Populus Vox

The Yankees Win

2009-11-04T23:59:00.002-05:00

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.....

2009-11-04T21:14:00.004-05:00

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

2009-11-04T08:22:00.002-05:00

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"

2009-11-03T17:39:00.002-05:00

"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

2009-10-19T16:37:00.003-04:00

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

2009-10-02T08:35:00.002-04:00

Headline print: -263,000

My estimate: -259,000

Net revisions to the previous 2 months negative as well.

Quelle Surprise ???

2009-09-18T10:40:00.001-04:00

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

2009-09-17T09:21:00.003-04:00

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

2009-09-17T09:10:00.002-04:00

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

2009-09-15T11:30:00.005-04:00

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

2009-09-15T10:51:00.002-04:00

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

2009-09-15T10:25:00.001-04:00

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

2009-09-15T08:55:00.003-04:00

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

2009-09-13T12:15:00.005-04:00

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

2009-09-13T12:06:00.002-04:00

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

2009-09-10T09:40:00.003-04:00

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

2009-09-09T08:33:00.006-04:00

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

2009-09-06T17:30:00.000-04:00

==============================================================
                        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

2009-09-05T07:44:00.005-04:00

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

2009-09-04T13:59:00.005-04:00

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

2009-09-04T08:50:00.005-04:00

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

2009-09-02T09:36:00.009-04:00

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

2009-08-27T08:10:00.006-04:00

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

2009-08-16T23:07:00.003-04:00

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

2009-08-16T09:30:00.000-04:00

===============================================================
                       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

2009-08-14T20:22:00.005-04:00

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

2009-08-05T09:06:00.003-04:00

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

2009-08-04T18:00:00.004-04:00

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...

2009-08-02T21:56:00.004-04:00

(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?"

2009-08-02T14:24:00.004-04:00

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

2009-08-02T13:52:00.003-04:00

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

2009-08-02T13:46:00.000-04:00

================================================================
                       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

2009-07-30T19:49:00.003-04:00

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

2009-07-29T07:58:00.003-04:00

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

2009-07-27T13:13:00.004-04:00

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

2009-07-27T12:10:00.003-04:00

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

2009-07-26T12:57:00.001-04:00

================================================================
                       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

2009-07-25T13:39:00.003-04:00

- 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

2009-07-24T09:29:00.003-04:00

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

2009-07-23T17:31:00.004-04:00

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

2009-07-23T09:04:00.003-04:00

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

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

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


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

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

2009-07-22T09:25:00.004-04:00

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

2009-07-12T15:34:00.004-04:00

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

2009-07-10T10:28:00.003-04:00

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

2009-07-09T11:22:00.002-04:00

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

Railroads: Economic Insight

2009-07-07T10:06:00.007-04:00

The Association of American Railroads reported that:

- Carloads dropped 19.7% from June '08 - June '09

- Intermodal traffic (flatcars) dropped 18.2% from June '08 - June '09

- 1st half of 2009 traffic down 19.5% and 17.0% respectively

- Largest percentage declines experienced by motor vehicles & equipment and metals & metal products

- Canadian traffic suffered comparable declines

On a related note:

Greenbrier Reports Fiscal 3rd Quarter Loss

http://news.moneycentral.msn.com/ticker/article.aspx?Feed=AP&Date=20090707&ID=10122391&Symbol=GBX

Robert Strange McNamara (1916 - 2009)

2009-07-06T11:21:00.003-04:00

Mr. McNamara was the subject of one of the best documentaries I've ever seen:

The Fog of War: Eleven Lessons from the Life of Robert S. McNamara

Personally, I accept his remorse as earnest. It is a film all should watch, especially in light of today's political atmosphere.

http://video.google.com/videoplay?docid=-8653788864462752804&ei=KRZSSvTdLILtlQfw8tGoDg&q=fog+of+war&hl=en&client=firefox-a

FDIC Gets Busy: 7 Failures

2009-07-03T10:17:00.004-04:00

Seven banks were shuttered yesterday, six of which were domiciled in Illinois. All of the banks were small, Founders Bank was the largest at just under $1 billion in assets. According to a Bloomberg news story, all six Illinois banks were controlled by the same family.

Poor decision making was not reserved to the money center banks or the greed of new banks. The FDIC will be busy for another year.

Sweden Jumps The Shark

2009-07-02T18:06:00.003-04:00

http://www.riksbank.com/templates/Page.aspx?id=32047

"The deposit rate is at the same time cut to -0.25 per cent and the lending rate to 0.75 per cent. "

-0.25%

The deposit rate is the "overnight rate of interest paid by the Riksbank on money held in accounts with banks."

So the central bank of Sweden is charging banks money to accept deposits. This is simply astounding. That is what I call deflationary fear.

Update: Job Losses & Recessions

2009-07-02T10:37:00.000-04:00

Start	End	Change
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	?	-4.68%

More Jobs Data: Weekly Claims

2009-07-02T08:50:00.002-04:00

Initial claims came in on the screws: 614,000 vs. estimate of 615,000.

