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Wednesday, December 13, 2006

A Range Of Good Economic News

Retail sales came in higher than projected; oil is stabilizing back to somewhere around $61, and the trend on Purchase Money mortgage apps continues sharply upward. In three weeks, the Purchase Index has gone from 406.7 to 426.6 and the latest release shows a roaring 463.8. Over the last 4 months, affordability ratios for new and existing homes have moved up nearly 5%. This is the last hoorah, and one thing about the USA, we sure do know how to throw a consumption party.

Conventional and government indexes increased. Points for traditional (20% down) increased and the associated mortgage rate inched up. Borrowers are using these rates to refi into more stable loans, which is a good indication. However, it does imply that the cash-out stimulus is going to weaken further in the first quarter. (Any time you have a lot of refis these days, you have a lot of money in borrower's hands.)

As I wrote earlier this week, I believe we have reached the low in mortgage rates and that they will now turn and move higher. The low mortgage rates are what has stimulated this last hoorah. If for some reason rates remain this low, then all bets are off. I believe, however, that the reality of continuing losses will prevent that from occurring.

The sub/non-prime origination market remains extremely hot, and will only be suppressed when people refuse to buy the paper. That will only happen when the packagers become afraid of being stuck with the losses. I believe that enough international angst has been generated to slow the appetite for the marginal stuff, so I expect the same pattern of the wild, wild west on the street being slowly curbed by the gatekeepers which, at this point are primarily the bond raters. Over the last few months, they have been quietly downgrading the riskiest paper quite consistently. Prime defaults are also inching up - for the last few years we have been trading on optimism, and now the day of reckoning is at hand.

I wonder if bonds will go down today? At this point, it's all about spreads.

But wait - some are dubious:
"The Commerce Department said it made some revisions last month to the methodology it used to calculate the data. This makes it risky to over interpret the data given the unusually big increases in the report," said Michael Niemira, retail economist with the International Council of Shopping Centers (ICSC).

Ian Shepherdson, chief U.S. economist with High Frequency Economics, called the numbers "baffling."

"Overall, these data imply a decent increase in real consumption in November, but we think it very likely that sales will either be revised down or there will be a hefty drop in December," he wrote in a note Wednesday.

It's hard to see how sales could have risen overall by that much considering WalMart reported same-store sales dropping. Still, we'll have to wait and see. Ian Shepherson likes the word "baffling".
And SpendingPulse had a very different reading yesterday:
Retail sales rose 0.3 percent on a seasonally adjusted basis in November, bouncing back from a 0.3 percent fall in October, according to SpendingPulse, which collects data from payment systems but excludes auto sales.

However, its "core" measure of sales, which excludes gasoline and building materials, recorded its first monthly drop since March, falling 0.2 percent on a seasonally adjusted basis after a 0.1 percent gain in October.

If the big item was high-end electronics, that could count for some of the difference.

Also, here's China's report:
China's retail sales, the main indicator of consumer spending,jumped 14 percent in November from a year earlier.

The growth rate is higher than last November but dropped slightly from October's growth. Spending in oil related products rose 34 percent, the highest of all categories. Auto sales and sales of grain and edible oils rose by over 20 percent. Telecommunications equipment sales increased by 17 percent. The growth in retail prices have pushed up consumer prices. Consumer prices rose 1.9 percent in November from a year earlier, mainly due to the higher cost.

Hi Mama; Bonds are getting crushed. So are 2's, 3's and 5's. When a market is priced for perfection, it doesn't take much to upset the apple cart.
"Priced for perfection". I love that.

It's a new, new paradigm.... in a very old game.

I think Commerce should have run the old and new version; in these circumstances, they are only increasing volatility.
"Increasing volatility"......oh, mama! I LOVE when you talk like that.......
I emailed you about it. Those numbers make no sense to me, but I don't see the huge discrepancy between the old and the new series.

Hey - this will make you want to run out and just buy a whole-loan portfolio of subprimes:
The foreclosure rate inched higher in the third quarter, with 1.05% of mortgages in the foreclosure process vs. 0.99% in the second quarter, the MBA said. While delinquency rates on all types of loans rose in the third quarter, it was the subprime category -- loans made to less creditworthy borrowers, that shot up the most to 12.56% from 10.76% a year ago.
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