Tuesday, March 31, 2009
Useful table at end or article.
Monday, March 30, 2009
Spain sports an unemployment rate of around 14%.
On a side note, I mentioned to a loyal reader on Friday that I believed a major U.S. bank (either Citi or BoA) would be nationalized within 45 days. It would be a major policy shift, but there is no choice. Target date: May 7, 2009.
Saturday, March 28, 2009
- Rip off the taxpayer to create a great deal for private bidders in acquiring junk assets from banks
- The banks, now that they have received a taxpayer supported, higher price for their junk assets, will lend again
- Economy will be saved
We all know that I hate this plan and that the only solution is bank nationalization. One of the big ones (Citigroup or Bank of America) will be reduced to a zero stock market value, but they probably all should be annihilated. I truly believe that the entire system is insolvent.
Anyway, you would think that as a result of this plan, the junk assets would improve in price. However, that is not the case.
The above graph tracks the price of credit default swaps on asset backed securities. The principal underlying loans for these securities are residential mortgages. The blue line shows the price range for each index and the red tick mark indicates Friday's closing price. For this index, the lower the price, the more expensive the credit protection. Notice that some indices hit new all time lows on Friday.
The above graph tracks the price of protection on securities backed by commercial mortgages. It works the opposite way: the higher the spread, the more expensive the protection. Once again, new highs for some indices.
So, either the market believes that the plan will not actually come to fruition or that the assets are so junky, that there is now way to save them. Either way, the rally in bank stocks is premature.
Friday, March 27, 2009
Thursday, March 26, 2009
In today's earlier post, I compared nominal GDP to the federal debt. That is because I made no adjustment for inflation when calculating the national debt (comparing apples to apples).
The above graph is adjusted for inflation. It is a more accurate snapshot of economic activity, no pricing distortions.
New home sales were released yesterday and the hoopla reignited because there was an uptick from the previous month. Judging from the below graph, would you be confident in saying the worst was over?
Another blogger made a great point: the increase might not have even happened. The increase from the previous month was 4.7%. However, the margin of error was plus/minus 18.3%. This certainly marginalizes the prospect of a bottom. This number is subject to revision, so the prudent step may to wait until April until proclaiming a bottom.
The graph below is included just for fun.
Before we dive into this topic, I would like to review a few things. The above table tracks the Debt of the General Fund for the last 35 years or so. After perusing the data (please click on table to expand), it is easy to dispense with the typical political name calling. This is not a political issue anyway, it is a question of a sustainable monetary and banking system. The numbers for the Obama presidency are my own estimates.
The growth over time is substantial. This is only one side of the issue though. For example, private companies often borrow money as a standard means of operating. The key for the lender is whether or not the borrower is making money and has stable operating margins. This is a simplified analysis, but the point is that borrowing can make sense.
The above table tracks the Gross Domestic Product (nominal terms) of the U.S. You will notice that, at best, GDP was growing as fast as the debt. GDP is a proxy for the revenue of the Federal Government since it gives us an idea of the potential tax revenue. If the economy is growing, corporate income tax receipts rise and personal income tax receipts rise.
This is the problem: the ratio of debt to GDP has increased from 33.2% to 69.6%. If my projections are on target, the ratio will rise to 88.2% by the end of Obama's first (only?) term. This is why China and other creditors are making noise about the fiscal position of our country. How can we pay off the debt if the tax base is losing ground?
After further analysis, we will see that the following identity exists in our monetary system: money = debt. Hence the current paradox. The market doesn't want more debt, but more money is needed to promote growth.
March 26 (Bloomberg) -- Billionaire investor George Soros said U.S. commercial real estate will probably drop at least 30 percent in value, causing further strains on banks.
“Commercial real estate has not yet fallen in value,” Soros, speaking at a forum in Washington, said. “It is inevitable, it is written, everybody knows it, there are already some transactions which reflect and anticipate it, so we know, they will drop at least 30 percent.”