Continuing claims came in a bit lower than forecast. This number is showing signs of having hit a peak 3 weeks ago. However, as I have mentioned in previous posts, it is important to know why the number is falling. If it is falling because people are finding jobs, great. If it is falling because people's benefits are expiring, not so good. Thirty-four states (and D.C. & P.R. as well) are offering extended benefits to those still looking for jobs. Those hopeful citizens are not included in this tally. I am trying to quantify.

Employment Thursday?

2009-07-02T08:38:00.006-04:00

Non-farm payrolls fell by 467,000 in June. This was considerably more than the consensus estimate of a loss of 350,000 jobs. However, it was only 17,000 more than my estimate of 450,000 (!). Revisions to the previous months were mixed & minor.

- 18 consecutive months of job losses

- 6,340,000 job losses since & including 12/2007

- Employment now stands at the same level as 9/2004

Employment Situation: ADP Jobs Report

2009-07-01T09:43:00.004-04:00

Job losses exceeded estimates: 473,000 vs. expectations of 390,000.

The miss was mitigated by upward revisions to previous months.

- 17 consecutive months of job losses

- 6,206,000 job losses since & including 12/2007

- Employment now stands at the same level as 4/2004

Home Prices

2009-06-30T09:15:00.002-04:00

Home prices fell less than forecasted in April. The 10 City and 20 City indices fell 18% and 18.1% (year over year) respectively. This data is a bit dated, mortgage rates bottomed in April. It will be interesting to see how the market responds to higher mortgage rates going forward.

Average Freddie Mac 30 Year Fixed rate (survey rate)

March: 5.00%

April: 4.81%

May: 4.86%

June: 5.42%

U.K. Slowed More Than Expected

2009-06-30T07:57:00.003-04:00

The GDP of the United Kingdom dropped 2.4% in the first quarter of this year. Please check the link below for all of the gory details.

The graph above is courtesy of the Office for National Statistics and tracks the growth in real GDP: quarterly change and annual change. Unlike the U.S. report, the headline number IS NOT ANNUALIZED. This number is the quarter to quarter change. To make it apples and apples:

U.S. first quarter: -5.5% annualized growth rate of real GDP

U.K. first quarter: - 9.3% annualized growth rate of real GDP

Not even industrialized nations report data in the same fashion, so please, read carefully when analyzing overseas data.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aqeTpadboF9c

China: Cautionary Tale

2009-06-29T08:32:00.001-04:00

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5675198/Chinas-banks-are-an-accident-waiting-to-happen-to-every-one-of-us.html

China's banks are an accident waiting to happen to every one of us

It's not just quantity of loans that is important, it's quality too (as we have just learned). Chinese equity markets have rebounded smartly from their recent lows, due in large part to easy money. It may be best to take a breather. Pundits first claimed that the economic crisis would be contained in the U.S., not spreading to the faster growing emerging markets. This was a faulty premise, these emerging markets depend on the U.S. for exports. It seems highly unlikely to me that these same economies can recover without a significant recovery in the U.S.

New Math, Obama Style

2009-06-28T10:00:00.005-04:00

http://money.cnn.com/2009/06/26/news/economy/how_many_stimulus_jobs_created/index.htm?section=money_topstories

Is stimulus creating jobs? Yes but.....

The above article concerns the number of jobs created by the stimulus package. Aside from actual hiring by the government, I'm not sure how one quantifies the number of jobs saved. Anyway, the White House has a formula that equates each $92,000 of stimulus funds to a job saved/created. OK then, here is my math:

6,000,000 jobs lost during this rec(depr)ession

$92,000 of stimulus needed per job

$552 billion of stimulus to get back to even on the jobs front

If the entire balance of the Recovery Act ($787 billion) was perfectly accessed to create jobs, the total would be 8.5 million.

When was the last time the federal government performed with perfect execution? Also, consider the fact that $650 million was spent on the analog to digital tv converter box program (spent on additional coupons and such). I doubt those funds saved over 7,000 jobs.

Major Economic Releases on the Horizon

2009-06-28T09:56:00.000-04:00

================================================================
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
================================================================
Case Shiller Monthly YO   6/30     April     -18.7%    -18.8%
Case Shiller Monthly In   6/30     April     140.0      n/a
Consumer Conf Index       6/30      June      54.9      55.2
ADP Payroll ,000’s        7/1       June      -532      -390
Construct Spending MOM%   7/1       May       0.8%     -0.6%
ISM Manu Index            7/1       June      42.8      44.5
ISM Prices Index          7/1       June      43.5      47.0
Pending Homes MOM%        7/1       May       6.7%      0.5%
Nonfarm Payrolls ,000’s   7/2       June      -345      -350
Unemploy Rate %           7/2       June      9.4%      9.6%
Manu Payrolls ,000’s      7/2       June      -156      -150
Hourly Earnings MOM%      7/2       June      0.1%      0.1%
Hourly Earnings YOY%      7/2       June      3.1%      2.9%
Avg Weekly Hours          7/2       June      33.1      33.1
Initial Claims ,000’s     7/2      27-Jun     627       615
Cont. Claims ,000’s       7/2      20-Jun     6738      6740
Factory Orders MOM%       7/2       May       0.7%      0.8%
================================================================

Failures Galore

2009-06-27T09:13:00.007-04:00

Five more bank failures yesterday, 2009 total now equals 45. All five banks were quite small, I'm not sure if the FDIC is making the best use of their time. There are some good sized banks that are in significant trouble. The longer they linger, the more they will impact the taxpayer.

