American Time Use

8 1/2 hours of sleep and 4 1/2 hours of work... must be nice.

Jobs... Beyond Unemployment

Less job openings/hiring, leads to the obvious decline in the number of those quitting...




To get an idea of the relative size of these sectors in the economy, below is a breakdown of the 4.6mm new hires for May by sector.

State Incomes and Home Prices

Although a bit dated (2006), I found the information interesting (is that strong 3rd earner in Hawaii from the surfers crashing in the spare room?!?!)...


I then did a REAL ROUGH comparison (hey it's Sunday morning!) of the Case Shiller Home Price Index for select cities t0 the Median State Family Income of that state (the multiples below) to see where home prices were expensive on a relative basis.


Even after the significant cliff diving areas such as Florida, Southern California, Arizona, and Nevada have seen, it looks like there may be additional price declines to go...

Mattel vs. GM: Toys Rule!

This morning, Mattel once again ran past GM in terms of market cap.

Source: Bloomberg (although it says Chart of the Day, I don't see one)

That 70's Show? PPI vs. CPI

Yesterday, we took a look at Headline vs. Core CPI. Today, lets see how the difference between PPI and CPI stacks up against historical norms.
Again, we haven't seen this type of differential since the early 1970's, when:

The central problem was that the US was engaged in a costly war it could not afford. One result was a weakening of the currency which – at a time of fixed exchange rates – chiefly expressed itself in a fall of the dollar versus oil and gold.

Sound familar? As can be seen below in a logarithmic chart of the Goldman Sachs Commodities Index, the recent spike looks very similar (albeit longer running) to that of the early 1970’s.



So are we headed towards 1970's level inflation? Not necessarily. The big difference between the current period and the 1970’s has been the inability of wages to keep up. For example, in June, real average weekly earnings were down 0.9% for the month, the third straight month when wages have not kept up with rising prices and the sharpest drop in real earnings since August 1984. For the year real average weekly earnings have fallen 2.4%.

Looking at the chart below, which shows U.S. average weekly earnings in nominal terms, one can see that wage pressure associated with the 1970’s hasn’t emerged. I see this trend continuing as a result of globalization (jobs can be moved around at a much easier level), a slowing U.S. economy (reduces demand for employees) and a significantly smaller presence of unions, especially compared to the 1970’s (less bargaining power).

Headline vs. Core Inflation

The last time we saw the ratio between Headline and Core inflation hit these levels was back in the early 1970's. Will the inevitable reversion mean a decline in the Headline or a spike in the Core?

Crude Capacity Utilization

Real vs. Nominal Retail Sales

Industrial Production - June

CPI - June

Historical CPI Component Weightings

Retail Sales - June

PPI - June

UK PPI - June

A preview of what we're likely to see here (U.S.) tomorrow morning...






Please note the different time series used below (input data only available from 1992 onward).

Fannie Mae Balance Sheet Breakout

Below is a breakout of Fannie's Balance Sheet as of 3/31/08 (the most recent 10-Q). Two things stand out:

• Leverage
• The size of their Subprime / Alt-A exposure
  

U.S. Treasury Budget

Monthly Trade Balance - May

Will the Real GSE Please Stand Up...

Fannie / Freddie are insolvent per Fed President Richard Poole, but the government won't step up unless there are $77b in losses. So... Fannie will get bailed out if they ARE to fail (with equity holders getting nothing), but Lehman is currently not allowed to fail and ARE currently being bailed out (in the form of access to liquidity from the Fed). Thus, the question, which entity is the Government Sponsored Enterprise?
Lets rewind and start with Fannie and Freddie (the actual GSE's) to see if any of this makes sense...

Fannie / Freddie:

Since 1990, U.S. nominal GDP has increased about 80% (logarithmically). Outstanding mortgage debt grew 50% more than this, raising the debt/GDP ratio from about 0.5 to 0.8. Mortgage-backed securities guaranteed by Fannie and Freddie grew 75% faster than GDP, while mortgages held outright by the two GSEs increased 150% more than GDP.

The share of all mortgages held outright by Fannie and Freddie grew from 4.7% in 1990 to 12.9% in 2006, which includes $170 billion in subprime AAA-rated private label securities. The fraction had been as high as 20.5% in 2002.3. It is hard to escape the inference that expansion of the role of the GSEs may have had something to do with the expansion of mortgage debt.

