EconomPics of the Week (2/27/09)

Economic Data
Historical GDP: "It Was Nice Knowing You U.S. Cons...
GDP Breakout: Revised Down to 6.2%
Durable Goods (January)
Good News Alert! Australia May Show Positive GDP
Japanese Exports Almost Halved in 12 Months
Consumer Confidence Plunge
Eastern Europe at a Tipping Point
Case Shiller Price Index (December)

Banks
Top Ten Banks.... Then and Now
FDIC Insured Institutions: System Wide Loss

Assets
Financial Bonds Spiking
Russia-China Oil Deal
Petroleum Supplies
What a Difference a Day Makes... Financial Firms Rocket
Where's the Equity Premium? Part III
Stairway to....
Equities vs. Housing... A Function of the Baby Boo...

Other
"Tax Rates of the Rich and Poor"
Bailout the Shelter. Not the Investment. Loan Modifications for Dummies

Historical GDP: "It Was Nice Knowing You U.S. Consumer" Edition

A snapshot at fourth quarter GDP prints going back to 1998. Even in the last recession, consumption added to GDP... not this time. The only real positive... a decline in imports (a positive for net exports), due to you guessed it... the possible death of the U.S. consumer.



Source: BEA

Financial Bonds Spiking

Across the Curve indicates financial are in across the board. Just in time... there is almost a 2% difference in the yield of financial bonds and their investment grade brethren.

GDP Breakout: Revised Down to 6.2%

WSJ reports:

The U.S. recession deepened a lot more in late 2008 than first reported, according to government data showing a big revision down because businesses cut supplies to adjust for shriveling demand.

Gross domestic product decreased at a seasonally adjusted 6.2% annual rate October through December, the Commerce Department said Friday in a new, revised estimate of fourth-quarter GDP.

The 6.2% decline meant the worst quarterly showing for GDP since a 6.4% decrease in first-quarter 1982 GDP.

In its original estimate, issued a month ago, the government had reported fourth-quarter 2008 GDP fell 3.8%. The sharply lower revision to a decline of 6.2% reflected adjustments downward of inventory investment, exports and consumer spending.

Source: BEA

Russia-China Oil Deal

EconomPic got an anonymous post that I've been meaning to reply to:

Anyone see this yet? China loans $25B to Russia for ~2.2B barrels of oil...that's less than $12 per barrel. Peak oil? Hmmmmm....

Further details of the transaction per Reuters:

Transneft and China National Petroleum Company (CNPC) agreed in October to build a spur to carry 15 million tonnes a year, or 300,000 barrels per day, between the countries' trunk pipelines.

Over 20 years, this adds up to 300 million tonnes, worth almost $90 billion at current prices, and enough to meet around four percent of China's current oil needs.

That last part is key... over 20 years. This is the equivalent of giving Russia a 20 year loan and expecting it to be paid back over the next 20 years. Solving for the payment size given a $25 billion present value, 365 * 20 periods, and whatever interest rate you want to assume you get the following:



Assuming a 10-12% interest rate (that of the Russian sovereign debt) over the 20 year "investment", then the price is more like $25-$30 per barrel. Looks like it could be a nice deal, but $12 it isn't.

"Tax Rates of the Rich and Poor"

Greg Mankiw shows the effective tax rates for 2005 by income level and declared:

That is, even before the Obama tax hikes, the rich face average tax rates more than twice those of the middle class, and about seven times those of the lowest quintile. These data do not tell you the optimal degree of tax progressivity, but they do describe the starting point from which policy is working.

While I have no problem with him stating these are the "starting point" rates, let me put them into a little more context... i.e. compared to when rates really were alarmingly high.



While this next comment may not make much sense to some as someone well off, I have absolutely no problem paying higher effective taxes than someone who happens to have a lower income (though I do have major problems with bailouts of speculators). The difference are the rules are straight forward and most of all logical (the cost of living as a percent of income is substantially higher for low income individuals). As someone who did not grow up with a silver spoon in my mouth, rather than be angered at paying more taxes because I happened to be more financially successful than others, I just hope these higher taxes open up all the opportunities for someone born into a low income family that were handed to 90% of my business school classmates and co-workers.

Source: CBO

GDP... How was It?

Traveling today with some posts to be delivered... wondering how much GDP was revised downward.

FDIC Insured Institutions: System Wide Loss

Interest Rate Roundup reports:

Every quarter, the FDIC releases a document called the Quarterly Banking Profile. It provides a wealth of data about banking industry losses, loan performance, failed banks, and more. The latest report (PDF Link) just hit the tape, and here are some of the details:

The banking industry as a whole lost $26.2 billion. That was a large swing from the year-ago profit of $575 million that the industry generated. It was also the first time since Q4 1990 that U.S. banks, in the aggregate, lost money.

And that -$26.5 billion would have been 50% worse had it not been for the $13.6 billion credit for income taxes (coming from those losses). If they can ever take them is another story.

includes Source: FDIC

Durable Goods (January)

Bespoke reports:

If January's Durable Goods report is any indication, 2009 didn't start off on a good economic note. As shown in the chart below, durable goods orders for the month declined by 23.3% on a year/year basis, which is the steepest decline in the history of the indicator (since 1960). If we strip out the transportation component of this series, orders for durable goods declined by a more "modest" 17.4%, which is the lowest level since 1975.

Source: Census

Bailout the Shelter. Not the Investment.

What is a Speculative Investment?

In addition to the reduced interest rate subsidies announced last week, the Chicago Tribune reports:

Congress is poised to give bankruptcy judges more power to modify primary home mortgages in an attempt to halt the foreclosure crisis, a move Democrats and housing advocates have been pushing for two years in the face of stiff opposition from Republicans and the mortgage industry.

So even if the contract of the loan states the bank can take over the home if the buyer doesn't pay (i.e. THEY ARE COLLATERALIZED LOANS), a judge can cram down the loan to an "affordable" level not necessary based on market price.

Besides a HUGE transfer of wealth from those taxpayers / investors that will fund this to those receiving the benefit, who else does it help? The NY Times reports Obama's view:

Mr. Obama said pointedly that it would not help “speculators who took risky bets” or “dishonest lenders who acted irresponsibly” or “folks who bought homes they knew from the beginning they would never be able to afford.”

I couldn't possibly disagree more.

Definition #1 for speculator:

To engage in a course of reasoning often based on inconclusive evidence.

Definition #2 for speculator:

To buy securities or property in the hope of selling them at a profit

Combining definition #1 and #2 we get definition #3 for a speculator:

Engaging in the purchase of property, with the inconclusive evidence that it can be sold at a profit

Or in an EconomPic form, we get the speculative investor "circle of life".



Real Life Mortgage "Moral Hazard" Plan

Not surprising, the AP reports real life sentiments as predicted by the Mortgage "Moral Hazard" Plan Matrix below:

Click for larger image



A quote by someone from the bottom right quadrant:

"I feel like I'm doing the right thing paying my mortgage, and now apparently I have to pay my neighbor's mortgage, too. People are really angry," said Kim Guymon, a stay-at-home mom who bought a three-bedroom home with her husband in suburban Seattle in 2001 and has watched it drop $150,000 in value since last summer.

And the top left:

"It's just rewarding crooks," said the 38-year-old single mother, who said she turned down a bank's $100,000 mortgage offer five years ago because she knew she couldn't afford it.

Personally, I'm in the bottom left quadrant. I was able to purchase a home that I could afford, but it would have been a significantly smaller place, in a less ideal location, and more expensive than what I was able to rent, thus it didn't seem like a good investment. I don't think many people would argue with this statement that a home is an investment; purchasing a home with an expectation that it will increase in value turns a house from just shelter (i.e. renting) into an investment. Furthermore, if someone buys a home and is not able to make monthly mortgage payments based upon the initial value of the home, then the home is not only an investment, it is a speculative investment (i.e. the buyer could only afford the home based on speculating that the value of the home would rise).

