Initial Claims Report Suggests a Much Weaker Labor Sector
The initial claims data weakened for the week ending Feb. 20 as the claims figure increased from 474,000 to 496,000. The consensus expected claims to decline to 460,000. Many analysts, including us, believed that inclement weather conditions across the U.S. would prevent many workers from filing new claims. If this scenario is true, then the actual initial claims figure would be much closer to 550,000... Continuing claims rose a modest 6,000 to 4.617 mln for the week ending Feb. 13. The figure for the week ending Feb. 6 was revised up from 4.570 mln, and the consensus expected claims to remain at that previous level. The decline in original claims is mostly due to workers running out of benefits and it seems the weather made it difficult to process extended benefit applications.
Durable Goods Orders Headline Data Deceiving
Durable goods orders rose 3.0% in January after increasing 1.9% in December. The consensus expected a more modest 1.5% gain. The headline data is very misleading. Transportation orders jumped 15.6% in January on the back of a 126% increase in orders for nondefense aircraft. Strangely, even though auto assemblies rocketed higher in January, motor vehicle orders fell 2.2%. The drop may correspond with higher motor vehicle inventories in the coming months. Excluding transportation, orders slipped 0.6% after increasing 2.0% in December. The consensus estimate called for a 1.0% increase. After a strong Q4 2009, growth in business investment seems to have slowed. Orders for nondefense capital goods excluding aircraft fell 2.9% after increasing roughly 3.3% in both November and December.
China's banks in cash-call rush to lift balance sheets
FT reports China's state-controlled banks are rushing to raise money from public markets to shore up their balance sheets after a year of unprecedented loan growth and the introduction of stricter capital requirements by regulators. This week alone, Chinese lenders have announced plans to raise up to 76 bln through equity and bond sales, with at least 150 bln of bank fundraising in the pipeline, analysts say. The cash calls come as Beijing tries to limit new lending to the white-hot property market and the investment vehicles of local governments.
Latest truck tonnage reading indicates economic recovery
Truckline reports the American Trucking Associations’ advance seasonally adjusted For-Hire Truck Tonnage Index jumped 3.1% in January, following a revised 1.3% increase in December 2009. Compared with January 2009, SA tonnage surged 5.7% which was the best year-over-year reading since January 2005 and the second consecutive increase. ATA Chief Economist Bob Costello said that the latest tonnage reading, coupled with anecdotal reports from carriers, indicates that both the industry and the economy are clearly in recovery mode, although at a slow pace.
Friday, February 26, 2010
Mortgage Delinquencies Continue to Rise
While the most broad measures of publicized economic data have showed positive readings over the past few months, indicating the massive stimulus and liquidity injections are likely working, we also want to keep an eye out for imbalances in those less reported pieces of fundamental data on the economy. For example, in a recent report, mortgage delinquencies of 60 or more days rose for the 12th straight quarter, hitting a record high 6.89% in Q4 2009, according to credit bureau TransUnion. Year-over-year, the delinquency rate is up about 50% from 4.58% delinquent in Q4 2008. When we are talking several trillion dollars in outstanding mortgage debt, 6.89% becomes a fairly large number.
TransUnion, one of the major US credit bureaus, conducts a survey of roughly 27 million all of its credit files from its total consumer base, or about one in every nine consumer files in its database of 250 million consumer files each quarter. States with the highest delinquency rates in Q4 2009 were led by Nevada with 16.19% and Florida with 14.93% delinquent.
Ironically, the bureau in December projected that delinquencies will drop nearly 3% by year-end 2010 to 6.39%; but that was when the year-end delinquency rate was expected to come in around 6.56% rather than 6.89%.
Part of the rise in delinquencies may come from a trend of more borrowers than ever choosing to pay down credit card debt before making mortgage payments. TransUnion found the share of borrowers who were delinquent on their mortgages but current on their credit cards rose to 6.6% in Q3 2009 from 4.3% in Q1 2008. At the same time, the share of borrowers that were delinquent on credit cards but current on mortgages slipped to 3.6% from 4.1%. It seems like more people are willing to default on mortgage debt than credit card debt.
In addition, the delinquency rate on commercial mortgage-backed securities (CMBS) loans posted the largest single monthly increase on record. US CMBS loans are also transferring to special servicing status faster and greater than ever before.
