Two Great Bounces! - February 04 2010

The following charts provide a simple comparison (not a correlation) between the big stock bounce that occurred in the wake of the DOW crash of 1929 and the bounce we are seeing today in the S&P 500 index.

The method of alignment was simple… take the first definitive up trading day off the bottom of the preceding bear market low and set that as the start of the series… then simply re-base both series to a value of 100 so that they can be compared side-by-side.

The lower bar chart plots the cumulative percentage change since the start of each bounce.

The S&P 500 is up over 47% in a little over 220 trading days… an historically aggressive run with an obvious note of mania to it… and wholly comparable to… even far stronger than… the price movement seen in the 1930s-era DOW rally.

At this point for the 30s-era DOW, the bull-run was over as the bear trend resumed in earnest… today though the Bull is seriously on the move… how long will this boom last?

Only time will tell…

Extended Unemployment: Initial, Continued and Extended Unemployment Claims February 04 2010

While today’s jobless claims report continued to show a, more or less, steady trend down to both initial and continued unemployment claims with a nearly textbook peak shaping up, considering the federal extended claims data offers a more dire view of the state of the job market and of the economy as a whole.

Seasonally adjusted “initial” unemployment claims increased by 8,000 to 480,000 claims from last week’s revised 472,000 claims while “continued” claims increased 2,000 resulting in an “insured” unemployment rate of 3.5%.

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 5.85 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 5.6 million people that are currently counted as receiving traditional continued unemployment benefits, there are well over 11 million people on state and federal unemployment rolls.

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.

The following chart 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.

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

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

Reading Rates: MBA Application Survey – February 03 2010

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 declined 1 basis point since the last week to 5.01% while the purchase application volume increased 10.3% and the refinance application volume jumped 26.3% over the same period.

It’s important to recognize that despite the Federal Reserve’s “quantitative easing” measures and record low interest rates, the purchase application volume has now dropped to the lowest reading since 2000.

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).

Pending Home Sales: December 2009

Today, the National Association of Realtors (NAR) released their Pending Home Sales Report for December showing a tepid 1% increase since November as buying activity continued to slow in the wake of the housing tax gimmick inspired mad-rush seen in October but still remained at a level 10.9% higher than seen in December of 2008, a notable increase.

Meanwhile, the NARs chief economist Lawrence Yun warns that the $8000 tax carrot may be clouding the waters:

"There are easily understood swings in contract activity as buyers respond to a tax credit that was expiring and was then extended and expanded, ... These swings are masking the underlying trend, which is a broad improvement over year-ago levels.”

Where Yun is wrong, of course, is that the tax gimmick has not masked an underlying trend of "broad improvement"... its simply temporarily papered over a major declining trend in existing home sales that still has a long way to fall before it reaching a more fundemental level inline with both new home sales and "organic" existing home sales.

The following chart shows the national pending home sales index along with the percent change on a year-over-year basis as well as the percent change from the peak set in 2005 (click for larger version).

Look at the seasonally adjusted pending home sales results:

• Nationally the index increased 10.9% as compared to December 2008.
• The Northeast region increased 14.9% as compared to December 2008.
• The Midwest region increased 8.7% as compared to December 2008.
• The South region increased 5.5% as compared to December 2008.
• The West region increased 18.6% as compared to December 2008.

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.

ISM Manufacturing Report: Inventory Restocking Bounce?

Although today’s Institute for Supply Management’s Manufacturing Report on Business showed strong trends in manufacturing, the sudden and dramatic reversal compared the last years readings may support an outlook of more tepid, even weakening results going forward.

At over twice the annual change seen at any point in the last twenty years, the employment component appears to be reaching levels that are typically seen only deep within a real durable recovery.

Similarly, the backlog of orders, new export orders and the imports indices recently experienced explosive progress as compared to levels seen last year resulting in annual improvements not seen in nearly twenty years.

As we move further into 2010, it would be hardly surprising to see these indices peal back as the significant inventory restocking seen primarily in Q4 2009 largely subsides.

Commercial Real Estate Lending: Tight Standards and Weak Demand

Today, the Federal Reserve released their latest installment of the Senior Loan Officer Opinion Survey on Bank Lending Practices showing continued weakness for commercial real estate lending.

The net percentage of domestic respondents tightening standards for commercial real estate loans, representing the supply dynamics of CRE lending, declined slightly to a still elevated level of 27.3.

The net percentage of domestic respondents reporting stronger demand for commercial real estate loans, representing the demand dynamics of CRE lending, increased slightly to a still very weak -27.3.