To get a better idea of someone in the top right quadrant of the matrix, lets go back to the AP article:

Rosa Valdez, a resident of Coachella, Calif., hopes it's not too late for her family to be helped. The native of Mexico saved enough to buy a new $380,000 home in 2006 in the Lennar development of La Morada, where foreclosures are rampant. She fears her home could be next without federal help.

While the current price of a home is related to willingness of the owner to pay, it has nothing to do with the ability to make those payments unless that home was purchased as a speculative investment and in need of appreciation to make due. Lets use Rosa's $380,000 home purchase as an example (a price that was almost twice the 2006 national median home value at the time). Just three years after the home was purchased, she and her family can no longer afford to make the monthly payments without federal help. Thus, at initiation there were two distinct possibilities:

• Home prices rise = Rosa would have sold the home for a profit or refinanced the home to tap into the new equity to make monthly payments
• Home prices fall = Rosa defaults and walks away

In other words, paying the mortgage down for life was never a possible outcome, which means the entire transaction was pure speculation...

If the government wants to help individuals stay in their homes... fine, but please give the taxpayer ownership of those assets if it involves taxpayer money.


But, Will the Plan Work?

It better for the cost of the plan. Unfortunately, I only see the benefit as being 'on the margin' and we need more than an 'on the margin' benefit for the size of the bailout, which is huge when broken down. The basic details of the plan are as follows:

The mortgage plan is hoping to help 9 million individuals at a cost of $275 billion. This comes out to $30,000 PER BAILOUT or 20% of the current value of the median home PER BAILOUT! While I don't question the government's ability to spend $275 billion, I do question the 9 million figure based upon my hypothesis that home prices NEED to eventually reach their natural price level (use the chart below to determine the cost per bailout based upon whatever estimate you want to use).



The question I've asked myself (as a non-homeowner who is looking to purchase); would I be willing to pay $200,000 for something I believe is worth $150,000, even if my monthly payments are the same due to subsidized financing? Of course not! What if I want to move in the next 5, 10, or even 15 years? In that case the house gets marked to market and I lose my $50,000 relative excess. Thus, my theory is that regardless of this plan, home prices still have room to fall.

It is clear the administration believes that solving the housing problem is more important than the moral hazard being introduced. If that's the case, here is my alternative... reduce the principal owed on these mortgages IF they are already taxpayer owned (i.e. a Fannie / Freddie mortgage - leave private loans out of taxpayers hands). If they want to blow $275 billion for 9 million people, then reduce the principal by that 20% per bailout amount.

In other words, if prices are going to fall anyway, why prevent the inevitable? Renowned investor Wilbur Ross seems to echo these sentiments (Housing Wire via Naked Capitalism):

“The price of housing needs to be cleaned out. The Obama administration could right-size every underwater home and reduce principal to fit the current market value of the home. If they are going to deal with it they have to deal with it in a severe way,” Ross told HousingWire. “They also really need to consider all borrowers who are underwater, and not just the ones that have gone into default.”

The Homeowner Affordability and Stability Plan does some of that, but doesn’t go far enough, Ross suggested. “The have to reduce the principal amount of loans, not just nonperforming loans, but also performing ones,” he told CNBC. “Why should a guy who’s not paying benefit, while some poor citizen who’s struggling to make the payments gets stuck with the mortgage?”

Petroleum Supplies

This was supposed to post yesterday... whoops.

Reuters reports:

Oil rose to over $42 a barrel after the U.S. Energy Information Administration said gasoline supplies declined by 3.4 million barrels, or more than the expected drop of 100,000 barrels in the week to Feb. 20.

"Demand is coming back," said Tom Bentz, analyst at BNP Paribas Commodity Futures in New York.

Seems like an awful large amount of optimsim for another bull market for oil after the beating it has already taken, especially when the longer trend still points to an increased supply for both oil and gas since last Fall.



Source: EIA

Good News Alert! Australia May Show Positive GDP

We had to travel around the world for some good economic news, but here it is. Business Day reports:

Companies ramped up plans for spending in the final months of last year, providing enough momentum for the economy to trigger a fresh look at 2008 growth estimates.
Business spending expectations for the three months to the end of December skyrocketed 6%, to $24.8 billion, seasonally adjusted, from an upwardly revised 1.6% rise in the September quarter, the Australian Bureau of Statistics said.

''This will provide vital support to fourth quarter GDP growth,'' said ANZ economist Katie Dean. ''Australia may well avert a negative read.''

''Today's data will prompt forecasters to rush to upgrade expectations for fourth quarter GDP growth,'' she said.

Source: ABS.gov

Japanese Exports Almost Halved in 12 Months

Bloomberg via Naked Capitalism:

Japan’s exports plunged 45.7 percent in January, resulting in a record trade deficit, as recessions in the U.S. and Europe smothered demand for the country’s cars and electronics...

Gross domestic product shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, and economists predict the slump will drag into this quarter. Toyota Motor Corp., Sony Corp. and Hitachi Ltd. -- all of which forecast losses -- are firing thousands of workers, heightening the risk the recession will deepen.

“The drop in exports is unbelievably bad,” said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo. “The pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted."

Loan Modifications for Dummies

Ahead of what is sure to be an ugly existing homes release, lets see how loan modifications can work (albeit in a highly simplified world without securitized loans and continually falling home prices). For both the homeowner, who gets to keep the house / retain a portion of equity, and the lender, that does take a haircut, but gets paid back more than after a distressed sale of the collateral in a foreclosure, it can be a win-win.

How? Lets take a look:

In December, 2008 the median home price in the western region of the U.S. went for $213k, down more than 30% from a year earlier. This wiped out all the equity of the homeowner if they put down 20% one year prior. At this point it appears the homeowner eats most of the loss, but the problem is the homeowner is likely to "walk away", leaving the outcome to the lender's foreclosure process. Assuming a 30% haircut selling in this distressed market, the lender ends up eating a huge portion of their original loan.



While that story is now well known, the lender does have the opportunity to modify that loan amount. Assuming a $55,000 reduction in the loan to put the homeowner $10,000 back in black (of which a portion is from losses the lender expects simply from the market downturn), the homeowner has the incentive to stay and the lender isn't force to sell the asset in a distressed market. This in turn creates more value for the existing owner of the loan.

Again, if only life were so simple...

What a Difference a Day Makes... Financial Firms Rocket

Bloomberg reports:

Federal Reserve Chairman Ben S. Bernanke rejected the idea that officials plan to use reviews of banks’ balance sheets as a pretext for government takeovers of the nation’s largest lenders.

The Treasury will buy convertible preferred stock in the 19 largest U.S. banks if stress tests determine they need more capital to weather a deeper-than-forecast recession, Bernanke told lawmakers in Washington today. The shares would be converted to common equity stakes only as extraordinary losses materialize, he said.

“I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary,” Bernanke said at the Senate Banking Committee hearing.

And financials roared....



Source: Yahoo

Consumer Confidence Plunge

Source: Conference Board

Eastern Europe at a Tipping Point

I was just about to release the following post when I saw FT's Alphaville reports Latvia has been downgraded to "junk" by S&P. Here is the background I planned to release...

The Financial Ninja details:

"Latvia’s four-party coalition government, facing the steepest economic decline in the European Union and plunging public opinion ratings, resigned after two parties called for Prime Minister Ivars Godmanis to step down.

East Europe has been battered by the global financial crisis, which is curbing demand for their exports while shutting off credit and investment. Gross domestic product in Latvia, which has had 14 governments since breaking from Soviet rule in 1991, contracted 10.5 percent in the fourth quarter. The country followed Ukraine, Serbia and Hungary in seeking international aid when it lined up 7.5 billion euros ($9.5 billion) in loans from a group led by the IMF in December."

For those in the economic blogosphere, this isn't a surprise. John Hempton at Bronte Capital posted Hookers that Cost Too Much last summer, detailing the struggles Latvia was going to face, based on (you guessed it) the price of hookers:

When travel to Latvia opened up it was eye-popping for an awful lot of British lads. Here was a country where the women were Baltic Beauties – and poor. To the London lads this was bucks party heaven. It became more so when Ryan Air put on a Friday evening flight from London to Riga. Ryan Air even tried a Riga-Shannon route to service the Irish lads. The locals even got to classifying all Brits as Ryanair sex tourists as this club review shows.

