Saturday, August 30, 2008

GDP ex Import Inflator: Third Straight Quarter of Decline

Due to a rise in the price of oil from less than $110 to $145+, the import portion of the GDP Deflator Inflator raised Real GDP by 4.6% (what is the GDP Deflator? click here). This is more than 2x the level seen at any other point during this decade and the highest amount EVER (we have to go back to Q1 1974 and Q1 1980 for levels even remotely close to that of this past quarter).

Had the contribution of imports on the GDP Deflator Inflator stayed the same as last quarter (which was historically large), GDP goes from the 3.3% as reported by the BEA to 0.9% for Q2. If the deflationary impact of imports were removed completely from the equation, GDP goes to -1.3% and shows GDP contraction for the third straight quarter.


Which sounds more reasonable to you?

Source: BEA

The "Relative Size" of Sarah Palin

This is not, nor will ever be a blog based on politics. With that said, I did find it amazing that someone who was the Mayor of Wasilla, Alaska ~2 5years ago (population somewhere in the range of 5500-7000) is the Vice President nominee of the Republican National Party.




Simply amazing...

Source: Wikipedia

Merrill Lynch: 1/4 of All Historical Profits Gone

Per the FT:
Merrill Lynch’s losses in the past 18 months amount to about a quarter of the profits it has made in its 36 years as a listed company, according to FT research. Merrill had the highest ratio of credit crunch losses to historical profits among 10 western financial groups analysed by the FT, which included Citigroup, JPMorgan, Bank of America, Morgan Stanley, Goldman Sachs, Lehman Brothers, Credit Suisse and UBS.
It's almost frightening how much this looks like a previously posted GM Chart...

Your Republican Vice Presidential Nominee

To be honest, I didn't know too much about her (if true, it's an interesting response by the Republican party to the Democrat's theme of "Change" or as Jim points out in the comments section, "it's not a response to 'change' as much as it's a response to gender issues").

Per Wikipedia:
Sarah Heath Palin (born February 11, 1964) is the current Governor of Alaska, and a member of the Republican Party. She is the first female governor of Alaska, its youngest, and is the first governor born after Alaska achieved statehood. Brought to statewide attention because of her whistleblowing on ethical violations by state Republican Party leaders, she won election in 2006 by first defeating the incumbent governor in the Republican primary, then a former Democratic Alaskan governor in the general election.


Source: Intrade

Real Personal Income / Consumption (July)

Updated: I had shown only Personal Income, but that ignored half the story.









Source: BEA

Thursday, August 28, 2008

Oil Machinery on the Rise

dblwyo (I would love to know what that stands for) left the following question in response to our post on durable goods:
Have you considered that the increase in machinery orders might be largely driven by oil equipment? And as the largest component increase that would make the numbers look even worse.
Lets take a look...


dblwyo was correct, new orders for mining, oil, and gas field "MOG" machinery rose 48% in June compared with June 2007, significantly higher than machinery as a whole. On a rolling 12 month basis, new orders for MOG machinery have trended up since the beginning of 2008 (interestingly shipments have yet to follow...). This ended a downward trend for both new orders and shipments that began at the end of 2006.

One can see the strong inverse relationship between the growth trend in MOG machinery ordered / shipped vs. the price of oil. My guess is that machinery orders have lagged the price of oil in the following manner:
  • When the price of oil was flat, machinery orders trended down as oil companies worried about their bottom line expenses
  • When oil prices spiked earlier this year, new orders followed as companies played catch up
It will be interesting to see if the majority of that machinery ever does get shipped after the recent sell-off.

Thanks for post dblwyo....

Source: Census

Income Inequality in Chart Form...

Why is this the case? A brief post by Will Wilkenson makes a compelling explanation... voters.
Americans who claim to be concerned about income inequality has risen (as income inequality has risen), support for redistributive programs has been more or less constant. What you see instead is increased support for educational reform, suggesting a widespread belief that the problem worth worrying about is the ability of people toward the bottom to gain the skills they need to be successful, not the fact that some small percentage of people are becoming really fantastically rich.

People often wonder why income inequality is so much higher in the U.S. than in other rich liberal democracies. In a nutshell, the preferences of American voters is why.



Source: Census (HT Barry)

Gap Between GDP Deflator and CPI Widest Since 1980

As we've detailed here and here, the GDP Deflator appears to overstate GDP by an incomprehensible (in my opinion at least) margin. How much? Well, one measure, CPI less GDP Deflator, shows the GDP Deflator is at its widest margin to CPI since 1980.







"Export Driven" Q2 GDP Revised Up to 3.3%

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.3 percent in the second quarter of 2008,(that is, from the first quarter to the second quarter), according to preliminary estimates released by theBureau of Economic Analysis. In the first quarter, real GDP increased 0.9 percent.
















