The Yankees Win

World Series Titles (27)

2009 • 2000 • 1999 • 1998
1996 • 1978 • 1977 • 1962
1961 • 1958 • 1956 • 1953
1952 • 1951 • 1950 • 1949
1947 • 1943 • 1941 • 1939
1938 • 1937 • 1936 • 1932
1928 • 1927 • 1923

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.

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."

GROSS DOMESTIC PRODUCT: THIRD QUARTER 2009 (ADVANCE ESTIMATE)
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, Edmunds.com 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 Edmunds.com stood by their findings.

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
purpose.

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"
tomorrow.

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
knees.

Jobs Picture: Not Good

Headline print: -263,000

My estimate: -259,000


Net revisions to the previous 2 months negative as well.

Quelle Surprise ???

http://www.bloomberg.com/apps/news?pid=20601087&sid=aDU.kmI1.p0Y


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

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:

-259,000

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.

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.

Postscript:


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.


PPI




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.

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

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior	Revised From
Sep 15	8:30 AM	Core PPI	Aug	-	0.0%	0.1%	-0.1%	-
Sep 15	8:30 AM	PPI	Aug	-	1.0%	0.8%	-0.9%	-
Sep 15	8:30 AM	Retail Sales	Aug	-	2.1%	1.9%	-0.1%	-
Sep 15	8:30 AM	Retail Sales ex-auto	Aug	-	0.1%	0.4%	-0.6%	-
Sep 15	8:30 AM	Empire Manufacturing	Sep	-	13.00	15.00	12.08	-
Sep 15	10:00 AM	Business Inventories	Jul	-	-1.2%	-0.8%	-1.1%	-
Sep 16	8:30 AM	Core CPI	Aug	-	0.0%	0.1%	0.1%	-
Sep 16	8:30 AM	CPI	Aug	-	0.2%	0.3%	0.0%	-
Sep 16	9:00 AM	Net Long-term TIC Flows	Jul	-	NA	NA	-31.2B	-
Sep 16	9:15 AM	Capacity Utilization	Aug	-	69.6%	69.1%	68.5%	-
Sep 16	9:15 AM	Industrial Production	Aug	-	1.0%	0.7%	0.5%	-
Sep 16	10:30 AM	Crude Inventories	09/11	-	NA	NA	-5.91M	-
Sep 16	10:35 AM	Crude Inventories	09/11	-	NA	NA	NA	-
Sep 17	8:30 AM	Building Permits	Aug	-	575K	596K	564K	-
Sep 17	8:30 AM	Housing Starts	Aug	-	570K	580K	581K	-
Sep 17	8:30 AM	Initial Claims	09/12	-	565K	555K	550K	-
Sep 17	8:30 AM	Continuing Claims	09/05	-	6000K	6114K	6088K	-
Sep 17	10:00 AM	Philadelphia Fed	Sep	-	10.0	8.0	4.2	-

Jobs Data: Weekly Claims

Weekly jobless claims came in a bit better than expectations at 550,000 (initial claims). Continuing claims are still hovering over 6 million, I have noted in past posts that interpreting this number is becoming more difficult because of the expiration of benefits.

We now have 3 of the 4 weeks in for modeling the September non-farm payroll report. The survey period ends on the 12th of each month, so the last 3 weeks of initial claims correspond to that time frame. The average initial claims for the last 3 weeks is 568,000: according to my model, this points to a drop of about 250,000 in non-farm payrolls.

This is a major problem. I know, job losses have slowed. However, could somebody please explain to me where people are going to get money to pay for stuff:

- Home prices are down roughly 18% from last year: no mortgage equity withdrawal

- Unemployment is creeping up on 10%: no jobs & wage pressure crimp income

- Expiration of unemployment insurance: no more weekly help form the government

- Consumer credit is falling: can't roll over debts any longer or borrow additional funds

- Negative wealth effect: equities have rallied since March, but are still below 2008 levels.

Keeping It Simple

The above graph tracks the consumer as a share of our economy. The ratio has increased over the years, but i believe that it is safe to say that consumption has been a large part of our economy for quite some time. This ratio topped 70% (70.14% to be exact) for only the second time in 2008.

The Fed's release of consumer credit data garnered considerable attention yesterday. The graph below tracks the last few years of data:



The trend has clearly been broken: 6 consecutive months of declining, declining in 10 of the last 12 months.

