Unemployment Mashup – MA vs. RI December 2008

Subtitle: Thar She Blows!

As I had noted in my prior posts, historically it has been very unusual for there to be more than a 1.5% difference (either more or less) between the unemployment rates if Massachusetts and Rhode Island.

Recently though, we have seen a historically unusual spread between Rhode Island’s high and accelerating rate and Massachusetts’ far lower but now quickly rising rate.

In fact, the current 3.1% spread continues to exceed all spreads seen in at least 40 years.

This indicates that either Rhode Island’s current rate would need to fall dramatically or the Massachusetts rate would need to increase sharply…. My sense, especially in light of the financial turmoil seen since September, is that Mass will be the one playing catch-up.

Today’s MA and RI state unemployment reports show that, in December, the Rhode Island unemployment rate rose significantly again to 10% while the Massachusetts rate jumped dramatically to 6.9%.

In December, Massachusetts experienced the largest year-over-year increase in unemployment since the recessionary environment that followed the tech-led dot-com bust jumping one full percentage point and clearly indicating that Mass has now entered a period of truly explosive unemployment growth.

New Residential Construction Report: December 2008

Today’s New Residential Construction Report continues to firmly demonstrate the intensity and completeness of the washout conditions that now exist in the nation’s housing markets particularly for new residential construction showing tremendous declines on both a peak and year-over-year basis to single family permits both nationally and across every region.

It’s important to note that today’s results strongly indicate that a new leg in the housing decline was reached between October and December with permit activity falling at the most significant rate seen in this decline.

Single family housing permits, the most leading of indicators, again suggests extensive weakness in future construction activity dropping 49.2% nationally as compared to December 2007 and an astonishing 77.50% since the peak in January 2005.

Moreover, every region showed significant double digit declines to permits with the Northeast declining 43.7%, the Midwest declining 49.1%, the South declining 49.7%, and the West declining a stunning 50.3% on a year-over-year basis.

Keep in mind that these declines are coming on the back of last year’s record declines.

To illustrate the extent to which permits and starts have declined, I have created the following charts (click for larger versions) that show the percentage changes of the current values on a year-over-year basis as well as compared to the peak year of 2004.

Declines to single family permits have contracted measurably in terms of monthly YOY declines, and the fact that we are now seeing declines of roughly 30%-50% on the back of 2006 and 2007 declines should provide a an unequivocal indication that the housing markets are by no means stabilizing.




Here are the seasonally adjusted statistics outlined in today’s report:

Housing Permits

Nationally

• Single family housing permits down 49.2% as compared to December 2007.

Regionally

• For the Northeast, single family housing down 43.7% as compared to December 2007.
• For the Midwest, single family housing permits down 49.1% as compared to December 2007.
• For the South, single family housing permits down 49.7% compared to December 2007.
• For the West, single family housing permits down 50.3% as compared to December 2007.

Housing Starts

Nationally

• Single family housing starts down 48.9% as compared to December 2007.

Regionally

• For the Northeast, single family housing starts down 37.8% as compared to December 2007.
• For the Midwest, single family housing starts down 47.5% as compared to December 2007.
• For the South, single family housing starts down 50.8% as compared to December 2007.
• For the West, single family housing starts down 50.0% as compared to December 2007.

Housing Completions

Nationally

• Single family housing completions down 34.9% as compared to December 2007.

Regionally

• For the Northeast, single family housing completions down 24.524.7% as compared to December 2007.
• For the Midwest, single family housing completions down 49.7% as compared to December 2007.
• For the South, single family housing completions down 31.3% as compared to December 2007.
• For the West, single family housing completions down 35.5% as compared to December 2007.

Keep in mind that this particular report does NOT factor in the cancellations that have been widely reported to be occurring in new construction.

Mid-Cycle Meltdown?: Jobless Claims January 22 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims increased 62,000 to 589,000 from last week’s revised 527,000 claims while “continued” claims increased 97,000 resulting in an “insured” unemployment rate of 3.4%.

It’s important to note that although the last several reports have indicated a slight decrease in the seasonally adjusted initial jobless claims, the non-seasonally adjusted numbers are showing very large increases.

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.

Reading Rates: MBA Application Survey – January 22 2009

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, 1 year ARMs as well as application volume for 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 increased 35 basis points since last week to 5.24% while the purchase application volume declined 2.47% and the refinance application volume slumped 12.44% compared to last week’s results.

It’s important to note though that although the steady decline in mortgage rates has likely played a significant role in the large increases in refinance application volume, it’s also altogether possible that the MBAA has some difficulty in seasonally adjusting their numbers around the November to January periods.