Well due the crazy exchange rate the bucks parties got too expensive. I am not going to lead your round the internet to stories about over-priced hookers – but the bucks parties are moving to Prague. The Shannon-Riga flight has been cancelled. Ryan Air has recently announced a Friday night Birmingham to Prague flight.

This was just one example showing that the Latvian currency was too strong, but it allowed John to realize Latvia (and Eastern Europe in general) had all the makings for a severe recession:

Eastern Europe is full of vulnerable currencies. Most of the countries have fixed their exchange rate to the Euro (hoping I guess for Euro membership at some stage) and have massive current account deficits.

Latvia is particularly bad. The exchange rate is pegged (as per this page from the central bank of Latvia). The current account is enormous, almost 25% of GDP. There is no doubt whatsoever this exchange rate is not sustainable. Not close.

With a currency too strong, exports get crushed, but as of now they have been unable to devalue their currency due to pressure from European banks who have made huge amounts of Euro denominated loans to these eastern European countries (hence the widening of CDS spreads). A devaluation of their currency would mean the value of the loans skyrocket in local currencies, removing almost any possibility that they will be repaid. It seems we are now at the tipping point... that point when internal pressures become too strong, which is exactly what is happening now in Latvia. Back to the Financial Ninja:

Street violence is just street violence... until it isn't. This occurs when the people finally coalesce around a new leader and a new ideal. Then they unceremoniously overturn in it's entirety the old order... with all the chaos and violence that that entails.

"The deepening economic crisis has sparked the worst street violence since independence, when hundreds rioted in Riga’s old city, smashing windows and battling police after a peaceful anti- government demonstration of about 10,000 people on Jan. 13 had dissolved."

Case Shiller Price Index (December)

For more information on what the Case Shiller Price Index is and why it may be an important measure, check out this old post.

The Case-Shiller Price Index (an adjustment to CPI) turned severely negative year over year, down 5% from December 2007 as home prices, a global slowdown, and the reversal in energy prices severely impacted price levels.

While, here is a graph of the difference...

Source: BLS / S&P

Where's the Equity Premium? Part III

I've previously compared the S&P to the Barclay's Aggregate Index going back 19 years and before that to the BCAG over the previous 12 years. Now, we have the S&P vs. the Barclay's Government Index over the past 20 years....



Source: Barclay's

Stairway to....

Source: Yahoo

Equities vs. Housing... A Function of the Baby Boomers?

In response to my post Help Jake Understand: Home Prices in Terms of Equity (chart below) there were a lot of great explanations.



My personal favorite was by 'anonymous' poster:

It's not a reemergence of housing, but a death of equities, which can only get worse as the baby boomers age. A cohort reaching retirement age in bubble-level numbers is going to flee equities with a passion.

This started a little earlier than it was supposed to because of the collapse of the housing bubble, but the trend is written in the demographics.

In other words the chart shows equities beginning their outperformance in the mid to late 1960's (when baby boomers were reaching the investment stage of their life) and housing beginning to outperform when these baby boomers were began to leave the equity market in large numbers to invest in less risky fixed income and home #2 (the demand for fixed income may have contributed to the cheap levels of financing as demand for fixed income lowers required rates and home #2 and/or #3 were vacation homes for these boomers). While all of this is highly theoretically, very big picture, and all a guess, it makes sense to me...

This would explain why even with the recent mortgage bust, equities are still underperforming relative to the housing market... equities are the much more liquid of the two and you only sell what you can. He or she goes further:

Take an idealized version of the baby boom: a pimple curve with a baseline of 1, a start point of 1945 and an end point 20 years later at 1965. Slide this curve forward by about 20 years: an age where the first boomers really need houses. That puts the start of the pimple at 1965, ending at 1985. Slide another version of the curve forward by 45 years: an age when the boomers have real money to invest in the market. That puts the start of the pimple at 1990, ending at 2010. Let the two curves represent demand: the first for houses, the second for equities.

I took that idea and created the chart below. The blue line shows the ratio between stocks and housing from 1968-1988, while the red line shows the same ratio with the x-axis (i.e. the inverse of the ratio... in other words housing over equities) from 1988-2008.



Interesting stuff...

Top Ten Banks.... Then and Now

Top ten banks by market cap; then (October 31st, 2007) vs. now (February 20th, 2009):

By Rank


Maintaining Same Color


And this is AFTER the billions of dollars in government "investments".

Source: WSJ

EconomPics of the Week (2/20/09)

Bottomless Money Pit
Mortgage "Moral Hazard" Plan
How Much is a $2.5 Trillion Deficit?
Help Jake Understand: Home Prices in Terms of Equity
$500 Billion Sinkhole
GM Bailout... Another Sinkhole
Federal Obligations > Annual Global Economy

Economic Data
CPI (January)
Philly Fed Index... "It Can't Get Worse" Edition
Leading Economic Indicators (January)
PPI January: Up Month over Month; Down Year over Year
The Case for an Auto Bailout
Industrial Production / Capacity Utilization Freefall
When Will the Economy Hit Bottom?
Empire Manufacturing Survey
Japanese Economy Crumbling

Banks
Bank Leverage Ratios... GE Boomin'
What Taxpayers Got for $45 Billion

Wealth / Asset Prices
Oil / Gas Divergence
Median Family Net Worth Down ~1/3
Import / Export Prices

High Yield "Time Bomb"

FT reports:

The amount of speculative-grade debt maturities will increase in the next three years, Moodys said, from $26bn in 2009, to $44bn in 2010, and $120bn in 2011.

How Much is a $2.5 Trillion Deficit?

James Quinn at Financial Sense.

The annual deficit for 2009 is now estimated at between $2 trillion and $3 trillion give or take a few hundred billion. These figures seem incomprehensible to the average person on the street. Some perspective is in order. If we use $2.5 trillion as the estimated deficit that means:

*We’re adding $6.85 billion per day to the National Debt
*We’re adding $285 million per hour to the National Debt
*We’re adding $475,000 per minute to the National Debt

Have a great $14 Billion weekend everyone!

Source: Financial Sense via Infectious Greed

Help Jake Understand: Home Prices in Terms of Equity

The last time I posted a "Help Jake" I got a TON of great replies (I'll admit that topic had more of a global economic appeal), but lets see what you all have to say?

First, what is it? It's the median home price in terms of the number of S&P 500 shares required to buy it, going back to 1968...



Explain away...

Source: S&P / NY Times

CPI (January)

BLS:

On a seasonally adjusted basis, the CPI-U increased 0.3 percent in January after declining in each of the three previous months. The energy index climbed 1.7 percent in January, its first increase in six months, but it was still 31.4 percent below its July 2008 peak level. Within energy, the gasoline index rose 6.0 percent in January after a 19.3 percent decline in December. However, some energy components continued to decline; the fuel oil index fell 3.7 percent in January and the index for natural gas declined 3.6 percent.

Note: BLS claims 0% CPI year over year, but using their figures and weights, it comes out to 0.4% (used above)... thanks for the great data BLS! And housing up year over year? Give me a break...

Philly Fed Index... "It Can't Get Worse" Edition

Interest Rate Roundup reported:

The Philadelphia Fed index plunged to -41.3 in February from -24.3 in January. That was far worse than the average forecast for a reading of -25 and the lowest reading since October 1990 (-48.2). Subindices tracking new orders, employment, and shipments all fell sharply.

Though in a bit of a silver lining, the index measuring expectations about the next six months rose to 15.9 from 7.4 a month earlier. That's the highest level since September.

Source: Philadelphia Fed

Leading Economic Indicators (January)

RTT News reports:

Thursday morning, the Conference Board released its report on leading economic indicators in the month of January, showing that its leading indicators index unexpectedly showed a notable increase compared to the previous month. The report showed that the leading indicators index rose 0.4 percent in January following a revised 0.2 percent increase in the previous month. Economists had expected the index to come in unchanged compared to the 0.3 percent increase originally reported for December.