The delinquency rate on CMBS loans rose by 1/2% in January, driving the total rate to 5.42% in February, according to a report by Moody’s Investors Service. The new rate marks the largest increase in the delinquency rate, by dollars and basis points, as recorded in the current downturn by Moody’s. (See chart below)
So while the broadest measures of economic statistics are showing better numbers and economic improvement, there are many cross currents. The economy does have some underlying fundamental weakness in certain areas, such as mortgages delinquencies, which, if the trend continues, could impact the degree and pace of economic recovery.
TransUnion, one of the major US credit bureaus, conducts a survey of roughly 27 million all of its credit files from its total consumer base, or about one in every nine consumer files in its database of 250 million consumer files each quarter. States with the highest delinquency rates in Q4 2009 were led by Nevada with 16.19% and Florida with 14.93% delinquent.
Ironically, the bureau in December projected that delinquencies will drop nearly 3% by year-end 2010 to 6.39%; but that was when the year-end delinquency rate was expected to come in around 6.56% rather than 6.89%.
Part of the rise in delinquencies may come from a trend of more borrowers than ever choosing to pay down credit card debt before making mortgage payments. TransUnion found the share of borrowers who were delinquent on their mortgages but current on their credit cards rose to 6.6% in Q3 2009 from 4.3% in Q1 2008. At the same time, the share of borrowers that were delinquent on credit cards but current on mortgages slipped to 3.6% from 4.1%. It seems like more people are willing to default on mortgage debt than credit card debt.
In addition, the delinquency rate on commercial mortgage-backed securities (CMBS) loans posted the largest single monthly increase on record. US CMBS loans are also transferring to special servicing status faster and greater than ever before.
The delinquency rate on CMBS loans rose by 1/2% in January, driving the total rate to 5.42% in February, according to a report by Moody’s Investors Service. The new rate marks the largest increase in the delinquency rate, by dollars and basis points, as recorded in the current downturn by Moody’s. (See chart below)
So while the broadest measures of economic statistics are showing better numbers and economic improvement, there are many cross currents. The economy does have some underlying fundamental weakness in certain areas, such as mortgages delinquencies, which, if the trend continues, could impact the degree and pace of economic recovery.
Friday, February 19, 2010
30 Year Bond Yields
We are currently paying very close attention to the 30-year bond yield which is testing key resistance at the 4.75% level. The highest closing yield since the 2008 collapse was 4.76% on June 10, 2009 and over the last 2 years 4.79% on June 16, 2008; meaning that this is potentially a crucial level to be aware of for bonds. Should the long bond go on to establish a higher range (higher interest rates), this would be one of the first signs of the bonds markets adjusting to positive economic date and the likelihood of the Federal Reserve raising interest rates in the near future. It should be noted that the bond market will adjust market interest rates in anticipation of the Federal Reserve moving interest rates higher. If Treasury bond yields move higher (price lower) this will push all other bond yields - such as corporate bonds - higher even if credit spreads continue to stay tight.
The 30-year bond seems likeliest to be a leading indicator of this change (the short end of the curve is too tied to the Federal Reserve's expectations) but it is highly likely to drag the benchmark 10-year note yield higher as well. As the chart below shows, the spread between these 2 yields is at the wide end of its historic range at 96 basis points (100 basis points is equal to 1%) and we doubt whether it would widen more than another 15 basis points. Should the 30-year bond yields move higher, we should expect to see the 10-year note yield move up to test key resistance at the 4.00% level. A move higher in the 10 year yield will cause lending rates - such as mortgages - to move higher as well; which could have some impact on future economic growth.
(Double click on image for larger view)
The 30-year bond seems likeliest to be a leading indicator of this change (the short end of the curve is too tied to the Federal Reserve's expectations) but it is highly likely to drag the benchmark 10-year note yield higher as well. As the chart below shows, the spread between these 2 yields is at the wide end of its historic range at 96 basis points (100 basis points is equal to 1%) and we doubt whether it would widen more than another 15 basis points. Should the 30-year bond yields move higher, we should expect to see the 10-year note yield move up to test key resistance at the 4.00% level. A move higher in the 10 year yield will cause lending rates - such as mortgages - to move higher as well; which could have some impact on future economic growth.