As you can see on the charts below, November through January usually brings some erratic spikes to the volume indices but the cause, at least in some part, is likely the result of troubles seasonally adjusting a noisy weekly series and not an actual spontaneous doubling of refinance activity.

As was noted last year, it’s probably sensible to wait until February to draw a final conclusion.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).


The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings January 2009

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing dramatic new lows and continued evidence that the new home market is experiencing a prolonged bout of depression.

Each component of the NAHB housing market index remain WELL BELOW the worst levels ever seen in the over 20 years the data has been being compiled strongly suggesting that the current severe contraction has surpassed all other events seen in the last 22 years and is now firmly in uncharted territory.

Prime Bomb! : Hudson City Bancorp Prime Delinquencies Q4 2008

I’ve been arguing for the better part of two years that although the traditional media and apparently general consensus has focused on subprime and other “toxic” mortgage products as the source for the credit tumult, the historic deterioration would by no means be limited to these “bleeding edge” products.

Before this massive housing and general economic contraction is complete, I expect to see new records set for prime defaults, be they prime-Jumbo ARM loans, prime-Jumbo fixed rate loans, prime-conforming ARM loans or prime-conforming fixed rate loans… we will see historic defaults across the entire spectrum of mortgage products.

Although there is significant debate about the true drivers of mortgage default, most individuals in default cite unemployment as the cause while other key instigators are: risky or insufficient household financial planning (high consumer debt and low/no savings), low-equity stake and housing depreciation, and simply general recession.

The key point to consider though is that while all of these factors have contributed to creating environments of high mortgage default in the past, our current circumstances make these past periods look like walks in the park.

In an effort to prove out this conjecture, I will track, with a quarterly recurring post, the operating performance of one of today’s most celebrated “conservative” mortgage portfolio lenders, Hudson City Bancorp (NYSE:HCBK), to see how their borrowers perform over the course of this economic downturn.

Hudson City is now fully recognized as the “poster child” for safe prime-only mortgage lending, stringent underwriting standards and a CEO, Ronald Hermance, whose frequent media appearances usually come with heaping portions of high praise and accolades.

It’s important to understand that although Hudson City’s average borrower has a reasonable LTV of 61.5%, they are still seeing a precipitous increase in loan defaults.

In fact, currently the average LTV of their non-performing loans (defaulted loans) is 69% so “prime” borrowers with 31% equity at the time of origination are now defaulting in steadily increasing numbers.

The following chart plots Hudson City Bancorp’s Non-Performing Loan Ratio (defaulted loans to total loan portfolio) since Q1 2004.

Notice that defaults have been on the rise since Q2 2006 while in Q2 2007 things really started to heat up.


But how does the growth in defaults of the Hudson City Bancorp “prime” portfolio stack up compared to other well know default rates?

The Following charts compare the Hudson City default rate to that of Fannie Mae and the MBAA foreclosure rate.

The top chart compares the normalized default rates since Q1 2004 while the lower two compare the same data since Q1 2007 in order to get a sense of the respective growth over these periods.

It’s important to keep in mind that although Hudson City is not experiencing the same ratio of defaults (Fannie Mae and the general MBAA rates are worse) the growth of prime defaults is comparable and, since Q1 2007, has even been substantially higher.



As for Hudson City loan loss provisions, as you can see from the following chart, the capital cushion is dwindling.

The key instigators in this growth of default is likely home price depreciation and unemployment both working together to bear down on “prime” homeowners as is shown by the following charts plotting the year-over-year percent change to the New York area S&P/Case-Shiller home price index against the Hudson City default ratio as well as the unemployment in New York and New Jersey since 2004.


I will continue to update this data in coming quarters in order to see how slumping home values and rising unemployment affect the performance of “prime” borrowers.

The Almost Daily 2¢ - Twin Peaks!

Subtitle: The (Suckers) Rally Has Left the Building?

And a very weak rally it has been… amazingly weak given all the talk of the new administration and its historically gigantic government bailout of everyone and everything… even some bears thought we might have reached the bottom…

But, alas it looks as though ‘tis over.

If the contagion of (well founded) fear from yesterday’s RBS (NYSE:RBS) $41 billion loss didn’t drive the nail in the rally’s coffin, then today’s nearly 50% opening drop of State Street Corp (NYSE:STT) should more than complete the job.

Banks and financial stocks as an aggregate are now well below their November 20 lows and, like a giant cement block shackled to the broad indices, will likely pull down the rest of the stock market to a dramatic re-test and failure.

Yet CNBC’s Bob Pisani still opines of a market “over sold” condition.

Fat chance.

In fact, it’s becoming more obvious to me that we are firmly on the path to a 70%-80% peak decline for the S&P.