3/31/09: FDIC Deposit Insurance Fund (DIF) has a balance of $13 billion

5/22/09: FDIC announces special assessment to raise roughly $5.7 billion

Cost of 2nd quarter failures: $9 billion

That would leave the DIF with $9.7 billion. I'm sure the DIF has earned interest on their investments and collected additional premiums, so let's say the DIF has about $10.5 billion on hand.

My guess is that the imminent failure (my opinion) of Corus Bank will cost about $2.97 billion, dropping the DIF well below $10 billion.

The other good sized banks that are in danger of failing (my opinion again) are:

Frontier Bank
Ocean Bank
Westernbank Puerto Rico
AmTrust Bank
R-G Premier Bank of Puerto Rico

Loss estimates: $1.5 billion, $1.6 billion, $2.3 billion, $2.4 billion and $729 million respectively.

The total would be $8.6 billion, collapsing the fund into negative territory. That credit line will undoubtedly be tapped and we will be insuring our own deposits sooner than the markets think.

Personal Income & Spending: What Really Happened in May?

2009-06-26T09:34:00.007-04:00

The above graphs track the same information over different time frames. The one on the right focuses on the last few years, highlighting the fact that income growth has stagnated.

Today's report announced that personal income increased $167.1 billion from the previous month. Consumption and savings increased as well: savings expanding at a much faster rate than spending. Please review the graph below.

However, the announcement that private wage & salary disbursements, goods producing industries' payrolls, and manufacturing payrolls decreased at a faster rate than the previous month caught me by surprise. In addition, service producing industries' payrolls and government wage & salary disbursements increased at a slower rate than the previous month. How can income expand without wages expanding?

Great question. The answer is........ "Personal Current Transfer Receipts." This figure increased by $162.6 billion in May, representing almost the entire gain in personal income. BEA's definition below:

Personal current transfer receipts

This component of personal income is payments to persons for which no current services are performed. It consists of payments to individuals and to nonprofit institutions by Federal, state, and local governments and by businesses.

Government payments to individuals includes retirement and disability insurance benefits, medical payments (mainly Medicare and Medicaid), income maintenance benefits, unemployment insurance benefits, veterans benefits, and Federal grants and loans to students. Government payments to nonprofit institutions excludes payments by the Federal Government for work under research and development contracts. Business payments to persons consists primarily of liability payments for personal injury and of corporate gifts to nonprofit institutions.

Please allow me to emphasize: "This component of personal income is payments to persons for which no current services are performed."

THAT CONSTITUTES A NET DRAIN ON THE ECONOMY TO BE BORNE BY TAXPAYERS !!!!!!!!!!!!!!!!!!

Catching Up With Japan

2009-06-25T23:10:00.003-04:00

No doubt can possibly remain, Japan is in the midst of deflation. The graph on the left tracks the year over year change in Japanese CPI. The price index is at the same level it was in August of 1993.

The graph on the right tracks Japan's current account position. As an exporting nation, Japan typically holds a current account surplus. This supply of foreign currency (i.e. US dollars) provides the fodder for the purchase of foreign assets. This is a volatile series, but the trend is clear: slowing global economies are decreasing their purchases of Japanese products. Perhaps this is why prices are falling in Japan.

Where is the Housing Market Bottom?

2009-06-25T09:33:00.005-04:00

Back on May 26th, I suggested that the housing market would bottom when the lines on the above graph met again. My basic premise was (is) that housing prices should not significantly outperform inflation over long periods of time. A home is a depreciating asset: there are constantly new homes being built and upkeep of a home tracks inflation.

Feel free to debate my choices of housing price index and inflation measure, but I don't think the conclusions would be materially different.

The model incorporates the growth rate of the indices since the housing market top in the middle of 2006. Holding the growth rates constant, home prices and inflation would meet in August of 2010. At that point, prices would be another 19.2% lower than the last reading (March, 2009). An instantaneous drop of 26.2% would do the same job. It is easy to see that dragging this out will have no benefit. The foreclosure moratoriums and shadow inventory are only delaying the inevitable.

At this point, it appears that we have seen the bottom in mortgage lending rates (see previous posts on mortgage payment levels & affordability). The graphs below track rates and spreads, measuring the absolute level of borrowing and the incremental return required for mortgage lending. Help on this front should not be expected.

Jobless Claims

2009-06-25T08:45:00.005-04:00

Another disappointment for the green shooters: 627,000 initial claims & 6,738,000 continuing claims in this week's report. In addition, the previous report's numbers were revised higher: more initial claims and more continuing claims than previously estimated. However, the revision to the continuing claims number was not enough to continue the record streak.

