Fat-Finger Trading?!?!?

Hitting a “B” instead of an “M”!… HUH?!

Sorry if I’m having a little difficulty believing this story… something is amiss…

Could a single trade cascade into this type of selling?

You have the Greece tumult, the U.K. election, euro plunging, a massive oil spill, China slowing, housing weakening, long term unemployment picture looking dire, new financial regulation…. Is this panic selling? Are we seeing “plunge protection”? Is the Bear Back?!? What is going on?

Interesting times to say the least.

Mad Money!

It’s pretty shocking how nimbly the “investment” community has integrated the fallout from the latest crisis into their settled outlook.

Yet, given the speculative nature of the times we live, with now decades of boom-bust binges, possibly that should be expected but still, the latest episode is so colossal and shocking.

If you could go back in time to even just 2005 and tell CNBC viewers that soon home prices would plunge 20% - 60% and that the largest government sponsored debt scam ever devised, Fannie and Freddie, would collapse along with many of the top financial institutions leading to a decade of job creation being totally wiped out and trillion dollar government deficits for as far as the eye could see … what would they think?

They would surely not believe you and those that did would likely panic and buy gold, guns and provisions.

Yet, in reality we are somehow beyond the panic… and as far as the investment community goes… Boo-yah! They are out from the bunkers and riding a myriad of new speculative plays as if the backdrop of massive crisis and looming government default holds no weight.

Likely as a consequence of looming default we see gold in a protracted bull-run but retailers? Bank stocks? Internet stocks? Just about any issue in the S&P 500?

In any event, he following chart (click for full-screen dynamic version) illustrates our current predicament very clearly… study it closely and put in proper perspective the prospects we now face.

On The Stamp: Food Stamp Participation June 2009

As a logical consequence of the prolonged economic downturn it appears that participation in the federal food stamp program is on the rise.

In fact, household participation has been climbing so steadily that it has far surpassed the last peak set as a result of the immediate fallout following hurricane Katrina.

The latest data released by the Department of Agriculture shows that, on a year-over-year basis, household participation has increased a whopping 23.56% while individual participation, as a ratio of the overall population, has increased 21.40%.

The June results confirm that participation is continuing to climb dramatically, likely as a result of the recent jump in total unemployment, driving the nominal benefit costs up an astounding 61.22% on a year-over-year basis to $4,675,586,160 for the month.

Looking at the last chart that plots the total unemployment rate (unemployment rate of all traditionally unemployed workers plus all marginally attached and part time workers) and the population adjusted individual program participation rate normalized since 2005, one can plainly see that program participation would be expected to continue its surge.

Manufacturing Inflation?

Ahead of tomorrow’s Q2 2009 Productivity and Costs report I thought I would highlight and interesting trend emerging in the manufacturing components that might signal early inflationary pressures.

It appears that along with the immense, yet typically timed, cyclical decline in manufacturing output that commenced (more or less) in Q1 2008 came an uncharacteristically large decline in manufacturing productivity.

In fact, Q4 2008 (-1.98%) and Q1 2009 (-3.18%) registered the first annual declines in manufacturing “output per hour” in over 20 years that the Bureau of Labor Statistics (BLS) has tracked manufacturing productivity.

To make matters worse, real hourly compensation appears to be increasing at the fastest annual rate on record jumping 8.65%.

The combination of plummeting productivity and surging labor costs is working to push the “unit labor costs” into the stratosphere… a possible harbinger of higher consumer prices.

Of course, we have to remember that the American manufacturing sector has looked pretty sickly since 2000 so while these early inflationary signals may serve as an interesting academic exercise, they likely don’t tell the full story.

A more concerning inflationary development that I’ll post on after tomorrow’s Q2 release is that a similar trend of higher real hourly labor costs outstripping gains in hourly productivity appears to be playing out in the more general business sector component…. Though it will be helpful to also reflect on the employment cost index in order to really get a thorough sense of any early inflationary action…. More to come!

