Chinese Real Estate Prices Jump Most in 5 Years

Bloomberg details:

China’s property prices rose a record in April, defying government measures to stem gains and suggesting more drastic curbs are needed.

Residential and commercial real-estate prices in 70 cities climbed 12.8 percent from a year earlier, the National Bureau of Statistics said on its website. That topped the 11.7 percent surge in March, which was a record then for the data series that goes back to 2005.

Below is a chart of the national "70 Medium-Large Sized Cities" real estate index, along with China's 5 largest cities showing the widespread jump for new, existing, and the broader index.



And while there are conflicting reports (the Bloomberg article has a quote claiming “the only reason why April posted a gain was the low basis of comparison from last year”), the data seems to show the pace was accelerating. Economic Times with those details:

Property prices rose 1.4 percent from the previous month, higher than the 1.1 percent pace in March and logging the quickest pace since December, when the monthly increase was 1.5 percent.

Moreover, many analysts say the way the index is compiled seriously understates the degree of property inflation. Real estate investment in the first four months increased 36.2 percent compared with the same period last year. Year-to-date investment in the first three months of 2010 was up 35.1 percent.

A chart showing the year over year change vs. the month over month change annualized seems to show an increased appreciation.



China is now apparently ready to do whatever it takes to fight the bubble:

China, trying to peel back the effects of a $586 billion stimulus package and lending binge that drove a surge in home prices, is stepping up efforts to cool the market with policies Deutsche Bank AG described as “draconian.” It ordered developers not to take deposits for sales of uncompleted flats without proper approval, curbed loans for third-home purchases, and on May 2 boosted banks’ minimum reserve requirement for the third time this year.

How much of an impact can this all have? Well, if one were to believe a Business Week article (I believe the direction, not the scale) a LOT.

Beijing News said property prices in the capital slumped more than a third over the past one month.

Housing prices fell 31 percent for the week ending May 9 from the week ending April 11, to average price of 16,898 yuan per square meter, the Beijing News reported today, citing statistics from consulting firm Comprehensive Real Estate Services Corp.

I don't buy 31% in a week, but it shows just how much air is in the bubble if that kind of number seems somewhat reasonable.

Source: National Bureau Statistics of China

Reflation Trade... Back On

Source: Yahoo

Consumer Credit Steady... Details Mixed

The latest consumer credit released occurred late Friday. Business Week details:

Consumer borrowing in the U.S. unexpectedly rose in March for the second time in three months, indicating Americans are becoming more optimistic about the recovery.

Confidence to finance spending may grow as more people are hired after the creation of 290,000 jobs in April, the most in four years. Consumer purchases, which account for about 70 percent of the economy, rose at the fastest pace in three years during the first quarter, pointing to a broadening of the economy.

“Consumption has recovered in recent months, and should continue the recovery in light of an improving jobs market,” said Win Thin, senior currency strategist at Brown Brothers Harriman & Co. in New York.

Even though consumer credit outstanding expanded, that level decreased as a percent of overall consumption as consumers utilized transfer payments, wealth created from financial asset reflation, and perhaps cash that "should have" gone to their mortgage (i.e. strategic defaults).



There was something funny looking in the Federal Reserve's release, specifically a crash in the amount of consumer credit in the securitized market and spike in the amount held by commercial banks.



The Atlantic provides the "why"details:

Financial institutions adopted accounting standard FAS 166/167 this month, which required them to take some securitization debt on balance sheet. As a result, pools of securitized assets plummeted by nearly 70% for the month, but that caused large increases for credit held by commercial banks and finance companies.

In other words, this is just the shadow banking system making its way back to the banks' balance sheets (likely delayed to ensure banks could first build up the required capital).

The Atlantic does detail an area that is perhaps more concerning:

But the Federal government continued to hold more credit, increasing its holdings at an annualized rate of 31% for the month.

Source: Federal Reserve

Hedge Funds Show Continued Strength in April

In what can broadly be described as PR for Paulson & Co rather than an article, the WSJ details (Paulson & Co references removed):

Hedge funds returned more than 1% on average in April as stock and bond markets rallied strongly, according to early estimates released Friday by firms that track performance in the industry.