While the leading indicators index rose for the second consecutive month, the Conference Board noted that the November and December values were revised down as new data for manufacturers' new orders became available.

The bigger than expected increase by the index in January reflected positive contributions from real money supply, the interest rate spread, consumer expectations, manufacturers' new orders for non-defense capital goods, and manufacturers' new orders for consumer goods and materials.

Source: The Conference Board

What Taxpayers Got for $45 Billion

By the fourth quarter of 2008, only Citigroup's Global Wealth Management Group was making any money (though those $29mm in earnings are too small to even see in the chart below).

Source: Citi via Ritholtz

PPI January: Up Month over Month; Down Year over Year

BLS reports:

The Producer Price Index for Finished Goods rose 0.8 percent in January, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This increase followed declines of 1.9 percent in December and 2.5 percent in November. At the earlier stages of processing, the decrease in prices for intermediate materials slowed to 0.7 percent from 4.2 percent in the prior month, and the index for crude materials declined 2.9 percent after dropping 5.3 percent in December.

Year over Year



Month over Month

Source: BLS

The Case for an Auto Bailout

In taking a closer look at yesterday's industrial production release, I pulled all the data, and sorted those industries showing the largest drop in production over the past 7 months (7 months is the furthest back the Federal Reserve details at this level).

Not surprising, the largest drop in production was within the auto industry. What did surprise me (it shouldn't have) was how sharp the decline was.



While I am not saying a bailout is the answer, I am not sure how any business would be able to survive when production goes down this much, this fast.

Source: Federal Reserve

Industrial Production / Capacity Utilization Freefall

Details of the state of U.S. industrial production was released yesterday and it wasn't pretty. Bloomberg reports:

U.S. industrial production fell in January for the sixth time in seven months and more than forecast as companies reduced manufacturing amid a worldwide slowdown in demand.

Output at factories, mines and utilities dropped 1.8 percent, after a revised decrease of 2.4 percent in December that was more than previously reported, the Federal Reserve said today in Washington. Car and truck assemblies fell to a record.

More bothersome to me were the figures detailing capacity utilization as compared to recessions and peaks of the past 20 or so years, as well as average over the 1972-2008 time frame (unfortunately they didn't include figures for recessions of the 1970's or 1980's).



The Federal Reserve release did share this frightening tidbit:

The factory operating rate moved down 1.7 percentage points, to 68.0 percent, the lowest rate of utilization since this series began in 1948.

While Bloomberg detailed:

Capacity utilization, or the proportion of plants in use, fell to 72 percent, the lowest since February 1983, from 73.3 percent in December.

Seems awfully deflationary to me (i.e. NO DEMAND). We'll see what this morning's PPI release shows there...

Source: Federal Reserve

Mortgage "Moral Hazard" Plan

Click for larger table

Source: Homeowner Afford Ability and Stability Plan Fact Sheet

GM Bailout... Another Sinkhole

Yves titled her post on the latest and greatest GM bailout 'Black Hole Alert', which reminded me of this chart I posted back in August.

Looks like I'll need to update and extend the chart...

Bank Leverage Ratios... GE Boomin'

Option ARMageddon via Infectious Greed reports:

As you can see, Morgan Stanley and Goldman have cut their leverage significantly. Citi is in worse shape. BofA and Chase are treading water. GE is the scary one.

December 30th’s was the first balance sheet the banks have published since they received TARP capital. Common shareholders are still in a first-loss position relative to the government, however, because TARP investments were in the form of preferred shares. So I have backed these out in order to arrive at the tangible leverage ratios above.

One BIG caveat with this calculation is that these companies carry “other assets” on the balance sheet, some of which might be intangible in nature. Also, each has significant risk exposure via off-balance sheet entities. The point is, even though these leverage calculations seem high, they actually understate the risks facing common shareholders…

Import / Export Prices

The latest BLS release for U.S. Import and Export prices shows a rebound from the deflationary pressures we've seen since the turmoil began in early Fall:

Imports

Import prices fell 1.1 percent in January and 23.4 percent over the past six months. For the sixth consecutive month, petroleum prices and nonpetroleum prices decreased, falling 2.4 percent and 0.8 percent, respectively, in January. However, prices for both overall imports and petroleum decreased at a smaller rate in January than in each of the previous five months since prices last rose in July.

Exports

Export prices rose 0.5 percent in January after declining in each of the previous five months. The increase was driven by a 6.2 percent rise in agricultural prices as nonagricultural prices were unchanged. The rise in agricultural prices followed decreases in four of the previous five months. Higher prices for corn, soybeans, and wheat accounted for the increase in January. Despite the January increase, agricultural prices fell 9.7 percent over the past 12 months. Nonagricultural prices recorded no change in January after falling in each of the previous five months.

When Will the Economy Hit Bottom?

The average recession dating back to the 1850's has been 17 months in length. With the current recession already at 14 months in length and growing, bottom callers (i.e. the average economist) are predicting things will turn around by Q3 2009. If this occurs, then this recession is... just "average" (hard for me to believe).



On the other hand, the five worst recessions since 1850 have averaged 40 months in length. If this recession plays out in a manner more consistent with one of the worst five since 1850, look for the economy to bottom in late 2010 or early 2011.

So which is it... Q3 2009 or Q1 2011? In general, it is just one big guessing game. As the WSJ details, only one "top economist" in their 2008 survey predicted GDP would contract in 2008, so how can we expect them (or anyone) to know exactly when the economy will turn.

The bulk of prognosticators were pessimistic going into 2008, but they weren't pessimistic enough. The economy would slow, they thought, but only Mr. Hatzius thought it would contract. He also foresaw a steep increase in the unemployment rate, moderate inflation and a Federal Reserve that would be busy cutting rates.

Source: NBER

Oil / Gas Divergence

The price of oil has come crashing down in recent weeks, but the price of gas hasn't followed (great chart of this is over at Bespoke).



Why? According to AP Energy Writer John Porrettoe:

The price of gas is indeed tied to oil. It's just a matter of which oil.

The benchmark for crude oil prices is West Texas Intermediate, drilled exactly where you would imagine. That's the price, set at the New York Mercantile Exchange, that you see quoted on business channels and in the morning paper.

Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. A severe economic downturn has left U.S. storage facilities brimming with it, sending prices for the premium crude to five-year lows.

But it is the overseas crude that goes into most of the gas made in the United States. So prices at the pump will probably keep going up no matter what happens to the benchmark price of crude oil.

Hey, at least we're back to the longer term mean.



Source: EIA

Empire Manufacturing Survey

Bloomberg reports:

Manufacturing in New York contracted in February at the fastest pace on record, signaling the recession that began more than a year ago is intensifying.

The Federal Reserve Bank of New York’s general economic index fell to minus 34.7, the lowest level since records began in 2001, from minus 22.2 percent in January, the bank said today. Readings below zero for the Empire State index signal manufacturing activity is shrinking.

Source: New York Fed

Median Family Net Worth Down ~1/3

Using data from the Survey of Consumer Finances, Baseline Scenario attempts to compute a "composite picture of the median family":

For each asset or liability, I include it if more than 50% of the families in the middle income quintile have it; in that case, I record the median amount held by families who hold that asset. This isn’t the median family, but we might call it a “typical” family.

Click for larger image



What this information shows is:

The weakening of household balance sheets (fewer assets, same liabilities, less net worth, more anxiety) has likely had a significant effect in depressing consumption, which has been the single largest factor in our recent decline in GDP.

$500 Billion Sinkhole

Paul Krugman jumps on the nationalization train (similar thinking as my post The Case for Nationalization). First he takes a look at expected future losses, which according to Dealbook adds another $520 billion in estimated losses from just six banks:

The future losses for some banks are staggering by CreditSights’ estimates: Wells Fargo, $119 billion; BofA, $99 billion; JPMorgan, $124 billion; Citi, $101 billion; Goldman Sachs: $47 billion; Morgan Stanley, $34 billion.