The following chart (click for larger dynamic version) shows manufacturing output since 1987 along with the annual percentage change. Notice that after a fairly robust run-up during the 1990s, manufacturing activity weakened notably in the 2000s and since Q3 2008 has been seriously on the ropes.

Also interesting is that fact that during the recessionary periods of the early 1990s and 2000s there were consistent gains in productivity even as the contraction side of the business cycle worked to significantly ebb total hours worked... today though it appears a different trend is playing out.

Next, take a look at manufacturing “output per hour” versus “real compensation per hour” … notice that output has declined on a year-over-year (… green bars) basis now for two quarters … the first annual declines on record.

Also note that “real compensation” (… black bars) is surging at the fastest annual pace on record.

Given that annual gains in real compensation have rarely outstripped gains in hourly output over the last 20+ years what we are seeing today, a combination of surging compensation and declining productivity, is truly unusual.

Finally, looking at the seasonally adjusted manufacturing “unit labor cost” you can see the result today’s unusual dynamics… is unusual increases in general price inflation on the way?

Massive Unemployment: Mass Layoffs May 2009

Today, the Bureau of Labor Statistics (BLS) released the May installment of the Mass Layoff Report clearly showing continued deterioration of the nation’s job market with 2738 mass layoff events resulting in 289,628 initial unemployment claims causing the six month moving average of non-seasonally adjusted mass layoff events to jump by 76.42% while total initial claimants increased 81.62% on a year-over-year basis.

Further, as you can see clearly from the charts below (click for full-screen super-interactive zoom-able chart) May typically brings a solid seasonal DECLINE in both mass layoff events total initial unemployment claims filed… this year however…. Things are different.

As I have pointed out in prior posts, mid-July marks the next typical seasonally spike in unemployment activity (a trend clearly seen in the non-seasonally adjusted initial unemployment claims series as well as the non-seasonally adjusted mass layoff data) and it appears from today’s mass layoff results, that the July peak may be notable.

Notice from the data below that the typical May decline in mass layoffs did NOT occur and, in fact, look to be surging… This is likely giving us an early indication that the July spike will be worse than normal.

The BLS considers a mass layoff event to be a condition where there are at least fifty initial claims for unemployment insurance originating from a single employer over a period of five consecutive weeks.

Follow The Leader: Index of Leading Economic Indicators May 2009

Today’s results of the Conference Board’s Leading Economic Indicators showed another significant monthly increase climbing 1.2% compared to April while cutting the annual decline to just 1.67% compared to May 2008 leaving the index at a level of 100.2.

On the face of it this is clearly a Bullish “Green Shoots” development as this series (an aggregate of 10 component leading indices) is signaling a clear shift from leading contraction to expansion though the strong “V”-shaped bounce is clearly reflecting the large move up in stocks recently as well as a six month surge in M2 (both components).

On The Stamp: Food Stamp Participation March 2009

As a logical consequence of the prolonged economic downturn it appears that participation in the federal food stamp program is on the rise.

In fact, household participation has been climbing so steadily that it has surpassed the last peak set as a result of the immediate fallout following hurricane Katrina.

The latest data released by the Department of Agriculture shows that, on a year-over-year basis, household participation has increased a whopping 18.93% while individual participation, as a ratio of the overall population, has increased 17.87%.

The March results confirm that participation is continuing to climb dramatically, likely as a result of the recent jump in total unemployment, driving the nominal benefit costs up 34.17% on a year-over-year basis to $3,775,669,351 for the month.

Looking at the last chart that plots the total unemployment rate (unemployment rate of all traditionally unemployed workers plus all marginally attached and part time workers) and the population adjusted individual program participation rate normalized since 2005, one can plainly see that program participation would be expected to continue its surge.

Ticking Prime Bomb!: Fannie Mae Monthly Summary April 2009

Decades from now the summer of 2008 will likely be remembered to mark the turning point where legislative blundering took an otherwise serious financial crisis and molested it into an epic financial collapse.

By fully assuming the liabilities of Fannie Mae and Freddie Mac, the two colossal and corrupt (and conduit of corruptness funneling junk Countrywide Financial loans onto the implied balance sheet of the federal government) government sponsored enterprises, the federal government, led by Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke, has thrust taxpayers into an abyss of insolvency with one mighty shove.

