Let's take a look at a few of the big stories going on out there this week...
North Korea is doing its best imitation of a malaria-infected mosquito. They are potentially deadly, but a mosquito nonetheless. North Korea is one of nine countries in the world believed to have nuclear weapons. They are the most recent to "join the club"; however, they are not a member of the five nations having signed the Nuclear Non-Proliferation Treaty. The nuclear test conducted by North Korea this past week was the first in the world since their last test in 2006. Prior to that, India and Pakistan each conducted tests in 1998. The United States conducted its last test in 1992.
The warhawks are now out in full force. There is talk of increasing our military presence in the region, increasing economic sanctions, and desiring China to exert diplomatic pressure on North Korea. On a related note, Mitt Romney appeared on Fox News Sunday and criticized the Obama administration on its spending cuts on missile defense. I'm not a defense expert, but I do know that we have an absolutely huge defense budget. Further analysis will have to wait for a future essay.
For more, read this article where Secretary Gates defends the cuts and view this video on North Korea by Ron Paul (R-TX).
*****
Henry Waxman (D-CA) has delivered the American Clean Energy and Security Act of 2009 to the floor of the House. The bill, H.R. 2454, currently checks in at 932 pages. Waxman noted that he does not know everything that is in the bill. Check out the clip here. If you want to see more to get the full context, you can view this video from C-SPAN (set the player at time 1:11:15). Waxman also hired a speed reader in response to GOP threats over forcing a read of the entire bill.
Indiana Governor Mitch Daniels authored an op-ed in the Wall Street Journal in opposition to the bill. He is receiving some of the spotlight on the national level.
*****
The biggest story in the national news this week was arguably Obama's nomination of Sonia Sotomayor to replace David Souter on the Supreme Court. This will be in the news for a couple of months, so I will speak more about this in other articles. In the meantime, two quick points.
I find the case of Ricci v. DeStefano an interesting one. My initial reaction is to side with Ricci (and against Sotomayor), but I will reserve judgment until I read more about the case.
In general, I am an originalist when it comes to constitutional interpretation. I look forward to learning more about the origins and intents of our constitutional design. Both the Federalist Papers and the Anti-Federalist Papers are in my reading queue.
So much more could be said on this subject!
*****
Finally, and quickly since I'm tired, the auto industry is about to have its second bankruptcy. GM will likely file for bankruptcy tomorrow morning. I plan to write an article this week which will attempt to break down the Chrysler bankruptcy and focus on some of Indiana's pension funds who have opposed the bankruptcy proceedings.
Sunday, May 31, 2009
Saturday, May 30, 2009
Unemployment Data
I've come to appreciate one aspect of our huge government: there is a lot of data which is made available to the public. Sometimes it is difficult to find, but if you know where to look, you can usually find what you want. I trust most of the data on face value, but some must be taken with a grain of salt - especially projections.
I've been casually watching the weekly reports on initial claims for unemployment. However, each week they (the Department of Labor) adjust the number which was reported the previous week. Without actually studying the data, it had seemed to me that the numbers were systematically under-reported in the initial report. I decided to look at the reports to see if my hypothesis was valid.
This first graph below shows the reported volumes versus the adjusted volumes for initial claims. As a matter of process, each Friday, the DOL releases the report at 8:30 AM providing the initial report of claims for the previous week. Additionally, they provide an adjustment to the previous week's report.
Source: Department of Labor
As you can see, the adjusted volume tend to always be higher than the reported volume. Since Obama's inauguration, the adjusted volume has been higher sixteen of eighteen times. The difference has usually been about 4,000 claims. This could be random, due to bias, or a tool of propaganda. I can't really prove this; however, based on what I see in the data, I would chalk it up to randomness with only a slight bit of bias.
When the report comes out, a key measure is the change from week to week. This is seen as an indicator of whether or not the economy is (in our current condition) getting worse at a slower or faster pace. In this comparison, the newly reported claims are usually compared to the previous week's adjusted claims. This is suspect to me unless the adjustment is truly random (no bias or propaganda). However, regardless of the purity of randomness, the difference does not seem to be too large. See this next graph.
Source: Department of Labor
In summary, I think my suspicions are generally unfounded. Most of the recent adjustments have indeed exhibited a potential bias. However, it has had little impact. If this bias continues, then there might be something wrong.
I've been casually watching the weekly reports on initial claims for unemployment. However, each week they (the Department of Labor) adjust the number which was reported the previous week. Without actually studying the data, it had seemed to me that the numbers were systematically under-reported in the initial report. I decided to look at the reports to see if my hypothesis was valid.
This first graph below shows the reported volumes versus the adjusted volumes for initial claims. As a matter of process, each Friday, the DOL releases the report at 8:30 AM providing the initial report of claims for the previous week. Additionally, they provide an adjustment to the previous week's report.
