Friday, July 31, 2009

EconomPics of the Week 7/31/09

Some more AWFUL weather here in Manhattan, so likely will be holed down in my apartment. If you want to keep up with anything interesting I might find, check out EconomPic at www.twitter.com/EconomPic

Opinion
The "1-Percenters"
Q2 GDP Predictions
Retro Post: Do Oil Futures Impact the Cash Price?
Is China Squeezing Out Other Exporters?

Economic

U.S.
Q2 GDP Breakdown
Q2 GDP Closer to -2.3% Accounting for Revisions
The New Consumer Confidence Index?
Durable Goods... "There Goes the Optimism" Edition...
Chicago PMI Jumps, but Still Contracting
New Home Sales Surge; Still Down 21% YoY
Consumer Not So Confident

Global
Japanese Retail Sales Down 10th Straight Month
UK: Housing Issues Over?
Record Deflation Hits Japan
When Falling Prices "Aid" Confidence
Unemployment Higher in EVERY Metro Area

Asset Classes
Positioning for Oil's Slide
Treasury Real Yields Highest in 15 Years
Case Shiller: Cleveland Rocks Edition
California Foreclosures > National New Home Sales
California Budget Balanced... For Now

Other
Bruno Ist Nicht Borat

Q2 GDP Closer to -5.8% Accounting for Revisions

Update:

My initial post stated that the decline was closer to 2.3% (rather than the announced 1%) as there were massive revisions to old GDP prints. Looking at GDP data below, old figures were revised down 1.3% on a cumulative basis from Q2 2007 through last quarter, but I forgot to turn the quarter over quarter change into a 12-month figure. Thus, the change from unrevised Q1 to Q2 is not a 2.3% annualized decline, but more like a 5.8% annualized decline.



Yikes...

Source: BEA

Chicago PMI Jumps, but Still Contracting

Briefing.com with the details:

According to the Institute of Supply Management-Chicago and Kingsbury International, Ltd., the Chicago Purchasing Mangers Index increased to 43.4 in July (consensus 43.0) from 39.9 in June. The July reading is the highest reading all year and is comfortably above the 6-month average of 37.3; however, a reading below 50 still signifies contraction. The message once again, then, in the July number is that the rate of decline in manufacturing activity in the Chicago Fed region has slowed. The main point of encouragement with this report is the new orders component. It jumped to 48.0 from 41.6 in June as the region recovers from the depths of the auto industry downturn/restructuring.

Source: Econstats

Q2 GDP Breakdown

For all Google users looking for Q3 GDP data... go here.

I must admit... nailed it (sometimes being lucky is better than being good). Marketwatch reports:

The U.S. economy contracted at a much smaller rate than in the past six months, the Commerce Department reported Friday. Real gross domestic product fell at a 1.0% annualized rate in the second quarter, compared with an average 5.9% drop over the past two quarters. However, this is the fourth straight quarter with a contraction in GDP. This has never happened before since records began in 1947.

The big story for the second quarter was in the much smaller decrease in business investment, exports and inventories. There was also an upturn in federal and state government spending. The government also released comprehensive benchmark revisions to GDP data, but they did little to change the basic story of the economy.

QoQ Data


Historical (puts recent events in perspective)


Source: BEA

UK: Housing Issues Over?

Missed this yesterday. Credit Writedowns with the details:
UK house prices have now risen for three months consecutively and four months in five according to statistics released by Nationwide Building Society this morning. The rise for July was a very robust 1.3% month-on-month, which translates into almost 17% on an annualized basis. Clearly, housing is doing very well during this summer selling season.


Source: Nationwide

Thursday, July 30, 2009

Q2 GDP Predictions

T - 8 1/2 hours, but before we dive into the data, lets take a look at how we got here...




It's also important to keep in mind the relative size of each component (see chart below). If investments continue their collapse (I think they will), it will have a much smaller impact than if consumption cliff dives (I don't expect a cliff dive based on April-May figures).



With that in mind... my predictions (to take with a grain a salt).
  • Consumption: Slight decline, though the strong weight will have a substantial impact
  • Investment: Massively down, though the small weight with have less of an impact
  • Government spending: Nice jump and decent impact (call it 1% impact)
  • Net Exports: Strong positive; Imports: Down... a lot; Exports: Just down
Aggregate? Lets go with -1% and better than expected. Why better than expected? The importance of one HUGE wild card with this release. A BEA revision to methodology:
On July 31, 2009, the Bureau of Economic Analysis (BEA) will release the results of a comprehensive, or benchmark, revision of the national income and product accounts (NIPAs). The comprehensive revision will incorporate the results of the 2002 benchmark input-output (I-O) accounts as well as changes in definitions, classifications, statistical methods, source data, and presentation.

Advance information about the comprehensive revision will be posted here as it becomes available.
Ed from Credit Writedowns predicts:
The revision is the first since the end of 2003. I would expect downward revisions for 2008 and 2009, reflecting a recessionary environment. Both Q1 and Q2 2008 showed real GDP growth even though the recession began in December 2007. Q1 2008 came in at 0.9% and Q2 2008 was a Bush tax cut stimulus-influenced 2.8%. I wouldn’t be surprised to see Q1 2008 cut to a negative number.
Interesting. The BEA has the ability to change the methodology at a time when a better than expected headline number may do wonders for confidence... I hate to be such a conspiracy nut (kidding, that is my passion), but my initial thought is "how convenient". If Ed is correct, a downward decline to historical data means that any new figure will appear to be much better than expected as the same output will appear to be a rebound (or smaller fall) off of a lower base.