Given the sheer size of these government sponsored companies, with loan guarantee obligations recently estimated by Federal Reserve Bank of St. Louis President William Poole of totaling $4.47 Trillion (That’s TRILLION with a capital T… for perspective ALL U.S. government debt held by the public totals roughly $4.87 Trillion) this legislative reversal making certain the “implied” government guarantee is reckless to say the least.

The following chart (click for larger) shows what Fannie Mae terms the count of “Seriously Delinquent” loans as a percentage of all loans on their books.

It’s important to understand that Fannie Mae does NOT segregate foreclosures from delinquent loans when reporting these numbers and that should they report the delinquent results as a percentage of the unpaid principle balance, things might likely look a lot worse.

Finally, the following chart (click for larger) shows the relative movements of Fannie Mae’s credit and non-credit enhanced (insured and non-insured) “Seriously Delinquent” loans.

Mid-Cycle Meltdown!: Jobless Claims June 04 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims declined 4,000 to 621,000 from last week’s upwardly revised 625,000 claims while “continued” claims declined 15,000 resulting in an “insured” unemployment rate of 5.0%.

It’s important to note that the two most significant periods for job cuts on a non-seasonally adjusted basis is January 15 and July 15 so as July and clearer visibility on H2 quickly approaches it will be interesting to see how initial jobless claims fares.

Also, the continuing claims series is presenting the clearest picture of what is likely to be one of the most problematic aspects of this period of economic crisis namely how to make an immense and growing number of highly specialized (college educated) service/professional service workers productive again.

It’s obvious now that we have reached the first real test of our majority services-based economy.

Unlike the “tech-wreck” of 2000-2002, our current downturn is very broad, leaving no sector and virtually no corner of the country untouched.

With millions of college educated workers now on the market incomes will clearly suffer but moreover, it will be soon all too clear that our prior bubble economy significantly overproduced service workers (particularly professional service workers) for which current employment opportunities will be scant resulting in continued and fundamental vicious-cycle effects.

The following chart shows the recent trend in initial non-seasonally adjusted initial jobless claims with the year-over-year percent change acting as a rough equivalent of a seasonally adjustment.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

I have added a chart to the lineup which shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit but as you can see, the pattern is still indicating that recession has arrived.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

NOTE: The charts below plot a “monthly” average NOT a 4 week moving average so the latest monthly results should be considered preliminary until the complete monthly results are settled by the fourth week of each following month.

As you can see, acceleration to claims generally precedes recessions.


Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).


In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a “flattening” period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the “mid-cycle slowdown” where for various reasons growth has generally slowed but then resumed with even stronger growth.

Until late 2007, one could make the case (as Fed chief Ben Bernanke surly did) that we were again experiencing simply a mid-cycle slowdown but now those hopes are long gone.

Adding a little more data shows that in the early 2000s we experienced a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing “initial” and “continued” unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

The most notable feature of the post-“dot com” recession era that is, unlike other recent post-recession eras, job growth has been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

It is now completely clear that the potential “mid-cycle” slowdown that appeared to be shaping up in late 2007, had been traded for a less severe downturn in the aftermath of the “dot-com” recession, and now has we have fully entered, instead, a mid-cycle meltdown.

Bull Trip!: GDP Report Q1 2009 (Preliminary)

Today, the Bureau of Economic Analysis (BEA) released their second installment of the Q1 2009 GDP report showing a (revised) significant contraction with GDP declining at an annual rate of -5.7%.

Easily the most notable features of today’s report are the stunning declines to residential and non-residential as well as exports of both goods and services.

Fixed investment provided significant drags on growth with non-residential investment declining a whopping -36.9% and residential investment plunging -38.7% while net exports of goods and services declined -28.7%.

Making a positive contribution to GDP were equally stunning declines to imports of goods and services slumping -34.1% as well as positive personal consumption expenditures increasing 1.5%.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

The Almost Daily 2¢ - “L” Is For ILLusion!

