Thursday, December 30, 2010

Housing -- Been down so long, it looks like up to me

The home market appears to be taking another leg down after the tax rebate induced spike earlier this year.

More details on home prices can be found here:
Paper-economy tracks (2nd link) the Radar Logic index which appears to lead the more well known Case/Shiller index.

Unfortunately if home prices fall further this may set up a feedback loop as more households with negative equity decided to strategically default.  Furthermore the recent rise in long term interest rates will not help affordability either

Housing permits are falling again and coming very close to putting in an all time low for the time series (The all time low was hit just a few months ago)  Looking at the graph you will also notice how in previous recoveries housing permits quickly rebounded.  Not this time.  Considering home values are falling this puts pressure on new home construction.  Lumber prices are also going up.

Eventually home prices will fall enough for demand and supply to finally balance but it doesn't look like we are there yet. For now the downward trend appears it will continue.

Disclosure: Short housing related stocks

Wednesday, December 29, 2010

Ahead of schedule PIIGS bond yields make new highs

Ahead of schedule bond yields in the PIIGS of Europe have reached new highs.   'Risk Free' interest rates have risen as well since November so the relative spread may not be at a new maximum yet but the trend is going the wrong way.

Monday, December 27, 2010

Taking away the punchbowl one way or another, Chinese version

The Chinese sense of humor was evident as they raised short term interest rates on Christmas Day by 25 basis points. (Bloomberg) What is interesting about this Saturday surprise is what happened a few days before with their failed treasury bill auction.

The ministry sold 16.76 billion yuan ($2.53 billion) of 91- day securities, falling short of the planned 20 billion yuan target, according to traders at the lead underwriters of government debt, who asked not to be identified. The average winning yield was 3.6769 percent, according to the traders. That compared with 3.22 percent on the debt of similar maturity in the secondary market yesterday.

Since the Chinese central bank was not able to drain enough cash out of the markets via Tbill sales, they raised interest rates instead.   One possible reason why the Tbill auction was not well received is there appears to be other demands on short term money in the Chinese banking system.  Short term bank repo rates are spiking higher as the year comes to a close. Why buy 3 month Tbills at 3.7% when you can lend out at 5.60% in the 3 month repo market?

As you can see there were spikes in the repo rates just before the end of previous quarter ends and I wonder how much of this current rise is due to squaring the books before year end.  We'll know soon. . .

Thursday, December 23, 2010

Something to watch in the new year

The year is wrapping up and the US stock market continues to grind higher in a Christmas rally. While the US is in a much calmer state as compared to a year ago, not all is well across the pond in Europe.

The fiscal crisis in the PIIGS of Europe (Portugal, Ireland, Italy, Greece, Spain) has not been 'fixed' in my opinion and will most likely move up to the headlines in America very shortly.

Here you can see a chart of the PIIGS bond yields  (Bloomberg) and they are not going in the right direction. The spike and fall in May 2010 was due to Greek financial difficulties and the spike in November was from Ireland. Note how much faster the fall in yields after the Ireland event has been retraced as compared to the Greek event.

As this chart shows the absolute yields and not the relative 'risk' of the PIIGS regions looking at the combined CDS for the PIIGS (Bloomberg) provides a clearer view of perceived risk.  It too is almost at new highs and could very well exceed previous peaks before the new year.    I suggest you keep an eye on both of these indicators and if you see them shooting higher you will most likely see weakness in the equity markets as well.

Friday, December 10, 2010

Hugh Hendry December Commentary

Mr. Hugh Hendry's December commentary has been floating around the internet for a few days and I thought I'd share it with my loyal readers.  As always his letters are an interesting read, seamlessly combining the literary and financial.

Hugh Hendry / Ecletica Fund December 2010 commentary

His main thrust is the monetary stimulus by central bankers is not enough to outweigh the massive consumer deleveraging going on right now.  It is an epic tug of war and Hugh Hendry is on the side of further deleveraging and deflation (for now)  Please read.

ht: ZeroHedge

Thursday, December 9, 2010

Inflation update

With the recent rise in interest rates I thought revisiting inflation rates would be helpful.

3 data series on this graph [click to enlarge]:
Blue for total Consumer Price Index (CPI) aka 'inflation'
Red for inflation minus (food and energy)
Green for housing subset

Notice how overall inflation tends to peak at the onset of a recession.
Headline inflation is still very low overall at near 1%
Housing inflation is still negative.
Inflation less food and energy is at a low for this timeline and is trending down.  Yes, we all need to eat and consume energy but both of those items are extremely volatile and stripping them out of the data series can provide additional useful information.

China comes to mind when people speak about energy and food inflation and like almost every other basic commodity the Middle Kingdom overshadows other negative factors such as Europe's continuing austerity drive and our own tepid domestic growth.  To me it appears whichever way China goes the energy, food, metals, etc. complex will follow.

Wednesday, December 8, 2010

Consumer credit update

Consumer credit data was recently released and the deleveraging continues.  This time I've shown the change in consumer credit over the entire data series so one can see how infrequently consumer credit declines.