The IUR is still 5.0%, suggesting that corporations feel little need to add workers. Initial claims have now exceeded 600,000 for 21 straight weeks. With the revisions to the previous week's data, my first guess at the June payroll losses is 450,000.

Equity futures are trading around the overnight lows.

More on Housing

2009-06-24T16:37:00.004-04:00

New home sales were reported today, falling short of forecasts: 342,000 (annualized rate). This means one thing to me: home prices are still too high.

The above graph tracks new home inventory. The number is arrived at by dividing the number of homes available by the most recent monthly sales rate. Although off the highs, this figure is considerably higher than the 20 year average of 5.8 months.

Based on the rebound in mortgage lending rates, it seems that any adjustment to affordability must come through home price. The graph below tracks affordability in terms of monthly mortgage payments.

Durable Goods and Today's Action

2009-06-24T08:48:00.004-04:00

New orders for durable goods exceeding economists' estimates, climbing to $163.9 billion for the month of May (March & April numbers were revised a bit lower). Once again, could this signal a bottom? Sure, why not? However, this number is still running 25% lower than it was during 2008. This is certainly a casualty of the housing collapse. Not only are the builders and construction workers directly effected, but appliance factory workers, shippers, etc. are impacted as well.

Yesterday's data included existing home sales. The number came in a bit lower than the consensus estimate. Inventory moved a bit lower, but prices are still well below the trend line. Until housing stabilizes, neither the manufacturing or financial sector will recover.

On a related note, S&P downgraded several securities backed by jumbo prime mortgages. The surprising part of it: paper issued as early as 1998 was impacted. Since mortgages written that far back are not generally characterised by terrible underwriting standards (like 2005 - 2007, especially 2007), one could imply that job losses to stable bill payers are taking their toll on the housing market.

Equity futures are moving higher, Treasuries are moving lower and the dollar can't find a buyer. I can't imagine that much will happen before the Fed announcement this afternoon.

Inflation Links

2009-06-21T14:03:00.008-04:00

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5586043/Dont-believe-the-hyperinflation-hype---dare-to-make-cuts.html

Don't believe the hyperinflation hype - dare to make cuts

http://www.nytimes.com/2009/06/21/business/economy/21view.html?_r=1

Why Inflation Isn't The Danger

Some Levity: We All Need a Laugh

2009-06-21T11:16:00.002-04:00

US To Trade Gold Reserves For Cash Through Cash4Gold.com

Upcoming Economic Data

2009-06-21T11:11:00.000-04:00

================================================================
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
================================================================
Exist Homes Mlns          6/23      May       4.68      4.82
Exist Homes MOM%          6/23      May       2.9%      3.0%
Durables Orders MOM%      6/24      May       1.7%     -0.8%
Durables Ex-Trans MOM%    6/24      May       0.4%     -0.4%
New Home Sales ,000’s     6/24      May       352       360
New Home Sales MOM%       6/24      May       0.3%      2.3%
GDP Annual QOQ%           6/25      1Q F     -5.7%     -5.7%
Personal Consump. QOQ%    6/25      1Q F      1.5%      1.5%
GDP Prices QOQ%           6/25      1Q F      2.8%      2.8%
Core PCE Prices QOQ%      6/25      1Q F      1.5%      1.5%
Initial Claims ,000’s     6/25     13-Jun     608       600
Cont. Claims ,000’s       6/25     6-Jun      6687      6707
Pers Inc MOM%             6/26      May       0.5%      0.3%
Pers Spend MOM%           6/26      May      -0.1%      0.3%
PCE Deflator YOY%         6/26      May       0.4%      0.1%
Core PCE Prices MOM%      6/26      May       0.3%      0.1%
Core PCE Prices YOY%      6/26      May       1.9%      1.8%
U of Mich Conf. Index     6/26     June F     69.0      69.0
================================================================

Failure Friday Returns

2009-06-20T10:18:00.004-04:00

40 banks have closed so far this year, three of which were closed yesterday. All three banks were on the bad banks list.

I am puzzled by the seemingly haphazard process that the FDIC is following when deciding to shutter a bank. Size is obviously a concern (the larger the bank, the longer it tends to linger), but beyond that, there seems to be no discernible pattern.

This Corus Bank saga is crazy. The bank is beyond repair and management has been selling shares by the millions in the last few weeks. The longer this bank is allowed to exist, the greater the risk to the FDIC. Since the FDIC is running out of money, that means more risk for you & me.

Ratings Actions

2009-06-18T09:56:00.003-04:00

http://www.moodys.com/moodys/cust/research/MDCdocs/17/2007400000619506.asp?namedEntity=Rating+Action&doc_id=2007400000619506&frameOfRef=structured

Moody's downgraded a large Credit Suisse structure. Some securities went all the way from Aaa to below investment grade. Ouch.

Last week, Fitch hammered several tranches in a similar fashion: AAA to below investment grade.

http://www.fitchratings.com/corporate/sectors/rmbs_rtng_actn_rpt.cfm?sector_flag=3&marketsector=2&detail=&body_content=rtng_actn

Tread lightly if you want to buy financial stocks.