There is simply no such thing as an “L”-shaped recession (or recovery as some seem to call it).

It’s more than a misnomer… it’s a figment of our seriously delusional collective imagination.

An economy either expands or it contracts… it either sheds jobs or it gains them… stock markets either grow in value in “real” terms or they contract in value in “real” terms…

Now, you can always find a period whereby you can pick points on a data series where the value has gone nowhere… for example, the average “real” (inflation adjusted) value of the S&P 500 during April of 1995 is roughly equivalent to its “real” value during February of 2009.. does that constitute an “L” whereby the stock averages value had gone nowhere for 14 years?... of course not… during that period stocks trended up and then, since 2000, down.

We know innately (whether we want to admit it or not) that what’s important is the trend and you would be hard pressed to find a period where a given important economic data point (unemployment, stock index, non-farm payrolls, consumer prices, etc.) simply went sideways.

Japan is most often cited as the prototypical example of an “L”-shaped economy yet upon closer inspection (look at the “real” NIKKIE 225 for instance) we will see that the trend has NOT been sideways but, in fact, down.

Japan didn’t have a “lost decade”… it’s quickly approaching a “lost score”.

Again, as I have often cited, our own economy is nearing its own “lost” moniker as the latest economic decline sets new lows in arguably the two most notable barometers of macroeconomic health, Jobs and Stocks.

So it’s not surprising that we, collectively, have a hard time digesting the trend seen above as it speaks volumes for our general economic climate and, of course, all it speaks is bad.

But it’s also important to recognize when we are inventing a theme that in some way assuages the collective mood rather than deals in reality.

An “L”-shaped recession is a simple pictographic theme … an “L”-shaped recession is better than a “\”-Shaped depression…

A “jobless recovery” is a better theme than “the weakest job recovery in history” or the more recent reality the “all the jobs gained since the 2002 ‘expansion’ have now been lost … and then some … while work age population has increased over 20 million over the same period” theme.

These realities are hard to accept but equally hard to avoid.

At the beginning of this year I began developing a theme of my own… The “PRIME BOMB!”… which you can read in better detail here and here… and, as of today’s headlines, appears to be gaining some significant traction on the playing field of reality.

New Home Sales: April 2009

Subtitle: Still… No Bottom…

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for April showing a continued deterioration in demand for new residential homes with a 33.96% year-over-year decline and a truly horrendous 74.66% peak sales decline nationally.

The following charts show the extent of sales declines seen since 2005 as well as illustrating how the further declines in 2009 are coming on top of the 2006, 2007 and 2008 results (click for larger versions)


It’s important to note that although the new home sales data appears to have prompted the traditional media to make many “bottom calls” recently, the evidence for their conclusions are scant.

First, most “bottom callers” have focused too closely on just the new home sales series and its historic bottoms rather than other important indicators that disclose a more complete state of the new home market.

As I have argued recently, the level of inventory and supply and level of completed new homes are still too high for a real sustained bottom for the new home market.

The following chart (click for larger) plots the new home sales (SAAR) series along with the current inventory level (NA) and the level of homes completed (NA) since 1973.

As you can see, although the new home sales series has breached the lowest level in over 30 years, the level of inventory (homes for sale at end of period) still remains higher than past historic bottoms and the level of homes completed remains much higher.

In fact, the level of completed new homes remains WELL ABOVE the PEAK levels for past housing boom periods… a truly bad sign for pricing going forward.

Make no mistake, I’m not suggesting that these three series will all bottom simultaneously, a simple cursory review of the chart above will dispel that notion, BUT I believe that if you consider the downward trend in home prices, the state of the job market, the lack of credit availability as well as the extent of the former boom (just look at the run builders had above.. steadily increasing sales from January 1991 to July 2005… truly unparalleled!) any sustained bottom is still a long way off.

The new home market might be in the process of clearing but at the moment it still looks seriously impaired and of the steadily shrinking pool of prospective buyers (from lack of confidence, lack of job or lack of cash and credit availability) those who wait to buy will almost certainly continue to find better pricing…. Thus sales will continue to fall.

