Wednesday, November 4, 2009

The Yankees Win

World Series Titles (27)


For Those Keeping Score.....

Some of the above bankruptcies have directly impacted individual investors. For example, CIT and GM issued medium term notes (debt trading in $1,000 increments) that were popular in retirement accounts. These obligations were junior to the larger debt issues that were traded by institutional accounts. As a result, individual investors may have only realized a return of 40 cents on the dollar.

ADP Jobs Report: The Fun Begins

According to data compiled by ADP, non-farm payrolls decreased by 203,000 jobs in October. This was in line with the consensus estimate of -198,000. Job losses among small business totaled 75,000: smallest loss in over a year. Revisions to previous months decreased the number of job losses.

This does not impact my forecast for this Friday's BLS report: a loss of 188,000 jobs. I believe that the economists are forecasting a loss of 175,000, so my guess is not that extreme this time around.

Tuesday, November 3, 2009

Monthly Auto Sales: In the Wake of "Cash for Clunkers"

"Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change."

Bureau of Economic Analysis 10/29/09

Autodata's U.S. Light Vehicle Retail Sales report for October was released today:

Actual sales: 838,052 units

Seasonally adjusted annual rate: 10.46 million units

This compares to a third quarter monthly average of 11.52 million units. What will the fourth-quarter GDP report look like with the end of the CARS incentive program? Great question. An even better question is what was the true cost to the taxpayer?

On 10/28/09, released their analysis of the program: each incremental auto sale cost the taxpayer $24,000. The average transaction price per vehicle (including cash rebates) was $25,248. The White House issued a rebuttal the following day and stood by their findings.

Monday, October 19, 2009

Real Interest Rates & You

Gross domestic product growth is only possible if a component of the
economy deficit spends. This is necessitated by the lag between
production and sale of a product. The majority of the borrowing
shifts between sectors over time, as economic cycles and political
appetites wax and wane. From this perspective, debt serves a useful

On a personal level, the same holds true: income expectations are
greater in the future for a recent college graduate. Therefore,
incurring debt allows the new worker the flexibility to establish a
base for future income.

However, the interest rate of the loan (price of money in a sense) is
not the only consideration when deciding to borrow money. A glance at
the work economist Irving Fisher provides a useful benchmark.

The Fisher Equation:

nominal interest rate = inflation rate + real interest rate + (real
interest rate * inflation rate)

The last term is typically small and ignored when casually calculating
the real interest rate. So:

real interest rate = nominal interest rate - inflation rate

This is important because the net impact of borrowing can only be
calculated with this rate. For example, a consumer borrows $100 for 1
year at 6% simple interest. With the $100, the consumer buys a year's
worth of groceries. In one year, the consumer needs to pay back a
total of $106.

Let's say that over that year, prices were steadily increasing. If the
consumer bought groceries over the course of the year, the average
price would have been $110. The consumer benefited from borrowing and
locking in prices at the beginning of the period.

In equation form: -4% = 6% - 10%

The real interest rate in this case was -4%.

In today's economy, prices are falling (on a year over year basis) as
measured by the Consumer Price Index (this index is used to determine
changes in labor contracts and government assistance payments). In
this case, debt works against he borrower. In essence, the borrower
is taking in "cheap money" today and paying back "rich money"

With regard to businesses, they will borrow money to produce goods if
they can sell those goods at higher prices in the future. There is a
production lag, of course. Goods that are being manufactured today
usually aren't sold today.

Companies need more pricing power when interest rates are higher. As
we know, corporate credit is terribly expensive. The last few CPI
releases shows us that they do not have the requisite pricing power to
borrow at current rates. This is the danger of deflation. Why would a
consumer borrow money to lock in prices if prices are going to fall?
Why would a business borrow money to produce goods that will drop in
price? No demand for debt........

Yet, real interest rates are not low by recent historical standards.
The graph below tracks a bank lending rate (nominal proxy) versus an
inflation rate (CPI). The government is failing miserably at creating
an environment that will promote growth. THEY NEED TO STOP BEFORE THEY
INSURE A DEPRESSION FOLLOWS. Let the savings rate rebound and suffer
the pain of inventory and consumption correction. Issuing debt is only
increasing real interest rates and cutting the recovery off at its

Friday, October 2, 2009

Jobs Picture: Not Good

Headline print: -263,000

My estimate: -259,000

Net revisions to the previous 2 months negative as well.

Friday, September 18, 2009

Quelle Surprise ???

FDIC May Tap Treasury Line to Bolster Insurance Fund, Bair Says

Thursday, September 17, 2009

Back To Retail Sales: Gas Prices

Please refer to Tuesday's retail sales post:

According to the CPI, Gasoline prices surged 9.1% from July to August.

Therefore, rising prices had a material impact on the "sales at gasoline stations" component of the retail sales report.

Weekly Jobless Claims

With this week's jobless claims numbers in the books, I am forecasting a non-farm payroll tally of:


I think the consensus will be about -205,000.

Incidentally, in order for the non-farm payroll number to hit zero, my model suggests that the weekly jobless claim number needs to be roughly 375,000.