Source: Department of LaborAs you can see, the adjusted volume tend to always be higher than the reported volume. Since Obama's inauguration, the adjusted volume has been higher sixteen of eighteen times. The difference has usually been about 4,000 claims. This could be random, due to bias, or a tool of propaganda. I can't really prove this; however, based on what I see in the data, I would chalk it up to randomness with only a slight bit of bias.
When the report comes out, a key measure is the change from week to week. This is seen as an indicator of whether or not the economy is (in our current condition) getting worse at a slower or faster pace. In this comparison, the newly reported claims are usually compared to the previous week's adjusted claims. This is suspect to me unless the adjustment is truly random (no bias or propaganda). However, regardless of the purity of randomness, the difference does not seem to be too large. See this next graph.
Source: Department of LaborIn summary, I think my suspicions are generally unfounded. Most of the recent adjustments have indeed exhibited a potential bias. However, it has had little impact. If this bias continues, then there might be something wrong.
Monday, May 25, 2009
The Credit Crisis: U.S. Treasury Securities
It's been a long time coming, and here is the third installment of a look at the so-called "credit crisis". In earlier posts, we explored LIBOR rates and the Fed funds rate. To recap the previous two articles in brief, LIBOR and the effective Fed funds rate are both rates for the interbank lending market. Recall that banks may find themselves with excess reserves which they want to lend on a short-term basis to make a profit. Instead of lending to another bank, they may choose to provide a short-term loan to the federal government.
This is where the U.S. Treasury market comes in to play. We all know that the U.S. government is running a massive deficit and has a large outstanding debt. Most of this deficit is funded via U.S. Treasuries and the debt is largely composed of outstanding Treasuries. However, the government does use Treasuries for more than funding the deficit. They are also important to fund basic government operations.
Like many individuals and businesses, the federal government does not receive cash at the same time it needs to spend cash. As such, borrowing money on a short-term basis is required. This is a very acceptable role in the economy to be provided by financial services companies. While a budget may be in balance, cash flows are not always the same. Consider the following graph which shows the average monthly levels of receipts (mostly tax revenues) and outlays (government spending) for the federal government.
Source: Monthly Treasury Statement - Financial Management Service, Department of the Treasury
The y-axis on the above chart is an index where 100 is the equivalent of an average month in terms of either receipts or outlays. In this data, the both sides of the budget are normalized and then averaged to ignore deficit levels and illustrate the seasonality of cash flows. The large red spike in April indicates that the government receives 60% in receipts than an average month (think tax season). You can see that receipts are far more volatile than outlays. This leads to a cash flow management problem which leads to the issuance of Treasury Securities.
The Bureau of Public Debt, a division of the U.S. Treasury, is responsible for issuing new government debt to fund both the deficit and cash flow issues. This is done via regular auctions by TreasuryDirect where a specific debt offering is bid upon competitively. Most Treasury Securities are offered at maturities of three or six months. This is consistent with the government's need to manage cash flows. Once the Treasuries are purchased in the auction they are often traded in the secondary market.
This is where the banks come in to play. First of all, banks are among the most active participants in the aforementioned auctions. They are also very active in trading these Treasuries amongst each other in the secondary market. When a bank has temporary excess cash reserves which they wish to lend, they have two basic choices: lend to another bank or purchase short-term Treasuries on the secondary market. The government is considered a lower credit risk than banks, so Treasuries generally trade at a lower effective interest rate than either LIBOR or the Fed funds rate. (Comparisons will be made in a future article.)
The below chart shows the history of the 3-month Treasury Bill (which is most commonly used in comparisons with the interbank lending markets) since 1954:
Source: St. Louis Federal Reserve
And this chart zooms in since 2001:
Much like the other rates we have looked at have reviewed previously, 3-month Treasury Bills are at historic lows. As we discussed in looking at LIBOR, context is important when looking at interest rates. The relationship between LIBOR, the Fed funds rate, and Treasury Bills are important and speak to the interbank lending markets. We'll look more closely at these relationships in the next installment in the series.
This is where the U.S. Treasury market comes in to play. We all know that the U.S. government is running a massive deficit and has a large outstanding debt. Most of this deficit is funded via U.S. Treasuries and the debt is largely composed of outstanding Treasuries. However, the government does use Treasuries for more than funding the deficit. They are also important to fund basic government operations.
Like many individuals and businesses, the federal government does not receive cash at the same time it needs to spend cash. As such, borrowing money on a short-term basis is required. This is a very acceptable role in the economy to be provided by financial services companies. While a budget may be in balance, cash flows are not always the same. Consider the following graph which shows the average monthly levels of receipts (mostly tax revenues) and outlays (government spending) for the federal government.
