Monday, August 06, 2007
You Know It's Bad When....
In other highly interesting news, the FDIC signed an MOU with China last week. In China, they hang or shoot embezzling bankers. I can't help but think this must be a fascinating document with intriguing purposes.
The Dow is jumpy and doesn't look like it will hold for very long (the up/down zigzag in these circumstances is a bad indicator), but the real news is in the commodities sell-off, which is blazing along. CBOT. If you take Treasury yields seriously, we will be in an undisputable recession next year. Oil prices have been taking a big hit and the energy company stocks will reflect that. (Note: a recession is classically defined as two consecutive quarters of negative growth. This is obviously of no use, so to predict economic conditions going forward most economists try to track current activity trends. The official start date of recessions is pretty much random, and often determined years after one happens.)
The Alt-A market continues to break down. IndyMac is a pretty good lender, historically, and its late night Friday action in imposing the 700/70 rule on stateds, a 10% downpayment for FTHB, and the elimination of all the no-doc/no ratios, pretty much shows where we are. The result is that Florida, California, New York and DC are going to take a massive hit. Any locality in which the income/price ratio has gotten severely out of whack will, because these stated loans have been the mainstay of the speculator/investor/second home/dingbat FTHB business. The result, of course, is that a lot of speculators who haven't bailed yet will get wiped out.
I think the Alt-A collapse was precipated by several factors, not the least of which was Countrywide's warning about increased Alt-A defaults. However, those defaults were mostly in second liens. The detonation of subprime seconds was what took out subprime.
For what this means, Salt Lake City has been providing a preview for y'all. Yes, Virginia, list prices can fall over 7% over three months! What caused the SLC collapse was speculators trying to sell and take cash to cover losing investments in other areas. What will cause similar behavior in CA, for example, is the collapse of stated income loans and the restoration of downpayment requirements. The agencies (e.g. Fannie, VA, FHA) are the last entities that will be able to write low/no downpayment and low-docs for resale to investors.
Last year almost 40% of mortgages fell into subprime and Alt-A categories. The result of recent events is that a minimum of 20% of the sales market just got taken out. The initial impact of subprime was about 7% direct. But each loss of chunk of demand affects another chunk, so I estimated net impact over the year at about 12%. Now this 20% loss probably pushed it to 30%, a nice chunk of which we have already seen.
This means homebuilder bankruptcies are in the offing. For that matter, consumer bankruptcies and small business bankruptcies are destined to rise quite significantly over the next year.
RBC does its own survey of consumer confidence, and the survey published in July showed a sharp downturn. One of the reasons for the downturn was job uncertainty:
In July, the RBC Job Index reached its lowest level in more than a year, dropping over 10 points to 116.8, compared to 126.9 in June. Personal job loss experience in July increased by 6 points, with 34 per cent of consumers reporting job loss in their immediate circle compared to 28 per cent in June. Expectations regarding future job loss also increased, with nearly one in five (18 per cent) Americans reporting future job loss is likely in the next six months, compared to 14 per cent in June.It will be interesting to see the next release, but this one matches relatively well with ADP and the household portion of the regular July employment release. The bottom line of all this is that we were moving into the second half of the year with a lot of economic weakness clearly evident, and the further shock imposed by the Alt-A break will have more impact than it otherwise would. The funding for many commercial building projects will now tend to dry up (by the end of June it was already tightening in many areas), and this will push construction activity down pretty quickly.
Rail traffic for July (we get it earlier than trucking) forecast a weak second half:
U.S. railroads originated 1,250,961 carloads of freight in July, down 39,196 carloads (3.0 percent) from July 2006. They also originated 913,590 intermodal trailers and containers during the month, down of 24,570 units (2.6 percent) from July 2006.July traffic benefits from end-of-quarter activity, which in the somewhat batty strategies of US companies is significant. The worst indicator in rail figures is that over the year intermodal has continued to worsen.
We have trucking stats through June:
ATA Chief Economist Bob Costello said that while the government reported the economy grew at a 3.4 percent annualized rate in the second quarter, that strength did not filter into the transport sector. “Our tonnage index fell 1.8 percent during the second quarter from the first quarter and was 3.2 percent lower than the same quarter in 2006,” he said.Those trucking figures cover over 80% of shipments, and the rail figures cover a significant portion of the rest. These figures are utterly incompatible with an economy that has genuine forward momentum. Inflation can and does mask early stages of recession. If inflation is understated by a relatively small margin, all the real growth figures are overstated. Local revenue drops in many municipality and states will be restraining public spending and employment by next year.
The light truck sales drop alone is a very powerful indicator of recession.
Is that anything like "Exceeding All Quotas of Comrade Stalin's Glorious Five-Year Plan"?
It was a good day for the Dow but commodities are selling off. Overall I think the situation is going to rationalize rapidly.
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