Game Theory: Why the Swine Flu Panic is Good

First 100 Days...

We'll see if the market holds up after Obama's bashing of hedge funds, but say what you want about the man... the market is actually up since he took over January 20th...



Source: Yahoo

Chicago PMI: Less Pessimistic

Marketwatch details:

Chicago-area businesses were a lot less gloomy in April, according to the Chicago Business Barometer released Thursday. The Chicago index rose to 40.1% from 31.4 in March. It was the largest one-month increase in the index since 1983. The index shows business activity in the Chicago area declined in April for the seventh straight month but at a much slower pace. Readings under 50 indicate most firms said business was getting worse. Production, new orders and employment all improved.

Source: Econstats

Personal Consumption Sinks

WSJ reports:

The spending of U.S. consumers dropped in March along with their incomes and they elevated savings to cope with the recession. Meanwhile, new U.S. claims for unemployment benefits unexpectedly fell last week, providing some hope that the pace of layoffs may be slowing somewhat after months of crippling job losses.

Personal consumption in March fell at a seasonally adjusted rate of 0.2% compared to the month before, the Commerce Department said Thursday. It wasthe fourth decline in six months. Spending increased a revised 0.4% in February; originally, spending was seen up 0.2%.

Source: BEA

Detroit's Auto / Housing Market Isn't its Only Problem

Forbes details:

The violent crime category is composed of four offenses: murder and non-negligent manslaughter, forcible rape, robbery and aggravated assault. We evaluated U.S. metropolitan statistical areas--geographic entities defined by the U.S. Office of Management and Budget for use by federal agencies in collecting, tabulating and publishing federal statistics--with more than 500,000 residents.

Though nationwide crime was down 3.5% year over year in the first six months of 2008, the cities atop our list illustrate a disturbing trend: All 10 of the most dangerous cities were among those identified by the Department of Justice as transit points for Mexican drug cartels.

Source: Forbes

Swine Perspective

Fox News reports:

President Barack Obama pledged "great vigilance" in dealing with the situation as the total confirmed cases in the U.S. rose to nearly 100, with many more suspected.

The Geneva-based World Health Organization sounded its own ominous alarm, raising its alert level to one notch below a full-fledged global pandemic. Said WHO Director General Margaret Chan: "It really is all of humanity that is under threat during a pandemic."

Dr. Richard Besser, acting chief of the Centers for Disease Control and Prevention, said there were confirmed cases in 10 states, including 51 in New York, 16 in Texas and 14 in California. The CDC also counted scattered cases in Kansas, Massachusetts , Michigan, Arizona, Indiana, Nevada and Ohio.

Should Swine Flu be a concern for health organizations around the world? YES. Should we do our best to inform ourselves of necessary precautions. YES. But should we also ignore the fear mongering media coverage realizing the problem is so far VERY small? YES.

How small? Well, in the five days that the disease 'Swine Flu' became integrated into day to day conversation, about 100 people (in a nation of ~300,000,000) have been diagnosed with having the disease and only 1 has died (a child who contracted the disease in Mexico).

How does this compare to the estimated number of actual deaths caused by murder in the U.S., which hopefully doesn't cross anyone's mind on a daily basis?



Lets just say 12x more people were murdered by hand or foot than by "swine" over that time frame...

Source: FBI

Japanese Industrial Production Up

Marketwatch with the details:

The increase to a seasonally adjusted index level of 70.6 marked the first gain in industrial output for Japan in six months and may be a sign that Japan's decline in production and exports are slowly coming to an end.

The data came in better than consensus. Economists surveyed by Bloomberg News had expected a milder 0.8% increase in Japan's March industrial output.

"The fact that IP is rising is hardly surprising, though, as the extremely sharp fall in previous months was an over-adjustment," said Andreas Schuster, strategist at CLSA in Tokyo.

However, the bad news is "that a recovery to a level that brings capacity utilization back to a ratio that ensures good profitability will be taking a very long time," he said.

Source: METI

Historical GDP Breakdown (Through Q1 09)

Source: BEA

Deflation Alert: Wages Show Biggest Drop Since 1950's

Source: BEA

"Equal Pay Day" Still Hasn't Arrived

Yesterday, April 28th marked 'Equal Pay Day'. Imperial Valley News with the details:

“Forty-six years have passed since President John F. Kennedy signed the Equal Pay Act into law in 1963,” pointed out Congressman Filner. “And yet, in many cases, there is still not equal pay for equal work in this country.”

In 1963, when the Equal Pay Act was signed, women who worked full-time, year-round made 59 cents on average for every dollar earned by men. In 2007, women earned 78 cents for every dollar earned by men. That is progress - but it is slow progress. It means that the wage gap has narrowed by less than half a cent per year.

Men vs. Women Pay by Industry


Source: BLS

Investment Slump

Marketwatch reports:

The big story for the first quarter was in the business sector, where firms halted new investments, and shed workers and inventories at a dizzying pace to bring down production and stockpiles to match the lower demand from U.S. and foreign markets.

"Businesses have not only cut back aggressively on inventories, but also on business fixed investment," wrote Harm Bandholz, economist for UniCredit Markets. "And the size of the declines in suggests that the adjustments in these areas have largely been made during the last couple of months."

Source: BEA

Consumption Strength? Yes and No...

All I hear on CNBC is that the market shrugged off the horrendous GDP figure as personal consumption showed surprising strength. Is that true?

Yes...


And no...


Looking at the above change in personal consumption expenditure year over year, one can see the quarter over quarter figure was up, but just a rebound off of massive lows.

Source: BEA

Q1 GDP Down 6.1%

Marketwatch reports:

The U.S. economy contracted violently again in the first quarter of the year as business investment declined at a record rate, the Commerce Department reported Wednesday. Real gross domestic product fell at a 6.1% annualized rate in the first quarter, nearly matching the 6.3% decline in the fourth quarter of 2008. The two-quarter contraction is the worst in more than 60 years. The big story for the first quarter was in the business sector, where firms halted new investments, and shed workers and inventories at a dizzying pace to bring down production and stockpiles to match the lower demand from U.S. and foreign markets.

Source: BLS

Depression Equity Returns... Not So Bad

NY Times details:

Historical stock charts seem to show that it took more than 25 years for the market to recover from the 1929 crash — a dismal statistic that has been brought to investors’ attention many times in the current downturn.

But a careful analysis of the record shows that the picture is more complex and, ultimately, far less daunting: An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 — less than four and a half years after the mid-1932 market low.

How can this be? Three factors have obscured this truth from investors: deflation, dividends and the distinction between the Dow Jones industrial average and the overall stock market.

Source: Irrational Exuberance

Good News Alert! Consumer Expectations Rockets

Yahoo details:

The Conference Board says that its Consumer Confidence Index rose 12 points to 39.2, up from a revised 26.9 in March. The reading marks the highest point since November and well surpasses economists' expectations for a level of 29.5. The Expectations Index, which measures how shoppers feel about the economy over the next six months, skyrocketed to 49.5 from 30.2 in March.

Source: Conference Board

CSPI Bounces Off Bottom, but Negative for Six Straight Month

I previously detailed that CPI may overstate inflation for an individual who:

• does not own a home
• would like to own a home
• will likely soon buy a home

as it does not include how "affordable" housing has become with the recent price collapse for non-homeowners (full details here, but in a nutshell CSPI replace the 'home owners equivalent rent' figure in the CPI with actual home prices).

Though CPI is fluctuating around zero, the Case Shiller Price Index (CSPI) has been negative for six months now.

In looking at the Composite 10's five year returns (annualized), it is now moving into negative territory and given past corrections, indicates there may still be room for further deterioration.

Source: BLS / S&P

Asset Class Returns "Normalizing"?

It amazes me that the same people that were talking about the end of the world in March, are now contemplating we are in "new, lasting bull". The WSJ reports (bold mine):

If stocks have already hit their bottom and are in a new, lasting bull market, then buying them would be the smart move, even though they have already risen some 23% (that is the DJIA, the S&P 500 is up closer to 27%) since March 9. Pessimists warn, however, that the market went on a very similar run from November to January before sinking again to new lows. This is another such bear-market rally, they believe, and new lows are still on the way.

