Saturday, March 31, 2007
If I Were Iranian
It might also be wise to realize that historically speaking, the Brits can be pushed too far, and it usually happens at a point that would puzzle people from another culture. In one way, they are like southerners. They'll be polite right up until they decide you need to be crushed. After that point, they proceed with dogged determination to crush you, completely ignoring any estimation of the odds against them. But when they proceed to the crushing phase, they go berserk in a controlled, calm, dogged and lethal fashion that is rare in the military history of the world.
It must be a cultural thing, because this pattern has held for a long, long time. The words "Tennis balls, my liege" apparently do not have any associations for Edgy Adji, who is supposedly a professor of engineering. My guess is that this will turn out to be one of the best demonstrations ever of the relevance of a sound educational foundation in the liberal arts over a narrow technical education. Unfortunately, our academics are so mired in navel-gazing that they'll never comprehend the inherent force of the argument.
The Iranians are going to push this too far, I think, because the Brits will make them back down one way or another. They are not going to permit any face-saving tactic from the Iranians at this point, whereas the US would allow it. When Blair terminated negotiations that ought to have been a sign. Now the Iranians are going to take it out on the captive troops. Tch, tch. Bad move. Maybe someday the Iranian people will get a nice new capital out of it, like the US did out of the War of 1812.
I'm sure the Iranian foamers are gaining the support of the oligarchs (it really is a theocratic oligarchy at this point) because every time the foamers rattle the sabers the oligarchs get a payoff from the higher oil revenues. Like Mussolini, the foamers tell the oligarchs of their impressive military, and the oligarchs find those cash-backed assurances comforting. The foamers need the extra government money from higher oil prices for payoffs of the Iranian Brownshirts. This has, from the POV of the various interests in power in Iran, been working well. They get paid for threatening everyone, which enables powerful interests not supported by the average person to remain in power. It's nice work if you can get it, but this time I think they've overreached.
Excerpt from Lossing's Field Book of the War of 1812 regarding the strike at Washington:
Such was the disposition of Winder’s little army when, at noon, the enemy were seen descending the hills beyond Bladensburg, and pressing on toward the bridge. At half past twelve they were in the town, and came within range of the heavy guns of the first American line. The British commenced hurling rockets at the exposed Americans, and attempted to throw a heavy force across the bridge, but were driven back by their antagonists’ cannon, and forced to take shelter in the village and behind Lowndes’s Hill, in the rear of it. 33 Again, after due preparation, they advanced in double-quick time; and, when the bridge was crowded with them, the artillery of Winder’s first and second lines opened upon them with terrible effect, sweeping down a whole company. The concealed riflemen, under Pinkney, also poured deadly volleys into their exposed ranks; but the British, continually re-enforced, pushed gallantly forward, some over the bridge, and some fording the stream above it, and fell so heavily upon the first and unsupported line of the Americans that it was compelled to fall back upon the second. A company, whose commander is unnamed in the reports of the battle, were so panic-stricken that they fled after the first fire, leaving their guns to fall into the hands of the enemy.
The first British brigade were now over the stream, and, elated by their success, did not wait for the second. They threw away their knapsacks and haversacks, and pushed up the hill to attack the American second line in the face of an annoying fire from Captain Burch’s artillery. They weakened their force by stretching out so as to form a front equal to that of their antagonists. It was a blunder which Winder quickly perceived and took advantage of. He was then at the head of Sterett’s regiment. With this and some of Stansbury’s militia, who behaved gallantly, he not only checked the enemy’s advance, but, at the point of the bayonet, pressed their attenuated line so strongly that it fell back to the thickets on the brink of the river, near the bridge, where it maintained its position most obstinately until re-enforced by the second brigade. Thus strengthened, it again pressed forward, and soon turned the left flank of the Americans, and at the same time sent a flight of hissing rockets over and very near the centre and right of Stansbury’s line. The frightened regiments of Schutz and Ragan broke, and fled in the wildest confusion. Winder tried to rally them, but in vain. Sterett’s corps maintained their ground gallantly until the enemy had gained both their flanks, when Winder ordered them and the supporting artillery to retire up the hill. They, too, became alarmed, and the retreat, covered by riflemen, was soon a disorderly flight.
Up to this time the conduct of the British had been in accordance with the rules of modern warfare. Now they abandoned them, and on entering the national capital they performed deeds worthy only of barbarians.
When Ross was assured of complete victory, he halted his army a short time on the field of battle, and then, with the fresh Third Brigade, which had not been in the conflict, he crossed the Eastern Branch Bridge. Assured of the retreat of the Americans beyond Georgetown, Ross left the main body a mile and a half from the Capitol, and entered the town, then containing about nine hundred buildings. He came to destroy the public property there. It was an errand, it is said, not at all coincident with his taste or habits, and what was done by him appears to have been performed as humanely as the orders of his superiors would allow. 38 When, on his arrival in the Chesapeake, he had been informed by Admiral Cochrane that he (the admiral) had been urged by Sir George Prevost, the Governor General of Canada (who was not satisfied with the terrible devastation of the Niagara frontier at the close of 1813), 39 to retaliate in kind upon the Americans for the destruction of the government buildings at York 40 and the village of Newark, 41 he demurred, saying that they had carried on the war on the Peninsula and in France with a very different spirit, and that he could not sanction the destruction of public or private property, with the exception of military structures and warlike stores. 42 "It was not," says one of Ross’s surviving aids, Sir Duncan M‘Dougall, in a letter to the author in 1861, "until he was warmly pressed that he consented to destroy the Capitol and President’s house, for the purpose of preventing a repetition of the uncivilized proceedings of the troops of the United States."
Friday, March 30, 2007
Now Really, Folks
These are Census figures for construction value put in place during a particular month. It is tracked under four different categories. This is where I got them - all official as can be. Tell me how construction spending increased in February? (These are the non-revised numbers for Jan, but I use non-revised against non-revised and revised against revised.)
Total All CategoriesIt's not the seasonal adjustment, either, because the non-seasonally adjusted figures show a YoY and MoM drop as well, and that release has the January revision in it.
Jan 2006..: 1,194,547
Feb 2006..: 1,199,873
Nov 2006..: 1,181,274
Dec 2006..: 1,189,308
Jan 2007..: 1,180,212 (YoY -14,335)
Feb 2007..: 1,170,817 (YoY -29,056)
Jan 2006..: 19,441
Feb 2006..: 19,565
Nov 2006..: 20,885
Dec 2006..: 20,452
Jan 2007..: 22,440
Feb 2007..: 19,799
State & Local
Jan 2006..: 235,790
Feb 2006..: 239,974
Nov 2006..: 256,727
Dec 2006..: 263,766
Jan 2007..: 263,520
Feb 2007..: 266,639
Jan 2006..: 277,893
Feb 2006..: 277,777
Nov 2006..: 311,586
Dec 2006..: 319,002
Jan 2007..: 318,865
Feb 2007..: 321,976
Jan 2006..: 661,423
Feb 2006..: 662,557
Nov 2006..: 592,076
Dec 2006..: 586,088
Jan 2007..: 575,387
Feb 2007..: 562,404
Thursday, March 29, 2007
STREPSIADES: a middle-aged Athenian
PHEIDIPPIDES: a young Athenian, son of Strepsiades
XANTHIAS: a slave serving Strepsiades
STUDENT: one of Socrates’ pupils in the Thinkery
SOCRATES: chief teacher in the Thinkery
CHORUS OF CLOUDS
THE BETTER ARGUMENT: an older man
THE WORSE ARGUMENT: a young man
PASIAS: one of Strepsiades’ creditors
WITNESS: a friend of Pasias
AMYNIAS: one of Strepsiades’ creditors
STUDENTS OF SOCRATES
[Scene: In the centre of the stage area is a house with a door to Socrates’ educational establishment, the Thinkery.* On one side of the stage is Strepsiades' house, in front of which are two beds. Outside the Thinkery there is a small clay statue of a round goblet, and outside Strepsiades’ house there is a small clay statue of Hermes. It is just before dawn. Strepsiades and Pheidippides are lying asleep in the two beds. Strepsiades tosses and turns restlessly. Pheidippides lets a very loud fart in his sleep. Strepsiades sits up wide awake]
STREPSIADES: Damn! Lord Zeus, how this night drags on and on!
