Here are a few interesting John Hussman Tweets from today. On Valuations Valuation Note: Shiller earnings = 6.3% of current S&P revenues vs. historical norm of 5.3%. At normal margins, Shiller P/E would now be 29 On Institutional Unloading vs. Retail Buying Institutions have never dumped more stock onto retail investors as they have in the past 4 weeks.
On Book Value (Re-tweeted by Hussman) Chanos says more companies >3x book value now than March 2000.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Inquiring minds are digging into the latest Durable Goods Report by the Census Bureau.
New orders for manufactured durable goods in June increased $9.9 billion or 4.2 percent to $244.5 billion, the U.S. Census Bureau announced today. This increase, up four of the last five months, followed a 5.2 percent May increase and was at the highest level since the series was first published on a NAICS basis in 1992. Excluding transportation, new orders increased slightly. Excluding defense, new orders increased 3.0 percent. Transportation equipment, also up four of the last five months, led the increase, $9.9 billion or 12.8 percent to $87.1 billion. This was led by nondefense aircraft and parts, which increased $6.5 billion.
Durable Goods Seasonally Adjusted
Durable Goods
Seasonally Adjusted
Monthly
Percent Change
June 2013
May 2013
April 2013
May-June
April-May
March-April
Total:
Shipments…………
229,757
229,773
226,915
0.0
1.3
-0.6
New Orders…………
244,494
234,581
223,003
4.2
5.2
3.6
Excluding transportation:
Shipments…………
160,646
160,465
160,211
0.1
0.2
-0.4
New Orders……………
157,420
157,369
155,774
0.0
1.0
1.8
Excluding defense:
Shipments………
217,464
217,701
215,110
-0.1
1.2
-0.3
New Orders………………
230,302
223,629
213,124
3.0
4.9
2.6
Manufacturing with unfilled orders:
Shipments……
161,645
161,836
158,586
-0.1
2.0
-0.9
New Orders………
183,051
173,160
161,842
5.7
7.0
4.8
Primary metals:
Shipments…………
24,915
24,379
24,698
2.2
-1.3
0.6
New Orders………
25,405
25,466
25,307
-0.2
0.6
2.3
Fabricated metal products:
Shipments………
28,943
29,009
29,090
-0.2
-0.3
2.2
New Orders……
29,617
29,593
29,712
0.1
-0.4
1.2
Machinery:
Shipments…………
34,217
34,624
34,255
-1.2
1.1
-2.3
New Orders………
35,392
34,572
34,396
2.4
0.5
1.2
Computers and electronic products:
Shipments………
27,471
27,259
27,569
0.8
-1.1
-3.1
New Orders………
21,661
22,239
21,541
-2.6
3.2
4.6
Computers and related products:
Shipments………
2,283
2,307
2,336
-1.0
-1.2
-5.9
New Orders…………
2,265
2,313
2,362
-2.1
-2.1
-3.7
Communications equipment:
Shipments……………
4,049
4,117
3,960
-1.7
4.0
0.6
New Orders…………
4,620
5,233
4,543
-11.7
15.2
11.9
Electrical equipment, appliances, components
Shipments…………
10,300
10,405
10,195
-1.0
2.1
-0.8
New Orders…………
10,519
10,712
10,358
-1.8
3.4
0.1
Transportation equipment:
Shipments…………
69,111
69,308
66,704
-0.3
3.9
-1.0
New Orders…………
87,074
77,212
67,229
12.8
14.8
8.0
Motor vehicles and parts:
Shipments…………
45,161
44,564
45,158
1.3
-1.3
2.3
New Orders………
45,340
44,758
45,127
1.3
-0.8
2.3
Nondefense aircraft and parts:
Shipments………
11,840
12,637
9,709
-6.3
30.2
-10.0
New Orders………
27,267
20,750
12,346
31.4
68.1
18.4
Defense aircraft and parts:
Shipments………
4,627
4,669
4,618
-0.9
1.1
-9.5
New Orders………
5,107
4,303
4,106
18.7
4.8
42.8
All other durable goods:
Shipments………
34,800
34,789
34,404
0.0
1.1
0.8
New Orders………
34,826
34,787
34,460
0.1
0.9
1.3
Capital goods:
Shipments…………
84,187
85,510
80,950
-1.5
5.6
-3.8
New Orders………
103,596
95,064
83,807
9.0
13.4
5.4
Nondefense capital goods:
Shipments………
74,253
75,770
71,394
-2.0
6.1
-3.5
New Orders………
91,601
86,190
76,374
6.3
12.9
3.5
Excluding aircraft:
Shipments………
65,822
66,399
65,164
-0.9
1.9
-2.1
New Orders……
69,526
69,013
67,531
0.7
2.2
1.2
Defense capital goods:
Shipments………
9,934
9,740
9,556
2.0
1.9
-5.7
New Orders………
11,995
8,874
7,433
35.2
19.4
29.9
Easily Seen
Note how orders for aircraft can skew the overall numbers. A closer look at the "New Orders" components will show precisely what I mean.