Using a simple regression model:

Forecast of consumer credit stabilizing at July's level.


- Personal consumption expenditures drop to $9.44 trillion

- Nominal GDP drops to $13.49 trillion

- Annual decline of 6.6% in Nominal GDP

In conclusion, with rising unemployment, a negative wealth effect (year over year) and falling available credit, I do not see a significant rebound in growth.

Short Week, Not Much Data

==============================================================
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
==============================================================
Cons. Credit $ Blns       9/8       July     -10.3      -4.0
ABC Conf Index            9/8     Sept. 7     -45       -44
MBA Mortgage Applicatio   9/9     Sept. 5    -2.2%      n/a
Trade Balance $ Blns      9/10      July     -27.0     -27.4
Initial Claims ,000’s     9/10     29-Aug     570       560
Cont. Claims ,000’s       9/10     22-Aug     6234      6200
Import Prices MOM%        9/11      Aug.     -0.7%      1.0%
Import Prices YOY%        9/11      Aug.     -19.3%    -15.9%
U of Mich Conf. Index     9/11    Sept. P     65.7      67.5
Whlsale Inv. MOM%         9/11      July     -1.7%     -1.0%
Federal Budget $ Blns     9/11      Aug.     -111.9    -159.1
==============================================================

Bank Failure Update

Starting with this post, the failure list will include only 2009 banks gone bust. The file has become too big to fit properly on blogger.

Five more yesterday, bringing the year's total to 89. Bank management and regulation has turned out to be neither a fail-safe or deterrent from greed and speculation. The Deposit Insurance fund is now empty and will require additional assessments to pay off future failures. Of course, the FDIC can always borrow from the Treasury and saddle us with the bill.

The Chair of the FDIC mentioned a contingent reserve fund during a press conference a few weeks back. I'm not sure about what this exactly is, but it seems to be store of funds that the FDIC draws fund. I will research this.


- Deposit Insurance Fund on 6/30/09: $10.368 billion

- Cost of failures since 6/30/09: $11.125 billion

- Current balance (excluding interim income): ($757 million)

Non-Farm Payrolls: Historical

Not a very impressive run for the last few years. Shedding jobs for the sake of increased margins is great for shareholders, not so good for households.

Non-Farm Payrolls

According to the monthly BLS report, the economy lost 216,000 jobs last month. This was better than the consensus loss of 230,000 and certainly better than my guess (loss of 262,000). However, the BLS revised the June number and July number: 20,000 more jobs lost and 29,000 more jobs lost respectively. Oddly enough, that totals 265,000. My gut tells me that my numbers will be close to the revised value.

The cumulative job losses since December, 2007 are essentially the same between the two surveys: 6.8 million for ADP & 6.809 million for BLS.

The last two weekly unemployment claims coincide with the survey period for the September BLS tally. As it stands, I believe we are heading for another loss of at least 200,000 jobs.

ADP Jobs Report

ADP reported that businesses cut another 298,000 jobs last month. The data for the previous two months was revised slightly upwards, mitigating this worse than expected report. Forty-nine percent of the job losses were in the service providing sector.

Since & including 12/2007:

- 6.8 million jobs lost

- average monthly job loss of 324,000

- 19 consecutive months of losses

The economy now has the same amount of jobs as it did in December, 2003.


For what it's worth, I am forecasting that the BLS will report a loss of 262,000 on Friday. If my forecast is accurate (and that is a big if...):

Recession Recession Change In Start End Non-Farm Payrolls Nov-73 Mar-75 -1.62% Jan-80 Jul-80 -1.07% Jul-81 Nov-82 -3.08% Jul-90 Mar-91 -1.13% Mar-01 Nov-01 -1.21% Dec-07 ? -5.01%

This is a recession not like many others. The above table tracks the job loss (according to the BLS) during the last few recessions.

Update: Corporate Bankruptcies

We've only just begun......



As a side note, last week's bank failures reduced the FDIC bankroll to a few hundred million dollars (my guesstimate). They have announced a plan to levy another "special assessment" this year and another one in the first quarter of 2010. The Quarterly Banking Profile will be released later today, so we can get the latest numbers.

