Economy: October 2009 Archives

If stocks truly do climb a wall of worry, then there's plenty for them to climb.  The gain from Thursday's better than expected GDP figures vanished the next day.  The culprit?

An 0.5 percent drop in consumer spending, flat personal incomes, and an increase in the savings rate.  Of particular concern to many was that even though personal incomes were flat, wages and salaries decreased by 0.2 percent.

The drop in consumer spending was right where the consensus estimate came in.  Analysts had expected a drop in spending after the expiration of the cash for clunkers program, and they were right.  Not surprisingly, sales of durable goods to consumers plunged by seven percent in September, after a gain of 6.1 percent in August.  Much of the swing was attributed to the cash for clunkers program.  Car sales were projected to have declined to less than ten million vehicles on an annual basis after getting a boost to 11.5 million vehicles in August.

Analysts said that the drop in consumer spending is a concern heading into the holiday season, which accounts for the majority of profits for most retailers.  With personal incomes flat and consumer spending declining, analysts are concerned that retailers may not meet their holiday estimates.

Even though the drop in consumer spending was expected, when added to worse than expected numbers on consumer confidence and housing, it was able to drag the markets down.  The Dow lost 2.5 percent to close at 9,713.  All 30 Dow components were lower, led by a drop of 7.3 percent in Bank of America and 5.8 percent in J.P. Morgan Chase.  The S&P dropped by 2.8 percent to 1,036, with financial, material, and energy companies leading the decline.  The Nasdaq was off by 2.5 percent and closed at 2,045.

Both the S&P 500 and Nasdaq were down for the month, with the Dow essentially flat.  The drop in the S&P 500 ended a seven month streak of gains.

All in all, it was a very disappointing week for investors.  Some, of course, were more disappointed than others.  Regular readers may recall that a position was entered in Novatel Wireless and ABB.  How did those trades turn out?  Not so well.  Novatel dropped by 20 percent after reporting strong third quarter earnings but providing disappointing guidance for the fourth quarter.  And ABB, while reporting a 12 percent gain in earnings, dropped on comments by its executives that the outlook for this year and next "remains uncertain."

The story of AIG and its bailout has taken on new legs.  A story from Bloomberg highlighted what happened last fall, when AIG was bailed out by the government.  AIG, as you know, had sold credit default swaps, which are basically insurance against various securities losing value.  Much of the debt that AIG insured were subprime collateralized debt obligations (CDO), which had plunged in value during 2008.

On September 15, Lehman Brothers filed for bankruptcy.  This caused the value of the CDOs insured by AIG to drop even more.

By September 16, AIG was running out of cash.  Payments to the counterparties to AIG's credit default swaps were draining AIG's reserves.  The government, fearing the repercussions of AIG filing for chapter 11 after seeing the carnage that Lehman's failure caused, stepped in with at $85 billion line of credit from the New York Fed, which was headed then by the man who became the Treasury secretary, Timothy Geithner.  Eventually, the government's rescue of AIG would end up costing the taxpayers $182 billion.

AIG deployed some of its staff to renegotiate the payments due for the credit default swaps it issued.  The goal was to cut the amount of money that the companies that had paid for the insurance by about 40 percent.  Nobody knows how these negotiations went, because that information has not been disclosed.

In early November, however, the New York Fed stepped in and took over negotiations, assisted by Hank Paulson's Treasury department and Ben Bernanke's Federal Reserve.  After about a week of negotiations, the New York Fed decided to pay AIG's counterparties everything they were contractually owed.  This meant that companies like Goldman Sachs, Merrill Lynch, Societe Generale, and Deutsche Bank received billions.

Some say that there is no way that AIG and the New York Fed should have paid those credit default swaps at par.  They argue that AIG was bankrupt, and that Citi accepted 60 cents on the dollar to retire a credit default swap that a bankrupt company had issued on a CDO.  That thinking led to the headlines that many have seen.  Headlines like "Geithner gave away the farm to AIG" or "Goldman profits at taxpayer expense" are all over the internet.  Those who believe this line of thinking say that the New York Fed's decision cost taxpayers tens of billions.

Others say that some counterparties were in dire financial straits themselves, and they needed to be paid at par in order to stay afloat.  Because of this, according to individuals close to the discussions, they demanded to be paid at par and the New York Fed did not want to cut individual deals.  They also said that the New York Fed considered a number of different options, including guaranteeing the CDOs that AIG had insured.  The decision to pay the credit default swaps at par, according to these individuals, was determined to be the best of several bad choices.

The former head of the St. Louis Fed defended the actions of his colleagues in New York.  William Poole asked people to remember the environment that was present at the time.  For months, financial bombshells that were seen as once in a generation events were being dropped.  First was the implosion of Bear Stearns and its subsequent takeover by JPMorgan Chase.  Then came the government takeover of Fannie Mae and Freddie Mac.  A week later, Merrill Lynch, facing a liquidity crisis, agreed to be taken over by Bank of America.  Then Lehman Brothers filed for chapter 11.  A day later, the government stepped in to bail out AIG.

"I think the Federal Reserve was trying to stop the spread of fear in the market," Poole says. "The market was having enough trouble dealing with Lehman. If you add, on top of that, AIG paying off some fraction of its liabilities, a system which is already substantially frozen would freeze rock-solid."

In any case, the TARP auditor, Neil Barofsky, will be putting together a report on whether or not AIG overpaid its counterparties.  That report, which will be very closely scrutinized, could be released as early as next month.

We here take a different view than either of the groups arguing about how many cents on the dollar Goldman, Societe Generale, and the rest of AIG's counterparties should have received.

We look at it like we would look at an insurance policy an individual would purchase from an insurance company.  That is, after all, what a credit default swap is -- an insurance policy.  If a homeowner bought a policy from AIG's insurance division and his house burned down, would he be asked to take less than the full amount AIG promised to pay him?  If someone bought a life insurance policy from AIG and died, should his widow be paid less than what AIG was contractually obligated to pay?

If a reader believes that the answer to those questions is no, then the reader needs to ask themself why they believe that one of AIG's counterparties for credit default swaps should be any different.

The only issue we have here with the New York Fed's actions is the lack of disclosure.  When you're spending tens of billions of taxpayer money, you need to disclose why you made certain decisions.  Who were the counterparties that needed to be paid at par so that they would not fail?  Besides the idea of guaranteeing the CDOs that AIG insured with credit default swaps, what were the other alternatives?