Weekly Jobless Claims

2009-06-18T09:30:00.004-04:00

Reported initial jobless claims were in in line with estimates: 608,000 (increase of 3,000). The previous week's number was revised upward (slightly) to 605,000. Continuing jobless claims fell for the first time since January.

Please note:

- Continuing claims were thought to have fallen 2 weeks ago, but the number was revised higher

- Even if the number is not revised higher, we don't know why the number dropped. Was it because people are finding jobs or is it because their benefits expired? A few weeks ago, I made mention of this. The longer the slide in jobs continues, the tougher it becomes to interpret the data.

China Taking Up The Slack for the U.S. Consumer?

2009-06-17T15:52:00.003-04:00

China's GDP: 54% of U.S. GDP

China's per capita GDP: 12.8% of U.S. per capita GDP

China's largest export destination: U.S. (19.1% of exports)

"Buy China" policy set to raise tensions

http://www.ft.com/cms/s/0/66454774-5a7c-11de-8c14-00144feabdc0.html

I think the rookies will stumble.

Inflation Like Zimbabwe?

2009-06-17T15:50:00.001-04:00

I think Marc Faber is great, but come on now.

CPI Drops, Does it Understate Deflation?

2009-06-17T09:32:00.005-04:00

CPI increased by 0.1% month over month: consensus estimate was an increase of 0.3%. The year over year drop came in at 1.0%, the largest annual decrease in quite some time. Please note: both figures are seasonally adjusted. The media is reporting a 1.3% year over year drop, this is not seasonally adjusted.

Fingers are pointing to the drop in energy prices as the main cause for the falling CPI. This is indeed a major cause. Energy costs impact consumer prices directly (home heating/cooling, gasoline) and indirectly (food prices, apparel, etc.). However, the largest component of the CPI is an item called Owner's equivalent rent of primary residence (OER). OER's weight is 24.4% of the index. From the BLS:

Rental equivalence. This approach measures the change in the price of the shelter services provided by owner-occupied housing. Rental equivalence measures the change in the implicit rent, which is the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market. Clearly, the rental value of owned homes is not an easily determined dollar amount, and Housing survey analysts must spend considerable time and effort in estimating this value.

When initially introduced, the rental equivalence index’s monthly movement was calculated by reweighting the rent sample to represent owner-occupied units. Starting with the CPI for January 1987, the rental equivalence index movement was based on changes in the implicit rents of a sample of owner-occupied units. As part of the 1987 revision, BLS drew a new housing sample to replace the old rent sample. The new sample had both owner- and renter-occupied housing units.

As the above graph illustrates, this component has been moving higher as home prices have been tumbling. My question is, why hasn't this component been falling over the same time frame?

Perhaps there are different dynamics in the rental market. Well, the below graph indicates otherwise. The Market Tightness index is a diffusion index. Readings above 50 indicate the market is getting tighter, readings below 50 indicate that the market is easing and 50 indicates that the market is unchanged.

So, home prices have dropped, rental markets are experiencing slack, housing affordability has improved (http://www.realtor.org/research/research/housinginx), yet OER is higher? Any thoughts on this one?

Thank you.

Dow Jones Industrial Average 2009

2009-06-16T16:39:00.004-04:00

...where it stops, nobody knows.

Based upon revised earnings estimates, I think fair value for the DJIA is 6,882 (drop of 19.1% from today's close). I backed into this number by taking my estimate for the S&P 500 and multiplying that by the the 200 day moving average of their ratio: 723.63 * 9.51

At this point, neither equity index is screaming over bought nor over sold. This will be a tricky couple of trading sessions until the FOMC meeting on the 24th (2 day meeting).

"I.P. Never Lies"

2009-06-16T13:54:00.003-04:00

When I was back there in seminary school, an old time trader said to me "I.P. never lies."

Whenever I listened to him, I made money. Every time I forget what he told me.......

Anyway, there is tremendous slack in our economy. Slack = Deflation

Inflation: PPI

2009-06-16T10:19:00.005-04:00

The first of the 2 monthly inflation reports was released today: PPI 0.2% month over month increase (lower than forecast).

On a year over year basis, producer prices have fallen 4.7%. This is rarefied territory for our country. This is not hyper-inflationary by the way.

In fact, it is continued deflation. Don't take your eye of the ball my friends. How many hyper-inflationary periods have started with 40% declines in home prices? How many times have gold buyers tried to push the price over (convincingly) $1,000? How many jobs have been lost the the last 18 months? How much have PRIVATE & CORPORATE borrowing decreased?

There is a big jump from where we are now to hyper-inflation.

Oh, and for all of those who have been saying "the market is bidding up oil and commodities and who knows better than the market. It is self fulfilling."

Just like when oil was $140.00 bbl..................

Housing Starts

2009-06-16T10:10:00.004-04:00

Housing starts were reported today and the headline print exceeded expectations. Please note that these are rebounds from all time lows.