So, do I believe we have seen equity lows? No... my concerns that the U.S. economy is still shedding millions of jobs, has a broke / indebted consumer AND government, and relies on the earnings of "healthy" corporations that can't get decent financing and struggling corporations that are just beginning to default still linger (though when the market does end up hitting its bottom, I will probably be saying those same things).

However, there have been signs of normalization. Asset class returns since the "equity market bottom" are actually "logical" in the sense that higher risk assets are returning more than lower risk assets down the line from equities to Treasuries (unlike what was detailed here).



Though I will say that high yield returns of 15% and equity market returns of 25% in a month and a half sure doesn't feel logical.

Guess Who?

I'll be honest. I hoped some people would agree with my post Torture: Should We Just Ignore It And Move On?, but here is someone I never expected:

'War crimes will be prosecuted, war criminals will be punished and it will be no defense to say, "I was just following orders."'

Source: CNN

Box Office Boom Continues...

As mentioned a few times already at EconomPic, the box office continues to show strength during this economic downturn as movie goers look for a cheap source of entertainment to forget about their surroundings. Even with the amazing weather on the east coats, this week was no exception. Time reports:

Enough customers were transfixed by the fatal-distraction drama Obsessed to place it at the top of the weekend's box office chart with a surprisingly robust $28.5 million, according to early studio estimates. The PG-13 thriller more than doubled the take of its nearest competitor, 17 Again, and earned nearly as much over the weekend as the total of the three other movies that opened in wide release. It is the all-time highest grosser (surpassing the 2004 Lindsay Lohan-Tiny Fey comedy Mean Girls) for the last weekend in April, when traditionally hardly anyone goes to the movies.

Obsessed marks the fourth release from 2009 that makes up the top 11 April openings ever.



Source: Box Office Mojo

Baseball Franchise Values... Mixed, but Holding Up

Yahoo! Sports with the details:

One-third of Major League Baseball teams declined in value over the past year while the New York Yankees’ worth increased 15 percent to $1.5 billion, according to the annual estimates by Forbes magazine.

The Washington Nationals took the biggest hit during the recession, down 12 percent to $406 million. The Atlanta Braves dropped 10 percent and the Detroit Tigers and Seattle Mariners each were off 9 percent, the magazine said Wednesday.

The decline by 10 teams was the most since 2004, Forbes said.

On the other hand, the rich have gotten richer. Both the Yankees and Mets have seen their franchise values continue to rise.

Bolstered by their new $1.5 billion stadium, the Yankees showed the top increase and remained the most valuable franchise in the majors. The New York Mets, also boosted by a new ballpark, were second in value ($912 million) and increase (11 percent).

Part of the value is due to the revenues these two teams generate (Yankees are king, the Mets are third behind the Red Sox), but they both have 'franchise value to revenue multiples' that are among the highest in the league due to their ability to grow those revenues.



It will be interesting to see how teams hold up through the economic downturn as their businesses, as well as owners are impacted.

Source: Biz of Baseball

European Exports

Interesting analysis at Zero Hedge making the case that the Euro may have more room to go on the downside. Along with some data on the level of leverage many of these countries have built up, Tyler details the reliance Europe has exporting to the UK and US (and lack of a large exposure to China and OPEC nations), both of which are facing their own own struggles.



And the associated cliff dive...



Source: Zero Hedge

Just One of the Guys

Matt Stafford, a "pretty solid" college quarterback based solely on stats (yes, not all college stats are fluffed, so it is possible he is better than those stats) just signed a new contract IN DETROIT FOR 6 YEARS.... 72 MILLION F&CKIN' DOLLARS.

According to the AP:

Detroit desperately needs a quarterback to help turn around the NFL's first 0-16 team, which has had the worst eight-year stretch in the league since World War II, and is turning to Stafford after he was a starter in each of his three seasons at Georgia.

Looking at Matt's new salary compared to the median wage for a variety of industries in the Detroit Metropolitan area, it looks like he'll fit right into the Detroit community.



Ah... the Detroit Lions... one of the only teams (I'll throw Cincinatti and Cleveland in there) that make my J-E-T-S look good. From 0-16 to.... 2-14? At only 175x the salary of the Detroit team doctor, he is WELL worth the money!



But lets looks at the positives... maybe he can throw some of that cash GM or Chrysler's way.

Source: BLS

EconomPics of the Week (4/24/09)

Opinion / Other
Torture: Should We Just Ignore It And Move On? Please briefly read this post and if you feel an additional investigation needs to take place, sign the petition telling Attorney General Eric Holder to appoint a special prosecutor to investigate the torture further
Inequality and Entitlement
The One Recession Proof Area Within Finance

Economic Data
Leading Economic Indicators (March)
Where's the Defense? New Orders Down (March)
UK GDP Down Most in 30 Years
European Manufacturing Crash - February
IMF: Negative Global Growth for First Time Since WWII
Deflationary Cycle: UK Edition

Banks
IMF: $2.8 Trillion in Estimated Writedowns by Banks
T - 30 Minutes to Stress Test: Above or Below 3% T.C.E.?

Assets / Markets
Crude Oil Inventory Rise Continues
A Positive Outcome from Foreclosures
Ten Year Yields: Higher or Lower?
10% on Top of 2 and 20% No Longer Sensible?
S&P Earnings and 6% Growth...
2008 Corporate Profits vs. Market Cap (Top 10)

T - 30 Minutes to Stress Test: Above or Below 3% Tangible Common Equity?

Ahead of the announcement in 30 or so minutes, Option Armageddon (via Naked Capitalism) with details of the stress test. Reuters reports:

"U.S. regulators want the top 19 banks being stress-tested to have at least 3% [TCE]."

Below is a chart put together with data from Option Armageddon.

We see a number of banks that would need to convert preferreds to common or hit up the markets (private or government aided) if these figures are correct.

Update: the actual release? Not much. As Paul from Infectious Greed details:

Lots of Testing, Not Much Stress

Where's the Defense? New Orders Down (March)

Marketwatch reports:

New orders declined in almost every industrial sector, although a key gauge of capital spending by businesses rose 1.5%, the second straight increase following a severe decline in January. New orders in the first quarter were down 27.1% compared with the first three months of 2008. Shipments of durable goods fell 1.7% in March and were down 18.4% in the first three months compared with the same period a year ago.

Source: Census

UK GDP Down Most in 30 Years

Daily FX with the details:

U.K. Q1 GDP contracted much more than expected, falling 1.9% quarter over quarter and 4.1% year over year, versus our survey median estimates for -1.6% and -3.8% respectively, highlighting the severity of the U.K. recession at the beginning of the year.

Total industrial production declined by 5.5% quarter over quarter, the largest quarterly drop since records began in 1948, emphasizing the very dire state for the sector. Meanwhile, manufacturing output fell by an even sharper 6.2% quarter over quarter , which was also the worst ever on record.

Historical Time Series


Recent Breakout


Source: Statistics.Gov.UK

A Positive Outcome from Foreclosures

Calculated Risk details in the post Housing Bust and Geographical Mobility that:

It is very difficult for homeowners with negative equity to move.

That is until negative equity homes become foreclosures. Comparing areas in which sales via foreclosures are picking up steam (i.e. forced to move out in California / West) against areas in which problems are still picking up steam (i.e. still stuck in their home in the Northeast), we see mobility has returned to those hit worse, while those muddling through remain stuck.



Source: Census

European Manufacturing Crash - February

Marketwatch reports:

Euro-zone industrial new orders posted a smaller-than-expected monthly fall in February, but were still down by a record amount compared to the same month last year. The statistics agency Eurostat on Thursday said new orders fell 0.6% from January. Compared to February 2008, new orders were down 34.5%. Economists had forecast a 2.5% monthly drop and a 34.9% year-on-year decline.

Source: Eurostat

IMF: Negative Global Growth for First Time Since WWII

Voice of America reports:

The IMF says the world economy will shrink by 1.3 percent this year, its worst performance in more than 60 years. It says recovery is expected to begin only at the end of the year and that growth will recover to only 1.9 percent in 2010. Blanchard says there has been unprecedented contraction in recent months.

"The collapse of demand has led to sharp cutbacks in production and a dramatic decline in exports. Global GDP went down by an unprecedented six percent, at an annual rate, in the last quarter of 2008. And, as far as we can tell, most likely declined almost as fast in the first quarter of 2009," he said.

