Japan: Machinery Orders and a (Potential) Recovery

WSJ details:

Japanese core machinery orders fell 3.7% in January after unusually strong growth in the previous month, the government said Wednesday, suggesting a full-fledged recovery in business investment is still some way off.

The findings suggest it may take more time before Japan's capital investment—which accounts for 15% of gross domestic product and is a pillar of domestic demand—starts recovering steadily and strongly. Core orders are considered a reliable gauge of future capital investment, and exclude often-volatile orders for ships and those from electronic power companies. The machinery orders were down 1.1% in January from the previous year.

Still, January's decline may be too moderate to dispel the view that demand for machinery is stabilizing. Previous data show core orders gained 0.5% on quarter in October-December for the first rise in seven quarters, and there are signs that the improvement in exports—a key incentive for manufacturers to invest—is gaining steam.

The below chart details the past 20 years of Japanese machinery order data in an attempt to avoid the short-term noise (while down in January, machinery orders were up more than 20% in December).



As indicated above, Japan has successfully relied heavily on exports in the past (at the beginning of last decade) to get their economy out of what was a more than a decade long period of slow / no growth. After peaking in mid-2007, the rug was taken out from under them when the continued lack of internal demand was met by a crash in external demand.

The key question is can the Japanese economy do it again? Business Week details news out of China, that on the margin, suggests they might:

China’s trade surplus shrank to the lowest level in a year in February as a surge in imports signaled the nation may start to outshine the U.S. as a destination for the world’s goods.

Imports rose a more-than-estimated 44.7 percent from a year ago, the customs bureau reported on its Web site today. The surplus was $7.61 billion, and exports gained 45.7 percent.

While the bulk of these imports are in the form of commodities, China is increasing their demand for "value-add" goods on the margin. If they (and other emerging Asian countries) continue to do so, Japan may have a shot...

Source: ESRI

More on the Improved Labor Market

Some additional detail behind the improvement we've seen on the margin in the labor market year to date. The AP reports:

Job openings rose sharply earlier this year, a sign that employers might be preparing to step up hiring.

The number of openings in January rose about 7.6 percent, to 2.7 million, compared with December, the Labor Department said. And the job openings rate climbed to 2.1 percent, the highest in nearly a year. That rate measures available jobs as a percentage of total employment.

There are now about 5.5 unemployed people, on average, competing for each opening. That's still far more than the 1.7 people who were competing for each opening when the recession began. But it's down from just over 6 people per opening in December 2009.

The gradually brightening jobs picture corresponds to what many job search Web sites are reporting.

As can be seen below, while the number of openings has jumped, the level of hires has not necessarily improved (possibly partially explained by the wariness of those with jobs to make the plunge).



While not anywhere near normalized, the unemployed to job opening ratio has turned sharply.

This will be another important metric to watch in coming months.

Source: BLS

Small Business Outlook Subdued

Marketwatch details (hat tip Calculated Risk)

An index measuring small-business optimism fell 1.3 points to 88.0 in February, erasing January's gain, according to a monthly survey released Tuesday by the National Association of Independent businesses. The index is far below its average, but has gained from 81.0 in March 2009, the second-lowest reading ever. Small businesses were cutting workers and prices in an effort to increase sales, the survey said. Fewer businesses reported problems getting credit, with 9% of firms saying they couldn't find the credit they need.

Source: NFIB

More on Consumer Credit

Yesterday I asked if the consumer was relevering?

While the latest consumer credit balance did tick up slightly, even in the face of declining disposable personal income (ex transfer payments) the overall path barely left its downward trend and remains well above the "normal" 20% level.



Source: Federal Reserve / BEA

Is the Consumer Relevering?

Sure looks like a possibility based on Friday's consumer credit release. Marketwatch details:

In an encouraging sign for the economy, U.S. consumers increased their debt in January for the first time in a year, just the latest hint that household demand may be on an upswing.

Although the economy has picked up steam lately, many economists don't believe it will be on a sustainable path unless consumers restart their spending.

This wasn't too big a surprise following last week's downturn in savings (paying down debt counts as savings), but maybe we should not be counting out the consumer in the short run. We shall soon see... later this week we get February's retail sales figure.

Source: Federal Reserve

The One Way Credit Bet...

Deutsche Bank’s Jim Reid (via FT Alphaville):

Anyway it’s a big anniversary week as tomorrow marks the 12-month point of the dramatic decade-plus lows in equity markets. Since then the S&P 500 and Euro DJ Stoxx 600 have returned 71.4% and 69.6% respectively (including dividends). US and European HY are 53% and 78.8% higher and BBBs have returned 31.2% and 28.6% respectively in the two regions.

