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 . . .