On March 5th, I mentioned that I thought an equity market rally was on the horizon. Back on March 16, I thought the rally would take the Dow over 7,500 by month end. The rally has indeed taken the index over that level, closing above 7,900 today. Trading volume in the Dow components has started to drift lower over the last few sessions and more than half of the 12/31/08 - 3/9/09 loss has been recouped. I think tomorrow will be the beginning of the end of the rally.
Tuesday, March 24, 2009
"The Geithner plan is very badly flawed," Stiglitz told Reuters in an interview during a Credit Suisse Asian Investment Conference in Hong Kong.
U.S. Treasury Secretary Timothy Geithner's plan to wipe up to US$1 trillion in bad debt off banks' balance sheets, unveiled on Monday, offered "perverse incentives," Stiglitz said
By Tiffany Kary
March 24 (Bloomberg) -- Dial-a-Mattress and its brand-name retailer 1-800-Mattress filed for bankruptcy court protection after creditors tried to force it into court protection last week.
The petitions for Chapter 11 bankruptcy filed in federal court in Brooklyn, New York, yesterday both listed under $50,000 in debt and assets. The New York City-based company had faced involuntary bankruptcy after Sealy Corp., the world’s biggest bedding maker, and two other companies owed a total of $1.65 million filed a Chapter 7 petition against it March 17.
Monday, March 23, 2009
The Treasury will allocate $75 billion to $100 billion from the TARP, so this is not new money being added to the fix. This program also has the same problem as the initial TARP: banks will become insolvent as they participate. The losses that will be incurred as a result of the market priced sale will deplete bank capital. Paradoxically, there will be fewer TARP funds available to prop up bank losses because of the funding of the PPPIP.
In addition, there is a non-trivial amount of leverage being employed to arrive at the initial $500 billion infusion of funds:
- Bank offers to sell loans
- The FDIC would evaluate the loans and decide how much of the pool they would guarantee
- Private sector bidders would then bid on the loan package
- The Treasury would finance 50% of the funds due
- Bank seeks to sell loans, $100 face value
- The FDIC determines that they are willing to provide leverage of 6 to 1 (maximum allowable under program)
- Private sector buyer wins the pool with a bid of 84 cents on the dollar
- FDIC provides guarantee of 72 cents on the dollar [(6/7) * 84 cents]
- Private sector buyer provides 6 cents, Treasury provides 6 cents
Buying securities process:
- Private sector buyer provides $100 in capital
- Treasury provides $100 in capital
- Treasury provides $100 - $200 in loans to the new fund
- Fund has access to TALF
It looks to me that the Treasury thinks that the problem is nowhere near being solved. This is attractive to the private sector because they can basically return to their old leverage ratios while DC picks up the tab. Of course, this will not work for the economy. This program tells us how little interest there is in buying debt and all they want to do is issue more debt.
The above graph tracks the median sales price versus the amount of inventory since January, 2008. The last two month's of data are pretty much on top of each other. Part of me wants to say that this is a sign of the bottom. Inventory seems to have stabilized and the price drop since June, 2008 is 23%. This is not a great answer, but I have a gut feeling that we have not seen the bottom in residential real estate. More layoffs are on the horizon and ARM resets will be a drag for the rest of the year.
Most of you are tired of hearing my story about the strip mall in New Jersey that was home to a Circuit City AND a Linens 'N Things, that is a 5 minute drive from a still vacant Comp USA store and is down the road from a Bennigan's.
We are not out of the woods.
Saturday, March 21, 2009
Tuesday, March 17, 2009
The housing start number was a bit puzzling at first glance: why would builders increase inventory at a time when foreclosures (cheap alternative) are sky-rocketing? I took a look at the raw data and it seems that there is usually an uptick in starts from January to February. The below graph contains the unadjusted, monthly data. Notice that there are only two occurrences where starts drop between those 2 months. It is also shocking to see the drop in actual monthly starts.