It’s endless. Won’t daylight ever come?
I heard a cock crowing a while ago,
but my slaves kept snoring. In the old days,
they wouldn’t have dared. Oh, damn and blast this war—
so many problems. Now I’m not allowed
to punish my own slaves.* And then there’s him—
this fine young man, who never once wakes up,
but farts the night away, all snug in bed,
wrapped up in five wool coverlets. Ah well, 10 
I guess I should snuggle down and snore away.
[Strepsiades lies down again and tries to sleep. Pheidippides farts again. Strepsiades finally gives up trying to sleep]
STREPSIADES: I can’t sleep. I’m just too miserable,
what with being eaten up by all this debt—
thanks to this son of mine, his expenses,
his racing stables. He keeps his hair long
and rides his horses—he’s obsessed with it—
his chariot and pair. He dreams of horses.*
And I’m dead when I see the month go by—
with the moon’s cycle now at twenty days,
as interest payments keep on piling up.* 20
[Calling to a slave]
Hey, boy! Light the lamp. Bring me my accounts.
[Enter the slave Xanthias with light and tablets]
Let me take these and check my creditors.
How many are there? And then the interest— 
I’ll have to work that out. Let me see now . . .
What do I owe? “Twelve minai to Pasias?”
Twelve minai to Pasias! What’s that for?
Oh yes, I know—that’s when I bought that horse,
the pedigree nag. What a fool I am!
I’d sooner have a stone knock out my eye.*
PHEIDIPPIDES: [talking in his sleep]
Philon, that’s unfair! Drive your chariot straight. 30
STREPSIADES: That there’s my problem—that’s what’s killing me.
Even fast asleep he dreams of horses!
PHEIDIPPIDES: [in his sleep] In this war-chariot race how many times
do we drive round the track?
STREPSIADES: You’re driving me,
your father, too far round the bend. Let’s see,
after Pasias, what’s the next debt I owe? 
“Three minai to Amynias.” For what?
A small chariot board and pair of wheels?
PHEIDIPPIDES: [in his sleep] Let the horse have a roll. Then take him home.
STREPSIADES: You, my lad, have been rolling in my cash. 40
Now I’ve lost in court, and other creditors
are going to take out liens on all my stuff
to get their interest.
PHEIDIPPIDES: [waking up] What’s the matter, dad?
You’ve been grumbling and tossing around there
all night long.
STREPSIADES: I keep getting bitten—
some bum bailiff in the bedding.
PHEIDIPPIDES: Ease off, dad.
Let me get some sleep.
STREPSIADES: All right, keep sleeping.
Just bear in mind that one fine day these debts 
will all be your concern.
[Pheidippides rolls over and goes back to sleep]
Damn it, anyway.
I wish that matchmaker had died in pain— 50
the one who hooked me and your mother up.
I’d had a lovely time up to that point,
a crude, uncomplicated, country life,
lying around just as I pleased, with honey bees,
and sheep and olives, too. Then I married—
the niece of Megacles—who was the son
of Megacles. I was a country man,
and she came from the town—a real snob,
extravagant, just like Coesyra.*
When I married her and we both went to bed, 60
I stunk of fresh wine, drying figs, sheep’s wool— 
an abundance of good things. As for her,
she smelled of perfume, saffron, long kisses,
greed, extravagance, lots and lots of sex.*
Now, I’m not saying she was a lazy bones.
She used to weave, but used up too much wool.
To make a point I’d show this cloak to her
and say, “Woman, your weaving’s far too thick.”*
--- Follow the link to find what happens!
PS: Did you read this in school? Was it assigned or suggested? If not, what years were you in high school? My guess is that no one reads this in college, because after all, Aristophanes is the ultimate dead white male.
Disappointing Unemployment Release
Different people attribute varying levels of importance to the initial claims weekly release. A lot of people watch the four-week moving average for initial claims. Obviously if that shoots upwards (it isn't doing so, it is dropping) it would be a negative sign.
However, I basically ignore the initial claims figures, but I place a high importance upon the continuing claims figure. The reason is that rising SA continuing claims show that displaced workers are having problems getting new jobs. To me, high initial unemployment claims mean little if continuing claims are not rising. Economies are constantly shifting and adapting, and worker displacement is not a problem unless the economy can't absorb those workers into new jobs.
This stat is probably of more than usual importance right now. We have a lot of illegal, self-employed and contract workers who can't claim unemployment, but they will compete with workers who can claim unemployment and make it more difficult for those insured unemployed to get new jobs if they are losing their jobs or substantial income from their jobs. Therefore this stat probably offers us a pretty good estimate of real employment conditions at the moment - better than the household or establishment survey. We know the number of such workers is high because the UI figures from the states in 2006 were so much higher than the establishment and household figures that the total workforce was adjusted upward by an unprecedented number at the beginning of 2007.
It's too early to say one way or another. Last week looked somewhat encouraging; for the first time SA and NSA continuing claims were just a bit shy of the prior year totals. This week the SA took a bounce up and the prior year gap increased for SA, NSA and the four-week moving average.
If you go to this page and pull the national weekly numbers for 1990 to the present, you can see that it is unusual for SA continuing claims to grow from the second week of the year through the twelfth week of the year. When it does, it is a sign of employment weakness. A better measure yet is to average the first two weeks of the year and the eleventh and twelfth weeks of the year because of retail layoffs and the shifting week placements.
We lack a few weeks to get the verdict, but as of March 17th we are up about 50,000 continuing claims. If this doesn't improve, it would be a very negative indication. Because of the strongly seasonal nature of construction employment, this measure probably is a good proxy for construction employment - it is, after all, true that more building tends to occur in strong economies. In any case, it will probably be one of the better first half leading indicators we get.
Just A Raised Eyebrow Or Two
More seriously, we are deep in a state of denial about land-use induced warming. Especially California. And hint, hint, ethanol is not the answer to reduce atmospheric CO2 even if you have joined the Al Gore cult. The cultic rituals are strange and not completely understood by scholars, but it appears mandatory that you have to build gigantic houses and fly around on jets while announcing the end of the world because of too much energy use by everyone else. It appears that the richer you are, the more incentive you have to join the cult, because otherwise you'd have to do something about the private jets and colossal energy-gulping estates. And then, for some reason, some person driving a 10 year-old car to work is supposed to pay your corporation to offset their energy usage. One can see its attractions for politicians.