New Orders
Total +4.2%
Excluding Transportation +0.0%
Primary Metals -0.2%
Fabricated Metals +0.1%
Machinery +2.4%
Computers and Electronic Products -2.6%
Computers Related Products -2.1%
Communications Equipment -11.7%
Electrical Equipment -1.8%
Transportation Equipment +12.8%
Motor Vehicles and Parts +1.3%
Non-Defense Aircraft and Parts +31.4%
Defense Aircraft and Parts +18.7%
Other Durable Goods +0.1%
One quick glance at new orders will give you the "easily seen" look at the durable goods numbers. Although such analysis is "easily seen" not many bother. Instead, many rely on the baseline reported number.
But what about the "not-so" easily seen? I am talking about constant revisions and the overall use of the report in general. Revisions
Today the U.S. Department of Commerce reported new orders for manufactured durable goods. One data point often analyzed by investors within the report is "non-defense capital goods ex aircraft". This is considered a good proxy for business capital spending in the U.S.
That is all well and good, but we find the data less useful than most.
Why? Heavy revisions.
Take June 2012 for instance.
When non-defense capital goods ex aircraft (non-seasonally-adjusted) was originally reported in 2012, it was $67,693. The following month it was revised to $66,452. It was then revised to $64,906. Today June 2012 was revised yet again to $68,555. Over the course of the year, June 2012 looked as though it had fallen nearly 5% from June 2011, only to be revised today to show an actual gain of 0.5%.
History of Non-Defense Capital Goods Ex-Aircraft Revisions
Here is the telling chart that Hartley put together.
Core Durable Goods
"Core Durable Goods" are the "total durable goods orders excluding transportation equipment. The new orders numbers are closely followed by market participants as they provide indications on current economic conditions as well as future production commitments in the manufacturing sector."
Today we see Durable Goods Excluding Transportation is +0.0%. If June 2012 is any guide, the number may be off by 5% in either direction.
Of what use is that?
And the reported baseline number of +4.2% is even more useless. Non-defense aircraft orders are up a whopping 31.4% on the strength of 287 new orders for Boeing aircraft.
Such orders are extremely volatile, and cancelable.
The Good, The Bad, The Ugly
The Good: The basline number was up
The Bad: The overall core number was flat; Numerous core numbers were negative
The Ugly: Over the course of the next year (or longer), the census bureau is likely to significantly revise all of the numbers in multiple directions, multiple times.
The bad and the ugly clearly outweigh any good in this report. So don't take today's surprisingly good number seriously.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Enrico Colombatto (EC), Professor of Economics at the University of Turin and director of the Center of Economic Research in the Piedmontese town, offers a groundbreaking proposal: "Do not pay the debt."
It seems unthinkable, but he believes it will be the only way to start fresh, leaving those who have lent money to irresponsible politicians pay for their mistake.
LM: Spain and Italy have very large states, but they are very inefficient. Our laws are stifling, heavy.
