Thursday, April 05, 2012

Philadelphia Fed Reports that State Economies Are Improving, with Future Gains Expected


According to reports this week from the Philadelphia Federal Reserve:

1. Over the past three months through February, the coincident economic indexes increased in all 50 states (see top map above).  The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic: nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index.

2.  Based on the Philadelphia Fed's leading economic indexes, 47 states are predicted to see their economies improve in the coming months (see bottom map above).  The leading index for each state predicts the six-month growth rate of the state’s coincident index. In addition to the coincident index, the models include other variables that lead the economy: state-level housing permits (1 to 4 units), state initial unemployment insurance claims, delivery times from the Institute for Supply Management (ISM) manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill.

Only three states -- New Mexico, Louisiana and Rhode Island -- can expect lower growth in the next six months, and West Virginia has the strongest prospects, "likely due to a boost from natural gas drilling in the Marcellus ShaleThe state also wasn't hit hard by the housing boom and bust, and has had far fewer government layoffs than other states," according to a CNN Money report.

20 Comments:

At 4/05/2012 9:43 AM, Blogger morganovich said...

Indexes for new orders and shipments remained positive but weaker than their February levels. The new orders index decreased 8 points, to 3.3, while the shipments index declined 12 points, to 3.5.

 
At 4/05/2012 9:56 AM, Blogger Methinks said...

Dear Mark Perry,

Because of government's deepening interference and shameless tampering with statistics, I'm now deeply suspicious of every number I come across - including the ones you regularly post here at Carpe Diem. Even more grating is that any recovery that occurs despite government meddling will be attributed to government meddling and will encourage more government meddling in the future.

That said, I sincerely hope that the recovery is real and that it continues because, in the end, I'm long the dollar and the United States in general.

 
At 4/05/2012 10:06 AM, Blogger morganovich said...

methinks-

i've been giving the economic situation and its effects on the market a great deal of thought lately.

i am increasingly concerned that from an equities standpoint, we are really painted into a corner.

m2 growth of 15% from a year ago is fueling the rally. unlike the days of disco, twist and zirp have essentially eliminated bonds as an alternate destination for a lot of this cash as real rates are deeply negative, so it's all flowing to equities.

this is going to have some very perverse results.

if the economy improves, the fed will decrease these massive money flows. this will increase bond yields making them more attractive relative to equities leaving equities with a smaller % of a smaller stream of cash.

will the economy be strong enough to offset this? i really doubt it.

this leads to the odd conclusion that an improving economy may be very bad for stocks. certainly, we have seen a fair bit of "positive" jobs data get sold.

strange times.

 
At 4/05/2012 10:20 AM, Blogger Methinks said...

Morganovich,

Yes, the unhappy outcomes of central planning attempts.

The Fed's relentless struggle to push everyone further out on the curve has worked.

The rate of return for a given level of risk has been artificially diminished by government action. It's difficult to conceive of a scenario where normalization won't create dislocations and more volatility.

Unfortunately, new regulation that severely hampers shorting (which, I remind those less well versed in financial markets than Morganovich, is necessary for hedging) will exacerbate the volatility in the equity market.

We've been living in an environment where good news is good and bad news is even better since the Fed began to torture the interest rate several years ago. It's odd for those of us old enough to remember a better functioning market.

 
At 4/05/2012 11:30 AM, Blogger Buddy R Pacifico said...

"Unfortunately, new regulation that severely hampers shorting (which, I remind those less well versed in financial markets than Morganovich, is necessary for hedging) will exacerbate the volatility in the equity market."

and then...

" It's odd for those of us old enough to remember a better functioning market."

So, bring back the Uptick Rule.

 
At 4/05/2012 12:13 PM, Blogger Che is dead said...

"So, bring back the Uptick Rule." -- Buddy Pacifico

While it may or may not slow high frequency trading, the "uptick rule" simply put smaller traders at a disadvantage. Hedge funds and institutional traders simply employed strategies to circumvent it, like purchasing stock and "married puts" and then selling at will.

 
At 4/05/2012 12:32 PM, Blogger Buddy R Pacifico said...

Che,

I have to admit, as a small trader, to not being familiar with the strategy. It seems like a good, but pricey strategy, to protect a position for the little guy also.

The small trader is scared from the market more by high volitililty, and the Uptick Rule would have dampening effect.

 
At 4/05/2012 12:50 PM, Blogger Methinks said...

So, bring back the Uptick Rule.


Beyond idiotic.

Why should there be a price test to sell a security but no price test to buy one? What does such a bias lead to but bubbles, crashes and inefficiency?