Tuesday, September 15, 2009

The FDIC's Balance Sheet

A few days ago, I made mention of the FDIC's contingent liability for future failures. It was mentioned in a speech by the Chair of the FDIC. I looked into this and came away with the following:

The balance of the Deposit Insurance Fund is kind of like the FDIC's capital. As of 6/30/09, the FDIC held about $64.8 billion in assets. Liabilities (including the one mentioned above) totaled about $54.4 billion. The fund balance was the difference: $10.4 billion.

In an accounting framework: assets = liabilities + capital

It seems to me that the FDIC creates reserves against payout events. The monies shift from the fund balance (capital) to the liability column. As the payouts actually occur, the FDIC decreases the liability and decreases assets.

As of 6/30/09, $32 billion sits in this contingent liability for future failures. The key issue then becomes the amount the FDIC is able to salvage from the banks that collapse. If the payout events are lower than anticipated, I guess that the FDIC can shift part of the balance out of the liability, back into the capital category. Has the FDIC been conservative enough? How likely is this outcome? Based on their past actions, I would say that recoveries will be dwarfed by new events.

In conclusion, we need to monitor both the fund balance and contingent liability to assess the (poor) health of the FDIC.


Of course, this Fund backs over $4.8 trillion in insured deposits. That $4.8 trillion is a low-ball estimate because it is based on the $100,000 limit, not the current $250,000 limit. Let's not forget the other programs & guarantees that the FDIC now provides as well. Your money in the bank is safe, but who will foot the bill? YOU WILL !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! The FDIC has actually promoted high risk taking behavior and needs to be dramatically alerted to fulfill its advertised purpose.

Another Quick Note

The Empire Manufacturing Survey indicated that manufacturing activity in New York State expanded at a considerable rate. The number of firms reporting higher prices paid increased substantially as well. However, the majority of forms reported that the prices they received declined.

Since these are diffusion indices, it is not possible to simply add them up and compute margins, but it seems clear that pricing power continues to elude manufacturers.

Is you paycheck going further because prices are declining or because your buying decisions have changed?

Is your paycheck going further in the first place?

Please leave a comment.

Quick Note

The population of the U.S. of A. has increased by 24.6 million in the last 9 years.

The number of jobs has decreased by 563 thousand in the same time frame.

Does that worry you?

Please leave a comment.

Inside The Data

Retail Sales

Retail sales increased by 2.67% from July to August. This move was considerably higher than economists were predicting. The dollar increase from month to month was $9.138 billion. The important thing to remember is that this retail sales number DOES NOT adjust for price increases. Therefore, if a good increases in price but the quantity sold remains unchanged, this number still rises.

Motor vehicle sales accounted for 67.1% of that $9.138 billion increase. I am not prepared to determine how much was due to the cash for clunkers program, but I would guess it was a considerable amount.

The other major contributor to this report was sales at gasoline stations. The number jumped 5.09% or $1.512 billion from the previous month.

So far in 2009, retail sales are running 8.65% behind last year's pace.


Producer prices increased more than forecast last month. The major culprit in this report was the rise in energy prices. We'll have to wait until the CPI report to see if these increases were passed on to the consumer. This will help us analyze the gasoline component of the retail sales report.

Sunday, September 13, 2009

Bank Failure Update

2009 total hit 92 on Friday, finally including Corus Bank. The Fund drifted further into negative territory, all but insuring another special assessment in early 2010 (there are already plans for a special assessment later this year). As I've noted in the past, this is the worst time to increase bank expenses. How the FDIC saw fit to charge zero premiums for several years is well beyond my ability to comprehend.

Big Week for Data

DateTime (ET)StatisticForActualBriefing ForecastMarket ExpectsPriorRevised From
Sep 158:30 AMCore PPIAug-0.0%0.1%-0.1%-
Sep 158:30 AMPPIAug-1.0%0.8%-0.9%-
Sep 158:30 AMRetail SalesAug-2.1%1.9%-0.1%-
Sep 158:30 AMRetail Sales ex-autoAug-0.1%0.4%-0.6%-
Sep 158:30 AMEmpire ManufacturingSep-13.0015.0012.08-
Sep 1510:00 AMBusiness InventoriesJul--1.2%-0.8%-1.1%-
Sep 168:30 AMCore CPIAug-0.0%0.1%0.1%-
Sep 168:30 AMCPIAug-0.2%0.3%0.0%-
Sep 169:00 AMNet Long-term TIC FlowsJul-NANA-31.2B-
Sep 169:15 AMCapacity UtilizationAug-69.6%69.1%68.5%-
Sep 169:15 AMIndustrial ProductionAug-1.0%0.7%0.5%-
Sep 1610:30 AMCrude Inventories09/11-NANA-5.91M-
Sep 1610:35 AMCrude Inventories09/11-NANANA-
Sep 178:30 AMBuilding PermitsAug-575K596K564K-
Sep 178:30 AMHousing StartsAug-570K580K581K-
Sep 178:30 AMInitial Claims09/12-565K555K550K-
Sep 178:30 AMContinuing Claims09/05-6000K6114K6088K-
Sep 1710:00 AMPhiladelphia FedSep-