GDP & Japan: Imperfect Together

Asian equity markets are not responding kindly to the latest economic data out of Japan. Second quarter GDP growth came in at 3.66% (annualized), the market was looking for a number closer to 3.9%.

This means that economic activity in Japan is where it was in December, 2004. Yep, no growth in over 4 years. No wonder why the Nikkei is down over 2% and Chinese stock indices are down between 2% and 3%.

U.S. equity futures are trading lower as well, pointing to a drop of about 0.4% at this time.

Economic Data Coming Up

===============================================================
                       Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
===============================================================
Empire Manu. Index        8/17      Aug.      -0.6      3.0
Net Long Term TICS $ Bl   8/17      June     -19.8      17.5
Total TICS $ Blns         8/17      June     -66.6      23.0
NAHB Housing Index        8/17      Aug.       17        18
PPI  MOM%                 8/18      July      1.8%     -0.3%
Core PPI MOM%             8/18      July      0.5%      0.1%
PPI  YOY%                 8/18      July     -4.6%     -5.9%
Core PPI YOY%             8/18      July      3.3%      2.8%
Housing Starts ,000’s     8/18      July      582       598
Building Permits ,000’s   8/18      July      570       575
Initial Claims ,000’s     8/20     8-Aug      558       550
Cont. Claims ,000’s       8/20     1-Aug      6202      6228
Philly Fed Index          8/20      Aug.      -7.5      -2.0
LEI  MOM%                 8/20      July      0.7%      0.7%
Exist Homes Mlns          8/21      July      4.89      5.00
Exist Homes MOM%          8/21      July      3.6%      2.1%
===============================================================

Failure Friday: Back With a Bang

Five more banks were shuttered today, one really tiny, one fairly large and three in the middle. The biggest one was Colonial Bank, located (formerly, I guess) in Alabama. Colonial could not sustain the losses they suffered from an ill conceived foray into Florida real estate.

As a result, we are much closer to insuring our own deposits. I know that I have been harping on this for quite some time, but the de facto insolvency of the FDIC (along with the PBGC, NCUA and the continuing conservatorship of Fannie and Freddie) is transferring the financial burden of failure from the risk takers to the tax payers. This is not capitalism.

In review:

- 77 bank failures in 2009

- Cost of 2009 failures: $18.3 billion

Since the most recent FDIC quarterly report:

- Insurance Fund balance on 3/31/09: $13 billion

- Cost of failures since 3/31/09: $16 billion

- Special assessment income (one time): $5.7 billion

- Additional income (my estimate): $1.25 billion

- Current balance: $3.95 billion

Workers Continue To Lose Jobs: ADP Report

371,000 jobs were lost in July according to today's ADP Employment Report. June was revised to a loss of 463,000 jobs (previous estimate was -473,000). The goods producing sector continues to fare much worse than the services sector, losing 4 times as many jobs on a percentage basis.

= Since (and including) 12/2007: 6,543,000 jobs lost

= 18 consecutive months of job losses (average loss of 368,000)

= The economy now has the same number of jobs as it did in March, 2004

The BLS will release its report on Friday. My guess: loss of 355,000 jobs

Financial Stocks & Dilution

Since the financial nightmare of late 2008, financial institutions have engaged in various capital raising ventures. Included in this is an increase in the number of common shares outstanding. Please remember this when bidding up the shares: market capitalization is the product of share price and shares outstanding !!!!!!!!!

For example:

Bank of America

Average common shares issued & outstanding Q2 2009: 6.81 billion


Average common shares issued & outstanding Q2 2008: 4.43 billion

Therefore, today's close of $15.64 per share of common stock is roughly equivalent to a price of $24.04 from 1 year ago (keeping market cap constant).

Not something we are accustomed to thinking about.....

....And By The Way...

(Eurozone Data immediately above)

It may be the same situation overseas. Pleas don't forget:

2008 GDP Estimates (Courtesy of the CIA World Factbook):

European Union: $14.8 trillion

USA: $14.3 trillion

Japan: $4.3 trillion

These 3 entities comprise 48% of the world's GDP. I dare say they determine the path.

"Why oh Why Didn't I Take the Blue Pill?"

It has been my contention that the amount of slack in our economy is too great to allow for a quick rebound:



The above graphs pint out the excess in the manufacturing sector, the abundance of workers without employment and the excess of goods (falling prices).