The SEC removed the idiotic uptick rule because it turns out that for liquid securities it is irrelevant (in a market a penny wide there is always an uptick) and for low to medium liquidity stocks the uptick rule simply sucked out liquidity, making those stocks more volatile.

In other words, even if one stupidly thinks that controlling the direction of price moves is wise, the uptick rule wasn't doing that, but it was making the market in the least advantaged stocks more illiquid and less efficient.

Of course, a lack of understanding of markets and how they function never stops fools from issuing demands for changes they, in their unqualified opinion, think ought probably shift the field in their favour. Maybe.

The SEC is not bringing back the uptick rule, but it's introduced other stupid restrictions and obligations which have all served to erase whatever efficiency gains (read: advantages to Joe Blow) were made in low to medium liquidity securities with the abolition of the uptick rule.

As it happens, my firm specializes in making markets in a wide range of low liquidity securities (from derivatives to plain vanilla stocks), so I've had a front-row seat to this sh*t show and I can assure you, Buddy, that Che is right. The only things hampered by the uptick rule were Joe Blows like you and efficiency (which is another way Joe Blows like you, who regularly beg for regulation you don't realize is screwing you, get screwed).

Of course, as a market maker, I agree. Bring it ALL back - trading in increments no lower than an eights and quarters, ban HFT's so that liquidity dries up and the spreads on which I make my money widen, kill the dark pools and all return all rules that hamper you and enlarge my profit. You're all begging for it, I am in a position to line my pockets (at your expense) from these rules. Bring it!

I'm tired of fighting the tsunami of stupidity.

 
At 4/05/2012 12:56 PM, Blogger Methinks said...

...and the Uptick Rule would have dampening effect.

Really?

What evidence do you have that the uptick rule dampened volatility? Where is it?

Before getting rid of the rule, the SEC studied markets where there was no uptick rule. They were not more volatile. WITH the uptick rule, less liquid securities were MORE volatile.

And that's from actual studies undertaken for a period of years, not some punter's unqualified assertion that something about which he knows nothing is fact merely because it seems intuitive to him.

 
At 4/05/2012 1:32 PM, Blogger Buddy R Pacifico said...

"Before getting rid of the rule, the SEC studied markets where there was no uptick rule. They were not more volatile. WITH the uptick rule, less liquid securities were MORE volatile."

further...

"What evidence do you have that the uptick rule dampened volatility? Where is it?"

And so, the Alternative Uptick Rule was put in place after the Flash Crash. The result, flash crashes have been short circuted. Eg. the very recent Apple fat finger event.

Varvara Blows, like Methinks, don't want to acknowledge this.

I'll take the market upward bias of uptick rules rather than the alternative.

 
At 4/05/2012 2:07 PM, Blogger AIG said...

Because of government's deepening interference and shameless tampering with statistics, I'm now deeply suspicious of every number I come across

No one is tampering with statistics. You just have to read the fine print to understand what the assumptions for those statistics are.

All those people screaming "the gov is lying!", clearly have never read what the numbers actually mean.

 
At 4/05/2012 4:15 PM, Blogger Methinks said...

Buddy,

Your post literally had me laugh with abandon. for that, I owe ya'!

I can't decide what's funnier - your kindergarten level analysis or your insurmountable ignorance.

I don't know which it is, but I encourage you to keep trading. You're the guy I want on the other side of my trades.

XOXO,

Methinks

 
At 4/05/2012 7:29 PM, Blogger Buddy R Pacifico said...

Methinks drops:

"Your post literally had me laugh with abandon. for that, I owe ya'!"

You must have cracked up then -- literally.

"I can't decide what's funnier - your kindergarten level analysis or your insurmountable ignorance."

Interesting way to answer my salient point-- with an attack rather than a response to the Alternate Uptick Rule. Oh well, the usual tactic by Methinks.

Я не буду комментировать больше. Ваш смешно высокомерие вновь подтвердили.

 
At 4/05/2012 8:58 PM, Blogger Methinks said...

Oh, Buddy, try not to use the auto-translator. You have the ability to make a fool of yourself just fine in English without making a bigger fool of yourself by posting nonsense in a language you have zero familiarity with.

Salient point? Is that supposed to be ironic or are you just not smart enough to realize that it is?

Okay, I'll throw you a bone with the circuit breakers that you insist on calling the Alternative Uptick Rule because you're too ignorant to realize nobody calls it that.

Um...they don't do anything except impose a price test on short sales for up to two days after a stock goes down 10% in one day. That restricted period is what I call my Golden Time because spreads become so wide, I could pull a galaxy through them and that just means more easy money for me and higher trading costs and more opportunities to get screwed for you.

Now, unlike you, the SEC actually knows that the circuit breakers don't do anything except pacify drooling fools with more bark than brains. How do I know? Well, the SEC told me.