"Hedge funds posted broad-based gains in April as sovereign credit risks escalated and currency adjustments remained at the forefront of investor concerns," Kenneth Heinz, president of Hedge Fund Research, said in a statement.

Important to remember that...

These hedge fund industry gains don't include the recent drop in stock and credit markets that turned into a rout on Thursday.

We shall see how well they were able to react in next months release.

Source: Barclay Hedge

Europe: Too Much Debt? Add ~$1 Trillion More

Bloomberg details the "shock and awe":

European policy makers unveiled an unprecedented loan package worth nearly $1 trillion and a program of securities purchases as they spearheaded a drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro. Jolted into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, governments of the 16 euro nations agreed to make loans of as much as 750 billion euros ($962 billion) available to countries under attack from speculators.

The ECB will also embark on “very significant operations,” European Union Economic and Monetary Commissioner Olli Rehn told reporters in Brussels after the 14-hour meeting. “The ECB has taken a decision to intervene in the secondary markets of government securities.”

Under pressure from the U.S. and Asia to stabilize markets, the European governments gambled that the show of financial force would prevent a sovereign-debt crisis and muffle speculation that the 11-year-old euro might break apart.

The European Central Bank will announce “intervention” in financial markets, Luxembourg Finance Minister Luc Frieden told reporters, without giving further details.

Some of the "unwind" the EU / IMF are trying to "rewind" is detailed in the chart below.



This doesn't address the core issue of too much debt (actually, it adds to it). Rather, this kicks the can down the road and gives peripheral Europe and European banks the time to address their solvency issues (the big concern with sovereign default was the fact that European banks hold a boatload of sovereign debt, thus a Greek default could have triggered a chain of events that I really don't want to think about).

Going forward, these countries will need to deal with the inevitable pain associated with deleveraging and belt tightening. My guess is the pain will prove too much for at least a few of these countries and default / restructuring of debt will happen. At that point my concern is not that the EU is shifting the peripheral countries (Greece, Portugal, Spain) refinancing problems to the broader EU. It is that they are shifting the solvency problems to the EU as well.

Source: BarCap

EconomPics of the Week... I Deserve a Drink Edition

Financial Markets / Asset Classes
The Certainty of Uncertainty
The Great Reflate
The Low Quality Corporate Bond Rally
The One Day Unwind? PART II (5/4)
Make that a Two Day Unwind (5/5)
Well, That Was Interesting (5/6)
ADP: Three Straight Months of Increased Employment...
Sell in May... Don't Go Completely Away

Economic Data
Not Sustainable
Employed... Labor Force... Unemployment Rate... All Jump
Hours Worked per Person Picking Up
Productivity vs. Employment
ISM Services Index Grows at Same Pace
Auto Sales Mixed, but Show Continued Rebound
Manufacturing Continues Expansion in April
Are Retirement Ages Going to Increase?

And your video of the week... Sublime w/ 40 Oz to Freedom

Hours Worked per Person Picking Up

A figure EconomPic has not shown in a while... the number of hours worker per person (i.e. person as in every person in the U.S. - more details here).



Not exactly booming, but definitely off the December low...

Source: BLS

Employed... Labor Force... Unemployment Rate... All Jump

The number of individuals employed jumped in April showing signs of life in the job market (red bars in the first chart below). In addition, the number of unemployed individuals jumped (yellow bars) as people returned to the labor market (green bars).



The result in the numerator (unemployed) increasing more than the denominator (labor force) is an increase in the unemployment rate and underemployment rate.

Source: BLS

Well, That Was Interesting

This post was timely!

Following a tough two days, we momentarily saw a complete meltdown as liquidity completely disappeared from the market (due to potential computer errors?). The below ETFs broke away from their respective benchmarks at times, but the chart below provides a sense into just how disorderly the sell-off was at times (daily peformance in red, how far things sold-off in yellow).



Update: want some insight into what happened today? I think this covers it.