The New York Fed could have saved itself a lot of trouble by disclosing this information.  Instead of this becoming a "the New York Fed wanted to enrich Goldman" story, it could have been a "the New York Fed helped prevent the bankruptcy of companies X, Y, and Z" story.

For the first time in more than a year, GDP grew in the United States.  GDP increased in the July through September quarter by 3.5 percent versus the prior quarter.  In the second quarter, GDP declined by 0.7 percent.  The consensus estimate was for an increase of 3.3 percent, so GDP climbed by more than economists expected.

According to the Commerce Department, the increase came from an increase in personal consumption, exports, private inventory investment, federal government spending, and residential fixed investment.  Not surprisingly, with the cash for clunkers program, motor vehicles added 1.7 percent to the GDP total, up from 0.2 percent in the prior quarter.

Personal consumption increased by 3.4 percent, versus a drop of 0.9 percent in the second quarter.  Durable goods purchased by consumers surged by 22.3 percent, largely driven by the cash for clunkers program.  The comparable figure in the second quarter was a drop of 5.6 percent.  But the increase in personal consumption wasn't limited to autos.  Nondurable goods increased by 2.0 percent and services increased by 1.2 percent.  In the second quarter, those sectors showed a drop of 1.9 percent and an increase of 0.2 percent, respectively.

Exports and government spending increased as well.  Exports increased by 14.7, versus a drop of 4.1 percent in the second quarter.  Who says that the United States doesn't have a manufacturing sector anymore?  And federal government spending slowed its rate of increase, up 7.9 percent, which was lower than the 11.4 percent increase in the second quarter.

Analysts said that while the return to growth was a positive sign, it remains to be seen whether consumer spending can continue to grow.  With over seven million jobs lost since the beginning of the recession, consumers will remain challenged.  Also, the economy received a one time boost from various stimulus programs, and some analysts question whether the economy will continue to grow after those programs end.

On the jobless front, initial claims dropped to 530,000, a decrease of 1,000 from the prior week.  Continuing claims also declined to 5.8 million, down by 148,000 from the prior week's figure of 5.9 million.  The consensus estimate was for a decline of 5,000 in the initial claims figures, with estimates ranging from a decline of 16,000 to an increase of 9,000.

The drop in continuing claims took that number to the lowest level in seven months, consistent with the return to growth shown by the GDP number.

Only one state, California, reported an increase in unemployment claims of more than 1,000.  California's increase of 5,774 claims was due to increased layoffs in the construction, trade, service, and agricultural industries.  In contrast, 19 states reported a decrease in claims of more than 1,000.

Analysts said that companies are laying off less people as they see a return to economic growth, driven in part by government stimulus, stabilization in the housing market, and an improving manufacturing sector.  This led Chicago Fed chairman Charles Evans to say that the "job destruction wave" has probably ended.

All in all, this morning's economic data was good.  This breaks the streak of disappointing numbers from earlier this week.  It shows an economy that's recovering, although not as quickly as anyone would like.

Third quarter GDP numbers, which will be released on October 29, just became even more important.

Stocks plunged on Wednesday after two releases of economic data.  First up, at 8:30 AM, was the release of durable goods orders.  Durable goods orders increased by one percent to $165.7 billion, according to the Commerce Department.  Excluding the volatile transportation sector, orders increased by 0.9 percent.  The one percent increase in overall orders was in line with estimates, and the increase in orders excluding transportation was above the consensus estimate of 0.7 percent.  This data was seen as indicative of an economy in recovery.

However, based on that data, Goldman Sachs cut its estimate for third quarter GDP.  The company had initially projected a three percent growth in GDP for the third quarter.  After seeing the durable goods data, their estimate was revised downward to 2.7 percent.

Half an hour after the markets opened, the Commerce Department released its new home sales data.  That report showed a drop of 3.6 percent between August and September, with September sales coming in at a seasonally adjusted annual rate of 402,000.  Commerce also said that inventory of new homes came in at 7.5 months of sales at the current rate.

The consensus estimate for new home sales was for an increase to 440,000.  Estimates ranged from 412,000 to 460,000, so even the lowest estimate by economists was better than the actual figure.

In reaction to the economic data, markets dropped by more than one percent.  Alcoa, American Express, and Caterpillar helped drag the Dow down by triple digits.  This was the third 100 point plus drop in four sessions.  The Dow dropped by 1.2 percent to 9,763.  The S&P 500 was off by two percent, to 1,043.  And the Nasdaq dropped by 2.7 percent to 2,060.

Analysts said that the pullback in stocks was driven by a number of factors.  First, traders with big profits were protecting those profits ahead of the release of third quarter GDP numbers.  Second, even though the economy is recovering, economic data that disappoints spooks investors.  Finally, even though companies are reporting earnings that have for the most part exceeded expectations, they are beating estimates through cost cutting.  And even with earnings exceeding expectations, earnings are still down by double digit percentages versus the same period last year.

Many traders said that stocks have gotten ahead of themselves and priced in strong economic growth.  Until consumer spending recovers, it's difficult to see how that will occur.  And earnings exceeding estimates appear to have been priced in to stocks and then some.

With all those factors influencing the price of stocks, it appears likely that unless there is a serious surprise to the upside in the GDP numbers, we may be looking at the end of the bias towards higher stock prices.  As they say, the trend is your friend until it ends.  And the recent drop in stock prices may indicate that the trend is ending.

The CEO of JPMorgan Chase, Jamie Dimon, addressed the annual meeting of Wall Street's biggest trade group, the Securities Industry and Financial Markets Association.  And among the bombshells that Dimon dropped was this one.

"Everyone should be allowed to fail.  But, you don't want a failure to hurt the country."  Dimon added that he thought "it's a bad long term policy to have anyone too big to fail.  There is a need to be able to take these firms apart and let them go away."

Dimon's company was one of the beneficiaries of the too big to fail mindset.  It wasn't needed, as JPMorgan Chase is one of the few banks to report quarterly profits throughout the financial crisis.  As a result of this, Dimon's star has risen and he has become one of the managers that many point to as someone who did things right.

In what will surprise those who think that Wall Street executives never speak out in favor of regulation, Dimon said that a systemic risk regulator needs to be established to take over large companies that are failing and wind them down.  But, he cautioned, "regulation needs to be done thoughtfully and well."