The above graph does not contain the headline numbers. It tracks the actual monthly activity: not seasonally adjusted, not annualized.

It is easy to pick out the seasonal patterns: May is the average peak, December is the average trough. If the trend continues, today's number would represent the peak activity. Ouch.

What are your thoughts about this number? There is obviously a tremendous supply of housing already, so a low level of starts would aid in the market rebound. However, an increase in starts keeps people working and could be indicative of a market bottom.

Alphabet Soup: ABS CDS

2009-06-15T19:46:00.006-04:00

Quick review:

Credit default swaps (CDS) function as insurance policies for certain securities. If a bond defaults, a buyer's loss can be mitigated from the profit generated by the CDS.

CMBX: protection on commercial mortgage backed securities

ABX: protection on residential mortgage baked securities

At this point in the cycle, it is safe to say that the lower rated trances, (single A, triple BBB, triple B-) won't recover. Therefore, the prices will stay pinned at their current levels. The killer here is the higher rated tranches. To attain these higher ratings, these securities have the most stable cash flows in the deal structure. The lower rated tranches get stuck with the initial losses, an attempt to shield the higher rated tranches from diminished cashflow.

It is not working. Whether it's Fitch, S&P or Moody's issuing downgrade notices and warnings or you just take a look at the above graphs, more losses are on the way.

Bankruptcy Update

2009-06-15T13:59:00.004-04:00

Please click on table to expand.

Two additions in the last week, including the owner of the Great Adventure theme park.

Wall Street Revenue: Update

2009-06-15T08:37:00.005-04:00

The above graphs contain activity through April. It certainly appears that investment bankers will be busier this year than last. However, it is a pale shadow of years past.

Please note the asset backed and non-agency mbs portion of debt underwriting. These figures are virtually non-existent. I believe it is impossible to have the vaunted V shaped rebound consumer spending without these debt markets. This also implies continued weakness in student loan origination.

These borrowers depended on the easy credit afforded to them by the securitization markets. Unless the federal government plans to start lending directly to the people, we will not see this activity again.

Upcoming Data

2009-06-14T09:49:00.001-04:00

===============================================================
                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
================================================================
Empire Manu. Index        6/15      June      -4.6      -4.6
NAHB Housing Index        6/15      June       16        17
PPI  MOM%                 6/16      May       0.3%      0.6%
Core PPI MOM%             6/16      May       0.1%      0.1%
PPI  YOY%                 6/16      May      -3.7%     -4.4%
Core PPI YOY%             6/16      May       3.4%      3.2%
Housing Starts ,000’s     6/16      May       458       485
Building Permits ,000’s   6/16      May       498       509
Ind. Prod. MOM%           6/16      May      -0.5%     -1.0%
Cap. Util. %              6/16      May      69.1%     68.4%
CPI  MOM%                 6/17      May       0.0%      0.3%
Core CPI MOM%             6/17      May       0.3%      0.1%
CPI  YOY%                 6/17      May      -0.7%     -0.9%
Core CPI YOY%             6/17      May       1.9%      1.8%
Core CPI SA Index         6/17      May     218.594   219.031
CPI NSA Index             6/17      May     213.240   214.589
Current Account $ Blns    6/17       1Q      -132.8    -84.8
Initial Claims ,000’s     6/18     13-Jun     601       605
Cont. Claims ,000’s       6/18     6-Jun      6816      6839
LEI  MOM%                 6/18      May       1.0%      1.0%
Philly Fed Index          6/18      June     -22.6     -17.4
================================================================

U.K. Banks React to Rising Rates

2009-06-12T00:38:00.001-04:00

http://www.timesonline.co.uk/tol/money/property_and_mortgages/article6457271.ece

Wow, story about U.K. lenders increasing loan to value ratio to keep the business going.

Impact of Higher Mortgage Rates Revisited

2009-06-11T13:09:00.002-04:00

The Freddie Mac Survey Rate (30 year, fixed rate) for this week was just posted: 5.59%

That brings the June average to 5.44%:

revised price for equal monthly payment: $195,300.00

Homeowner's Equity

2009-06-11T12:37:00.004-04:00

PLEASE click the above table to expand.

The housing market is in big trouble. Very few homeowners have the economic incentive to stay in their homes. The more protracted this correction becomes, the lower prices will have to go (my opinion).

Option ARM Accounting

2009-06-11T11:19:00.011-04:00

Option ARM:

There are 2 key features to this loan, those being the rate component and the option component. ARM refers to the loan being an adjustable rate mortgage. The interest that the borrower pays fluctuates over time (it is usually fixed for an initial period of time) and is linked to a benchmark rate. For example, a loan may be indexed to the 1 year Treasury Bill rate. Each year, the mortgage payment is recalculated using the new rate observation.

This feature has been more common in Europe, but volume picked up in the USA when the overall interest rate level was quite low. In theory, there is nothing wrong or sneaky about these loans. They offer a degree of stability to banks because they can avoid the danger of a flattening yield curve. For the consumer, rising rates usually (I repeat, usually) coincide with higher home values. So their payments may be higher, but their homes are worth more.