The rate of decline is turning around, or so it seems.

This next graph shows a slightly different story (Thanks to @dafowc of

Remove lending by Sallie Mae and the Federal government and the rate of decline has not been arrested.  Furthermore you can see this is a new phenomenon.

Very curious . . .  

Friday, November 19, 2010

More thoughts on the muni market

My previous post on the muni market needed some more information.  (Ready, Fire, Aim)
Bond Girl over at highlights some recent events which most likely were the catalyst for the most recent downdraft in the muni market.

The pending expiration of the Build America Bond (BAB) program has pulled supply forward, and this is going to seesaw over the next several weeks.  Since the BAB program was initiated, most issuers have structured their new issues with the sense that they will go to either the tax-exempt or taxable market, whichever is more advantageous at the time. . . 
What is going on now is that muni issuers are scrambling to get deals done to take advantage of the program before it expires, and this is pulling the number of new issues that would ordinarily be coming to market forward.  So the looming expiration of the BAB program is creating the very conditions it was created to alleviate.
I suggest reading the entire article for some additional info on the current situation. As I mentioned in my previous post  it is unusual for muni bonds to trade at a higher yield to treasuries as the muni's have a tax benefit.  The current situation is unusual and bears further attention.

Thursday, November 18, 2010

Some perspective on the muni bond market

There's been some recent news regarding how municipal bond prices are dropping and California is having some problems selling new muni debt.  Looking back one can see the relative drop in municipal bond prices is not new and its been going on since May.

Observing the ratio of the etf's MUB (nationwide muni bond fund) to IEF (7-10 year US Treasury bond fund) can be instructive as it shows the relative value of two bond funds with almost the same duration (7.58 vs 7.26)

The relative decline in MUB is more dramatic when observed in this fashion versus an absolute basis. Furthermore looking at each etf's yield is interesting:
MUB 12 month yield: 3.71%
IEF 12 month yield: 3.00%
In other words a tax free bond fund is yielding 71 basis points more than a treasury fund with the same interest rate risk.  This 'shouldn't be' as muni bonds are tax free and a safe investment, right?  The markets are telling you something here; the perceived credit risk of muni bonds is increasing.

Stockcharts MUB:IEF
etf MUB home page
etf IEF home page

edit:  I have a followup post to this entry which you should read as well.

Friday, November 12, 2010

The flogging will continue until morale improves

The Federal Reserve recently announced they will purchase another 600 Billion in US Treasury bonds (commonly called Quantitative Easing 2 or QE2)  I am working on a longer email regarding how our current financial situation is very different from previous recessions and recoveries but the Federal Reserve's QE 2 announcement deserved some commentary. 

The markets did not really respond until after reading Fed Chairman Ben Bernanke's article in the Washington Post on November 4:
For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.
In short Fed Chairman Ben Bernanke wants higher stock prices so you'll feel better about yourself and go buy more stuff.  
Will it work?  
I have my serious doubts (as I'll expand upon in later emails).   The banks already have so much unused money they deposit the excess at the Federal Reserve. (973 billion as of October 10)  How is another 600 billion going to change the situation? 

So why is the Fed printing? Because they can and they feel like they can't do anything else. It looks like an easy painless solution but in the long term it will not fix the problem of too much debt in America. 

The problem with QE2 is the money being created is not going where Mr. Bernanke would like it to, the real US economy.  If you look at the market's reaction before and after the announcement one sees the money shifting into commodities and emerging economies while simultaneously weakening the US dollar.   The Fed is taking the easy way out by attempting to prop up and paper over our structural problems.

Lest you think this is merely the ranting of a crazed financial advisor former Federal Reserve Chairman Paul Volcker stated the QE2 plan won't help much as well: (Yahoo, November 5, 2010)
Volcker told a business audience in Seoul that the Fed's bond plan is obviously an attempt to spur the U.S. economy but "is not the kind of action that's likely to change the general picture that I've described as slow and labored recovery over a period of time."
The Wall Street Journal (November 4, 2010) expresses caution as well:
The Fed is essentially lending enough money to the government to fund its operations for several months, something called "monetizing the debt."
In normal times, this is one of the great taboos of central banking because it is seen as a step toward spiraling inflation and because it risks encouraging reckless government spending.
Financial markets Thursday responded warmly to the Fed move, but outspoken critics of the policy issued full-throated critiques.
"It is doubtful the Fed decision will produce any results," Brazilian Finance Minister Guido Mantega told reporters following a cabinet meeting with Brazilian President Luiz Inacio Lula da Silva. Officials in Brazil, which averaged 850% annual inflation in the 1990s, have been critical of the Fed's easy-money policies because they are spurring price pressures abroad and could encourage new asset bubbles outside the U.S.
If all else fails, keep doing what you did before seems to be the rule at the Federal Reserve.  By his actions Ben Bernanke is attempting to artificially raise asset prices and reduce the value of the dollar.  We shall see if he is sucessful, but what happens when the crutch of QE money is removed? 

