Sunday, February 28, 2010

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.

Friday, February 26, 2010

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

Thursday, February 25, 2010

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

Wednesday, February 24, 2010

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

Tuesday, February 23, 2010

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

Thursday, February 18, 2010

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

Wednesday, February 17, 2010

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?

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

Tuesday, February 16, 2010

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.

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

I shared in my February 4th post 'What's Going On?' what I felt was the cause of the abrubt downward turn in risk assets:

My thought... I think the legit issues within the Eurozone are causing some 'dollar shorts' / 'risk asset longs' to reconsider (or forced to unwind) their positions. As detailed back in November's post (Did We Learn Anything? Carry Trade Edition), any shift in sentiment has the potential to move markets dramatically as so many levered "investors" have piled in on the same short dollar trade. Once an unwind of any carry trade begins, there is the potential for a pretty bad feedback loop.

My guess is that things (assets / non-USD currencies) will bounce back from here over the short-run (bought some pretty cheap options for a short-term rebound), but if it doesn't... things may get VERY ugly, VERY quickly.

While my explanation may or may not be correct, it looks like things "bounced" vs. "got crushed" for the time being (I am officially out of my short-term rebound trade, though I am continuing to hold some strategic long positions in gold, commodities, and non-USD currencies).

Not quite the opposite of what we saw during the February 4th or February 8th sell-off. At that time most of these ETF's were negative. Today ALL of them rallied.

Source: Yahoo

Empire Manufacturing Jumps in February

The Street with the details:

A reading on factory activity in the New York area remained positive for a seventh month in a row and strengthened more than expected this month, suggesting manufacturing is continuing its recovery since last year. The general business conditions index jumped 9 points to register 24.9 in February, according to the Empire State Manufacturing Survey released early Tuesday from the New York Federal Reserve Bank. Consensus forecasts provided by showed analysts expected the index to show a lighter expansion at 18. It's the index's best showing since last October, when the gauge reached 33.4 and remains far ahead of last February's -31.6 slump.

Source: NY Fed

Where to Hide?

Any concerns within broader credit markets need to start with sovereign risk (per The Star).

The sovereign debt crisis contagion is spreading in Southern Europe, from Greece to Portugal, Spain and Italy, where government debts and budget deficits are high.

Investors have sold government bonds in those countries as perceived default risks have risen.

This has resulted in the rise in the yields of government bonds resulting in higher borrowing costs for the government and private sector as loans are often tied to the risk free rate of government bonds.
But that is not where it ends.

Since the remarkable comeback across all risk sectors following 2008's collapse (the illiquidity in TIPS during the crisis made them trade among credit risk sectors), corporate bonds (both investment grade and high yield), agency mortgages, and even TIPS have been under pressure.

So if you can't hide in credit, TIPS, or mortgages, where can you hide and get more than 0%?

I have a few ideas, but would love everyone's thoughts...

Source: BarCap

Monday, February 15, 2010

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

NY Times details the headline Q4 figure:

The Japanese economy grew at an annualized pace of 4.6 percent in the final quarter of 2009, preliminary numbers showed Monday, as a rebound in exports helped alleviate fears of a “double-dip” recession.

As detailed above, the growth was led by exports which jumped an astonishing 20% annualized over the period.

So how can a 4.6% increase not mean the economy actually grew?

The starting point.

Third quarter GDP was reported to have grown 4.8% back in November. As I noted back then, the number looked odd as nominal GDP was negative even with that 4.8% real growth due to deflation.

Now it appears that 4.8% growth never happened.
Tokyo has come under increasing pressure to address wild variations in its readings of gross domestic product: In the third quarter last year, the government initially said the economy had grown a robust 4.8 percent, only to revise that rate down to reflect no growth or decline. The latest numbers, the government says, have been adjusted for more accuracy.
Subtract that 4.8% growth and add in this quarter's 4.6% growth and you get... well, no growth from the level of GDP reported back in Q3.

Over the longer period, we do see a slow normalization. However, anytime nominal growth is under this much pressure in an indebted nation (a nation's debt must be paid back in nominal terms, thus with nominal growth), there is still a lot of concern going forward.