Source: IMF

Ten Year Yields: Higher or Lower?

Higher --> Supply: Across the Curve

Treasury bonds are taking a severe drubbing and the yield on the benchmark 10 year note is approximately at the level which prevailed on the day when the Federal Reserve announced quantitative ease (2.96 percent currently).

One participant noted that the 200 day moving average on the Long Bond was 3.798 percent and the market penetrated that level this morning as a sharp knife would melting butter.

Lower --> Quantitative Easing / Continued Economic Deterioration: Zero Hedge

There has been a lot of criticism of Big Ben (us included) but one thing that has come out is he is not afraid to take relatively risky moves to combat whatever he perceives as the biggest threat. As we have noted before, he has clearly revealed his playbook in the past and we see little indication that he will stray from it going forward. On the balance between inflation and deflation, much has been made of the Chinese response if we try to print our way out of this situation but the much larger problem has always been deflation. Combining what we know about the available policy options and the effectiveness of the last round of QE, we have to believe that more purchases of long rates are on the table as a serious consideration.

Source: Yahoo

Crude Oil Inventory Rise Continues

The AP details:

Crude inventories rose more than forecast last week while gasoline inventories jumped despite expectations for a dip, according to government data released Wednesday.

For the week ended April 17 crude inventories rose by 3.9 million barrels, or 1.1 percent, to 370.6 million barrels, which is 17.2 percent above year-ago levels, the Energy Department's Energy Information Administration said in its weekly report.

That's the highest inventory level since September 1990.

Source: EIA

The One Recession Proof Area Within Finance

Lobbying paid for by the financial sector continued to grow in 2008 despite the turmoil.



As Boston.com reports, the trend continues:

Major recipients of federal bailout money spent more than $10 million to lobby lawmakers in the first three months of 2009, including arguing against pay limits for corporate executives, according to newly filed disclosure records.

The biggest spenders among major financial firms and automakers included General Motors Corp., which spent nearly $1 million a month on lobbying so far this year, and Citigroup and J.P. Morgan Chase & Co., which together spent more than $2.5 million in their efforts to sway lawmakers and Obama administration officials on a wide range of financial issues.

"Taxpayers are subsidizing a legislative agenda that is inimical to their interests and offensive to what the whole TARP program is about," said William Patterson, executive director of CtW Investment Group, an activist group affiliated with a coalition of labor unions. "It's business as usual with taxpayers picking up the bill."

Source: Open Secrets (idea via Charting the Economy)

IMF: $2.8 Trillion in Estimated Writedowns by Banks

The IMF released the Global Financial Stability Report. One section details the estimated $4.1 trillion in writedown losses, of which $2.8 trillion are expected to be held by banks.

Of estimated potential writedowns of $4.1 trillion on mature market credit for global market participants, banks are expected to suffer $2.5 trillion. In addition, global banks are expected to take an additional $340 billion of writedowns on exposure to emerging market assets, bringing the total to $2.8 trillion (Table 1.15).

Although Europe excluding U.K. banks are expected to suffer a sizable portion of its writedowns on assets within the region, a substantial proportion of the total, 44 percent altogether, is borne on assets outside the region, mostly in the United States, and in emerging European markets. By comparison, U.S. banks are expected to suffer only 8 percent of writedowns on non-U.S. exposure. Similar to continental Europe, U.K. banks suffer 45 percent of writedowns on nondomestic assets. For banks in Asia, potential writedowns on U.S. assets (35 percent) are higher in dollar terms than on any other regional exposure.

Table 1.15 (loss of $2.8 trillion by asset origination region)


Table 1.15 (loss of $2.8 trillion by region held)

10% on Top of 2 and 20% No Longer Sensible?

FT Alphaville reports:

In its latest findings, Hedge Fund Research, an industry data provider, estimates investors redeemed up to $104bn from hedge funds in the first quarter, versus the record $152bn withdrawn from the industry in the fourth quarter of 2008. The first-quarter figure makes up some 7.4 per cent of industry assets.

However, here’s the clincher: withdrawals from ‘fund of hedge funds’ specifically totalled $85bn in the first quarter — that far exceeds the fourth quarter 2008 redemption of $50bn and accounts for the majority of capital withdrawn from the hedge fund industry overall.

Inequality and Entitlement

In Felix Salmon's post The Plight of the Overpaid, he details Gabriel Sherman's New York Magazine article The Wail of the 1%, which takes on those bankers that feel they still deserve to be paid in excess:

As Sherman says, bankers are the last Americans to Get It: they don’t think that the excesses of Wall Street were responsible for wealth destruction rather than wealth creation, and they still think that a degree from Wharton is, in and of itself, a Good Thing. One financier essentially tells Sherman that the going rate for any job which involves being woken up in the middle of the night should be roughly $2 million a year — which is not the kind of attitude guaranteed to make you friends among, say, the farming community.

Most people outside Wall Street have come to the conclusion that excess pay was a direct cause of the current meltdown, but the highly-paid symbolic analysts at our biggest investment banks somehow have a massive blind spot when it comes to that fact.

The entitlement is striking, but is somewhat explained by the reality that the third quartile American earns 2x more than the first quartile (i.e. what has been reality becomes ingrained that it should be reality).



Yet 'Wall Street' vs. 'Main Street' is far from the only source of inequality that remains. In fact, according to the BLS the median Asian man earns more than 50% more than the median Hispanic man (both of which earn more than the woman of either race).



While I absolutely believe in capitalism, getting a brand name education, a finance job, and being the "right race" should not in itself equate to substantially more income than someone who just didn't have the same opportunity (this coming from someone who went to an Ivy League business school, works in finance, and is white so take that with a grain of salt). While I do not believe in the redistribution of wealth for redistribution of wealth's sake, if taxes are used to create the same opportunities for all and shifts income to jobs that truly add value to our economy, I'm all for it...

Source: BLS

Deflationary Cycle: UK Edition

ITV reports:

The headline rate of inflation, which includes mortgage payments, has fallen below zero for the first time in 50 years.

RPI stood at 0.4 per cent last month - down from zero in February - showing the cost of living is actually getting cheaper.

But negative RPI should not necessarily be welcomed. The figure is often used as a benchmark to set wage, state pension and other benefit increases.

That last sentence is striking. According to Save Borrow Spend:

Millions of public sector workers could find their incomes on hold if the UK enters a period of deflation. Council workers, nurses and teachers could all see their pay cheques stand still because public sector pay is tied to the RPI.

Let the deflationary cycle begin.

Source: Statistics.Gov.UK

2008 Corporate Profits vs. Market Cap (Top 10)

Source: CNN Money

Leading Economic Indicators (March)

Marketwatch reports:

The recession may continue though the summer, though its intensity could ease, the Conference Board said Monday. The index of leading economic indicators fell 0.3% in March, following an upwardly revised dip of 0.2% in February. Building permits were the largest negative contributor in March, while the real money supply was the largest positive contributor. "There have been some intermittent signs of improvement in the economy in April, but the leading economic index and most of its components are still pointing down," said Ken Goldstein, economist at the Conference Board.

Source: Conference Board

S&P Earnings and 6% Growth...

Interesting analysis of historical earnings in the Barron's article What's the Real P/E Multiple?

There's more we can do to make sense of earnings: The best way to measure present earnings and future earnings is to smooth them out over long periods. Earnings can grow at only approximately 6% a year over the long term. The trend is limited by the growth in real GDP plus inflation. And long term, real GDP cannot grow faster than the increase in the labor force plus the increase in productivity.

If you don't accept this, look at a long-term chart and draw a 6% growth line through the earnings. It is clear that earnings sometimes rise above the line and sometimes fall below it, but earnings always revert to the 6% mean.

Going back to 1950, every instance where actual earnings rose above trend-line earnings was followed by a period where actual earnings went well below trend-line earnings.

Comstock Partners believes that we have entered such a period now, and that the market is trading at such a high multiple of trend-line earnings that it will be difficult to make money.

You could even lose a lot of money.

Source: Irrational Exuberance

Torture: Should We Just Ignore It And Move On?