Source: Yahoo Finance

Productivity vs. Employment

Reuters details:

U.S. non-farm productivity growth slowed sharply in the first quarter, government data showed on Thursday, suggesting businesses will have to raise employment to boost output.

The Labor Department said non-farm productivity rose at a 3.6 percent annual rate, the smallest advance in a year, after expanding at a brisk 6.3 percent pace in the fourth quarter.

Analysts polled by Reuters had forecast productivity, which measures the hourly output per worker, rising at a 2.5 percent rate in the January-March period.

Productivity expanded rapidly in the previous three quarters as businesses wrung more output from a small pool of labor. Despite the resumption of economic growth, firms have been reluctant to hire new workers, opting instead to increase working hours. With productivity slowing, they may need to start hiring workers to keep production up.

Looking at the chart, one can see that we have been squeezing out more, from less for 10+ years now. Productivity is a good thing, but it can be painful as the economy transitions to new technologies and requires new skill sets.

Source: BLS

The Certainty of Uncertainty

Abnormal Returns has a great post about uncertainty and investing; a topic that has been on my mind of late due to the bomb scare, oil spill, natural disaster, and of course sovereign crisis (for anyone interested, I asked for / received help in understanding the potential for a Eurozone breakup back in January '09). To the post:

Alexander Ineichen writes directly to the issue of time diversification and uncertainty:

We believe time amplifies risk. It is true that the annual average rate of return has a smaller standard deviation for a longer time horizon. However, it is also true that the uncertainty compounds over a greater number of years. Unfortunately, this latter effect dominates in the sense that the total return becomes more uncertain the longer the investment horizon.

The logic here is that over the longer term, more bad things can happen and the probability of failure (i.e., non-survival) is higher. The probability, for example, of San Francisco being wiped out by a large earthquake over the next 100 years is much larger than over the next 100 days. If accidents happen in the short term, one might not live long enough to experience the long term. After all, the long term is nothing else than many short term periods adjoined together.

Ineichen uses the recent example of Japan showing that sometimes a market, even a developed one, can go down and stay down. The issue isn’t one of better estimating the equity risk premium or volatility of returns. It stems more from the fact that we really don’t know what the future holds. Recognizing the limitations of our statistical knowledge is a necessary step in facing uncertainty.

And here it is... the chart shows the Nikkei 225 index and the change from its previous peak (note that the chart does not include reinvestment of dividends). 20+ years and the index is still 70% below its peak.



An outlier right?

Well, it took the U.S. Equity market* from 1929 - 1954 (i.e. ~35 years) to re-reach its prior peak post Great Depression.



These "outliers" are important to keep in mind as the global economy has never been more inter-connected or had less "cushion" if an event were to occur (sovereign balance sheets were sucked dry during the crisis making any large bailouts [sovereign or banking] much more difficult going forward).

The result is that any little hiccup (in any part of the world) may have a far greater impact on the entire system than the market is currently pricing in. While it may not happen over the next day, week, month, or even year(s)... it is coming.

* the S&P 500 recreated by Professor Shiller to pre-date its 1957 inception

Make that a Two Day Unwind...

Source: Yahoo Finance

ISM Services Index Grows at Same Pace

Marketwatch details:

Growth in the U.S. service sector was flat in April, but activity remained at the highest rate in four years, according to the Institute for Supply Management. The ISM non-manufacturing index stayed at 55.4% in April.

Readings over 50% indicate more firms believe business is getting better instead of worse. Economists surveyed by MarketWatch were looking for the index to rise to 56%. In April, 14 of 18 industries were growing. Yet the new orders index fell to 58.2% in April from 62.3% in March. And the employment index dipped to 49.5% in April from 49.8% in March.

