A Little Research

Dear Reader,

David is finishing up the last edits to our new issue of The Casey Report, so Chris will be filling in today.

I’ve always considered myself somewhat of an optimist, but my super-bearish outlook for 2010 has made me feel like an outcast among my fellow men (and women) as of late. So, in hopes of finding some bright spots in the economy, I decided to do a little research.

Here’s what I found…

Depression-Era Rallies vs. Today’s Rally

First, let’s look at a chart showing the stock market rallies during the Great Depression and then compare that with the current rally to try and get a sense of the thing.

You can see in the chart above that in the first four years of the Great Depression, there were eight large stock market rallies in which the Dow Jones Industrial Average rose between 19% and 122.5%, with an average increase of 52.6%. You can also see that the average duration of these rallies was a little less than three months (11.3 weeks).

How does that compare to the Dow’s recent run-up?

To put it simply, the current rally has lasted much longer than any of the depression-era rallies. From the March 3, 2009, close of 6,726.02 to yesterday’s close of 10,572.02, this rally – which I still believe to be a dead-cat bounce – has endured for a whopping 10 months and has seen the Dow rise more than 57%.

Is this a good thing?

Some probably consider the sheer duration of the current rally as proof that we’re back on track to good times for all, but I see it more as proof that many investors have lost their minds. Corporate profits have stabilized somewhat, but that was due to cost-cutting measures that are no longer feasible. And revenues are still swirling around in the toilet bowl. Add to that the massive equity issues and shareholder dilution taking place, and what do you get? Something that makes no sense.

Okay, so what else is going on?

Tax Revenues Tanking

If there’s one thing the federal government is good at, it’s taking our money. So, if the underlying economy is improving and we are producing more, you’d think tax “revenues” would be rising.

All of the Obama administration’s plans are predicated on growing tax revenues, from individuals and from corporations. The truth of the matter is, however, that rather than increasing, tax revenues from these sources, and overall, are falling fast.

If you comb through the past couple dozen editions of the “Monthly Treasury Statement of Receipts and Outlays of the United States Government,” which is compiled and published by the Treasury Department’s Financial Management Service, you’d find some disturbing trends.

Over the most recent 12 months for which there is data (through November 2009), individual income taxes are down 22.4% from the previous 12 months, corporate income taxes are down an astounding 56.5%, and total tax receipts have fallen 17.6%.

Looks like all that money the government is spending will have to come from somewhere else, i.e., the hidden tax known as inflation.

Home Sales & Inventory

I contacted the folks at the National Association of Realtors to find out what’s going on in the housing market. Here’s a breakdown of the data they sent:

• Existing home sales in the U.S. are down 15.9% from the September 2005 peak seasonally adjusted annual rate of 7.25 million sales, but up 35.9% from the January 2009 trough of 4.49 million sales.
  
• Existing home inventory stands at 3.574 million, which reflects a seven-month supply. This compares favorably to the 11-month supply peak inventory figure of 4.575 million back in July 2008.
  
• The median home sales price in the U.S. of $172,600 is 4.7% above the January 2009 figure of $164,800, but is still 25% below the July 2006 figure of $230,300.

Furthermore, the Census Bureau reported a couple weeks ago that November housing starts rose 8.9% compared to the previous month.

On the surface it appears housing may be stabilizing somewhat. But if you dig a little deeper you’d find… not so much.

First of all, the slightly improved sales figures and marginal rise in prices likely have much to do with the first-time home buyer tax credit and the move-up/repeat home buyer tax credit, both of which were recently extended through April 30, 2010.

Second, the Census Bureau’s report was statistically insignificant. The margin of error (with a 95% confidence interval) on these figures is +/- 12%.

Debt Continues to Grow

Although consumer credit and home mortgage debt declined 0.8% and 0.9%, respectively, in the third quarter, increases in government debt more than made up for this marginal decline. Federal, state, and local government debt outstanding grew 4.2% in the third quarter, pushing total debt outstanding to a new all-time high of $34,551.9 billion, according to the Federal Reserve’s newly released Z.1 Flow of Funds document.

This document also revealed that in the third quarter, personal savings dropped 17.8% based on the seasonally adjusted annual rate figures.

Personal Bankruptcy Rising

As icing on the cake comes this story from The Wall Street Journal. And I quote:

The number of Americans filing for personal bankruptcy rose by nearly a third in 2009, a surge largely driven by foreclosures and job losses.

And more people are filing for Chapter 7 bankruptcy, which liquidates assets to pay off some debts and absolves the filers of others. That is significant because a 2005 overhaul of federal bankruptcy laws aimed to encourage Chapter 13 filings, which force consumers to sign onto debt-repayment plans in exchange for keeping certain assets.

The changes were designed to make it more difficult for people to shed their debt, particularly in a Chapter 7 filing. A "means" test, for example, was introduced to separate those who could afford to repay their debt from those who couldn't. A Chapter 7 filing is off the table if the means test determines a person is able to pay back at least a portion of the debt after it is restructured.

The worst U.S. recession in a generation is testing the effectiveness of these laws. The economic downturn also has prompted more middle-class Americans to file for bankruptcy protection.