Look at the following summary of today’s report:

National

• The median sales price for a new home declined 14.89% as compared to April 2008.
• New home sales were down 33.96% as compared to April 2008.
• The inventory of new homes for sale declined 35.4% as compared to April 2008.
• The number of months’ supply of the new homes has decreased 2.9% as compared to April 2008 and now stands at 10.1 months.

Regional

• In the Northeast, new home sales were down 52.5% as compared to April 2008.
• In the Midwest, new home sales were down 45.8% as compared to April 2008.
• In the South, new home sales were down 25.4% as compared to April 2008.
• In the West, new home sales were down 39.7% as compared to April 2008.

S&P/Case-Shiller: March 2009

Today’s release of the S&P/Case-Shiller home price indices for March 2009 again confirms the washout conditions seen in the nation’s housing markets with ALL of the 20 metro areas tracked reporting significant year-over-year declines and ALL metro areas showing large and even shocking declines from their respective peaks.

Further, March brought a slight seasonal deceleration of the month-to-month price slide with the 10-city index dropping 2.06% and the 20-city index dropping 2.17% since February.

Even a cursory glance at the charts below should result in the firm understanding that what we are experiencing today is unprecedented.

Thirty three months into the decline and the bottom to the home price slide is nowhere in sight.

The most optimistic argument one could make at the moment is that the pace of the decline is currently slower than it was a few months ago.

That should come as little comfort though considering that this decline will more than likely continue for another two to three years.

It’s important to consider that the 90s housing bust took roughly 50 months to reach the bottom in prices but as you can see from the charts below, our current housing bust literally dwarfs the 90s era tumult.

Further, the 90s housing recovery played out against the backdrop of a truly unique period of growth in the wider economy fueled primarily by novel and ubiquitous technological change (cell phones, internet, personal computers, telecommunications, etc).

In all likelihood, our current decline will play out at least as long as the 90s era (more than likely far longer) with a full recovery measured not in years but in decades.

The 10-city composite index declined 18.65% as compared to March 2008 far firmly placing the current decline in uncharted territory in terms of relative intensity.

Topping the list of regional peak decliners were Phoenix at -53.03%, Las Vegas at -50.40%, Miami at -47.00%, San Francisco at -46.07%, Detroit at -44.13%, San Diego at -42.25%, Los Angeles at -41.27%, Tampa at -40.62%, Washington DC at -33.88%, Minneapolis at -36.23%, Chicago at -27.44%, Seattle at -22.50%, Cleveland at -21.56% and Boston at -20.07%.

Additionally, both of the broad composite indices showed significant declines slumping -33.09% for the 10-city national index and 32.21% for the 20-city national index on a peak comparison basis.

To better visualize the results use the PaperEconomy S&P/Case-Shiller/Futures Charting Tool as well as the PaperEconomy Home Value Calculator and be sure to read the Tutorial in order to best understand how best to utilize the tool.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as compared to each metros respective price peak set between 2005 and 2007.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as on a year-over-year basis.

Additionally, in order to add some historical context to the perspective, I updated my “then and now” CSI charts that compare our current circumstances to the data seen during 90s housing decline.

To create the following annual charts I simply aligned the CSI data from the last month of positive year-over-year gains for both the current decline and the 90s housing bust and plotted the data with side-by-side columns (click for larger version).

What’s most interesting about this particular comparison is that it highlights both how young the current housing decline is and clearly shows that the latest bust has surpassed the prior bust in terms of intensity.

Looking at the actual index values normalized and compared from the respective peaks, you can see that we are still likely less than half of the way through the portion of the decline in which will be seen fairly significant annual declines (click the following chart for larger version).

The “peak” chart compares the percentage change, comparing monthly CSI values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.


In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 97 months (over 8 years) peak to peak including roughly 43 months of annual price declines during the heart of the downturn.

Notice that peak declines have been FAR more significant to date and, keeping in mind that our current run-up was many times more magnificent than the 80s-90s run-up, it is not inconceivable that current decline will run deeper and last longer.