What is waterboarding? According to Wikipedia:

Waterboarding is a form of torture that consists of immobilizing the victim on his or her back with the head inclined downwards, and then pouring water over the face and into the breathing passages. By forced suffocation and inhalation of water the subject experiences drowning and is caused to believe they are about to die. It is considered a form of torture by legal experts, politicians, war veterans, intelligence officials, military judges, and human rights organizations. As early as the Spanish Inquisition it was used for interrogation purposes, to punish and intimidate, and to force confessions.

In contrast to submerging the head face-forward in water, waterboarding precipitates a gag reflex almost immediately. The technique does not inevitably cause lasting physical damage. It can cause extreme pain, dry drowning, damage to lungs, brain damage from oxygen deprivation, other physical injuries including broken bones due to struggling against restraints, lasting psychological damage or, ultimately, death. Adverse physical consequences can start manifesting months after the event; psychological effects can last for years.

Thus, while there is absolutely no question that Khalid Sheikh Mohammed and Abu Zubaydah are both evil individuals, the following news made my stomach turn. The Empty Wheel (via Paul Krugman) with the details:

According to the May 30, 2005 Bradbury memo, Khalid Sheikh Mohammed was waterboarded 183 times in March 2003 and Abu Zubaydah was waterboarded 83 times in August 2002.

On page 37 of the OLC memo, in a passage discussing the differences between SERE techniques and the torture used with detainees, the memo explains:

The CIA used the waterboard "at least 83 times during August 2002" in the interrogation of Zubaydah. IG Report at 90, and 183 times during March 2003 in the interrogation of KSM, see id. at 91.

183 times in one month; that means, on average, they subjected Khalid Sheikh Mohammed to the sensation of drowning to death six times per day. Obama's statement on the memos:

We have been through a dark and painful chapter in our history. But at a time of great challenges and disturbing disunity, nothing will be gained by spending our time and energy laying blame for the past. Our national greatness is embedded in America's ability to right its course in concert with our core values, and to move forward with confidence. That is why we must resist the forces that divide us, and instead come together on behalf of our common future.

The United States is a nation of laws. My administration will always act in accordance with those laws, and with an unshakeable commitment to our ideals. That is why we have released these memos, and that is why we have taken steps to ensure that the actions described within them never take place again.

Whether or not this method of torture was legal (a form of waterboarding was ruled legal by then Assistant Attorney General Jay Bybee on August 1st, 2002, who "JUST HAPPENED" to have been nominated by President Bush to be a federal judge months prior), is the release of their names enough?

I certainly don't think so. If you have similar thoughts and feel an additional investigation needs to take place, you can sign the petition telling Attorney General Eric Holder to appoint a special prosecutor to investigate the torture here.

EconomPics of the Week (4/17/09)

Opinion
New Baseball Fields and (Empty) Corporate Boxes
If Goldman's Selling... Beware of Buying
Taxpayers Subsidizing Paper?
Only Now Moody's Downgrades Ambac to Below Investment Grade?

Economic Data
State Unemployment Spike
State Tax Collections Decline.... Sales Taxes with a Record Drop
Michigan Consumer Sentiment Rebounds; Flat Year over Year
Philly Fed Index... "Business Sucks Now, BUT WILL ...
Eurozone Industrial Production Collapse
Deflation Camp: Under-utilized Capacity
Industrial Production Slump Continues
CPI Down; Solely Due to Transportation
Inventories Continue to Fall...
Retail Sales Fall (March)
Deflation, Here We Come (PPI March)

Markets / Assets
Reader Opinion Friday.... Is this Sustainable?
No Foreign Demand for US "Risk" Assets
Investment Grade Corporate Bond Yield
Global Equity Rebound

Other
Citi Losing Non-US Deposits

State Unemployment Spike (and Oregon Struggling)

All States (click for ginormous chart)



States w/ Statistically Significant Unemployment Rate Changes



Update:

Reader Thomas asks the question:

Any particular obvious reason why Oregon is hit so badly? Somehow, it wasn't on my list of usual suspects. Did they have lots of construction jobs?

I was wondering the same thing. The Statesman Journal ponders the question.

The question on everyone's mind is why Oregon's unemployment rate has risen so high, Cooke said.

"We don't have definitive answers," he said. "We have some ideas as what is the likely cause."

California, which has suffered a strong economic hit with the bursting of the housing bubble, is likely dragging down Oregon's economy, he said. California's unemployment rate is the nation's fourth highest at 11.2 percent.

The housing bust also has affected demand in Oregon's lumber and wood products industry, Cooke said.

Demand for mobile homes and other durable goods made in Oregon also is down.

And there's no good news on the horizon.

Source: BLS

Michigan Consumer Sentiment Rebounds; Flat Year over Year

Reuters reports:

U.S. consumer confidence rebounded in April to the highest levels since September before investors panicked about the collapse of Lehman Brothers and the global banking system's near implosion, a survey showed on Friday. The Reuters / University of Michigan Surveys of Consumers said its preliminary April reading of consumer sentiment rose to a level of 61.9, up from 57.3 in March and was the highest since 70.3 recorded in September.

Source: St. Louis Fed

Citi Losing Non-US Deposits

Back in October, Bloomberg reported:

The Federal Deposit Insurance Corp. will temporarily guarantee new senior unsecured debt and fully protect non-interest-bearing deposits at banks in a bid to restore confidence in the financial system.

"All of us are prepared to do whatever it takes, to fix whatever problems arise, and to work with Wall Street and Main Street to unclog the financial system,'' FDIC Chairman Sheila Bair said today during a Treasury news conference.

The program is the latest effort by the FDIC to shore up confidence in the U.S. banking system in the wake of 15 bank failures this year. The $700 billion U.S. financial industry rescue law raises FDIC coverage of bank deposits to $250,000 per customer from $100,000 through 2009.

Looking at the shift in Citi's deposit base over the last year, the added insurance looks very timely as non-interest bearing deposits spiked, helping to offset a portion of the rather large drop in deposits outside of the U.S. (though more than half of the decline outside of the U.S. was due to FX adjustments).

Change in Deposit Base

Cumulative Percent Change in Deposit Base by Type / Region

Source: Citigroup

Reader Opinion Friday.... Is this Sustainable?

Are you a buyer at these levels and importantly (whether a buyer or seller)... WHY?



Lets hear it....

Philly Fed Index... "Business Sucks Now, BUT WILL Improve" Edition

Felix Salmon (now at Reuters) with the details:

The Philadelphia Fed said its business activity index came in at minus 24.4 in April compared with minus 35.0 in March. A reading below zero indicates contraction in the region's manufacturing sector.

The median forecast among economists polled by Reuters was minus 32.0.

Among the survey's relative bright spots, the new orders index came in at minus 24.3 compared with minus 40.7 in March, while the employee gauge stood at minus 44.9 against March's minus 52.0.

The outlook among Mid-Atlantic companies also improved in April. The Philadelphia Fed's six-month conditions index bounced up to 36.2 from 14.5 in March. The April outlook figure was the highest since October 2007 prior to the start of the current recession.

Source: Philadelphia Fed

No Foreign Demand for US "Risk" Assets

Brad Setser reports:

It is a good thing the US trade deficit has come down, because foreign demand for US financial assets — actually foreign demand for US assets other than short-term Treasury bills — has dried up.

Foreign investors bought $68 billion of T-bills in February. Russia alone (likely Russia’s central bank) bought close to $14 billion. Private investors — seemingly Japanese private investors — also bought $23.5b of longer-term Treasury notes. Otherwise, though, foreign investors didn’t buy much of anything. And Americans also didn’t buy many foreign assets.

It will be interesting to see if March's rally in risk assets corresponded to an increase in demand by foreigners.

Source: Treasury

Eurozone Industrial Production Collapse

Bloomberg details:

Industrial production in Europe contracted by the most on record in February as the deepening global recession curtailed demand for manufactured goods around the world. Output in the euro region fell 18.4 percent from the year-earlier month, the biggest drop since the data series began in 1986, after a revised 16 percent decline in January, the European Union’s statistics office in Luxembourg said today.

Source: Eurostat

State Tax Collections Decline.... Sales Taxes with a Record Drop

Bond Buyer with the details:

State tax collections for the fourth quarter of 2008 declined for the first time in more than six years, and sales taxes were dealt a record-setting blow during that period, according to a report issued yesterday by the Nelson A. Rockefeller Institute of Government.