We shall see soon...

Source: BEA

Record Deflation Hits Japan

WSJ reports:

Japan's core consumer price index fell at its fastest pace on record for the second straight month in June, while the jobless rate rose to near its all-time high, troubling trends that economists say could complicate any economic recovery.

The data come as other recent indicators have shown the corporate sector appearing to get in better shape as Japan's export markets recover and firms increase production. But falling prices and increasing unemployment are likely to worsen in the months ahead, and those could hurt the overall economy, analysts say.

The core CPI, which excludes volatile fresh food prices, fell 1.7% on year in June, surpassing the 1.1% slide in May, the Ministry of Internal Affairs and Communications said Friday. Core prices have now fallen for four straight months.

The result is likely to fuel concerns that the world's second biggest economy is headed for deflation, a prolonged period of damaging price falls, just three years after emerging from the last such period.


Source: Stat.GO.JP

When Falling Prices "Aid" Confidence

Missed this yesterday. BBC (via Credit Writedowns) details:

German consumer prices fell for the first time in 22 years in July, official figures have shown. Prices fell 0.6% in July from a year earlier – the first fall since March 1987, when they declined by 0.3%. The decline was largely due to falls in energy prices, which peaked in summer 2008, and analysts said Germany was unlikely to see a deflationary spiral. Prices can fall for a short time without hurting the economy, but prolonged declines can be damaging.
Dirk Schumacher, an analyst at Goldman Sachs, said that the falling prices could help the economy in the short term. "Falling prices are aiding consumer confidence and purchasing power. That’s aiding consumption," he said."This is not deflation. We’re still far away from that. It’s no cause for alarm," he added.


Back to Ed from Credit Writedowns:
Right. Keep telling yourself that.

Prices are falling. This is deflation and it should underline for anyone with half a brain that deflationary forces of demand growth declines, deleveraging and overcapacity are still at work.
Source: DeStatis.DE

Wednesday, July 29, 2009

The New Consumer Confidence Index?

September '08 was Lehman...
March '09 was the market collapse...
The question... what is the concern now????



Source: Google with fixed scaling (via Reddit)

Update: KMH with a great explanation:
I suspect a red herring. Related terms like "Great Depression" are not spiking, whereas they did last year.

My guess: Earlier this month Larry Summers pointed to the fact that the search term "economic depression" had declined in usage as evidence of economic recovery. It wouldn't take a large fraction of curious or vindictive Summers observers googling his favorite search term to generate a spike, especially when "economic depression" is almost certainly not the first term most people would bang into Google during a panic. Perhaps somebody even wrote a bot to do it just to make Summers squirm - genius!

Irrespective of the cause, I wouldn't be surprised if it still turns out to be a great leading indicator...

Unemployment Higher in EVERY Metro Area

NPR's Planet Money reports:

The jobless rate was higher this June than the year before in every American metropolitan area, says the Bureau of Labor Statistics. In a report released today, the BLS finds that 18 of those 372 mets have unemployment of at least 15 percent. Eight of those were in California and five in Michigan. Elkhart County, Ind., with its devastated RV industry, posted one of the biggest year-over-year increases -- a 10 percent jump to 16.8.
Here are those unlucky 18

Source: BLS

Bruno Ist Nicht Borat

Some lighter news...

The NY Daily News predicted two weeks back that Bruno's opening week haul wasn't as strong as it may have first appeared:

Sacha Baron Cohen's "Brüno" sashayed to first place at the box office, but in the end its debut weekend wound up not being so wunderbar.

"Brüno" earned a very respectable $30.4 million, but took in nearly half of the weekend total on Friday night as earnings tumbled Saturday and Sunday.

Revenues for hit movies typically go up on Saturday, so the nosedive for "Brüno" could be a sign that it lacks the shelf life that made Cohen's "Borat" a $100 million smash.
And they were right. But, I'm not even sure they realized how large the fall would be. After that $30.4 million opening weekend, the movie has cliff dived and was down more than 70% each of the past two weekends.



Maybe the world is just not ready for a gay Austrian celebrity wanna be...

Source: Box Office Mojo

Durable Goods... "There Goes the Optimism" Edition

Remember last months jump in durable goods (that turned out to be a jump only in aircraft)? Well, looks like it wasn't so sustainable (or as large as first thought). Reuters details:

New orders for long-lasting U.S. manufactured goods fell more sharply than expected in June, notching their biggest decline in five months as demand for communications and transportation equipment slumped, a government report showed on Wednesday. The Commerce Department said durable goods orders fell 2.5 percent, the largest drop since January, after rising by a revised 1.3 percent in May, previously reported as a 1.8 percent surge. This was worse than market expectations for a 0.6 percent decline. Orders had advanced for two straight months.


Source: Census

Retro Post: Do Oil Futures Impact the Cash Price?