Overall, personal bankruptcy filings hit 1.41 million last year, up 32% from 2008, according to the National Bankruptcy Research Center, which compiles and analyzes bankruptcy data. It is the highest level of consumer-bankruptcy filings since 2005. Consumers rushed to file in 2005 before the new bankruptcy laws took effect in October of that year.

Chapter 7 filings were up more than 42% as of November 2009, compared with the same period a year earlier, according to the research center. November is the most recent month with analyzed data available. Chapter 13 filings rose by 12% and made up less than a third of 2009 filings as of November.

All these things taken together tell me we are nowhere near out of the woods yet. But that’s just one man’s/bear’s opinion.

If you want to know what some of my more esteemed colleagues think, you should check out the January 2010 edition of The Casey Report that will be released this week. In it you will find Chief Economist Bud Conrad’s comprehensive forecast for 2010 and specific ways to invest; it also includes a special bonus report on expatriating yourself and/or your money. If you’d like to regain control over your money and your life, you won’t want to miss this special edition. And with our 100%, 3-month money-back guarantee, you don’t have to. Details here.

Miscellany

New Year, New Laws

Taking a cue from the head nanny, state legislatures have enacted more than 40,000 new laws that will go into effect during 2010, according to the National Conference of State Legislatures (NCSL), which provides an annual round-up of such laws.

Here are some samples that were posted on the Daily Contributor:

• In New Hampshire, same-sex marriages will be allowed. Physical therapists can get certified to practice on animals.
  
• In Texas, college freshmen and transfer students will need to be vaccinated against bacterial meningitis before they can live on campus. Smoke detectors will need to be able to alert a hearing-impaired person if requested by a tenant. Teenagers cannot use a tanning bed unless accompanied by an adult.
  
• In North Carolina, smoking gets banned in bars and restaurants. The state is the largest tobacco producer in the country.
  
• In Kentucky, payday borrowers will be restricted to two loans of no more than $500 at a time, and payday lenders face tougher penalties if they lend to someone who has reached the maximum.
  
• In Oregon, children under age 16 are required to wear a seat belt on any ATV or vehicle on public property, and the fine for people riding a motorcycle without a helmet will increase to $720.
  
• In Montana, insurance companies will be required to provide coverage for autism-spectrum disorders.
  
• In California, restaurants can no longer use oils, margarine, or shortenings with more than half a gram of trans fat per serving.
  
• In Illinois, drivers may not text while driving. Schools must include Mexican-American history and history of people with disabilities.
  
• In Louisiana, stores can no longer sell lighters that appeal to children. And consumers must be warned of the dangers of eating seafood from China.

Sen. Dodd Departing

Senate Banking Committee Chairman Christopher Dodd (D.-Conn.) plans to announce today that he will not seek reelection this year, The Wall Street Journal reported. The news comes the day after another key Senate Democrat, Sen. Byron Dorgan of North Dakota, also announced he would not run for reelection this year.

Here’s a quote from The Wall Street Journal:

Sen. Dodd's decision could alter the dynamic of Senate negotiations on the financial regulatory change package, a key domestic agenda item for the Obama administration. Free from having to worry about re-election, Sen. Dodd is likely to be more willing to compromise on objections raised by Republicans and the financial-services industry, analysts said.

"Presumably now he has a greater interest in leaving a legacy," Thomas Gallagher, an analyst at International Strategy & Investment said in a note on Wednesday.

The House already passed its financial-markets overhaul measure, but Senate action has been bogged down by the debate over health care and a general partisan rancor in that chamber. Sen. Dodd has been attempting to work with the Senate Banking Committee's top Republican, Sen. Richard Shelby (R., Ala.), but progress thus far has been slow. A discussion draft introduced by Sen. Dodd late last year was seen as too radical by many Republicans and even some more business-friendly Democrats.

Sen. Dodd's draft bill would create a new Agency for Financial Stability, with a mandate to identify and remove systemic risks to the economy, as well as a Consumer Financial Protection Agency to deal with products such as mortgages and credit cards. It also called for a single bank regulator to oversee an industry whose regulation is currently spread across a number of agencies.

Sen. Dodd's measure would also require both domestic and foreign-owned financial firms that are deemed a systemic risk to face enhanced supervision and standards that would be "increasing in stringency with the size and complexity of the specified financial company."

The discussion draft likely represented the high-water mark for the Senate's ambitions to overhaul regulation of financial markets. Senate aides and industry analysts said Sen. Dodd already had to compromise on some issues in order to move legislation through the Senate; Wednesday's expected announcement only solidifies the likelihood the legislation will be moderated.

"Even if Dodd wanted to get tougher, he does not have the votes to do it," said Jaret Seiberg, an analyst with Concept Capital. The desire to cap off his Senate career with a landmark piece of legislation is also likely to play a role, Mr. Seiberg said: "That means compromising to get the Dodd-Shelby-Frank Financial Reform bill enacted."

And that, dear reader, is that for today. David will be back with you tomorrow. Until then, thank you for reading and for subscribing to a Casey Research service.