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Thursday, June 21, 2007

Diffusion, Baby

Initial claims were up 10,000 SA. Marketwatch summary:
It's the highest level of claims since April. The four-week moving average of new claims rose by 2,500 to 314,500, a six-week high. The number of people continuing to collect unemployment benefits rose by 39,000 to 2.523 million in the week ending June 9.
Year over year comparisons suffer because last year was a very good year for employment. Nonetheless, the employment trend has shifted, with initial SA claims going 309,000 >311,000 > 311,000 > 314,000 > 324,000. Continuing NSA claims, which lag initial by a week, have gone 2,231,139 > 2,254,344 > 2,267,739 > 2,303,069. Continuing claims are a better employment measure than initial claims, because you can get quite high initial claims in a transitional economy, but if employment is strong the unemployed find new jobs quickly. This was the weekly Doleta report state highlights:
State Change State Supplied Comment
MI -1,093 Fewer layoffs in the automobile industry.
STATES WITH AN INCREASE OF MORE THAN 1,000
State Change State Supplied Comment
NY +1,124 Layoffs in the construction and service industries.
NJ +1,481 Layoffs in the trade, service, and manufacturing industries.
GA +1,755 Layoffs in the manufacturing industry.
SC +2,420 Layoffs in the manufacturing industry.
IL +3,162 Layoffs in the trade, service, and manufacturing industries.
FL +3,576 Layoffs in the construction, trade, service, and manufacturing industries, and agriculture.
PA +5,220 Layoffs in the printing/publishing, transportation, chemical, and mining industries.
CA +10,333 Layoffs in the trade and service industries.
The higher numbers in the last two monthly employment reports for older workers, younger workers and involuntary part-time workers forecast this change.

We are not seeing any major new holes developing in the economy. It looks more like a spreading and diffusing weakness. The combination of high inflation for basic needs and constrained profits was destined to lead to higher unemployment in the retail and wider service economy. Restaurant sales for casual dining have been slow this year, as have weekly chain store sales. Most regrettably, the weather excuse is running out:
Chain store sales for the week ended June 16 rose 1.9% from the year-ago period, according to a survey released Tuesday by the International Council of Shopping Centers and UBS Securities. On a week-over-week basis, sales slipped 0.1%. "The roller-coaster pattern of spending continued for the ninth consecutive week," said Michael Niemira, chief economist for the ICSC. "Although warmer weather and Father's Day were present, consumers seemingly were little motivated to spend."
I guess what consumers need is a drill sergeant to "motivate" them? The battier the analyst comments get, the more sure it is that the underlying situation displeases them. Clothing prices have dropped significantly due to weaker sales in most chains. But many other items are higher. The implicit price defllator is higher than the year over year increase, which is never a good sign.

Redbook on the first two weeks of June:
National chain store sales fell 0.8% in the first two weeks of June versus the previous month, according to Redbook Research's latest indicator of national retail sales released Tuesday.
...
The Johnson Redbook Index also showed seasonally adjusted sales in the two-week period rose 1.9% compared with June 2006, also in line with the target.

Redbook said on an unadjusted basis, sales in the week ended June 16 were up 2% from the same week in 2006, after a 1.7% increase the previous week.
...
Sales of hard and soft seasonal merchandise also improved, said Redbook, with summer apparel "active" in both discount and department stories. Merchants dealing in consumer durables such as fans, air conditioners and sporting equipment also had good results, Redbook said.
We're seeing an environment in which consumers are far more careful with spending, and it is likely to persist until gas prices drop significantly. Inflation for food and fuel is understated in the CPI-U, because when these costs rise significantly, consumers must spend more of their disposable income on these items proportionally. But the CPI-U allocation does not change, i.e., it assumes that consumers are still spending the same percent of their income on these items and the same percent of their income on items like clothing or dining out. This, of course, is not true in an environment with increases as high as we have seen lately.

The ongoing Bear Stearns hedge fund drama is going to add a little more fuel to the non-prime mortgage fire:
Merrill Lynch & Co.'s threat to sell $800 million of mortgage securities seized from Bear Stearns Cos. hedge funds is sending shudders across Wall Street.

A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.

Because there is little trading in the securities, prices may not reflect the highest rate of mortgage delinquencies in 13 years. An auction that confirms concerns that CDOs are overvalued may spark a chain reaction of writedowns that causes billions of dollars in losses for everyone from hedge funds to pension funds to foreign banks.
...
The perceived risk of owning corporate bonds jumped to the highest in nine months today. Contracts based on $10 million of debt in the CDX North America Crossover Index rose as much as $10,000 in early trading today to $178,500, according to Deutsche Bank AG. They retraced to $171,500 at 8:28 a.m. in New York.
That's just in case you thought I was alarmist on credit. The truth really is that there is a lot of bad paper out there. It will not be repaid on its terms. Major losses will cut into the assumed value of these paper holdings. Mortgages are bad; commercial credit is worse. There are more problems overall there.

A little-noticed change occurred a few days ago which has even broader implications; the Federal Reserve dumped Fitch's ratings when calculating its figures for credit quality and spreads. Instead they will now use only Moody's and S&P. Take heed.

The truth is that commercial credit quality is so bad that no one wants to keep some of this paper; the segments that are growing are the stuff that's handed off to Greater Fools in securitizations - see Outstandings:

The paper wealth in this economy is slowly getting eroded. Unfortunately, the response has been to package this stuff up in more and more complex vehicles, which allows everyone to pretend that they are holding paper that is worth considerably more than it really is. If you imagine what the impact on the economy would be if stocks dropped 20% in six months, you can get a handle on the scope of what is being discussed here. You cannot hide this stuff forever, and the cost of hiding it is mounting, scaring the street.

CDO's and other packaged debt obligations (some are CDO's of CDO's) are widely held in various types of funds. If you do not know what your retirement funds are invested in, now would be a good time to find out. All the hedgies and the fund managers have been relying on the fact that they will be the first to know and will get out quickly. That means that the losses are going to run down hill, and guess who's at the bottom of the hill? The consumer's 401K or pension fund, that's who.


Comments:
ed in texas

Diffusion is a widely used function; it comes right ahead of distallation and separation. (I'm being obscure.)
Remember all the bombasts going on about use of the debt economy for the creation of additional money (one real dollar becomes, say 3,) with one real and others backed by exchange? What appears to be going on here is the pigmen and their minions are splitting off the real dollars and storing them separatly (tranches, anyone) and then handing out the remainder to the masses.
Leastwise, if I was inclined to conspiracies, that might be what I was seeing.
 
Not really, Ed. Those tranches are normally "equity" tranches, which means that they have the potential to pay high but are the tranches which take it in the kisser first. In this environment, they're not worth much.

It's the packaging of tranched securities, then repackaging, then pretty 'em up, then sell them that obscures the underlying investment.

The big firms that do this earn great fees. They don't make their money off the securities, but rather the fees for doing the deal.
 
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