The WSJ reports:

The Commodity Futures Trading Commission plans to issue a report next month suggesting speculators played a significant role in driving wild swings in oil prices -- a reversal of an earlier CFTC position that augurs intensifying scrutiny on investors.
In a contentious report last year, the main U.S. futures-market regulator pinned oil-price swings primarily on supply and demand. But that analysis was based on "deeply flawed data," Bart Chilton, one of four CFTC commissioners, said in an interview Monday.
Need to brag a bit... Below is a "retro post" from June 19th of last year (AND the first time a post on EconomPic had actual words in it) in which I make the case that futures DO impact the cash price of oil (AND it looks like I happen to be on the right side of an argument in which Paul Krugman was on the other... that doesn't happen often). Lets go to the EconomPic time machine.



While I completely buy into the whole China / emerging markets story for a portion of the higher prices we've seen in oil, it is amazing to me how many people question whether new investors / speculators "inspectors" have made an impact. 'If it were "inspectors" where is the build up in inventory?' they asked. I believe much of this was was correctly explained by Paul's own readers. With the emergence of this little tidbit, which supports the hypothesis that not all information regarding the questionable (lack of) inventory build up is available, lets put that to rest until we get some better data points.

I thought I'd move on to discuss another reason listed as to why "inspectors" do not have an impact, which is because they:
"Invest in futures, rather than in physical supplies of oil. So every month, they must trade contracts that are about to fall due for ones that will not mature for several months. That makes them big sellers of oil for prompt delivery."
This is flat out flawed. In a nutshell, participants (buyers and sellers) of futures which CAN be delivered, can buy / sell the spot / future (or a mix of the two) because they are THE SAME THING, just with a different delivery dates. Think of a spot sale as a future at Time = 0. With more buyers emerging to invest / speculate, demand has increased which equals higher prices.

Let me provide a very basic example. For simplicity assume no financing or storage costs associated with the futures, thus the futures prices should always be equal to the spot (or else there is an arbitrage opportunity) and that only two dates of which the futures are available; 1 and 2 years out...

1) With no speculators; spot price = futures price at Time 1 and 2
2) Speculators (or index investors) new to the market buy at Time 2, driving up prices
3) The difference between 1 and 2 year prices are arb'd out by futures participants (ignoring cash market for now)
4/5) The spot market converges as those who typically buy in the futures market have an incentive to buy in the spot (i.e. producers or even hedge funds), while sellers who typically sell in the spot market, have an incentive to sell in the futures market and keep storing the underlying (either in inventories or in the ground).

Click for larger size

Thus, the actual position where futures players "invest" (Time 1 or Time 2) does not matter. What matters is the "net exposure" of their investments. Thus, rolling the position (the trading of contracts quoted above) which consists of a buy and a sell order to keep the investment in the futures market, has little or no impact on the spot price, as the "net exposure" does not change!

It is only at initiation of the new position that the demand for the underlying commodity has increased. As each day passes, more and more "investors" globally are adding commodities to their portfolios (because commodities are exploding) which increases the "net exposure", the net demand, and the price even more! Sound similar?

Update: Notice how this process would also explain the steep curve (i.e. contango)

Tuesday, July 28, 2009

Japanese Retail Sales Down 10th Straight Month

Bloomberg reports:

Japan’s retail sales fell for a 10th month in June, extending the longest losing streak since 2003 as job losses and wage cuts forced households to trim spending.

Sales slid 3 percent from a year earlier, the Trade Ministry said today in Tokyo. Economists surveyed by Bloomberg News predicted a 2.5 percent drop.

“The worst is over but that doesn’t completely wipe out households’ concerns,” said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. “Japan’s recovery will be weak until a pickup in jobs and wages boosts consumer spending.”

Department-store sales fell 8.8 percent in June, capping the worst half-year performance on record, the Japan Department Stores Association said last week. Sales at convenience stores declined for the first time in 14 months in June, the Japan Franchise Association said last week.

Source: Meti.GO

Case Shiller: Cleveland Rocks Edition



Source: S&P

Consumer Not So Confident

Washington Post details:

The Conference Board Consumer Confidence Index reported 46 percent of consumers called current business conditions in July "bad," a 1 percent increase from the month before. Consumers who reported jobs are "hard to get" jumped to 48 percent, an increase of about 3 percent from June.

"Consumer confidence, which had rebounded strongly in late spring, has faded in the last two months," said Lynn Franco, director of the Conference Board Consumer Research Center, in a news release. "The decline in the Present Situation Index was caused primarily by a worsening job market, as the percent of consumers claiming jobs are hard to get rose sharply."



Source: Conference Board

Is China Squeezing Out Other Exporters?

Michael Pettis (via RGE Monitor) has an interesting piece titled 'Squeezing Out the Exporters". Michael makes the case that Europe and the U.S. will likely take a tougher stance on imports from China because of the perception that China is subsidizing their exports. However, the data he lists to support that view seems highly misleading.

Below is a chart of a table of data he references from the Economic Policy Institute (a group he admits is not noted for its commitment to free trade).



This is where I believe the data may be flawed. Michael states (bold mine):

Perhaps as a consequence of a fiscal stimulus aimed at boosting investment and production, China’s share of the US trade deficit has grown significantly. Since the US trade deficit is shrinking quickly, this means that other exporters are getting killed. As I have argued for a while, this is not sustainable and will almost certainly cause trade tensions to erupt.
All exporters are getting killed, but that's because all exports are down, not because China is taking a massive amount of share. One needs to look at TOTAL imports by China vs. TOTAL imports, not TOTAL imports by China vs. TOTAL Net Imports (the ignoring of oil is fine with me).