Source: Rockefeller Institute via The Bond Tangent

Deflation Camp: Under-utilized Capacity

Finfacts reports:

Outside of manufacturing, the output of mines fell 3.2% in March, as oil and gas well drilling continued to drop. After a relatively mild February, a return to more seasonal temperatures pushed up the output of utilities. The capacity utilization rate for total industry fell further to 69.3%, a historical low for this series, which begins in 1967.Early this morning saw the release of Capacity Utilization data.

Source: Federal Reserve

Investment Grade Corporate Bond Yield

We've detailed similar thoughts here and here, but worth repeating. While the borrowing cost for corporations that have been able to maintain their AAA or AA rating (not many) has stayed relatively flat, for other Investment Grade borrowers... not so much.



Source: Barclays

Industrial Production Slump Continues

Bloomberg reports:

Industrial production in the U.S. fell for the 14th time in the last 15 months as factories trimmed unwanted stockpiles. Output at factories, mines and utilities dropped 1.5 percent last month, more than anticipated and matching the prior month’s decrease, according to a report from the Federal Reserve today in Washington. The amount of industrial capacity in use fell to 69.3 percent, the lowest level since records began in 1967.

Source: Federal Reserve

CPI Down; Solely Due to Transportation

BLS details:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in March, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The index has decreased 0.4 percent over the last year, the first 12 month decline since August 1955.

Looking at the chart below, we see the only area that saw price declines year over year was transportation, dropping 12.5% year over year.



This 12.5% had a weighted impact on CPI of -2%, thus CPI "ex transportation" was at 1.6% year over year. Remarkably, the change in the price of gasoline itself had an impact of -1.2% of that -2%.

Source: BLS

Inventories Continue to Fall...

Yesterday we saw another monthly decline in business inventories. Xinhuanet with the details:

Inventories held by U.S. businesses on shelves and backlots fell 1.3 percent in February, marking the sixth straight monthly decline, the Commerce Department reported Tuesday.

The 1.3 percent drop in business inventories matched the January decline and close to the 1.2 percent fall that economists had expected.

The sixth consecutive decline is the longest stretch since the country's businesses cut their stockpiles for 15 straight months ending in April 2002, a period that covered the last recession.

The February drop in inventories came as businesses' sales edged up by 0.2 percent, rebounding from a 1.2 percent decline in January.

Source: Census

New Baseball Fields and (Empty) Corporate Boxes

I am a HUGE Mets fan and I was fortunate enough to spend WAY too much money scalping tickets to last night's home opener (which happened to be the first ever regular season game at the new Citi Field). My initial thoughts of the stadium; absolutely beautiful, but it oddly doesn't feel like it was built for the Mets. The all green seats / green wall when the Mets colors are Blue and Orange, plus the new dimensions that actually cost the Mets the game because Ryan Church (the Mets rightfielder) isn't used to the new dimensions of the outfield, all felt slightly off...

Anyhow, the place was PACKED... with one odd exception. As most new ballparks have ridiculously new pricing for the best seats, these best seats now ALL go to... corporations. Yes, I understand this has been a growing trend in recent years, but the pricing discrepancy has moved to a new level with these new stadiums. The result per Ticketnews:

Overall, the Mets raised ticket prices 8.6 percent – against the tide of what many MLB teams have done. According to the just-released April 2009 Major League Baseball Team Marketing Research (TMR), 16 MLB teams either cut, maintained or raised ticket prices by less than 1 percent for 2009. Four others raised ticket prices by less than the MLB average of 5 percent. The Mets average ticket price is $36.99, $10.35 above the MLB average.

This would all be fine if all those clients actually enjoyed baseball and were fans, but lets take these two pictures as proof that they are not. These were both taken in the 7th inning of a 1 run game.

First the upper / nose-bleed seats in right field... packed!




Now the best seats in the house, those right behind the plate...



Unless these fans were dressed like empty seats, they had already taken off. Is it worth it for a non-baseball fan to go out of there way for a ball-game? I have a feeling no, thus we'll see a lot of empty seats going forward...

Retail Sales Fall (March)

WSJ reports:

U.S. retail sales unexpectedly plunged during March in a broad-based decrease that threw a shadow over recent signs of improvement in the slumping economy. Retail sales decreased by 1.1% compared to the prior month, the Commerce Department said Tuesday. Economists expected an increase of 0.3%.

Sales in February were revised up, increasing 0.3% instead of dipping 0.1% as originally reported. January sales were revised up to an increase of 1.9% from aan increase of 1.8%.

The big decline in March sales was a disappointment. The increases in January and February sales had temporarily ended a freefall in consumer spending during the second half of 2008. People seemed to be braving a pitiless job market and pulling out their wallets again, which is good for the economy. Consumer spending makes up 70% of gross domestic product, the broad measure of economic activity.

Source: Census

Deflation, Here We Come (PPI March)

Year over Year


Month over Month


Source: BLS

Only Now Moody's Downgrades Ambac to Below Investment Grade?

I understand Moody's ratings don't necessarily apply directly to equity, BUT this does tell the story rather well...

Click for Larger Chart


And now... a full year too late The Bond Tangent details:

According to Marketwatch, Moody's cut Ambac to Ba3 from Baa1. Ambac senior debt was cut to Caa1 (highly speculative). Moody's cites significantly increased loss estimates, especially on Alt-A transactions.

One question at this point... why bother at this point?

Taxpayers Subsidizing Paper?

In the latest installment of "Greed that Makes Me Want to Throw up in my Mouth" we have International Paper. It started innocently enough with the following press release on March 24th:

In January 2009, the company was notified that its registration as an alternative fuel mixer was approved. On March 20, 2009, the company received its first check from the Internal Revenue Service in the amount of $71.6 million related to an alternative fuel mixture produced and used at 15 of its mills for the period of November 14 to December 14, 2008. The company will continue to submit refund claims based on actual mill production and use of an alternative fuel mixture and will provide investors with information relating to future credits during its regular quarterly earnings calls.

No doubt in part to that new taxpayer revenue source, International Paper's stock soared to its most recent peak, up more than 100% from when the S&P hit bottom on March 9th (to be fair, the stock had gotten slammed before this run-up). A win-win-win right? International Paper gets a "first check" of $71.6 million from taxpayers (thoughts are it could become as much as $1 billion this year), while helping the environment, AND the U.S. becomes less dependent on oil... right?

Core Economics with the abridged reasoning as to why that is incorrect:

Congress passes bill to encourage fuel mixtures as a way to weaning the economy off oil. Subsidises usage of that fuel to the tune of 50c per gallon. Paper producers, who had been using a by-product of their process as a fuel for decades, now add diesel to it in order to claim the subsidy.

The Nation with the full details (bold mine):

Since the 1930s the overwhelming majority of paper mills have employed what's called the kraft process to produce paper. Here's how it works. Wood chips are cooked in a chemical solution to separate the cellulose fibers, which are used to make paper, from the other organic material in wood. The remaining liquid, a sludge containing lignin (the structural glue that binds plant cells together), is called black liquor. Because it's so rich in carbon, black liquor is a good fuel; the kraft process uses the black liquor to produce the heat and energy necessary to transform pulp into paper. It's a neat, efficient process that's cost-effective without any government subsidy.

By adding diesel fuel to the black liquor, paper companies produce a mixture that qualifies for the mixed-fuel tax credit, allowing them to burn "black liquor into gold," as a JPMorgan report put it. It's unclear who first came up with the idea--Wrobleski (Ann Wrobleski is International Paper's vice president for global government relations) told me it was "outside consultants"--but at some point last fall IP and Verso, another paper company, formerly a part of IP, began adding diesel to its black liquor and applied to the IRS for the credit. (Verso nabbed $29.7 million at just one of its mills in the final quarter of 2008 for its use of mixed fuel.)

Despite the obvious contrivance of the procedure, Wrobleski is unapologetic: "The credit is supposed to encourage the use of green fuel." Sure, I said, but isn't it a bit weird you're now adding diesel fuel to the process in order to take advantage of it? "It is what it is," she said.

"It is what it is"? Maybe IP should have their traditional PR contact handle these types of media requests going forward....

Source: Yahoo

Global Equity Rebound

Source: Investment Postcards

If Goldman's Selling... Beware of Buying

If I've learned anything, it is that when the "smart money" is selling, you SHOULD NOT be buying. The WSJ reports:

Goldman Sachs Group Inc., riding a rising market, is considering making a multibillion-dollar offering of its shares to investors as part of an effort to repay a $10 billion government loan, according to people familiar with the matter.