So a stunning period for returns across equities and credit. If we look back at historic 12-month price moves in the S&P 500 this period will likely rank in the top 130 of the 20,263 rolling 12-month periods we have data for back to 1928.

Source: Yahoo

The Attractiveness of Dividend Yields

This isn't meant to be an attack on Surley Trader's post (which I believe unintentionally presents what I feel is misleading data), but rather to inform retail investors on the misleading data itself.

Surly Trader (hat tip Abnormal Returns) details:

Right now, the IShares Investment Grade Corporate Bond ETF (LQD) earns an indicated yield of 5.05% with an average maturity of over 12 years. On the equity side, the WisdomTree Dividend ex-Financials ETF (DTN) is currently earning an indicated yield of 5.04% without the same exposure to rising interest rates. Utilities alone (XLU) have an indicated current dividend yield of 4.93%.

The 5.04% indicated yield is not the yield of the fund, but rather the "current" fund distribution yield. According to WisdomTree, this yield is:

The annual yield a Fund investor would receive in distributions if the most recent Fund distribution stayed consistent going forward.

This measurement becomes irrelevant if dividends are widely varying. The most recent distribution for the WisdomTree Dividend ex-Financials ETF (DTN) was a 53 cent quarterly distribution in December (0.53 x 4 / $42 ETF price = 5.04%). Unfortunately, the dividend is not stable (the prior dividend was 0.368, which would have made the distribution yield just 3.5% back in November if the ETF were priced at its current level).

A more accurate yield is likely closer to 3.77%, which is what WisdomTree details as the SEC 30-day yield and according to Answers.com:

It is based on the most recent 30-day period covered by the fund's filings with the SEC. The yield figure reflects the dividends and interest earned during the period, after the deduction of the fund's expenses. This is also referred to as the "standardized yield."

While not perfect, by this measure the IShares Investment Grade Corporate Bond ETF yields 4.71% or ~100 bps higher than the WisdomTree Dividend ex-Financials ETF. This is not to say that the 3.77% yield is unattractive, especially when compared to the dividend yield of the components of the DJIA (only 6 corporations within the DJIA have a dividend yield above that level, which makes the 4.77% yield of investment grade corporate bonds even more attractive on a relative basis).

Back to the Surly Trader, who asks:

Why would you hold long-maturity fixed income bonds in a low interest rate environment on the precipice of an inflation wave when you can earn the same income from solid equity companies with upside potential?

Even if incomes were the same (they aren't), there is an important point missing... dividend yields do not always go up. In fact, as we learned in 2008-09, they can fall and fall quickly.

Source: Yahoo

EconomPic Turns Two / Jake Has a Favor to Ask

I was debating whether to first thank you all for the support that has allowed EconomPic to "blossom" over the past two years and then ask a favor OR to first ask the favor and then thank you all. At the risk of sounding insincere in my appreciation to all of you readers, I will lead with the favor… (hey, I think this is the first favor I've asked in these two years so give me a break).


The favor… Anyone Know of a Job for Jake in the San Francisco Area?

Maybe not the best timing considering unemployment is near a 30 year high, but I have reached the point where I am now ready to begin actively looking for a new opportunity. However, I am in the awkward position of not wanting to reveal my real identity to 5000+ potential viewers (I actually really like my current job… definitely more so than being unemployed which is a potential result if my current employer were to discover that I was actively looking to leave).

Thus, the question… how do I attempt to lever my readership (i.e. those that understand my point of view, share a strong interest in the field of which I am pursuing a new opportunity) while not risking my current employment?

Solution (for now) = “Jake”.

I apologize if this bursts the bubble, but my name is not Jake (shocker!). In fact it does not even start with a J (or does it?). That said, let me provide true (somewhat murky) facts about “Jake” (if referring to a fake name, it is not third person… right?).

Jake:

• Works in the field of investment management
• Graduated from an Ivy League Business School ~ 3 years ago and has an undergrad degree from a large “state school” (results in my rare blend of "sophistication" and beer drinking skills)
• Since business school has worked for a well-known firm and received a nice promotion ~ one year ago
• Lives in New York City (and has for most of the last 10 years)
• Is ONLY looking for an opportunity in the California Bay Area (this is actually driving the decision to look… again, the current job is great, just not in the Bay Area)
• Is hoping to move to a position even more aligned with his strengths and interests; currently works closely with a number of very large institutional clients on the relationship / marketing side of the business, but is looking for a role that is more 'data / research / investment decision making' driven
• That said, he is looking at all possibilities including roles and employers (hedge funds, mutual funds, consultants, endowments, foundations, etc...)
• While money is an important factor to a point (would like to pay the bills), the much larger factor will be whether it is a role that makes him excited to go to work on a Monday (or Saturday and Sunday if need be)
• Is not scared to travel (I am actually becoming a professional at it), but would prefer to limit this to 5 days or less / month
• Has a passion for both economics and financial markets (see econompicdata.com for more details)
• Loves to look at broad swaths of data and make it more understandable (see econompicdata.com for more details)
• Can be considered a risk taker when he has strong views
• Has a mind that can race 1000 miles an hour, but is known to sit down and read long (supposedly boring) documents when he feels he can learn more about something
• Enjoys coming up with broad ideas when his mind does race and likes to test those ideas with market data (see econompicdata.com for more details)

