SoldAtTheTop's Fables: King Beaver and King Monkey

King Beaver and King Monkey got to talking one day about the state of their respective clans.

“By the looks of the numbers of your dams, you beavers are neither very powerful nor prosperous” said King Monkey adding, “Have you done nothing to inspire or encourage your beaver kin?”

“My kin need no encouragement for they work hard toiling independently against the vicissitudes of nature and as for inspiration, there is only what I gain from the sight of their constant efforts” said King Beaver.

“My monkey kin for certain know a better life than your beavers for I have made for them a deal whereby every monkey is given a tree nest so long as the able-bodied pay tribute to our clan” replied the Monkey King.

“Tribute? ... In what form?” asked the Beaver King.

“Two bananas a day from the mighty, one pawfull of seeds from the typical and a few leaves or nothing at all from the weak for it’s the least we can do for those who, as nature would have it, have been dealt such unfortunate circumstances” replied the Monkey King.

“That sounds like quite a bargain” said the wise Beaver King adding, “are your able-bodied kin holding up their end?”

“They certainly are, and I should add…” replied the foolish Monkey King “that this deal comes none too soon as we are finding nature to be weakening our ranks with each passing day!”

Existing Home Sales Report: May 2011

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for May showing continued weakness and sharp declines with slumping sales and prices and an increasing monthly supply.

Single family home sales declined a whopping 3.2% from April falling 15.4% below the level seen last year while the median selling price declined a notable 4.5% below the level seen in May 2010.

Further, inventory of single family homes remains high declining just 1.1% from April and 2.1% below the level seen in May 2010 which, combined with the relatively slow pace of sales, resulted in a increase in the monthly supply to 9.0 months.

The following charts (click for full-screen dynamic version) shows national existing single family home sales, median home prices, inventory and months of supply since 2005.

Target the American Dream

Last week, workers at a Target retail store in New York rejected unionization and while I'm certain that many could argue the various merits for or against that decision, I would like to take issue with a bit of the dramatic language offered by union president Bruce W. Both.

Both states that "Target did everything they could to deny these workers a chance at the American Dream... However, the workers' pursuit of a better life and the ability to house and feed their families is proving more powerful."

This statement got me thinking about how earners at the lower end of the income scale are depicted, not just by this union leader whose primary interest is on expanding his organizations reach, but in general.

In short, I fundamentally disagree with Mr. Both's statement and the general depiction of unskilled laborers.

These workers, by performing simple menial labor in a retail chain are doing everything they can to deny themselves the American Dream.

Consider what it costs to have the minimum American Dream... to live in America, have a family, a house, a car, some decent clothes, and be reasonably fed and properly insured.

It's pretty expensive and can't be done by simply stocking shelve in a retail store.

There is no rational person who will argue that the American Dream can be had by simply working in a retail chain doing basic labor... labor that is often times performed perfectly well by minors or even individuals with developmental disabilities and handicaps of the mind.

The modern day version of the American Dream demands more than the minimum level of effort and further, requires real strategy.

If it's well understood in advance that a particular direction can never pay an American Dream yielding living wage, then it would be best to face that fact and not have false expectations about what may come of your effort.

For example, suppose you want to be a musician but the best you could muster given your efforts is to blow a G-note on a tuba.

Knowing that no musician in history has ever made a career of single tone should demand that you change your strategy either working harder to become a real musician or changing disciplines altogether.

The last thing you would want to do is to pretend that somehow being able to play a single note makes you a valuable musician or, worse yet, join up with a group of other G-note blowing tuba "players" in hopes that somehow more value is created from the union.

This line of thinking may seem callous to many given that current trends of discourse tend to pander to the "disadvantaged" forcing many to spin roughly the same language as used by Mr. Both but the fact remains, the American Dream cannot be had by stocking shelves in a retail chain and no amount of unionization, socialization or dramatic language will ever change that fact.

University of Michigan Survey of Consumers June 2011 (Early)

Today's early release of the Reuters/University of Michigan Survey of Consumers for June indicated a worsening of consumer sentiment with a reading of 71.8 falling 5.53% below the level seen last year while one year inflation expectations declined to 4%.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) declined to 66.8, and the Current Economic Conditions Index declined to 79.6.

It's important to recognize that while consumer sentiment is higher than the panic laden trough level seen in late 2008, the current sentiment level is still far lower than any level seen during the 2001 tech recession and roughly equivalent to the worst seen during the early 1990s and second dip 1982 recessions.

Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey June 2011

The latest release of the Federal Reserve Bank of Philadelphia Business Outlook Survey (BOS) for June indicated a continued notable pullback in the regions manufacturing activity with the current activity index plunging to a level of -7.7 while the future activity index also declined to a level of 2.5.

The current activity index along with four additional current data points (new orders, unfilled orders, delivery time and inventories) are now indicating contraction of manufacturing activity with the size and breadth of the latest pullback clearly demanding that closer scrutiny be paid to these series in future releases.

The following chart shows the current and future activity indexes both with their corresponding 3-month moving averages. The red line marks the threshold between contraction and expansion for these diffusion indexes.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims June 16 2011

Today’s jobless claims report showed decline to both initial and continued unemployment claims as a rising trend continued to materialize for initial claims.

Seasonally adjusted “initial” unemployment declined by 16,000 to 414,000 claims from last week’s revised 430,000 claims while seasonally adjusted “continued” claims declined by 21,000 resulting in an “insured” unemployment rate of 2.9%.

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 3.88 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 3.42 million people that are currently counted as receiving traditional continued unemployment benefits, there are 7.31 million people on state and federal unemployment rolls.