Monday, March 16, 2009
The Dow Jones Industrial Average was down as much as 2,229.34 points or 25.4% before rebounding the last few sessions. The Index has gained 622.53 points or 9.44% since 3/5/09. Financial stocks have lead the rebound, with market participants focusing on operating earnings for the first quarter. This appears to be a tradable rally, perhaps taking the index over 7,500 before the month is out. In fact, I think that is the most likely scenario. Gold has topped out in the short term, as well as Treasuries. In the intermediate/long term however, the prospects are far different.
The graphs below depict the grim reality of our fiscal situation. Nominal (unadjusted for inflation) GDP growth has been slowing for the last thirty years. Technological achievements notwithstanding, this is typical of a mature economy.
The problem is the growth rate of debt to support this economic expansion. We have come to expect 6% growth rates, but this is simply not rational. Take a look at the leverage necessary to get our economy to run at those rates. For simplicity, I have only used Treasury data when calculating debt growth rates. Both household mortgage debt and consumer credit have expanded at similar rates over the last thirty years. The sum of the three is stunning: $23 trillion.
An economics professor of mine once commented that the debt load of our country was a curious development and made little practical sense. His rationale was that a mature economy should be lending to other nations as a supplement to its own decreasing opportunities. An economy as large as ours shouldn't be borrowing, we shouldn't need to. Little attention was paid to this in the 1990s, growth kept going and there was always a buyer for our debt. This current crisis is forcing the rest of the world to look behind the curtain and critique our system. They can't like what they see.
Saturday, March 14, 2009
Friday, March 13, 2009
Equity futures are up this morning, pointing to continuing gains for the stock market. I would like to point out however the story regarding China's concern over their U.S. Treasury holdings. In the past, I have posted my concerns over the amount of debt that the government is issuing. Japan has voiced concern (late last year) and credit default swap markets are pricing Treasuries at historic highs.
This is not an anti-Chinese sentiment that I am expressing, it is an anti-ceding control of our economy and national security sentiment. Japan holds roughly $626 billion in Treasuries and China holds roughly $727 billion. Add it up, we get $1.35 trillion. That equates to about 12.3% of all of the federal government's debt. Simply put: if they have a problem with lending the U.S. money, we have a major issue.
Thursday, March 12, 2009
The taxpayer owns about 80% of each of these terrible corporations. I'll just say this for now:
- These companies were supposed to be the backbone of the mortgage lending industry
- While the Federal Government was paring down their borrowing under the Clinton administration, Fannie & Freddie were borrowing up a storm: more leverage, different name.
"A state is classified as a high-unemployment state if the state’s insured
unemployment rate (IUR) is at least 4%, and at least 120% of the average of the 13-week
IUR in the prior 2 years for the same 13-week calendar period."
Friday, March 6, 2009
BLS report really doesn't anything that the ADP didn't. Although the headline print of a 651,000 decrease in jobs was better than some forecasts, the prior month revisions paint a slightly worse scenario.
Nonetheless, including and since the Feb, 2008:
ADP reports 4.04 million jobs lost
BLS reports 4.31 million jobs lost
Thursday, March 5, 2009
So far in 2009:
- Dow Jones Industrial Average is down 2,181.95 points
- This is a drop of 24.86%
- 28 out of the 43 trading sessions have been negative
- The longest streak of gains is only 3 days (1/26, 1/27, 1/28)
- That streak was wiped out by the next 2 trading sessions (1/29, 1/30)
I am thinking of retiring this table, it is always good to go out on top. For the first time, the TARP infusions EXCEEDED THE TOTAL STOCK MARKET CAPITALIZATION of the recipients. The stock market is finally getting how bad the situation is. I think a rally is on the horizon.
Wednesday, March 4, 2009
The U.S. economy lost 697,000 in February according to ADP's monthly jobs report. 3,938,000 jobs have been eliminated since (including) the February, 2008 report. This is roughly the amount of jobs that were created from May, 2005 to January, 2008.
A simple regression of the ADP number is pointing to a loss of 676,000 jobs for the BLS report (released this Friday).
I am expecting the pace of job cuts to fall off in the next few months. It seems to be the case that job cuts are usually overdone and indiscriminate when executives need to pare costs and support earnings. The negative effects need to be suffered before an appraisal period begins.