Why? Lets look at an example. Assume we import goods from four countries, each representing 25% of all imports, and totalling $100 billion, while we export $50 billion per year. In this case (Scenario 1), each country's exports makes up 50% of the trade balance.



Fast forward to scenario 2. Imports from all countries are down an equal amount (in this example 40%), while exports are down only 10%. The result, each country's exports makes up 75% of the trade balance (up from 50%).



Did all counties take market share? Impossible, yet this is the reason why it may appear that China took a ton of market share. The actual figures show that Chinese did take market share in what the U.S. imported, but it was much smaller (from a bit less than 20% to a bit more than 20% excluding oil imports). My thoughts is that was likely due to the decline in cheap goods imported from China being less than the decline for broader goods. It completely ignores the fact that imports from China are down 17%+ year over year.

So... is China squeezing out other exports to the U.S.? Yes, but not any more than they have been doing over the previous 20-30 years. They just import the cheap goods we are less likely to cut out of our lives, thus everyone is taking notice.

The "1-Percenters"

According to the Center on Budget Policy Priorities:

Average pre-tax incomes in 2006 jumped by about $60,000 (5.8 percent) for the top 1 percent of households, but just $430 (1.4 percent) for the bottom 90 percent, after adjusting for inflation, according to a new update in the groundbreaking series on income inequality by economists Thomas Piketty and Emmanuel Saez. Their analysis of newly released IRS data shows that in 2006, the shares of the nation’s income flowing to the top 1 percent and top 0.1 percent of households were higher than in any year since 1928.
Note that the latest data available is from 2006.



Notice the point (in the above chart) at which the top 1% began to earn a greater share of the total pie for the first time after the Great Depression... the early 1980's. Know what else occurred in the early 1980's? Financial professionals began to earn a SIZABLE relative share of national income while all other wages were stagnant.



Thus began a 25+ year run in which financial professionals and the powerful elite both had a huge incentive to keep the financial bubble going. The financial professionals earned their commission, while the elite had outsized gains on their capital. As the NY Times states:
The gains for the richest took place amid a booming economy, in which hedge funds and private equity firms blossomed and the subprime lending machine went into high gear.
In hindsight, it is not surprising to me that this level of income concentration was last seen right before the Great Depression (I assume financial professionals had an outsized share of income then as well). And even though much of this wealth was just saved by the trillions of taxpayer dollars used to keep the financial machine going, the 1-percenters are protecting this wealth at all costs. Truthdig details:
But what really makes the ultrawealthy so fortunate, what truly separates this moment from a run-of-the-mill Gilded Age, is the unprecedented protection the 1-percenters have bought for themselves on the most pressing issues.

With 22,000 Americans dying each year because they lack health insurance, Congress is considering universal health care legislation financed by a surcharge on income above $280,000—that is, a levy almost exclusively on 1-percenters. This surtax would graze just 5 percent of small businesses and would recoup only part of the $700 billion the 1-percenters received from the Bush tax cuts. In fact, it is so minuscule, those making $1 million annually would pay just $9,000 more in taxes every year—or nine-tenths of 1 percent of their 12-month haul.

Nonetheless, the 1-percenters have deployed an army to destroy the initiative before it makes progress.
While a lot of progress is needed, the bigger question is whether national healthcare is just another form of redistribution of wealth or do wealthy individuals owe it to society for all they have extracted from the system? Obama seems to think the latter (back to Truthdig):
For his part, Obama has responded with characteristic coolness—and a powerful counterstrike. “No, it’s not punishing the rich,” he said. “If I can afford to do a little bit more so that a whole bunch of families out there have a little more security, when I already have security, that’s part of being a community.”

If any volley can thwart this latest attack of the 1-percenters, it is that simple idea.
I agree...

Data Source: Emmanuel Saez, BLS

Monday, July 27, 2009

California Foreclosures > National New Home Sales

The Big Picture's quote of the day:

“National New Home Sales, on a monthly basis, don’t even add up to half of the total foreclosure activity in California alone in a single month.”

-Mark M Hanson
Let's go to the chart...


While the Census reported new home sales came at 36,000 for the month on an unadjusted basis, Foreclosure Radar reported:
Notices of Default, the initial step in the foreclosure process, rose by 11.8 percent to the second highest level on record at 45,691 filings. Year-overyear filings increased by 10.0 percent from June of 2008.
Mark is close (and things are horrendous), but they aren't quite that bad. So, please use the following quote going forward:
“National New Home Sales, on a monthly basis, don’t even add up to 80% of the total foreclosure activity in California alone in a single month.”
-Jake (EconomPic Data)

Positioning for Oil's Slide

Regular readers of EconomPic shouldn't be surprised that I believe oil will trend lower in coming months (see here and here for a few posts on the subject). While I in no way believe that history always repeats itself, there are many parallels between sentiment now and as it existed last summer before last year's crash (concern over inflation causing investors to pour money into commodities / the belief that the worst is behind us).


Not surprising then that the path of oil in 2009 has followed the path we saw in 2008 (hat tip Hugh Hendry in his June commentary for the chart).