EC: In Italy, the public sector is not intended as an aid to the production of wealth and public goods and services. It has been conceived as an observatory to generate political consensus and to please the own clientele. The concept of public is of assistance but not to the public, but the public sector employee. The beneficiary of the public sector is dependent on this sector, not the public.
LM: After six years of crisis we have more spending, more laws, more intervention, ... Where does change start?
EC: By the mentality. It has aggravated the welfare spirit that we have within us. The state is the problem, not the solution.
LM: It's counter-intuitive, but when politicians fail, they want more power. And politicians who are succeeding all want more power to the state. In Spain, demonstrations call for a public banking as a solution to problems. Can we escape this trap?
EC: If we think that the state is the solution, all the problems are going to focus in that perspective. The problem is cultural and ideological. It starts when our children go to school and get to talk about social justice. Children are taught the state should solve every problem: pensions, sickness, education ... The solution is to drop the veil that protects the state. In bankruptcy, people will realize that giving loans to the State, and state guarantees are useless.
LM: A few days ago there was a poll in which the public demanded more taxes.
EC: It is a matter of propaganda. The State says "do not worry, I will only raise taxes on the rich". However, the rich pay more, but also the poor. For example, in Italy, the Monti government introduced a tax on real estate, and 85% of Italians are owners. This is a middle class tax hike. And a country that stifles and suffocates its middle class can not grow.
LM: From your perspective as a university professor, do you have bad omens in regards to a lost generation for Italy and Spain?
EC: Yes and no, It could be 50 years, not just 15. The key will be in the new political class.
LM: Some people think it might not be so bad that we intervene. They prefer to let Germany or the troika decide instead of our politicians.
EC: Because the Germans have many Spanish and Italian bonds, they always favor higher taxation so Southern Europe can pay back those loans. I trust the Chinese more than the Germans. We need a new ruling class because the existing system is corrupt and must be eliminated - No IMF, EU bureaucrats, or Germany.
LM: Where to begin?
EC: You have to start by deregulation. Monti's government has made things worse, especially in the labor market. The regulation is where it was 10 years ago ... well, maybe as it was 150 years ago.
LM: It is always said that Spain and Italy need to get to compete globally, but many of the labor laws limit the growth of companies, with more regulation and more taxes to the largest companies.
EC: Yes, there are two elements. First regulation, both in general and the labor market in particular, changes to the size of companies. Often the entrepreneur thinks "it's not worth growing, because I will have many new demands." There is also an issue of tax evasion: it is much harder to do it when you're big. And finally, we have the element of funding. To grow need a functioning credit market. And in Italy in the last thirty years, the credit market has served to finance the public debt. There are so many resources that should be used to finance the growth of businesses, but only served to finance the growth of the state. As a result, businesses remain small, because they are funded with self-financing.
LM: Correct. But with this in mind, is there way out of this? Because Italian public debt is the highest in Europe after Greece.
EC: The only hope is the default by the State. We paid about 90,000 million euros in interest. And along with this, we have to face the return of credit. It can't be done.
LM: And the financial system does not collapse?
EC: Why? The underlying conviction is that we will emerge from the crisis by printing money. It is a politically attractive solution, but destructive. The last example in Europe led to Nazism. I do not think we'll get to that, of course, but inflation certainly create social problems and tensions. The question is who should pay? The one who has financed the bad debtor [Spanish or Italian politicians] or the community via higher taxes? The European socialist solution is that losses should be disseminated throughout the population. But this has failed.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
Detroit can enjoy the protections of bankruptcy, including immunity from lawsuits related to the case, a federal judge ruled, extending that shield to Michigan Governor Rick Snyder.
U.S. Bankruptcy Judge Steeven Rhodes in Detroit today blocked lawsuits by public employee groups and pension funds who allegd the state overreached in seeking court protection from creditors. Such claims must be heard in bankruptcy court, Rhodes said. His ruling gives the city the opportunity it said it needs to address $18 billion in debt without disruptions.