(Double click on image for larger view)
Friday, February 12, 2010
Economic Indicators 101
Almost everyday, there is some economic statistic or number that media pundits discuss as either good for the markets or bad for the markets. It makes sense for investors to have a basic understanding of how the economy works and how economic activity is measured. While we focus and monitor the numbers from month to month, we thought it would be informative to give you a breakdown of the key economic indicators for your reference:
Business Inventories: A monthly running total of how well companies are selling their products, business inventories are a signal to economists. The business inventory data is collected from three sources: the manufacturing, merchant wholesalers, and retail reports. Retail inventories are the most volatile component of inventories and can cause major swings. A sudden fall in inventories may show the onset of expansion and a sudden accumulation of inventories may signify falling demand and hence onset of recession.
Gross Domestic Product: The gross domestic product (GDP) is the most important economic indicator published. Providing the broadest measure of economic activity, the GDP is considered the nation's report card.
The four major components of the GDP are: consumption, investment, government purchases, and net exports. As the barometer of the nation's total output of goods and services, GDP is the broadest of the nation's economic measures.
Consumer Price Index (CPI): The consumer price index (CPI) is considered the most important measure of inflation. It compares prices for a fixed-list of goods and services to a base period.
Unlike other measures of inflation, which only cover domestically-produced goods, the CPI covers imported goods, which are becoming increasingly important to the U.S. economy.
Job Growth: Except for the GDP, the government's employment report is the most significant economic indicator reported, setting the tone for the entire month, providing information on employment, the average workweek, hourly earnings, and the unemployment rate.
Consumers feel more at ease and more confident when the job market is expanding. But when job growth contracts to 100,000 or less month to month, it typically means a recession or slow growth for the economy.
Consumer Confidence: The Conference Board maintains this index of consumer sentiment based on monthly interviews with 5,000 households.
In bad times or good, consumer confidence serves as a reflection of the nation’s financial health. Sometimes the consumer worries about inflation more than unemployment, and at other times the reverse is true. Consumer confidence is far more important to the financial markets during times of national crisis or panic and recessions.
As might be expected, consumer confidence is the weakest during recessions, slightly better on average during recoveries, and highest during expansions (like the decade long bull market of the 1990’s.
Unemployment Index: The government's employment report covers information on payroll jobs, including employment, average workweek, hourly earnings, and unemployment. Unlike the jobs data, which is a coincident indicator of economic activity (it changes direction at the same time as the economy), the unemployment rate is a lagging indicator. It increases or falls following a change in economic activity.
Housing Starts: This indicator tracks how many new single-family homes or buildings were constructed throughout the month. For the survey each house and each single apartment are counted as one housing start, (a building with 200 apartments would be counted as 200 housing starts). The figures include all private and publicly owned units, with the only exception being mobile homes which are not counted.
Most of the housing start data is collected through applications and permits for building homes. The housing start data is offered in an unadjusted and a seasonally adjusted format. Declining housing starts show a slowing economy, while increases in housing activity can pull an economy out of a downturn.
Index of Leading Economic Indicators: The index of leading economic indicators (LEI) is intended to predict future economic activity. Typically, three consecutive monthly LEI changes in the same direction suggest a turning point in the economy. For example, consecutive negative readings would indicate a possible recession.
Business Inventories: A monthly running total of how well companies are selling their products, business inventories are a signal to economists. The business inventory data is collected from three sources: the manufacturing, merchant wholesalers, and retail reports. Retail inventories are the most volatile component of inventories and can cause major swings. A sudden fall in inventories may show the onset of expansion and a sudden accumulation of inventories may signify falling demand and hence onset of recession.
Gross Domestic Product: The gross domestic product (GDP) is the most important economic indicator published. Providing the broadest measure of economic activity, the GDP is considered the nation's report card.
The four major components of the GDP are: consumption, investment, government purchases, and net exports. As the barometer of the nation's total output of goods and services, GDP is the broadest of the nation's economic measures.
Consumer Price Index (CPI): The consumer price index (CPI) is considered the most important measure of inflation. It compares prices for a fixed-list of goods and services to a base period.
Unlike other measures of inflation, which only cover domestically-produced goods, the CPI covers imported goods, which are becoming increasingly important to the U.S. economy.