As the report noted, CRE lending remains weak:

“Banks’ policies on CRE lending were an exception, as large net fractions of respondents further tightened their credit standards during the final quarter of last year. In addition, banks reported that they had tightened terms on CRE loans substantially over the past year…”

Double-Blip Expansion

As we all know, the Fed has taken unprecedented measures to “rescue” the economy from the “brink” of destruction but while the latest efforts have been truly extraordinary, it was only some six years ago that the Fed embarked on a similar operation in the wake of the dot-com collapse.

It’s been well reported that the low (below 2%) interest rates that the Fed set between 2001 and 2004 along with its embrace of affordability mortgage products and lax oversight greatly contributed to the most intense years of the housing/credit bubble and associated macroeconomic effects.

As I have noted before, regardless of the Feds handiwork, both stocks and employment trended down throughout the entirety of the 2000s.

In some sense the technical recovery engineered by the Fed in the wake of the dot-com crash more or less resembles a “blip” within the context of an otherwise down trending economy.

But this “blip” was artificial, fragile and fraught with malinvestment on the part of both firms and households so eventually, it relented to the overarching declining trend, giving way to our latest crisis and an even more substantial economic engineering experiment on the part of the Federal Reserve and the federal government.

So, now that the Fed has held rates below 2% for well over a year and the federal government has embarked on all forms of economic gimmickry, one has to wonder how much better an outcome will come of this round of economic engineering.

Looking at the chart below (click for full-screen dynamic version) you can see that while the Fed has effectively reached the zero bound for interest rates and likely inspired a sense of confidence among the investment community, unemployment will likely continue to trend up and stay elevated for some time begging the question, are we simply witnessing a second engineered “blip”?

Construction Spending: December 2009

Today, the U.S. Census Bureau released their December read of construction spending showing a continued slowing of the government’s tax-carrot fueled bounce in residential construction spending while indicating continued weakness to non-residential construction spending.

Even with the governments tax-credit gimmick, residential construction spending is still 10.90% below the level seen last year and a whopping 61.50% below the peak set in March 2006.

Worse off though was private single family residential construction spending which declined 17.60% as compared to December 2008 and a truly grotesque 75.51% from the peak set in February 2006.

Non-residential construction spending, currently accounting for over half of all private construction spending, posted another significant year-over-year decline of 17.75%.

The following charts (click for larger 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 and peak percent change to each since 1994 and 2000 – 2005.

Bull Trip?!: GDP Report Q4 2009 (Advance)

Today, the Bureau of Economic Analysis (BEA) released their first installment of the Q4 2009 GDP report showing that the economy expanded significantly with GDP increasing at an annual rate of 5.7% from Q3.

It's important to recognize that the majority of this growth is the result of inventory restocking, growth in fixed non-residential equipment and software investment as well as a notable slowdown in imports.

As with last quarter, estimates of fixed investment in both residential and non-residential appear too optimistic in the release which, along with the change in inventories, saw nearly a 40% increase in overall gross private domestic investment.

Residential fixed investment saw an increase of 5.7% at an annual rate but likely still has further downward revisions to come in benchmark releases.

Non-residential fixed investment saw an increase of 2.9% at an annual rate but again, will likely be revised to show a steeper contraction in future revisions.

Ticking Prime Bomb!: Fannie Mae Monthly Summary November 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 ultra-dynamic and surf-able chart) 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.

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

The Chicago Fed National Activity Index: December 2009

Yesterday’s release of the Chicago Federal Reserve National Activity Index (CFNAI) indicated that national economic activity nearly contracted again in December with two of four component indices declining and with the personal consumption and housing component showing the weakest results.

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 is expanding at its historical trend rate while a negative value indicate 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.

It’s important to note that at -0.61 the current three month average index value is very near the official recessionary indicator mark.

The following charts (click for full-screen interactive zoom-able version) plot the national activity index as well all of its four components.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims January 28 2010

While today’s jobless claims report continued to show a steady trend down to both initial and continued unemployment claims with a nearly textbook peak shaping up, considering the federal extended claims data offers a more dire view of the state of the job market and of the economy as a whole.

Seasonally adjusted “initial” unemployment claims decreased by 8,000 to 470,000 claims from last week’s revised 478,000 claims while “continued” claims decreased 57,000 resulting in an “insured” unemployment rate of 3.5%.

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 5.6 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 5.79 million people that are currently counted as receiving traditional continued unemployment benefits, there are well over 11 million people on state and federal unemployment rolls.

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.

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

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