Another surprise came with regard to JPMorgan Chase poaching talent from companies which are subject to having their compensation practices reviewed by pay czar Kenneth Feinberg.  JPMorgan Chase paid back its TARP loan, so it's free to pay its employees anything it wants.  That would allow it to offer higher compensation to well regarded employees at companies like Citi and Bank of America, which have not.  Feinberg, according to Bloomberg, shaved salaries at the companies he was overseeing by an average of 90 percent and cut total compensation by about 50 percent.

Dimon, however, said "I morally have an issue with people going against those companies that are hamstrung.  It's wrong to say, 'Let's go hire the best people.' We're not going to do that."

When it came to who was responsible for the financial crisis, Dimon pointed the finger at both the consumers who took out loans they couldn't repay or took out loans on false pretenses and as well as the banks who gave them the loans.  "Shame on them.  And shame on us for not doing our due dilligence," he said.

Dimon was positive on prospects for the economy once it gets past the next few quarters.  According to Dimon, the "chance of financial Armageddon is over."  He cited stabilization in housing prices and consumer spending as reasons for drawing this conclusion.  Like many, Dimon predicted that jobs would be the most difficult hurdle for the economy to overcome. 

"Everyone thinks [unemployment] could get worse for the next quarter or two.  Most people think that unemployment is a lagging indicator and that hopefully it will get better after that."

Unemployment is predicted to climb to double digits before declining starting in the middle of 2010.  The latest report from the Labor Department had unemployment at 9.8 percent.

Today's data on consumer confidence and housing showed that while the economy is recovering, the recovery is uneven.  Those expecting a smooth road for the economy will likely be surprised by the potholes they encounter.

Today's pothole was the Conference Board's consumer confidence index.  For the second month in a row, consumer confidence declined, dropping to 47.7 from September's 53.4 level.  The present situation index dropped to 20.7 from 23.0 last month.  And the future expectations index dropped from 73.7 last month to 65.7.

The consensus estimate was for the consumer confidence index to climb to 53.5 from a previously reported 53.1, so the drop was unexpected.  The range for estimates from a group of 74 economists surveyed by Bloomberg was from 48 to 57, so the actual number came in below even the worst estimate.

What drove the consumer confidence index down?  In a word, jobs.  In commentary released with the data, the Conference Board said, "consumers' assessment of present-day conditions has grown less favorable, with labor market conditions playing a major role in this grimmer assessment."

In what is bad news for retailers with the upcoming holiday season already projected to be weak, the Conference Board added, "consumers also remain quite pessimistic about their future earnings, a sentiment that will likely constrain spending during the holidays."  This may mean that the estimate of a one percent drop in holiday sales released by the National Retail Federation may be optimistic.

Analysts said that as long as the labor market remains weak, consumer spending -- which is 70 percent of the economy -- will remain constrained.  Without that, the recovery that likely began in the third quarter of the year will be weak and the earnings growth that many are projecting will not materialize.  With stocks already pricing in that earnings growth, disappointing earnings will likely result in a pullback.

Investors did get some good news, however, on the housing front.  As you know, housing is what dragged the economy into recession.  Without a recovery in housing, it's going to be difficult for the economy to return to strong growth.

For the third consecutive month, the Case-Shiller home price index showed an increase.  The ten city index increased by 1.3 percent between August and September and the 20 city index increased by 1.2 percent.

In commentary accompanying the report, Standard & Poors said that "broadly speaking, the rate of annual decline in home price values continues to improve.  The two Composites and 19 of the 20 metro areas showed an improvement in the annual rates of return, as seen through a moderation in their annual declines. Looking at the monthly data, 17 of the MSAs and both Composites saw price increases in August over July. While many of the markets remain down versus this time last year, the relative rate of decline has shown some real improvement."

Both the 20 city index and ten city index have returned to levels from the fall of 2003, before the bubble really started getting inflated.  Both indices are down by approximately one third from their summer 2006 peaks.

Still, the rate of decline has slowed, with some markets edging close to breakeven when compared to year earlier numbers.  Dallas and Denver showed declines of 1.2 and 1.9 percent on an annual basis, so they are creeping close to breakeven.  And two markets, New York and San Diego, are no long showing double digit declines from a year ago.  New York's prices declined by 9.6 percent and San Diego's decline was 8.9 percent.

With the housing market, it's definitely a case of things being less bad instead of things being good.  It remains to be seen how the housing market will react to the end of the $8,000 tax credit for first time home buyers and whether the improvement we have seen in housing will continue.

All in all, today's data shows that there are still many challenges being faced by the economy as it moves to recovery.

Stocks started out the day with a bang but ended it with a whimper.  The markets soared early, with the S&P 500 up as much as 1.1 percent on better than expected profits from a number of companies.  More than three quarters of the companies in the S&P 500 reporting profits so far have exceeded expectations, and traders reacted to this by pushing stocks higher.

However, as the day progressed, traders pounced on news that some large banks may be required to sell new shares in order to pay back government loans.  A drop in oil prices also pounded energy and materials companies.

The final straw for stocks was news that the $8,000 tax credit for first time home buyers would be phased out throughout 2010.  That news drove the stocks of the 12 companies in the S&P 500 down by 3.4 percent.  Pulte Homes and D.R. Horton led the way lower, plunging by 3.8 percent.

Banks saw big losses as well, as the stocks of banks like Fifth Third, SunTrust, and Bank of America dropped by a minimum of five percent.

On the day, the Dow was off by 1.1 percent to 9,868.  The S&P 500 lost 1.2 percent to 1,067.  The Nasdaq held up better, dropping by 0.6 percent to 2,142.

This volatile market resulted in some major swings in our positions.  We closed out our position in Radio Shack, which we entered at $15.17 last week.  We closed out our position at $16.50, for a gain of 8.8 percent in a week, for an annualized return of 455.9 percent.

We took some of the gains from that position and used them to purchase options on Vale, which is a raw materials producer.  We bought December $28 call options for $1.65, and watched the value of those climb to $1.75 before we left for work.  That gave us a gain on paper of 6.1 percent in about ten minutes!

We should have booked those gains, because by the time we went to lunch, those options were down to $1.45.  And by the time we got home, those options were trading for $1.15, so we lost $0.60 or more than a third of our investment.

What did we do wrong here?  We wrongly assumed that the initial surge would continue throughout the day, pushing the price of our options higher.  Unfortunately, we didn't anticipate the news about the potential problems banks would have paying back the TARP or the downward push on oil and raw materials prices or the phase out of the tax credit for homebuyers pushing stocks downward.