Thursday, October 28, 2010

Hugh Hendry Watch -- October 28 on BBC

Hedge fund manager Hugh Hendry was recently on the BBC.  While his comments are directed towards the British economic situation they are very relevant to the situation in America.  Watch the entire clip.

Youtube link

ht InfectiousGreed

Tuesday, October 26, 2010

Bank lending update

The data initially looks good but a change in accounting rules is the reason and not more lending by the banks.

In Chart #1 you can see the recent large spike in total loans and leases at commercial banks.  New accounting rules forced the banks to place off balance sheet items back on their books.  (I thought the Enron scandal fixed all that? Guess not)

This really throws off the year over year data so don't get excited if you hear bank lending has recently surged.

Just to show you how this decline in lending is unusual Chart #2 shows the series longer term on a year over year change.  As you can see until recently serious declines in lending never happened.

In case you are wondering what the banks are buying instead of lending... they are buying US government securities.
In my opinion this lack of lending by the banks is just one reason the Fed is freaked out and is prepping the markets for QE 2.0.  They are going to flood the market with money to try to get more people to borrow money and buy stuff.  Unfortunately I don't think it will work and I'll be writing about that soon(tm)

Monday, October 18, 2010

Money Money + Money -- Money supply update

The broadest measure of money supply still reported by the Federal Reserve continues falling albeit at a decelerating pace.

While the pace of decline is moderating, broad money (M2 + Institutional Money Market Funds) continues dropping. I wonder if QE 2.0 will put a floor in the decline?

As you can see money supply growth is negative, something not seen during this entire data series.  As a growing money supply implies a growing (real) economy this does not bode well.

Friday, October 15, 2010

Consumers and Credit -- Behaviors may not be changing

One item I follow are aggregate debt levels as well as additional focus on the consumer as they are a large portion of GDP.

A WSJ blog entry from Sept 18 caught my eye and the results of their analysis are very interesting.

Their conclusion is the consumer is not voluntarily deleveraging, rather it is from charge-off and defaults.  This information does synch with how retail sales continue slowly rising even in the face of declining credit. 

From the WSJ:

There are two ways, though, that the debts can decline: People can pay off existing loans, or they can renege on the loans, forcing the lender to charge them off. As it happens, the latter accounted for almost all the decline. Our own analysis of data from the Fed and the Federal Deposit Insurance Corp. suggests that over the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans.
That means consumers managed to shave off only $22 billion in debt through the kind of belt-tightening we typically envision. In other words, in the absence of defaults, they would have achieved an annualized decline of only 0.08%.

Interesting data providing for very different conclusions. People will shop until their credit cards are pried from their cold dead fingers.

Wednesday, October 13, 2010

Latest Chinese Lending Stats: Ignore these numbers!

An odd way to start a post but as mentioned in my previous entry it is hard to know how much lending is truly going on in China these days.  The official data shows a decline in the rate of growth in lending and the government appears to be reigning in credit growth by raising reserve ratios

This does not tell the entire story. There is a boatload of off balance sheet lending but there are no 'official' numbers for that.
The WSJ (Sept 28,2010 ) recently commented:
A report from Standard Chartered economist Stephen Green estimates that by the end of August between 2 trillion yuan and 3 trillion yuan worth of loans (the banks don’t formally disclose the amounts) were moved off balance sheets–and outside the PBOC’s formal loan data–in this way. Over the same period, PBOC data showed the banks lending out 5.6 trillion yuan, suggesting the banking system has already passed the central bank’s 2010 target for new credit creation. It also means that the tightening signaled by the loan quota never happened.
Standard Chartered is guessing an additional 50+% of unofficial lending this year. Not a small number.  If the bank regulators crack down on this unofficial lending the rate of true loan growth would fall dramatically.

Tuesday, October 12, 2010

Foreclosure mess update: Why this is important

Barry Ritholtz clearly explains why this foreclosure mess is so important and how all the cutting of corners by the loan servicing organization has gotten completely out of control.

I could try to paraphrase it but you really must read it ALL to understand why this scandal is more than just some 'goofed up paperwork'
Bank of America halts all foreclosures.  This is a few days old but just the latest in a long march of banks who are calling a full halt to foreclosures.

BofA's sterling efficiency is demonstrated by them foreclosing on a house with no mortgage. Whoops!

This is going to get worse before it gets better . . .

Inflation expectations

The recent rumors of an imminent second round of quantitative easing (QE 2.0) by the US Federal Reserve has sent ripples throughout the entire financial market.  One series I occasionally check in on is the implied breakeven inflation rate by looking at nominal versus inflation protected rates in the treasury market.    The threat of QE 2.0 can be seen here as well.

10 year inflation protected rates (TIPS) have fallen to levels not seen for this entire data series.  In other words people are bidding up the value of inflation protection.    However in the context of comparing TIPS rates to nominal the spread is trending downwards but is not out of the ordinary. 

Of course the Fed threatening to buy up outstanding T bonds (instead of just buying more at auction) also creates a supply demand issue but this trending divergence bears watching.

