much money that, coming full circle, came to $652 million in borrowing expenses in one year. So, the next time you hear somebody complain about state workers not being particularly happy about cuts to their already frugal compensation, point out that the reason the state is in this mess is because of Wall Street and their aforementioned $194 million in external management fees.

Annual Housing Completions

The other component of housing data that often gets overlooked is the number of actual housing completions.  While this is not a forward indicator, it gives a better retrospective look at the housing market as it relates to valuation of the home construction sector.  Since data began being collected on this back in 1968, we just posted the worst home completions number ever, coming in at 653,500 total homes completed.  The previous worst number was last year, coming in at 794,400 total homes.  In other words, the home construction market came in at 18% below last year.  The recent peak number was in 2006, coming in at 1,979,400.  The all time peak was in 1973, coming in at 2,100,500.  We are 67% off the 2006 high. 

Trade Balance: Reality Edition

http://www.bloomberg.com/news/2011-01-13/trade-deficit-in-u-s-unexpectedly-narrows-to-10-month-low.html

The news today has mostly been focusing on the supposed narrowing trade gap due to a weaker dollar and “growing global demand”.

Here’s what the numbers YTD look like in 2005 chained dollars compared to last year:

The trade gap has actually increased $66.73 billion.

Source:  http://www.census.gov/foreign-trade/Press-Release/current_press_release/index.html

JOLTS and the Jobless Recovery, Decade Edition

http://www.reuters.com/article/idUSTRE70A41H20110111

Oftentimes the reporting for the BLS JOLTS data (Job Openings and Labor Turnover Survey) focuses on job openings, but I personally don’t find a job opening compelling if it doesn’t translate into an actual hire, from an economic standpoint. 

http://www.bls.gov/jlt/

They compile both, as well as providing separations data.  I decided to do a quick bump up of these numbers to get a net job creation number (simply take hires and subtract separations).  The trending was not at all surprising, it mirrored the technical recession periods of 2001-2002 and 2008-2009.  What was surprising was the total net creation; specifically, per this data we’ve had a net negative job creation over the past decade of 1.76 million jobs.

Of Blizzards And Angst

http://news.yahoo.com/s/nm/20110106/bs_nm/us_usa_retail_sales

Per the headline, snow in December + “angst” = sales and profit misses for retailers.  These misses probably could have been avoided had the analysts tracking retailers simply kept their eye on the ball.

http://www.gallup.com/poll/112723/Gallup-Daily-US-Consumer-Spending.aspx

This tracks discretionary consumer spending (excludes house, vehicle, and standard monthly bills).  They include a handy download link to get all the raw data in Excel.

From this data, here’s what average consumer discretionary looked like in 4Q 2009 vs. 4Q 2010:

Daily spending dropped from $66.79 in 4Q 2009 down to $63.96 in 4Q 2010, or a drop of 4.2%.  Obviously there are other factors at work in determining how this relates to stock valuation for the retail sector as a whole, but from a fundamentals standpoint, it’s probably unreasonable to make an argument for higher valuations of retail stocks in the absence of significant cost cutting measures.

On Housing Permits, Starts, and Completions

http://money.cnn.com/2010/12/16/real_estate/November_housing_starts/index.htm?source=cnn_bin

Much of the news this morning focused on the beat of expectations regarding housing starts, which some are viewing as an indicator of a recovery in the sector.

http://www.census.gov/const/newresconst.pdf

One issue with using the housing starts data to get a read on this sector is the wide margin of error.

“Privately-owned housing starts in November were at a seasonally adjusted annual rate of 555,000. This is 3.9 percent (±12.0%)* above the revised October estimate of 534,000, but is 5.8 percent (±12.0%)* below the November 2009 rate of 589,000.”

Housing completions suffer from a similar wide margin of error.

“Privately-owned housing completions in November were at a seasonally adjusted annual rate of 513,000. This is 14.1 percent (±10.9%) below the revised October estimate of 597,000 and is 39.6 percent (±8.6%) below the November 2009 rate of 850,000.”

A more reliable indicator of the market within this “facts on the ground” release is the housing permits data, as this data is taken from actual public record rather than surveys, and is a better metric for arriving at forward P/E’s for FIRE sector stocks with significant exposure to the cyclical portion of the market. 

