How The Bear Popped The Bubble!

Gather 'round all ye bubble-sitting families and partake in a reading of this warm old holiday classic by Dr. SoldAtTheTop! (Originally posted Christmas 2006!)

***

Every Bull
Down in Bull-ville
Liked the Housing Bubble a lot...

But the Bear,
Who lived just South of Bull-ville
Did NOT!

The Bear hated the Bubble!
He blamed the Fed, rates and lending!
But the Bulls didn't care, they just kept right on spending.
It could be that Bulls were just very trendy.
It could be, perhaps, they were whipped into a speculative frenzy.
But I think the most likely reason of all
May have been that their noggins were two sizes too small.

But,
Whatever the reason,
Their heads or the craze,
They continued to spend, for days upon days.
And the Bear, staring up from his cave down below
Sensed the limit had been reached, things were going to BLOW!
For he knew every Bull up in Bull-ville that night
Had stretched every dollar, squeezed their finances tight.

"And they're going back for more!" he could see to his dismay
"This just cannot last, not for one more day!"
Then he ran to his closet to fetch a loud-speaker
"I MUST warn them all, before they get in any deeper!"
For, the Bear knew...

...All the Bull girls and boys
Who had been flipping, and borrowing and buying up toys
Were all skirting the edge, sitting perfectly poised
For collapse that once realized... oh, the noise! Noise! Noise! Noise!

Then the Bulls, young and old, will be in a terrible fix.
And they'd have to hunker down and stop all their mad tricks!
And the economy... oh what a mighty deep-six!
It will sink faster than boat load of bricks!

And THEN
Something would happen that he liked least of all!
Every Bull up in Bull-ville, the tall and the small,
Would all start to panic, when home prices stop swelling.
They'd reverse the craze… they'll all begin selling!

They'd sell! And they'd sell!
AND they'd SELL! SELL! SELL! SELL!
And the more the Bear thought of the Bull-Panicky-Sell
The more the Bear thought "This is NOT going to end well!"
"Why for almost a decade I've watched the bubble inflate!
I MUST warn them now!
Before it's TOO LATE!"

THEN
He mounted the loud-speaker
To the top of his car
And a siren with flood lights
That were blazing like stars

Then the Bear said, "I’m off!"
And he drove forty blocks
Toward the homes that the Bulls
Had been trading like stocks.

All their windows were bright. Flat panel glow filled the air.
All the Bulls were all carrying-on without even a care
When he came to a stop in the Bull-ville town square.
"This is the best place," the Bear thought as he reached
For the microphone that he would use when he preached.

THEN
Click! On went the siren, the lights and the speaker!
Then the Bear started yelling! "Things are looking bleaker and bleaker!
You all must come out, listen to what I have to say
Give me a chance to appeal to your senses today!"

Then one Bull emerged through his front door.
Then another came out, and some more... then still more.
Soon the square was abuzz with a large crowd of Bulls
All grumbling and muttering about association rules.

But the Bear went on "You are all in grave trouble!
I have come here to warn you of the Great Housing Bubble!
You see it's been inflating, stretching thinner and thinner..
If you don't stop now, there will be almost no winners!"

"This is the greatest Ponzi-scheme ever devised
Where all of you have been convinced to not question your eyes.
Just go right on speculating... pushing prices up higher
And assume there will always be a greater fool buyer!"

"But Things are now not looking so hot...
Home sales are plunging, The builders are shot!
Inventory is rising, there is no place to hide.
Soon you will be in for a vicious price slide!"

Then he clicked off the speaker and he heard not a sound.
The Bulls all looked puzzled, just standing around.
Then one Bull, an Economist named David Lereah (Pronounced Le-ray)
Stood up and he shouted, "I have something to say!"

"You are a very foolish Bear!" He said with a sigh
"This is a GREAT time to SELL or to BUY!
Yes prices are moderating, that much is sure true.
But that is a HEALTHY sign that the market will pull right on through.
I've seen all the numbers, I release them you know...
And what I've seen is STABILIZATION as we level off at the low"

"So pack up your things and head off down the hill!
We don't need your type of hype in Bull-ville!"

So the Bear did as he was told, all downhearted and grim.
He silently opened his car door and stepped in.
And he backed down the hill and then crawled into his cave.
And he thought about the Bull-ville that he failed to save.

But just then the Bear heard a horrible sound!
A massive explosion that sent shock waves through the ground!
As he looked from his window, he could not believe either eye...
The whole of Bull-ville had been blown to the sky!