That would bring the broad index to a level of roughly 300 - 500… a startling level for sure… yet would anyone really be surprised?

Make no mistake… we are in the midst of a generational decline.

A long unwind of massive debt and delusion that even the federal government cannot prevent.

2009 will be a year of somber awakening to the harsh reality that our economic troubles are more complex and intractable than is now expected.

While many pundits still believe that a significant component of the decline to date is attributable to sentiment and psychology, this year we will all agree that something truly fundamental is afoot.

As regular readers know, I have been following along the stock market decline for about a year now with this recurring “Twin Peaks” post whereby I simply charted some very basic technical analytics (somewhat ala the amazing Louise Yamada mixed with a couple of my own inventions) which compared the underlying average movement of the current S&P/500 index to its performance during the unwind of the “dot-com” collapse.

Be sure to study the charts well as they present several different ways of capturing market volatility and together compare past market performance to what we are seeing today.

I will continue to post the comparison to the “dot-com” era bear market for posterity but now that we have broken through the 2002 lows all technical similarities going forward have ceased… we are firmly in uncharted territory as the two bust eras are now one.

The “Percentage Up-Down” chart clearly shows that we have just entered a period of REAL volatility BUT also leads one to believe that we may have a long way to go in this market shakeout.

The “Up-Down Daily Closings” chart seems to indicate that although we have seen increased volatility and significant declines, we have yet to match the distribution of daily up closings and down closings (inverted red line).

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.



What follows below is now just maintained for old times’ sake… the second peak was obviously real and this series of posts identified it roughly a year ahead of time.

Now that we have entered effectively into uncharted territory, we are at a loss for historical comparison.

THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
• H. Down Down we GO! (Uncharted Territory)

Production Pullback: Industrial Production December 2008

Today, the Federal Reserve released their monthly read of industrial production showing truly dramatic declines to the aggregate production and widespread declines across many industries, particularly those related to consumer spending, construction and business vehicles, resulting in a significant year-over-year decline to the total index of 7.82% as compared to December 2007 and a 2.00% decline since November.

“Final product” consumer durable goods continue to show weakness falling 21.12% as an aggregate on a year-over-year basis, with particularly significant declines coming specifically from home appliances, furniture and carpeting which declined for the 32nd consecutive month by 23.18% on a year-over-year basis.

Construction supply production has been showing the most severe contraction seen in at least the last 20 years with wood products falling 22.19%.

Although automotive production has been showing weakness since the middle of 2004, business vehicle production is now showing a stark contraction.

The following charts (click for larger) show the overall consumer durable component along with the Home Appliances, Furniture and Carpeting sub-component on both a time series and year-over-year basis, construction supply production with the wood products sub-component, and general and business related vehicle production all overlaid with the last two recessions for comparisons purposes.

Question(s) of The Day - Will the Feds Ever Learn?

I hate to belabor this point BUT…

As of mid-December Paulson was “…expecting no other major financial institution to fail…”

So, what about today’s $138 billion bailout of Bank of America?

Wasn’t this one just too obvious?

Countrywide Financial was a complete sham and Merrill Lynch was a disaster waiting to happen… Kenneth Lewis must resign in disgrace no?

Now the Obama Administration is looking to revive the Paulson’s old “Bad Bank” concept… Will the government ever learn from its mistakes?

Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey January 2009

Today, the Federal Reserve Bank of Philadelphia released the results of their Business Outlook Survey for January showing a continued deterioration of the regions manufacturing sector with the current activity index indicating substantial contraction at –24.3.

The survey of the Philadelphia regions manufacturing sector has been a pretty solid leading indicator of the overall strength or weakness and recession experienced by general economy.

As you can see by the following chart (click for larger version), during the past three post-recession expansion periods, the “current” diffusion index generally vacillated between 0 and 35 while the “future” index left the period of contraction at an elevated level and eventually joining the “current” index.

Finally, as the economy pushes closer to contraction, both indices decline dramatically with a breach of -20 by the “current” index generally indicating that recession is upon us.

As you can see from the charts below, and now having been officially confirmed by the NBER, the business outlook survey again very accurately predicted the start of the current recession and further continues to indicate contraction.


Also, today’s results now certainty show that any recent parallel to the stagflationary eras of the 70s and early 80 have given way to a stronger stag-deflationary force bringing down prices, new orders and employment simultaneously.

The following chart shows the latest results of the “current new orders” “current prices paid” and “future employment” components (click for larger versions).

Notice that that current orders, future employment and current prices paid are all now trending down.

The following chart (click for larger) shows these measures during the last stagflationary era seen between 1976 – 1980. Notice the clear divergence of rising prices and falling growth.