Monday, October 11, 2010

Volatility measure goes bonkers

One of the indicators I follow just hit multi year lows and that's not a positive sign for the equity markets.  (Stockcharts link)

Scroll back through history and notice when this ratio of short term volatiliy to longer term volatility was so low . . .

Another sign of money market stress

Short term lending rates in Europe are creeping upwards, showing a measure of bank stress. Here's the Bloomberg link

I'd be concerned if this keeps going upwards . . .

Initial unemployment claims - Treading water

While I touched on initial unemployement claims before in an attempt to see if Google Trends could accurately predict changes, (failure!)  other people have shown the change in initial unemployment claims provides some predictive value. Creditwritedowns writes about how looking at the year over year change in unemployement claims provides insight into changes in consumer spending in America.   In short, a year over year decline in initial unemployment claims forebodes postive growth in the economy.

Let us take a look at the data (Source: Federal Reserve)

Looking at the year over year percent change in initial unemployement claims all appears well. The year over year number is negative meaning fewer people are getting laid off each week. 

There is a problem with this prognosis however and you can see it looking at the absolute numbers in the second graph. In chart two initial unemployment claims have remained quite stubborn for 2010, refusing to drop below the ~440k number for the entire year.   In a couple months if unemployment claims don't start falling our year over year metric will flatten out.  Right now the employement situation is treading water and this meshes well with the general sluggish feel to the economy.  

Right now this economic indicator is flashing Yellow.

Wednesday, October 6, 2010

Foreclosure mess roundup

I have not commented on the foreclosure mess but considering how it may impact you, gentle reader, I thought it worthwhile to repeat.

In short, the mortgage processors and servicers did not keep a proper chain of custody and MBS Pool 'C' which believes they own the mortgage does not have the paperwork proving they purchased it from Loan Company 'A' which sold it to 'B', who packaged it up into MBS (Mortgage backed security) 'C', and Bank 'D' now owns said MBS.

Some people along that chain over ownership have been caught forging paperwork.  It's a long and nasty tale that will remain stuck in the courts for a while.

If you know of someone who is going through foreclosure and they want to keep the house this is something to keep in mind. Talk to a lawyer about ensuring the bank has all the proper paperwork.

From the WSJ, October 4
First, the affidavits IndyMac used to file the foreclosure were signed by a so-called robo-signer named Erica A. Johnson-Seck, who routinely signed 6,000 documents a week related to foreclosures and bankruptcy. That volume, the court decided, meant Ms. Johnson-Seck couldn't possibly have thoroughly reviewed the facts of Mr. Machado's case, as required by law.

Secondly, IndyMac (now called OneWest Bank) no longer owned the loan—a group of investors in a securitized trust managed by Deutsche Bank did. Determining that IndyMac didn't really have standing to foreclose, a judge threw out the case and ordered IndyMac to pay Mr. Machado's $30,000 legal bill.

From Bloomberg, October 4
Citigroup Inc. and Ally Financial Inc. units were sued by homeowners in Kentucky for allegedly conspiring with Mortgage Electronic Registration Systems Inc. to falsely foreclose on loans. The homeowners claim the defendants filed or caused to be filed mortgages with forged signatures, filed foreclosure actions months before they acquired any legal interest in the properties and falsely claimed to own notes executed with mortgages.
Video from NBC Nightly News, October 1

Calculatedrisk blog:

Nakedcapitalism has posted several entries regarding this topic.  Here's just one entry:
Lender Processing Services, a crucial player in the residential mortgage servicing arena, has been hit with two suits seeking national class action status (see here and here for the court filings). If the plaintiffs prevail, the disgorgement of fees by LPS could easily run into the billions of dollars (we have received a more precise estimate from plaintiffs’ counsel). To give a sense of proportion, LPS’s 2009 revenues were $2.4 billion and its net income that year was $276 million.
Here's one MSNBC Video on the mess:

I don't do this nasty tale of cutting corners and deception any justice with this overview. Read all the links above for a fuller story. 

Wednesday, September 22, 2010

Hugh Hendry watch - September 21, 2010 on BBC

Hedge fund manager Hugh Hendry has a long conversation on BBC Hardtalk regarding taking risk and the public bailouts.  It is refreshing to see a 25+ minute discussion regarding taking risk and losses, unlike the nanosecond blipverts so common in American business TV.

Part 1

Part 2

Part 3

Tuesday, September 21, 2010

Shadow inventory: More homes coming

I have spoken before about how the supply of forced sale (foreclosed or short sale) inventory continues to increase but may be close to peaking. Here's an article stating the peak is not yet in and we have more to come:

From Realestatechannel comes some rather scary data regarding how the pipeline continues to be filled and they see no let up on new supply being dumped on the market.

If this were early 2005, one could claim that 40% of homeowners who were delinquent 90 days or longer would eventually bring the mortgage current. But the cure rate has plunged along with home prices. As early as one year ago, the cure rate had dropped to almost zero. A delinquency of 90+ days now means almost certain foreclosure or short sale.