Source: Monthly Treasury Statement - Financial Management Service, Department of the TreasuryThe y-axis on the above chart is an index where 100 is the equivalent of an average month in terms of either receipts or outlays. In this data, the both sides of the budget are normalized and then averaged to ignore deficit levels and illustrate the seasonality of cash flows. The large red spike in April indicates that the government receives 60% in receipts than an average month (think tax season). You can see that receipts are far more volatile than outlays. This leads to a cash flow management problem which leads to the issuance of Treasury Securities.
The Bureau of Public Debt, a division of the U.S. Treasury, is responsible for issuing new government debt to fund both the deficit and cash flow issues. This is done via regular auctions by TreasuryDirect where a specific debt offering is bid upon competitively. Most Treasury Securities are offered at maturities of three or six months. This is consistent with the government's need to manage cash flows. Once the Treasuries are purchased in the auction they are often traded in the secondary market.
This is where the banks come in to play. First of all, banks are among the most active participants in the aforementioned auctions. They are also very active in trading these Treasuries amongst each other in the secondary market. When a bank has temporary excess cash reserves which they wish to lend, they have two basic choices: lend to another bank or purchase short-term Treasuries on the secondary market. The government is considered a lower credit risk than banks, so Treasuries generally trade at a lower effective interest rate than either LIBOR or the Fed funds rate. (Comparisons will be made in a future article.)
The below chart shows the history of the 3-month Treasury Bill (which is most commonly used in comparisons with the interbank lending markets) since 1954:
Source: St. Louis Federal ReserveAnd this chart zooms in since 2001:
Much like the other rates we have looked at have reviewed previously, 3-month Treasury Bills are at historic lows. As we discussed in looking at LIBOR, context is important when looking at interest rates. The relationship between LIBOR, the Fed funds rate, and Treasury Bills are important and speak to the interbank lending markets. We'll look more closely at these relationships in the next installment in the series.
Second Update On S&P Forecast
Earlier this year, I attempted to predict the level where the S&P 500 index would settle in 2009. I was not explicit in regard to the amount of time the market would trade in a particular range, so I'll claim victory if the market reaches my predicted range and trades there for a week or so. If you recall, that range was 600-640.
On Valentine's Day, I provided the first update on my prediction. Today is Memorial Day, so I'll provide my second update.
As you may recall, the market bottomed on March 9, with the S&P hitting a low of 666.79; we've been on a big rally since then climbing back above 900 before settling back to 887. Where do we go from here?
Let's revisit the S&P earnings forecast which we've reviewed before in this analysis. The below chart shows the quarterly earnings estimates for Q4 2008 through Q4 2009 as they stood back in February in comparison to today. The updated data is available here.
As you can see, the estimates for 2009 are even worse than they were in February. (If you recall, the February estimates were much worse than January.) The 2009 estimates are now at $54.15 which is just below the bottom of my range provided in January. I think we may begin to see some stabilization unless the economy gets even worse - unfortunately, this may still happen.
The real question now rests with how the market will price these earnings in terms of the P/E ratio. At the end of March, the P/E stood at 18.6 which still seems too high to me. Alas, I am not an expert (consider that a disclaimer), so we will see how the market moves between now and my next update on Independence Day.
On Valentine's Day, I provided the first update on my prediction. Today is Memorial Day, so I'll provide my second update.
As you may recall, the market bottomed on March 9, with the S&P hitting a low of 666.79; we've been on a big rally since then climbing back above 900 before settling back to 887. Where do we go from here?
Let's revisit the S&P earnings forecast which we've reviewed before in this analysis. The below chart shows the quarterly earnings estimates for Q4 2008 through Q4 2009 as they stood back in February in comparison to today. The updated data is available here.
As you can see, the estimates for 2009 are even worse than they were in February. (If you recall, the February estimates were much worse than January.) The 2009 estimates are now at $54.15 which is just below the bottom of my range provided in January. I think we may begin to see some stabilization unless the economy gets even worse - unfortunately, this may still happen.
The real question now rests with how the market will price these earnings in terms of the P/E ratio. At the end of March, the P/E stood at 18.6 which still seems too high to me. Alas, I am not an expert (consider that a disclaimer), so we will see how the market moves between now and my next update on Independence Day.
Sunday, May 24, 2009
Loose Ends... Vol. XLIV
It's Memorial Day weekend, so I could save Loose Ends for tomorrow night. But, I'll post now beginning by addressing the holiday. The holiday began as a remembrance to Union soldiers in the Civil War and was later expanded to honor all U.S. military casualties regardless of conflict.
I have a great deal of respect for anyone who performs a service or makes a living while putting their life on the line. This goes for military personnel, police and firemen, and even the race car drivers who risk their life for entertainment as we saw today in the Indianapolis 500. It is also sad when the powers that be make decisions which increase the risk. The world is not a perfect place. It is full of fear and hate mixed in with trust and love. All too often the imbalance leads to misunderstanding and violence.