Source: ESRI

The Value of Corporate Bonds

WSJ (hat tip Abnormal Returns) details:

Since peaking in mid-January, corporate-bond prices have had their biggest decline since a breakneck rally that began last March. That climb had made it cheaper for companies to finance operations, greasing the skids of the economy.

This past week, though, the cost of protecting against corporate defaults rose to the highest level in three months. Returns on high-yield debt turned negative for the year. And companies, after raising record amounts of new debt earlier this year, abruptly trimmed the amount of new debt they brought to market. Some were forced to cancel sales.

Even after the market's recent declines, many analysts aren't expecting much, if any, of a rebound.

"The move from here gets a lot tougher," said Morgan Stanley credit strategist Rizwan Hussain. "We are now basically back to what looks like a typical credit recovery."

While not exactly a sell-off, after the one direction bet we've seen with corporate bonds over the last 12 months ( that has narrowed the spread on the broader corporate bond benchmark from 600+ bps to less than 200 bps), the value of corporate bonds becomes as dependent on expectations of interest rates as on future spread compression.

Source: Barclays Capital

Saturday, February 13, 2010

"A Simple Way to Data Mine"

James Altucher has an article in the WSJ titled 'A Simple Way to Beat Hedge Funds' in which he discusses the 4x2 system:

I’ve traded this system for years, and even though it has no fancy chaos theory, it works. Basically, if a stock falls in price for four days in a row (for instance, after a bad earnings report) chances are the selling is done. Within four days, everyone’s seen the news, everyone’s had a chance to sell and most of the sellers have probably already sold.
He reports the following cumulative performance from 1992-2009.

I had no problem with the article about a model until this statement (bold mine):
But a simple system like this: wait for a stock to go down four days in a row, then buy until it goes up two days in a row, has never had a down year, and has beaten nearly every hedge fund.
Has "never" had a down year is a BOLD statement. And quite possibly true... if a 17 year period is "never".

While I won't question the above data (although it is almost impossible for the average investor [me] to verify), the Nasdaq has been around since 1971 and one can easily test the broader index with the 4x2 strategy over that entire period (I figure this would at least show the broad trend, but I would love to see the actual results).

My results?

Buying at the close at every period in which the Nasdaq was down 4 days in a row and selling when it was up 2 days in a row, the performance from 1992-2009 was exceptional (close to what is detailed above) with an average return for each trade over that period of more than 1% (though there was a massive draw down in 2001 [with a period in August - September where the Nasdaq did not have a 2 day win streak over a 31 day trading window] that I am not sure how individual security selection would miss).

But from 1971-1991?

Not so much.... returns per trade were less than -1% (and there were more trades in this period, thus overall Nasdaq since inception 4x2 performance is negative).

My take?

At the end of the day he is trying to do exactly what the hedge fund managers he insults in his article are trying to do:
to impress investors or potential investors
My take? Just like the data mined equity signal I created 'The Pub Power Equity Signal', if it sounds too good to be true... it probably is.

Source: Yahoo

Friday, February 12, 2010

EconomPics of the Week (Love is in the Air) Edition

Economic Data
U.S. Consumer Keeps Chugging Along
More on Retail
The Death of the Workforce
Women Taking Over the Workforce
Wholesale Inventories and Q4 GDP Revisions

Global Data
Euro Zone GDP Disappoints
Loose Money and The Aussie Surge
Global Trade Continues to Bounce Back to the Old Norm

Asset Classes
Hedge Funds Off to a Slow Start in '10
What Mortgage Payment?
Market Recap (2/08/10)

And in honor of Valentine's Day, the best scratchy voiced, live, hotel played, acoustic, cover love song ever.

More on Retail

My post on retail sales this morning may have been a bit misleading.

Are levels improving? Yes.

Are we back to old levels even in nominal terms? Not even close.

Source: Census

U.S. Consumer Keeps Chugging Along

Reuters details:

The Commerce Department said total retail sales increased 0.5 percent after falling by a revised 0.1 percent in December. Sales in December were previously reported to have dropped 0.3 percent.