FAVOR: So... does anyone out there know someone in the Bay Area in the field of investment management or even better, know of an opportunity that I may be qualified for? If so, PLEASE drop me an email at econompicdata@gmail.com or direct my email address to your contact and I would be happy to share more about my background.


Now... To the Sincere Appreciation

Back on March 4th, 2008 EconomPic came to be with this sorry looking chart of CPI. The point of the blog was simply to store charts that I had been creating to get a better sense of what made up headline economic figures that were reported (lazily at best, intentionally misleading at worst) by traditional media outlets.

Here and there, I would send Barry over at The Big Picture (I used to correspond with Barry from my business school days) some of these charts, which on occasion he would post and to my amazement I would get a few hundred hits from his site.

I didn't post a single word (literally, I didn’t even source my initial posts as I didn’t think anyone was reading them) on EconomPic until June 11th, 2008 when I wrote a post titled "Why Not Deflation?". I honestly didn't expect a single person to read the post, but I wanted to document this belief so I could prove to a friend or two that I had called it right when the economy slowed. Likely due to my own click through to Naked Capitalism (I linked to a post at Naked Capitalism, which likely made Yves aware that my blog even existed), to my utter amazement, it was made one of her links of the day.

In my now 1600+ posts, I've learned more about the economy and world of finance than I thought possible (yet I still know little). This is only possible by the great reader base and other great bloggers I read daily that have made traditional media seem flat and out of touch. The thought of giving back to this community provides the motivation to keep making 10-20 posts per week. The fact that EconomPic has ~1800 RSS subscribers through Google Reader alone is mind boggling.

So thank you to everyone who has read or contributed, which has enabled EconomPic to be something more than a storage space for these tacky charts.

Employment Shows Signs of Life

The long term horror...


And the shorter term signs of life...

Source: BLS

Employment: Noise or Stabilization

Barry of (The Big Picture fame) reminds us that we should ignore the noise of any single payrolls report (especially given the snowstorms that will add extra noise):

Given the potential impact of the snowstorms across the United States during the BLS survey week, the potential range of NFP for this month is half a million people wide. Any jobs report between +100k and -400k would not surprise us.

That said, the actual number was better than forecast (per Bloomberg).

The jobless rate in the U.S. held at 9.7 percent in February and employment declined less than forecast even as severe winter weather may have forced some employers to temporarily close.

Payrolls dropped 36,000 last month after a 26,000 decrease in January, figures from the Labor Department in Washington showed today. Employment fell in construction and increased at temporary-help services. While more people entered the workforce, the unemployment rate was unexpectedly unchanged.

Non-farm figures show people re-entering the workforce and a HUGE jump from teens.



And the longer trend to the unemployment rate (unemployment was flat at 9.7%, while the alternative broader measure was up slightly to 16.8% from 16.5%....



Source: BLS

Investing with a Steep Yield Curve

World Beta with some great analysis on how a variety of asset classes have historically performed given the steepness of the 3 month to 10 year points in the yield curve in his post Investing Based on the Yield Curve – REITs Like it Steep.

Here is the data in chart form separating returns into times when the yield curve was relatively flat (less than 1%), moderate (1-2%), or steep (more than 2%)....



Surprising (to me) is not the outperformance of REITs during periods in which the yield curve is steep (steep yield curves are good for banks, which means in normal times they are more willing to lend [this time may be different warning]), but the STRONG underperformance of commodities and gold during these times (I figure most of the times that the yield curve was steep over this period was during downturns when the Fed was adding liquidity or in other words disinflationary periods, which aren't good for commodities).

Unemployment by State = Nowhere to Hide

BLS reports:

Annual average unemployment rates rose in 2009 in all regions, divisions, and states, the U.S. Bureau of Labor Statistics reported today. Employment-population ratios decreased across all of these geographic areas as well. The U.S. jobless rate jumped by 3.5 percentage points from the prior year to 9.3 percent, while the national employment-population ratio fell by 2.9 points to 59.3 percent.

The chart is "squished", but should be legible (click for larger image).



