U.S. economic growth edged up as expected in the third quarter. Gross domestic product expanded at a 2% annual rate as consumer spending rose at its fastest pace since 2006, the Commerce Department reported in its most recent data release.
While consumer spending increased and business investment continued to expand, much of the rise in demand was met by overseas production and domestic goods continued to pile up in warehouses. This may lead to more tepid growth in the fourth quarter.
However, the economy is definitely recovering, it is just doing so at a very slow pace. The economy expanded at a 1.7% rate in the second quarter and third-quarter growth matched most economists' expectations.
The GDP report showed the Fed's preferred inflation measure, the personal consumption expenditures (PCE) index, excluding food and energy, rose at an annual rate of 0.8 percent in the third quarter. According to reports, this was the smallest increase since the fourth quarter of 2008 and well below the Fed's comfort zone for inflation.
A pick-up in consumer spending gave the economy a lift in the last quarter. Third-quarter growth in consumer spending, which accounts for 70 percent of U.S. economic activity, increased at a 2.6 percent rate after rising 2.2 percent in the prior period.
Analysts expect the Fed to announce treasury bond purchases of at least $100 billion a month on Wednesday. Bond prices rose on the premise of more "quantitative easing" from the Fed, while the dollar extended losses against the yen on the prospect the Fed will need to print more money.
Friday, October 29, 2010
Friday, October 22, 2010
Small Business Credit Easing
Below is an excerpt from an article referring to the fact that the contraction of credit for small corporations has ended. After two years of very restrictive lending standards, credit is becoming more available. This is a positive for the economy as many new jobs are created by small businesses.
Credit Eases 'My Pain' as U.S. Bank Lending Buoys Small Business
Khalique Rehman, who runs My Pain Clinic in McDonough, Georgia, got a $1.8 million loan this month from Atlanta-based Private Bank of Buckhead to purchase a new building and construct offices.
“I was surprised because everyone said it would be so difficult,” said the 46-year-old physician, who plans to double the space of his eight-employee practice and hire another doctor and possibly a nurse. “I am really happy.”
The freeze in bank credit is beginning to thaw after two years, signaling more support for the U.S. recovery.
American banks increased credit in July, August and September, the first consecutive gains since October 2008, according to Federal Reserve data released Oct. 15. Commercial and industrial loans rose in July and August after dropping 25 percent, the data showed. Banks eased lending standards in the second quarter for the first time since the credit crisis began, the Fed reported Aug. 16.
The stabilization may help reduce the odds of a relapse into recession next year to less than 10 percent, said Neal Soss, chief economist at Credit Suisse Holdings USA Inc. in New York. That compares with a median estimate of 20 percent during the next 12 months among 48 economists surveyed by Bloomberg News this month.
“Lending is no longer collapsing,” Soss said. “That is a very good thing compared to where we were. When you are in a hole, the first thing is to stop digging deeper. That is where we are: The credit system is not getting weaker.”
Regional bank stocks are likely to benefit from any increase in lending, including Wells Fargo & Co. of San Francisco, PNC Financial Services Group Inc. of Pittsburgh and Fifth Third Bancorp of Cincinnati, said Richard Bove, an analyst at Rochdale Securities in Lutz, Florida.
The pick-up in lending also may boost yields on U.S. Treasury 10-year notes to 4% by the end of 2011, said Mark Zandi, chief economist at Moody’s Analytics. The yield fell to 2.33 percent on Oct. 8 from 4 percent in April as the economy slowed.
“This is a very positive sign for future growth,” the West Chester, Pennsylvania-based economist said. “Non financial corporations are no longer deleveraging. Increasingly it is no longer a question of whether businesses can invest and hire, but whether they are willing. This is a good reason for optimism.”
An increase in bank lending may help the economy expand 2.5 percent next year, he estimates. Growth stalled to an annualized 1.7 percent pace in the second quarter from 5 percent in the last three months of 2009.
Rehman said his 4 1/2-year-old clinic, which specializes in pain, sports medicine and rehabilitation, will move to its new location in Stockbridge, Georgia, after the interior is rebuilt. Processing the loan through closing took about two months.
“Banks are definitely eager,” he said. “Everything went very smoothly. I am quite satisfied.”
Pat Carroll, 31, received a $300,000 loan from Wells Fargo in August to expand his Atlanta apartment-management company with additional properties in Georgia, North Carolina, Tennessee, Texas, Maryland, Virginia and Florida.