As I have mentioned before, inflation is related to the growth of money supply. Some have mentioned that the decline in prices is mainly due to falling energy prices. This is true to some extent, but I would also like to point out the following:



Money supply growth, although positive, is hardly expanding at alarming rate. Especially when one considers the following:



So not only is there slack, but the government's efforts to reflate are not of the magnitude that many perceive.

Here is why:



Banks are STILL not lending, choosing to hang onto cash in unprecedented proportions. Be careful greenshooter..........

Update: FDIC Continues to Bleed Dry

This week's tally: 5 bank failures, $911.7 million in losses

This year's tally: 69 bank failures, $14.45 billion in losses


According to my estimates (please see post on 7/25/09), the FDIC's fund is well under $8 billion. This amount of money is backing over $4.8 trillion in insured deposits. Would you allow your insurance company to operate that way? Would you agree to bail out your insurance company if they screwed up? Well, then why is the FDIC so special??????

Another Big Data Week

================================================================
                       Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
================================================================
ISM Manu Index            8/3       July      44.8      46.5
ISM Prices Index          8/3       July      50.0      51.5
Construct Spending MOM%   8/3       June     -0.9%     -0.5%
Vehicle Sales Mlns        8/3       July      9.7       10.0
Domestic Vehicles Mlns    8/3       July      7.2       7.4
Pers Inc MOM%             8/4       June      1.4%     -1.0%
Pers Spend MOM%           8/4       June      0.3%      0.3%
PCE Deflator YOY%         8/4       June      0.1%      0.2%
Core PCE Prices MOM%      8/4       June      0.1%      0.2%
Core PCE Prices YOY%      8/4       June      1.8%      1.7%
Pending Homes MOM%        8/4       June      0.1%      0.6%
ISM NonManu Index         8/5       July      47.0      48.0
Factory Orders MOM%       8/5       June      1.2%     -0.6%
Initial Claims ,000’s     8/6      18-Jul     584       580
Cont. Claims ,000’s       8/6      11-Jul     6197      6245
Nonfarm Payrolls ,000’s   8/7       July      -467      -325
Unemploy Rate %           8/7       July      9.5%      9.6%
Manu Payrolls ,000’s      8/7       July      -136      -105
Hourly Earnings MOM%      8/7       July      0.0%      0.1%
Hourly Earnings YOY%      8/7       July      2.7%      2.5%
Avg Weekly Hours          8/7       July      33.0      33.0
Cons. Credit $ Blns       8/7       July      -3.2      -4.2
================================================================

Press Catches Up to Us: Taxpayers Are Losers

WSJ article:

http://online.wsj.com/article/SB124897332666294327.html

GSEs Unlikely to Repay U.S. in Full


Please refer to my post on July 10, 2009.

http://populus-vox.blogspot.com/2009/07/taxpayer-will-never-be-paid-back.html

Update: Corporate Bankruptcies

Recent CDS Auctions:

Lear Corporation CDS: 38.5 cents on the dollar

Six Flags, Inc. CDS: 14 cents on the dollar

Visteon Corporation CDS: 3 cents on the dollar

General Motors Corporation CDS: 12.5 cents on the dollar


I guess there is risk in lending to corporate America............

S&P 500 Earnings

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUbVti8SvAMA

Surging Profit Estimates Signal 26% Rally for S&P 500

In the above linked article, the authors state that "Wall Street firms estimate the S&P 500 will earn $74.55 a share next year." They neglect to mention that this is on an OPERATING basis. It does not include items that are not perceived to be parts of everyday business, e.g. write-offs.

In my posts regarding equity valuation, I have been relying on S&P's own estimate of AS REPORTED earnings. My reasoning is that these write-offs have been so pervasive and consequential, that ignoring them would vastly overstate future earnings potential.

For calendar 2010, S&P estimates operating earnings of $74.01, not too far from the Street consensus. However, their as reported number comes in at $37.26. That is basically one-half of operating earnings. The below graph tracks the ratio of the reporting methods. You be the judge. (Note: my analysis consistently tracks historical as reported numbers, I NEVER combine apples & oranges.)

