Market Talk

Here’s a link to the latest quarterly musings of Jeremy Grantham, always informative, thought-provoking and entertaining. Titled “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever,” here’s a nice little taste:

Now no one, in round numbers, wants to buy into the implication that we must rescale our collective growth ambitions. I was once invited to a monthly discussion held by a very diverse, very smart group, at which it slowly dawned on my jet-lagged brain that I was expected to contribute. So finally, in desperation, I gave my first-ever “running out of everything” harangue (off topic as usual). Not one solitary soul agreed. What they did agree on was that the human mind is – unlike resources – infinite and, consequently, the intellectual cavalry would always ride to the rescue. I was too tired to argue that the infinite brains present in Mayan civilization after Mayan civilization could not stop them from imploding as weather (mainly) moved against them. Many other civilizations, despite being armed with the same brains as we have, bit the dust or just faded away after the misuse of their resources. This faith in the human brain is just human exceptionalism and is not justified either by our past disasters, the accumulated damage we have done to the planet, or the frozen-in-the-headlights response we are showing right now in the face of the distant locomotive quite rapidly approaching and, thoughtfully enough, whistling loudly.

Anyone betting that manufacturing will continue to lead the US economic recovery might think twice after reading comments from survey respondents in Dallas Fed’s April Texas manufacturing outlook.

Similar to Philly Fed’s gauge last week, Dallas headline number tanked, to 8.1 from 24.1 in March. The Philly survey’s headline number fell to 18.5 from 43.4 in March, but unlike the Dallas survey, Philly doesn’t include respondent comments in its report.

Down in Texas there’s a fair measure of cautious optimism among survey respondents, and plenty of concern about high costs and soft demand. Here’s one from a plastics and rubber products manufacturer that sounds pretty good:

“We are very encouraged by the breadth of activity with our cross section of customers in the Dallas–Fort Worth area. It is not just a few companies with increased requirements for plastic parts, but pretty much all of our diverse customer base.”

Now here’s one from the other end of the spectrum, a furniture/related product manufacturer: “Our industry has hit another brick wall. Rapidly increasing costs and fuel costs have shocked the consumer away from any nonmandatory spending. They normally adjust, but it may take several months.” Continue reading…

From News Hub host and colleague Simon Constable:

Just in time for Earth Day, New York City Mayor Michael Bloomberg announced yesterday he wants phase out the very filthiest furnaces that are used to heat apartments. Under the plan, in two decades in New York City there would be no boilers that use the two dirtiest types of fuel – No.4 and No. 6 heating oil.

Last night I heard a commentator on the radio suggest that it wasn’t fair to introduce such a measure as the cost of switching out the boiler equipment would be disproportionately fall on the poor. The truth is the cost of changing heating equipment would fall on the richest residents of the city: Those living on the fashionable Upper West Side and Upper East Side of Manhattan.

Here’s a column I wrote last year:

NEW YORK (Dow Jones)–Manhattan’s expensive Upper West Side, often criticized as the bastion of northeastern liberal “elites,” is also the home to the highest concentration of the filthiest home-heating furnaces in New York City.

That’s according to a recently published report titled, “The Bottom of the Barrel,” that pinpoints the location of furnaces by fuel-type through the whole of the Big Apple. It was commissioned by the Environmental Defense Fund and the U.S. Green Building Council, both respected organizations in the green arena.

It isn’t just the UWS that is pumping smog from the basement. Not far behind on the dirty-list is the so-called “billionaires’ row” on the Upper East Side.

How so?

It is in those locations in New York, the Upper West Side and the Upper East Side, that you’ll find the highest count of furnaces fueled using a black sludge that kicks off high concentrations of sulfur-dioxide and nitrous-oxide.

Known as No. 6 heating oil, it emits a far higher level of those pollutants than other commonly used heating fuels such as natural gas, and No. 2 and No. 4 oils.

As a result of this sludge use, a mere 1% of structures citywide contribute 87% of soot pollution that is linked to heating oil, the report says.