New Residential Construction Report: May 2011

Today’s New Residential Construction Report showed slight increases to both single family permits and starts from last month and notable declines from last year while the new home market remains historically distressed.

Single family housing permits, the most leading of indicators, increased 2.5% on a month-to-month basis to 405K single family units (SAAR), dropping a notable 6.90% below the level seen in May 2010 and an astonishing 77.47% below the peak in September 2005.

Single family housing starts increased 3.7% to 419K units (SAAR), dropping 8.91% below the level seen in May 2010 and a stunning 77.02% below the peak set in early 2006.

With the substantial headwinds of elevated unemployment, epic levels of foreclosure and delinquency, mounting bankruptcies, contracting consumer credit, and falling real wages, an overhang of inventory and still falling home prices, the environment for “organic” home sales remains weak and likely very fragile.

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings June 2011

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing declines across every measure with the "future conditions" component falling to the historic low while the "buyer traffic" index remained near record lows as home builders continue to plod through the weakest activity seen in generations.

It's important to recognize that currently all measures are showing notable declines in the level of activity seen since last year.

Clearly the new home market has seen another no-show start to the buying season with the typically strongest selling months (remember Bob Toll's analysis of the seasons) fully behind it.

The new home market will likely not resume any significant form of healthy function until the considerable overhang of inventory is cleared.

Production Pullback: Industrial Production May 2011

Today, the Federal Reserve released their monthly read of industrial production and capacity utilization showing slight flattening of sorts with total industrial production increasing just 0.10% from April but rising 3.42% above the level seen in May 2010.

Capacity utilization declined 0.01% from April but climbed 3.25% above the level seen in May of 2010 to stand at 76.73%

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.

The Empire State Manufacturing Survey: June 2011

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 notable overall weakness and indicated contraction for current manufacturing activity with the current activity index declining to -7.79 while assessments of future activity declined as well with the future activity index declining to 22.45.

Current prices paid registered the first decline in seven months falling to 56.12 while current new orders declined to -3.61 and assessments of future new orders plunging to 15.31.

Reading Rates: MBA Application Survey – June 15 2011

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 declined 3 basis points to 4.51% since last week while the purchase application volume increased 4.5% and the refinance application volume jumped 16.5% over the same period.

Rates now appear to be trending down having, more of less, declined continually for the last few months.

Given that we are nearing the end of the Feds QE2 intervention, it will be interesting to see how long rates trend in the next few months.

In any event, the purchase application volume remains near the lowest level seen in well over a decade while refinance activity continues to bounce around a bit.

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).

The Fall of Greece: April 2011

Looking at the most recent OECD economic indicators, Greece makes by far the weakest showing in all the Eurozone as it continues to plod through tremendously difficult economic times.

Industrial production remains in severe contraction territory, consumer confidence has fallen off a cliff, business confidence is clearly depressed and the leading index is turning down fast dropping 0.66% since March and 6.36% below the level seen in April 2010.

For May (more timely data), consumer confidence declined 0.04% from April and dropped 0.69% below the level seen in May 2010 while business confidence declined notably from April dropping 0.47% but remaining 0.86% above the level seen in May 2010.

Industrial production remains epically weak plunging 1.21% between February and March 2011 (less timely data) remaining near the lowest levels seen since the late 1990s.

China's Engine: April 2011

Looking at the latest release of the OECD economic indicators for China, it appears that the massive jump in economic activity seen since the panicky period of late 2008 took a notable pause throughout most of 2010 and after having shown some growth into early 2010, is now back on the decline (note... this is a highly revised series that has been swinging between expansion to contraction with each monthly release).

China’s leading economic indicator suggests that economic activity declined in April showing a month-to-month decline of 0.33% bringing the latest level just 0.84% below the level seen in April 2010.

OECD Composite Leading Indicators: April 2011

Note... be sure to bookmark the OECD Dashboard for a real-time view of all the OECD composite indices.

The Organization for Economic Co-Operation and Development (OECD) publishes a wealth of data tracking the fundamental economic dynamics of the world’s largest economies.

The OECD leading indicator, industrial production, business confidence and consumer confidence series all disclose important and timely clues to the state of each respective economy or group of economies.

The latest monthly results indicate that economic conditions in the global economy generally weakened with the total leading index declining 0.02% since March but climbing 0.44% above the level seen in April 2010 while a more timely indicator of business confidence weakened notably.

Total Business confidence plunged 0.89% since April (more timely data) but still remaining 0.71% above the level seen in May 2010.

Total Consumer confidence increased with the total index climbing 0.26% since April (more timely data) dropping 0.08% below the level seen in May 2010.

Conspicuous Correlation: Retail Sales May 2011

Today, the U.S. Census Bureau released its latest nominal read of retail sales showing an decline of 0.2% since April bringing the total increase since last year to 7.7% on an aggregate of all items including food, fuel and healthcare services.

Nominal discretionary retail sales including home furnishings, home garden and building materials, consumer electronics and department store sales increased 0.01% from April increasing 3.13% above the level seen in May 2010 while, adjusting for inflation, “real” discretionary retail sales actually declined 0.43% over the same period.

On a “nominal” basis, there had appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.

The following chart shows the year-over-year change to nominal discretionary retail sales and the year-over-year change to nominal the S&P/Case-Shiller Composite home price index since 1993 and since 2000.

As you can see there is, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.

Looking at the chart below (click for full-screen dynamic version), adjusted for inflation (CPI for retail sales, CPI “less shelter” for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.