New Home Sales: Some Perspective

New home sales surpassed estimates: 384,000 vs. 352,000

However, please take note:

- This represents a 21.3% fall from June, 2008

- The median price has fallen 12% from June, 2008 and 5.8% from May, 2009

- Inventory stands at 8.8 months. This is a marked improvement from the last few months, but still exceeds the 20 year average of 5.8 months

Upcoming Data Calendar

================================================================
                       Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
================================================================
New Home Sales ,000’s     7/27      June      342       352
New Home Sales MOM%       7/27      June      2.7%      2.9%
Case Shiller Monthly YO   7/28      May      -18.1%    -17.9%
Case Shiller Monthly In   7/28      May      139.2     138.6
Consumer Conf Index       7/28      July      49.3      49.0
Durables Orders MOM%      7/29      June      1.8%     -0.6%
Durables Ex-Trans MOM%    7/29      June      1.1%      0.0%
Initial Claims ,000’s     7/30     18-Jul     554       580
Cont. Claims ,000’s       7/30     11-Jul     6225      6300
GDP Annual QOQ%           7/31      1Q A     -5.5%     -1.5%
Personal Consump. QOQ%    7/31      1Q A      1.4%     -0.5%
GDP Prices QOQ%           7/31      1Q A      2.8%      1.0%
Core PCE Prices QOQ%      7/31      1Q A      1.6%      2.4%
Employ Costs QOQ%         7/31       2Q       0.3%      0.3%
Chicago PM Index          7/31      July      39.9      43.0
NAPM Milwaukee Index      7/31      July      50.0      52.0
================================================================

Failure Friday Update

- 64 banks have failed in 2009

- Insurance fund balance on 3/31/09: $13 billion

- Cost of failures since 3/31/09: $11.26 billion

- Special assessment income (one time): $5.7 billion

- Additional income (my estimate): $1.2 billion

- Current balance: $8.64 billion

It is a certainty that the FDIC will run out of funds and tap their credit line with the Treasury Department. This will necessitate the issuance of more Treasury debt and increase the burned n the taxpayer.

Another Poor Showing For U.K. GDP

The U.K.'s GDP number for the second quarter surprised to the downside: 0.8% decline. Some forecasters were actually predicting an expansion. Remember, this number is not annualized: our BEA would have reported this number as a drop of 3.2% (please see the post on June 30, 2008 regarding calculation methods).

Existing Home Sales

June existing home sales slightly bested expectations. The above graph tracks the median sales price versus the amount of existing home inventory since January, 2008. I am less impressed by the month over month improvement than I am by the year over year performance. June's combination of seasonal factors, pricing and mortgage rates was enough to lure the most buyers into the market in over 12 months (and mortgage rates hit their highs in June)*.

*based on actual number of sales recorded for that month (not annualized)

Weekly Jobless Claims: More Seasonal Impacts

Initial jobless claims came in an 554,000: just around the consensus estimate. Back on July 9, I mentioned that seasonal adjustment factors would distort this number for a few weeks. Starting with next weeks report, the number will jump dramatically higher. In fact, if next week's factor was applied to this week's report, the number would have been 669,000 !!!!!

The same can be said for the continuing claims number, although to a lesser extent. I have also noted in past posts that this number becomes tougher to interpret because we don't know why this number is falling; new jobs or expiration of benefits?

In summary:

UNEMPLOYMENT INSURANCE DATA FOR REGULAR STATE PROGRAMS

---

	Advance				Prior1
WEEK ENDING	July 18	July 11	Change	July 4	Year

---

Initial Claims (SA)	554,000	524,000	+30,000	569,000	413,000
Initial Claims (NSA)	580,944	671,242	-90,298	581,145	411,408
4-Wk Moving Average (SA)	566,000	585,000	-19,000	607,000	393,000

	Advance				Prior1
WEEK ENDING	July 11	July 4	Change	June 27	Year

---

Ins. Unemployment (SA)	6,225,000	6,313,000	-88,000	6,904,000	3,165,000
Ins. Unemployment (NSA)	6,231,108	6,173,940	+57,168	6,061,619	3,164,970
4-Wk Moving Average (SA)	6,541,500	6,674,000	-132,500	6,774,250	3,176,000

---

Ins. Unemployment Rate (SA)2	4.7%	4.7%	0.0	5.2%	2.4%
Ins. Unemployment Rate (NSA)2	4.7%	4.6%	+0.1	4.5%	2.4%

Equity Market Valuation

Having now entered the 2nd quarter earnings season (37 of the S&P 500 companies have reported so far), it seems like the right time to review valuations:

S & P 500 closed at 954.58 yesterday

My fair value opinion: 726.97

The index needs to drop 23.84% to compel me to buy.