The danger, as with most things, is in the disclosure. A consumer must have knowledge of the reset schedule, benchmark rate, initial fixed rate period, teaser features and future personal earnings expectations when making a decision.

The option component refers to the flexibility the homeowner has in making a mortgage payment. Typically, the mortgagee can make a fully amortizing payment (standard principal & interest payment), an interest only payment (only the standard interest due for that month) and a specified minimum payment (less than the interest only payment).

If a borrower does not make the full payment, the residual is tacked on to the balance of the loan. This is referred to as negative amortization. The principal balance actually increases over time.

Rising home prices mitigate the issue of negative amortization because it keeps the loan to value ratio in check. However, when prices fall, the ratio moves markedly higher. In addition, the choice of payments masks the intention of the borrower. A homeowner with every intention of defaulting can stay in the home longer by making very small payments.

A few years ago, I dove into a Washington Mutual annual report. What I found was absolutely horrific. On page 57 of the 2007 annual report is a table that spells out earnings from option ARMS.

December 31,
		2007			2006			2005
		(dollars in millions)
Loan balance		$	58,870		$	63,557		$	71,201
Capitalized interest recognized in earnings that resulted from negative amortization			1,418			1,068			292
Total amount by which the unpaid principal balance exceeded the original principal amount			1,731			888			160
Balance of loans that experienced a net increase in negative amortization during the year			48,162			48,832			44,796
Percentage of borrowers whose final loan payment of the year resulted in negative amortization:
	By number of loans		50	%		51	%		42	%
	By value of loans		69			68			56

OVER THE COURSE OF 3 YEARS, THE COMPANY REALIZED $2.7 BILLION IN EARNINGS FROM NEGATIVE AMORTIZATION.

Of course, the natural question is: How can the bank be sure that they will ever receive that money?

What happens when a loan of that type defaults? Do they restate the previous period's earnings lower?

This product is the single worst idea in financial history and ranks on the top 14 of all time worst human brain droppings.

JP Morgan is now the proud owner of these WaMu loans. Wells Fargo via Wachovia via Golden West also holds a large chunk of this stuff. Several estimates place the amount of these loans originated at $750 billion over the last few years. Not surprisingly, the bulk were backed by California real estate.

One more thing: these loans are subject to recast. Recasting occurs when the principal balance of the loan hits a specified level over a given time horizon. At that point, the mortgage payments are recalculated based on the new unpaid balance. As this occurs, foreclosure will skyrocket.

Weekly Jobless Claims

2009-06-11T09:17:00.002-04:00

Initial claims retreated to 601,000: the lowest weekly figure since 1/24/09. This marked the 19th consecutive week of at least 600,000 initial claims.

Continuing claims rose to 6,816,000. The previous week's number were revised higher, so the record streak was not actually broken.

Retail Sales

2009-06-11T09:07:00.005-04:00

Retail sales rebounded a bit in May: $340 billion ($338 billion in April).

Here is the bad part: retail sales are 9.18% below last year's pace. These numbers are now back to 2005 levels.

Mover in this months report were building material and garden equipment dealers (+1.3%) and gas stations (+3.6%).

Home Foreclosures

2009-06-11T08:57:00.004-04:00

RealtyTrac's number: 321,480 foreclosure filings in May.

The number dropped from the previous month's 342,038, but marked the 3rd straight month over 300,000 (and the 5th out of the last 10). Ten states accounted for 77% of the filings, no real surprise as California, Florida and Nevada still feel the weight of real estate speculation gone wrong.

Back to China

2009-06-10T23:43:00.001-04:00

http://www.bloomberg.com/apps/news?pid=20601087&sid=al8v4wR00eSo

China’s Exports Fall by Record After Global Demand Dries Up

...and they are buying iron ore like it's going out of style.

Impact of Higher Mortgage Rates

2009-06-10T14:20:00.004-04:00

The above graph tracks the monthly mortgage payment assuming the median new home price and the Freddie 30 year mortgage rate.

March, 2009: home price $209,700; rate 4.81%; payment $1,101.49

April, 2009: rate 4.86%; to keep the same payment, price needed to drop to $208,500 (data released shortly)

May, 2009: rate 5.29%: to keep the same payment, price needed to drop to $198,600

That would be a 4.75% price drop in 1 month. Still shootin' greens partner?

Prospects for Commercial Mortgages

2009-06-10T10:49:00.001-04:00

http://www.bloomberg.com/apps/news?pid=20601087&sid=aW5MljIvmB1k

Commercial Mortgage Woes

Falling Prices In China

2009-06-09T23:45:00.002-04:00

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

China’s Consumer Prices Decline 1.4%, Aiding Recovery

That is some interpretation by Bloomberg. Anyway, as I said earlier today: China is playing a dangerous game. Falling prices mean that there are too many goods.

Deflation & Debt: Japan

2009-06-09T23:05:00.003-04:00

Japanese producer prices dropped by 5.4% (year over year) as announced by the Bank of Japan today.