50 / 50 Club

The Big Picture via Mike Panzer:
Since the S&P 500 hit a closing peak of 1565.15 on October 9th, the benchmark has lost 18.11% (through this morning). However, 50 stocks, or 10% of the index constituents, have actually fallen by more than 50%.
Click for larger chart:

Wednesday, August 27, 2008

The FDIC Wants in on the Bailout Action...

Yesterday we took a quick look at the increase in "problem banks". Below, we go further presenting historical data for both problem and failed banks going back to 1990 along with the elephant in the room... an underfunded FDIC.

As can be seen below, the "Problem List" has been highly correlated to the number of bank failures (failures have occurred at ~ 1/10th the number of problem banks).


Now to the bigger issue. We've already had a bank bailout, we detailed the request of the auto industry to have an auto bailout, Fannie / Freddie are bound to be bailed out any day now, and now the FDIC is looking to get in on the action. Per Ben Bittrolff (i.e. The Financial Ninja):
FDIC Chairman Sheila Bair said her agency might have to borrow money from the Treasury Department to see it through an expected wave of bank failures. She said the borrowing could be needed to handle short-term cash-flow pressure brought on by reimbursements to depositors after bank failures.




With a fund balance of ~$45 billion and new projections of the IndyMac bailout costing a revised $8.9B or 20% of that total, I expect this to become bigger news as the Holiday weekend distraction fades...

Source: FDIC (hat tip to Reddit's Sharpsight2)

Durable Goods - July

Durable goods look improved on a seasonally adjusted month over month basis, but not nearly as solid in year over year terms.

As one can clearly see below, growth (over rolling 12 month time frames) of both New Orders and Inventory hasn't flowed through to Shipments or New Orders.
















Source: Census - Descriptions

Derivative Exposure at U.S. Commercial Banks

As Barry stated:
$90 Trillion dollars derivative exposure for JPMorgan ? No wonder the Fed "rescue" of Bear Stearns was via JPM -- it was their own derivative exposure that was at risk.

Source: Treasury (Page 22)

Household Income Up / Per Capita Income Down

The Census just released their 'Income, Poverty, and Health Insurance in the U.S.' survey for 2007. To summarize...
Household Income Rises, Poverty Rate Unchanged, Number of Uninsured Down
While household incomes are up after five tough years, per capita income is down. This means more people are living under each roof and earning less, which makes sense given the increase in both unemployment and foreclosures.



More perplexing, per capita income for those of Asian descent dropped an astonishing 4.5%+ in 2007 (though that was off the highest income level in 2006).








Tuesday, August 26, 2008

"Problem List" of Banks Growing, but 1/15th that of the S&L Crisis

Per Bloomberg:
The U.S. Federal Deposit Insurance Corp. said its "problem list'' of banks increased 30 percent in the second quarter to the highest total in five years as more commercial real-estate loans were overdue.

What do most of these banks have in common? Commercial Real Estate Loans...

Many banks on the list have high levels of commercial real- estate loans, especially in construction and development loans, said John Corston, the FDIC's associate director of large bank supervision.
Still, things are currently not so bad. With over 8500 banks in the U.S., 117 is a drop in the bucket compared to the S&L Crisis (great chart here), when 1500+ banks were on the problem list.

Source: Bloomberg

China Says No More Diesel: Price Set to Drop?

Financial Times: China’s Petrol Buying Spree Poised to End:
Since late last year, the two Chinese state-owned refiners had been importing increasing amounts of diesel, peaking at 960,000 tonnes in June, and the country be­came a net petrol importer for the first time in May.

Industry experts have attributed the buying binge to political orders to refiners to avoid shortages during the Olympics. The import wave had been boosted by tax rebates granted to Sinopec and PetroChina for imports of refined products.

However, much of the imported petrol and diesel has been stockpiled rather than consumed. “The state refiners’ stockpiles are so full that they have been reselling the stuff,” FPCC said.

Mr Wang said this was one of many non-economic factors in the oil price.

Case Shiller Index Continues Slide, but "CSPI" Turns Positive

I previously detailed that CPI may overstate inflation for an individual who:
  • does not own a home
  • would like to own a home
  • will likely soon buy a home
as it does not include how "affordable" housing has become with the recent price collapse for non-homeowners (full details here).

Interestingly, the Case Shiller Price Index (CSPI) has turned positive year over year with the spike in June's CPI offsetting further deterioration in the housing market, with the Composite 10 dropping over 17% year over year.

In looking at the Composite 10's five year returns (annualized), even after the huge downturn in prices, returns over the most recent five year period are still positive at ~3.8% / year and indicates there may still be room for further deterioration.