ISM details what respondents are saying:

• "Best production/service levels in 24 months." (Wholesale Trade)
• "Selling prices for our products continue to decline." (Mining)
• "The market and other financial indicators point to an improving economy; however, that is being overshadowed by skepticism and lack of confidence. Capital spending is being constrained by concern over the economic view in a post-stimulus era, with double-digit interest rates and mounting debt." (Educational Services)
• "Market shows slight signs of tightening." (Information)
• "Business conditions are improving." (Management of Companies & Support Services)
• "There are signs of improvement which are leading us to be optimistic; however, as prices escalate the stability of the recovery is at risk." (Retail Trade)

Source: ISM

The Low Quality Corporate Bond Rally

The low quality (i.e. high beta) corporate bond rally has continued into 2010...



As a reminder... the SPECTACULAR rally of 2009.

We'll see if this continues. One day is in most cases just noise, but it looks like a high beta sell-off this morning as a flight to quality has sent 10 year Treasuries to 3.54% (down almost 50 bps over the last month).

Source: BarCap

ADP: Three Straight Months of Increased Employment

ADP reports:

Nonfarm private employment increased 32,000 from March to April 2010 on a seasonally adjusted basis, according to the ADP National Employment Report. The estimated change in employment from February to March 2010 was revised up, from a decline of 23,000 to an increase of 19,000.

In addition, the revised estimate of the monthly change in employment from January to February 2010 shows a modest increase of 3,000. Thus, employment has increased for three straight months, albeit only modestly. The slow pace of improvement from February through April is consistent with the pause in the decline of initial unemployment claims that occurred during the winter months.

Unlike the estimate of total establishment employment to be released on Friday by the Bureau of Labor Statistics (BLS), today’s ADP Report does not include any federal hiring in April for the 2010 Census. For this reason it is reasonable to expect that Friday’s figure for nonfarm total employment reported by the BLS will be stronger than today’s estimate for nonfarm private employment in the ADP Report.

Not exactly a huge number (and the market doesn't seem pleased), but a bottoming none-the-less.

Source: ADP

The One Day Unwind? PART II

After last weeks European induced sell-off, EconomPic asked if it was a one day event (last week... it was).



How about this time?

Source: Finance

Sell in May... Don't Go Completely Away

There is always lots of "Sell in May, Go Away" chatter this time of year. Marketwatch's Mark Hulbert (via Abnormal Returns) details why:

There are surprisingly strong statistical reasons for "selling in May and going away," many nevertheless find it difficult to actually do what the strategy calls for -- sitting on one's hands from now until Halloween.

It is especially hard to do now, in fact, with the bull market defying all odds and continuing to chug along. Money managers tell me that the worst crime that they can commit, at least in the eyes of many of their clients, is being out of the market when it is rising.

Agreed... and while EconomPic in no way, shape, or form advocates investing in the manner described below, it is interesting none-the-less. Rather than "Sell in May and Go Away", the chart below details the results of the "Secret Sauce" (i.e. Sell S&P 500 in May and then invest in the Long Government / Credit bond index, rather than sit in cash) vs a buy and hold S&P 500 strategy (note that these returns include reinvestment of dividends).



Why does this work?

I have no idea...

Source: S&P / BarCap

The Great Reflate

Tony Boeckh (via John Mauldin):

To rescue the economy and financial system from near-total meltdown, the government created an unprecedented package of bailouts, stimulus, free money and massive fiscal deficits. It succeeded, and a 1930s style debt deflation and depression were aborted. Liquidity, on a vast scale was unleashed into the financial system, demonstrating, once again, the power of such flows to drive up the prices of stocks, commodities and other risky assets.

And those driven up returns through April (via Capital Spectator).



And the concern...

This effort to reflate—pump air back into the balloon—had to be on a scale at least as large as the bubble itself. It is an experiment never before attempted in the context of U.S. experience, and it will have consequences unlike anything seen before.

More here.

Source: Capital Spectator

Auto Sales Mixed, but Show Continued Rebound

The Atlantic details:

April was a good month to be in the U.S. auto business. The top-seven auto companies all saw increased sales compared to a year ago. For that group, sales were up an aggregate 19%. But not all car makers did equally well.

Now a little perspective... autos have shown a nice rebound over the past 12 months, but levels are still well below 2008 levels (though it appears automakers are profitable at these levels).



But back to the point of mixed results...