There are several structural differences between our economy and the Japanese economy. However, their sovereign debt to GDP ratio is approximately 1.4:1 (they have 1.4 yen worth of debt for each yen of GDP) and they are experiencing deflation. Please keep this in mind if you are considering the reflation trade.

More On China

2009-06-09T10:49:00.002-04:00

http://www.mgn.com/news/dailystorydetails.cfm?storyid=9975

PRECIOUS SHIPPING EXPECTS DRY RATES CRASH

In conversations over the last few days, I have discussed the risks that China is taking with regards to their stimulus package. It was a significant amount of money and it is being deployed in the real economy: manufacturing & production.

It seemed to me that stockpiling was not the way to deal with a global slowdown. Does China know when this will end? It may seem like a good idea to buy industrial commodities when prices drop significantly, but I think it is a rookie mistake. How far will prices drop if the global economy does not rebound when China thinks it will?

Vulnerable Banks

2009-06-08T22:30:00.004-04:00

Please click on the above table to expand.

Commercial loan concentration = (commercial & land development loans + commercial real estate loans + commercial & industrial loans) / earning assets

junior lien concentration = (junior lien loans + home equity loans) / earning assets

goodwill ratio = goodwill / equity capital

The list is comprised of banks with at least $20 billion in earning assets and a commercial loan concentration of at least 20%.

China: Land of the (un)Free

2009-06-08T12:01:00.003-04:00

http://www.nytimes.com/2009/06/09/world/asia/09china.html?_r=1&hp

China Requires Censoring Software

I get the whole China argument, I do. However, if this is indicative of the state of the State......

Chinese democracy (aside from an album over 10 years in he making) doesn't exist. A republic doesn't exist.

The truly frightening thing is that our country may not be far off from this behavior:

http://www.huffingtonpost.com/james-love/obama-administration-rule_b_174450.html

S&P 500 Earnings Review

2009-06-08T09:23:00.004-04:00

With 492 of the S&P 500 members reporting, it looks like 1st quarter earnings will total $7.59 (as reported, no operating earnings nonsense). The trailing 12 month tally will be $6.93, a far cry from the high set in June of 2007: $84.92 (yep!).

Valuation is, quite frankly, on another planet. It is possible that the recession is over and this is a bull market. However, there is little caution being exercised by market participants. Protective put buying is low and the market is overvalued by almost 27% in my opinion. To pay 27% more than historical valuations tells me that a bull market is a certainty. How can anyone be that sure of a profit picture that has dropped by almost 100% and a GDP that has dropped by more than 5% for 6 months?

S&P 500 should be at 689, maybe 705 tops.

Inside The Fed's Buying

2009-06-08T08:28:00.005-04:00

The focus of this post will be mortgage backed security (MBS) purchases. On March 18 of this year, the Fed announced that it would purchase up to $1.25 trillion of Agency & GSE MBS this year. The purpose of this was to free up funds for mortgage issuance; the Fed was to provide mortgage market liquidity.

There is a major risk with his plan: Wall Street does not have the same motives as The Fed. Wall Street traders want to make money so they get bigger bonuses, The Fed think they can save the economy by pushing down mortgage rates. As a result, you have a market that is not acting rationally and will be prone to move in a volatile fashion (witness the last few weeks in the mortgage market, rate are up at least 0.30%).

Since MBS are subject to prepayments, their prices are sensitive to prevailing interest rates. If you own MBS, you want the market to be as docile as possible. Large upward moves in rates decrease the value of your cash flows and extend the effective life of the MBS, increasing risk. Also, large downward moves in rates encourage refinancing behavior, which shorten the effective life of MBS. This mitigates the benefit of the cashflow being worth more in a falling rate environment.

So we have a buyer (The FED) that does not have to act rationally because they can withstand losses that other market players would not tolerate.

In graph 1 tracks the coupon rate of the Fed MBS purchases. It is clear that the bulk of their buying has been 4.0% & 4.5% coupon MBS. Graph 2 tracks the relative rate environment since the program has begun. Notice that the Fed has not materially change the average coupon, even though the rate environment has move higher. Of course, The Fed is paying a lower price for those securities, but that is not the only concern. The Fed is sending conflicting signals to the market with regards to valuation.

Not Much Data Coming Up

2009-06-07T14:40:00.001-04:00

================================================================
                      Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
================================================================
Whlsale Inv. MOM%         6/9      April     -1.6%     -1.1%
Trade Balance $ Blns      6/10     April     -27.6     -29.0
Federal Budget $ Blns     6/10      May      -165.9    -181.0
Initial Claims ,000’s     6/11     6-Jun      621       615
Cont. Claims ,000’s       6/11     30-May     6735      6770
Retail Sales MOM%         6/11      May      -0.4%      0.5%
Retail ex-autos MOM%      6/11      May      -0.5%      0.2%
Business Inv. MOM%        6/11     April     -1.0%     -1.0%
Import Prices MOM%        6/12      May       1.6%      1.4%
Import Prices YOY%        6/12      May      -16.3%    -17.4%
U of Mich Conf. Index     6/12     June P     68.7      69.5
================================================================