A Subprime Saga: Merced, CA

An interesting / sad story in the NY Times over the weekend about Merced, CA and the devastation the housing bubble enacted on the town.
In the three years since housing peaked here, the median sales price has fallen by 50 percent. There are thousands of foreclosures on the market. The asking prices on those properties are so low that competitive bidding, a hallmark of the boom, is back.

But almost no homeowner can afford to sell. If you cannot go as low as “the foreclosure price” — the cost of a comparable bank-owned house — real estate agents say you might as well not even bother listing your home.

And so most people do not: three out of four existing-home sales in Merced County are now foreclosures, the highest percentage in the state, according to DataQuick Information Systems. The only group for whom selling makes sense, real estate agents here say, are the elderly entering assisted-living facilities, who often have decades of appreciation built into their home’s value.

The remarkable thing about Merced, CA (and a major problem with housing in general nationally), has been the stickiness of prices. Until there is a legit "floor" in home valuations, NOBODY can price those darn securities = uncertainty in the amount of capital needed in the banking system = dysfunctional credit markets = inability for legitimate buyers to get decent financing terms... phew.

In Merced, the average price of a home is still well north of pre-bubble levels, up ~5.4% on average annually since December 1998, well north of the 2.91% annualized return of the S&P (including dividends) over the past 10 years and a similar return as the Lehman Aggregate U.S. Bond Index over the same period.




If one of the worst hit housing markets in the U.S. has produced twice the return of the S&P 500 and a similar return as the investment grade bond market, who can possibly call this the bottom?

Apparently not even those who have recently purchased a home in Merced.
The market is “probably going to go lower,” says Ms. Johnson, who works at a local jewelry store. But time is on her side: She got a 30-year fixed-rate loan. The landscapers will be by shortly to breathe new life into her golden lawn.
Source: Zillow, NY Times

Monday, August 25, 2008

Box Office Recession?

A recent CNN article claims When Times get Tough, Consumers Beeline to the Movies:
With "The Dark Knight" setting a record for highest-grossing opening weekend and "Pineapple Express" and "Step Brothers" also doing well, 2008 is on track for a record box office summer - suggesting once again that the movie business may be counter-cyclical to the economy.
After reading that, I expected to see very different results when I broke down box office performance going back to 1980. Instead, what I see is a market that peaked in 2002 and is on pace to sell the least amount of tickets since 1996 (even with the massive turnout for The Dark Knight).


With the high price of gas, an average ticket of more than $7, and $5 for greasy (yet tasty) popcorn, many families do not see the value proposition...

Source: Box Office Mojo

DJIA: Continued Downside?

With the Dow down 241.81 points today, I thought the charts below (inspired by a post / email exchange I had with Edward from Credit Writedowns) were fitting:


My guess? Volatility will continue to be the norm and we have not yet seen a bottom...

United States Balance Sheet / Dependence on Foreign Capital

Ben Bittrolff points us to an interesting take on the fragility of the current International Financial system via Bloomberg:
"A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank.

"If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said in e-mailed answers to questions yesterday. "If it is not the end of the world, it is the end of the current international financial system."

"The Chinese are getting a little feisty as their losses continue to mount.

"China's $376 billion of long-term U.S. agency debt is mostly in Fannie and Freddie assets, according to James McCormack, head of Asian sovereign ratings at Fitch Ratings Ltd. in Hong Kong. The Chinese government probably holds the bulk of that amount, according to McCormack."
Lets take a look at just how large the U.S. dependence on foreign investors is:
Liabilities and Equity of US Economy
Source: Federal Reserve

Sunday, August 24, 2008

Auto Bail Out... What's Another $25 Billion?

When I called this the Ener-GM Bail... I Mean Energy Bill earlier this month (guaranteeing the debt of poorly managed / failing auto companies is somehow good for the environment), U.S. Representative (surprisingly from Michigan) John Dingell was asking for a measly $25 Billion.

It looks like the big three (GM, Ford, and Chrysler) need a little more these days to stay afloat; per Bloomberg:
General Motors Corp., Ford Motor Co., Chrysler LLC and U.S. auto-parts makers are seeking $50 billion in government-backed loans, double their initial request, to develop and build more fuel-efficient vehicles.

The U.S. automakers and the suppliers want Congress to appropriate $3.75 billion needed to back $25 billion in U.S. loans approved in last year's energy bill and add $25 billion in new loans over subsequent years, according to people familiar with the strategy. The industry is also seeking fewer restrictions on how the funding is used, the people said today.





















Another $25 Billion? Fewer restrictions on how it's used? So $50 Billion for auto markers when it was approved as part of an Energy Bill (i.e. hardly any connection) and it should be LESS restrictive??? Sounds more and more like a pure bail out, but can't be right?