As you can see, GM saw a 6.7% rise, but that's pretty weak compared to its competitors. All others had at least double-digit sales increases. Nissan and Hyundai outshined the others.

Really, this news has to be pretty worrisome to GM. Even though it saw more sales, through a little analysis, you can quickly see that its market share fell.

Ford on the other hand (i.e. the American manufacturer that isn't owned by the taxpayer), continues to perform very well.

Source: Auto Blog

Manufacturing Continues Expansion in April

Bloomberg details:

Manufacturing expanded in April at the fastest pace since 2004, propelling a U.S. recovery that’s getting a bigger lift from consumer spending.

The Institute for Supply Management’s factory index rose to 60.4, the highest level since June 2004 and exceeding the median forecast in a Bloomberg News survey of 76 economists. Readings greater than 50 signal expansion and today’s report marks a ninth consecutive month of growth.

ISM repondents report:

• "Finances continue to be tight, and we are decreasing safety stock levels to reduce inventory." (Electrical Equipment, Appliances & Components)
• "Business conditions continue to improve. Actual sales exceeded budget for the third straight month." (Food, Beverage & Tobacco Products)
• "Demand from automotive manufacturers has continued to improve month over month." (Fabricated Metal Products)
• "We are finally seeing a turnaround." (Primary Metals)
• "Upward price pressure still evident." (Chemical Products)

Continued strength, but a surprise decline in inventory levels.

Source: ISM

Not Sustainable

The WSJ details:

U.S. consumer spending rose twice as fast as income in March as saving dropped to its lowest level in 18 months and a closely watched indicator of inflation remained stable.

Personal income rose 0.3% in March as a weak labor market continued to keep a lid on wage growth, the Commerce Department said Monday.

Meanwhile, consumer spending -- which accounts for 70% of demand in the U.S. economy -- increased by 0.6% from the prior month, likely lifted by government efforts to spur economic growth.

With income growth sluggish, U.S. consumers slowed their pace of saving in March. Americans in March saved $303.9 billion as the national saving rate slid to 2.7% from 3.0% the previous month. The saving rate is at its lowest level since September 2008.

Below is a chart of the cumulative change in the largest sub-component of personal income, compensation, in real terms over the past three years.



And a chart of the same data, but in year over year terms since 1990.

The above disconnect occurred for a number of reasons (less savings, transfer payments [i.e. unemployment], return on financial assets, borrowing [commercial bank credit is down due to defaults, but net borrowing is actually up], and missed mortgage payments [some evidence that people are spending what "should be" their mortgage]).

None of which are sustainable.

As a result, look for consumption to slow unless wages and actual income levels begin to rise.

Source: BEA

Are Retirement Ages Going to Increase?

Paul Kedrosky of Infectious Greed provides a table of the average retirement age for a number of countries and posits:

I would love to be able to peek into 2020 and see what the following chart looks like then, but I will posit one general guess: Every solvent country will average age 70 or over.

Below is a chart showing details of the table in blue, along with the average life expectancy for each country (interesting that there does not seem to be a strong relationship between retirement age and average life expectancy).



I can't say that Paul will be wrong (he very likely is right), but I think there is a "better" (in my opinion) alternative. Rather than work longer, why not "require" less goods / services and enjoy free time more?

In other words, why not become more French?

Source: OECD / Wikipedia

EconomPics of the Week (4/30/10)

These posts are from the last two weeks (no 'EconomPics of the Week' last week as there were only four posts).

Economic Data
GDP Growth Slows in Q1: Back to Reliance on the Consumer
How Far Had We Fallen? A LOT...
Year over Year GDP Breakdown
College Enrollment Rate at New High
Consumer Confidence Increases in April
Corporate Earnings: Mixed, but Broadly Upgraded....
Food and Energy Drive PPI Higher
Leading Indicators... Growing Strength
Continued Widespread Deflation in Japan

Asset Classes / Returns
Fixed Income: One Long Round Trip Edition
Year over Year Housing Prices Up for the First Time Since '06
Is the S&P 500 at Fair Value?
More on the S&P 500 Relative Value
You Call that a "V"?
A Greek Tragedy
The Greek Blow Out
The One Day Unwind?
Just a One Day Unwind...
More on the Housing Overbuild
Consumer Confidence Increases in April
Mass Layoffs...
Texas Manufacturing: Recovery Gaining Traction
Federal Reserve "Printing" Money

And your video of the week... Vampire Weekend with A-Punk

How Far Had We Fallen? A LOT...

