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.