But it isn't only my view on oil that has been the cause of my increased short position in USO (U.S. Oil Fund ETF) via puts. The additional reason is that USO performs poorly when there is contango in the oil market. As detailed in the USO prospectus via Market Folly:
in the event of a crude oil futures market where near month contracts trade at a lower price than next month contracts, a situation described as ‘‘contango’’ in the futures market, then absent the impact of the overall movement in crude oil prices the value of the benchmark contract would tend to decline as it approaches expiration. As a result the total return of the Benchmark Oil Futures Contract would tend to track lower. When compared to total return of other price indices, such as the spot price of crude oil, the impact of backwardation and contango may lead the total return of USOF’s NAV to vary significantly. In the event of a prolonged period of contango, and absent the impact of rising or falling oil prices, this could have a significant negative impact on USOF’s NAV and total return.
And this is exactly what has happened so far this year. The market was in extreme contango (a post on contango more generally is here) which resulted in the ETF underperforming the actual spot price by 40%!



And while no longer extreme, the market does remain in contango.



In addition, this offers an explanation as to why the recent drawdown in crude isn't necessarily good news for oil bulls. Stephen Schork (via FT):
The market is paying you to build supplies by virtue of the discount on nearby material. If the recent run-up in price was based on real demand for wet barrels, then this discount would disappear, i.e. the market would be moving from contango toward backwardation. That is not the case at this time. Thus, the ongoing drawdown in U.S. crude oil supplies (outside of Cushing) is not demand driven, but rather a function of lower domestic production and fewer imports. In other words, refiners, as any good grocer would tell you, are aggressively emptying the shelves, as it were, of surplus material.
With all that said, there is still reason for concern that the price level will continue to rise. Away from additional investor flows into the asset class, large commodity players are in such control of the price, that regardless of the economic conditions that could be cause for a drop in price, the price may remain elevated. The Oil Drum sums it up eloquently:
The manipulation in the oil market is taking place at a different “meta” level to the Leesons and Hamanakas. The Goldman Sachs and J P Morgan Chase's of this world do not break rules: if rules are inconvenient to their purpose they have them changed.

The Market is the Manipulation.
Deep...

Source: EIA

New Home Sales Surge; Still Down 21% YoY

Bloomberg reports:

Purchases of new homes in the U.S. climbed 11 percent in June, the biggest gain in eight years, underscoring evidence that the deepest housing slump since the Great Depression is starting to stabilize. Sales increased to a 384,000 annual pace, higher than any forecast of economists surveyed by Bloomberg News and the most since November, figures from the Commerce Department showed today in Washington. The number of houses on the market dropped to the lowest level in more than a decade.
And now, the long-term perspective...


Source: Census

Treasury Real Yields Highest in 15 Years

Bloomberg reports:

The highest inflation-adjusted yields in 15 years are helping provide the Treasury with record demand at auctions as the U.S. prepares to sell $115 billion of notes this week.

Treasuries are the cheapest relative to inflation since 1994 after consumer prices fell 1.4 percent in June from a year earlier. The real yield, or the difference between rates on government securities and inflation, for 10-year notes was 5.06 percent on July 24, compared with an average of 2.74 percent over the past 20 years.

“Concerns surrounding rising Treasury supply to fund the various U.S. stimulus programs are overblown,” strategists led by Brad Henis in New York at Citigroup Inc., one of the Fed’s 17 primary dealers required to bid at the auctions, wrote in a July 23 research report.


Source: Barclays / BLS

California Budget Balanced... For Now

NY Times reports that California Legislature finally approved a budget to close the $26 Billion Gap.

The budget contains a vast array of spending cuts that will soon be felt throughout the state. The K-12 education budget, which also includes community colleges, lost $6.1 billion from its roughly $58 billion base, and higher education took a $2 billion hit.

There were accounting tricks, like $1.2 billion that will be saved in a one-time deferment of state worker paychecks for one day, moving them into the next fiscal year.


Tough, but at least by screwing over the next generation of intellectuals, California has solved the budget crisis for good... right? Nope. Not even Arnold and California's legislative leaders think that's the case. Business Week reports:
"We are still in troubled waters; there are still uncertainties," the Republican governor said. "We don't know how much longer our revenues will drop. We don't know if we may not be back in the next six months to make further cuts."
Legislative leaders said much the same thing.

"It's entirely likely we will ultimately see further declines in revenue, which will almost certainly require further budget action," said Assembly Minority Leader Sam Blakeslee, a Republican from San Luis Obispo.
Source: NY Times

Friday, July 24, 2009

EconomPics of the Week (7/24/09)

After a brutal week of travel, I'm looking forward to getting around to some "detailed" analysis next week. As always, if you want to keep up with anything interesting I find over the weekend, check out EconomPic at www.twitter.com/EconomPic

Economic Data
States are Broke
Unemployment Across the United States
Leading Economic Indicators Jump in June

Real Estate
Flip That "Worthless" House
Existing Home Sales (and Prices) Rise in June
60% of Those Unemployed Can't Get a Job Within 1 Year
CRE: I Think the Shoe Just Dropped

Global
UK Economy Shrinks by Record Level
China's Balancing Act
China Now Accounts for ~20% of All Japanese Export...
European Industrial New Orders Slip in May

Asset Classes
Bubble or Bull?
Nasdaq Up 50% Since March 9th
Is Volatility Cheap?
Microsoft Revenue "Freezes"... Company Looks to "Reboot”
Was the Goldman TARP Payback Below Market Value?
The Dollar is Overvalued... But Against What?
When $3 Trillion Seems Like Small Potatoes

Other
Mark Buehrle's Perfect Game

Flip That "Worthless" House

Infectious Greed (via RedFin) with an unbelievable example of how out of control the housing bubble got.