Socialized medicine is traumatizing hundreds of thousands of Brits giving birth? That's the claim, anyway:
Only last week a study revealed that thousands of women find themselves isolated and frightened during labour because they do not get the care they need.The study was done by the UK Department of Health, but the hundreds of thousands figure comes from another association. Reading about midwives and hiring doulas and the comments about bringing someone who knew how to give birth with you to the maternity ward made me twitch. I've got no problem with midwives, but shouldn't an obstetrician be on duty as well? The big complaint seems to be about not enough midwives, which struck me as rather third-world. Maybe that's a misnomer; one commenter had a suggestion:
Over half were left alone at times during labour. Just 19 per cent had one midwife providing continuity of care during their labour and while giving birth, with over half of firsttime mums having a stream of three or more midwives see them through the experience.
This is the reason why I and my wife decided to have our baby in India; private hospitals in most developing countries are more than affordable for most people (£4,000 will buy you a decent flat in some parts of India!) and provide a much higher standard of care than most NHS hospitals, in my experience. I don't even have a dentist in the UK - get all of that done in India as well, for a tenth of the price charged here and whenever I want!
Wednesday, March 28, 2007
Weak, Weak, Weak, And The Word Is Said
CHRIS RUPKEY, SENIOR FINANCIAL ECONOMIST, BANK OF TOKYO/MITSUBISHI-UFJ, NEW YORK:It really was weak. Gentle Ben duly gave his outlook (see CR here and here for excerpts & commentary). What struck me is that Gentle Ben acknowledged that there was "weakness" in housing and spillover to consumer spending and employment, plus a recent problem with manufacturing, yet still forecast moderate growth.
"It looks like orders are declining quite sharply ... This is very weak. It's persistent two months in a row.
"This is what it looks like when we are going into a recession. I'll be surprised if we don't.
"This means about 1-1/2 percent GDP. It's a disappointing report for the economy and the outlook."
I'm going to repeat myself from a few days ago. Retail showed that price-adjusted consumer spending on basics (groceries, gas) was negative YoY. Housing is still declining. Employment will follow shortly, although judged by weakness in remittances to Mexico, sub rosa employment or earnings is already affected. The latest durable goods report does seem to confirm that the manufacturing slump may well be a recession. Even by the most conservative estimates, building, consumer spending and manufacturing make up over 70% of GDP. I cannot construct a scenario in which all three are in decline but the economy continues to grow.
What really shocked people is that the January advance durable goods report was revised down to -9.3% for new orders. New orders rose in Feb, but not by much and they fell .1 if you exclude transportation. In fact, if you excluded aircraft, this is the fourth drop in five months.
Also, the unhappy suspicion that this report may be revised down also is probably generating even more nerves.
Inventories continue to increase:
Inventories of manufactured durable goods in February, up twelve consecutive months, increased $0.5 billion or 0.2 percent to $298.0 billion. This followed a 0.4 percent January increase.Inventories need to fall soon for new orders to rebound. Read the Bloomberg headlines - Walmart shares drop, Circuit City announces that it will be cutting thousands of jobs. It is very hard to make lemonade out of this bucket of lemons. The market has been valiantly adding sugar since the end of March, but I think the sourness is beginning to prevail. Companies vulnerable to a decline in consumer spending are going to have a very, very tough year both on Wall Street and Main Street.
Hillary Gets Staked Out
More than 20% of Democrats said no to Hillary (36% said they would vote for her, 11% undecided)
45% of women said no to Hillary
48% of Independents said no to Hillary
56% of men said no to Hillary
69% of those 62 and older said no to Hillary.
Most especially it does not surprise me that the 62 and older crowd are the most negative contingent. After all, this is the lady whose proposal for health-care reform basically advocated outlawing treating the medical conditions of old people. Oh sure, it came under the rubric of only palliative care in the last six months of life, but that is hardly a comforting proposal when one realizes that, for example, an untreated diabetic is always in his or her last six months of life. The "last six months of life" has no medical meaning in most cases. You can't accurately project treated lifespans for patients that way, according to several doctors I asked.
The thing about medical treatment is that it vastly extends life, which is why we bother with it. HillaryCare stopped just short of recommending that the elderly and disabled be turned into dog food. The proposal didn't just advocate that the taxpayers shouldn't pay for treatment - it wanted to make it illegal for all physicians to provide "non-approved" care. By the time you reach your 60s, you realize that means you.
Hillary is not electable. Years of nothing but fawning press haven't made her electable, and if she ever gets to the point of a down-and-dirty electoral fight, those jokes about presidential shorts and futures trading are going to overwhelm her prospects. The lady stares at us with cobra eyes, and we stare back in doubt. Only the media carries hod for her.
I want to know what happened to the other viable Democratic prospects. Why is Vilsack out? Why did Warner never get in? It's not that there are not good prospects out there - why aren't they running? Why has Hillary been dubbed the presumptive heir by the press? I think it is the worst disservice to the Democratic party in a generation.
I do vote across party lines, and I want a viable Democratic candidate. Is that too much to ask?
Tuesday, March 27, 2007
GUH Part 2
Well, in a lot of cases commercial really isn't. Consumer debt turns into purchases from commercial operations, and both production and consumer credit may be funded by commercial paper. In the last five years commercial asset-backed securities have increased in a similar pattern to consumer ABS. Commercial debt is used for trading on margins, etc, in the same way consumer debt is.
If you consider two of the largest uses of commercial credit, you can understand how intertwined consumer and commercial credit are. Most mortgages are funded with warehouse lines of credit made to originators, which are then repaid when these loans are securitized and sold to investors. Most construction is funded with commercial lines of credit which are repaid when the project is finished and sold. Commercial construction may be sold to commercial RE investors, and then rented, and consumer construction is generally sold to the end-user (in which case the commercial paper is repaid by consumer mortgages) or to RE investors who get another commercial mortgage.
A great deal of small business credit originates either from credit cards or from RE-backed lines of credit. Banks have regulatory limits on how much unsecured lending they can do. If collateralization on a loan or line of credit is considered lacking, the bank is constrained by regulation to offset that risk by investing in extremely safe and extremely low-return investments. These investments generally return less than than the interest the bank must pay on deposits, which sharply cuts into the expected profits from the loan.
So while small business credit is profitable for banks, it requires careful management and generally is issued backed somehow by both consumer assets and by demand clauses so that the bank can limit its losses. Pricing on commercial debt should reflect the risk involved, including the risk of reserves required to carry the debt. Whenever you get into a situation in which the only real way to cover risk is to call the debt, you run the risk of inducing a secondary credit-caused downturn on top of a soft patch in the economy.
The Federal Reserve puts out a weekly summary of Commercial Paper:Rates and Outstanding which gives an interesting outlook on short-term costs and trends in commercial credit. This chart shows outstanding:
You can see how much asset-backed commercial debt has grown since 2001. Only the blue line (non-financial) is scaled to the left. If you will look at the right of the graph, you will see that all three categories have taken a turn down recently. It is early days yet, but it looks like a contractionary signal.