Job Growth: Except for the GDP, the government's employment report is the most significant economic indicator reported, setting the tone for the entire month, providing information on employment, the average workweek, hourly earnings, and the unemployment rate.
Consumers feel more at ease and more confident when the job market is expanding. But when job growth contracts to 100,000 or less month to month, it typically means a recession or slow growth for the economy.
Consumer Confidence: The Conference Board maintains this index of consumer sentiment based on monthly interviews with 5,000 households.
In bad times or good, consumer confidence serves as a reflection of the nation’s financial health. Sometimes the consumer worries about inflation more than unemployment, and at other times the reverse is true. Consumer confidence is far more important to the financial markets during times of national crisis or panic and recessions.
As might be expected, consumer confidence is the weakest during recessions, slightly better on average during recoveries, and highest during expansions (like the decade long bull market of the 1990’s.
Unemployment Index: The government's employment report covers information on payroll jobs, including employment, average workweek, hourly earnings, and unemployment. Unlike the jobs data, which is a coincident indicator of economic activity (it changes direction at the same time as the economy), the unemployment rate is a lagging indicator. It increases or falls following a change in economic activity.
Housing Starts: This indicator tracks how many new single-family homes or buildings were constructed throughout the month. For the survey each house and each single apartment are counted as one housing start, (a building with 200 apartments would be counted as 200 housing starts). The figures include all private and publicly owned units, with the only exception being mobile homes which are not counted.
Most of the housing start data is collected through applications and permits for building homes. The housing start data is offered in an unadjusted and a seasonally adjusted format. Declining housing starts show a slowing economy, while increases in housing activity can pull an economy out of a downturn.
Index of Leading Economic Indicators: The index of leading economic indicators (LEI) is intended to predict future economic activity. Typically, three consecutive monthly LEI changes in the same direction suggest a turning point in the economy. For example, consecutive negative readings would indicate a possible recession.
Friday, February 5, 2010
S&P 500 Index Update
Over the past five or six months, the broad markets have continued to climb higher, surprising many pundits and economists. When the markets slowly grind higher and bullish sentiment becomes somewhat euphoric (as we saw in the sentiment readings in January), there is a setup for a pickup in volatility. When markets correct to the downside and volatility intensifies, as we have experienced over the past few weeks, the selling pressure can quickly wipe out months of appreciation in the markets; which is why we have been more defensive and cautious since last Fall.
Below is a six month chart of the S&P 500 Index as of yesterday's close. As you can see, we are essentially back to mid September levels in the index, virtually eliminating all gains from the 4th quarter of last year and beginning of this year in just a few weeks - dropping over 8% from this year's high.
Fortunately, there is some good news. First, reported earnings have been fairly positive so far and the economy is improving, albeit at a slow pace; and it's much better than it was last year at this time. Second, this market decline has caused an 180 degree turn in sentiment for both dumb money confidence and smart money confidence. Below is a chart showing dumb money confidence dropping to 46 down from a high of 75, while smart money confidence has risen from a low of 38 to 50; indicating the smart money is becoming more confident in the markets as prices decline. The smart money readings are moving close to the levels from March of 2009. If the markets continue to fall and smart money confidence continues to rise, we will look to become less defensive and more opportunistic, so when the pendulum swings back, we will be on the right side of the market, along with the smart money.
Below is a six month chart of the S&P 500 Index as of yesterday's close. As you can see, we are essentially back to mid September levels in the index, virtually eliminating all gains from the 4th quarter of last year and beginning of this year in just a few weeks - dropping over 8% from this year's high.
Fortunately, there is some good news. First, reported earnings have been fairly positive so far and the economy is improving, albeit at a slow pace; and it's much better than it was last year at this time. Second, this market decline has caused an 180 degree turn in sentiment for both dumb money confidence and smart money confidence. Below is a chart showing dumb money confidence dropping to 46 down from a high of 75, while smart money confidence has risen from a low of 38 to 50; indicating the smart money is becoming more confident in the markets as prices decline. The smart money readings are moving close to the levels from March of 2009. If the markets continue to fall and smart money confidence continues to rise, we will look to become less defensive and more opportunistic, so when the pendulum swings back, we will be on the right side of the market, along with the smart money.
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