And it should be "history", not "histor", but I refuse to remake this chart after my error (and I like histor)...

60% of Those Unemployed Can't Get a Job Within 1 Year

According to the Department of Labor, the Exhaustion Rate is:

The exhaustion rate is equal to the number of final payments in a twelve-month period divided by the number of first payments in a twelve-month period that lags the period over which final payments are counted by six months (26 weeks). For example, the exhaustion rate for December 2004 is equal to the number of final payments from January 2004 to December 2004 divided by the number of first payments from July 2003 to June 2004. When charted, the exhaustion rate is much smoother than the simple count of exhaustions because each point represents twelve months’ worth of aggregated data, much like a moving average.
As I detailed in my previous post Exhaustion Rate Underestimates the Issue, the six months was applicable when unemployment insurance was... six months. That length has shifted to 12 months in November, thus the Exhaustion Rate (as listed by the DOL) is no longer applicable. Fortunately, I crunched the numbers and voila... we have the chart below.



And it is rather frightening. Of those that received their first unemployment benefits 12 months ago, 60% were unable to get a job AND are now no longer able to collect unemployment. This is a huge reason why the continuing claims number and unemployment rate underestimates the issue.

Source: DOL

Bubble or Bull?

Initially posted the Irrational Exuberance Matrix on March 4th (within a week of the market bottom). Time to dust it back off... are we in the early stages of a bull market or just another bubble?



For the record, this is still the favorite thing I've done at EconomPic.

UK Economy Shrinks by Record Level

Bloomberg reports:

The U.K. economy shrank more than twice as much as economists forecast in the second quarter as a record annual slump in construction, banking and business services kept Britain mired in the recession.


Gross domestic product contracted 0.8 percent from the first quarter, the Office for National Statistics said today in London. Economists predicted a 0.3 percent drop, according to the median of 32 forecasts in a Bloomberg News survey. From a year earlier, the economy shrank 5.6 percent, the most since records began in 1955.


Source: National Statistics

Microsoft Revenue "Freezes"... Company Looks to "Reboot"

Omnious signs when the bellwether software company posts its first ever year over year decline in revenue (down 3% for FY09 vs. FY 08 and 17% Q4 09 vs. Q4 08). NY Times details:

Microsoft has closed out perhaps its most difficult year as a public company in less than stellar fashion. On Thursday, the company significantly missed Wall Street’s fourth-quarter revenue target and reported the first decline in full-year revenue in its 34-year history.
Because of the global recession and a slumping PC market, Microsoft has suffered a number of historic lows the last seven months. In January, it initiated large-scale layoffs for the first time in its history. Sales of its flagship Windows software have also declined for the first time ever, as consumers and businesses cut back on PC purchases during the economic downturn.

Source: Microsoft

Thursday, July 23, 2009

Mark Buehrle's Perfect Game

MLB reports:

Twenty-seven times, Rays hitters took their cuts off Buehrle. And 27 times, they walked back to the visiting dugout unsuccessful, as Buehrle tossed a perfect game in a 5-0 White Sox victory against the Rays, setting off a wild on-field celebration at U.S. Cellular Field.

"The first couple innings just went by too fast," Rays designated hitter Pat Burrell said. "By the time we realized what we were getting into, I think we were a little late. That being said, that was just awesome, fun to be a part of."
Fast is right. Buehrle, who is known to work much faster than any other pitcher in baseball, needed less than one minute for 2/3 of the batters he faced.




And for those that missed it, check out this catch by (9th inning replacement) Dewayne Wise with no outs in that ninth inning to save the perfect game.... unbelievable.


Was the Goldman TARP Payback Below Market Value?

Back in October, the Treasury purchased $10 Billion in Warrants from Goldman Sachs as part of TARP. Yesterday, Lloyd Blankfein made the claim that in repaying that $10 Billion amount with $11.418 Billion, it works out to a 23% annualized return for U.S. taxpayers. Per Marketwatch:

"This return is reflective of the government's assistance, which benefited the financial system, our firm and our shareholders," Goldman Chief Executive Lloyd Blankfein said in a statement. "We are grateful for the government efforts."
And it does. If you ignore such "small" things like the $13.9 Billion provided to Goldman via AIG and all those FDIC guarantees. As the WSJ points out:
FDIC guarantees helped the company secure financing at a cheaper rate since Goldman was essentially using the government’s credit card. This helped boost the company’s earnings for the three quarters it used the program. And Goldman didn’t dabble. It was the sixth biggest participant in the program by volume, according to Dealogic.
Ignoring ALL of this... lets see how our (i.e. taxpayer) 14.2% NON-annualized investment performance compares to what we could have received as a normal market participant.


Yes, I understand that we, the taxpayer, got in at the preferred stock level (i.e. more senior than equities), thus the underperformance relative to the returns seen in Goldman's common equity (though not sure about 60% less).

But how is 20% less than the return on a ~10 year Goldman Sachs corporate bond "fair value"?