Analysts polled by Reuters had forecast retail sales increasing 0.3 percent last month. Compared to January last year, sales were up 4.7 percent.

Retail sales are being closely watched for signs whether consumers are healthy enough to sustain the economy's recovery once government stimulus and the boost from restocking by businesses wanes.

Source: Census

Euro Zone GDP Disappoints

Reuters details:

The euro zone's economic recovery lost steam in the final quarter of last year as gross domestic product barely expanded, with France the only one of the currency area's four biggest economies to post growth.

The 16-country area's GDP edged up 0.1 percent in the October-December period compared with the previous quarter, and contracted by 2.1 percent from the last quarter of 2008, EU data office Eurostat said in a flash estimate.

Analysts polled by Reuters had expected quarterly growth of 0.3 percent and a year-on-year decline of 1.9 percent.

Over the full year 2009, euro zone GDP fell 4.0 percent.

Source: Eurostat

Thursday, February 11, 2010

Hedge Funds Off to a Slow Start in '10

Yes, I understand one month is merely a blip, but hedge funds had their worst month (in aggregate) since February of last year according to Barclay Hedge.

By Strategy

Source: Barclay Hedge

Wednesday, February 10, 2010

Global Trade Continues to Bounce Back to the Old Norm

The LA Times details:

The U.S. trade deficit widened by an unexpectedly large margin in December as American exports continued to grow but imports rose at an even faster pace, largely because of a sharp increase in petroleum purchases, the Commerce Department reported Wednesday.

It was the third straight month of rising trade deficits -- and the surprisingly big jump in December, to $40.2 billion from $36.4 billion in November, suggested that U.S. economic growth in the fourth quarter, initially estimated at 5.7%, could be revised down slightly, said Paul Dales, an economist at Capital Economics.
Another reason for a downward GDP revision... shocking. Back to the article...
The continued pick-up in trading activity, including the rise in volatile oil imports, reflects the rebound in the global economy and greater production demand in the United States.
And more broadly, a continued reversal of the absolute collapse witnessed in the Fall of 2008.

Source: Census

Loose Money and The Aussie Surge

As I've stated before, Australia is:

A commodity driven economy that has a close proximity to one of the world's fastest growing / largest commodity importing economy (China).
Add (excess) liquidity in that importing country (per Marketwatch):
Chinese banks extended loans amounting to 18.5% of the full-year lending target in January, underpinning rapid growth in the money supply, while factory input costs and wholesale prices rose more than expected, according to the data.

The People's Bank of China said lending by the nation's banks totaled 1.39 trillion yuan ($203.5 billion) during the month, more than three times the 379.8 billion yuan extended in December. The figure was about the middle of a range expected in analysts' forecasts.
And you get some magical results (Bloomberg details the latest):
Australian employers added the most workers in more than three years in January, sending the currency surging on speculation the central bank will resume its record round of interest-rate increases.

The number of people employed rose 52,700 from December, more than three times the 15,000 median estimate of 21 economists surveyed by Bloomberg News. The jobless rate fell to an 11-month low of 5.3 percent from 5.5 percent, the statistics bureau said in Sydney today.

The biggest hiring boom in five years is increasing pressure on Reserve Bank of Australia Governor Glenn Stevens to resume raising borrowing costs to prevent a surge in wages feeding inflation. Traders doubled bets the bank will raise the benchmark lending rate by a quarter point to 4 percent next month, adding to similar moves in December, November and October.

“It will concern the Reserve Bank that the unemployment rate has peaked at a very low rate,” said Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney. “Imagine what’s going to happen later this year” to inflation and wages when a forecast surge in mining investment intensifies, she said.

Thus, the remarkable fact that Australia never really suffered an employment downturn during what was a global economic crisis, especially relative to the rest of the developed world.

Source: ABS

Tuesday, February 9, 2010

Wholesale Inventories and Q4 GDP Revisions

Professional economists were predicting inventories to "continue to rebuild" from November's level. Amateur economists (i.e. me) that actually looked into November wholesale inventory data noted it was not "real". As stated a month back.