“You couldn’t get a loan two years ago,” he said. “Banks are back in business and lending again. Things are starting to loosen up.”
Some borrowers still aren’t seeing much change. Brian Rist, who runs a Fort Myers, Florida-based hurricane-protection company, said he’s disappointed that a loan he’s negotiating may require him to put up family assets as collateral, even though his business is profitable and has $13 million in revenue. He wants to hire another 20 to 25 people to diversify into energy audits for companies and individuals.
Fed data show that most of the credit growth so far comes from banks buying securities including mortgage-backed bonds rather than making loans, as demand, especially among consumers, is still weak. Commercial and industrial loans rose at an annual rate of 1.6 percent in July and 0.4 percent in August after 20 consecutive months of declines and fell 3.5 percent in September, as businesses slowly begin to reverse efforts to shed debt and hoard cash.
Purchases of securities other than Treasury and agency bonds have risen at an annual rate of more than 10 percent for three months, according to the Fed. That indicates lenders are willing to take risks and feel more comfortable about their capital levels, said Paul Kasriel, chief economist at Northern Trust Corp. in Chicago.
“When bank credit reaccelerates, it usually starts with the securities and then moves with a lag to the loan portfolio,” said Kasriel, who worked as a research economist at the Federal Reserve Bank of Chicago. “This appears to be the first sign that banks are willing to commit risk-based capital. We are early in the game.”
Banks also are loosening standards on lending to businesses of all sizes, according to the Fed’s most recent survey of senior loan officers, released Aug. 16.
“The good news is that the tightening of credit standards has passed,” New York Fed President William Dudley said Oct. 10 in Washington. “As time passes, we’ll see a further improvement in credit availability, and as that happens, that will actually support economic activity going forward.”
Zions Bancorporation’s loan business is starting to stabilize, and the Salt Lake City-based bank’s commercial portfolio may be “even growing a little bit,” Chief Executive Officer Harris H. Simmons said Sept. 13 at a Barclays Capital investor conference in New York. “We are very much focused on increasing lending activity.”
Credit Eases 'My Pain' as U.S. Bank Lending Buoys Small Business
Khalique Rehman, who runs My Pain Clinic in McDonough, Georgia, got a $1.8 million loan this month from Atlanta-based Private Bank of Buckhead to purchase a new building and construct offices.
“I was surprised because everyone said it would be so difficult,” said the 46-year-old physician, who plans to double the space of his eight-employee practice and hire another doctor and possibly a nurse. “I am really happy.”
The freeze in bank credit is beginning to thaw after two years, signaling more support for the U.S. recovery.
American banks increased credit in July, August and September, the first consecutive gains since October 2008, according to Federal Reserve data released Oct. 15. Commercial and industrial loans rose in July and August after dropping 25 percent, the data showed. Banks eased lending standards in the second quarter for the first time since the credit crisis began, the Fed reported Aug. 16.
The stabilization may help reduce the odds of a relapse into recession next year to less than 10 percent, said Neal Soss, chief economist at Credit Suisse Holdings USA Inc. in New York. That compares with a median estimate of 20 percent during the next 12 months among 48 economists surveyed by Bloomberg News this month.
“Lending is no longer collapsing,” Soss said. “That is a very good thing compared to where we were. When you are in a hole, the first thing is to stop digging deeper. That is where we are: The credit system is not getting weaker.”
Regional bank stocks are likely to benefit from any increase in lending, including Wells Fargo & Co. of San Francisco, PNC Financial Services Group Inc. of Pittsburgh and Fifth Third Bancorp of Cincinnati, said Richard Bove, an analyst at Rochdale Securities in Lutz, Florida.
The pick-up in lending also may boost yields on U.S. Treasury 10-year notes to 4% by the end of 2011, said Mark Zandi, chief economist at Moody’s Analytics. The yield fell to 2.33 percent on Oct. 8 from 4 percent in April as the economy slowed.
“This is a very positive sign for future growth,” the West Chester, Pennsylvania-based economist said. “Non financial corporations are no longer deleveraging. Increasingly it is no longer a question of whether businesses can invest and hire, but whether they are willing. This is a good reason for optimism.”
An increase in bank lending may help the economy expand 2.5 percent next year, he estimates. Growth stalled to an annualized 1.7 percent pace in the second quarter from 5 percent in the last three months of 2009.