Source: Yahoo, Barclays

Existing Home Sales (and Prices) Rise in June

This morning's announcement showed relative strength not only in sales, but importantly in price. A lot of this is "addition by the elimination of subtraction" due to less forced sales and more participants biting the bullet with the realization that the price of their home is down, but good news none-the-less (distressed sales accounted for 31% of all sales in June vs. 50% in March).


Additional details from Marketwatch:
Resales of U.S. single-family homes and condos rose 3.6% in June to a seasonally adjusted annual rate of 4.89 million, the highest level since last October, the National Association of Realtors reported Thursday. Resales have risen for three straight months. The housing market appears to be healing, said Lawrence Yun, the NAR chief economist. The increase was higher than expected.
Economists surveyed by MarketWatch expected sales to rise to 4.85 million. Inventories of unsold homes are still elevated and putting pressure on prices. The inventory of unsold homes on the market fell to a 9.4 month supply at the June sales pace, down from 9.8 months in May. Yun said that inventories would have to be at a 7 month supply to get price stabilization. The median sales prices fell 15.4% in the past year to $181,800.

Source: Realtor.org

Is Volatility Cheap?

Daily Options Report reports (hat tip Abnormal Returns) on the relative cheapness of volatility (as currently priced in options):

Bottom line is options have gotten cheap enough to where net selling them looks very risky as you have little cushion for a sudden move. But by the same token, it doesn't mean you go back up the truck and cross your fingers that volatility starts ticking up right........now.
It is true that the VIX (which tracks the daily implied volatility on S&P 500 options) has come down MASSIVELY from Fall highs. In the actual marketplace, realized daily volatility has also snapped back in recent months as seen below.


Daily Options Reports continues...
But cheap does not always mean a buy. At the end of the day, you will need realized volatility in GOOG (or anything) between now and expiration to exceed the implied volatility you paid for the option. In other words, you could catch the absolute low tick in GOOG options volatility and still lose money if GOOG volatility itself remains lower.
True, you could. BUT, you can also catch a higher level of volatility and still make money even if volatility decreases. One recent example, I am fortunate enough to say, happened to me. I purchased a boatload of Out of the Money "OTM" calls on QQQQ (to be more specific September 43's) a few weeks back for a few cents each, which I delta hedged by shorting QQQQ's and later by buying QQQQ puts when QQQQ became difficult to short.

What has happened since then? Well, QQQQ's have run up significantly in price and I've continued to delta hedge, BUT the implied volatility on QQQQ's has actually fallen slightly since that time. Importantly, even with that drop in volatility, the combined positions have done quite well. Why? Because daily volatility does not always reflect exactly what is being captured.

According to Wikipedia, volatility is:
More broadly, volatility refers to the degree of (typically short-term) unpredictable change over time of a certain variable.
Thus, volatility only measure the predictability of short term changes. When you buy an option, you don't care how volatile the underlying security performs around the mean (i.e. lots of small movements unless you want to be abused by transaction fees), but rather you care about short-term, yet significant, moves in absolute terms. As an extreme example, if a security returns 0.5% EVERY day for a month, the volatility over that month is... ZERO. Yet, the security would have moved by more than 10% over a 20 trading day period, which is very volatile for the broader market. Thus, while volatility has declined, the option position has likely paid out BIG time.

This can be seen in the chart below. Rather than the previously shown monthly volatility (as calculated on a daily price change), we show the six month change on a monthly basis. Here, we see that volatility over longer times frames has actually not moved down much at all, but has actually remained at a historically high levels.


And this is the reason why I feel that options (and volatility) continue to be cheap.

China's Balancing Act

The Economist reports:

Chinese growth was already the envy of the world. Now recession-stricken countries will be turning an even brighter green. On July 16th new figures showed China’s GDP growth quickened to 7.9% in the year to the second quarter. That is healthy enough by anyone’s standards but the headline number conceals a more astonishing rebound. Goldman Sachs estimates that GDP grew at an annualised rate of 16.5% in the second quarter compared with the previous three months (see chart 1). Over the same period, America’s economy probably contracted again. China’s economic stimulus has clearly been hugely effective. So effective, indeed, that some economists are now worrying it may be working rather too well.

It has been reported that while the stimulus plan has been tremendously effective, a lot of the money from those new bank loans have been invested directly into the market. The result has been a massive rebound (as seen in the ETF FXI) in the Chinese stock market; now up 60% over the last six months, though it should be noted the ETF is still down 40% from its peak.


So the million dollar question... is this the next bubble forming or will China's decoupling story finally come true?


Update: Reader Yuri points out:
FXI actually tracks shares listed in Hong Kong that have their main operation in mainland China - the so called H-shares. They are in fact closed to Chinese mainland investors and are primarily the realm of foreign investors and often trade at a hefty discount. Therefore the market madness that is going on there is obviously not reflected in this index. It only reflects international investor sentiment about China.

Wednesday, July 22, 2009

China Now Accounts for ~20% of All Japanese Exports

Bloomberg reports:
Japan’s exports fell in June at the slowest pace this year as demand picked up worldwide, helping the trade surplus widen for the first time in 20 months and setting the stage for an economic recovery.

Shipments abroad declined 35.7 percent from a year earlier, after dropping 40.9 percent in May, the Finance Ministry said today in Tokyo. The surplus widened to 508 billion yen ($5.4 billion).

Bloomberg continues:
Faster growth in China is propping up sales for Japanese manufacturers including Komatsu Ltd. and Nissan Motor Co. The recovery in shipments from the record collapse spurred by the financial crisis probably helped the economy grow for the first time in more than a year last quarter.