Source: Eurostat

Inflation is Off the Table

The Business Financial Newswire reports:

Nonfarm business sector labor productivity increased at a 6.9% annual rate during the fourth quarter of 2009, the US Bureau of Labor Statistics reported today (4 March). The gain in productivity reflects a 7.6% increase in output partially offset by a 0.6% increase in hours worked.

From the fourth quarter of 2008 to the fourth quarter of 2009, productivity increased 5.8% as output declined 0.2% and hours fell 5.7%.The annual measure of productivity increased 3.8% from 2008 to 2009.Unit labor costs in nonfarm businesses fell 5.9% in the fourth quarter of 2009, the result of productivity increasing faster than hourly compensation.

So productivity up and real compensation trending down = unit labor declining massively in Q4.

Unit labour costs decreased 4.7% from the same quarter a year ago, the largest four-quarter decline since the series began in 1948.

The relevance? Well, if the past is any indication of the future (in this case I believe it is), then inflation is not a problem (at least in the near future) and the most recent period is simply noise from the whipsawing of commodity prices and massive monetary / fiscal stimulus.

Source: BLS

Services Employment Stabilizing

The headline figure that's reported regarding ADP news (per Marketwatch):

According to today's ADP National Employment Report(R), private sector employment decreased by 20,000 in February. The ADP National Employment Report, created by Automatic Data Processing, Inc. (ADP(R)), in partnership with Macroeconomic Advisers, LLC, is derived from actual payroll data and measures the change in total nonfarm private employment each month.

And the corresponding chart.



But hidden in the release is this...

Automatic Data Processing, Inc, in conjunction with Macroeconomic Advisers, LLC, has published the scheduled annual revisions to the estimates of employment shown in the ADP National Employment Report. This month's ADP Report incorporates revised historical estimates based on the 2010 benchmark revisions to establishment employment published by the Bureau of Labor Statistics on February 6, 2010.

And the revision (vs. last month's release) was as follows:



So, ADP reports almost 1.4 million less people employed than last month, BUT it is important to note that this revision was done only to match that of the BLS (thus, don't expect a similar revision in Friday's national release). This may in part explain why the ADP report has been reporting stronger employment in the services sector, while the ISM services report shows continued contraction more aligned with the BLS. This month is no exception. ISM reports (hat tip Calculated Risk):

Employment activity in the non-manufacturing sector contracted in February for the 26th consecutive month. ISM's Non-Manufacturing Employment Index for February registered 48.6 percent. This reflects an increase of 4 percentage points when compared to the seasonally adjusted 44.6 percent registered in January.

We'll see Friday how this plays out in the BLS figure, but it appears that a slight decline in the services sector is likely, though we are getting close to what appears to be the bottom.

Source: ADP / ISM

Ford Taking Advantage of Toyota's Weakness

Chicago Tribune details:

Ford Motor Co. said Tuesday that its February sales rocketed 43 percent from a year earlier, helping it to surpass General Motors Co. as the largest U.S. automaker for the month.

GM also posted gains, but Toyota Motor Corp. saw its sales plunge almost 9 percent, hurt by a series of recalls and federal investigations into safety defects.

Ford's sales report underscores how a lineup of new products and Toyota woes have helped to fuel a turnaround at the Dearborn, Mich., automaker. Ford sold 142,285 vehicles last month, taking over the top spot from GM by about 300 vehicles. Ford last outsold GM in August 1998.

Year over Year Auto Sales



Looking closer, Ford (the big winner) sales lept more than 40,000, while Toyota (the big loser besides a discontinued brand) dropped more than 10,000, resulting in Ford sales outpacing Toyota by more than 40,000.



Source: Auto Blog

More on Disposable Income

The chart below details the year over year change (in this case 12 months ended January of each year) in the categories that makes up disposable income, as a percent of disposable personal income. The goal is to clearly show the shift in the makeup in personal income growth over the past 10+ years.

As a reminder, personal current transfer receipts are (per the BEA):

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

As a result, the chart shows that outside of rental income, the only growth in personal income has been due to reduced taxes paid and payments for no services performed.



Were the tax cuts and transfers needed? I would say probably given the crisis.

That said, don't be fooled into thinking the relative stability in disposable personal income is anything more than the public sector adding new liabilities just to maintain the status quo.

Source: BEA

Japanese Unemployment (and Employment?) Drop

The Good

Bloomberg details:

Japan’s unemployment rate unexpectedly fell in January.

The jobless rate dropped to 4.9 percent from a revised 5.2 percent in December, the statistics bureau said today in Tokyo. The median forecast of 25 economists surveyed by Bloomberg News was for the rate to be unchanged from a preliminary 5.1 percent.