And what happened then...?
Well, in Bear-ville they say
That although he was sad...
His pride grew three sizes that day!
And the minute his heart stopped feeling so blue
He published a book titled "What To Do and Not To Do If a Bubble Finds You!"

The Chicago Fed National Activity Index: November 2012

The latest release of the Chicago Federal Reserve National Activity Index (CFNAI) indicated a slight improvement for the national economy with the index climbing to a tepid level of .10 from a notably weak level of -.64 in October while the three month moving average improved to a weak level of -0.20.

The CFNAI is a weighted average of 85 indicators of national economic activity collected into four overall categories of “production and income”, “employment, unemployment and income”, “personal consumption and housing” and “sales, orders and inventories”.

The Chicago Fed regards a value of zero for the total index as indicating that the national economy is expanding at its historical trend rate while a negative value indicates below average growth.

A value at or below -0.70 for the three month moving average of the national activity index (CFNAI-MA3) indicates that the national economy has either just entered or continues in recession.

New Residential Construction Report: November 2012

Today’s New Residential Construction Report showed mixed results for November with a slight slip in single family permits and significant declines to total and single family starts but with gains to total permits.

Single family housing permits, the most leading of indicators, dropped 0.2% from October to 565K single family units (SAAR), and increased 25.3% above the level seen in November 2011 but still remained an astonishing 68.58% below the peak in September 2005.

Single family housing starts declined a whopping 4.1% from October to 565K units (SAAR), but rose 22.8% above the level seen in November 2011 but still remained 69.01% below the peak set in early 2006.

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings December 2012

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing continued improvement in December with the composite HMI index rising to 47 while the "buyer traffic" index improved to 36, a level not seen since early 2006.

While all indicators have made truly spectacular improvements this year, it's important to note that conditions still remain fairly distressed by historic standards.

Although, looking at the data, it is fairly clear that the last few months of results indicate a major change in builder sentiment likely coming as a result of improvements in confidence given the notable rise in buyer traffic, reduced inventory and a more balanced monthly supply.

The Empire State Manufacturing Survey: December 2012

The Empire State Manufacturing Survey consists of a series of diffusion indices distilled from a monthly survey of New York regional manufacturing executives and seeks to identify trends across 22 different current and future manufacturing related activities.

Today’s report showed a slight decline for current assessments of manufacturing activity and an improvement to future assessments with the current activity index falling to a notably weak level of -8.1 while future activity improved to 18.66.

Current prices paid rose to 16.13 while current new orders weakened to -3.7 as assessments of future new orders improved to 32.26.

Production Pullback: Industrial Production November 2012

Today, the Federal Reserve released their monthly read of industrial production and capacity utilization showing notable increase in November with total industrial production increasing 1.05% since October and rising 2.51% above the level seen in November 2011.

Capacity utilization also jumped 0.91% from October and climbing 0.93% above the level seen in November of 2011 to stand at 78.42%

It's important to recognize that though the "recovery" is well over two years old, both industrial production and capacity utilization are notably below the peaks set in late 2007.

Envisioning Employment: Employment Situation November 2012

Today’s Employment Situation Report indicated that in November, net non-farm payrolls increased adding 146,000 jobs overall with the private non-farm payrolls sub-component adding 147,000 jobs while the civilian unemployment rate declined to 7.7% over the same period.

Net private sector jobs increased 0.13% since last month climbing 1.76% above the level seen a year ago but remained a whopping 3.21% below the peak level of employment seen in December 2007.

Recovery-less Recovery: Unemployment Duration November 2012

Be sure to bookmark the "Scary Unemployment Dashboard"... it's live.

Today's employment situation report showed that conditions for the long term unemployed improved in November remaining epically distressed by historic standards.

Workers unemployed 27 weeks or more decreased to 4.786 million or 40.1% of all unemployed workers while the median number of weeks unemployed dropped to 19.0 weeks and the average stay on unemployment declined to 40.0 weeks.

Looking at the charts below (click for super interactive versions) you can see that today’s sorry situation far exceeds even the conditions seen during the double-dip recessionary period of the early 1980s, long considered by economists to be the worst period of unemployment since the Great Depression.

On The Margin: Total Unemployment November 2012

Today’s Employment Situation report showed that in November “total unemployment” including all marginally attached workers declined slightly to 14.4% while the traditionally reported unemployment rate also declined to 7.7%.

The traditional unemployment rate is calculated from the monthly household survey results using a fairly explicit definition of “unemployed” (essentially unemployed and currently looking for full time employment) leaving many workers to be considered effectively “on the margin” either employed in part time work when full time is preferred or simply unemployed and no longer looking for work.