On top of that, it's possible that stocks are just overpriced and traders are looking for reasons to take profits.  According to an economist who correctly predicted the end of the dot com bubble, stocks are overpriced by 40 percent and are headed for a decline as the extraordinary measures governments throughout the world put in place to prop up the financial system wind down.  Technical analysts also say that the market could be primed for a drop.  Others said that the reaction of the markets today could be seen as a sign that traders are looking to book gains because they are anticipating a larger decline later.

It's likely that the market will react throughout the week to any economic news or rumors.  And of course, the market is widely anticipating the release of the first estimate of third quarter GDP on Thursday.  Expect the markets to make big moves depending on whether the economy returned to growth and whether the actual number exceeds or falls short of the consensus estimate.

Aggressive traders may want to use options to put a straddle in place ahead of the GDP numbers.

Thursday's release of initial third quarter GDP is going to be the biggest economic news in a week full of data.  After shrinking for the previous four quarters, economists expect that the economy grew at a 3.2 percent pace in the third quarter.

The economy has also shrunk in five out of the last six quarters, with only the second quarter of 2008 showing growth due to the issuance of stimulus checks by the government.

The current downturn is the worst since the 1930s.

Government stimulus also is responsible for much of the return to growth.  The Cash for Clunkers program is estimated to have increased sales of autos by 700,000 and the $8,000 tax credit for homebuyers has helped to boost home sales.

Now, the concern among analysts is whether or not the economy can continue to grow after the stimulus ends.

Many economists believe that with inventories depleted, companies will be forced to restock.  This will help keep the economy growing, they say, even as unemployment climbs.  However, few expect the economy to grow at a strong pace as unemployment, housing, and a new focus on savings keeps the consumer from opening up his wallet.  The consensus is for sustained growth, but not at a strong enough pace to fire up hiring.  This may lead to a period of slow growth but high levels of unemployment.

The GDP figure is going to be the one that gets the most attention, but there's a lot of other economic data that will be released this week.  Other reports leading up to the GDP release are the Case-Schiller home price index, consumer confidence, durable goods orders, and new home sales.  On the same day that the GDP data is released, we will see initial unemployment claims, continuing claims, and personal consumption data.  We will close the week out with the University of Michigan confidence index.

All in all, it will be a busy week for market moving data and the markets will likely be volatile.

As you know, we are seeing fewer layoffs these days but we are still a long way away from a resumption of hiring among employers.  While there are a few firms like Google, who are taking advantage of weakness on the part of competitors to hire employees and expand, most companies have not resumed hiring in large numbers.

The economy is expected by most analysts to have returned to growth in the third quarter after four consecutive quarters of contraction.  And employment always lags behind an economic recovery.  But the combination of much higher than expected job losses -- 7.2 million jobs have been lost since the recession began in December of 2007 -- and other factors will keep unemployment high for the near future.

Many businesses are skeptical about the current recovery, seeing it as driven by government stimulus and inventory replenishment.  They do not see it as a result of increasing demand for their goods and services.  So, given that mindset, they are asking the employees they have to do more work, and looking for ways to make their processes more efficient.

As a result, the average hours worked per week has dropped to 33, the lowest since records started being kept in the 1960s.  Productivity has surged, since employers cut workers more quickly than they cut output.  Productivity jumped by 6.6 percent in the second quarter of the year, the highest gain since 2003.  In contrast, the average productivity gain from 2000 to 2008 was 2.5 percent.

So employers are able to continue produce their goods and services with fewer workers.  And they can add hours to their current employees workweek instead of hiring new workers.

Furthermore, even if the economy returns to growth and the economy adds jobs at the pace it did during the boom of the 1990s, where 2.2 million jobs were added annually, it will take more than three years before the economy replaces the 7.2 million jobs lost.

And those who get jobs are likely to find that the job is not what they expected.  Since the downturn began, employers have reduced pay, made employees pay more for health insurance, and cut their contributions to 401k programs.  Many of these moves will not be rescinded after the recession ends.

According to a survey by Watson Wyatt, two thirds of the companies that cut health care benefits will not be restoring them after the recession ends.  Less than half of those who cut retirement benefits plan to restore them in the next year, and eight percent said they will make those cuts permanent.

Companies need to be careful when they cut these benefits.  Employees will accept them now, because for some reason when 90 percent of those who want jobs have them, they feel lucky to have a job.  But when the economy picks up, those who cut benefits too far will find that many employees will jump to companies with better compensation packages, leaving them with only those who aren't talented enough to make the jump.

That's not going to happen any time soon, however.  One indicator of upcoming growth in employment is increased use of temps.  But at Robert Half and Manpower, two big temporary help firms, revenues and earnings are continuing their slide.

Manpower's CEO said that September and October are traditionally big months for companies that provide temp workers.  When asked to comment on those months, all he could do is say the company is "moving forward into 2010 with our current infrastructure."  Manpower's third quarter results came in worse than analysts had expected, and they guided down for the fourth quarter.

Robert Half reported a drop of 37 percent in revenue, causing earnings to plunge by 86 percent.  The company said that the market "remained challenging."

All in all, the situation does not look good for the labor market in the near future.

The Labor Department's weekly initial unemployment claims report showed a rise to 531,000, up 11,000 from last week's 520,000 number.  Continuing claims declined, however, by 98,000 to 5.92 million.  Last week's figure was 6.02 million.

The consensus number for initial claims was for a climb of 1,000 claims, so the numbers are worse than expected.  And while the continuing claims number may appear to be good news, some analysts said that it was due to people exhausting their unemployment insurance instead of people getting jobs.

Only one state, California, had a decrease of over 1,000 in the initial claims number, with the number of claims filed in California dropping by 7,062.  On the other hand, 18 states reported increases of more than 1,000 in their initial claims number.  According to the states reporting those increases, layoffs were seen in the manufacturing, service, transportation, trade, warehousing, automotive, construction, and agriculture industries.

The prediction of most analysts is for a climb in the unemployment rate to ten percent.  Even though companies are slowing their pace of layoffs, they remain focused on cutting costs and are reluctant to hire.  This is going to make the job market weak for some time to come.

However, there are some companies, such as Google, which are doing well and which are looking to take advantage of their weakened competitors to expand and grow.  Google will resume hiring after third quarter numbers came in better than analyst expectations.  "If you have all this behind you, the only outcome you should have as management is: 'OK, let's build now," Chief Financial Officer Patrick Pichette said.

Companies like Google can be seen as the equivalent of the "green shoots" economists were talking about during the first half of the year.  This time, however, the "green shoots" are in the labor market, which has been slow to participate in the recovery.