A decline in the unemployment rate is one of the first signs that a rebound in exports is starting to benefit workers, whose job prospects falter last year during Japan’s worst postwar recession. It may still be too early to expect “clear improvements” in the labor market because companies still have excess workers, said economist Tatsushi Shikano.

The Bad

According to Trading Economics:

The unemployment rate is defined as the level of unemployment divided by the labour force. The employment rate is defined as the number of people currently employed divided by the adult population (or by the population of working age).

And the decline is purely the fact that the number of those participating in the workforce has also declined (thus the employment rate has declined along with the unemployment level).



Source: Stat.GO


Update:

GetYourselfConnected asks which is more ironic:

• The US follows the Japan QE fighting deflation war to no avail for years on end
• Japan copies US data reporting to show better than expected results with cooked books

I'll go with a tie

Why Save?

One reason for the continued low savings rate (and continued spending)?

No place to store it (unless you want limited return).

The below chart details the historical savings rate vs. the three year Treasury yield (I used three year yields as this is a relatively safe investment on the duration side).



Coincidence or a legitimate relationship?

Source: Federal Reserve / St. Louis Fed

ISM Manufacturing Expands in February

Respondents are stating:

• Depends on division, plant and market served." (Transportation Equipment)
• "Current economy has killed new capital sales." (Machinery)
• "Commodities are firming again." (Food, Beverage & Tobacco Products)
• "First quarter orders up compared to prior two years!" (Fabricated Metal Products)
• "...lead times for electronic parts are pushing out to 8 to 24 weeks." (Computer & Electronic Products)

Source: ISM

Income Stagnant + Consumption Up = Savings Down

RTT News details:

the Commerce Department released a report on Monday showing that personal income increased by less than anticipated in the month of January, the report also showed a bigger than expected increase in personal spending.

The report showed that personal income edged up by 0.1 percent in January following a downwardly revised 0.3 percent increase in December. Economists had expected income to increase by 0.4 percent, matching the growth originally reported for the previous month.

At the same time, the Commerce Department said that personal spending rose by 0.5 percent in January after rising by an upwardly revised 0.3 percent in the previous month. The increase exceeded economist estimates for 0.4 percent growth.

Real personal income is now flat year over year, while real consumption is up. No surprise then that personal savings is once again trending down.



Source: BEA

Long Term Trend in Personal Savings

Ahead of tomorrow's personal savings release, lets be reminded of the longer term trend...

While the savings rate has turned up to ~5% since bottoming in early 2008, we are still a long way off from the 8-10% level seen from the early 1960's to mid-1980's. It is also important to note that paying down debt liabilities is included in the above savings rate, thus the actual amount "saved" has not actually been this high in recent months as the consumer delevers.

Source: St. Louis Fed

EconomPics of the Week

A short one at EconomPic this week....

Economic Data
'Average GDP' in 2009 Worst Since 1946
Consumer Confidence Collapses
Q4 GDP Revised Higher on Inventory Rebuild
Durable Goods... Aircraft Boom (All Else Stagnant)...
More on Durable Goods
New Home Sales Hit New Record Low

Asset Prices
The Short and Long-Term Case for Treasuries
Housing Market Stabilizes... For Now
Existing Home Sales... "Uh Oh" Edition

And your video of the week.... Albert Hammond Jr's (of The Strokes) In Transit:

Existing Home Sales... "Uh Oh" Edition

What happens when you begin to take away the stimulus (i.e. housing subsidies)? Sales once again fall even with reduced price levels.



Source: Realtor

'Average GDP' in 2009 Worst Since 1946

Table 1.1.2 in the GDP release shows the average QoQ contribution by component (in 2009 it was negative 2.4%, though real GDP at the end of Q4 09 vs. Q4 08 actually increased slightly).

The point (I believe) is to reduce noise (i.e. ignore the beginning and ending level) to show what it really felt like throughout the year).



How bad is this 2.4% drop? According to Rex Nutting (via The Big Picture):

Even with the big Q4 GDP, U.S. GDP was down 2.4% in 2009 — the worst showing since 1946 (down 10.9%). Rex also notes “In 2009, business investment fell the most since 1942, while imports fell the most since 1946.”

Source: BEA

Q4 GDP Revised Higher on Inventory Rebuild

Rather than "rebuild", make that a smaller inventory decline (inventories were revised down to a $20.4 billion decline in Q4 from a $156.5 billion decline in Q3).

Other revisions include:

• A decline in consumption, but a large increase in imports (thus we are consuming MUCH less in the way of goods produced in the U.S.)
• An increase in business investment (a great sign)
• An increase in exports (likely a driver of the bottoming we've seen in manufacturing)
• A decrease in state and local consumption (a growing trend?)