Well, Global Insight's Aaron Bragman doesn't even pretend the loans are meant to help the big three transition to new energy efficient technology:
"We've seen these kinds of bailouts for the financial companies, why not the automakers?'' said Aaron Bragman, a Troy, Michigan-based auto analyst for Global Insight Inc. `"The big problem is that a lot of people in Washington don't see a value in the U.S. auto industry because they have a foreign plant in their district that is doing just fine.''
So foreign plants are doing just fine? Isn't that the EXACT reason the failed U.S. Auto Industry should NOT get $50 Billion in unappropriated loans?

Emergency Unemployment Compensation

This new temporary unemployment insurance program provides up to 13 additional weeks of unemployment benefits to certain workers who have exhausted their rights to regular unemployment compensation (UC) benefits. The program effectively begins July 6, 2008, and will terminate on March 28, 2009. No EUC benefit will be paid beyond the week ending July 4, 2009.

Derivative Exposure at U.S. Commercial Banks

All the amounts listed below are the year over year increases in notional exposure. While exposure did not decrease in 2007, the slowing growth was dramatic. I would expect a continuation in this trend (if not an outright contraction) for the year 2008.


Source: Treasury

VP Democrat Nominee

AP: Presidential candidate Barack Obama said Friday the running mate he has chosen — but has not yet announced — had to meet three standards to join the Democratic ticket: Prepared to be president, able to help him govern and willing to challenge his thinking.


Source: Intrade (hat tip Bespoke)

CRE: The Next Shoe to Drop?

As the value of home mortgages crumbles by the day, Wall Street has hoped that commercial real estate loans would stay clear of the storm.

But bankers believe the headwinds may be shifting, The New York Times says, after a large apartment complex in Harlem warned last week that it might not be able to make good on a $225 million mortgage payment by September.

“The fear is the next shoe to drop may be commercial real estate,” Jeffrey Harte, a banking analyst at Sandler O’Neil, told The Times. “When consumer credit goes south, commercial will follow.”


Source: Dealbook

Value at Risk vs. Actual Writedowns

Value at Risk "VaR", as defined by the amount at risk at a 99% confidence level over one trading day, means that a VaR of $1 indicates a trading loss of greater than $1 should only occur once every 100 trading days under "normal" market conditions.

Not sure what defines normal, but the past year has been far from normal. Comparing the average VaR of three banks for 2007, as detailed by the Treasury, to the average daily value these banks have written down over the past year (I'm assuming the writedowns are from positions on their books during 2007), one can see just how far off these estimates were.

Citigroup hasn't just lost more than $142 million (their average VaR) on a few occasions. They had $220 million in writedowns on average EACH TRADING DAY.

Source: Treasury

Thursday, August 21, 2008

Inflation, Eh? Canadian Inflation to Five Year High

Higher gasoline prices pushed Canadian inflation to a five-year high of 3.4 per cent in July.

On a relative basis to the United States, inflation looks relatively tame.

Hard to Sell Assets

WSJ: More Broker Writedowns? You Don't Say!:
The subjects are Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., and Morgan Stanley, and the shooter is Citigroup’s Prashant Bhatia, who lowered earnings estimates on all three due to the “difficult operating environment, characterized by lower client-related trading volumes and losses on hard-to-sell assets.”

Leading Economic Indicators (July)

The Conference Board:
The leading index declined sharply in July, the second decrease in the index in the past three months. Building permits, stock prices, and weekly initial claims (inverted) made very large negative contributions to the index this month, more than offsetting positive contributions from the interest rate spread and consumer expectations. The six-month change in the index stands at -0.9 percent (about a -1.8 percent annual rate), up from the 3.4 percent annual rate of decline at the end of the first quarter of 2008. However, the weaknesses among the leading indicators continue to be very widespread.

Wednesday, August 20, 2008

More Millionaires in Florida than in New York

Put this in the should have known there was a housing bubble folder; the WSJ Reports:
According to new wealth stats released by the I.R.S. Florida had 199,000 residents with a net worth of $1.5 million or more as of 2004 (their latest period). That topped New York’s count of 168,000, though it still trailed way behind leader California, which boasted 428,000–more than a fifth of the nation’s total.

A little digging into the numbers, however, reveals a troubling trend for the nation’s top millionaire states. Much of the growth came from real estate, which is included in the IRS calculation. About 40% of the net worth of California’s million-and-a-halfers was in real estate in 2004. Florida’s was slightly more than 20%, and New York’s was slightly less than 20%.

But you can bet that with the real-estate slide, California’s and Florida’s million-and-a-halfers will be hit especially hard. And maybe, just maybe, New York will regain its No. 2 spot.