The move, which could be announced as early as next week, comes as the firm prepares to report solid first-quarter earnings Tuesday. Goldman executives haven't determined the exact size of the offering, but it is expected to be at least several billion dollars, these people say. They caution a final decision isn't made, and will be based partly on market conditions.

Although Goldman's stock price has been far from immune during this global downturn, a sale at today's equity valuation would be a substantial improvement (more than 2x) than seemed possible just a few months back.



Tyler Durden at Zero Hedge with the conspiracy theory behind this recent run-up (he also makes the case that this low volume rally is poised to crash):

Key to note here is that Goldman's program trading principal to agency+customer facilitation ratio is a staggering 5x, which is multiples higher than both the second most active program trader and the average ratio of the NYSE, both at or below 1x. The implication is that Goldman Sachs, due to its preeminent position not only as one of the world's largest broker/dealers (pardon, Bank Holding Companies), but also as being on the top of the high-frequency trading/liquidity provision "food chain", trades much more often for its own (principal) benefit, likely in tandem with the other top dogs on the list: RenTec, Highbridge (JP Morgan), and GETCO. In this light, the program trading spike over the past week could be perceived as much more sinister. For conspiracy lovers, long searching for any circumstantial evidence to catch the mysterious "plunge protection team" in action, you should look no further than this.

Below is the data he references in chart form...



In other words, Goldman Sachs own trading has made up a HUGE portion of the program trading volume on the NYSE since the market turned in early March (here is a link to the past week of data, a week in which program trading was suspiciously higher than past weeks and one in which we saw a massive rally in financials). The chart below details how unprecedented this level of "program trading share" by Goldman is as compared to the first week of 2007 and 2008.



Goldman's principal trading amounted to 20%+ of all program trading reported on the NYSE, up from between 3-5% one and two years back. In other words, leading up to a period when Goldman may be issuing several billion dollars in an equity offering, their own principal trading has amounted to 4-5x more volume than what had been typical, in an illiquid market, potentially driving up the value of financial equities in the process... interesting.

Update: Zero Hedge has an update to the original post that makes Goldman a part of the run-up, but not the reason for the run-up (i.e. they are just delta hedging their book)

Source: Yahoo

EconomPics of the Week (4/10/09)

It was a quiet week of news... lets hope the lack of drama continues....

Economic Data
Good News Alert! Imports Down, Exports Up, Trade Balance Crash
Good News Alert! Wholesale Sales Up, Inventories Crash
The Prime Loan (Under)Performance Problem
Credit Down 5th Time in 7 Months, Before that Once in 15 Years
Japanese Export Recession
Euro Area GDP Breakdown
Same Store Sales (March)

Markets / Asset Classes
Hedge Fund Returns (March)
Abnormal Markets...
Yen Continues Sell-Off... Plenty of Room to Go
Don't Read too Much into the VIX
No Room for Walmart in Rebound
Market Bottom or Bear Market... Invest Wisely
Crude at Levels Not Seen in 16+ Years + Tiny Distillate Drop = “Shocked” Traders

Government Financing
Budget Deficit Close to $1 Trillion in First Six Months
Are Long Bonds About to Break Through or Bounce Back

Other
Absolute Domination Defined...

Budget Deficit Close to $1 Trillion in First Six Months

Marketwatch reports:

The U.S. federal budget deficit rose to a record $956.8 billion in the first six months of the fiscal year after the government stepped up spending to cope with a recession that has depressed tax receipts, the Treasury Department reported Friday.
The deficit is well on its way to the $1.75 trillion -- or 12.3% of gross domestic product -- that the White House has estimated for the full fiscal year, which ends in September.

The deficit through the first six months is more than three times higher than it was at this time last year. The government has borrowed $1 trillion from the public so far this fiscal year.

Source: Treasury

Same Store Sales (March)

The NY Times presents:

Only a handful of chains on Thursday reported an increase in sales at stores open at least a year, a measure of retail health. Wal-Mart Stores, the nation’s largest retailer and a bellwether for the industry, had a 1.4 percent increase over March 2008, not including fuel. Other discount stores like TJX and Ross Stores, as well as some teenage apparel chains, also fared well.

But a majority of the nation’s retailers continued to suffer sales declines. Abercrombie & Fitch was most notable, with a stunning 34 percent drop that analysts attributed to its strategy of not offering the same deep discounts as its competitors. Sales at other mall apparel chains and department stores remained weak.

Market Bottom or Bear Market... Invest Wisely

The Big Picture details the importance of understanding the difference between a "real thing" (i.e. market bottom) and a bear market rally. Here is point #1 of 3:

Follow the Playbook: The smart investor’s playbook is very different in bear markets than bull markets. In a Bull Market, you buy the dips. Lower prices are an opportunity to buy into equities at cheaper valuations. Most sales are disappointing, as prices eventually go higher. Buy & hold is the simplest, most cost effective investment strategy.

Bear markets call for a very different set of plays: You sell the rallies; higher prices are opportunities to sell equities at premium valuations. Most buys are disappointing, as prices eventually go lower. Buy & hold is a losing strategy – trading what the market presents to you is the best risk management strategy.

The goal during bull markets is to grow your capital; the goal during bear markets is to protect your capital.

Source: Yahoo

No Room for Walmart in Rebound

WSJ reports:

Major U.S. averages soared Thursday, but shares of Wal-Mart Stores were left in the dust as the nation’s largest retailer reported disappointing same-store sales for March, driven largely by home, health and grocery divisions. The shares, thus far, have dropped 4.2% on a day when major averages gained more than 2%. Since the market bottomed on March 9, however, investors have been looking elsewhere for a source of potential returns. While the Standard & Poor’s 500 has gained 22% since that day’s close, a 12-year low, shares of Wal-Mart are up just 7%, lagging the overall market.

Source: Yahoo

Crude at Levels Not Seen in 16+ Years + Tiny Distillate Drop = "Shocked" Traders

Reuters reports:

U.S. crude oil futures reversed course and rose sharply Wednesday after government inventory data showed that, despite crude inventories rising to their highest level in nearly 16 years, distillate stocks fell much more than had been forecast for last week, stunning traders.

"The big distillate draw is a big surprise and shocked everybody and that has a lot to do with crude turning to the upside here," said Mark Waggoner, president of Excel Futures in Huntington Beach, California. Domestic crude stocks rose for the fifth straight time last week, by 1.7 million barrels to 361.1 million barrels --- the highest level since the week to July 16, 1993, when stocks hit 362.2 million barrels, EIA data showed.

I'll agree crude rose (and rose to levels seen not 16 years, but closer to 19 years ago)....



But the shock about the "big" draw? While I'm no expert, in the grand scheme of things, this doesn't appear all that "big".



Source: EIA

Good News Alert! Imports Down, Exports Up, Trade Balance Crash

Okay, first I need to brag as I pretty much nailed we'd see a relative strength in exports (and the dollar) in this DECEMBER 8TH post.

Now that I got that out of the way, Marketwatch reports:

Imports into the United States fell sharply again in February and the U.S. trade deficit narrowed to $26 billion, the smallest since 1999, the Commerce Department reported Thursday. Imports of goods and services fell 5.1% to $152.7 billion, the lowest in more than four years. Exports of goods and services rose 1.6% to $126.8 billion, the first increase since July. The February deficit was much smaller than the $36.2 billion forecast by economists surveyed by MarketWatch. After adjusting for price changes, the real trade gap in goods fell in February to the lowest level since May 2001.

Trade Balance


Import / Export Breakdown by Goods / Services


Trade Balance by Goods / Services


Source: Census

Don't Read too Much into the VIX

Bespoke details:

Even though the market is barely up on the day at the moment, the VIX volatility index is down more than a point and has broken below 40. As shown in the long-term chart of the VIX below, prior to the current bear market, the VIX seldomly moved above 40. However, since last September, the VIX has remained solidly above 40. Since the VIX is widely considered a "fear" gauge that rises along with investor nervousness, the bulls would like to see the index break solidly below 40 for a longer period of time.

