Thursday, May 28, 2009

Comment: Meyerson's, "How the Golden State Got Tarnished," Washington Post, May 28

Like all liberals, Meyerson goes back to Proposition 13 as California's original fiscal sin. To be sure Proposition 13 has a boatload of problems, but the real sin in California is an electorate that wants to spend big bucks on every social program under the sun, while being unwilling to tax itself to pay for them. Like a good friend of mine says, "they want all the lovin without the heartache." The road back for California involves drastic budget cuts to bring spending into line with revenues. Let every constituency scream, and we'll then know whether the California electorate really wants the all the government it is now paying and borrowing for.

I suspect that if every Californian has to bear the burden, they will vote for less government. One last point Meyerson incorrectly notes that California's poor pay more in taxes than California's rich. That is a canard because it assumes that poor renters pay property taxes through their rents. They do not; the property owner bears the property tax burden. This is evidenced by the fact that rents did not go down after Prop. 13 passed; they went up!!

Wednesday, May 13, 2009

Spraying Round-Up on the Green Shoots of Recovery

Today the Commerce Department reported that April retail sales declined by 0.4% which followed a downward revised 1.3% drop in March. The data signalled that the consumer rebound of January and February was ephemeral and that despite optimism about the stimulus package and the Obama Administration, consumer spending is being weighed down by rising unemployment and falling asset prices. Put bluntly the data sprayed the weed killer Round-Up on the emerging green shoots of recovery.

As a result real consumption after rising by 2.2% in the first quarter will likely decline in the second quarter thereby marking down GDP projections. Thus it is no surprise that stocks are down about 2% as of 3:00 PM today.

Saturday, May 9, 2009

Too Soon to Break Out the Champagne

From Washington, D.C. to Wall Street too many economists broke out the champagne and toasted the better-than-expected decrease in April payroll employment of 539,000 jobs and smallest monthly drop since October. Almost lost in the apparent glee was a total 66,000 downward revision to the February and March job counts and the fact the the April data was enhanced by the hiring of 62,000 new 2010 census workers. Although there will be more census jobs to come and they are certainly "real," it goes without saying that these jobs are temporary. Thus a better measure of the "true" run rate of job losses in the economy is in excess of 600,000. To be sure the second derivative of the employment decline is negative(falling at a lesser rate), the 5.7 million job losses recorded since the start of the recession in December 2007 remains well on the road to 7.5 million.

Indeed the data for June, which will be reported in early July, could very well be the worst since the recession started. How so? Part of the answer is technical and part of it is certainly real. It is obvious to all that the college hiring season this year was the worst in memory. Meantime the seasonal adjustment factors used by the BLS look for a big increase in employment by new entrants to the workforce. This year it is highly likely that the increase in employment coming from new college and high school graduates will be de minimus. Hence the data could very well show a big drop off in jobs perhaps as high as 750,000.

From a qualitative standpoint our sources tell us that the pasta business is booming. For example the Ragu tomato sauce factory in Owingsboro, Kentucky is running 24/7 and still cannot meet the demand. If this recession has a culinary theme, it is back to cheap comfort food with a high carbohydrate content. Thus we were not surprised to see that only industry in manufacturing that increased employment last month was processed foods.

In the Washington Post, "In Poor Job Numbers, Hints of Improvement," May 9

"The financial system is healing ahead of the economy," said David Shulman, senior economist with the UCLA Anderson Forecast. "The financial system is in the seventh inning, while the economy is still in the fourth inning."

Saturday, May 2, 2009

In Barron's Cover Story, "The Other Shoe," May 4

The vicious REIT selloff over the past 1½ years has brought belated vindication to former bear David Shulman, a REIT analyst at Lehman Brothers from 2000 to 2005. After his departure from the investment house, Shulman was mocked by Steve Roth, Vornado's longtime CEO, for having "a three-year sell on Vornado with a $43 average target" at a time when the stock was in the 80s. Vornado peaked at $133 in 2007, but plunged as low as $29 in March and now is in the high 40s. It recently sold $741 million of common stock at $43, Shulman's old price target. Roth hasn't apologized in print.
"REITs are a lot more attractive now than they were at the highs in 2007," Shulman said last week from his New Jersey home. "But compared with the rest of the stock market, they don't look so cheap." He notes that most real-estate investment trusts change hands at 10 to 16 times pretax cash flow, while a quality stock such as Johnson & Johnson, which has a triple-A credit rating, fetches 12 times after-tax earnings and seven times pretax cash flow.