GDP Shrinkage

GDP's negative trending
Is not the economy's ending;
We're having a boom
In the stuff we consume,
Offset by less government spending.

It was a shock to read yesterday that the US economy actually shrank by -0.1% in the fourth quarter of 2012, but the markets reacted steadily.  It appears that, beneath the negative headline number, the private economy is actually doing pretty well.  Here's the Washington Post on the breakdown of the numbers (see chart at right):

The GDP report for the fourth quarter of 2012 is, on its face, disappointing. The economy shrunk, at an 0.1 percent annual rate, the first such contraction since the recession’s nadir in 2009. But commentators are surprisingly upbeat about it. Spending and investment are still looking good, but sharp contractions in business inventory and federal defense spending sunk the overall number. Paul Ashworth at Capital Economics called it “The best-looking contraction in U.S. GDP you’ll ever see.”

Small Investors Jump In

At times, when the stock market rises,
The basis for all the new highs is:
Investors who yearn
For a better return
Than the interest-rate outlook advises.

The billions investors have shifted
To stock funds effectively lifted
The market's appeal
(And also, the deal
That avoided the big Fiscal Cliff did.)

There's a saying that's really akin to it,
From traders who've commonly been to it:
On the stock market floor,
According to lore,
You get out of it what you put into it.

I guess by now almost everybody is aware that we are in a bull market for US stocks, and one would expect a surge of small investor interest to follow this realization.  However, according to the Wall Street Journal, a massive inflow of retail cash into equity mutual funds also preceded and contributed to the market surge.  On Tuesday, the Dow Jones Industrial Average rose 72 points to close at 13,954, its highest level since October 2007.  The Dow has risen 850 points - or 6.5% - in January, a New Year's achievement not seen since 1989.  As shown by the graphic, this strong performance was helped by $6.8 billion of investor cash flowing into equity funds in the first three weeks of the year, after years of massive outflows.  No doubt some of the recent inflow manifests the public's relief that the federal government did not take the economy over the Fiscal Cliff in January, and is thus a rebound from the fearful, exaggerated December outflow.  However, in the market, optimism may create its own reward by boosting demand for assets (stocks) and hence, their prices; proving, once again, that you get out of life what you put into it.

Fertile Ground

A politico trained in agronomy
Was convinced he could grow the economy:
"To start with manure
'S the best way for sure,
So bullsh*t's incumbent upon-a me."

If there's one phrase that unites Washington these days, it's "to grow the economy."  Passions may boil over whether it's better to direct such growth from "the middle out" or "from the top down;" whether "the job creators" or "America's working families" comprise the more fertile soil in which to germinate the economy's roots; but there is no doubt as to the choice of metaphor.  In the newly redesigned New Republic's Jargonist column, Noreen Malone finds that "growing the economy" is a relative neologism in our old republic, first popularized by Bill Clinton in 1992.  Prior to that, the preferred metaphor imagined the economy as "an engine," on the basis of which the partisans could dispute how many cylinders it had, or whether it was firing on all of them.  Perhaps it is time to bring back Adam Smith's "invisible hand," although, in our hypersexualized era, we may not yet be ready for its inappropriate touch.

Core Cash Flow Multiple

Said a notable stock-pickin' man:
"Of $AAPL I'm not such a fan,
But the price is so low
Compared to cash flow,
I'm buying as much as I can."

Hedge fund manager and blogger James Altucher posted an amusing take-down of the bearish Apple sentiment in Seeking Alpha yesterday. The gist of it is that six times cash flow is too little to pay for the shares of a company whose revenue is still growing at 20%, so the recent fall to $440 from $600 a share is just noise.

Says Altucher: "I own Apple since my initial $1000 call and anyone who did is well in the money. Meanwhile, I also own Google and Amazon. These companies are going to keep innovating past each other and by the time they are through one of them is going to make a time machine, the other is going to put a phone into our neurons, and the third is going to let us spend the rest of our lives in drugged out virtual realities while we fly around in pilotless spaceships. So I'm staying long."

N.B. Altucher's investment horizon is five years, so this is not exactly a day-trading recommendation.

Regulatory Oversight

If the SEC chairwoman-candidate
Has both tried the Street and defended it,
One may sensibly ask
If she'll make of her task
To have reined in the Street or befriended it.

According to the New York Times' Dealbook, there's a "signal to Wall Street in Obama's pick for regulators."  So, one may ask, what is the signal?  In announcing his nomination of Mary Jo White to run the Securities & Exchange Commission, President Obama said: "It’s not enough to change the law; we also need cops on the beat to enforce the law," adding: "You don’t want to mess with Mary Jo." Indeed, Ms. White made a name for herself as the United States Attorney in Manhattan in the '90s, prosecuting the 1993 World Trade Center bombers and John Gotti, among others. The current US Attorney in Manhattan, Preet Bharara, who put inside trader Raj Rajaratnam in jail, is among the generation of prosecutors trained by Ms. White.