Two days after the the Dow closed above 10,000 again, selling pressure is going to put that threshold at risk.  Market futures are pointing to a lower open as disappointing earnings reports from Bank of America, General Electric, and International Business Machines.

Bank of America, which is the country's biggest bank, reported its second quarterly loss in less than a year.  The company was unable to shake off the effects of the worst recession since the Great Depression.  The bank, which was the recipient of two bailouts from the government, reported a $0.26 per diluted share loss, which works out to a $1 billion loss.  In the third quarter of last year, the bank earned $1.18 billion, or $0.15 a share.

Analysts said that Bank of America's results show that the financial crisis is not over and that many banks are still facing difficulties.  A closer look at the earnings numbers shows that banks are still facing problems with bad loans.  Losses on mortgages and insurance more than doubled from $724 million to $1.6 billion.  And credit card losses ballooned from $167 million to $1.04 billion.  Write offs for uncollectible loans jumped by 11 percent to $9.62 billion.

General Electric, which is often seen as a proxy for the economy because it's involved in so many businesses, reported a drop in earnings of 45 percent.  The company reduced its real estate and consumer lending and also sold less medical devices.  This caused top line revenue to fall more than analysts expected, and that flowed to the bottom line.

Revenue at General Electric fell by 20 percent to $37.8 billion.  Large orders in the company's infrastructure division slipped by 18 percent, which was a better than the 44 percent drop seen in the second quarter.  Spending to shed workers and unprofitable units cost the company $600 million as buyouts and other payments were made.

GE's CEO said that the company was on track to recover, and that the third quarter was likely the low point for the company in the current economic downturn and recovery.

IBM exceeded earnings expectations, reporting a profit of $3.2 billion or $2.40 a share.  However, revenue fell short of analyst expectations, coming in at $23.6 billion.  Analysts had expected revenues to come in at $23.9 billion.

IBM's revenue shortfall, driven in part by lower than expected contract signings, were seen as a sign that businesses were not yet ready to begin spending again.  Signed service contracts dropped by seven percent, and consulting and systems integration contracts dropped by 16 percent.

The reports from BAC, GE, and IBM show that the economy, while improving, is still not out of the woods.  BAC's losses show the weakness in the consumer market, especially the increasing write offs.  GE's revenue drop, especially in the infrastructure division, show that companies are not spending on big ticket items.  And IBM's drop in service contracts shows that even IT spending, which was seen as something that companies would do in good times and bad, is facing problems.

All in all, today's earnings reports should serve as a sign for investors to stay away from irrational exuberance.

This morning at 8:30, the Labor Department released two reports that investors will likely view positively.  Initial jobless claims decreased by 10,000, to 510,000.  That level was the lowest level since January.  The number of continuing claims also decreased by 75,000 to 5.99 million.  Last week's figure was 6.07 million.  The unemployment rate continues to flirt with double digits, coming in at 9.8 percent.

Analysts had expected a much lower drop in the initial claims figure, with the consensus forecasting a drop of 1,000.

While the drop in initial claims is good news, it doesn't mean that companies resuming hiring in large numbers.  Analysts are forecasting that the economy, while recovering, will continue to shed jobs until 2010.  At that point, they expect that companies will start to hire again and the unemployment rate will fall.

The Fed is predicting "only a slow improvement in labor markets, with the unemployment rate moving down to about 9.25 percent by the end of 2010."

There were two states which reported a drop in claims of more than 1,000, Florida and California.  Claims were down by 5,178 in Florida and 3,911 in California.  On the other side of the ledger, seven states showed an increase of more than 1,000 claims.  These states were led by Pennsylvania's increase of 3,618 claims.

Fortunately, for both those who have jobs and those who are looking for them, the Fed will be able to keep interest rates at record lows as inflation remains restrained.  The consumer price index rose by 0.2 percent, down from August's 0.4 percent increase.  This was slightly higher than the consensus projection of 0.1 percent, but it's still a sign that inflation remains in check. 

The CPI has declined over the past year by 1.3 percent.  That reflects the pressures put on pricing power by the worst economic downturn since the Great Depression.

Excluding the volatile food and energy sectors, the CPI was up by 0.2 percent as well, a slightly higher increase than the 0.1 percent increase in August.  The biggest gains were seen by used cars, with prices up by 1.6 percent.  The biggest decrease in prices was seen in piped natural gas, down by 1.7 percent.

Analysts saw the number as a sign that "inflation remains muted.  There is still much excess capacity to absorb, retailers are still fighting for their share of consumers' shrinking wallets."

So, while the economy has lost 7.2 million jobs since the beginning of the recession in December of 2007, the good news is that the Fed can continue to keep interest rates at historic lows in order to spur growth.

The Commerce Department today reported that retail sales dropped by 1.5 percent in September.  Much of the drop in retail sales can be attributed to the expiration of the cash for clunkers program.  Auto sales dropped by 10.4 percent as buyers rushed to take advantage of the program in August.  Excluding autos, retail sales climbed by 0.5 percent from August.

Sectors showing growth in sales between August and September were the furniture and home furnishing, gasoline stations, general merchandise, health and personal care, food and beverage, clothing and clothing accessories, food and drinking, and sporting goods, hobby, and music sectors.  Increases here ranged from 0.1 percent for the sporting goods, hobby and music sector to 1.4 percent for the furniture and home furnishing sector.

Sectors showing a decrease in sales were lead by the autos sector.  Others with decreasing sales were the miscellaneous stores, building materials and garden equipment, and nonstore sectors.  Drops here were 1.9 percent, 0.2 percent, and 0.1 percent respectively.

The electronics and appliance sector was flat.

Analysts had expected a 2.2 percent drop in the topline retail sales figure.  Excluding autos, a gain of 0.2 percent was projected so both numbers came in better than expected.  The better than expected numbers were seen as a sign that even though unemployment is continuing to increase and is expected to hit a double digit rate, consumers are becoming more confident in an economic recovery.  This was seen as an encouraging sign for the economy.

However, consumers remain cautious and anyone expecting a return to the free spending days of a few years ago is going to be disappointed.  Fed Vice Chairman Donald Kohn said that he expected "muted" gains in consumer spending given a "weak" labor market and "subdued" increases in income.

The combination of better than expected sales and tight inventory management caused business inventories to drop by 1.5 percent.  This drop brought business inventories down to $1.31 trillion.  The drop was the biggest this year and brought inventories down to a level last seen in December 2005.  Analysts had expected a drop of 1.0 percent, so the drawdowns of inventories was much greater than anticipated.