. . .  To come up with a total for the shadow inventory, let's first add the total number of loans in default to those delinquent 90 days or more since we know that these loans are headed for foreclosure or a short sale. That comes to 4.5 million properties. Based on the cure rate for loans delinquent at least 60 days, we will add 95% of those 60-day delinquencies. That is an additional 723,000 residences. For the same reason, we will add 70% of those delinquent for at least 30 days - 1.25 million properties.
And, of course, let's not forget the REOs that have not yet been placed on MLS listings by the bank servicers. We'll be conservative and estimate them at 500,000. Adding all of these together, we come up with a total of roughly 6.97 million residences which are almost certainly going to be thrown onto the resale market as distressed properties at some point in the not-too-distant future. This massive number of homes will put enormous downward pressure on sale prices. To believe that prices are firming now is to completely ignore this shadow inventory. Ignore it at your own risk.
I suggest you read the whole article.

ht: PragCap

Monday, September 20, 2010

One small facet of the the mortgage mess

NPR (National Public Radio) has a great ongoing series about the mortgage mess.  As a centerpiece to the series they purchased a slice of one very sick package of mortgages and are investigating the mortgages inside it.  So far they have found some serious mortgage fraud as well as some other interesting stories.  Take a look at one small facet of the housing bubble:

NPR: Planet Money's Toxic Asset

ht: NicTrades

Thursday, September 16, 2010

The Humans are dead -- At least to the HFT computers

For those of you who aren't knee deep in the markets, you may not know about the HFT (high frequency trading by computers) and their affects on the markets. HFT was implicated in the May 'flash crash' and with the declining volume in the stock market it appears most trading is between computers.  In that spirit I present a more humorous slant on the entire situation:

Here's the acoustic version:

And some news regading HFT systems getting fined (Zero Hedge)

Update: The Reformed broker has some new HFT toys for Christmas! :)

Tuesday, September 7, 2010

Oil inventories creeping upwards

While oil prices have not done much recently total oil product inventories have been creeping upwards in America and throughout the rest of the OECD.

Looking at total US oil and petroleum products inventory levels you will see they are at 20 year peaks!  The OECD is also above its 5 year average inventory levels.

So if the industrialized world is filling up with oil where is it all going and why have prices not dropped?  Some possible reasons are:
* Emerging market demand and specifically China is a great unknown. 
* The Iran / Israel situation is keeping people jumpy. 
* The financialization of commodities also provides a firm bid on oil prices. 
* Hurricane season is just warming up in the US.  We'll see how much carnage they produce.

Here's some previous entries on the topic of hurricane season:

Monday, August 30, 2010

The Fed is exacerbating the move in bonds

The recent Federal Reserve August 10 announcement to reinvest principal paydowns from its very large  (1+ Trillion) mortgage backed security portfolio into longer dated US Treasury securities is providing additional downward pressure on home loan rates.

Because interest rates have dropped since the completion of purchases,  (March 31,2010: Federal Reserve MBS Faq)  the frequency of individual homeowners refinancing has gone up. As such cash flows back to the Federal Reserve have increase to a rate higher than initially expected.

If you look at the first chart attached you can see 10 year bond prices were already marching higher before the Federal Reserve reinvestment announcement of August 10. (Shown here as a white vertical line)  Since then they have continued higher.

These principal payments are being invested in longer term Treasury Bonds which then pressures long term interest rates down, causing more refinancings, causing more cash to be sent to the Fed which then buys more Treasury bonds.  Do you see the pattern here?  This does not mean long bond yields WILL drop, but it places additional pressure for them to go down until the current refinancing burst (Paper Economy) ends.

I wonder if the Fed thought this all through?

Wednesday, August 25, 2010

Refinance your home if you haven't done so already

Now is a good time to consider refinancing your home if you have not done so already. As you can see from this graph mortgage rates are at generational lows. The recent decline in long term rates was a 'surprise' to the markets but not unanticipated by some. (Clients please look at your account statements.)

The Wall Street Journal had a recent article about shopping for a home loan:

The interest rates for 30-year fixed-rate mortgages are in free fall, averaging just 4.44% on Aug. 12, according to Freddie Mac. Not only was that down from 5.07% in January, it was the lowest since Freddie began keeping records in 1970.
But even better deals can be found at smaller banks and credit unions.
"I've found that my clients can get routinely better rates by heading to a more regional lender and forgoing the bigger lenders," says Sean Satkus, a real-estate agent in the Washington, D.C., area.
The differences can be stark. On average, the three biggest banks—Bank of America Corp., Wells Fargo & Co. and J.P. Morgan Chase & Co.—offer rates of 4.66% on 30-year fixed mortgages for home purchases, according to By contrast, St. Louis's Heartland Bank is offering a rate of 4.50%. Acacia Federal Savings Bank comes in at 4.25%. And Rockland Trust Co. in Boston is offering just 4.13%. (None of these offers include "points," or extra fees to secure lower rates.).
As the article mentioned some very good deals can be found at smaller banks and credit unions. Our family's primary checking account is at a credit union and their excellent customer service and low fees are a stark contrast to the national chains.