The Bureau of Labor Statistics considers “marginally attached” workers (including discouraged workers) and persons who have settled for part time employment to be “underutilized” labor.

The broadest view of unemployment would include both traditionally unemployed workers and all other underutilized workers.

To calculate the “total” rate of unemployment we would simply use this larger group rather than the smaller and more restrictive “unemployed” group used in the traditional unemployment rate calculation.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims December 06 2012

Today’s jobless claims report showed declines for both initial and continued jobless claims as initial claims dropped below the closely watched 400K level.

Seasonally adjusted “initial” unemployment claims declined by 25,000 to 370,000 claims from a revised 395,000 claims for the prior week while seasonally adjusted “continued” claims declined by 100,000 claims to 3.205 million resulting in an “insured” unemployment rate of 2.5%.

Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 2.04 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 2.83 million people that are currently counted as receiving traditional continued unemployment benefits, there are 4.88 million people on state and federal unemployment rolls.

ISM Non-Manufacturing Report on Business: November 2012

Today, the Institute for Supply Management released their latest Non-Manufacturing Report on Business indicating that service related business activity was improved in November with the business activity component climbing and the overall non-manufacturing index rising to 54.7 from 54.2 in October.

At 61.2 the business activity index rose a notable 10.47% since October climbing 9.09% above the level seen a year earlier.

This month, service industry respondents are sounding mixed reporting some "cautious" optimism as well as "lagging" conditions:


"Cautiously optimistic is the best way to describe customer sentiment. Revenue continues to remain well below last year, but seems to have finally reached a point of stability. Price pressures are beginning to ease and customer traffic is once again picking up." (Arts, Entertainment & Recreation)

"We have experienced an estimated 25 percent [increase] in new job orders, and in new hires for services." (Professional, Scientific & Technical Services)

"Some companies seemed slower to make hiring decisions and/or place new positions on hold due to uncertainty in the economy and political climate." (Management of Companies & Support Services)

"Worries about global slowdown persist; however, the housing market appears to have hit its lows and is beginning to climb. This is good news for governmental tax base projections." (Public Administration)

"Hurricane Sandy has impacted our business activity tremendously. This emergency should not be misconstrued as a positive increase in business as usual; we merely facilitated emergency equipment and supplies to be delivered to the affected areas and the emergency responders." (Wholesale Trade)

"Sales continue to lag, but there are signs of improvement." (Retail Trade)

ADP National Employment Report: November 2012

Today, private staffing and business services firm ADP released the latest installment of their National Employment Report indicating that the situation for private employment in the U.S. improved in November as private employers added 118,000 jobs in the month bringing the total employment level 1.62% above the level seen in November 2012.

Perusing the rest of the data in the ADP dataset you can see the the economy is currently showing the most growth for small to mid-sized service providing jobs with goods-producing jobs remaining near trough levels.

Look for Friday’s BLS Employment Situation Report to likely show somewhat similar trends.

Reading Rates: MBA Application Survey – December 05 2012

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages as well as the volume of both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage (from FHA and conforming GSE data) decreased 2 basis point to 3.43% since last week while the purchase application volume increased a slight 0.10% and the refinance application volume increased 6% over the same period.

Clearly, the Federal Reserve's QE3 announcement and implementation has had a notable effect on mortgage rates in recent weeks continuing to lift refinance application activity and possibly helping to establish a base of sorts to purchase applications.

The question is though, if the Fed is stimulating this activity by forcing artificially low rates, what would these trends look like if prevailing rates were based on a more fundamental market function?

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006 as well as the purchase, refinance and composite loan volumes (click for larger dynamic full-screen version).

Recession 2013....Redux

Last month I reported on a relatively new recession probability indicator (… the “markov switching” series recently introduced to the Fed FRED/Blytic) that was giving a pretty clear, though preliminary, indication of probable recession.

While I noted that the series was highly revised, I pointed out that even taking into account the revisions, the series was giving a recession signal since using just the "maximum" reported values (values that had been all been revised lower) the reporting 20% probability was very unusual and typically associated to oncoming trouble.

In the latest release of the data we find that not only has the September (... there is a lag) value come in at a relatively low level of 2.94% probability of recession, the August number has now been revised down from 19.6% to 3.8%.

It's important to note though that the point of my prior post was to highlight just the "maximum" reported values and while the latest release revises down the 19.6% and reports an additional low probability for the latest month, it makes no difference... the fact remains that this series has NOT given such a significant over estimate of recession without there being a probable recession ahead.