Q3 vs Q4 GDP (Contributions)

Q3 vs Q4 GDP (Change in Contributions)

Source: BEA

More on Durable Goods

This puts the drop and subsequent rebound in perspective...



Source: Census

Durable Goods... Aircraft Boom (All Else Stagnant) Edition

LA Times reports:

Excluding transportation equipment, new orders for manufactured durable goods slipped 0.6% in January, to nearly $131 billion, after increasing 2% the month before, the Commerce Department said Thursday.

Transportation equipment was a bright spot, increasing 15.6% to $44.8 billion, led by orders for non-defense aircraft and parts.

Overall, new orders rose 3% to $175.7 billion. Shipments fell, however, after four consecutive increases (including a 2.4% rise in December); they slid 0.2% to $180.7 billion in January.

Inventories remained relatively even in January at $302.6 billion after falling steadily over the past 13 months. But stockpiles of computers and electronics plunged 1.2% to $42.9 billion.

Source: Census

New Home Sales Hit New Record Low

WSJ reports:

U.S. new-home sales unexpectedly fell in January, setting a record low and erasing all gains made in the market during the past year as the economy recovers from recession.

Demand for single-family homes fell 11.2% from the previous month to a seasonally adjusted annual rate of 309,000, the Commerce Department said Wednesday.

Sales in December fell 3.9%, revised from an originally reported 7.6% decline. The 11.2% decrease carried sales to their lowest ever. Records began in 1963. Sales fell below the level of 329,000 in January 2009 that analysts had considered the bottom for the market. Over the past year, sales had climbed, albeit slowly and unevenly, because of low prices, low mortgage rates, and tax incentives. But Wednesday's report wiped out the advance and showed, year over year, sales were 6.1% down from January 2009.

Source: Census

The Short and Long-Term Case for Treasuries

Trader's Narrative (hat tip Abnormal Returns) presents why Treasuries may outperform over the long term:

Presented with those basic facts, it is not difficult to put the pieces together. The average household’s wealth is very underrepresented in fixed income. Some of that has to do with the strong equity culture in the US. You simply won’t find the same comfort level with equity ownership and trading in Europe for example. The key is that there seems to have been a moment of epiphany where the average Joe and Jane realized that their balance sheet was very lopsided.

No doubt that eureka! was sparked by several painful events: the real estate meltdown, the stock market bear market (on heels of the 2000 bear market, giving a zero decade long return) and the economic meltdown which either reduced or eliminated incomes (through the steep rise in unemployment). The result is that the babyboomers, facing a looming retirement, have retreated into the posture of capital preservation and income generation.

And here's why they may outperform over the short term... 'Long Treasuries' have not had negative performance OR underperformed their intermediate counterparts in back to back years since the inflation scare of the late 1970's / early 1980's.

Long Treasury Index



Long Treasury Index less Intermediate Treasury Index



All that said... with record Treasury supply coming to market, a Fed likely to err on the side of higher inflation, the end of quantitative easing, and the questioning of future purchases coming from abroad... this (like any other investment these days) is unfortunately no sure thing.

Source: Barclays Capital

Housing Market Stabilizes... For Now

The Good

After the collapse in the housing market over the past two years, we are seeing what appears to be the beginning stages of a bottoming (at least on a seasonally adjusted basis).



The Concern

But as Ed from Credit Writedowns pointed out, the bottoming thus far appears to be concentrated in those areas that experienced utter collapse:

What is clear from the numbers is that the markets in which prices are now doing the best are mostly the same ones that had both experienced the greatest carnage and had also experienced a prior price bubble. This includes Phoenix, LA, San Diego, San Francisco, and Las Vegas. You see yearly home price increases in California for example. Moreover, the only four markets where prices increased month-to-month were in the previously devastated bubble markets of Phoenix, Las Vegas, San Diego and Las Vegas.

I agree with Ed that another leg down is not all that unlikely. Along with all the economic problems that remain, there is evidence that the rental market will continue to put downward pressure on the price of homes (valuation issue), while the bottoming we have experienced thus far is due to a number of items that aren't sustainable (technical issue).

Rental Market

Calculated risk details the shadow rental market, which is driving down rental prices nationally:

The total number of rental units (red and blue) bottomed in Q2 2004, and started climbing again. Since Q2 2004, there have been over 4.7 million units added to the rental inventory.

When rental prices decline, it increases the price (ownership) to rent ratio. The price to rent ratio soared to an unthinkable level during the height of the housing bubble when it became easier to own then rent in some areas of the country. Since then it has collapsed, but still remains above levels seen throughout the 1990's, which Calculated Risk says:

suggests that house prices are still a little too high on a national basis. But it does appear that prices are much closer to the bottom than the top.