What has happened is that more commercial paper has been acquired by non-bank lenders. For the commercial entities borrowing, the cost is generally less due to the fact that the marketplace does not have the same regulatory requirement to compensate for risk (see the previous paragraph). However, the logical corollary is that in an economic downturn, these lenders will refuse to renew at similar terms in order to compensate for risk! The competition from the general marketplace has generally induced looser commercial credit terms at banks as well, and in the beginning of last year several banks I truly respect had largely backed off pursuing commercial credit because of the relatively low rate of return it offered in relation to the degree of risk.
To summarize, the same trends we have seen in consumer ABS (asset backed securities) have governed commercial debt. For example, one of the dictates in the C&D issued against Fremont was that they could no longer renew commercial loans by rolling into the new principal amount unpaid interest from the previous debt. Nor are they the only bank which has been C&D'd for this practice or for undercolllateralization and ALLL deficiencies.
The trend, then, in commercial credit has been similar to the trends governing consumer credit. Loan terms were easy, risk-based pricing has been an almost forgotten concept, and the prevailing belief was that if a loan became a problem one could always refinance out of it. Whether the borrower could actually repay even the interest on the principal borrowed became of relatively little concern, because the theory was that there would always be another refi to prevent the present lender from having to recognize any loss.
See, for example, the discount rate spread chart from the Fed release:
As you can see, the spread (difference between interest rates charged between risky and safe credit) has been steadily diminishing for years. Unlike consumer credit, the spread has not yet begun to be restored. However, delinquencies are rising and it looks as if the economic slump will accelerate that trend. When that happens, businesses will have to spend more of their profits paying off debt, and it is likely that this will occur when their profits are tending to shrink anyway.
I cannot look at such information and believe that we are not facing a situation in which both business and consumer spending will not be constrained by the need to pay off or keep up with huge extensions of credit over the last half a decade. Until the fourth quarter of 2006, consumers were essentially repaying debt with more debt, generally in the form of home equity loans. Now that is reversing itself, and the results can already be seen in retail sales.
The top-off in the outstanding credit graph indicates that the same is beginning to occur in commercial credit. As with consumer credit, the moment the easy refi stops delinquencies are doomed to rise.
We are beginning to see the first signs of those delinquencies in yet another Fed release - the euphoniously named Charge-offs and Delinquency Rates on Loans and Leases at Commercial Banks. In the fourth quarter, seasonally adjusted delinquencies for commercial RE loans took a significant step up, even compared to consumer. Consumer RE loan delinquencies increased 17.9% from the fourth quarter 2005, but commercial RE loan delinquencies increased 23% from 4th Q 2005 to 4th Q 2006. If you look at the non-seasonally adjusted figures, it looks considerably worse! NSA consumer RE delinqencies increased 18.5% in one year, whereas commercial RE delinquencies increased 23.3%. Commercial is lagging consumer, but commercial delinquencies are increasing faster at banks.
Needless to say, commercial RE delinquencies are increasing more rapidly at small banks than at the 100 largest banks. On the other hand, consumer RE delinquencies are increasing more rapidly at the 100 largest banks than at small ones. Overall loan and loss delinquency rates in the fourth quarter were similar to those seen between the second and third quarters of 2004. Chargeoffs will follow.
Lender surveys did show some tightening in loan standards, and so all the data agrees - we have a commercial credit bubble of sorts, and the compensation process will exert some drag on the economy going forward. It's possible that the commercial credit bubble may turn out to be worse or approximately equivalent to the consumer bubble. Again, the first problems in commercial credit showed up in an expanding economy, so a slowing economy is expected to inflict a sharp exacerbation.
Margin credit for trading of equities, commodities and currencies has been running very high as well. At some point all of this is going to catch up with us. Everyone hopes that this will occur in the form of a slow and orderly tightening. That is the best case scenario.
Monday, March 26, 2007
GUH Part 1
First, let's consider the background. Beginning in December of last year, loan defaults had reached a point requiring that those who were buying the loans from the originators or packagers draw back and require a higher quality of loan or a much higher return. From a market point of view, it makes little difference as to whether people refuse to lend money at all to some would-be borrowers, or will agree to lend money to those would-be borrowers only at very expensive terms. Both produce rationing of effective demand in the housing marketplace.
Terms have been tightening since December, with the bulk of the effective tightening happening in late January and February. Terms have not stabilized yet; in the last two weeks much of the effective tightening has occurred in the Alt-A market rather than the subprime market.
The major economic debate in the last few weeks has centered on how much of an effect the tightening will have on the housing market and on the general economy. In terms of immediate effect, a cut in building has a broader effect on the economy than a drop-off in existing home sales, and many optimists argued that the credit tightening would have little effect on the new home market, because that was a "richer" target market and it would not be affected by troubles with subprime.
That, of course, is BS. I wrote about Centex and Beazer loans last year. It is not that these two homebuilders were unique, either - they weren't. KB Homes, for example, partnered with Countrywide for a great deal of its home loans. My belief is that the tightening in lending standards will have a greater effect on the new home market than on the existing home market because a great deal of the lending supporting new home sales was highly speculative and a great deal of speculation was occurring in new homes.
Just to make myself perfectly clear - my projection is that tightening lending standards will cut out 18-23% of the new home demand and only 9-12% of the existing home demand. I haven't read any forecast that remotely agrees with mine, so keep that in mind when you read any of my posts. If I am wrong and everyone else is right, the overall economic picture should be better than I am forecasting. Another aspect of my divergent forecast is that I expect ultimate overall losses in the Alt-A sector to be greater than in subprime.
Existing home sales will be supported by the financial conservatives who actually saved for downpayments and/or sold at the height and buy back in when they see good deals in stable-looking neighborhoods. However, by definition, a great number of the new developments are highly unstable. Some will become almost instant ghettos in the next two years. If one-third of the buyers got in with extremely variable loans, the foreclosures and the resulting price decreases will far outweigh those for existing, stable neighborhoods.
Today Census released the New Home Sales report for February. IMO it clearly shows the disproportionate impact of tightening lending standards on new home sales. This report had downward revisions for the end of 2006 and January, giving the following seasonally adjusted national totals (all data in thousands):
Oct 2006..: 967This represents an 18% drop in sales from February of last year. Year to date non-seasonally adjusted sales are down 17.9% compared to 2006 year-to-date sales, so I place some confidence in that number. For additional perspective, in 2005 total new home sold were 1,283, and for 2006 total new homes sold were 1,053. It is certain now that there will be no recovery for new home sales in comparison to 2006. Seasonally adjusted sales (which are annualized) did not drop below the 1,XXX level until July of last year, and after July exceeded the 1,XXX figure in three months - Aug, Sept & Dec.
Nov 2006.: 988
Dec 2006.: 1,047
Jan 2007..: 882
Feb 2007.: 848
What does this mean? It means that overall building, which has just begun to slow, will continue to slow, and that residential and total construction will have a significant net negative effect on the 2007 economy. Regardless of all the talk, net construction was very strong last year. Total construction, and therefore total construction employment and general economic stimulus, has just begun to fall off.