If you are in the position to refinance and have questions give me a ring and we can talk about some of the options / pitfalls when looking for a new mortgage.

Monday, August 23, 2010

Greek bond yields keep crawling higher

Greek 10 year bond yields are creeping higher again.  I don't know if 'creeping' is the best word considering their volatility over the last year but you be the judge.   The 10 year closed at 10.91% today.
You can see the spike to 12+% and then rapid decline in May when the 750+ billion Euro bailout package was announced.
Since then rates have started climbing again.  I wonder what will happen when rates climb above their pre-bailout levels?

Thursday, August 19, 2010

Seasonality and the Baltic Dry Index

I'm doing some research on other economic indicators showing seasonality for a later post. An article on the BDI (Baltic Dry Index) and how shipping rates show a seasonal tendency caught my eye.

From the Financial Times:
It is with interest, therefore, that we note Icap’s latest monthly shipping report — which errs towards the notion that the move wasn’t necessarily so unusual.

According to the broker, for example, the BDI has fallen in June on 20 separate occasions since 1985 — making the recent declines relatively consistent.
As they noted: other month can claim to have such a poor track record, although the month of July has shown a similar tendency towards weakness over the years.
As you can see from the graph from Stockcharts the BDI can be ... volatile.

It's important to know if a data series contains seasonal affects to it.  That's one reason I tend to show data on a year over year format which eliminates time of year influences. 

Wednesday, August 18, 2010

Money Money Supply -- Money supply update.

A money supply update.  The data presented includes both the M2 money supply and the only remnant of M3 still published by the Federal Reserve which is Institutional Money Market Funds. Together this is the 'broadest' measure of money supply published by the Federal Reserve.

As you can see money supply continues contracting which has not happened for the entire data series starting back in 1974.  The previous slowdowns around 1994 and 2005 did show declining growth rates but this absolute decline on a year over year basis is unique.  

The Fed needs to take some lessons on how to make money:

Tuesday, August 17, 2010

China lending update. Is bank lending speeding up or slowing down?

It has been a while since I have updated you on the bank lending situation in China.   This is not due to me slacking off (I'll admit to a slower pace of posts recently, but I have some good excuses, really)  following this topic.  The data source, People's bank of China, has suddenly been a little more reticent in publishing this data in English and as my Chinese language skills are a bit lacking this data series has languished....

Data released recently shows a continuing trend of official slowing in the rate of loan growth.  I put official in italics because there appears to be some off balance tomfoolery going on. . .

From Caixin Online:
Despite regulatory directives aimed at preventing banks from removing loans off their balance sheets to dodge credit restrictions, China's banks did not slow down their pace in packaging loans as wealth management products.

Banks and trusts cooperated on wealth management products, effectively allowing them to shirk their responsibilities toward credit limits imposed nationwide under the central government's macroeconomic controls.
In the first half 2010, according to trust company reports, the value of wealth management products cooperatively offered by banks and trusts rose to 2.6 trillion yuan, topping the previous year's 1.77 trillion yuan.

This amount combined with the 4.58 trillion yuan in on-the-books, new credit issued by banks in the first half brought total lending in China through June 30 to near the 7.5 trillion yuan limit set by the government for all 2010.
[The 4.58 trillion yuan number matches my data.  Look at the 'wealth management products' value of 2.6 trillion.  Greater than 50%  of the 'on the books official' value of 4.58 trillion.  Continuing . . ]
By charging fees as well as commissions of up to 2 percent, banks earn more than trusts when they jointly market bank-trust products. Moreover, by cooperating with trusts, banks keep customers otherwise unavailable due to credit controls, since off-book business doesn't require bank capital and thus avoids CBRC capital constraints.
When companies start hiding assets off balance sheet it rarely ends well.

If you are wondering where all that money is going, this blog entry by staff at the World bank is stunning. Not only for the information presented but the absolute lack of surprise. (ht Mish)
In Chenggong, there are more than a hundred-thousand new apartments with no occupants, lush tree-lined streets with no cars, enormous office buildings with no workers, and billboards advertising cold medicine and real estate services – with no one to see them.
I went to China in 2003 and I can assure you I NEVER saw a single piece of urban pavement that was not completely full of cars, trucks, bikes, scooters, etc at all times.   I have mentioned empty Chinese cities before such as Ordos. How many more empty cities in China are there? Andy Xie has wrote about this before. Here is his latest article regarding the excess housing stock in China:
What distinguishes China’s property bubble from others is its unprecedented quantity dimension. China just doesn’t have any constraint limiting supply. The current debate about the quantity of empty flats is about the extent of quantity excess. The stock of empty flats measures the size of the quantity bubble. Taiwan experienced a price-cum-quantity bubble in late 1980s. At the time the market quantified the number of empty flats by obtaining data from the electricity supplier on flats without usage of electricity. The stock of empty flats measured this way was about 15% of the total households. Some analysts are trying the same tactic to quantify the volume of empty flats in China. The problem with this methodology is the complexity of China’s housing conditions.  . . . While the data are not accurate, we can confidently conclude that China doesn’t have absolute housing shortage and the per capita space is above Europe and Japan’s level. Indeed, if we adopt Japan’s standard, China already has sufficient urban housing space for everyone in the country, i.e., there is housing for every person in the countryside to move into city. . .  Four unique factors may explain China’s unique phenomenon.