Then Paul jumps into his argument:

Given these numbers, it’s extremely hard to rescue these banks without either (a) giving a HUGE handout to current stockholders or (b) effectively taking ownership on the part of we, the people. Of these, (a) would be politically unacceptable as well as bad policy — but the Obama administration isn’t ready to go for (b), because it’s not in our “culture”.

Hence the perplexity of policy. Our best hope right now is that the “stress test” will make (b) inevitable — that Treasury will declare itself shocked, shocked to find that the banks are in such bad financial shape, leaving government receivership unavoidable.

Paul focuses just on the big four "money centers" (leaving off Goldman and Morgan Stanley). I would argue these "formerly known as Investment Bank" entities have a similar need for capital. As Yves points out in a post at Naked Capitalism:

Now that Goldman and Morgan Stanley are bank holding companies, they are wildly out of compliance with regulatory capital requirements (investment bank, under SEC jurisdiction, were permitted much higher levels of gearing).

Federal Obligations > Annual Global Economy

Worldnetdaily reports:

The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the "2008 Financial Report of the United States Government" as released by the U.S. Department of Treasury.

The difference between the $455 billion "official" budget deficit numbers and the $5.1 trillion budget deficit cited by "2008 Financial Report of the United States Government" is that the official budget deficit is calculated on a cash basis, where all tax receipts, including Social Security tax receipts, are used to pay government liabilities as they occur.

I believe I correctly backed into that $5.1 Trillion number below (drop me a comment if anyone interpreted this differently).

Click for larger chart



More frightening, the article details the growing federal obligations as calculated by John Williams at Shadowstats:

Calculations from the "2008 Financial Report of the United States Government" also show that the GAAP negative net worth of the federal government has increased to $59.3 trillion while the total federal obligations under GAAP accounting now total $65.5 trillion.

How large a figure is this? More than the size of the global economy, estimated at $54 Trillion for 2007.

Source: ShadowStats / Department of Treasury

Japanese Economy Crumbling

FT Alphaville reports:

Japan’s economy shrank at an annual 12.7% pace last quarter, the most since the 1974 oil shock, as recessions in the US and Europe triggered a record drop in exports, reports Bloomberg. GDP fell for a third straight quarter in the three months to Dec 31, down a quarterly 3.3%, the government said Monday in Tokyo. Exports plunged an unprecedented 13.9% from the third quarter as demand for cars and televisions collapsed amid a slump that the G7 nations said will persist for most of 2009.

Source: ESRI

EconomPics of the Week (Valentine's Edition)

Asset Classes
Oxymoron of the Day: S&P Earnings
Equity Markets: Expect Volatility
S&P 500 on a Five Month Rally? Just Ignore the First Half of the Month
LIBOR Has Come a LONG Way

Economic Data
Business Sales and Inventories (December)
Euro Region GDP Down 1.5%
European Industrial Production (December)
Retails Sales Bounce 1% MoM, Down 10% YoY
U.S. Trade in Goods Crashing = Contraction of Trade Deficit
Wholesale Inventories Rising Dramatically
Same Store Sales (January)
Revolving Credit Free Fall

Banks
Merrill $3.6 Billion Bonus Breakdown
Bailout of Securitization Market = Bailout of Banks
Yen Shopping Spree Finally Here?

Bailout
Moody's: The United States is Resilient... Not Resistant to Downturn
Treasury Budget Soars
Real Treasury Yields Moving Lower
TARP Review: Taxpayers Paid too Much
The Case for Nationalization?

Other
Great Depression II = Rock n' Roll
A-Rod: "It was Such a Loosey-Goosey Era"

Oxymoron of the Day: S&P Earnings

Calculated Risk details the S&P 500 will report its first ever quarter of negative earnings (expectations are for a loss of -$10 per share).



Even excluding financials the figure is expected to be negative.

Calculated Risk asks:

What is the P/E for that?

Source: S&P

Merrill $3.6 Billion Bonus Breakdown

Andrew Cuomo writes Barney Frank (hat tip Paul):

Merrill Lynch's decision to secretly and prematurely award approximately $3.6 billion in bonuses, and Bank of America's apparent complicity in it, raise serious and disturbing questions.

In the letter there are details regarding the breakdown of that $3.6 billion, which I've attempted to breakout further (there is some rounding and assumptions involved, but in general it is what it is).

Total Breakdown

Average by Tier (not sure how clear this is... I couldn't think of a better way to show it)

Source: NY State

Business Sales and Inventories (December)

LA Times reports:

Inventories at U.S. businesses fell more than forecast in December and the most since 2001 as companies responded to slumping sales that reflect a deepening recession.

The 1.3 percent drop in the value of unsold goods at factories, retailers and wholesalers followed a revised 1.1 percent decline in the prior month, the Commerce Department said today in Washington. Sales fell 3.2 percent after a 5.7 percent decline in November.

So while inventories are shrinking at a rapid pace, sales are falling even faster.

Looking over a longer time frame (year over year, rather than month over month) we see sales that have plummeted and inventories at almost exactly the same level. Awfully bearish for expectations of production growth going forward.



Source: Census

Euro Region GDP Down 1.5%

Bloomberg reports:

Europe’s economy contracted the most in at least 13 years in the fourth quarter, compounding pressure on the European Central Bank to reduce interest rates to the lowest ever next month.

Gross domestic product in the euro region declined 1.5 percent from the previous three months, the European Union’s statistics office in Luxembourg said today. That was more than the 1.3 percent economists expected and the most since euro-area GDP records began in 1995. From a year earlier, GDP fell 1.2 percent in the fourth quarter, the only full-year drop on record.

Source: Eurostat

European Industrial Production (December)

Bloomberg reports:

European industrial production dropped the most on record in December, pointing to a deepening economic slump in the fourth quarter. Output in the euro region fell 12 percent from the year- earlier month after an 8.4 percent decline in November, the European Union’s statistics office in Luxembourg said today.

Source: Eurostat

Moody's: The United States is Resilient... Not Resistant to Downturn

Felix at Portfolio.com asks the worrisome question:

Can the yield on US Treasuries be considered the "risk free rate of return" if there are other securities which are lower-risk than US Treasuries?

Apparently Moody's has broken up their AAA rating into three tiers and the United States is not in the top tier (though I am left wondering who trusts / listens to / respects / cares about Moody's these days). Reuters reports:

The "Resistant" category included Germany, France, Canada and the four Scandinavian countries, whose ratings have so far been untested. These countries have either entered the financial crisis from a very strong position or have economic models that remain robust, it said.

The "Resilient" group comprises the United States and the UK, whose ratings are being tested due to a shock to their growth model and large contingent liabilities. But it added: "These countries display an adequate reaction capacity to rise to the challenge."

The size of the U.S. and UK economies, financial markets and capital flows and relative debt levels to growth mean policymakers have more scope to loosen fiscal policy without endangering the public finances too much.

Ireland and Spain fell into the third, "Vulnerable" group, which refers to nations which are forced to take risks with their public finances.

Click for Larger Table



Anyone ready for a conspiracy theory? Drumroll please.... this announcement by Moody's comes on the same day as Dr. Greenspan's panning of rating agencies. The Big Picture quotes Dr. Greenspan as saying:

“What we have created in this world is an aura around the credit rating agencies about certification from them is the Good Housekeeping seal of approval, ” Mr. Greenspan said. “I will tell you the record of a lot of the forecasters of ratings have not been distinguished. They never were.”

Was this whole announcement just meant to deflect away Dr. Greenspan's criticism? I doubt it, but I bet more discussion centers around the Moody's rating decision than Dr. Greenspan's quote in the A.M.

Bailout of Securitization Market = Bailout of Banks

Eight top financial executives from various firms appeared yesterday before Congress. CNN reports:

Many of the CEOs at Wednesday's hearing defended their actions, noting that while credit standards have tightened, they were continuing to issue loans. Several of the CEOs added that without government assistance, credit would be even harder to obtain.