Chapter 9 of the U.S. Bankruptcy Code, which covers municipalities, typically prevents creditors from taking actions against the debtor that might interfere with reorganization.
City unions and pension officials claim Snyder, 54, violated Michigan's constitution by authorizing Orr to file for bankruptcy. Pension funds for retired city workers sued in state court to have the filing declared illegal.
Barring lawsuits against Snyder related to the bankruptcy would be unfair to Michigan's citizens, said Sharon Levine, an attorney for the American Federation of State, County & Municipal Employees, part of the AFL-CIO.
"We're taking away very fundamental constitutional rights," Levine said.
Michael Artz, a lawyer for the American Federation of State, County & Municipal Employees, said outside court after the hearing that while the question of the constitutionality of the Chapter 9 filing should have remained in state court, the union "will fight whatever court we're in."
Fights by AFL-CIO Welcome
I welcome these fights by the AFL-CIO. Indeed I hope they spend every cent they have because they are going to lose.
And when they lose, others cities will decide to escape preposterous unions contracts and pension benefits via bankruptcy.
General Obligation Bondholders Beware
Several people emailed me that that bondholders should have nothing to worry about because the bonds are backed by tax revenue.
Really?
If that was the case, then there should be little to no difference in interest rates between such bonds. But there is. Just like there is a difference between Greek bonds and German bonds, even though we heard the ECB say for years "we say no to default".
Well guess what? The market was correct, not the ECB.
All bets are off in bankruptcy court because you cannot tax a hollow shell. And what is Detroit but a hollow shell?
Triumph of Math Over Unions
As for pension claims and the Michigan constitution? Same thing: You cannot pay what you do not have. This is the triumph of math and common sense over union greed, arrogance, threats, and coercion.
CHICAGO - As Detroit enters into what would be the largest municipal bankruptcy in the U.S., ratings agencies said the outcome may have a negative impact on unlimited-tax general obligation bonds in future credit analysis.
Detroit emergency manager Kevyn Orr's restructuring plan treats the city's unlimited-tax general obligation bonds as unsecured, on par with the its lowest-secured debt, such as retiree health care benefits.
The move marks a departure from traditional treatment of ULTGOs, typically considered among the strongest municipal debt.
Orr's plan, if accepted by a bankruptcy judge, may affect the way Fitch Ratings analyzes ULTGOs in the future, the ratings firm said in a comment released Friday.
Fitch analyst Amy Laskey said in a telephone interview that it's still uncertain how broad the impact would be if a bankruptcy judge approved Orr's plan.
"These are issues we're talking about internally, how broadly that might extend," Laskey said. "It would certainly make us reexamine the value to credit quality of having that unlimited-tax pledge versus other tax-supported obligations," she said.
"Our feeling was that with unlimited-tax general obligation bonds you have the pledge to levy property tax without limitation to pay the debt, and that seemed somewhat more secure [than other tax-supported bonds]," said Laskey. "They do give you a little more financial flexibility because you have the ability and the obligation to pay for them, which you don't have for limited-tax bonds, certificates of participation, or lease revenue bonds."
If the city moves into Chapter 9, the case could set precedents when it comes to treatment of ULTGOs, she said.
Once again, I cite common sense: you cannot tax a hollow shell. Bondholders took a risk for higher yield, just as did buyers of Greek debt. If there was no risk, yields on Detroit bonds would not have been higher in the first place.
So, pensioners and bondholders both should take it on the chin.
Detroit Will Be In Bankruptcy 'For A Long Time'
Harvey Miller, partner at Weil, Gotshal & Manges, tells Bloomberg Law's Lee Pacchia that Detroit's recently filed Chapter 9 bankruptcy case will not be an easy restructuring. In addition to the profound economic challenges facing the city and the limited ability of a bankruptcy court to force changes on its government, the fundamental tension between bondholders, pensioners and taxpayers could mean Detroit will remain in tangled up in litigation for a long duration of time. "There's going to be a lot of legal fighting in this," he says.
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