At 726.97, the earnings yield would equal the long term average of 4.795%

The earnings yield at current levels is 3.652%.

The earnings yield calculations are based on 2010 numbers: using S & P's forecasts, I arrived at a figure of $34.86.

Lots 'o Data Coming Up

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior	Revised From
Jul 13	2:00 PM	Treasury Budget	Jun	-	NA	-$77.5B	$33.5B	-
Jul 14	8:30 AM	Core PPI	Jun	-	NA	0.1%	-0.1%	-
Jul 14	8:30 AM	PPI	Jun	-	NA	0.8%	0.2%	-
Jul 14	8:30 AM	Retail Sales	Jun	-	NA	0.5%	0.5%	-
Jul 14	8:30 AM	Retail Sales ex-auto	Jun	-	NA	0.5%	0.5%	-
Jul 14	10:00 AM	Business Inventories	May	-	NA	-1.0%	-1.1%	-
Jul 15	8:30 AM	Core CPI	Jun	-	NA	0.1%	0.1%	-
Jul 15	8:30 AM	CPI	Jun	-	NA	0.6%	0.1%	-
Jul 15	8:30 AM	Empire Manufacturing	Jul	-	NA	-5.00	-9.41	-
Jul 15	9:15 AM	Capacity Utilization	Jun	-	NA	67.9%	68.3%	-
Jul 15	9:15 AM	Industrial Production	Jun	-	NA	-0.6%	-1.1%	-
Jul 15	10:00 AM	Business Inventories	May	-	NA	NA	NA	-
Jul 15	10:30 AM	Crude Inventories	07/10	-	NA	NA	-2.90M	-
Jul 15	2:00 PM	Minutes of FOMC Meeting	June 24	-	-	-	-	-
Jul 16	8:30 AM	Initial Claims	07/11	-	NA	NA	565K	-
Jul 16	9:00 AM	Net Long-Term TIC Flows	May	-	NA	NA	$11.2B	-
Jul 16	10:00 AM	Philadelphia Fed	Jul	-	NA	-5.0	-2.2	-
Jul 17	8:30 AM	Building Permits	Jun	-	NA	523K	518K	-
Jul 17	8:30 AM	Housing Starts	Jun	-	NA	530K	532K	-

The Taxpayer Will Never Be Paid Back

Please click the above graphs to expand. Theses graphs track the cumulative annual earnings for each company (1999, 1999 + 2000, 1999 + 2000 + 2001, etc.). For example, Freddie Mac's net income from 1999 - 2007 was $28.28 billion. Keep this in mind when evaluating the following (I used the most conservative measure of government investment, so use your imagination if you want to see how much worse it can get.):

Freddie Mac:

Current Market Capitalization: $360 million

Government Investment: $50.7 billion

2009 Q1 Earnings: -$10.2 billion


Fannie Mae:

Current Market Capitalization: $570 million

Government Investment: $34.2 billion

2009 Q1 Earnings: -$23.2 billion


AIG:

Current Market Capitalization: $1.3 billion

Government Investment: $69.8 billion

2009 Q1 Earnings: -$5.4 billion

GM:

Current Market Capitalization: $702 million

Government Investment: $50.7 billion

2009 Q1 Earnings: -$6 billion


Quite simply, how are these companies going to generate the earnings to pay the taxpayer back? Why would the government invest so much money when the stock market is placing a dramatically lower valuation on these companies? Question for the ages.....

Weekly Jobless Claims: Take Note of Seasonal Factors

Initial jobless claims fell below 600,000 for the first time since late January. This came in lower than most estimates. Continuing claims resumed their upward climb, eclipsing 6.8 million in this week's report.

It is worth noting that the seasonal factors for the next 2 weeks (this week's report as well) are considerably different from the last few weeks. In fact, if the same factor from last week as used in this week's report, the initial claims figure would have been 637,000!

This is one of the major reasons why one week's worth of data is of nominal importance.

The below link will bring you to the whole report:

http://www.dol.gov/opa/media/press/eta/ui/current.htm