Friday's surprise 1.5% gain in Wholesale Inventories (i.e. what appeared to be an inventory rebuild) was not real, just like last month's post Wholesale Inventory Correction isn't "Real" in October. As can be seen below, the spike was entirely to Farm Products (Wholesale Inventories ex Farm Products was 0.1%) and Farm Products (both livestock and grains) rocketed in price in November.
Thus, not a huge surprise that inventories did not match expectations (per the AP):
The Commerce Department said Tuesday that wholesale inventories were reduced 0.8 percent in December. Economists surveyed by Thomson Reuters had expected inventories to rise by 0.5 percent during the month.
All that happened in December (broadly), was just continued weakness and a reversal in price level for a number of these items (and just wait until January's wholesale release that must deal with this collapse).

Medill Reports reports what happens to Q4 GDP as a result:
The inventory drop occurs on the heels of a 1.6 percent increase in November, which was the largest monthly jump since July 2004, according to the Department of Commerce.

Economists initially forecasted a modest 0.5 percent increase in inventories, according to a poll by Thomson Reuters. The surprise slide could influence the Gross Domestic Product, a prospect that persuaded some analysts to ratchet down their GDP outlook.

“The drop was unexpected,” said Ellen Zentner, senior U.S. macroeconomist with Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “We are shaving close to 0.3 percent off our GDP estimate.”
Sounds similar to what I guessed before the Q4 GDP figure was even released. My third prediction as to the main driver of the print...
  • The MASSIVE impact from the inventory rebuild, which I suspect will be revised down in coming quarters as it is realized that the inventory rebuild wasn't all real
Okay, I'll get off my pedestal as this does provide at least one positive opportunity. Namely, wholesalers are reaching the point that they can't continue to let inventories slide. Back to Medill Reports:
“Inventory levels are tight, but that’s a positive,” said Russell Price, senior economist at Ameriprise Financial Inc. in Detroit. “The more producers have to ramp things up to meet demand the more production levels increase and the number of hours worked increases.”
Source: Census

The Death of the Workforce

Traveling ALL week, so posts will be intermittent.

I pointed out yesterday that for the first time in U.S. history, more women are in the workforce than men. Brad DeLong points out that this is due in large part because men are dropping out of the workforce:

Social roles and social pressures in America today are such that if you are male between 25 and 54 in America and you don't have a job, there is a presumption that there is something wrong; One thing that goes wrong is a recession (or a depression), but steadily since 1950 other things have been going wrong for an increasing number of American prime-aged males...
Specifically, a 60 year slide in the male workforce participation rate. So if male participation has gone down, female participation must have gone up... right?

From 1950 through the mid part of this past decade... right.

Now? No more.

So while females were taking the place of their male counterparts in the workforce as the composition of the workforce was changing, the overall workforce had been continuing to grow on a per capita basis.

Now? No more.

Think about this. In January 2010, almost 3 more people out of EVERY 100 that can work, are no longer even looking and more than 6 more people out of EVERY 100 that can work aren't as compared to the workforce in January 2000.

Source: BLS

Monday, February 8, 2010

Market Recap (2/08/10)

As long as markets remain as interesting (volatile) as they've been, I'll occasionally be posting these daily updates.

The story of the day? Long fixed income, short risk assets.

Source: Yahoo

Women Taking Over the Workforce

NY Times details that women, for the first time in recorded history, outnumber men in the workforce (on a non-seasonally adjusted basis):

For the first time in recorded history, women outnumber men on the nation’s payrolls.

This benchmark is bittersweet, as it comes largely at men’s expense. Because men have been losing their jobs faster than women, the downturn has at times been referred to as a “man-cession.”

Women’s new majority in the nation’s workplaces comes decades after women first began trading in their aprons for pantsuits in droves, and it reinforces expectations that women will continue on the path to pay parity.

Source: BLS

What Mortgage Payment?

TransUnion (hat tip Calculated Risk) details:

A new study developed by TransUnion confirms that the "new" payment hierarchy -- where consumers pay their credit cards prior to their mortgages -- is continuing, with the trend occurring more readily than ever before.