Sustainability of Recovery

So we're normalizing. But the question is why we are normalizing. Peter Boockvar (via The Big Picture) shares his longer-term concern, which is similar to mine.

The slowdown in the foreclosure rate (now about 1/3 of sales down from a high of 1/2), the home buying tax credit, and the artificial suppression of mortgage rates have all helped to cushion the decline in prices but when much of this wears off this summer, the market will be put to another test.

Source: Case Shiller

Consumer Confidence Collapses

The Conference Board detailed the poor confidence reading (both present and future) this morning:

Says Lynn Franco, Director of The Conference Board Consumer Research Center: "Consumer Confidence, which had been improving over the past few months, declined sharply in February. Concerns about current business conditions and the job market pushed the Present Situation Index down to its lowest level in 27 years (Feb. 1983, 17.5).

Consumers' short-term outlook also took a turn for the worse, with fewer consumers anticipating an improvement in business conditions and the job market over the next six months. Consumers also remain extremely pessimistic about their income prospects. This combination of earnings and job anxieties is likely to continue to curb spending."

Source: Conference Board

EconomPics of the Early Weekend

Going away for an early weekend (fun) and then traveling most of next week (work) so it's quite possible there will be no posts until March...

End of Recession? Now What?

The Recession is Over!!!

Fed Raises Discount Rate... More "Unwind" in the Future?

Japan's Economy Grows... or Does It?

Where to Hide?

Asset Performance

"A Simple Way to Data Mine"

China Sells Treasuries... or Did They?

What a Difference a Day Makes (2/16/10)

The Value of Corporate Bonds

Economic Data

More on Leading Economic Indicators

Leading Economics Positive, but Pace of Growth Slows

Producer Prices Jump from a Year Ago

Housing Settling... But a Much Lower Level

Empire Manufacturing Jumps in February

And your jam of the week... Radiohead's Paranoid Android.

What's the parallel between this song and the week we had?

Nothing... the song's just badass, I hadn't heard it in a while, and Radiohead is damn good live.

Fed Raises Discount Rate... More "Unwind" in the Future?

The Fed raised the Discount rate (not the Fed Funds rate) to 0.75% per Calculated Risk.

Just to be clear, this is the discount rate (this is the rate the Fed charges banks that borrow reserves) and not the Fed Funds rate. This move was being discussed for some time although the timing is a surprise.

Regardless, the bond market sold off in an expected, non-expected manner (nobody expected it today, but given the surprise hike shorter rates sold off more than longer rates in what would be an expected fashion).

Why expected?

Short rates are more directly impacted (on a relative basis) by expectations of Fed hikes, whereas longer rates are more directly impacted (on a relative basis) by future rates, (thus expectations of inflation). This removal of liquidity from the system may mean the Fed is more likely to hike Fed Funds sooner (I don't buy that aspect of it), while inflation concerns may be less justified with less liquidity in the system.

What to expect now?

Besides the obvious answer "the unexpected", remember that renormalization following the unwind? Expect that unwind to be back in play.

Source: Bloomberg

More on Leading Economic Indicators

dblwyo comments:

Jake - have you got data access to the LEI? I don't but Northern Trust has been
publishing charts for a while showing YoY LEI vs. GDP and those are very good.
LEI per se has not held up well on a MtM basis but the YoY comps show them
shining (and yes the subliminal Nicholson pun is intended).

Thanks to Dr. Donald J Oswald we all have access to LEI data.



While I recognize the LEI has led the recovery (that is the intention as it's "leading"), it has shown far more growth than the actual economy.

Likely because all the stimulus feeds directly into the components of LEI, but have not been reflected in the "actual" economy.

Source: BEA / CSUB.EDU

Leading Economics Positive, but Pace of Growth Slows

RTT News details:

While the Conference Board released a report on Thursday showing that its leading economic indicators index increased for the tenth consecutive month in January, the increase by the index was smaller than economists had been anticipating.

The report showed that the leading index increased by 0.3 percent in January following an upwardly revised 1.2 percent increase in December. The index had been expected to increase by 0.5 percent compared to the 1.1 percent growth originally reported for the previous month.

It will be interesting to see how these indicators play out when stimulus (both fiscal and monetary) are removed from the system. We already get a sense in January's data with the money supply being a 0.29% drag month over month.



Source: Conference Board

Producer Prices Jump from a Year Ago

Marketwatch reports:

U.S. wholesale prices rose a seasonally adjusted 1.4% in January on double-digit increases in gasoline and home heating oil, the Labor Department estimated Thursday. Core prices of finished goods - which exclude food and energy goods - rose 0.3% in January, led by higher prices for light trucks and other capital goods.