This is all well and good, but her appointment sends other signals as well.  As a recent, must-watch PBS Frontline documentary points out, no Wall Street or financial industry figures have been prosecuted for the frauds that contributed to the financial crisis.  As chair of the litigation department at Debevoise & Plimpton for the last ten years, Ms. White made it her business to keep the industry's leaders "untouchable".  The "revolving door" between Wall Street and Washington has long served to take the teeth out of regulation; it remains to be seen which way the door is turning in the case of Mary Jo White.

Davos

There's a conf'rence of world VIPs
Taking meetings in spas and on skis;
By Switzerland's hills
They solve the world's ills,
Or at least decide who's the big cheese.

Every year at this time, the gloom of January is brightened (or deepened, depending on your viewpoint) when central bankers and business leaders from around the world gather in Davos, Switzerland to discuss the world economic outlook.  The World Economic Forum is "committed to improving the state of the world" and, according to the organizers of the annual meeting, it "remains the foremost creative force for engaging leaders in collaborative activities focused on shaping the global, regional and industry agendas." Others take a more cynical view, including Bloomberg radio commentator and former SEC chairman Arthur Levitt, who has given up going to Davos, remembering it as a social competition in which the object was to collect the greatest number of prestigious names on one's "dance card."

Those prestigious names are now concerned over the possibility of systemic financial failure, according to a report by Reuters.  Over 1,000 central bankers and business leaders were surveyed ahead of the annual meeting, and it turns out that they are worried about all the excess liquidity that the former have pumped into the system for the benefit of the latter.  Recurring asset bubbles and "currency wars" of internationally competitive devaluations are some of the other concerns that keep the power elite uneasily awake through those snowy Alpine nights.

2nd Term Priorities

Obama's prioritization
In his 2nd-term administration
Should be making some dents
In the rising expense
Of medicine and education.

This priority shouldn't give pause
To government skeptics because
There's much to be gained
By undoing the pain
From ongoing federal laws.

President Barack Obama kicked off his second inauguration yesterday with a rousing speech of liberal policy prescriptions that he intends to pursue in his new term.  Underlying much of the rhetoric was the goal of using the social fabric and safety net to support and strengthen the American middle class.  Among the many factors that have led to the hollowing-out of the middle are the rapidly rising costs of education and healthcare.  It is education that is increasingly necessary to enter the world of steady, well-paid work, while affordable healthcare would prevent much of the undoing of employer-provided benefits that we have seen in the last generation, as well as the great number of personal bankruptcies.

To those who ask: what could the federal government possibly do to arrest these cost increases, I would say: what is it currently doing to contribute to them?  Two examples come to mind.  In education, the federal government contributes to the price spiral by providing a seemingly limitless supply of student loan funding for it.  A more discriminating, less misguidedly generous posture might be in order.  In medicine, the Medicare and Medicaid programs are the biggest contributors to the "fee for service" model that is one of the roots of healthcare inflation identified by the President.  These are just two thoughts off the top of my head; I'm sure that thoughtful policymakers could find more.

Punitive Measures

A six-billion loss dealt a blow
To the name of a bank's CEO.
To atone for this trade,
He merely was paid
A paltry ten million or so.

What do you take from the man who has everything?  That was the question faced by the board of JPMorgan Chase, which had to determine the consequences for CEO Jamie Dimon of the $6.2 billion loss from the "London Whale" trades.  The answer was a 50% reduction in Mr. Dimon's total compensation, from $23 million in 2011 to "only" $11.5 million for 2012.  (To be fair, the compensation package reflects a record year for the bank's profits, in spite of the outsized trading losses.)  The New York Times' Dealbook page, no doubt attempting to wrap its head around the fact that $11.5 million is only half of someone's compensation, believes that, in the face of such a striking management lapse, more radical changes are called for.  Suggests columnist Agnes Crane:

One could be to split the roles of chairman and chief executive. A well-chosen chairman provides a check on a chief executive’s powers. In one indication that this can work, GMI Ratings last year concluded that an executive pulling double duty can earn 50 percent more than the total pay of two people performing the top jobs separately.

It sounds as though, if governance is strong, compensation finds a more appropriate level as a matter of course.

Post-Holiday Blues

The December performance of retail
Was bullish in ever-y detail;
All the gifts that were sold
Decisively told
A surprisingly good Christmas tree tale.

But the 1st quarter figures & facts
Describe a consumer that lacks
A spending position,
Since broad imposition
Of 2% more payroll tax.

The US retail sales numbers for December were announced on Tuesday, and painted a picture of robust holiday consumption.  The 0.5% quarterly increase was much better than expected, and much faster than the rate for the previous two quarters.  However, it looks as though the momentum may not carry through to the 1st quarter of the new year.  Weekly retail reports in January have already fallen below expectations, and the reason seems clear: most US workers now have less take-home pay, thanks to the increase in the payroll tax by two percentage points to 6.2%, from the temporary, "stimulus" rate of 4.2%.  Other indicators appear less than bullish, as well: the Federal Reserve Bank of New York reports that manufacturers in its district (which is also my district) continue to reduce their activity.  The ongoing drama of the fiscal cliff and debt ceiling doesn't help, either.