Sounds like a lot of leverage to me, but Possibly (with a big P) for the "public good"...

Now to Lehman (from the Washington Post):

Lehman's high-risk, high-reward strategy produced cash gushers during the good days -- the firm reported almost $16 billion of profits from 2003 through 2007 -- but those days are gone. Lehman recently reported a $2.8 billion second-quarter loss, which probably won't be its last unprofitable quarter.

AND

The arms race -- and the associated risk for Lehman -- has grown exponentially more intense since 2004, when the world began to find itself awash in cheap short-term money, and globalization and dealmaking increased the call on Lehman's capital for such things as leveraged buyouts.

Where's the public good in that? Besides incentive for the employees and shareholders (over 30% of shareholders are in fact employees), I don't see much.

Taking a look at a chart of Lehman's Stock price vs. Fannie's (through yesterday - so drop them each another ~20%), one can clearly see where Lehman took off. While Fannie's stock rocketed in the early 1990's through early 2000 (a period in which their market share tripled) Lehman's stock kept up and blew it away starting in mid-2003, right when Lehman moved towards the more high-risk strategy.

While I am sure that employees with stock in Lehman are currently at a loss for words, there was EXTREME moral hazard at work when the risk-taker (employee) has an unlimited reward for doing so, yet with limited downside. 

Don't Mess with Texas: Continued Claims Edition

Mortgage Rates: Whipped in the Fannie...

Even after the Fed's attack (i.e. cutting the Fed Funds by 325 bps + opening up their balance sheet to add liquidity to the market) , rates on high quality (quasi government guaranteed) loans have risen. Looking at historical yields on Fannie Mae 30 year bonds one can see why...

Option adjusted spread "OAS" tells the whole story widening from an unbelievably tiny 7.3 bps in May 2003 from the incredible demand for CMO's and CDO's (before they realized it was a WHOLE lot easier to do synthetically) all the way to 154.9 bps (literally off the chart) in early March when banks / investors were selling anything they could get a decent bid for.


Where does it go from here? I do see light at the end of the tunnel for the OAS spread; not so much due to a rebound in demand or from a decrease in further delevering of banks, but rather in the decreased supply that will continue to hit the market in the coming months.

However, in my opinion, overall rates are likely to continue to rise as underlying rates rise more than OAS fall over the near term. This in itself would be very detrimental to the housing market and would increase the potential (can't believe I'm saying this for the third time now) for a deflationary environment.

Hedge Fund Returns - June / YTD

GuruFocus.com via Seeking Alpha via Naked Capitalism (whew... the power of blogs!) shows us that even the pros have been smacked around during the first half (and in many cases over the last year). As Yves puts it:

What is a little different about today's hedge fund sighting from Bloomberg isn't that certain funds or certain styles are faring poorly (remember the quant disasters of last August?) but hedge funds on average lost money the first half. And that was before fees (bold emphasis mine).

Per HFRI:

Consumer Credit - May

Petroleum Wholesale Analysis

The State of State Taxes

State tax revenues continue to be clobbered by a slowing U.S. economy with:

• Increasing layoffs / declining equity market (less personal income to tax)
• Declining consumption (less sales tax)
• Rising inflation / banking losses (less corporate profits to tax)
• Housing recession (lower real estate valuations to tax)

How bad is it? Looking at year over year REAL changes in state tax revenues (the inflation rate is backed out by the BEA State and Local Government Implicit Price Deflator), each of the four major state taxes have shown multi-quarter declines for the first time since the effects felt from the 2001 recession.

While this reveals the strain state and local governments must be feeling, it also reveals further deterioration of the U.S. economy. Specifically, since The Rockefeller Institute of Government began to track this data in 1991, sales tax revenues have NEVER seen this level of decline, down 5 straight quarters and a whopping -5.8% in 1st quarter 2008 as compared to a year ago. There is an old saying to "never bet against the U.S. consumer". Between stretched budgets and sky-high oil prices this time may be different.


Source: The Rockefeller Institute of Government

The "Dow"nturn

Long term U.S. equity growth has been on a continued decline, resulting in a DJIA practically where it was 10 years ago. The case can be made that we're in the middle stages of the next great secular equity bear market as:

• Profit margins are being eaten alive from higher financing / commodity costs
• Current price multiples are at "appalling" levels
• The U.S. economy is slowing with a potentially deflationary environment in the future

In looking at the chart above, the current market action looks a lot like the late 1960's /early 1970's (and the early 1970's may not be an awful comparison). I am not yet buying into ANOTHER lost decade for U.S. equity markets, but I'd love to hear a convincing argument as to why I should be bullish over the secular horizon?