These are Census figures for construction put in place during a particular month. It is tracked under four different categories.
Total All Categories
Jan 2006..: 1,194,547
Nov 2006: 1,181,274
Dec 2006: 1,189,308
Jan 2007..: 1,180,212
FederalSo consider the ugly reality that the fourth quarter's anemic 2.2% GDP gain will be further undercut by housing, and you can understand how overwhelmingly optimistic predictions of 2.5% GDP growth for 2007 must be. This is beginning to seep through the dikes of economic denial, btw. Bloomberg:
Jan 2006.: 19,441
Nov 2006: 20,885
Dec 2006.: 20,452
Jan 2007..: 22,440
State & Local
Jan 2006.: 235,790
Nov 2006: 256,727
Dec 2006: 263,766
Jan 2007.: 263,520
Jan 2006..: 277,893
Nov 2006: 311,586
Dec 2006.: 319,002
Jan 2007..: 318,865
Jan 2006..: 661,423
Nov 2006: 592,076
Dec 2006: 586,088
Jan 2007..: 575,387
Private economists may not be so sanguine. They have cut their forecasts of business spending three times since December, and now expect it will grow this year at the slowest pace since 2003, according to surveys by Blue Chip Economic Indicators. That's after expenditures on equipment and software fell last quarter by the most in four years.In short, we are seeing a correspondence in economic wave troughs, with construction reinforcing other economic problems. It's not a matter of the economy "shaking off" housing - it's a matter of housing no longer compensating for a fundamental slackness in the economy.
This year, profit growth is slowing as margins shrink. Analysts surveyed by Bloomberg News see per-share earnings growth among S&P 500 companies slowing to 6.8 percent this year from 16.6 percent in 2006.
Next up - commercial.
"A society in which the Christian conscience does not live anymore loses direction, does not know anymore where to go, ends up empty and bankrupt," the Pope told parish elders on Sunday.Interspecies cloning:
Such a conscience was needed to promote justice and a sense of responsibility among one another, he said.
At least three respected teams of British scientists have reignited the moral debate over inserting human genes into animal eggs by proposing experiments similar to Cibelli's.Growing part human, part sheep organs for transplant(different guy, different research):
Minger's request for a government license to use cow eggs instead of women's eggs to generate human embryonic stem cells stirred significant controversy in the United Kingdom last year. His application with the Human Fertilization and Embryology Authority—along with another from Lyle Armstrong of the North East England Stem Cell Institute—is expected to be ruled on later this year.
He has already created a sheep liver which has a large proportion of human cells and eventually hopes to precisely match a sheep to a transplant patient, using their own stem cells to create their own flock of sheep.We're playing with fire here. Nuclear DNA is not the only genetic material in an egg, so you can't create a human stem cell using an animal egg and human nuclear DNA, nor can you remove all genetic material from an egg and still have a viable cell. You can only create a human-animal hybrid using this technique. Furthermore, any hosted diseases from the animal egg cell donor will still be there.
The process would involve extracting stem cells from the donor's bone marrow and injecting them into the peritoneum of a sheep's foetus. When the lamb is born, two months later, it would have a liver, heart, lungs and brain that are partly human and available for transplant.
And any time you start using animal organs for transplant you run the risk of creating new human strains of diseases. It's not a minor risk, either, as the mad cow disease problem has shown. (That was caused by feeding cows ground-up sheep, and in the process giving cows a new disease which then passed to humans.) To use such organs as transplants magnifies the risk, because you have to use immune-suppressants to block rejection, which creates an immune-suppressed host for whatever's in the mix. It's the perfect immunological storm, and other patients in hospitals will inevitably be exposed to whatever may boil up in these poor persons' bodies.
In short, we're crazy to be considering this. We already have enough of a problem with disease passing through human-to-human tissue and organ transplants. Much knowledge, no sense. This isn't a problem of a lack of Christian ethics, but of a lack of any ethics.
Tuesday, March 20, 2007
A Fine Lenten Snowstorm
A very good Bloomberg article on real estate in Spain. If you read it carefully, you will see why I don't expect the Euro economy to decouple from the US economy:
``The second homes market is more vulnerable to a slowdown,'' said Oliver Gilmartin, senior economist at the Royal Institution of Chartered Surveyors in London. ``I don't think the slowdown is a necessarily a harbinger of wider problems.''The ring of economic fire (Ireland, the UK to some extent, Poland & other Soviet bloc escapees) surrounding old Europe is still ripping along, but those economies are also seeing a lot of speculation. The European commercial and real estate debt markets show the same traits as ours. Thus, the cautionary tale of the US slide will be reflected to some extent in increased respect for risk in Europe. My guess is that many areas in Europe (and definitely in Asia) have seen more extensive speculation than the US, and are even more vulnerable to a correction. When everyone starts writing and talking about a soft landing, a rational person suspects that those sources are worried about a hard landing.... Note that the Bloomberg article discusses the trend for lender requirements imposed on RE firms such as increasing equity. Those are called "covenants", which are conditions imposed under a lending requirement. It is covenant violations that are taking most of the US originators down.
Corruption charges brought against some of the country's biggest realtors are adding to concern about prices. At least 75 people have been arrested as part of the investigation, including the mayor of Marbella, Marisol Yague.
The stigma hurts firms that haven't been accused of wrongdoing by driving investors to other regions such as Portugal's Algarve, said Juan Antonio Ibanez, chief executive officer at Urbasa Proyectos Urbanisticos SA, which is building 140 vacation houses near Marbella.
``For companies that are exposed to the vacation home market, what's happening there may be a sign to slow things down,'' said Mark Stucklin, the author of ``Buying Property in Spain'' who runs Spanish Property Insight Web site and writes a column on the market in Spain for the Sunday Times in London. ``If sales to foreigners are slowing, that means there's less building to be done and that will have an economic impact.''
Over at Calculated Risk, they have been discussing commercial credit and the impact of the housing slump on banks. Banks will take quite a hit, depending on their areas of concentration and their overall portfolio holdings.
In the press, the meme of "housing is stabilizing" has largely been dropped in favor of a determined drumbeat about subprime loans causing all the problem and the new meme of "it will not spread from subprime". The new meme is just as nonsensical as the old meme and just as flawed. The resale value of a home is determined by supply and demand in the particular area. If more people want to and need to sell than people who want to and can afford to buy, then housing prices will drop.
In most years, about 5 or 6% of housing stock turns over. Therefore, if only an extra 1% of homeowners gets into a position of having to sell, the extra supply on the market is somewhere around 15-20% of normal. If an extra 2% of homeowners have to sell, the extra supply will be 30-40%. Given that the national foreclosure "starts" have hit a record, while housing completions have just started to drop, it sure looks like we have 30% - 50% of extra inventory out there. Some of this will be compensated by the withdrawal of normal sellers from the market if they can do so. The rest has to be compensated for by generating additional buyers in the form of home price drops which increases affordability for buyers. In normal times, about 15-20% of purchases will be first-time homebuyers or reentrants.