Rehman said his 4 1/2-year-old clinic, which specializes in pain, sports medicine and rehabilitation, will move to its new location in Stockbridge, Georgia, after the interior is rebuilt. Processing the loan through closing took about two months.
“Banks are definitely eager,” he said. “Everything went very smoothly. I am quite satisfied.”
Pat Carroll, 31, received a $300,000 loan from Wells Fargo in August to expand his Atlanta apartment-management company with additional properties in Georgia, North Carolina, Tennessee, Texas, Maryland, Virginia and Florida.
“You couldn’t get a loan two years ago,” he said. “Banks are back in business and lending again. Things are starting to loosen up.”
Some borrowers still aren’t seeing much change. Brian Rist, who runs a Fort Myers, Florida-based hurricane-protection company, said he’s disappointed that a loan he’s negotiating may require him to put up family assets as collateral, even though his business is profitable and has $13 million in revenue. He wants to hire another 20 to 25 people to diversify into energy audits for companies and individuals.
Fed data show that most of the credit growth so far comes from banks buying securities including mortgage-backed bonds rather than making loans, as demand, especially among consumers, is still weak. Commercial and industrial loans rose at an annual rate of 1.6 percent in July and 0.4 percent in August after 20 consecutive months of declines and fell 3.5 percent in September, as businesses slowly begin to reverse efforts to shed debt and hoard cash.
Purchases of securities other than Treasury and agency bonds have risen at an annual rate of more than 10 percent for three months, according to the Fed. That indicates lenders are willing to take risks and feel more comfortable about their capital levels, said Paul Kasriel, chief economist at Northern Trust Corp. in Chicago.
“When bank credit reaccelerates, it usually starts with the securities and then moves with a lag to the loan portfolio,” said Kasriel, who worked as a research economist at the Federal Reserve Bank of Chicago. “This appears to be the first sign that banks are willing to commit risk-based capital. We are early in the game.”
Banks also are loosening standards on lending to businesses of all sizes, according to the Fed’s most recent survey of senior loan officers, released Aug. 16.
“The good news is that the tightening of credit standards has passed,” New York Fed President William Dudley said Oct. 10 in Washington. “As time passes, we’ll see a further improvement in credit availability, and as that happens, that will actually support economic activity going forward.”
Zions Bancorporation’s loan business is starting to stabilize, and the Salt Lake City-based bank’s commercial portfolio may be “even growing a little bit,” Chief Executive Officer Harris H. Simmons said Sept. 13 at a Barclays Capital investor conference in New York. “We are very much focused on increasing lending activity.”
Friday, October 15, 2010
S&P 500 Earnings Forecast
Our current assessment is that the US stock market averages (based on S&P 500 index) are slightly undervalued, yes undervalued, taking into account the most recent expectations for future earnings growth and Federal Reserve interest rate policy. This is a change from previous forecasts where the expectation was for earnings to decline given a slowdown in economic growth, thus causing the US markets to decline. While a slowdown in economic growth did occur and markets did decline over the summer on the expectation of a decrease in corporate earnings, the slowdown apparently didn't impact corporate profits, as earnings estimates have not declined since the end of last quarter.
Surprisingly, earnings estimates have continued to move higher over the past few weeks, an indication from analysts that despite a slowdown in growth companies are still able to produce an increase in profits, most likely do to operating efficiencies and continued cost cutting.
As of October 1, earnings estimates have increased from $81.73 at the end of last quarter to $82.69 for the 2010 calendar year. Earnings estimates for 2011 decreased a few percent to $93.93, which assumes growth of 13.5% over 2010 numbers. Using a price-earnings multiple of 15 (long-term average valuation proxy), we calculate valuations of roughly 1,240 for the S&P 500 Index for 2010 and approximately 1,400 for 2011, above current index levels of roughly 1175. Remember, the markets tend to follow earnings and not economic growth. So even though economic growth may be weak, it seems corporations have been able to sustain and even increase earnings through continued cost cutting in conjunction with productivity gains.
In the first few weeks of the third quarter earnings season, corporate profits are coming in better than expected so it is possible earnings estimates are not inflated as originally thought. As long as reported earnings are generally positive during the quarter and future guidance is upbeat, we should expect the markets to continue to move higher, at least in the intermediate term.
Surprisingly, earnings estimates have continued to move higher over the past few weeks, an indication from analysts that despite a slowdown in growth companies are still able to produce an increase in profits, most likely do to operating efficiencies and continued cost cutting.