“Privately-owned housing units authorized by building permits in November were at a seasonally adjusted annual rate of 530,000. This is 4.0 percent (±2.9%) below the revised October rate of 552,000 and is 14.7 percent (±1.7%) below the November 2009 estimate of 621,000.”

Note that the annualized rate of 530,000 stands in sharp contrast to November 2005, where the rate stood at 2,155,000.

http://www.census.gov/const/newresconst_200511.pdf

This is important to keep in mind as you’re back testing your valuations.  For example, Toll Brothers (TOL):

http://www.finviz.com/quote.ashx?t=TOL&ty=c&ta=0&p=m

KeyBank recently put them at $22, Barclays had them at $21 back in January, and JPM had a target of $29 back in September 2009.  They were trading in the 35 range back around November of 2005.  The permits data indicate that the opportunities to build have dropped 75% since that time, which would suggest a valuation (assuming similar corporate performance) of 8.75.  Obviously there are other factors at play here, but the fact that their past 5 year earnings per share has dropped 78.55% suggests that market size does matter.

Municipal Debt Headed South

http://en.wikipedia.org/wiki/Build_America_Bonds

One provision of the American Recovery and Reinvestment Act (enacted February 2009) was the creation of the Build America Bonds program, which provides special incentives for investors to purchase municipal debt.  The Tax Credit BAB provides a federal subsidy in the form of tax credits to the bond holders, where as the Direct Payment BAB provides a federal subsidy in the form of a 35% cost sharing with the state or municipal bond issuer on the interest of the debt. 

The “big news that didn’t make the news” as of late is that this program appears set to expire at the end of the year with no extension (as some had anticipated as part of the soon to be signed extension of the Bush-era tax cuts).  This will result in a fairly immediate increase in the cost of borrowing for states and municipalities.  Given the already high cost of borrowing for states such as California and Illinois, this will put substantial pressure on the Federal Reserve to start yet another round of quantitative easing in the form of direct purchases of municipal debt in order to keep the costs of borrowing by these states and municipalities low.

Reality: The American Consumer is Deleveraging

http://research.stlouisfed.org/fred2/series/CONSUMER?cid=100

Adjusting for the FASB accounting changes effective end of Q1 2009, there has been a $105 billion dollar drop in consumer loans since the peak in February 2009, and has been trending steadily down.

What does this mean?  Generally speaking, in a fractional reserve system, debt must increase in order for the economy to grow.  Debt decrease = economic decrease.  Ergo, I would anticipate disappointing sales figures in aggregate when 4Q earnings are reported in January/early February. 

Pending Home Sales – A Closer Look

http://www.upi.com/Business_News/2010/12/02/Pending-home-sales-up-104-percent/UPI-22441291320943/

Source data:

http://www.realtor.org/research/research/phsdata

The current index reading for October 2010 is 89.3.  A 100 reading indicates the level of contract activity as of 2001.  The contract activity is a count of pending contracts, not an estimated sum of overall contract value.  The reading is down from 112.4 in October 2009, and up from 80.9 last month. 

Their staff economist, Lawrence Yun, attributed much of this to looser lending standards and more affordable prices.  The issue I have with this interpretation is:

1.       The lending standards affect the actual sale of the home, rather than the pending sale.  For example, if I enter into a pending contract to buy a home, I still have to then get approval on the financing of that purchase.  Also, a much larger percentage of buyers recently have been all-cash auction purchases, which would not accurately capture the lending environment.  The Federal Reserve Bank of St. Louis has better research on this topic that more specifically addresses real estate lending:

http://research.stlouisfed.org/fred2/series/REALLN?cid=100

Click on “view data” to get a more granular view, but this shows the actual total real estate loan activity (both existing and new loans) of all commercial banks.

http://research.stlouisfed.org/fred2/categories/32239

Another group of metrics I really like, these metrics show where the loan officers at banks are actually doing in the mortgage market.  For instance:

http://research.stlouisfed.org/fred2/series/DRTSPM?cid=32239

This shows that loan officers are actually tightening standards for prime loans.

http://research.stlouisfed.org/fred2/series/DRTSSP?cid=32239

This shows that loan officers are all but shutting down subprime loans.

In a separate but interesting tangent:

http://research.stlouisfed.org/fred2/series/DRTSCLCC?cid=32239

They’re now more than willing to let you ramp up your credit cards.  Go figure.  They love your unsecured debt, but hate your asset secured debt.  Such is the securitized debt markets and funky accounting, where they’re trying to make MBS prettier, while stuffing garbage in consumer debt.   