The radical change in lending standards over about 8 weeks has resulted in excluding many would-be first time buyers, because now most of them are going to have to come up with about 2-3% to buy (3% seller credit, 2-3% buyer input). So compared to 2006, the first time buyer needs to show up with about $4,000 - $20,000 in cash depending on area. Say we've just knocked out only 10% of FTHB and 25% of reentrants - now, at the most optimistic calculation, we have a 30-40% supply/demand overhang, which implies that any serious seller must cut his or her price to at least 10% below the median asking price for that type of housing in that area. So prices will continue to decline all this year, and because of that, relatively few of the borrowers who are getting into trouble will be able to sell out without bringing money to closing, getting approved for a short-sale, giving the house back to the lender, or going to foreclosure.
You can see how asking prices have declined by using HousingTracker. Overall mortgage delinquencies were 4.95% in the fourth quarter, while foreclosure "starts" were rising faster than new delinquencies. In the fourth quarter, over 1/2 of 1 percent of all loans entered into foreclosure, which is an all-time record. We will most certainly get an extra national 1-1.3% of additional forced sales in 2007 expressed as a percentage of all housing stock. It could go as high as 1.7% if these trends continue. These statistics come from the MBA's quarterly release, which is hardly in the business of talking down the housing market.
The reason why you should look at HousingTracker to estimate price drops is that when you decimate the bottom of the housing food chain (first-time buyers and reentrants), an abnormally high percentage of home sales and purchases are "swaps" - pre-existing owners buying and selling to each other. These people do not buy entry-level housing, so these types of transactions occur above the median housing price line, and so reported average and median sale prices go up, instead of down. This is what is happening now. Nationwide, my best estimate is that 1-4 family housing has lost an average of 7-8% in price already, and it certainly appears to be set to drop another 7-8% this year. Needless to say, most people who took out 90% or higher CLTV loans within the past three years will be underwater by the end of 2007. Most of them will continue to pay on mortgages that are a strain on their household budgets, which will put a hefty constraint on discretionary consumer purchases.
As for the overall expected economic effect, it is best expressed by this limerick:
There once was a girl from Dundee,
Who was raped by an ape in a tree,
The result was most horrid,
All ass and no forehead,
Three balls and a purple goatee.
Thursday, March 15, 2007
Employment Release And Picture
The problem seems to be that salary increases for about six years have lagged in all but the top tier of the private sector, so real wages for at least the bottom half of the distribution are less than they were in 2000. We had very high inflation last year in base costs (food, energy, health), so a lot of people are just able to spend less on discretionary purchases, and it would appear that the balance has now shifted toward the need to curb spending on "need" things like groceries. At the same time, a lot of people have been doing great, and still are.
It seems that what pushed the retail figures over was the very significant drop in refinances to extract equity, which was apparently making up the gap between real incomes and household debt service plus consumer spending. That decrease will continue, because the housing appreciation for most people hasn't been there and isn't going to be there. See Housing Tracker, which reports on list prices for homes by urban areas.
I don't make a recession call lightly. I did it on the basis of inflation adjusted spending at grocery stores, etc and Walmart going negative compared to a year before. Our population has increased, and I cannot believe that a YoY price-adjusted negative in that spending area reflects anything but a very real consumer spending contraction. Consumer spending is over half the economy, and it is either slowing sharply or contracting overall right now.
Manufacturing is about 12% of the economy, and it is slowing or contracting. You see different measures of housing, but it is at least 18% of the economy, and it is definitely contracting. Added up, this takes us out of the "stall speed" zone and into negative growth. The definition of a recession is more than one quarter of negative growth, and it takes about three months after a quarter ends to get definitive GDP numbers for that quarter, so we won't have the official word until late this year.
The next downward step should be a contraction in retail employment growth in response to slowing consumer spending and lower profits at stores. Retail employment growth (service) has been somewhat slow over 2006 anyway, compared to historical norms.
The last monthly employment report looked somewhat positive, although when the ratio of private/public jobs falls to 58/39 (less than 1.50) it is not a sign of an expanding economy. The low overall unemployment estimate derived largely from a workforce drop of 190,000 between January and February. I am skeptical about that.
The other way to assess employment is by looking at unemployment. Unemployment falls into two groups - insured and non-insured. Each week the US Dept of Labor issues a report on initial unemployment claims and total continuing claims. This has been running less than half of all unemployment.
Non seasonally adjusted continuing claims are slowly rising compared to last year:
March 3 2007.......:3,024,591
Same week 2006..:2,860,513
Continuing claims are a good measure of the economy's ability to absorb laid off workers, and thus its general direction. Another thing I watch closely in this weekly report are the reasons given by states for their rise or fall in unemployment claims. This week I saw something interesting:
AL +1,190 Layoffs in the primary metals, fabricated metals, wood products, and service industries.The prior week, out of five states that reported rising initial unemployment claims, three (IN, CT, NJ) identified service layoffs as part of the source. At this page, you can get all of these releases for whatever year and week you would like. Comparing to the same week in 2006, the seasonally adjusted insured unemployment rate is higher than it was this time last year. Last year the unemployment rate dropped for much of the year. I doubt we will see that this year, as workforce hours and multiple job workers are rising.
OR +1,368 No comment.
TX +1,388 Layoffs in the trade, service, and manufacturing industries.
IL +1,756 Layoffs in the trade and manufacturing industries.
KS +1,827 Layoffs in the transportation equipment industry.
KY +3,404 Layoffs in the automobile and manufacturing industries.
MI +3,590 Layoffs in the automobile industry.
CA +6,396 Layoffs in the construction and service industries.
NY +10,768 Layoffs in the transportation and service industries.
You can also go to this page and see the weekly claims reports going back for years. In a good economy, those continuing claims should drop - it's especially clear if you look at the seasonally adjusted claims. Generally, if they don't it is an early indicator of recession. I'll try to put up a graph this weekend showing the correlation.
Tuesday, March 13, 2007
We Are In A Recession
- MoM adjusted total retail would have been negative except for the increase in gas sales.
- Grocery store receipts are negative YoY when adjusted for price increases.
- MoM adjusted for restaurants and bars is negative.
- YoY adjusted and non adjusted for restaurants is negative when price increases are taken into account.
Consumer credit from last week (Jan preliminary) showed moderate increases, no doubt because consumers were appalled by the credit card binge in November. The bottom line is that Q4 2006 total consumer debt rate of increase doubled from Q4 2005. Q4 2006 revolving credit (credit cards, basically) rate of increase nearly doubled from Q4 2005.
What we are seeing in consumer credit is the end of consumer spending financed by mortgage equity extraction (MEW). And what we are seeing in retail is that the consumer cannot borrow enough on credit cards to sustain spending increases.
Now these two reports make it clear that consumer spending will be decisively weak all this year, and that is because of the income distribution involved in those total wage increases reported so positively by the media. The problem is that the top echelon is getting nearly all of it, while the bottom echelon is getting less than enough to compensate for price increases.
The end result is that the housing problems have spread throughout the wider economy. In short, we are experiencing contraction not just in manufacturing, autos and housing, but in consumer spending. Very shortly we should see the four week moving average of initial unemployment claims move past the 350,000 mark.
A Manpower survey reported that employment plans overall are "neutral". My private inquiries show that most big companies that have significant sales to consumers are, if anything, planning job cuts. The problems in housing are due to accelerate because of the ongoing credit contraction in nonprime and Alt-A. What you see is what you get, economically. It's going to be more of the same right through this year and into 2008.