Why are they useless in dampening volatility? Well, because you don't need an uptick to sell a long position and shorts are a tiny minority that don't account for enough trading volume to meaningfully drive a stock down. Also, there's usually little reason to short by the time a stock has dropped 10%. But the more obvious reason is that by the time the circuit breakers kick in, there's already a significant spike in volatility. The stock must drop 10% before they kick in.

So, all these dumb circuit breakers mean is that it takes just a touch longer for a stock to reach fair value and the ignorant are pacified.

Now, that said, I'm with you. Anything that unfairly transfers wealth from your pocket to mine, I'm in favour of. I used to be in favour of fair and orderly markets where everyone is allowed to act in his or her own best interest because those kinds of markets reduce spreads and increase efficiency (bad for my business, but good for the markets as a whole and especially small retail guys). But, I see I'm fighting a losing battle. The sheep are just begging to be slaughtered, so now I'm just content to sharpen my knife and cheer on every one of your self-defeating requests of the SEC. I'm on your side, my dear. Totally.

 
At 4/06/2012 2:41 AM, Blogger Ron H. said...

"The sheep are just begging to be slaughtered, so now I'm just content to sharpen my knife and cheer on every one of your self-defeating requests of the SEC. I'm on your side, my dear. Totally."

Isn't it also true that the sheep gratefully re-elect the goats that help lead them to slaughter the first time, as once is never enough?

This gives new meaning to the saying "you get what you pay for".

 
At 4/06/2012 2:48 AM, Blogger Ron H. said...

Methinks,

You wrote: "Um...they don't do anything except impose a price test on short sales for up to two days after a stock goes down 10% in one day."

- and there's more.

I presume that, and the rest of your previous comment, is an excerpt from your upcoming book. Looking forward to reading the whole thing. :)

 
At 4/06/2012 8:18 AM, Blogger Methinks said...

Ron H.,

Regulators aren't elected. These are people who are able to impose rules completely outside of the normal legislative process. And there are so many broadly written rules that the regulator refuses to clarify (as in literally: "No, we will not clarify, but thanks for asking for clarification anyway. And, yes, you are still subject to the regulation even though you have no idea how to comply with it.") that nobody is ever completely in compliance. Thus, the regulator can nab whatever firm it wants at any time and that's why I write about it anonymously.

Regulators (at least financial industry regulators) are very much influenced by the current popular wind. Ignoramuses like Buddy write their representatives begging for stuff the effects of which they don't understand and the reps (who don't give a damn about anything other than re-election and the appearance of "doing something") then harass the SEC. While the dingbats at the SEC aren't elected, they can be fired, so they march to the drummer and enact all kinds of rules that even the dregs of the law profession (and that's what works at the SEC) understand at best do nothing more than impose an extra cost or at worst exacerbate the situation the rule is trying to mend. That's how the "independent" regulator works.

Through all of this, the professionals of course try to bend the rules in their favour or carve out exemptions. The bigger the firm, the more successfully it does so. And it's not exactly unheard of in other industries with other regulations - note the flurry of exemptions to Saint Obama's healthcare deform.

Also note that Buddy is a classic example of the fools begging to be skewered. He can't come up with any research showing that the uptick rule dampened volatility (in fact, there's research showing the opposite and none to support his aggressive assertion), but that doesn't stop him from strongly asserting that it does. When asked for evidence, he starts babbling instead about the even more idiotic circuit breakers reluctantly imposed by the SEC to deal with a problem caused by suddenly disappearing liquidity. Those are now declared to dampen volatility despite the plainly obvious fact that they require a massive increase in volatility (a 10% move) to even come into play and the resulting restrictions widen bid/ask spreads which, by definition, increase volatility. And when the obvious is pointed out to them....? See the conversation above. Buddy is not alone. He's but a classic example. And this conversation can be repeated about short selling (a topic these guys really don't get and half the people in my industry haven't thought very deeply about either).

No, it's not the people they elect in this case. They do this to themselves and then complain that the market is rigged. Well, duh. They rigged it.

 
At 4/06/2012 11:11 AM, Blogger Ron H. said...

Methinks,

Thanks for the clarification. Your picture of the SEC world is so much more interesting than the one they paint of themselves. :)

 
At 4/06/2012 1:24 PM, Blogger Methinks said...

You mean the one where they all sit around watching porn? I thought that was a rather neat picture, but it did paint them as a much more interesting and intelligent bunch than they really are.

 
At 4/06/2012 1:49 PM, Blogger Ron H. said...

"You mean the one where they all sit around watching porn?"

Yeah! That's the one. I forget - did anyone lose their job over that?

We can agree, then, that the SEC will be the 1st thing to go when we are in charge.

 

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