1) Sustained negative real interest rate has led to declining demand for money and rising appetite for speculation. Greed and fear of inflation are working together to form unprecedented speculative demand for property.
2) The massive amount of gray income looks for a ‘safe’ haven. China’s gray income of various sorts could be around 10% of GDP. In an environment of rising inflation and depreciating dollar-the traditional safe haven, China’s rising property market is becoming the preferred place for this money.
3) China’s masses have no experience with property bubble. The property crash in the 1990s touched a small segment of the society. Foreigners and state-owned enterprises were involved. Geographically, it was restricted to Southern freewheeling zones like Hainan and Guangdong and Shanghai. Most people in China don’t know that the country had a property crash. Lack of fear is turbo-charging the greed.
4) Speculators believe that the government won’t let property price fall. They correctly surmise that local governments all depend on property for money and will try every effort to prop up its price. But, their faith in the government omnipotence is misplaced. In the end, market is bigger than government. Government behavior can delay, not abolish market force. Nevertheless, this faith in government is removing the fear over the downside. Hence, the speculative demand just grows with credit availability unchecked.

When this bubble goes pop you better have some popcorn and a good seat because the explosion will best any action film explosion sequence.

Monday, August 16, 2010

Housing update -- Some good news. Some bad news.

The good news is it appears the number of people with late home loans may have peaked.  From the data released by Fannie Mae and presented at blog Paper Money it looks like the percentage of seriously delinquent home loans may have peaked and is on the way back down.

Unfortunately one reason the late pay rate is falling is Fannie Mae foreclosing on homes. From Calculatedrisk one can see the total real estate owned (REO) by the big 3 goverment agencies continues to rise.   These homes owned will need to be eventually sold by the Gov't agencies and until both the late pay rate and excess inventory is worked off home prices will remain sluggish at best.

Another wrinkle is the late pay rate may be declining if Fannie Mae is increasing their foreclosure rate and 'clearing out' some of the late payers by taking their homes.  Only when both the late payer rate and REO's in inventory are on the decline can we start considering the worst of the storm as having passed.

Tuesday, August 10, 2010

A word about the change in Fed policy today

Today the Federal Reserve altered their policy regarding principal payments on their Mortgage Backed Security holdings.

From the press release:
To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.
The stock market immediately moved upwards from the news, reducing the losses for the day.  The ten year treasury bond shot upwards in value.

A few comments regarding the change in policy:

Before the announcement the Fed intended allowing MBS principal paydowns to slowly reduce the Fed's balance sheet over time which would have reduced the quantity of narrow money in the economy.  With this news the the Fed's balance sheet will remain the same size (for now) but the composition will change from GSE backed assets to Treasury bonds and bills.

If the Fed had allowed the MBS paydowns to shrink their balance sheet the narrow and broader money supplies would have shrunk as well.  As you can see from this chart the M2 gauge of money supply has been very sluggish of late and shrinking the Fed balance sheet at this time would have slowed M2 growth even further.

This measure is not stimulative, no more money is going to be injected into the system.

If the economy was on the mend why did the Fed alter their strategy of slowly removing this stimulus?

Friday, July 30, 2010

Hugh Hendry watch

Here's some linkage and video of hedge fund manager Hugh Hendry.

NY Times article - July 19, 2010

Vdeo interview posted July 23:

Monday, July 26, 2010

Chinese property developers cut prices.

From Chinadaily:
BEIJING - More property developers have began to cut prices and adjust their business portfolios to cope with sluggish transaction numbers due to government tightening of the real estate sector.   According to Li Wenjie, general manager of property agency Centaline China's North China Region, most Beijing developers have lowered prices by 15 percent on new projects.
Shenzhen-based Vanke, the country's largest real estate firm, made public sale prices of a large-scale project in Beijing over the weekend, with units priced 1,600 yuan ($236) lower than the expected price of 15,000 yuan per square meter.

Shanghai-headquartered Shimao Group just launched an upscale residential project called "Royal Garden" in Beijing's Central Business District area at a price of 65,000 yuan per sq m. The average price of similar projects nearby has been close to 70,000 yuan per sq m.
Of course the article quotes real estate firms spinning the lower prices but as I have mentioned previously first volume slows and then the price cuts start.  Is the beginning of the end or just the end of the beginning? 

Consumer credit keeps rolling downhill.

Earlier this month the Fed released the consumer credit data for May.  Total consumer credit keeps rolling downhill with no sign of slowing down.  I've included a longer term year over year chart as well as a more recent graph showing total consumer credit outstanding.

As you can see from this longer term year over year chart a sustained decline in lending has not occurred since this data series began at the end of World War II.  This is just one example of how this recession is different than all other post WWII slowdowns.