Monday, March 12, 2007
The essence of New Century's filing is that its warehouse lenders yanked funding and demanded that New Century repurchase loans, eating up New Century's much touted capital reserves in the twinkling of an eye. Under ordinary circumstances the warehouse lenders would not have done this. By forcing New Century into bankruptcy, they lose recourse for those junk loans. So now they have to eat those losses. Clearly they had no confidence that New Century could succeed as an Alt-A lender.
Some significant parts of the filing:
As of March 9, 2007, all of the Company's lenders under its short-term repurchase agreements and aggregation credit facilities had discontinued their financing with the Company or had notified the Company of their intent to do so. Certain of these lenders had also purported to terminate the Company's servicing rights under the respective financing arrangement, as described in Item 2.04 of this Current Report.Other lenders are demanding repurchases also. The above are just examples. An entire industry segment just died, although some of the carcasses have not been buried yet.
The Company has received two letters from Bank of America, each dated March 8, 2007. The letters allege that certain subsidiaries of the Company failed to satisfy margin calls under that certain Third Amended and Restated Master Purchase Agreement ... as a result Events of Default (as defined in the respective Bank of America Agreements) have occurred. The letters also purport to accelerate the obligation of the Company's subsidiaries to repurchase all outstanding mortgage loans financed under the Bank of America Agreements.
The Company received a Notice of Termination of Servicing from Barclays, dated March 8, 2007, purporting to terminate the right of one of the Company's subsidiaries to service certain loans under that certain Master Repurchase Agreement, dated as of March 31, 2006, by and among the Company, certain of its subsidiaries, Barclays and Sheffield Receivables Corporation. In its notice, Barclays also requested that the Company and its subsidiaries take certain actions to facilitate the transfer of the servicing rights to a party appointed by Barclays.
Alt-A loans as written by many of these companies are not less risky than subprime. They probably will have fewer defaults overall, but overall their defaults will carry higher losses per default. If you don't verify a buyer's ability to make a loan payment, a FICO score means little. Aside from idiots who just don't bother to repay loans, risk in lending is related to whether a particular borrower has the ability to service loan payments. If that ability is not clear, then it's necessary to verify that the borrower has other assets it can liquidate to service loan payments. Whenever such verifications are not done, the lender is really relying on the ability to foreclose, which is equivalent to hard money lending. However, hard money lenders don't extend high Loan To Value ratio loans and they charge much higher interest and fees to cover the cost and expense of foreclosure and resale.
Alt-A and subprime lenders were really making hard money loans but not charging for them or restricting loan to value ratios to the point that principal could be recovered. As soon as housing stopped appreciating significantly, it was inevitable that those stuck with this paper would be taking heavy losses.
The underlying credit quality of the mortgage pools is worsening by the month. If foreclosures and defaults concentrate into an area, it is a well-known phenomenon of lending that those forced sales and foreclosures will drive the value of all housing in the area down. Once you reach the point at which one-fifth of the listings in a particular area and price bracket are forced sales or REO, the other would-be sellers are forced to compete with those houses on price, and the downward pricing spiral can't be broken. Given that most recent subprime and most risk-layered Alt-A loans were written with very high Loan To Value ratios (due to the dramatic housing appreciation) and on terms that virtually forced a refinance within a couple of years, the inevitable result of tightened lending standards is to prevent a number of refinances before foreclosure, creating more defaults and more foreclosures. At this point we can confidently expect the number of defaults to rise through 2009 at a minimum.
The monumental unaddressed financial scandal relates to the ratings companies. How and why did they put the stamp of approval on these loan pools? There will be lawsuits galore over this, and anyone who understands anything about the world of finance must be experiencing a complete loss of confidence in those ratings. There are unpleasant logical implications for the commercial credit market.
See OC Register blog post on subprime percentages (remember, this doesn't even include Alt-A), Calculated Risk for topical news and related commentary, and Housing Wire, who, like me, was stunned into silence this weekend.
Thursday, March 08, 2007
For What It's Worth
In a period like this, everyone's aim should be to ensure that there's a little cash at hand and that investments are constructed to conserve capital.
Walmart same store sales in the US increased .4% in February.
Wednesday, March 07, 2007
The French Constitutional Council has approved a law that criminalizes the filming or broadcasting of acts of violence by people other than professional journalists. The law could lead to the imprisonment of eyewitnesses who film acts of police violence, or operators of Web sites publishing the images, one French civil liberties group warned on Tuesday.Sounds very Chinese to me. I keep trying to have confidence in the Euro sector, but when I read stuff like this my confidence takes a hit.
The government has also proposed a certification system for Web sites, blog hosters, mobile-phone operators and Internet service providers, identifying them as government-approved sources of information if they adhere to certain rules.
A very, very unbalanced pilot filed a lawsuit:
The lawsuit, filed last week, claims Boeing Co. and the Air Line Pilots Association (ALPA) can’t assure him that B747-400 planes are safe. McConnell, who is the process of seeking an early retirement from Northwest, claims the planes are rigged by Boeing and can be remotely detonated.Needless to say, the lawsuit claims a 911 connection, which, of course, has nothing to do with Muslims at all. Read it for yourself. All I want to know is that this guy isn't still flying. Btw, the lawsuit is asking for 4.5 million. There's money in conspiracy theories nowdays.
While the Treasury and Fed officials are trying to convince us all of a rosy future, this morning Boeing's shares are down.... Could it be this article yesterday, which reviewed load factors for airlines? We will have ups and we will have downs, but overall we are due for a substantial decline in stocks due to economic weakness. Still waiting for consumer credit.
Tomorrow we get the initial claims from DOLETA, and on Friday we get the full employment report. Today's futures nerves might be based on the ADP payroll report. It has been dicey lately, so I don't put that much weight on it, but ADP expanded its sample size for this report:
In February, employment in goods-producing industries cut 43,000 jobs, including 29,000 fewer jobs in manufacturing. It was the largest loss in the goods-producing sector since September. Job losses had averaged 4,000 over the previous three months.To me this report seems consistent with the ISM Manufacturing report, which did look like a small business expansion to me. The constraining factors on small businesses at this point seem to be qualified employees, cost pressures and inability to compete for the employees they need with large businesses. As the year wears on, small businesses should get some benefits from the employment weakness in large firms. We have to hope that corporate credit doesn't tighten enough to throttle this trend off. Large companies will be fighting for profits this year in order to maintain their stock prices, which will prevent them from expanding employment as they have recently - so we urgently need small business expansion to offset that trend and the continued decline in housing.
Services-producing firms created 100,000, the weakest since April. Job gains had averaged 171,000 over the previous three months.
Small- and medium-sized businesses (fewer than 500 employees) created 86,000 jobs in February, while large businesses lost 29,000, the most since mid-2003, ADP said.
I don't take these ADP reports too seriously for their absolute numbers (ADP says employment growth dropped to about a third of recent numbers), but I do think they track the small/large business employment trends pretty well.
Tuesday, March 06, 2007
Mfr's Shipments, Inventories & Orders (preliminary for Jan):
New orders decreased 5.6%Take this on top of advance January retail sales, which came in flat from December, and considering YoY data and price increases, either flat or below January 2006. Nominal increase was 2.3% YoY. The advance retail sales for February should be released on the 13th and I am anxiously awaiting that.