As of October 1, earnings estimates have increased from $81.73 at the end of last quarter to $82.69 for the 2010 calendar year. Earnings estimates for 2011 decreased a few percent to $93.93, which assumes growth of 13.5% over 2010 numbers. Using a price-earnings multiple of 15 (long-term average valuation proxy), we calculate valuations of roughly 1,240 for the S&P 500 Index for 2010 and approximately 1,400 for 2011, above current index levels of roughly 1175. Remember, the markets tend to follow earnings and not economic growth. So even though economic growth may be weak, it seems corporations have been able to sustain and even increase earnings through continued cost cutting in conjunction with productivity gains.
In the first few weeks of the third quarter earnings season, corporate profits are coming in better than expected so it is possible earnings estimates are not inflated as originally thought. As long as reported earnings are generally positive during the quarter and future guidance is upbeat, we should expect the markets to continue to move higher, at least in the intermediate term.
Friday, October 8, 2010
The Feds Next Move
Is the Federal Reserve, with its zero percent interest rates and promises of more quantitative easing (read printing more dollars) responsible for the markets rallying? It's hard to say for sure because much of the data doesn't really support the view that excess liquidity provided by the Federal Reserve has been finding its way into equity markets.
However, it could be that the possibility the Federal Reserve may provide additional levels of liquidity in the future that is driving equity prices higher.
We do have a bit of a paradox at the present time, however. If excess liquidity, or its future prospect, are driving stock prices higher, why is it that bond yields continue to move lower? To the extent that excess liquidity from the Federal Reserve may cause future inflation, bond yields should be rising, not falling. We tend to believe that institutional bond investors are the smartest players in the room, so we always pay attention to their actions.
So there is the paradox. Excess liquidity should create expectations of future inflation and cause bond yields to rise (prices drop), yet bond yields continue to move lower (prices rise). This is a paradox that is not easily resolved or explained. To find the answer, we may just have to wait until the Fed's next move.
However, it could be that the possibility the Federal Reserve may provide additional levels of liquidity in the future that is driving equity prices higher.
We do have a bit of a paradox at the present time, however. If excess liquidity, or its future prospect, are driving stock prices higher, why is it that bond yields continue to move lower? To the extent that excess liquidity from the Federal Reserve may cause future inflation, bond yields should be rising, not falling. We tend to believe that institutional bond investors are the smartest players in the room, so we always pay attention to their actions.
So there is the paradox. Excess liquidity should create expectations of future inflation and cause bond yields to rise (prices drop), yet bond yields continue to move lower (prices rise). This is a paradox that is not easily resolved or explained. To find the answer, we may just have to wait until the Fed's next move.
Friday, October 1, 2010
ISM Release
Back in July we stated in a special update that we expected the manufacturing sector to slow down heading into the fourth quarter. In a press release today, The Institute for Supply Management (ISM)said the manufacturing sector expanded for the 14th consecutive month, although at a slower pace (54.4 in September versus 56.4 in August).
While the headline number shows relative strength this month as the PMI reading of 54.4 percent is still quite positive (anything above 50 shows expansion) the overall picture is less encouraging. The growth of new orders continued to slow, as the index is down significantly from its high this year of 65.9% back in January 2010. Production is currently growing at a faster rate than new orders, but it typically lags and would be expected to possibly weaken further in the fourth quarter of this year. Manufacturing has enjoyed a stronger recovery than other sectors of the economy, but it appears that weaker growth is the expectation for the fourth quarter. Both the Inventories and Backlog of Orders Indexes are sending strong negative signals of weakening performance in the sector. It seems like the summer slowdown in the economy is likely carrying over to the fourth quarter.
See table below for details: (Double click for larger image)
While the headline number shows relative strength this month as the PMI reading of 54.4 percent is still quite positive (anything above 50 shows expansion) the overall picture is less encouraging. The growth of new orders continued to slow, as the index is down significantly from its high this year of 65.9% back in January 2010. Production is currently growing at a faster rate than new orders, but it typically lags and would be expected to possibly weaken further in the fourth quarter of this year. Manufacturing has enjoyed a stronger recovery than other sectors of the economy, but it appears that weaker growth is the expectation for the fourth quarter. Both the Inventories and Backlog of Orders Indexes are sending strong negative signals of weakening performance in the sector. It seems like the summer slowdown in the economy is likely carrying over to the fourth quarter.
See table below for details: (Double click for larger image)
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