The 1.4% increase in the producer price index was higher than the 0.9% gain expected by economists surveyed by MarketWatch. The core rate of 0.3% was also higher than the 0.1% gain expected. The producer price index is up 4.6% in the past year, the largest year-over-year gain since the financial crisis began in late 2008. The core PPI is up 1% in the past year.

Even higher than that 4.6% core rate is the 6.4% year over year increase in finished consumer goods (driven by nondurable goods less foods [i.e. gasoline]). My view is this still largely a reflection off of extreme lows seen a year ago, but the question is will shrinking excess capacity on the margin and overall capacity was taken out of the system drive further increases? My guess is no, but this will be interesting to watch in the coming months.

Year over Year


Month over Month

Source: BLS

The Recession is Over!!!

Barry (of The Big Picture) noticed that the recession is officially over!!! (well, at least according to the charts over at the Federal Reserve):

Now it appears that with the latest G17 release on Industrial Production, the Federal Reserve is making the same assumption. They make note of this referring to several charts stating:

"The shaded areas are periods of business recession as defined by the National Bureau of Economic Research (NBER). The last shaded area begins with the peak as defined by the NBER and ends at the trough of a 3 month moving average of manufacturing IP.”

They are referring to the technical definition of contractions (recessions) as starting “at the peak of a business cycle and end at the trough (as defined by the NBER).

The Fed's charts are no longer showing the shaded regions that indicate recession (re-created below sans shading).

Too early?

Source: Federal Reserve

Housing Settling... But a Much Lower Level

Reuters reports on the month to month noise:

The Commerce Department said housing starts increased 2.8 percent to a seasonally adjusted annual rate of 591,000 units, reversing the prior month's weather-induced drop.

Housing, which is at the core of the most painful economic downturn since the Great Depression, is crawling out of a three-year slump, supported by government programs. New home construction contributed to economic growth in the third quarter of 2009 for the first time since 2005.

But activity slowed sharply in the fourth quarter and while homebuilder sentiment edged up this month, it remains at levels consistent with poor conditions. New building permits, which give a sense of future home construction, fell 4.9 percent to 621,000 units last month after rising to a 14-month high of 653,000 units in December, the Commerce Department said.

Over the longer term we see that the housing market has rebounded (slightly) off the bottom, but levels remain remarkably lower than during the boom.

Source: Census

China Sells Treasuries... or Did They?

Bloomberg (like every major media entity) reports:

China’s ownership of U.S. government debt fell in December by the most since 2000, allowing Japan to regain the position as the largest foreign holder of Treasury securities.

Japan’s holdings rose 1.5 percent in December to $768.8 billion while China’s dropped 4.3 percent to $755.4 billion, Treasury Department figures today showed. China allowed its short-term Treasury bills to mature and replaced them with a smaller amount of longer-term notes and bonds, the data showed.

China, with the world’s largest central bank reserves, may be moving money to other investments from the relative safety of Treasuries as the U.S. runs record budget deficits, economists said. China’s Treasury holdings peaked at $801.5 billion in May, and net sales in November and December were the first consecutive months of reductions since late 2007.

So Japan has passed China in total Treasury holdings.... or have they?

Looking at the above chart we see that the United Kingdom is listed as the third largest holder of Treasury bonds after the MASSIVE 12 month change seen below.



This is where I miss Brad Setser and his blog Follow the Money (he left blogging when he went to work for the White House). As he detailed back in the summer:

China tends to account for a very large share of purchases through the UK.

From mid-2006 to mid-2007, about 2/3s of the UK’s purchases of Treasuries were ultimately reassigned to China. I would expect the something similar is happening now — all of China’s bill holdings tend to appear in the US data in real time, but only a fraction of China’s long-term purchases tend to show up directly in the US data.

So (most of / some of?) these purchases by the United Kingdom were likely on behalf of China. Below is the last jump / reset cycle, though it is important to note that this cycle has happened on six occasions since 2002.



So has China stopped buying Treasuries? It doesn't appear so... yet.

Source: Treasury

Update: it looks like the WSJ (hat tip Rolfe Winkler) picked up the story and explains the why:

To maintain a steady dollar/yuan rate while running a huge balance-of-payments surplus, China's central bank has little choice but to recycle that surplus into dollar-denominated assets. And U.S. Treasurys remain the easiest and safest place for China to park its foreign-exchange reserves.‪

Meanwhile, indirect Treasury purchases suit China politically. Headline data showing mainland China's purchases of Treasurys leveling off help allay domestic criticism that China, a "developing" country, is keeping the profligate U.S. government afloat. ‪It also injects a grain of doubt into the minds of free-spending U.S. policy makers when it comes to assuming that China will always be there to snap up the country's debt.