Does June Gloom = Equity Boom?

Apologies in advance for that awful title...

Yesterday's Barron's: The Bears Back post, along with friends "non-expert" advice all Holiday weekend that the market could only get worse, pushed me to do some analysis as to where we may be headed.

Dow's June was the 8th worst month on record since 1940! Below is a breakdown of the 16 worst months over that time frame (16 allowed October AND November of 1987 to act as bookends, which I like for some reason), along with the corresponding 6 month / 1 year returns following those declines.

Are things as bad as they seem? Maybe not. On average, the Dow was up 9.6% and 12.2% (over 6 and 12 months) respectively during those following periods.




Do I think the U.S. economy has seen the worst of it? I don't, but I think it may be time to get some skin back in the equity game...

Barron's: The Bear's Back

Below is an adapted chart from Barron's (the original is posted over at The Big Picture) which provides details regarding bear markets since 1940. Although interesting, it appears (from history) we have no idea where we are headed...

Non-Manufacturing ISM "Service" - June

Initial Claims - June 28th

ECB vs. the Fed

Interesting take on this over at Naked Capitalism

Birth / Death Model - June

29k increase in Construction and 8k increase in Finance in June? Hmmmm....

Employment - June

Update: Ironman is again beating a dead horse (and again does not let readers post on his site!) that I used a percent of a percent in the chart below. While I love shameless, gratuitous gloating as much as the next man, why is he bringing up something so utterly unimportant when the charts I show are so gosh darn pretty and loaded with great information???

What the chart shows (clearly I may add) is that:

• the number of those unemployed in June increased by 22% over June of 2007
• the civilian labor force increased by ~1% over that time (22% is greater than 1% -- we have a problem)
• men are dropping out of the labor force, women are not (green bars)
• those aged 16-19 didn't have the same relative increase in unemployment as the rest of the population (but in green one can see why - they chose not to work!)

Two requests for Ironman... let me know if you cannot make out that information listed above clearly and OPEN YOUR SITE TO COMMENTS!!!!

For more beautfiul employment related charts for July, click here.

• 
  

UPDATE:

Planned to post a response on Political Calculations, but no area for that (and no way to respond to him... very secretive that guy named after a superhero is!). For clarification, calculations in the chart are not percents of percents, but in fact the year over year change in the number of ACTUAL people in:

*The labor force
*Employed
*Unemployed
*Not in labor force

Thanks for the link through though!

UPDATE 2:

Ironman posts:

Yeah, the movie. The worst part of being me is having people do the Black Sabbath guitar theme whenever they see me....

Thank you for clarifying how you determined your numbers - there's still a bit of a problem in that the resulting percentages do not share the same base, which makes for an apples-oranges type comparison between the various figures.

I know it's tempting to try to get everything on one chart, but it's just not viable in this case. I picked up on the percentage change of percentages (which should be identical to your results in the case of unemployment), as the resulting scale was so far out of proportion with the rest of the data.

This just doesn't make sense. A simple example shows why:

*A man moves from China to the U.S.
*U.S. population growth > China population decay (the denominator is smaller for the U.S. because the U.S. is ~1/3 the size)

These can still be (and are) analyzed side by side (so are GDP, inflation, etc...) because the importance is the relative size of the YoY change, regardless of whether the denominators are different.

Oil Stocks, Production, and Imports

U.S. Auto Sales - June

ISM - June

Go here for some additional ISM insight...

Chicken or the Egg?

Are commodities being driven up by Chinese demand or has China been powered by cheap commodities? The story goes as follows:

• High growth in China increases the demand for commodities, such as oil
• The increased demand increases the price of commodities
• A spike in commodity prices hurts Chinese growth prospects
• Slower growth decreases the price of commodities
• Rinse, repeat…

Since Fall there has been a dramatic shift in the relationship between the two with it looking like China’s success may have indeed been enabled by cheap commodities (cheap labor is not enough when commodities spike).

Without a rapid decline in the price of energy and/or other related commodities, it will become cheaper for many companies to move production closer to home, rather than utilize China to create goods at a cost struggling US consumers may no longer be able to afford.

UK PMI