Shipments decreased 1.2% (this had been increasing for three months)
Unfilled orders increased 0.1% (had been increasing for six months)
Inventories finally decreased 0.2%, but inventories to shipments ratio increased to 1.23%
New orders for durable goods dropped 8.7%
New orders for nondurable goods dropped 2.0%
Pending home sales (pdf) for January were discouraging. I take seasonally adjusted figures with a big grain of salt, but according to NAR's seasonally adjusted figures pendings were down from December. The non-adjusted figures showed an 8% drop from January 2006, and they were negative YoY in all four regions. Pending sales are recorded when a sales contract is signed and before a mortgage application is filed on the property, so it is likely that the changes in underwriting standards will allow a lower percentage of these pending sales to go through than last year. It is absolutely impossible to interpret these figures as signs of a stabilizing housing market.
It is really no surprise, but 4th quarter productivity was revised down to 1.6%, raising concerns about inflation pressures.
Wages may be rising, but we have yet to manage to claw ourselves out of the negative savings rate syndrome shown in personal income. How long can this last? Consumer credit is due this afternoon at 3:00, and that's one I'll be looking at carefully.
The bright spot is still the ISM Manufacturing report released March 1st, which managed to come in at 52.3, a figure which indicates manufacturing expansion. It showed new orders increasing nicely, so perhaps January's slump is exceptional and will be largely reversed when the February report comes in.
Monday, March 05, 2007
Tornado On The Street
Okay, that's a metaphorical tornado, but not so if you are involved. Asia and Europe took another step down last night and we are set to follow.
I am waiting for Fannie to file its financials with great interest. New Century looks to be dead. Over the weekend Fremont got out of the consumer subprime business. The significance of Fremont is that the depositories have been considered less vulnerable because of their ability to get money to lend from their own deposits. So much for that brilliant theory.... The FDIC shut that part of their operations down with a C&D.
Fannie and Freddie aren't buying subprime unqualified (ability to make payment after reset) paper any more, which should logically mean that no one else wants it either. If anyone else is still buying this, sell their stock. The significance of that is not that subprime is over, but that subprime will return to being written the way it used to be - with due consideration for the probability that the borrower can make payments over at least three years without having to sell or refinance.
Alt-A in bubble areas (higher scores, incredibly witless lending practices) is due to go the way of subprime - loans will still be made, but as reality returns they will be made based on qualifying the borrowers' real ability to repay the loan. These two changes will knock out a great deal of purchasing in the high-priced areas, which will push their housing values down very quickly compared to historical norms. Historically, what we would have expected would be that housing prices would drop a little at first in nominal terms, and then just gain nominally below the rate of inflation for five to seven years. Now that is an impossible outcome.
I warned you about the equities and I see no real bottom for months to come. I expect a steep, steep selloff and that the Dow will end the year near to 11,200 than to 12,200. I wouldn't mind being wrong on that at all.
This week we get pending home sales for January, which is now utterly useless for prediction purposes, ISM Services, which is very important, consumer credit which is important but ignored by the markets, and employment on Friday, which is important.
Update: ISM Services below consensus at 54.3. General picture, to me, is slowing. Backlog of orders dropped again and inventory sentiment is "too high". Interesting comment:
"Discretionary consumer business contracting overall, growing in highly differentiated and personalized offerings." (Accommodation & Food Services)That's not very positive. Employment is still growing, but not as fast as January. With manufacturing slow-ish and housing contracting sharply, we would need to see real life in this sector.
Friday, March 02, 2007
When It Rains, It Pours
I was scared to death yesterday, because that line of storms was going to bring wind and fire it up again, but at least this time we got rain along with the wind.
Last night Chicago raised margins:
In setting margins levels, the Chicago Board of Trade Margin Committee along with the CME Clearing House monitors current and historical price movements covering short-term, intermediate and longer-term data using statistical and parametric and non-parametric analysis. Futures maintenance margin levels are typically set to cover at least the maximum one-day price move on 95% to 99% of the days during these time periods.Hmm. Let's hope this doesn't mess up the financing for Hillary's presidential campaign.... In theory this should dampen down volatility; in practice I suspect it might take a few days for that to happen!
Initial unemployment claims yesterday weren't too hot. I am watching NSA continuing unemployment more than anything, which is now running higher than it was last year at this time and increasing. For comparison:
2/16/1991 - 4,036,931Early in economic transitions the continuing unemployment stat is a better indicator of what is happening than the initial claims. A strong economy can absorb initial claims without too much hassle, but a slowing economy doesn't. The four week moving average (SA) of initial claims increased again to 335,250. Many losses of jobs relating to a real estate decline will not show up as insured employment, so it should be interesting to compare this to the next household survey. Unemployment is forecast to rise this year whether the economy goes into recession or not.
2/15/1997 - 2,952,894
2/19/2000 - 2,520,055
2/17/2001 - 3,003,753
2/16/2002 - 4,270,421
2/19/2005 - 3,096,036
2/18/2006 - 2,905,648
2/17/2007 - 3,094,630
We'd better hope that the underlying economy remains relatively strong, because a short glance at the trading headlines will show you that there is growing turmoil in the financial industry:
* Goldman, Merrill, Morgan Stanley Are Almost `Junk,' Their Own Traders Say
* Investors Should `Aggressively Underweight' Stocks, Dresdner Says in Note
* Poole Says U.S. Recession, While Possible, Isn't Federal Reserve Forecast
* Insider-Trading Ring Bust May Fuel Concern Over Hedge-Fund Ties to Brokers
* Yen Heads for Best Week in 14 Months as Investors Unwind Currency Wagers
The existing home sales report this week was pretty rough. For year over year comparisons, I use the non-seasonally adjusted numbers.
The trend for excessive slowing in the west is the problem. YoY (remember, we are now more than one year into this decline) the west saw sales for single-family decline another 9% and median prices declined 4.4%. The south also looks worse than average. Needless to say, claims that the housing market was stabilizing are being rebutted by reality.
Condos did even worse; YoY sales in the west were down 14.3% and median price was down 8.2%. The west will be battered by the changes in underwriting standards, and that will force prices down even more.
You can make a case that the housing market may be stabilizing in the northeast and midwest (although I don't believe that's so), but those two regions will not save the non-prime, non-GSE market (non-traditional mortgages). Now see Calculated Risk and make up your own mind.
The bright spot in all this is that the ISM manufacturing report picked up - it came in at 52.3%, which indicates expansion. The JPM Global manufacturing report also came in positively:
February data indicated that growth of the global manufacturing sector recovered from the sluggish trend seen at the start of 2007. The JPMorgan Global Manufacturing PMI rose from January's one-and-a-half year low of 52.4, to record a four-month peak of 53.7. The PMI was led higher by stronger trends in production, new orders and employment. Improved growth of international trade volumes also contributed to the latest expansion.The six largest economies:
United States.....: 30.6If Japan and Europe maintain a strong expansion, the global economy can decouple from the US. But usually, if the US economy slumps it will be felt globally.
United Kingdom: 04.5