I "borrowed" the concept of the chart below from Calculated Risk, which showed the GDP declines from the prior peak for post WWII recessions in REAL terms (this downturn doesn't actually look too different).

The real level is of course more relevant than nominal level in most cases. HOWEVER, nominal matters a lot to country that is very indebted as debt is nominal (i.e. you get to pay it back in nominal, not real terms, which is why the thought of "inflating" debt away is so attractive to some).

As can be seen above, the decline in nominal was really unparalleled over the past 50 years and only now are we back to previous peaks (yet I still calculate us ~$1 trillion below trend). Yet another reason why, on the margin, we are at risk of suffocating under our indebtedness.

Source: BEA

Year over Year GDP Breakdown

Same type of chart as this morning, but with year over year figures (rather than quarter over quarter annualized) and going back to Q1 '09 (every other quarter).



Source: BEA

GDP Growth Slows in Q1: Back to Reliance on the Consumer

Marketwatch details:

U.S. consumer spending rose at the fastest rate in three years in the first quarter of 2010, powering the economy to a 3.2% growth rate, the Commerce Department estimated Friday.

The 3.2% increase in real seasonally adjusted gross domestic product was exactly as expected by economists surveyed by MarketWatch. See our complete economic calendar and consensus forecast.

GDP is up 2.5% in the past year, following the worst downturn in generations. GDP rose at a 5.6% pace in the fourth quarter, primarily because of inventory reductions.

In the first quarter, by contrast, private domestic demand was the main engine of growth. Consumer spending rose at a 3.6% annual rate, while business investments in equipment and software increased at 13.4% pace.

So we're back to relying on an extended consumer for economic growth... nothing changes.

Source: BEA

Continued Widespread Deflation in Japan

Bloomberg details:

Japan’s consumer prices fell for a 13th month in March, indicating the economy remains hampered by deflation even as the export-led recovery starts to spread.

Prices excluding fresh food slid 1.2 percent from a year earlier, after dropping 1.2 percent in February, the statistics bureau said today in Tokyo. The result matched the median estimate of 28 economists surveyed by Bloomberg News.

Source: Stat.GO

College Enrollment Rate at New High

Economix details:

More than 70 percent of the members of the high school graduating class of 2009 were enrolled in college last October. That is the highest portion on record, which goes back to 1959, according to a new Labor Department report.

The below chart provides details of how likely these high school graduates (aged 16-24) were to enter the work force, as well as the success they have had getting actual work.



Not a surprise that those not enrolled in school are more likely to enter the workforce than those enrolled full time, but surprising to me is the lack of relative success someone not enrolled in school has getting a job. My guess is they are looking for the more difficult to get full-time jobs, but that difficulty is likely to explain why the college enrollment rate among high school graduates has continued to increase.

While a tough job market has been a negative over the short-run, an educated work force will hopefully pay dividends over the longer term.

Source: BLS

Just a One Day Unwind...

Yesterday, I asked if the sell-off was just a one day unwind? For the time being, it indeed looks like any dips may still be buying opportunities.



Source: Yahoo

You Call that a "V"?

This... is a V!

Bloomberg with the details (hat tip to Rolfe Winkler).

Junk bonds are trading within a half cent of face value for the first time since June 2007 in a sign investors are convinced the economic recovery and profit growth will keep the neediest borrowers from defaulting.

High-yield bonds rose to 99.67 cents on the dollar, up from a low of 54.78 cents in December 2008, according to Bank of America Merrill Lynch index data (the chart below is the BarCap High Yield index). The debt last reached par on June 11, 2007, just before credit markets began to seize up as losses on subprime mortgages spread.

