Monday, March 03, 2008
HAH! Something Good!
Granted, services had a very bad month. Very bad indeed. Accounts placed for collection was 39.3! And the twelve-month trend is bad. But still, manufacturing took a decent hike up, and so services should tend to ameliorate in the months ahead.
I know ISM manufacturing continued to slide, but the NACM focuses on the credit end of it. I trust it a bit more than ISM, and in this case I think it is leading. What I believe is happening is that the weaker firms are going under and that the stronger firms are gaining a bit. That would be consistent with FUT, Business Employment Dynamics and the like.
Also, construction spending shows increasing manufacturing spending over the year - spending has increased 32.3% and is still gaining on a month-to-month basis. So I do believe that there is genuine evidence that insourcing is occurring. Eventually that will have a positive effect on the economy.
We need the manufacturing intensely, because the muni mess is having extreme effects. This Bloomberg article gives a pretty good explanation:
The potential supply equals almost 40 percent of the municipal securities sold last year, overwhelming a market that tumbled 4.9 percent last month, according to indexes maintained by Merrill Lynch & Co., which began compiling market data in 1989.Combined with falling revenues in many states, the effect on government spending is likely to be extremely troublesome for the Fed. The best response would be some sort of government-backed insurance fund to pick up some of the risk.
``It's a supply tsunami,'' said Robert Fuller, principal of Capital Markets Management LLC in Hopewell, New Jersey, a financial adviser to municipalities. ``All of that is going to be redone, and it's going to be redone fast,'' he said of auction-rate bonds.
As these rates go higher and funds have to find new homes, they'll be sucking all the money out of other similar markets. For example, the muni mess may well kill off Thornburg.
See HSH Trends. Rates stopped shooting up, but jumbos averaged 7.18%. Conforming are at 6.30%. It is true that there is a risk differential between conforming and jumbo, but that can be overcome with good underwriting. The difference that cannot be overcome is that jumbos refinance much quicker when rates go down, so the average duration of the good loans is much lower. A drop of 40 basis points in rates will get a lot more jumbos to refinance from a mortgage pool than it will conforming. Suppose I bought 1 mil of jumbos paying me an average 7%. If I expect a recession (pushing down rates), then I expect that they will be paying me that rate for much less time, and I expect that those that stick in the pool will have worse credit quality. So I'm really buying a much shorter duration than if I bought 1 mil of conformings. The much shorter duration brings them into competition with the muni reworks.
At this point, I'd way rather buy some of these munis at their current rates than jumbos. Thornburg just took a nasty hit on its ability to raise capital. These are treasury yields for February. (Hmm, they keep disappearing. Something about Blogger. Go to the link.)
It would appear that investors are less worried about inflation than losing their capital. It is often said that mortgage rates are most related to 10 year treasuries. I think that is untrue and has been untrue for some years. I think they are related to the expected pool durations of the securities, which vary according to type, and also much more now to risk expectations.
The upshot is that I am wondering just how much oomph the Fed has left in its quiver by playing with rates. Probably not much. I am sure they will try to take rates down, but at this point I don't think we'll see it in the marketplace. The Fed's money auctions are having far more effect. If I were the Fed, I wouldn't lower. Oh, I know that runs contrary to all accepted financial wisdom, but I cannot see that it will have any good effect at all. Instead it will probably foster more speculation.
The real way to change effective rates would be to backstop the munis. Once you do, you even out the market again and let lower Fed Fund rates show up in mortgages and the like.
That is a remarkable treasury curve. Just remarkable. The two-year shows that fear dominates this market.
To date, Commercial Paper confirms the NACM news that the Fed's TAF initiative has been effective in ensuring the flow of capital to credit-worthy businesses does not cease. I am not sure how much longer it can be if the munis don't begin to settle soon:
What is the dollar collections bit in the NACM that was such a blowout for February? A bit more color if it's not too much trouble...
Yes, I agree that we are circling the drain, but in reality we are seeing the first signs of resurgence in the "real" economy. The Fed's task is try to keep the credit meltdown from short-circuiting that. They can't do jack about bad LBO debt, bad muni debt, bad residential mortgages, bad commercial mortgages, bad auto loans, bad credit card debt, and bad commercial loans. We have an abundance of all that. A veritable cornucopia of bad credit that probably will end up with something like 1.5T written off.
Services accounts placed for collection was at 39.3. Those are accounts that have been sent to some sort of formal collections process. For comparison, the average on this one for the prior 12 months was 50.84, and for the prior 3 months was 51.63. In February of 2007 it was 48.1. This is a stunning and sudden degeneration.
Disputes and customer deductions also showed sharp drops from January. In services, a lot of firms are extremely short on cash. Although a few of the other indicators improved, the sheer awfulness of the earlier readings presage a consequential decline.
Manufacturing has a very large diffusive effect on services. So I am using psychological jujitsu, not to be confused with mall ninja stuff, to force myself to contemplate this disaster by assessing the relative dips and curves.
The bottom line is that a lot of service firms are in deep financial trouble, which will take out a lot of jobs. However, manufacturing is genuinely showing earlier signs of resurgence. Very early, but it is there.
Overall both manufacturing and services will probably slide for at least six more months.
If there had been any doubt as to whether we were in a recession, the NACM services report would have resolved it. We are well into one.
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