It gets worse.

“Overall…heating systems release 50% more soot (PM) and 17 times more sulfur dioxides (SO2) than cars and trucks on New York City’s roads,” the report states.

When I mentioned this smog outrage to colleagues who live in the Upper West Side, they pointed to the age of the buildings–quite old–as the likely reason for the use of these pollution-pumping furnaces.

If only it were that simple. The truth is that furnaces need to be replaced every few decades so that a century-old apartment building will likely have seen a number of replacement furnace installations.

Money may be a more likely reason. Turns out that burning black sludge is economic if dirty. No. 6 oil costs $15.14 per million British thermal units, compared with $20.49 for the less polluting No. 2 oil, according to the report.

How about that.

Or, at least, Google was weighing on the market. Stocks certainly have taken off since our report at 10:30 in the a.m. Guess the markets put those disappointing earnings reports behind them, and are buying the Fed’s argument that there isn’t any inflation, at least any that’s going to last.

Good luck with that one.

Big show today. We covered Bank of America’s earnings, the SEC’s likely settlement with the banks over the issue of mortgage-backed securities, and the potential Groupon IPO.

First, dear readers, an apology. We’ve been pretty consumed with the live launch of the Markets Hub, and that combined with our regular job, the Market Talk service for the Newswires, plus features like The Upshot, has pretty much given us no time lately to write for this blog.

But, we do have a post today, or rather, a cross post, of something I wrote for the MarketBeat blog over at WSJ.com. And, look, if you’re a regular reader of this blog, and like the mix of opinion and analysis we’ve offered here, I’d recommend you start watching the Markets Hub, live daily at 10:30 a.m. on wsj.com.

Here’s the post:

How many more body blows can the global economy absorb? Three more? Two? One?

Japan’s economic recovery is “a thing of the past,” at least according to Japan’s Cabinet Office, which said so in its monthly report. It shouldn’t come as a surprise, given what the Japanese have endured over the past month, and officials are hopeful that the economy can regain its footing by the end of the year.

The combined earthquake/tsunami/nuclear crisis is more than most nations could handle, and we hope for nothing but the best for the Japanese people. But when the world’s third largest economy sees its economy stall, it should be a red flag for everybody.

There are other red flags, too. The U.S. economy limped into the end of the first quarter, as consumers contended with flat wages (should they be lucky enough to have wages at all) and rising prices.

Continue reading…

Corn’s at an all-time high, supposedly on surging demand.

But just remember that whatever such increases there are, it’s primarily not going into people’s bellies, but their gas tanks just as crude oil is reliving its 2008 superspike.

Haven’t we seen this movie before?

We’ve been bellowing (and we’re not totally alone on this, as the Bank of Japan’s recent report shows) about how QE has been cascading untold liquidity into the financial markets, allowing for stocks to nearly double the past two years and commodities to surge toward, or past, their 2008 peaks. Much of the thanks for that can go to the nation’s central planners bankers, and the free-money bonanza of the last decade.

We’ve long plowed the road here of how the Federal Reserve helped goose the credit markets that allowed for dodgy borrowers to get dodgy mortgages. Then even-dodgier securities were created for “sophisticated” investors looking for the next best thing.

But the half-wits in Congress — dithering over how to cut a few billion here, a few billion there as shut down of the US government looms — have commodity-spike blame as well. Beyond refusing to enact trade deals that would boost US exports and potentially help develop new supplies of commodities in those markets, we get things like farm subsidies that incentivize not raising crops or animals and laws requiring ethanol — largely developed from corn — to be added to gasoline while its benefits are in question.

So until we get enough grown-ups on Capitol Hill and in the halls of the Federal Reserve able to bring about responsible policy, the likes of Dallas Fed President Richard Fisher will seemingly just be playing the role of graveyard whistlers or token dissidents while crony capitalism lives on and fans the flames of inflation.