Inventories are down to 1.33 months of current sales, which is the lowest level since the September 2008.  Because of this, it is likely that businesses will restock inventories.  That is likely to provide a boost to the economy as it starts to emerge from the worst downturn since the Great Depression.

Today's data is another sign the economy is starting to emerge from recession.  Investors would be well advised to heed Kohn's words and plan for a relatively tame recovery.  However, even a tame recovery beats a recession, especially the worst in 70 years.

When you think of Oklahoma, you may think of the Boomer Sooner. Or you may think of Conoco Phillips. Or you may remember tragedies and remember the bombing of the Murrah Federal Building in what was then the deadliest terrorist attack on American soil.

But you probably never thought of, nor heard of the Oklahoma Wind Power Institute.

NPR recently did a story on this organization. It told the story of someone who used to work in the oil fields but who got tired of the boom and bust cycle of oil. He was looking to provide for his family, and he decided that wind would be the way to go.

As you probably can guess by the lyrics to the Rodgers and Hammerstein song Oklahoma!, the wind blows in Oklahoma. And if you check out the maps provided by the Oklahoma Wind Power Institute, it blows a lot.

Oklahoma's gas and oil industry obviously dwarfs the wind power industry. But the oil and gas industry is dealing with declining fields. The more you pump out, the less you have, and the harder it is to get.

On the other hand, wind is a relatively untapped resource.

This is another case where going green creates green. It also creates jobs, something needed in this tough economy. It is difficult for relatively low skill labor to find jobs that pay as well as those in the oil industry. Wind power, as Oklahoma is finding, can provide some of those jobs.

Green energy is going to be a big field, especially with new legislation such as cap and trade and the requirements of many states that a certain percentage of electricity come from non-fossil sources. Study it and invest accordingly.

In the meantime, enjoy this video.

Recently, we've seen some companies reporting better than expected earnings.  Alcoa, for example, reported profits for the third quarter when a loss was projected by analysts.  This normally would be good news.  Companies that report earnings surprises to the upside are a sign of good economic times, right?

Well, not necessarily.  Normally, profit increases come as a result of growing sales.  The top line flows to the bottom line, and companies respond to growing sales by hiring more people to meet the increased demand for their products.

This time, however, it's different.  Now, it's been said that the best way to lose money is to listen to anyone when they say those words.  But this time, it really is.

Instead of generating higher profits -- and keep in mind that even the increased profits companies are reporting are down by about 25 percent from the same quarter last year -- by increasing sales, companies are increasing their profits by cutting costs.  This only makes sense.  A lot of capacity remains idle due to decreased demand.  With that the case, a lot of executives are saying they won't be investing the increased profits into their companies anytime soon.

This situation presents headwinds to any economic recovery.  With the unemployment rate flirting with and expected to climb to double digits, consumers will keep their wallets shut.  Consumer spending is 70 percent of the economy, and as long as that remains anemic, companies won't resume hiring in anything close to normal rates.  And that means the cycle will continue.

Furthermore, the current situation also means that reinvestment that is required for future growth.  Profits need to be reinvested into companies in order to drive growth.  That is not happening now.


As you can see from the chart, net private investment has dropped to the lowest level since at least the 1940s.  Even in previous recessions, the low was approximately three percent.  In the second quarter of the year, net private investment dropped to near zero.

Often, when companies cut spending, they go after things they need to invest in so that they can grow.  One of the first things on the chopping block is marketing.  Another one that gets killed quickly is research and development.  Cutting these things is penny wise and pound foolish.  Without research and development, new and innovative products can't be developed. And even if those products are developed, without marketing, nobody will know about them.

Besides, no company has ever cut its way to prosperity.  The list of companies which have disappeared due to continuing spending cuts is long and undistinguished.  And as long as this continues, we will not see the hiring needed to cut into the unemployment rate, which means the economy will remain weak.

When investors evaluate earnings reports, it is important for them to look at what is driving any profit increases.  If the earnings are increasing due to spending cuts while sales are declining, that's a warning sign.  And if a company is cutting expenses that don't pay off now but are critical to a company's future, like research and development, that's another one.  Investors would be well advised to give companies who are reporting profits but who are cutting investments needed for their future a long, hard look.

There are many things that people point to when it comes to reasons for the global recession.  Many point to the housing bubble that inflated in the United States.  Others point to weak government regulation.  And some say that it was too much money chasing too few return producing assets.

A new paper by researchers at the National Bureau of Economic Research (NBER) says that the "large increase in the developed world's labor supply, triggered by geo-political events and technological innovations, is the major underlying cause of the global macro economic imbalances that led to the great recession."

According to the NBER, the financial crisis that brought the financial system to the brink last year was just a symptom of the problem.  They say that the root cause of the recession was the growth of the workforce in the developing world, adding that if only ten percent of the workers in the developing world join the workforce, they are equal to the entire workforce of the United States.

Specifically, the authors point to three main problems that are rooted in the growth of the developing world's workforce:

• The inability of emerging economies to absorb savings through domestic investment and consumption due to inadequate national financial markets and difficulties in enforcing financial contracts
• the currency controls motivated by immediate national objectives;
• and the inability of the US economy to adjust to the perverse incentives caused by huge money inflows leading to a breakdown of checks and balances at various financial institutions

The solution from the authors?  "Recovery will only occur when structural imbalances in global capital flows are corrected, in part through higher saving in developed nations and in part through greater capital flows into developing nations,"

So, if you believe the authors are correct -- and there is sure to be a big debate over this -- individuals in developed countries like the United States need to save more.  The chart below shows that the savings rate in the United States has climbed to five percent, a five year high.



That's the first part of the solution.  Now, according to the authors, in order to cure the problems that the world's economy is suffering from, we need to see countries like China and India start to focus more on stimulating domestic consumption instead of relying on exports.  Furthermore, developed nations need to invest more money in the developing world according to the authors.

The findings are sure to be controversial, and it's unknown if developing economies will turn inward instead of focusing on exports.  Exports have been a surefire way for developing economies to grow.  We will see if the focus that many developing countries have on this will shift.

There have been many commentators who blame the blowup in the housing market on the Community Reinvestment Act (CRA) of 1977.  The thesis behind this is that the law, which has been on the books for more than 30 years, is responsible for banks lowering their lending standards and giving loans to those who can't pay them.  Of course, these critics don't let the fact that the law has been on the books for decades, long before the housing bubble inflated and burst.  They further don't let studies which actually analyze data that concludes "the CRA cannot be rationally blamed for current problems in the mortgage market, much less for the U.S. financial crisis deter them from making these claims.