JPMorgan Chase & Co. and Morgan Stanley Investment Management are recommending investors buy the debt, even after it returned 86 percent since the market bottomed in 2008. Rising profits are making it easier for companies to meet payments, leading Moody’s Investors Service to raise its ratings on 143 junk bonds this year and downgrade 105, data compiled by Bloomberg show. Last year it upgraded 229 and lowered 902.

Source: BarCap

More on the S&P 500 Relative Value

Earlier this week, EconomPic detailed the relationship between the S&P 500 and nominal GDP and asked "Is the S&P 500 at Fair Value?"

Below is additional detail of those results by decade. Pretty interesting to start in the 1920's (the only data point is 1929) and work through the decades. Definitely shows how we got to the point where we were so extended at the earlier part of last decade.



Source: BEA / Irrational Exuberance

A Greek Tragedy

Money CNN details:

The yield on Greek bonds soared to record levels again, a day after Standard & Poor's slashed its debt rating on the country to junk and amid reports that the IMF is considering more loans to the beleaguered country.

The yield on 10-year Greek bonds surged to 11.24% early Wednesday from 9.68% on Tuesday. The yield is the highest for the 10-year since the introduction of the euro in 2002.

The jump in the yield on the Greek bond has led to an enormous spread, of 8.22 percentage points, compared with German bond yields. The yield on the German 10-year bond, considered the European benchmark, slipped to 3.02% early Wednesday.

Source: BarCap

Corporate Earnings: Mixed, but Broadly Upgraded...

In this week's edition of EconomPic Q&A, a new reader asked:

I'm looking for a report on sector earnings. I want to see what percentage of companies have beat/missed earnings in each sector. Any ideas??

Standard & Poor's has a ton of information on their site, including detailed breakout of all sector components of the S&P 500's earnings estimates. Below is not exactly the answer to the question (percent beat / missed, which is broadly ~75-80% "beats"), but rather how much estimates have changed since earnings season began a few weeks back.



Source: S&P

The One Day Unwind?

Or the the start of something bigger?

Performance during today's risk-asset sell-off was rather interesting. Take a look at the order of magnitude of the downturn across asset classes, as well as the sole survivors?

Specifically, take note of the strength in gold in a day when there was a dramatic flight to Treasuries.

Source: Finance

Consumer Confidence Increases in April

Bloomberg reports:

Confidence among U.S. consumers increased in April to the highest level since September 2008 as Americans became more upbeat about the labor market.

The Conference Board’s confidence index rose more than forecast, to 57.9 from 52.3 in March, according to the New York- based private research group. The median forecast of economists surveyed by Bloomberg News projected a rise to 53.5. A measure of expectations was the highest since 2007.

Pessimism is starting to abate after employers added workers to payrolls in three of the last five months. More job growth will be needed to spark bigger gains in confidence, incomes and spending, which accounts for about 70 percent of the economy.

“Consumers are feeling better about the labor market,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, who forecast the index to rise to 57. “If they are to spend more, they need to have jobs.”

Source: Conference Board

Year over Year Housing Prices Up for the First Time Since 2006, But Momentum Weak

The Washington Post details:

Home prices in February posted their first annual increase in more than three years, though it's too early to say the housing market is recovering.

Despite the 0.6 percent increase on a non-seasonally adjusted basis, 11 of the 20 cities in the Standard & Poor's/Case-Shiller home price index showed declines.

The last time prices rose on a year-over-year basis was December 2006. But economists polled by Thomson Reuters had predicted prices to rise 1.2 percent in February.

Home prices are up more than 3 percent from the bottom in May 2009, but still are 30 percent below the May 2006 peak.

On a month to month basis, the Case-Shiller Home Price Index was relatively unchanged on a seasonally adjusted basis (the Composite 20 dipped slightly, the Composite 10 jumped slightly). Both were below estimates.

What is striking is where the month-to-month increases were concentrated... almost entirely in the west.



And the longer view shows the relative strength (i.e. weakness) of the rebound as compared to the fall.