"We are still lending, and we are lending far more because of the TARP program," Bank of America Chairman and CEO Ken Lewis said in a copy of his prepared remarks.

Looking at the data, it looks like they may have a point (though they play a big part in this story later on). Since 1948, the commercial banking sector's share of consumer loan holdings dwindled from a peak of more than half the entire market (in the late 1970's), to less than 30% at the beginning of this decade.

The issue thus isn't only whether commercial banks are lending, but how to bring the securitization market back to life. Securitization holdings of consumer loans grew larger than that of commercial banks, all from nothing just 20 years ago.

And now the securitization market has all but ceased. WSJ's Marketbeat reports:

Securitization issuance is down 91% from this point last year, according to Dealogic, with asset-backed issuance declining to $2.6 billion from $32.1 billion at this point a year ago. Most consumer loans, such as credit cards, auto loans, student loans and others, are relatively easy to bundle and sell as securitized assets, but not now, when buyers of such product do not exist.

To summarize the problems in the securitization market (very high-level):

A) Nobody will buy securitized loans (which would restart the market) unless the yields are higher than that reported on bank balance sheets (although they do actually trade at these higher yields)

B) If these high yields were accepted as actual market prices (and not "forced selling" prices), it would force banks to write-down the value of their assets to the point where they could no longer pretend to be solvent

So.... solving problem A means banks are bankrupt (I am not opposed to nationalization, but "the forces" of corrupt politicians and their rich cronies sure are), while solving problem B means we are stuck in the present situation. Thus, without government intervention there appears to be no solution that solve BOTH A and B. This is where the TALF comes in. For details lets go to Morningstar:

Under the TALF, the Federal Reserve Bank of New York will lend to each borrower an amount equal to the value of the pledged ABS minus a haircut. The Fed posted a haircut schedule Friday.

Borrowers will be able to choose either a fixed or floating interest rate on TALF loans. The fixed interest rate will be 100 basis points over the three-year Libor swap rate, and the floating interest rate will be 100 basis points over one-month Libor.

In other words, the TALF will provide cheap, long-term financing, with no recourse to institutional investors, who can use this cheap financing to lever up the below market yields to an attractive level, all the while banks can continue to pretend they are solvent... what a beautiful plan. For everyone except taxpayers that is (who do you think is actually financing this leverage?)

Source: Federal Reserve

Retails Sales Bounce 1% MoM, Down 10% YoY

Marketwatch reports:

U.S. retailers rang up their largest increase in sales in more than a year in January, rebounding strongly after six straight months of sharp declines, the Commerce Department reported. Retail sales increased 1% on a seasonally adjusted basis in January, the first increase since June and the largest percentage increase since November 2007. The gain was unexpected, with economists surveyed by MarketWatch looking for a decline of 0.4%.

Retail sales are down 9.7% in the past year. The government data showed most retail sectors enjoyed increased sales in January compared with December.

Source: Census

Treasury Budget Soars

Xinhuanet reports:

The U.S. federal budget deficit soared to 569 billion dollars in the first four months of the current fiscal year, the highest on record for this period, the Treasury Department reported on Wednesday.

Rolling back that same fourth month time frame back to the mid-1980's we see just how unprecedented this truly is.



Not a surprising result in an economy in which production / employment (thus taxes) are sharply down, while stimulus / bailouts are sharply up. Looking at the 12 month change in the level of receipts and outlays over that same period, we get the following chart which must make all Keynesian's proud and conservatives shudder.

Source: Treasury

Real Treasury Yields Moving Lower

Even with the Treasury sell-off witnessed over the past few weeks, with expectations for inflation on the rise, real yields of Treasury bonds (as computed by taking the nominal Treasury rate and subtracting the implied inflation rate embedded in an inflation swap) have been declining at a rapid rate.

(Note that I didn't just graph TIPS real rates as TIPS are trading cheap due to technical / liquidity issues). What does this all mean?

• The Good: The U.S. Government is borrowing on the cheap (and needs to borrow a lot so cheap = good)
• The Bad: Real rates are the lowest they have been since Lehman went under... signifying continued stress in markets if investors are willing to take 0.50% real returns over the next 5 AND 10 years

U.S. Trade in Goods Crashing = Contraction of Trade Deficit

Marketwatch reports:

The U.S. trade balance fell to a six-year low in December as the global market for U.S.-made goods shrank at a record pace while Americans also decreased their appetite for imports, the Commerce Department reported Wednesday. The trade gap - the difference between imports and exports of goods and services - fell to a seasonally adjusted $39.9 billion in December, the lowest in nearly six years, from a revised $41.6 billion in November.

The huge change was due to the trading of goods (services held up well, which makes you wonder how bad things would be in the U.S. had we not shifted so dramatically towards a service based economy over the past few decades).

Taking a closer look at both exports and imports of goods, we see a huge drop in both. Important for the trade balance, imports are falling faster than exports AND are falling from a higher denominator (i.e. the reason the U.S. trade deficit is contracting sharply).

Source: Census

Wholesale Inventories Rising Dramatically

In response to my post on Wholesale Sales, GreenAB asks:

Do you have a chart of this data (industry sales ratio)? Vehicle inventories rose 1.7 percent, after increasing 1.5 percent the prior month, while auto sales fell 8.1 percent, today’s report showed. That pushed the industry’s inventory-to-sales ratio up to a record 2.31 months...

You want it? You got it...

Bloomberg further details:

Wholesalers had enough goods on hand to last 1.27 months at the current sales pace, the highest level since 2002. Sliding demand in the U.S. and abroad signals a further pullback in production as companies try to work through their stocks of unsold goods at warehouses, worsening the recession.

More interesting (to me) is the year over year change in the inventory sales ratio.

In other words, even if final consumer demand picks up, wholesalers won't necessarily be buying from producers as they already have the inventory piling up.

Source: Census

Yen Shopping Spree Finally Here?

A strong currency has crushed the Japanese trade balance in recent months.



While the strong Yen makes Japanese businesses uncompetitive (Japan is an export based economy), there are benefits of having a strong currency. Back in October I pondered whether there would be a Yen Based Acquisition Spree on the Way? It looks like it may be. Bloomberg reports:

“A lot of assets have gotten extremely cheap and Japanese investors are looking to park their money somewhere,” said Kenichiro Ikezawa, who oversees about $3 billion as a fund manager at the second-largest brokerage in Tokyo. “Emerging markets including Brazil, Mexico and Turkey look attractive. We would like to invest more in such countries.”

After a year when the yen rallied against 177 currencies, Japan’s biggest money managers say the best is over in the foreign exchange market. The nation’s investors bought 940 billion yen ($10.3 billion) more international stocks and bonds than they sold in the five days to Jan. 31, the seventh week of net purchases, according to the Ministry of Finance.

Japanese companies are also taking advantage of the strengthening currency, spending record amounts on mergers and acquisitions outside the country. The total value of overseas takeovers more than tripled to $76.8 billion last year, according to data compiled by Bloomberg.

Great Depression II = Rock n' Roll

I'm going to pretend that machinery = guns so that we can get the trifecta of Guns, Drugs, and Booze as the only things people are buying (besides food). I'm not sure if I'm scared or excited by this...

Source: Census

Revolving Credit Free Fall

Inside ARM reports (bold mine):

With banks freezing credit lines and the economy tanking, consumer credit in the U.S. declined in December 3.1 percent for the third straight month. It’s the longest slide in consumer since 1991.

The Federal Reserve reported late Friday that overall consumer credit outstanding in the U.S. dropped by $6.6 billion in December, or at an annualized rate of 3.1 percent. The Fed’s consumer credit report, called the G.19, does not include debt backed by real estate.

Most of the decline was in revolving credit, most commonly comprised of credit card debt. Revolving credit fell $6.32 billion, or 7.8 percent annualized (5.3% annualized over the quarter), to a total of $963.55 billion outstanding in December. In November, revolving credit declined 8.5 percent.