War is inevitable as much as any other ugliness in the world. We can, however, strive to do our best and our part to help avoid the inevitable. It is sad that millions have died in battle. It is even sadder when the purpose of the battle is unknown, misguided, incomplete, or just plain wrong.
We should all respect anyone who is willing to put their life on the line in the name of defending us. That respect does not equate to blind support of all actions taken by our military.
*****
There is a new political party which is in the process of being formed. It is aptly named the Anti-Federalist Party and shares many common themes with the Libertarian Party, the Constitution Party, and places important focus on the Rule of Law. Read more about the original anti-federalists here.
[Edit: It appears that the party name is now the American Federationist Party.]
I have a great deal of respect for anyone who performs a service or makes a living while putting their life on the line. This goes for military personnel, police and firemen, and even the race car drivers who risk their life for entertainment as we saw today in the Indianapolis 500. It is also sad when the powers that be make decisions which increase the risk. The world is not a perfect place. It is full of fear and hate mixed in with trust and love. All too often the imbalance leads to misunderstanding and violence.
War is inevitable as much as any other ugliness in the world. We can, however, strive to do our best and our part to help avoid the inevitable. It is sad that millions have died in battle. It is even sadder when the purpose of the battle is unknown, misguided, incomplete, or just plain wrong.
We should all respect anyone who is willing to put their life on the line in the name of defending us. That respect does not equate to blind support of all actions taken by our military.
*****
There is a new political party which is in the process of being formed. It is aptly named the Anti-Federalist Party and shares many common themes with the Libertarian Party, the Constitution Party, and places important focus on the Rule of Law. Read more about the original anti-federalists here.
[Edit: It appears that the party name is now the American Federationist Party.]
Friday, May 22, 2009
How Dare They??!!
I have been incredibly lazy lately in terms of my writing and researching...honestly I think because my discovery of hulu has virtually eliminated my viewing of streaming videos from C-SPAN. However, today I sort of "ran out" of things to watch on hulu and wandered back over to C-SPAN, where I decided to watch a 1-hour video from Wednesday of House debate on the so-called "Credit Card Holders Bill of Rights." Admittedly, I haven't really been following this issue very closely so I don't know much of what is in the bill. I was also wholly unaware of the great controversy surrounding Senator Tom Coburn's, R-Okla., insertion of an amendment into the Senate version of the bill regarding the possession of firearms inside of federal parklands. I learned about this only from the video I watched, because about half of the "debate" in the hour-long video was about this amendment. It was fairly predictable in that every Democrat who spoke about it was in "strong opposition" and the Republicans who spoke were "strongly in support." Blah, blah...what's new? There were 2 things that really bothered me about all of this...first, was the absolute indignation that each Democrat expressed at the Republicans for the "audacity" of inserting such an unrelated amendment into a credit card bill. Many mentioned "hijacking" and also "pork." Seriously? Talk about hypocritical...the way they were talking made it sound like Democrats never have done such a thing, and never would think of it!
The second thing that really bothered me was a bit more diffuse--some of the statements made by Democrats during this debate video about the amendment and the idea of guns/weapons in national parks, etc. Some of the things they said were, quite frankly, absolutely asinine. There is simply no other way to describe it. If one were to believe what these Democrats were saying, this amendment (if passed) would lead to utter chaos that would deter nearly anyone from ever visiting a national park or monument again. Just imagine driving through Yellowstone and encountering a bloody gang battle!!! One Democrat said something to the effect of "well, if we allow people to have guns in our national parks why don't we allow them to bring them to the White House, to the Capitol?" blah blah. I'll just let you see for yourself...
http://www.c-spanarchives.org/library/vidLink.php?b=1242879323&e=1242883223&n=1
The second thing that really bothered me was a bit more diffuse--some of the statements made by Democrats during this debate video about the amendment and the idea of guns/weapons in national parks, etc. Some of the things they said were, quite frankly, absolutely asinine. There is simply no other way to describe it. If one were to believe what these Democrats were saying, this amendment (if passed) would lead to utter chaos that would deter nearly anyone from ever visiting a national park or monument again. Just imagine driving through Yellowstone and encountering a bloody gang battle!!! One Democrat said something to the effect of "well, if we allow people to have guns in our national parks why don't we allow them to bring them to the White House, to the Capitol?" blah blah. I'll just let you see for yourself...
http://www.c-spanarchives.org/library/vidLink.php?b=1242879323&e=1242883223&n=1
Sunday, May 17, 2009
Loose Ends... Vol. XLIII
I'm going to be weak again and not post in Loose Ends tonight. We got a few posts out there finally this week. I'm traveling over the next few days, so it may be a slow week again. Later...........
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