Source: S&P

Mass Layoffs...

BLS reports:

The Good...

The number of mass layoff events in March increased by 58 from the prior month, while the number of associated initial claims decreased by 4,854. The number of events has decreased in 5 of the last 7 months, and the number of initial claims has decreased in 6 of the last 7 months. In March, 356 mass layoff events were reported in the manufacturing sector, seasonally adjusted, resulting in 39,290 initial claims. Both figures registered their lowest levels since August 2007.

The Bad...

During the 28 months from December 2007 through March 2010, the total number of mass layoff events (seasonally adjusted) was 56,937, and the associated number of initial claims was 5,731,683. (December 2007 was the start of a recession as designated by the National Bureau of Economic Research.)

So the trend is moving down, which is clearly good news. But after a whopping 5.7 million mass layoffs over the past year and a half, it is amazing to me that we are still above the median level of mass layoffs of the last 15 years (i.e. at what point have businesses already cut off all the "low hanging fruit").

Texas Manufacturing: Recovery Gaining Traction

RP details:

Texas factory activity increased for the sixth month in a row in April, according to business executives responding to the Texas Manufacturing Outlook Survey. Results of the survey were released April 26 by the Federal Reserve Bank of Dallas. The production index, a key indicator of state manufacturing conditions, climbed further into positive territory as more producers reported increased activity.

Source: Dallas Fed

Is the S&P 500 at Fair Value?

The first chart shows the relative value of the S&P 500 as compared to nominal GDP (to be more specific... the S&P 500 index / nominal GDP in billions $$) since 1929.



And the importance of such a measure.... the ten year forward annualized change in the S&P 500 index vs. the starting S&P 500 to nominal GDP ratio since 1929.



The above has a remarkable 0.73 r-square.

Where are we now? Well, assuming the economy grew at the 3.2% annualized rate that has been forecasted for Q1, at current levels the S&P 500 is ~8.4% of nominal GDP (in billions $$).

Or just about at the 80 year average.

Source: BEA

The Greek Blow Out

Bloomberg details:

The yield premium investors demand to hold the nation’s 10- year bonds rather than German bunds climbed to more than 600 basis points after the Financial Times cited German Finance Minister Wolfgang Schaeuble as saying Greece must firm up plans for deficit reductions in 2011 and 2012, and not just for this year, to qualify for aid. Citigroup Inc. said a reorganization of the debt or need for extra support looks “unavoidable.”

The 10-year Greek bond yield jumped 78 basis points to 9.58 percent as of 11:30 a.m. in London. The 6.25 percent security due in June 2020 slid 4.34, or 43.40 euros per 1,000-euro ($1,333) face amount, to 78.86. The two-year yield jumped 300 basis points to 13.96 percent, after soaring the most on record to 14.66 percent.

Source: BarCap

Fixed Income: One Long Round Trip Edition

A lot has happened since the summer of 2007, about the time when the word "subprime" entered mainstream culture (fun fact, it was the American Dialect Society's word of the year for 2007).

But, for all that's happened (bank failures, recession, credit freeze, unemployment spike, inflation and deflation concerns, quantitative easing, European sovereign risk, housing collapse, oil spike / freefall, etc...) the Treasury, Investment Grade Corporate, High Yield Corporate, and TIPS fixed income sectors (as measured by their BarCap benchmarks) have almost identical cumulative performance over that time frame.



Source: BarCap

Food and Energy Drive PPI Higher

Marketwatch details:

Higher prices for vegetables helped drive U.S. wholesale prices higher by a seasonally adjusted 0.7% in March, reversing a drop in February, the Labor Department estimated Thursday. The producer price index has risen by 6% in the past year, led by a 23% rise in energy prices, the government agency said.

Excluding often-volatile food and energy prices, the core PPI increased 0.1% in March and is up 0.9% compared with a year earlier. The big story in the March PPI was wholesale food prices, which rose 2.4%, matching the biggest gain in 26 years. Prices of fresh and dried vegetables soared 49.3%, the most in 16 years.

Source: PPI