“There’s no doubt China has been a driving force for Japan’s exports,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “Manufacturers will probably continue to increase production amid the improvement in exports, and that’s good for the economic outlook.”
Indeed. Once one gets over the absurd collapse which makes me question the "setting the stage for an economic recovery", it does become clear that things would be MUCH worse if China had not shown relative strength (and now account for ~20% of all Japanese exports).


European Industrial New Orders Slip in May

ForexTV reports:

Eurozone industrial new orders dropped 0.2% in May from the previous month, following a revised 0.7% decrease in April, the Eurostat report revealed Wednesday. Economists were looking for a monthly growth of 1.9%.

Excluding ships, railway and aerospace equipment, for which changes tend to be more volatile, orders slipped 0.3% on a monthly basis and 30.2% annually.
Compared to May 2008, industrial new orders were down 30.1% in the euro area. The rate of decline for April was revised to 35.3% from 35.5%.

Economists were expecting a 27.9% decrease for May.Eurozone industrial new orders dropped 0.2% in May from the previous month, following a revised 0.7% decrease in April, the Eurostat report revealed Wednesday.



Source: Eurostat

Nasdaq Up 50% Since March 9th

Remarkably the Nasdaq is now up more than 50% from the lows hit just 134 days ago (March 9th).



Source: Yahoo

Tuesday, July 21, 2009

The Dollar is Overvalued... But Against What?

Investment Postcards details why the dollar is in jeopardy:

David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, points out that there is one policy tool that is practically unchanged since two years ago … the US dollar. “It is the only policy tool that has not budged one iota since the crisis erupted two years ago. But we are sure that as the unemployment rate makes new highs and increasingly poses a political hurdle in a mid-term election year, it would make perfect sense for a country that always operates in its best interest - even if it may not be in everyone’s best interest - to sanction a US dollar devaluation as a means to stimulate the domestic economy,” he said.
Makes sense, but lets look at the other side of the coin (needed a currency pun in there). If the U.S. were to intentionally devalue the dollar, not only would that mean we were willing to piss off China (a country we seem to be rather reliant on in any recovery story), but it would also mean other developed countries were not, in fact, attempting the same thing (call it the paradox of devaluing - all currencies can't be worth-less against one another).

In addition, according to the very official Big Mac Index (via Credit Writedowns) the dollar is already rather weak as compared to a number of "developed" currencies..



Which leads David to the following recommendation:
That investors should start thinking about protecting their portfolios against a declining dollar by taking positions in commodities, gold, the Canadian dollar, resource stocks and US sectors that have high foreign exposure (materials, industrials, staples, health care).
In other words, if you believe in a weak dollar going forward, don't invest in other currencies... invest in hard assets.

When $3 Trillion Seems Like Small Potatoes

The blogosphere is buzzing with the news that the U.S. rescue "could" reach $23.7 Billion after Neil "I Need PR Lessons" Barofsky (the special inspector general for the Treasury’s Troubled Asset Relief Program) said (bold mine):

U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies.

The Treasury’s $700 billion bank-investment program represents a fraction of all federal support to resuscitate the U.S. financial system, including $6.8 trillion in aid offered by the Federal Reserve.
May be is the key. While the Fed and Treasury have spent an unbelievable amount of money to date in an attempt to save the system (which in itself may cause as many problems as it fixes), $23.7 trillion reflects such a worst case scenario that if that were to happen our government's debts are the least of our concerns (I'll let you doomsayers think out of the box with that one).

Further details as provided by the WSJ:
The $23.7 trillion figure also includes total forecast exposure of the Fed, the FDIC, the Treasury — outside the TARP program — as well as the cost of swallowing up Fannie Mae and Freddie Mac, not too mention the potential cost of the enlarged guarantees tied to agencies such as Ginnie Mae. (For the full rundown on everything thrown into the number check out this section of the watchdog agency’s quarterly report.)

Thus, the current balance is more like $3 trillion, which almost seems small after considering $23.7 trillion. Hmmm. maybe Neil Barofsky is better at PR than I first thought.

Source: WSJ

Monday, July 20, 2009

CRE: I Think the Shoe Just Dropped

The worry that commercial real estate was the "next shoe to drop" goes back a long time, but after this additional data point, I think we're here. How banks and other financial institutions are hiding this level of damage has me scratching my head. Calculated Risk with the details:

From Dow Jones: Moody's: Commercial Real-Estate Prices Fall 7.6% In May

Commercial real-estate prices fell 7.6% in May ... The indexes are down 29% from a year ago and 35% from their October 2007 peak.
According to Moody's, CRE prices fell in 8.6% in April (about 16% in two months).

Talk about cliff diving!

Source: MIT

Leading Economic Indicators Jump in June

Marketwatch reports:

The U.S. index of leading economic indicators rose 0.7% in June, the Conference Board said Monday. This is the third straight monthly increase. The rise was slightly larger than the consensus forecast of Wall Street economists, who had expected a 0.5% rise. The gain is not as strong as the last two months. The index rose 1.0% in April and 1.3% in May. In the latest month, the coincident index fell 0.2%, while the lagging index fell 0.7%.


A closer look at the monthly (and last six months) breakdown.



Source: Conference Board

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