Looking at graph #2 for a shorter time period one again sees the steady decline in consumer credit.  Compare this to the early 90's where consumer credit levelled off but did not decline. 

In my opinion until the employment numbers start to seriously improve and home prices start creeping upwards we are going to see continued declines in consumer credit and thus sluggish growth (at best) in the overall economy.

Source: Federal Reserve

Wednesday, July 21, 2010

Unemployment claims and Google trends continue to diverge

One of my topics (and headscratchers) recently has been the disparity between the Google Trends unemployment data and initial unemployment claims data from the government.  While both of them are trending upwards the difference between the two data series grows. 

Here's a few possible reasons why:

  • The Google Trends data changes. A lot.  As I update my data series I have noticed the entire set has changed (all the way back to 2005!) up to 10%  Comparing the older and newer data series gives you the same shape of the graph for year over year purposes but seeing data change that much is perplexing.  I've emailed Google about this but we'll see if I get any response. 
  • The strong seasonality of layoffs (Go look at the government non seasonally adjusted data. It is very 'spikey') could be making the two series non comparable at this time of year. Even though both series are compared on a year over year basis something may still be incorrect.
  • There could just be anxiety about losing ones job right now and those searches are showing up in the Google data.
  • Census workers are getting laid off right now and looking for new jobs but they may not be showing up in the unemployment claims data.
  • The Google data is relative to all other searches which should remove the bias of greater internet usage over time but it may not properly isolate this specific function used more as compared to others. 
Looking at the data you can see both series tend to follow the same direction but the Initial Claims data leads the Google Trends data (the graph is of a 30 day simple moving average of the daily data)  This time the Google data is leading the Initial Claims data (or is just plain wrong)  I could perhaps be asking too much of the Google data as well. Considering the slope of both is upwards I should perhaps call it good . . .

I don't have any bets placed due to this data but I'm still hopeful something can come of this series.  In a few hours we'll see if I'm still banging my head against a wall or onto something.

Source: Federal Reserve, Google

Inflation watch -- Headline inflation rolling over.

Inflation data was released recently.  The headline rate of inflation continues to roll downwards towards zero as the chart shows.  (Source: Federal Reserve)  With oil prices no longer going higher it is likely the headline inflation rate will continue declining.  'Core' inflation (red line)  has been stuck at 1% for the last few months but the longer term trend looks downwards to me as well.  The housing component is stuck in negative territory.

Overall the trend is down for all the sub components of inflation. 

Wednesday, July 14, 2010

Late Night Linkage

Postings have been light due to some business related demands.  Here's some links to my recent reads from the last few days.

Vuvuzela -- Will it blend? Youtube

Telegraph - did BIS gold swap spook the markets?

From Chinadaily - Property restrictions continue.
Chinadaily - Home price appreciation slows.
Chinadaily - Rate of lending slows in China.

From CalculatedRisk - A Chapter 13 bankruptcy can wipe away a 2nd lien.

From FT -- The financialization of commodities.

From Hellenicshipping - A lot of spare LNG ships standing idle.

Globe and Mail - Canada exporting lumber to China.

Sovereign debt
CalculatedRisk - How much debt is there and what is the probability of default?  It's a multi part series. Good stuff.
GMO - White paper on defaults in history. Very good. Intend to write longer blog post about this.

BP / Oill spill
WSJ - BP has replaced old cap, trying new one in an attempt to stop leak.  (This is at least 24 hours old.)

Telegraph - Legal challenges to bailout of Greece.
WSJ - Moody's downgrades Portugal.

Annaly - The debt deleveraging continues.

Thursday, July 8, 2010

Unemployement claims and Google Trends. Not much clarity.

Ok call that a whiff. . .  Initial unemployment claims were released today and showed a decline.  I'm going to keep my eye on these series and see if the two continue to diverge  . . .

Wednesday, July 7, 2010

Google Unemployment Trends rising. Will initial claims follow suit?

I recently mentioned the correlation between Google Trends data on unemployment and initial unemployment claims data published by the government.  As you can see, in the short period of time since that last post the Google Trends data has risen dramatically.

I do not know if this is due to all the newly unemployed Census workers re-entering the ranks of the unemployed or if it is actually due to an 'unexpected' jump in initial claims.  We'll have more clarity in a few hours.

Either way the trend is not positive . . .

Federal Reserve, Google

Tuesday, July 6, 2010

Late Night Linkage

Some links of stuff I've been reading recently:

Canadian home sales falling.  Prices next?

A different look at Dr. Copper

China home prices

Payroll number may take a header next month due to birth death model

Greece -- Default now or later? Good reads.

Iran discovers large gas fields

More oil found in North Sea

Libya eyes purchasing stake in BP.  Cue irony.

China building more nukes

BP considering selling assets to pay fines

Ozzie mine tax revised

ECRI predicts more frequent recessions in future

Steven Keen gets some more press on his Minsky model predicting what will happen next.

Recent jobs report was not good