Now we've got more data that shows the problem isn't like it's characterized by much of the media.  The common perception is that the poor and middle class are the ones who are causing the problems.  The wealthy, many think, are immune.  Of course, this was what the pundits said about high end retailers like Nordstrom and Saks.  They said that their wealthy clients would keep spending regardless of the downturn, and same store sales showed this just wasn't true.

Zillow.com, a real estate website, decided to analyze the numbers to see if there was anything behind the anecdotes they've heard about the foreclosure problem moving up the income ladder.  Their conclusion is that it definitely has.

According to Zillow, the top third of the housing market now accounts for 30 percent of foreclosures.  During the peak of the housing bubble, houses in the bottom third of the home values made up 55 percent of foreclosures, with the middle third accounting for 29 percent and the top third totaling 16 percent.  That is what would be expected, as those who could afford higher end properties are most likely to be those who can afford the payments.

In July 2009, however, the numbers showed a far different story.  The bottom third's proportion of foreclosures plunged, dropping to 35 percent of all foreclosures.  The middle third showed some increase, comprising 35 percent of all foreclosures.  But the top third came in at 30 percent, which is almost a doubling of its previous rate.

The reasons for this, according to Zillow, are due to the increase in defaults on prime, Alt-A, and option ARM products.  The growth of delinquincies in these products, which far outnumber the number of subprime loans, is causing the number of more expensive homes in foreclosure to jump.



According to the Mortgage Bankers Association, prime loans accounted for 58 percent of all foreclosures in the second quarter of this year, up from 44 percent in the same period of 2008.  Subprime mortgages were a third of foreclosures, down from half last year.

Problems in the housing market are what dragged the economy into recession.  While many have called bottom in housing, it remains difficult to see how that can be the case if the number of foreclosures is rising.  It's even more troubling that the contagion has spread to the upper end of the market.

Investors who look at this data and see how stocks of housing companies like Toll Brothers and KB Homes have soared may want to take gains, or at the very least hedge against potential losses in their positions.

Federal Reserve Chairman Ben Bernanke stated the obvious at a press conference, and markets reacted badly.  A couple of the reasons why the Fed exists are to keep inflation in check and to help the economy grow by influencing interest rates.  At a press conference discussing the Fed's balance sheet, which has ballooned to record levels after the financial crisis of last fall, Bernanke said that the Fed will continue accomodative monetary policies "for an extended period."  No surprise there.

However, the next words in Bernanke's speech caused markets to react by dropping.  "At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road," he said. 

"When the economic outlook has improved sufficiently, we will be prepared to tighten the stance of monetary policy."

This, of course, should come as no surprise.  Anyone who thinks that the Fed can keep its target interest rate at zero to 0.25 percent and continue its policy of quantitative easing forever is delusional.  At some point, the economy will recover, and keeping interest rates at that level would spur inflation.

As the economy recovers from the worst recession in decades, investors are watching the Fed to see when they will start to remove some of the unprecedented measures they have implemented in order to shore up the financial system.  Recently released economic data shows that the recovery is not a strong or smooth one.  Last week, payrolls showed a much greater than expected drop but this week saw better than expected initial unemployment claims and retail sales figures. 

In other news this morning, the US trade deficit fell in August to $30.7 billion, down by 3.6 percent from July's revised $31.9 billion figure.  Analysts had been expecting an increase of $1 billion in the trade deficit.

The lower than expected trade deficit was seen as a result of increasing exports of cars to Canada as well as a drop in imports of oil.  American factories are benefiting from both the drop in the value of the dollar versus other currencies as well as the stimulus being implemented overseas, with over $2 trillion in government stimulus programs boosting demand.

One of the beneficiaries of this stimulus may have been Alcoa, which released better than expected earnings numbers and helped boost stocks yesterday.

Stocks climbed for the third time in four sessions today, as good news on jobs, retail sales, and earnings caused markets to rally.  In addition to gains in the major indices, hundreds of stocks hit 52 week highs.

The Dow was up 0.6 percent to 9,787; the S&P 500 climbed 0.8 percent to 1,065; and the Nasdaq advanced 0.6 percent to 2,124.  On the NYSE, 416 stocks hit 52 week highs and 177 stocks passed their previous 52 week highs on the Nasdaq.

Investors got good news before the opening bell rang, with initial unemployment claims down by 33,000 to a ten month low. 

Alcoa, which is the first Dow component to report earnings, added to the good news with an unexpected return to profitability.  The company, which is the world's largest aluminum producer and viewed as a leading indicator for the economy, reported earnings of $0.04, much better than the expected loss of $0.09.

Investors also got good news on the retail sales front, with a Thomson Reuters report showing that sales at 30 major chain stores increased by 0.6 percent versus September 2008.  However, many analysts warned that the comparison came against a very weak month last year, as the nationalization of Fannie Mae and Freddie Mac combined with the implosion of Lehman Brothers to cause a huge slump in consumer spending.

Even the organization that represents retailers, the National Retail Federation, warned that continuing high levels of unemployment will cause consumers to be very frugal.  That is an ominous sign for retailers as the holiday season is less than a month away.

Nevertheless, analysts believe that the worst is behind for the economy.  They point to how commodities companies like Alcoa are early cycle plays and that Alcoa's better than expected earnings show how things are improving.

Signs that investors are still skittish remain, though.  Stock mutual funds showed net outflows of $4.2 billion in September, with bonds, which are seen as a safer investment choice, showed inflows of $9 billion.

The Labor Department's initial unemployment claims report showed that initial claims dropped to 521,000.  That figure is a ten month low and is a drop of 33,000 from last week's adjusted 554,000.  Economists had expected a drop in initial claims but not as large of one, with the consensus estimate for a drop of 11,000. 

Continuing claims came in at 6.04 million, down by 72,000 from last week's 6.11 million.  This is the lowest level of continuing claims since March.

Three states reported a drop of more than 1,000 in claims filed, New York, North Carolina, and South Carolina.  On the other hand, Tennessee, Missouri, Illinois, Ohio, and California reported an increase of more than 1,000 claims filed.

Analysts said that companies are now in a position where they are reducing the number of layoffs, but they are still not hiring workers in high enough numbers to offset even a reduced number of firings.  As long as this continues, consumer spending is likely to remain weak.  Consumers that are worried about their jobs don't go and spend money.