2.       Median prices are currently at $170.5K vs. $172K October of last year, yet, sales are down 20%.  The price of the home strikes me as being an almost irrelevant correlation here.  Ultimately, most economists view home prices as being stable at 3x median household income.  The current average in the US is $49,777, so the stable median price should currently be about $150K.  As such, current home values are about 13.7% overpriced compared to stable market demand.   

A Deeper Dive of Construction Data

http://www.census.gov/const/www/c30index.html

Private construction in the residential market was buoyed by home improvement projects, as new housing was down from last month 0.7% and down 7.9% from October of last year.  Spending overall was up 2.5% from last month, and down 9.2% from October of last year.

Private nonresidential construction was down 0.7% from last month and down 20.7% from October of last year.  The only nonresidential area of improvement from last month was in power utilities, which were up 7.8% from last year.  Power utilities are the most significant portion of nonresidential construction, nearly meeting the combined commercial and manufacturing sectors combined in total spending.

Public construction spending was up .4% from last month and up 2.2% from last year.  The two biggest components of the public construction sector are education and roads/highways.  Education spending is actually down 7.4% from last year, while roads/highway spending is up 51.4%.  Oddly, public safety spending is also down 10.7%.  Call me crazy, but I would suggest that budget priorities need to be reconfigured here.

Unemployment Rate: Indicator of Economic Activity?

http://www.portfolio.com/business-news/reuters/2010/11/24/jobless-claims-at-2-year-low-spending-rises

“New claims for jobless benefits last week dropped to their lowest level in more than two years while consumer spending rose in October, pointing to a moderate strengthening in economic activity.”

The problem with using the headline unemployment rate is that it doesn’t give an accurate picture of the labor market itself, ie., it says nothing about the actual dollar size of the labor market and its contribution to the economy. 

http://www.bls.gov/webapps/legacy/cpswktab1.htm

This gives you the approximate number of how many people are employed, and what their weekly earnings are, in order to arrive at the dollar value of the labor market.  3^rd quarter 2009 total employed was 99.125 million people, paid an average of $741/week ($38,532 per year) for a total value of $3.819 trillion dollars.  3^rd quarter 2010 total employed was 100.291 million people, paid $745/week, or $38,740 per year, for a total value of $3.885 trillion dollars.  The labor market value increased $6.6 billion dollars over the course of a year, a 1.7% increase in value.  

The big thing to take away from this is that the Dow Jones industrials have increased 11.8% over that same period, indicating that the correlation between the labor market and the stock market (another often used indicator of economic activity) is fairly weak. 

New Home Sales: An Alternative View

As a companion to yesterday’s piece, today we’ll look at the new homes market.

http://www.census.gov/const/newressales.pdf

Total sales have dropped from 396K in October 2009 down to 283K in October 2010. 

Again, total sales only tell half the story:

http://www.census.gov/const/www/constpriceindex_excel.html

If you take the 2009 average price of $270,900 and adjust it to the 3^rd quarter 2010 price index vs. the 3^rd quarter 2009 price index, you end up with an average sale price of $267,453.

Therefore, the total new homes market has dropped from $107.28 billion in October 2009 down to $75.69 billion in October 2010, a $31.59 billion (29.4%)  drop in total value in a year.

Existing Home Sales: An Alternative View

Existing home sales were reported to be "slightly down":

http://finance.yahoo.com/news/Existing-home-sales-drop-cnnm-3446938743.html?x=0

But per their data source:

http://www.realtor.org/research/research/ehsdata

Existing home sales dropped from 5,980,000 in October 2009 (at $172,000 median price) down to 4,430,000 in October 2010 (at 170,500).  The total existing home sales market size therefore dropped from $1.029 trillion down to $755 billion dollars, a $274 billion (26.6%) dollar drop in market size in one year.

It's important to look at the economic value of the housing market, particularly on a timeline longer than month-to-month, in order to get an accurate read of where the market is when making decisions on whether to invest in companies within this line of business (such as ZIPR), as this is what affects their actual earnings. 

A comparable analysis can be completely for the new homes market, and can be used as a more accurate way of assessing the homebuilders sector.  Both existing homes and new homes economic value data can be used as supporting information along with MBA mortgage applications to provide a solid read of the current and near future (2 or less year timeline) home mortgage market.