Rather than a measure of fear, the VIX has been closer to a reflection of actual volatility of the market. As the chart below details, the VIX has moved almost one-for-one with the actual volatility of the S&P 500, as measured by the rolling one-month standard deviation of daily price movements of the S&P 500 annualized (assuming 252 trading days in a year).



Source: Yahoo

Good News Alert! Wholesale Sales Up, Inventories Crash

As the saying goes, inventories can't go negative. Thus, at some point these businesses will have to reorder. Especially if sales continue to surprise to the upside.

Per the WSJ:

U.S. wholesale inventories in February fell by the most ever even as sales rose modestly, according to a report that suggested businesses were getting control of their stocks of goods. Wholesale inventories decreased by 1.5% compared to the prior month, falling to a seasonally adjusted $419.34 billion, the Commerce Department said Wednesday.

Inventories fell a revised 0.9% in January; originally, supplies were seen down 0.7%. Sales of U.S. wholesalers climbed by 0.6% in February to a seasonally adjusted $319.73 billion. The last time sales climbed was June 2008, so the increase was a promising sign for an economy that went into recession in December 2007. January 2009 sales fell a revised 2.4%; originally, sales for the month were estimated 2.9% lower.

Sales


Inventories

Source: Census

Abnormal Markets...

High yield bonds are outperforming investment grade corporate bonds, which are outperforming equities (year to date 2009).



How rare is this? Well, this hasn't happened over a full year since 1993 when all three were positive.



And the last time high yield had positive returns, while investment grade bonds and equities had negative returns... well I don't have enough data to tell if that's ever happened.

Japanese Export Recession

Bloomberg reports:

Japan’s current-account surplus narrowed in February as the global recession eroded demand for the nation’s exports.

The surplus shrank 55.6 percent to 1.117 trillion yen ($11 billion) from a year earlier, the Ministry of Finance said in Tokyo today. The median estimate of 24 economists surveyed by Bloomberg News was for a gap of 1.07 trillion yen. Japan had a 172.8 billion yen deficit in January, its first in 13 years.

The world’s second-largest economy is headed for its worst recession since 1945 as plunging overseas demand forces companies from Nissan Motor Corp. to Panasonic Corp. to cut production and fire workers. Confidence among Japan’s biggest manufacturers fell to a record low in March and executives signaled more spending and job cuts, the Bank of Japan’s Tankan survey showed last week.

Source: Customs.Go.JP

Credit Down 5th Time in 7 Months, Before that Once in 15 Years

Marketwatch reports:

Total outstanding consumer credit, including both revolving and nonrevolving credit, fell at a 3.5% annual rate, or $7.5 billion, to a seasonally adjusted $2.56 trillion, the Fed said. Credit has declined in five of the past seven months. Prior to that, credit had declined in only one month in the previous 15 years. "No other recession has seen monthly changes in consumer credit contract this many times or so deep before going back to January 1943, which is how far the data go back," wrote Young Kim, an analyst for Stone & McCarthy Research. The retrenchment reflects "less available credit, less consumer demand for credit, and consumers' new found propensity to pay down debt."

Below is a chart showing revolving credit (i.e. credit cards), which fell 9.7% annualized in February and 6% annualized over the last three months. Like so many other things, we are in unprecedented territory.

Source: Federal Reserve

Euro Area GDP Breakdown

The WSJ reports:

The record contraction in the euro-zone economy in the fourth quarter was even sharper than initially estimated, fueling fears that it will take longer for the currency block to recover from recession, final figures showed.

Gross domestic product contracted 1.6% from the third quarter and 1.5% from a year earlier in the final three months of 2008 in the 15 countries that then used the euro, the biggest contraction by both measures since records began in 1995, the European Union's Eurostat statistics agency said. The euro zone added a 16th country, Slovakia, on Jan. 1.

"Worryingly, it is far from inconceivable that euro-zone GDP contraction was even deeper in the first quarter of 2008, given largely dire data and survey evidence," said Howard Archer, chief U.K. and European economist at IHS Global Insight.

Source: Eurostat

Are Long Bonds About to Break Through or Bounce Back?

The WSJ reports:

A fresh batch of Treasurys up for sale this week sent prices on long-end Treasury futures lower Monday, sending anticipated yields higher even as investors sought safety from falling stocks.

Futures contracts on 30- and 10-year Treasurys declined as the U.S. government announced that it will sell $59 billion in 10-year notes, 10-year Tips and three-year notes in coming days, the latest debt issuance as the government seeks to fund a bevy of financial rescue efforts.

"This is the Treasurys looking at the supply we have coming in this week," Lesh said. "If we didn't have equities down the way they are, I'd imagine the 10-years would be worse."

The impending glut of new Treasurys canceled out investors' renewed trepidation around the prospects of big banks and general wariness around first-quarter earnings reports, which begin this week.

Source: Yahoo

Absolute Domination Defined...

I am no UNC fan, but I have never seen that dominating a performance throughout a final four.



Source: ESPN

The Prime Loan (Under)Performance Problem

OCC and OTS Release Mortgage Metrics Report for Fourth Quarter 2008 (hat tip Calculated Risk):

The Office of the Comptroller of the Currency and the Office of Thrift Supervision today jointly released their quarterly report on first lien mortgage performance for the fourth quarter of 2008. The report covers mortgages serviced by nine large banks and four thrifts, constituting approximately two-thirds of all outstanding mortgages in the United States.

Of these loans, the chart below details the performance of those loans labeled "seriously delinquent mortgages":

Seriously delinquent mortgages, defined as mortgages that are 60 or more days delinquent plus loans to bankrupt borrowers who are 30 or more days delinquent, ncreased to 4.60 percent of the total portfolio in the fourth quarter from 3.54 percent in the third quarter.

Seriously delinquent mortgages increased across all loan categories during the fourth quarter, continuing the trend reported in prior quarters. Serious delinquencies were highest for subprime loans at 16.40 percent and lowest for prime loans at 2.40 percent, reflecting the higher overall risk profile of subprime loans. Prime loans experienced a significant increase in serious delinquencies, increasing from 1.67 percent in the third quarter to 2.40 percent in the fourth quarter—an increase of nearly 44 percent.

While Subprime and Alt-A loans are dramatically underpeforming Prime loans, the shear volume of Prime loans (there are more of them) has resulted in the number of delinquent Prime loans to outnumber Subprime loans.

Yen Continues Sell-Off... Plenty of Room to Go

Reuters reports:

The yen fell broadly on Monday, hitting its weakest against the dollar and the euro in nearly six months as investors took on perceived riskier assets on the view that a global economic downturn may have hit a bottom. The dollar rose as high as 101.45 yen, according to Reuters data, vaulting above 101 yen for the first time since last

"As long as stocks can retain their buoyancy ... risk appetite and risk-based trades will be in vogue and investors will continue to add to and rebuild yen short positions," said Jeremy Stretch, currency strategist at Rabobank in London.

Hedge Fund Returns (March)

A bit busy, but the chart below shows March and YTD returns through March. All bar charts show absolute returns (i.e. Emerging Markets returned 5.54% in March and 1.25% YTD).



Source: Barclays Hedge

EconomPics of the Week (April 3rd)

Asset Classes

Are Corporate Bonds a Screaming Buy?

TIPS Rockin'

Stocks for the Long Run... Why Does Intra-Year Volatility Matter?

Uggghhhh.... 2009 Returns Looking All Too Similar

Market Up 30% Pre-Open!!!!

Economic Data

Population vs. Labor Force vs. Employed

Unemployment to 8.5%, Broader Measure Rockets to 1...

The Public Construction Boost

Autos Breakdown: Ugly, But at Least the Hummers Dead

ISM Manufacturing (March)

ADP Payroll Bloodbath

Consumer Confidence: The Present is "Bad", The Future is “Less Bad”

Chicago PMI to the Downside

Case Shiller Price Index Level at -5% YoY in January

Wealth Concentration in the U.S.

Other

China Isn't the Issue... Part II

TARP Running Dry

Box Office Bonanza Continues

Population vs. Workforce vs. Employed

Making this an early weekend, but one more chart before I go...

What this shows is the population is growing, the labor force is shrinking, and those employed is crashing. Not a surprise, but this puts the #'s in context.

Everyone have an enjoyable, long weekend!