"Conventional wisdom has always been that, when faced with a financial crisis, consumers will pay their secured obligations first, specifically their mortgages," said Sean Reardon, the author of the study and a consultant in TransUnion's analytics and decisioning services business unit. "However, a recent TransUnion analysis has found that increasingly more consumers are paying their credit cards before making mortgage payments. This analysis reaffirms the results of a previous TransUnion study that examined data between the third quarter of 2006 and the first quarter of 2008."
This response has been even more pronounced in areas that have suffered more on a relative basis (i.e. Florida and California).

These numbers are astounding.

Source: Transunion

Friday, February 5, 2010

EconomPics of the Week (Who Dat? Edition)

What's Going On?
February 4, 2010 - Boom Goes the Dynamite
Second Largest Equity Pullback Since the March Bottom
Asset Class Performance: It's Been All E.M.

Economic Data
Inventory Adjustments in Q4... Now What?
Comparing U.S. and E.U. Unemployment
Don't Worry About Inflation... For Now
More on Wage Inflation
Employment by Education Attainment
Unemployment Drops to 9.7%
ADP Employment... Getting There
Services Sector Improves.... Slightly
Manufacturing Expands in January
Auto Sales Mixed, but Sluggish

TV Viewership and Educational Attainment
We're All Socialist Now

More on Wage Inflation

Earlier this week EconomPic detailed that now is not the time to worry about inflation.

Commodity driven inflation absolutely can pose major problems, but it is usually wage inflation that feeds into any out-of-control inflation spiral. Thus, keep the following in mind when thinking about whether inflation will be a major issue over the near term horizon.
The "following" was a chart of the change in compensation over the past decade. In response, reader Boatman commented:
in the largest inflationary period in US in modern times wages were flat (78-82). i was there. tomorrows problem is todays opportunity. this is gold buying time,find the bottom & pull the trigger.
Memories are a funny thing because that is just not true. Inflation fed through wages until Volcker stamped it out by dramatically raising short-term interest rates.

That said, I personally think gold can (and will) go higher, but for different reasons (see here and here).

Source: BLS

Employment by Education Attainment

This clearly shows the growing differentiation within the U.S. of the "haves" and "have nots".

Source: BLS

Unemployment Drops to 9.7%

Headline figures show a substantial improvement, but I'll see if I can't dig into the details to see if employment really was this strong.

Source: BLS

Thursday, February 4, 2010

February 4, 2010 - Boom Goes the Dynamite

Source: Yahoo Finance

What's Going On?

Light posting today as I am once again on the road, but I thought I'd weigh in on what I view as the cause for today's (and the past few weeks) risk asset collapse...

While some are claiming the ugly initial claims number, I can't fathom how this makes sense (is the weak employment market a surprise to anyone at this point? And how does this explain the dollar rally?).

My thought... I think the legit issues within the Eurozone are causing some 'dollar shorts' / 'risk asset longs' to reconsider (or forced to unwind) their positions. As detailed back in November's post (Did We Learn Anything? Carry Trade Edition), any shift in sentiment has the potential to move markets dramatically as so many levered "investors" have piled in on the same short dollar trade. Once an unwind of any carry trade begins, there is the potential for a pretty bad feedback loop.

My guess is that things (assets / non-USD currencies) will bounce back from here over the short-run (bought some pretty cheap options for a short-term rebound), but if it doesn't... things may get VERY ugly, VERY quickly.

Wednesday, February 3, 2010

Services Sector Improves.... Slightly

ISM reported on the services sector this morning (I was traveling, thus the delay). Marketwatch with the details:

The service sectors of the U.S. economy rebounded in January, the Institute for Supply Management reported Wednesday. The ISM non-manufacturing index rose to 50.5% from 49.8% in December. Despite the improvement, the increase was below expectations. Economists were looking the index to rise to 51%. The index had been above 50 for two months in the fall but then slipped under the threshold in November and December. The closely-watched employment index rose to 44.6% in January from 43.6 in December. The employment index has been below 50 since December 2007. It hit a low of 31.1 in November 2008.

Source: ISM