Source: Federal Reserve

LIBOR Has Come a LONG Way

Some good news!


LIBOR was actually worse than this, but October 17 was the first day Across the Curve presented the LIBOR curve.

Source: Across the Curve

The Case for Nationalization?

The NY Times reports Geithner's plan prevailed. As Mish comments:

Notice how insane this is. The market cap of Citigroup(C), JP Morgan Chase(JPM), and Bank of America (BAC) combined is $158 billion, yet the program is going to provide an initial $250 billion to $500 billion (with more insanity coming) just to deal with "soured mortgage-related assets".

I'll add in Wells Fargo (WFC) to make his point even more clear. In addition, it is important to note that the equity only has this value based on the assumption they were going to be bailed out.

Equity Markets: Expect Volatility

The chart below details the four week rolling change in the value of the DJIA during the Great Depression, against the index itself. Notice all the periods in which the market had monthly returns of 10-20% all the while declining from almost 400 to 50.



In other words, if you feel there is still significant deterioration that will take place in the economy (I do), be very careful at interpreting these 10-20% rallies OR (to be my own devil's advocate), there will be plenty of short-term opportunities to buy equities regardless of your expectations for the economy...

A-Rod: "It was Such a Loosey-Goosey Era"

MLB reports:

Rodriguez told veteran baseball reporter Peter Gammons that he used steroids "for a period of time" and only when he was with the Rangers. Rodriguez played for Texas from 2001-03 before being traded to the Yankees prior to the '04 season.

Don't get me wrong, he is still putting up massive numbers, but not like he did during the 01-03 seasons (though it makes you question what substances he is taking now).



I can't believe I am saying this, but I almost feel bad for Yankees fans. It must be tough hating your own team.

S&P 500 on a Five Month Rally? Just Ignore the First Half of Each Month

Equity markets continue to act wildly different in the first half of each month than the second. As I detailed back in December, this is in part due to rebalancing of large pension plans back to equities towards month-end (as markets have sold off, allocations to equities have become smaller than policy, thus they rebalance from better performing assets).

Going back to September, we see five consecutive months where this has been the case (by more than 5% in each instance).



If an individual had invested in the S&P only during the second half of these months, they would have actually had a positive return (almost 10%) during one of the S&P's worst performing periods EVER.

TARP Review: Taxpayers Paid too Much

The Congressional Oversight Panel (hat tip Felix) reports the Treasury "overpaid" for assets from troubled banks in the first round of TARP; especially when compared to investments made from private investors:

The Panel’s review of the ten largest TARP investments the Treasury made during 2008 raises substantial doubts about whether the government received assets comparable to its expenditures.

It doesn't surprise me that TARP paid above market value for assets (intentionally overpaying made it a form of equity injection - I thought this wasn't a bad thing at the time, though what banks have done with that equity has made me rethink that view). As Yves at Naked Capitalism stated back in September:

The intent is to overpay relative to current market prices, and with real estate and the economy headed south, these assets are certain to trade at even lower prices for a very long time. Plus banks will sell the stuff where they think Treasury is overpaying the most, and hang on to those assets that they think have the most upside.

That being said, I completely agree with Felix on his comment that:

If Treasury wants to overpay for bad assets, in order to recapitalize the banking system, then it should do so transparently. What's unforgivable is lying, and saying that you're paying a fair price when you're not.

Same Store Sales (January)

Missed this last week. CNN Money reported:

Most U.S. retailers, including Gap Inc., Target Corp. and Macy's Inc., reported weak January same-store sales Thursday as soaring unemployment and the deepest recession in three decades led consumers to retrench even as Walmart Stores Inc. bounced back with a gain for the month.

So to increase market share in this environment, all you have to do is be Walmart or take advantage of teens that can no longer afford Abercrombie and Fitch which is refusing to discount merchandise:

"We really feel that parents and teens are voting with their dollars," Chen said. "Competitively, at full retail price points, Abercrombie is too expensive. If Abercrombie chooses not to promote, that could continue to help the other retailers."

Is this a new data point to look out for? When / if Abercrombie discounts will that be the contrarian sign we've finally hit bottom?

EconomPics of the Week (2/6/09)

Unemployment
Unemployment to 7.6%: Broader Unemployment to 13.9%.
And the Best Reason to Stay in School is...
Unemployment: Birth Death Adjustment at it Again
Global Unemployment

Economic Data
German Production Down Most Since 1960's
Productivity and Costs: The Tale of Two Cities
ISM Services (January)
ISM Manufacturing Improves
Personal Consumption Down... No More "Borrowing"
European Labor Productivity
Disposable Income Breakdown

Assets
Vacant Homes "Cliff Climbing"
Top 20 Auto Brands: Then and Now
January Auto Sales... 45 Year Low
Pending Home Sales... Foreclosure Boom
Hedge Fund Returns (January)

Other
Deflation Worries Easing?
Game Theory: Why Giving the "Option" to Limit Pay Won’t Work

German Production Down Most Since 1960's

Not even when the Berlin Wall fell and Germany had to deal with the combination of East and West Germany has production fallen this fast. Per Bloomberg:

Industrial production in Germany, Europe’s largest economy, dropped the most in at least 18 years in December as demand for plant and machinery faltered.

Output fell a seasonally adjusted 4.6 percent from November, the biggest decline since records for a reunified Germany began in January 1991, the Economy Ministry in Berlin said today. It was the fourth straight monthly drop and almost twice the 2.5 percent retreat forecast by economists in a Bloomberg survey.

And the Best Reason to Stay in School is...

And those unemployed are having a difficult time re-entering the work force.

Sources: Education / Duration

Unemployment: Birth Death Adjustment at it Again

YET AGAIN... the Birth Death Model overstates employment. Per The Big Picture:

Since 2003, the B/D adjustment has been part and parcel to BLS' Current Employment Statistics (CES) program, the official measure of US employment. In brief, the Birth Death adjustment imagines (hypothesizes) how many jobs were created by companies too new and/or too small to participate or be found by CES. The model attempts to create what is perceived as a BLS error at the start of any recovery, when many new jobs are created but missed by BLS.

The birth death model did subtract 356,000 jobs in January (though LESS THAN the 378,000 reduced in January 2008; January and July are typical revision months). In addition, hidden from the January revision was an additional -180k revision for the April - December 2008 time frame as follows:

Rather than put those revisions in the prior months, I lumped the revisions into January to update the NFP / Birth-Death chart below:

As can be seen above, even with the revisions, the Birth / Death Model still indicates 746,000 net new jobs were added by small businesses in the past 12 months (while more than 3 million jobs were shed), including 12,000 in finance!

In other words, the unemployment figure was ugly, but it likely is even worse.

Source: BLS

Unemployment to 7.6%:Broader Unemployment to 13.9%

Source: BLS

Hedge Fund Returns (January)

These returns compare very well to the -8.4% return in January for the S&P 500.



Note that I removed the Equity Short Bias Index from the above chart (as of yesterday it had only 1 data point and was down 9% which looked funny considering equities sold off).

Source: Barclay

Productivity and Costs: The Tale of Two Cities

Businesses: Production per hour up. Hours down. Total Production modestly down.

Durable Goods Manufacturing: Cliff dive (my guess with compensation is they have laid off the "cheap" workers and kept middle management)

Source: BLS

Deflation Worries Easing?

Paul Krugman posts a chart that he believes shows a strong relationship between an output gap and deflation, while Paul Kedrosky implies that same chart shows randomness. So which is it... inflation or deflation?

CPI swap expectations have moved from north of 3% as recently as last May to negative (i.e. expected deflation over 2 and 5 years). Since mid-December, they are all beginning to reverse course. In other words, the market can't figure it out either.

Vacant Homes "Cliff Climbing"

Marketwatch reports:

The vacancy rate for homes typically occupied by the owner rose to 2.9% in the fourth quarter of 2008 from 2.8%, matching the all-time high set a year ago, the commerce Department reported Tuesday. Prior to the housing bubble bursting in 2005, the vacancy rate had never been above 2%. For rental properties, the vacancy rate rose to 10.1% from 9.9%. The homeownership rate fell to 67.5%, the lowest since 2001. In the fourth quarter, 2.2 million homes were vacant and for sale, virtually unchanged from a year earlier. The nation's housing stock increased by 2.2 million in 2008 to 130.8 million.