Unemployment to 8.5%, Broader Measure Rockets to 15.6%

Source: BLS

TIPS Rockin'

Vix and More (hat tip Abnormal Returns) details:

One excellent way to protect against inflation is through the use of Treasury Inflation-Protected Securities, more commonly known as TIPS. As I noted last September in Treasury Inflation -Protected Securities and Inflationary Expectations, TIPS utilize the CPI as an inflationary benchmark and TIPS coupon payments and the underlying principal are automatically adjusted to account for inflation.

After underperforming Treasuries in 2008 (the 5 year duration TIPS index underperformed the 5 year duration Treasury index by 15%), TIPS have come out on fire in 2009, especially following the March 18th announcement that TIPS would be part of the Fed's quantitative easing. With performance that strong, expect investors to chase return, while those looking to lock in 1-2% real return annualized over the next 5 years will keep prices steady in the short-run.

Longer run, I'm not a huge fan as the adjustment to principal is based on CPI (i.e. a government figure). Just last year when the price of food and energy was skyrocketing, CPI only rose slightly. Does anyone expect something different next time around?

Stocks for the Long Run... Why Does Intra-Year Volatility Matter?

The NY Times had an article Now the Long Run Looks Riskier Too over weekend that makes the case that equity returns tend to be more volatile in the long-run than in the short run. I personally am having a hard time understanding why any of the points listed matter (bold mine):

Applying Bayesian techniques, the professors found that reversion to the mean isn’t powerful enough to overcome the growing uncertainty caused by other factors as the holding period grows. Specifically, they estimated that the volatility of stock market returns at the 30-year horizon is nearly one and a half times the volatility at the one-year horizon.

Why don’t traditional measures of volatility, such as standard deviation, pick up this phenomenon? Those measures focus only on how much the stock market’s shorter-term returns fluctuate around the long-term average, Professor Stambaugh says.

Looking at the annualized standard deviation of monthly returns over 5 and 30 year periods, we see that the shorter (i.e. 5 year periods) did tend to have lower volatility than 30 year periods, so yes it appears the statement is true.



The reason stated in the article is that there are things in this world that will have profound effects in the long-run, but not the short-run, thus causing longer term volatility:

One example of such a force, Professor Stambaugh said, is global warming. Its impact on the economy over the next 12 months is likely to be quite small, he said. But expand the horizon to the next several decades, and the possible effects of global warming range from negligible to catastrophic.

In my opinion this completely misses the mark. My thoughts? Well, business cycles tend to last anywhere between 3-6 years or so, thus market movements would tend to include the trend of the current business cycle in the short-run (i.e. one direction, thus a lower standard deviation), but if you extrapolate standard deviation over 30 years, you may have returns encompassing 6+ business cycles (i.e. whipsawing, thus greater volatility).

You say tomato, I say tomato (that doesn't quite work when written)... what matters more is where we end up, not how we got there. And while the article states that the past shouldn't be relied on (I agree), it is still useful to see how equities have performed. In looking at the past 100 years of 30-year rolling S&P 500 real returns (thus 130 years of data) we see the following:



Strong returns, typically yes. Reliable? To me, remarkably so. Over the past 100 years there really were no 30-year periods in which equities didn't at least keep up with inflation. Thus, my confusion as to the relevance of the following paragraph:

What is the investment implication of the new study? Other things being equal, Professor Stambaugh says, you would probably lower your portfolio allocation to stocks. But by how much? It’s impossible to generalize, since the answer depends on your time horizon and what else is in your portfolio.

If I am investing in equities and have 30 years until retirement, why does the intra-year volatility matter at all? What matters is unfortunately the timing of when I retire as compared to the last downturn (i.e. most investors continually invest, thus are more heavily weighted to movements at or near retirement). And unfortunately for those retiring in the near term, that is now.

The Public Construction Boost

Reuters details:

U.S. construction spending fell at a slower-than-expected rate in February, a government report on Wednesday, suggesting that the pace of deterioration was start to moderate.

The Commerce Department said spending on construction projects slipped 0.9 percent to a seasonally adjusted annual rate of $967.5 billion, the lowest since March 2004, after falling by a revised 3.5 percent in January.

Analysts polled by Reuters were expecting a 1.8 percent decline in overall construction spending in February. Compared to the same period a year-ago, construction spending dropped 10 percent. Spending in the first two months of 2009 is down 10.9 percent versus the same period last year, the department said.

Total Construction

Private residential construction spending tumbled 4.3 percent in February to $275.1 billion, the lowest since December 1997, after falling 3.7 percent the prior month.

Private Construction

Spending on public construction rose 0.8 percent in February, the biggest gain since October, versus a 2.4 percent decline in January, while spending on private nonresidential structures increased 0.3 percent after falling 4.3 percent the prior month.

Public Construction


Source: Census

Autos Breakdown: Ugly, But at Least the Hummers Dead

Although the WSJ tried to be cheery in their post Auto Makers See a Ray of Hope (article since pulled?) and quotes a bottom caller:

"I believe we are in a bottoming process for the industry," Bob Carter, a group vice president at Toyota Motor Corp., said in a conference call. Mr. Carter said the company's 18% sales improvement in March compared with February could be "a very early indication that we have floored and some optimism is starting to return to the market."

The data suggests otherwise. Autoblog with the details (and figures):

The U.S. auto industry's sales slide continues, and despite the overall market selling more vehicles in March versus February, nearly all brands fell versus the same month in 2008.

The lone notable exceptions are Subaru and Kia. These two brands have ignored industry trends all year long, and this month Subaru posted a small 2.6% loss in sales volume versus last year.

Looking at month over month data (use this for relative purposes only as this is not seasonally adjusted), we see relative strength for those autos that got crushed last month (thus this is just a correction from February lows). That is except for the big, soccer mom, ugly, fuel sucking, box vehicles soon to be formerly known as Hummers, which are dieing the slow death I have been dreaming about for years.

ISM Manufacturing (March)

This morning (sorry for the late posts... been traveling) Motley Fool's Caps reported:

The US manufacturing sector contracted significantly in the month of March, but the nation’s manufacturers cut back on production at a slower pace than expected, according to the Institute of Supply Management’s manufacturing index. The ISM tracks the breadth of growth across firms, asking purchasing managers if business is better this month than last. The PMI came in at 36.3%, up from 35.8% in February. Economists were happy to see this, as a trend may be developing. The PMI rose once again for the third consecutive month, bouncing off its cyclical lows of 32.9% in December. Readings above 50% indicate growth, and anything below, contraction.

Source: ISM

Uggghhhh.... 2009 Returns Looking All Too Similar

Source: World Beta

ADP Payroll Bloodbath

The WSJ reports:

Private-sector jobs in the U.S. fell a steep 742,000 in March, according to a national employment report published Wednesday by payroll giant Automatic Data processing Inc. and consultancy Macroeconomic Advisers.

That's much higher than the 656,000 loss forecast by economists in a Dow Jones newswires survey. The ADP survey tallies only private-sector jobs while the Bureau of Labor Statistics' nonfarm payroll data, to be released Friday, include government workers. Economists surveyed by Dow Jones Newswires expect that the BLS will report job losses totaling 673,000 for March.

Source: ADP

Consumer Confidence: The Present is "Bad", The Future is Looking "Less Bad"

A day late, a buck short... yesterday, the AP reported:

Americans seem more resigned to the hardships of the recession as consumer confidence stabilized in March after falling to an all-time low in February.

But economists caution that shoppers — dealing with shrinking retirement funds, falling home values and worries about job security — are still very gloomy and any improvement in sentiment is fragile.

"There is a sense that consumers are now familiar (with) how bad things are," said Bernard Baumohl, chief global economist at the Economic Outlook Group. "They have read the papers. They recognize that the job market is awful."

Some glimmers of better economic data of late helped stem further sharp declines in sentiment, which remains the lowest since at least 1967 when the index began. The Consumer Confidence Index issued Tuesday by the New York-based Conference Board edged up to 26.0 in March from a revised 25.3 reading in February. It had fallen from 37.4 in January and is less than half its level of a year ago.

Source: Conference Board

Market Up 30% Pre-Open!!!!

April Fools! Yes, I should've made that figure less to be more realistic, but looking at the chart below which shows how things would look if it were indeed up 30%, the Dow would still be more than 40% below its high....



Source: Yahoo