Hopefully it’s not like the 1970s. Not like I would remember, being a tyke back in those days. But there’s no need for me to get first-hand experience, thank you.

Is the stock market rising on strong fundamentals, or strong liquidity? We get into that debate today, and we were lucky enough to have best-selling author John Mauldin on to help us get to the heart of it.

Economists seem generally unfazed by the drop in ISM’s March non-manufacturing index, with most rationalizing that after some strong gains it was due to ease, and all readings still signal expansion.

Goldman Sachs noted the headline decline “was driven by a sharp drop to 59.7 from 66.9 in the business activity index — the biggest drop since late 2008 — which is the component we have found to be most closely correlated with GDP growth.”

Firm notes it’s “the first meaningful disappointment in a business survey in several months, so it deserves some attention.” Nomura points out that the decline narrows “the general divergence” seen recently “between hard data and survey-based data.”

Our favorite observation following the ISM services report comes from RDQ Economics, aimed at the Fed’s tale on rising commodity prices.

“The broad-based nature of price increases make the Fed’s assertion that commodity price increases are demand driven and have nothing to do with ultra-easy monetary policy nonsensical,” the firm said. To further illustrate the absurdity, roofing shingles were listed in the report among commodities reported “up in price.”  Roofing shingle prices “are rising in the U.S. because of demand even though there is very little building going on?” RDQ very appropriately wonders.

Which brings us once again to Chairman Bernanke and his comments last night. Newswires Michael Derby reported that Bernanke said that the rise in global commodity prices — which is all demand driven, mind you — will be transitory and prices “will eventually stabilize.”

If you buy the Fed’s demand-driven thesis, then demand — particularly in Asia and emerging markets — needs to cool off a lot, and cool off quick in order for commodity price gains to prove to be temporary. The necessary sharp pullback in global growth, and particularly in emerging-market growth, is not a widely held view, as far as we’re aware.

The run-up in commodity prices may indeed prove temporary, but only after the Fed finishes with QE II and then begins to signal an interest in drawing down the liquidity it’s poured into the global financial system.

At the end of last week, we joked that “if the troubling headlines keep up, we could be back at all-time highs before Earth Day.” So far, so good –  the headlines are still dreary, and bulls are the ones laughing as stocks forge higher.

It remains a curious and impressive sight. An ugly March consumer confidence report, and another month of home-price declines indicating that even after prices started heading south nearly five years ago (and tens of billions of taxpayer money used for artificial support), housing still hasn’t found a bottom. And stocks rally.

Now, it’s true the downbeat numbers were in line with expectations, but that doesn’t mean they stink any less. And their implications for future activity, both for consumers and the housing industry, are grim.

Economists worked to minimize the consumer confidence tumble, saying it’s tied to high gas prices, events in the Mideast and market volatility, as if those troubles are set to disappear any day now. Consumers’ near-term outlook is considerably worse than a month ago, with fewer expecting business conditions to improve, fewer expecting their incomes to increase and fewer expecting to see more jobs. And those declines are all off of already low numbers. Continue reading…

Seems as if corporations feel more cautious than the investors who have bid up their stocks lately, with companies content to conservatively bide their time sitting on loads of cash.

“Healthy profits, combined with opportunistic borrowing at very favorable market interest rates, are providing corporations with an ample cushion against the next business downturn,” Credit Suisse says, noting “the ratio of liquid assets to total assets on nonfinancial corporate balance sheets is hovering near a 45-year high.”

Big cash buffers are a manifestation of “the severe money demand shock American firms experienced in recent years,” the firm suggests. While that’s not good for long-term growth, it remains hard to get businesses “to risk even more of their precautionary holdings” on expansion, which could lift job growth.

The continuing decline in weekly jobless claims suggests employers have trimmed their workforces about as much as they can, but as Credit Suisse infers, they remain reluctant to expand or hire. Demand remains uneven, at best, and there’s clearly enough uncertainty related to the geopolitical picture and global growth to hold off on hiring, at least here in the US. Continue reading…