It had been thought that the problems in the "owner occupied" segment of the housing market would be a boost to the rental market (i.e. those that can no longer afford to own) and it has by number. The problem for those that own those rental homes is there is absolutely no pricing power due to the huge growth in vacancies.

And before the comments begin stating this chart is distorted because the number of vacancies is still substantially smaller than owner occupied units... save it. Since 2004, the number of vacant homes has increased by 4.65mm units or roughly 400,000 more than the increase in those owner occupied.

Source: Census

ISM Services (January)

Continued deterioration, but at a slow rate (note that Inventory Sentiment above 50 means respondents believe inventory levels are too high).


Source: ISM

Game Theory: Why Giving the "Option" to Limit Pay Won't Work

The AP reports:

The Obama administration plans to limit pay to $500,000 a year for executives of government-assisted financial institutions in a new get-tough approach to bankers and Wall Street, a senior administration official said Tuesday.

Back in September I used the below chart to show why giving banks the option to accepting TARP money with the caveat that they must limit pay will fail (they key is the option). My guess... if this passes, many banks will simply give the bailout money back (hey, maybe that's what the Whitehouse is hoping for).

Originally posted September 26th, 2008:

Lets assume for the time being that there are only two banks; Bank A and Bank B.

The media / political pundits would have you believe the likely outcome of the bailout is the top-left box in which both Bank A and B sell risk assets to the Treasury. In this case, the result is a more regulated banking industry, with imposed limits to salary, but importantly markets clear.

Click for larger table:



HOWEVER, it is in BOTH banks interest to deviate from that.

Why? Simple. If Bank A (or B) believe the other is selling their risk assets to the Treasury; they will each be better off holding on to theirs.

Why? If the other bank sells and they hold, markets will still clear (in theory) and the bank that holds onto their risk assets can sell at the new market prices. This results in increased market share as they:

• Can pay more for talent
• Are less regulated
• Don’t have the stigma of selling to the Treasury (think of what selling portrays to the market)

This is even worse in the “real world” as all banks have the incentive to wait for other banks to sell risk assets to the Treasury to clear markets.

The likely result? The bottom right box in which no bank sells voluntarily and markets remain frozen. While there were many problems with the initial plan, at least there was a 100% incentive to sell the assets.

Top 20 Auto Brands: Then and Now

Yesterday we took a look at the year over year change in sales across all brands in terms of percent, today we'll take a look at the top 20 brands by units sold. Unbelievably, Kia sold more units than Pontiac AND Chrysler combined (last year Kia sold 1/3 of that combined total).

Source: Auto Blog

January Auto Sales... 45 Year Low

How low were January sales? According to the FT (hat tip Infectious Greed):

US car sales fell to their lowest level since 1963 in January – and were less than China’s on an annualised basis for the first time – as rental fleets and consumers bought fewer vehicles in spite of steep industry discounts and government efforts to ease lending.

Click for ginormous chart


Hey, it could be worse. According to Auto Blog:

If you think things have been tough for General Motors in America, you should see how bad it's going for them in Japan. Forget pulling out of the Tokyo Motor Show, we're talking a steady sales decline over the past decade that has brought volume to just 2,000 units a year from a high of 50,000 in 1996.

Source: Auto Blog

European Labor Productivity

Absolute Return Partners (via InvestorsInsight) dives into a topic I asked for reader help (and received a bunch of great comments) not too long ago... can the Euro survive? While the article goes into much greater detail about why the European Union is /isn't in trouble, the below portion details how a single currency removes the option for the "PIGS" (Portugal, Italy, Greece, and Spain) to devalue their currency to remain productive:

Since the introduction of the euro, the PIGS have failed miserably to keep up with Germany on this measure of competitiveness. So has Ireland by the way, hence its current predicament.

EU countries outside the euro zone, such as the UK, have also lost out to Germany in recent years, but the UK has been able to play a card which is not at the disposal of the euro zone members. That card is called devaluation. Whether by design or otherwise, the UK has received a massive boost to its competitiveness in recent months as a result of the sharp fall in the value of the pound. Italy used to play this card repeatedly back in the days of the Lira. So did countries like Denmark in the dark days of the 1970s.

Pending Home Sales... Foreclosure Boom

The Big Picture reports Foreclosure Sales in the West Drive PHSI

A surge in foreclosure sales and distressed properties was the primary driver behind a notable improvement in the Pending Home Sales Index. In December, the PHSI rose 6.3% from an upwardly revised reading in November. The more important year-over-year reading was a more modest 2.1% increase versus December 2007.

The west bounced back, but as Barry stated:

Given what we know about the foreclosure-driven existing home sales out west, this last data point is no surprise.

Source: realtor.org

Disposable Income Breakdown

A breakdown of those areas contributing to disposable income going back to 1948 is below. Compensation for employees and proprietors income (i.e. salaries) have decreased from well north of 80% to 70%, while personal income receipts on assets increased from less than 10% in 1948 to almost 20% in 2008 (i.e. owners of capital had been king).



And the area with the largest growth over the past 60 years? Personal current transfer receipts, which according to the BEA are:

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.

Expect this to grow dramatically in coming years... we're all socialist now!

Source: BEA

Update- an anonymous comment adds:

I think you're ignoring the possibility that much of this is demographic (Social Security and Medicaid). As you say, it will get worse (with the pickup in Boomer retirement).

Good point.

Personal Consumption Down... No More "Borrowing" Buffer

Marketwatch reports:

Personal incomes and consumer spending fell in the United States in December from November, the U.S. Commerce Department reported Monday. Incomes dropped 0.2 percent, while disposable income also fell 0.2 percent, the government said. In the previous month, incomes fell 0.4 percent, while disposable income fell 0.3 percent. Consumer spending, meanwhile, fell faster, dropping 1 percent, the report said. Consumer spending, which drives a lion's share of the U.S. economy, fell 0.8 percent in November and 1.1 percent in October.

In other words, the savings rate increased (if spending drops more than income, that means it is going to savings). Looking at the chart below whichs details the savings rate going all the way back to 1948... it's about time.



This increase in savings was expected for those trying to get their personal balance sheets back in order (and required when the savings rate actually turned negative in 2006). However, just because it is needed, doesn't mean it won't be the cause of significant pain for an economy made up ~70% by consumption.

As can be seen below, we are entering a new secular phase for the U.S. economy. For the past 16 years we have had unbelievably "smooth sailing", with personal consumption growing a steady 1-4% per capita in real terms over that entire period. What I found interesting is what I will refer to as the "borrowing buffer". That is, when disposable income didn't increase (the blue line), the U.S. consumer was able to borrow to keep up the spending pace (the red line).



Until now. With the turmoil in consumer credit, lack of supply (and in many cases demand) for cheap credit, the "borrowing buffer" is no more. Personal consumption broke through the 1-4% range and is now down almost 2% in real per capita terms over the past year. In other words, personal consumption like most other economic data, has fallen off a cliff.

This is why the government has and will continue to pick up the private sectors slack.

Source: BEA

ISM Manufacturing Improves

Marketwatch reports:

The ISM manufacturing index inched higher to 35.6% in January from 32.9% in December. See story on ISM. "The improvement is not entirely surprising since many of the regional manufacturing reports also increased last month," said Kathy Lien, director of currency research at Global Forex Trading. "The manufacturing sector is still a long way from recovery which is why the impact on the U.S. dollar has been limited." The January figure marked the second-steepest monthly decline in activity in the survey's 11 1/2 year history, Markit said.

Source: ISM

Global Unemployment

Though the data is slightly dated, the CIA's 'The World Factbook' shows that the U.S. unemployment ("officially" at 7.2%) is still the envy of every war torn nation.

Click for ginormous chart: