Category: Recession

Economics Update

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ADP’s private report suggests 40,000 new jobs, though it should be noted that , “U.S. companies’ planned layoffs rose 15 percent in May from April to the highest monthly total since December 2005” it has been noted that, “ADP has been inaccurate of late, overpredicting payrolls,” so I would wait for the government figures.

On the other hand, productivity rose more than predicted in Q1 of 2008, though all indications is that this was not more stuff to do, but simply less stuff doing it, “Aggressive cuts in worker hours will help shield corporate profits and keep wage-related cost pressures under control, helping to reassure the Fed.”

Personally, I’m inclined to take the pessimistic assessment of this, because the Institute for Supply Management’s (ISM) non-manufacturing index fell to 51.7, indicating a softness in the service sector.

Additionally, we have the forecasting a world wide growth rate of only 1.8% this year, and weekly mortgage applications fell to a 6-year low.

Inflation worries are now weighing down the dollar, though oil prices are down a bit more to $122.48/bbl, but retail gas prices rose to a new high again, $3.983/gal.

Lastly, we have a visit from our old friends, the monoline insurers, with Ambac and MBIA getting hammered because Moody’s is finally considering a downgrade on their debt.

Another Corporate Voice Challenges Employment Stats

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This time, it’s Dow Chemical CEO Andrew Liveris, who made news last week when they announced across the board price increases, says that, “he thinks the U.S. is underestimating the level of inflation in the economy and he expects the rise in energy costs is beginning to destroy demand.”

The “demand destroying” will become even more true when interests rates finally rise.

Another part of the unsustainably low rates that created the mess that Alan “Bubbles” Greenspan made.

Economics Update

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CNN is reporting that Consumer spending was flat relative to inflation, which really is not true, since the CPI is crap, and because consumer spending includes food and energy, which are going through the roof, so everything else was down.

It looks like there will be more downward pressure on the dollar, as Euro-zone inflation is at 3.6%, which means that the ECB will definitely not cut rates, and might raise them, though the dollar strengthened slightly today.

BTW, the report of the improved growth in the intermediate report on US GDP? It’s really a contraction, as Barry Righoltz notes, the gains weredefense spending, inventory builds, and exports, with the rest of the economy at -0.4%.

Go to his site for the chart pr0n.

In energy, oil rebounded a bit from yesterday’s fall to $127.35/bbl, and retail gasoline hit a record yet again.

Economics Update

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The economy grew more than previously estimated in Q1 of 2008, at an 0.9% annual rate adjusted for CPI, as opposed to the previously reported 0.6%. Note that this still a contraction, as inflation, even the official bogus CPI understates true inflation by well over 1%.

Not surprisingly, treasuries fell, as the revised numbers show more potential for inflation.

New jobless claims rose +4000 to 372,000, just above the estimate of 370,000, which, to me at least, reinforces my thoughts on the trajectory of the economy.

Crude oil prices fell to $126.62/bbl, but retail gasoline hit another record. That’s 22 straight days.

The FDIC issues a very grim report on banks, with bank profits falling by more than 50% and “problem” banks on the rise.

This is, of course, largely tied into the real estate bubble, which appears to be popping in Britain (yet again), with prices falling 2.5% over the last month, and 4.7% year over year.

In the US, I think that those people expecting a turn around will be disappointed, as 30 year fixed mortgage just topped 6%, with indications of more to come, particularly since selling the loans will become harder, as S&P just lowered the ratings on 1,326 Alt-A residential mortgage back securities (RMBS).

Economics Update

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Well, the Oracle of Omaha very bearish on the economy. Warren Buffett is predicting a long and deep recessions.

This is not all that surprising a conclusion seeing as how consumer confidence index fell to 57.2, well below the prediction of 60, and the lowest number since October 1992.

On the brighter side, the dollar has strengthened a bit, and crude prices have fallen, though Gas prices hit a new all time high for the 20th time in 20 days.

Even if oil prices moderate, the bond prices are falling because of inflation fears.

Basically, if you expect inflation, you don’t want to hold a bond with a fixed interest rate, and so if you want to sell your bond, the buyer wants a bigger discount.

In real estate, we have home prices falling an eye popping 14.1% year over year:

The S&P/Case Shiller composite index of 20 metropolitan areas fell 2.2 percent in March from February and plummeted a record 14.4 percent from March 2007.

Economists expected prices for the 20-city index to fall 2.0 percent on month and 14.0 percent from a year earlier, according to the median forecast in a Reuters survey.

This is ugly for anyone who wants to buy a home, and the fact that we are seeing skyrocketing property tax delinquencies means that people who want to stay in their houses may find that municipal services are shrinking.

In banking, we have UBS saying that the mortgage bloodletting is not over, and US savings & loans setting aside $7.6 billion against potential losses in the home market, so if anyone is telling you that this has bottomed out, don’t believe them.

What are the Leading Economic Indicators?

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Barry Ritholtz does a very good job of taking us through what is actually in the LEI, and he notes changes that might render it less accurate.

In terms of the recent numbers, which have been surprisingly upbeat, he notes that, “The 0.1% LEI reading was marginally positive primarily due to 3 factors: 1) increasing stock prices (.16); 2) Positive yield curve (.14); 3) An unfathomable 0.13% increase in building permits.”

I don’t place much stock in the stock market as a predictor, and the yield curve going positive is an artifact of the Fed dropping rates like a pole axed steer.

As to the increase in building permits, I gotta figure that there is just something wrong here.

In terms of the changes in the LEI, Ritholtz notes:

Recall that a few years ago, the LEI was reconfigured — mostly to include more financial factors, and less real world economic data. Inthat way, its a bit more like government data. The reconfigurations seem to be avoid showing negatives.

And I am inclined to agree.

Here is a question though: what happens when the statistics can no longer be fudged?

Go read it.

Economics Update

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On the good news side, Leading indicator increased 0.1% to 102, the first back to back gain in about 6 months. I’m calling a dead cat bounce.

One of the reasons is because of good news like, southern California house sales “surging” 22% from March to April, where the reporter ignores the fact that while this is a month-to-month gain, year over year, it’s still a 19% drop, and one of the weakest Aprils on record.

So Cal has a Mediterranean climate, which means that March is wet. People don’t house sit when it’s wet.

It also ignores the small fact that 34% of those sales were REOs, real-estate owned properties. So these were basically foreclosed properties.

It’s why California Luxury home prices fell for the 2nd straight quarter.

Not only are real estate prices still falling, but Commercial property prices are falling, the most since 2000. (A critique of the financial press on this in a later post)

In contrast to Bernanke and Paulson, Jean-Claude Trichet, head of the European Central Bank is saying that the credit crunch is ongoing. I think that this is true, and portends a major shift in the financial markets. (Again, I’ll go into more detail in a later post)

As to why, perhaps the fact that banks are doing accounting backflips to keep $35 billion in losses off of their balance sheets justifies a lack of faith in the financial markets and financial industry.

Of course, boneheaded moves like UBS blowing $24 billion by deciding to expand into asset based securities further erodes people’s confidence in financial “professionals”.

My cats could do better on the cat-turd futures market than these guys.

As a result, we are seeing another big LBO foundering, this time the the $51.8 billion Bell Canada takeover, what is (was?) to be the largest LBO ever.

Economics Update

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Well, the financial news is reporting that consumer spending are up, but as Barry Ritholtz notes, “Retail Sales were rather unimpressive: Gasoline, Groceries, Food & Beverage were up, while pretty much everything else was flat to down. (see picture)

Also note that the real numbers are actually a reduction when adjusted for inflation.

In the “same as it ever was” department, we have crude oil and gasoline hitting a new record again, $126.98/bbl.

In real estate, The median single-family home price dropped 7.7% Q1, annualized, that is around a 30% drop, but you will see articles calling a bottom soon.

In banking, we have Bank of America saying that credit costs are up.

Translated from bank-speak, it means that they are having more late payments, defaults, and foreclosures.

On the good news side, Ben Bernanke is promising more free money through the Federal Reserve’s “sh%$pile for dollars” auctions.

Economics Update

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The numbers are out for March pending home sales, and they are very grim, with the pending home sales index falling to it’s lowest level since its founding in 2001, a 1% one month and 20% year over year drop. Of course the NAR is seeing a turnaround in the next few months, like they always do.

We are also seeing increasing signs of inflation, with Federal Reserve Bank of Kansas City President Thomas Hoenig suggesting that inflation pressures may lead to rate hikes soon, and Toyota to raising prices on their cars, largely as a result of the falling dollar.

On the plus side, however, productivity increased by 2.2% in the first quarter, more than the 1.5% predicted, which should moderate inflation some.

On a more general, “we in a recession” note, retail imports fell 4.8% in March, yet another indicator of a slowdown, that the retailers are cutting back.

Oil hit another record today too.

Economics Update

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Gee, Alan “bubbles” Greenspan is now saying that we are having an, “awfully pale recession.” Well, I guess he can still afford to eat at the Four Seasons, so it’s someone else’s problem…Neh?

Actually, I’m surprised that he did not use the unexpected growth in the service sector, with the ISM numbers rising to 52 from 49.6 (50 indicates growth).

His goal has always been more to prevent government intervention than giving an accurate assessment anyway, because he believes that preventing government action is the only thing that he can do of value.

Of course, the fact that oil busted the $120 barrier, hitting $120.21/bbl doesn’t bode well for the economy anyway.

Oil is up on supply fears from potential attacks in Nigeria and Kurdistan, along with the dollar weakening because of the Fed rate cuts.

Interest rates in the private sector, however, appear to be on the way up, with 30-year mortgages rates rising despite the Fed rate cuts. Additionally, the Fed is reporting that banks are tightening up on their lending at a historically high rate.

The fact that consumer bankruptcies are up almost 48% year over year in April might have something to do with this, or perhaps the other way around. It’s a chicken egg thing to me.

However, the fact that S&P has decided to stop rating bonds backed up by second mortgages seems to indicate that this still has a way to go on the way down.

The fact that companies cannot refi right now may very well take down ResCap, the 8th largest mortgage lender wing of GMAC:

ResCap, the eighth-largest U.S. residential lender in 2007, today began offering as little as 80 cents on the dollar to exchange or buy back $14 billion of bonds to extend maturities and stave off bankruptcy. To finance the debt restructuring, ResCap is seeking a new $3.5 billion credit line from its parent GMAC, which is owned by General Motors Corp. and an investor group led by Cerberus Capital Management LP.

“There is a significant risk that we will not be able to meet our debt service obligations, be unable to meet certain financial covenants in our credit facilities, and be in a negative liquidity position in June 2008,” Minneapolis-based ResCap said in a filing to the Securities and Exchange Commission today.

With all this going on, it’s not surprising that UBS is looking at cutting 8000 jobs.

Economics Update

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Well, the consumer confidence index fell to its lowest level in 5 years, what’s more, the Frog consumers are bumming more than they have in 20 years.

Sarkosy is not going to find a lot of support for making the French economy more “Anglo-Saxon” right now.

In real estate, foreclosures jumped 23% in 1Q of 2007, which is on a pace for a 200% increase in foreclosures in 2008, while the Case-Shiller Home Price index fell 13% year over year in February.

This is not over. It’s not close to being over.

In the ever entertaining Countrywide sage, the mortgage lender posted a $893 million first-quarter loss.

I still wonder when some Bank of America investor finally starts screaming about a proxy fight over their purchase of Nationwide. Every day, the deal looks worse and worse.

As to energy, oil is down, but gasoline is up.

Economics Update

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It’s official, we’re in a recession, because Bush is denying that we are in a recession – Apr. 22, 2008.

For more direct evidence of a recession, we have American drivers cutting back on driving and gasoline usage. When Americans stop driving, it means that the recession is here…big time.

In energy, oil broke $119/bbl, $110/bbl now appears to be the new $100/bbl

Across the border, Canadian Central Bank cut rates by 50 basis points, but even so, the Canadian dollar is still above parity with the US dollar, but they are definitely seeing the fallout from the US downturn.

In other currency matters, the dollar weakened to above $1.60:€1.00, though it’s now about $1.5992.

At the beginning of the year, it was $1.48 or so.

In things related to banking and real estate, we have to start with the elephant in the room, that GSEs Fannie Mae and Freddie Mac are looking increasingly at risk, and a potential bailout would run to over $1 trillion, which might threaten the US government’s AAA rating.

Generally, bank profits are tanking, so it should come as no surprise that banks are retrenching.

Notably, Bank of America will be ending subprime operations, and tightening generally on mortgage standards, which makes it hard to understand why it’s buying Countrywide.

Citi needs more capital, so it’s offerring $6.2 billion in hybrid bonds, at 8.4%, with an A2 rating.

Hybrid bonds are….are….Ummm, a sort of hybrid between preferred stock and bonds…I’m confused, and they are described as “innovative”. I’ll try to get more information, but in the meantime, run away.

Finally, the Fed bailout of banks continues apace, reaching $360 billion with the sale yesterday.

Economics Update

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Well, it looks like 80,000 jobs were lost in March, and the unemployment rate went up to 5.1%, see here, here, and here.

There was good news, at least by the standards of the hacktacular financual press, the ISM’s report on non-manufacturing businesses rose, from 49.3 to 49.6, when it was expected to be 48.5.

Note that while the headline on the story speaks of a rebound, it’s not. Any number under 50 is a contraction, so the contraction was slower than expected, but it was still a contraction.

Given these numbers it’s no surprise that the Federal Reserve is signaling more rate cuts.

It won’t work. We need to go Nordic on this problem and nationalize the insolvent institutions, for a time at least.

Give all this information, it should come as no surprise that we are getting reports of skyrocketing vacancies in commercial space, the stuff that all the “experts” said was not going to be a problem.

This is typical. Commercial space lags residential space.

It won’t help that Oil is back above $105/bbl.