Now clearly, there could always be a first time... this is just estimated data... but the prior 19.6% reported figure clearly argues for following this series very closely in the coming months.  

ISM Manufacturing Report on Business: November 2012

Today, the Institute for Supply Management released their latest Report on Business for the manufacturing sector indicating that manufacturing activity declined in November.

At 49.5 the purchasing manager’s composite index (PMI) declined 4.26% since October and dropped 5.17% below the level seen a year earlier giving an indication of contracting manufacturing activity for the fourth time in six months.

Respondents now appear to have decidedly negative assessments with most indicating sluggish activity and even some mention of looming recession:

"Conditions still appear to be positive for continued growth in sales." (Machinery)

"Business is steady, but not much more than that. We are in a lull." (Food, Beverage & Tobacco Products)

"The principle business conditions that will affect the company over the next three or four quarters will be the U.S. federal government tax and budgetary policies; the impact of those policies is not yet clear." (Petroleum & Coal Products)

"Differences between first half of year and remaining half are very dramatic, growing to a peak in the middle of the year with a gradual decline since." (Plastics & Rubber Products)

"Seeing a slowdown in request for quote activity." (Computer & Electronic Products)

"The fiscal cliff is the big worry right now. We will not look toward any type of expansion until this is addressed; if the program that is put in place is more taxes and big spending cuts — which will push us toward recession — forget it." (Fabricated Metal Products)

"Seeing a slowdown in demand across markets." (Electrical Equipment, Appliances & Components)

"Economy is very sluggish. Production is down and orders have slowed considerably from Q1." (Transportation Equipment)

"East Coast storms delayed some shipments." (Primary Metals)

"Global economic uncertainty still seems to be sticking around which is not necessarily making things worse, but it is also not making things better from a demand standpoint." (Chemical Products)

Constuction Spending: October 2012

Today, the U.S. Census Bureau released their latest read of construction spending showing better results in October with total construction spending with both residential and non-residential components improving since September. 

On a month-to-month basis, total residential spending increased a notable 3.00% from September climbing 22.60% above the level seen in October 2011 while still remaining a whopping 56.50% below the peak level seen in 2006.

Single family construction spending climbed a notable 3.61% since September rising 31.52% since October 2011 but remained a whopping 69.97% below it's peak in 2006.

Non-residential construction spending increase a slight 0.27% since September and rose 6.09% above the level seen in October 2011 and remained a whopping 30.13% below the peak level reached in October 2008.

The following charts (click for larger dynamic versions) show private residential construction spending, private residential single family construction spending and private non-residential construction spending broken out and plotted since 1993 along with the year-over-year, month-to-month and peak percent change to each since 1994 and 2000 – 2005.

Bull Trip!: GDP Report Q3 2012 (Second Estimate)

Today, the Bureau of Economic Analysis (BEA) released their second "estimate" of the Q3 2012 GDP report showing that the economy continued to expand with real GDP increasing at an annualized rate of 2.7% from Q2 2012.

On a year-over-year basis, real GDP increased 2.67% while the quarter-to-quarter non-annualized percent change was 0.66%.

The latest quarterly results indicate that the most notable source of weakness in the economy came from declines to fixed non-residential investment in structures, equipment and software with the nonresidential investment component declining at an annualized rate of -2.2% from Q2.

Residential investment, on the other hand, worked to buoy the overall fixed investment component growing at an annualized rate of 14.2% from Q2.

Keep in mind that these results are likely very poorly estimated and are sure to be revised notably in following quarters and even years to come.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims November 29 2012

Today’s jobless claims report showed declines for both initial and continued jobless claims as initial claims dropped below the closely watched 400K level.

Seasonally adjusted “initial” unemployment claims declined by 23,000 to 393,000 claims from a revised 416,000 claims for the prior week while seasonally adjusted “continued” claims declined by 70,000 claims to 3.287 million resulting in an “insured” unemployment rate of 2.6%.

Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 2.15 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 2.94 million people that are currently counted as receiving traditional continued unemployment benefits, there are 5.10 million people on state and federal unemployment rolls.

New Home Sales: October 2012

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for October showing a slight monthly decline with sales falling 0.3% since September but rising 17.2% above the level seen in October 2011 though remaining at an historically low level of 368K SAAR units.

It's important to recognize that the inventory of new homes appears to now be bouncing around a very low 147K units, near the lowest level seen in in at least 47 years while the median number of months for sale has improved to 5.9.

The monthly supply increased to 4.8 months while the median selling price increased 5.74% and the average selling price increased 7.89% from the year ago level.

The following chart show the extent of sales decline to date (click for full-larger version).