Those who are hoping for a second stimulus in order to boost job growth may very well be disappointed.  The Congressional Budget Office estimated that the budget deficit for the year will be $1.4 trillion.  While that isn't stopping some democratic party leaders from talking about the need for additional stimulus measures, the deficit as a percentage of GDP is at its highest levels since World War II.

The White House has already said that it will push to extend enhanced unemployment benefits and provide subsidies to purchase health insurance under COBRA.  However, Senate Majority Leader Harry Reid, who represents the state with the highest level of foreclosures in the nation, wants an extension of a tax credit for first time homebuyers.  The White House believes that doing this would be too expensive for the limited benefit it would provide to the economy.

Congressional leaders are also pushing for a tax credit for new hires.  While President Obama campaigned on this, the provision was dropped after concerns arose that employers could hire workers to take advantage of the credit and then quickly fire them.

Despite this, it's likely that some form of stimulus -- even if it's not called that -- will pass Congress and get signed into law.  For example, there's the transportation spending bill, which funds construction projects that create jobs.  This bill may see more money allocated for construction that would be normal.

According to the Federal Reserve, consumers reduced their debt by an annualized 5.8 percent in August.  Revolving credit, such as credit cards, dropped by an annualized 13 percent and non-revolving credit dropped by 1.5 percent.

The drop in consumer debt was greater than the consensus estimate of a reduction of $10 billion.  Consumers are focused on paying down their credit card bills as the continued weakness in the job market makes them nervous.  In addition, tight credit standards at banks are making it difficult for those who want to borrow to find lenders.

Americans are still carrying $2.46 trillion in debt.  Of this, $900 billion is revolving debt, and that's the debt that consumers are focusing on shedding.  Deleveraging has gone from Wall Street to Main Street, as consumers are following the lead of financial institutions and shedding debt.

August was the 11th month in a row where consumers reduced the amount of debt they're carrying.  Since consumer credit hit its peak of $2.58 trillion in the third quarter of 2008, consumers have reduced their debt by $116 billion.  Most of the debt reduction has come in revolving credit, which as dropped by $76 billion since the third quarter of 2008.

It remains to be seen whether or not the drop in consumer credit is due to a long term shift from borrowing to savings or if it's just a temporary reaction to a tough labor market.  The loss of seven million jobs has certainly contributed to the much higher levels of writeoffs by banks.  Banks have written off 11.5 percent of their loans as uncollectible, up from 10.5 percent in July.

Regardless of whether or not this is a temporary or permanent shift, the shedding of debt by the consumer means that it is likely that consumer spending will remain weak.  And that is going to make it very difficult for the recovery that many economists say we are in to be a strong one.  The threat of a "jobless recovery" is real.  If that is the case, then economists calling the recent rally in stocks and the optimistic outlook for the economy "irrational exuberance" may very well be right.

Australia's central bank, the Reserve Bank of Australia, surprised investors with an interest rate hike.  The bank hiked its main target interest rate by a quarter point to 3.25 percent.  This move was the first move by a major central bank to raise interest rates since the financial crisis hit last fall.

Australia's economy, unlike that of the much of the world, never dipped into recession.  It was insulated from the downturn due to strong demand for its commodities, much of it coming from growing countries in Asia.  Because it never entered a recession, Australia was likely to be one of the first countries to raise interest rates.

However, despite this, analysts didn't expect Australia to increase interest rates so soon.  Analysts said that other countries with economies that have large contributions from commodities, such as Canada and Norway, may raise interest rates soon.  On the other hand, countries like the United States and those in most of Europe are unlikely to do so.

The move by Australia, and hints of a rate hike from other commodity heavy economies, was seen as a sign that the global economy is into its recovery phase.

Not surprisingly, on the news, stocks rallied.  The Dow was up by 1.4 percent to 9,731; the S&P 500 rose by 1.4 percent to 1,055; and the Nasdaq rose by 1.7 percent to 2,104.

However, a number of well known economists said that equities may have risen on "irrationally exuberant" expectations for a recovery.  Nobel Prize winner Joseph Stiglitz warned of "big bumps" on the road to recovery, citing continuing job losses, commercial real estate, and housing as threats to a recovery.  He said that any recovery is going to be "well short of what we need to keep unemployment from growing."

Stiglitz joins New York University professor Nouriel Roubini and George Soros in predicting challenges for the economy and for equities.  Roubini, who correctly predicted the financial crisis, said that there is a significant risk of a correction in the fourth quarter of this year or the first quarter of next year as investors "realize that the recovery is not rapid."

Soros warned that the economic recovery in the United States will be "very slow" and that "the United States has a long way to go."

Some evidence that these men may be right could be found today in trading that occurred with the S&P Retail Index SPDR (XRT).  Despite a prediction from the National Retail Federation that holiday sales will decline by one percent this year, XRT surged by 2.5 percent.  Given that many of those sales will be rung up at high discounts, it's hard to see why a rally in retailers based on a one percent decline in sales is anything other than irrational exuberance.

While it's only early October, the National Retail Federation (NRF) has already come out with its projections for the holiday shopping season.  As you know, retailers depend on the holiday season for much of their revenue, and the fourth quarter is their busiest quarter.

The NRF is predicting that sales for the holiday seaons will decline by one percent.  While that's much better than last year's 3.4 percent drop or the 3.0 percent projections for 2009 as a whole.  However, it's far from a good report and according to the NRF, "falls significantly below the ten-year average of 3.39 percent holiday season growth."  Further, shoppers are expected to "focus primarily on practical gifts and shop on a budget."

As always, though, you can find someone who thinks otherwise.  Beacon Asset Managers writes that holiday "retail sales will surprise to the upside by one to two percent."  They recommend shares of retailers that sell to teens and children, sell boomer health products, or who are e-commerce focused.  Beacon expects that retailers in these areas "should have a bumper year."

Analysis of the report from CNBC can be found below.

in the first six months of the year, 917 jewelers closed their doors so far this year, versus 563 in the same period of 2008.

Citi said that "Tiffany will benefit from market-share gains given capacity withdrawal -- liquidations, store closures -- beginning in the fourth quarter of 2009 as consumer spending stabilizes."

If Citi is right, and Tiffany does better while the retail sector does worse this holiday season, it will prove that once again investors need to keep in mind that it is an market of stocks, not a stock market.

DISCLOSURE:  THE AUTHOR IS LONG TIF AND HOLDS CALLS ON C