It also looks like Delphi auto parts may be going under, Appaloosa Management LP is pulling out of a deal to invest 2.55 billion in the manufacturer.

This will leave GM on the hook for a lot, and they may have no parts for their cars.

Economics Update

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In honor of March Madness:

Click image for source

You may recall that Monoliner insurer FGIC having problems. Now it is saying that was saying that it would not honor its insurance contract withCredit Agricole SA and IKB Deutsche Industriebank, because they deceived the insurers about their financial health.

Seeing as how IKB seems to be facing villagers with torches, this may very well be true.

It’s in court.

And of course, because it’s a day of the week ending with “y”, the Federal Reserve is giving away another $100 billion to the banks.

No wonder noted bear, and Oppenheimer analyst Meredith Whitney is predicting that Citi will be cutting its dividend again soon.

In economic matters for the rest of us, personal income did better than expected, but personal spending remained weak, and the head of Freddie Mac is saying that he does not expect recovery in house prices until 2010.

I say that he is an optimist. The regional crashes we have seen, which have been much less severe, have all lasted at least 5 years, which puts the date at 2012, though I would take 2015 in the over/under in non-inflation adjusted dollar terms.

I don’t think that we will be back to the 2006 highs adjusted for inflation in my lifetime.

And in the world of collapsing economic institutions, we have former sub-prime lender Fremont General ordered to find a buyer by the FDIC, in addition to restricting interest it can pay to depositors, payments to senior executives, and transfers to its parent company.

This does make the fact that the Office of Federal Housing Enterprise Oversight has told Fannie Mae and Freddie Mac that they are free to raise another $20 billion a bit nonsensical.

The taxpayers will end up on the hook for all of this.

Economics Update

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The first two bits are easy to understand, New home sales are the lowest since 1995, which matches with the horrid existing home sales data that I posted yeaterday, and Factory orders fell off a cliff in February.

First, things are simply getting even weirder in the never-dull world of monoliner insurers, with the Federal Home Loan Banking looking at offering bond insurance for municipal infrastructure project bonds.

It’s a dull, but very profitable racket, because there has been some sort of freaky deal between the monoliners and the rating agencies for years that has them offering artificially low ratings to muni bonds, which pretty much forces said governmental agencies to buy bond insurance.

If it works, it kills the monoliners, because this business is the only thing keeping them afloat on a sea of collateralized debt obligations (CDO).

Additionally, we have monoliner insurer FGIC notifying regulators that due to some “dodgy” dept that it is ensuring, that it is insolvent under New York State law, “FGIC in notes to its consolidated financial statements said it plans to submit a plan to the New York superintendent to reduce its risk. FGIC also said it has voluntarily ceased writing new business to preserve capital.”

This means that, theoretically at least, regulators could seize the FGIC, though they are in litigation with the borrower of the aforementioned debt, and they are filing a recovery plan.

Economics Update

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Jobless claims
378,000, up 22K from the previous week, and the leading economic indicators fell for the 5th straight month by 0.3%.

Oil dropped nearly $4.00/bbl, and the dollar is up versus the Euro.

These are both driven by what is seen as reduced demand for oil, and a rate cut from the Fed which was around 25 basis points (0.25%) less than expected.

Still, it does not appear that the banks are optimistic Citi is looking to cut 2,000 jobs in their securities division (investment banking and trading). This is in addition to the 4k announced in January.

Just to remind you, it’s not just sub-prime, as Alt-A delinquencies and foreclosures are spiking too, and are trashing the related mortgage backed securities.

Finally, the Federal Reserve continues its extended bout of anilingus with the brokerage houses, making $75 billion in treasury securities available to investment banks.

A Big Wet Kiss, With Tongue, and Possibly on the Genitals, to the Upper Management of Bear Stearns, Courtesy of the New York Times

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Maybe I’ve grown hard hearted in my middle age, but somehow, the plight of upper management at Bear Stearns does not inspire the empathy in me that it does Landon Thomas Jr. of the New York Times.

Bear Stearns has always been one of the shadier brokerages, with line fuzzing being a part of their investment strategy, so I’m just not upset that James E. Cayne “billionaire just over a year ago when Bear’s stock soared past $160, his 5.8 million shares are now worth about $28 million at Monday’s closing price of $4.8”.

Nor am I distressed that, “Some executives had moved quickly, putting their weekend homes on the market”.

Because of their work there are now people with no home at all.

And then there are the poor investors, “Bear executives were not the only big losers. Joseph Lewis, the Bahamas-based financier, invested $1 billion at prices above $100 last year, and top institutional investors like Morgan Stanley, Legg Mason and Barrow, Hanley, Mewhinney & Strauss, a value investor in Dallas, have been recent buyers of the stock.”

Boo F*&%ing Hoo.