Useless Dow Jones Industrial Average Trivia

Yesterday and today the Dow Jones Industrial Average had back to back gains.  The Dow had had a streak of 24 days without having back to back gains.  Before today, the last time the Dow had back to back gains was September 26, 2008 when the Dow closed at 11143.13.  Today the Dow closed at 9325.01 (16.3% lower from 9/26). 

Since October 1928, that has happened 18 times; 11 times since the Great Depression and 7 times during the Great Depression.  It happened 5 times in 1931 alone.  That is pretty dismal considering it could only happen 11 times within one year.  The record is 52 days without back to back gains set in 1931.  The last time it happened before this string was in 1995 and then 1984 before that.

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GDP falls by 0.3%; consumer spending drops by 3.2%

The Bureau of Economic Analysis released the advance Gross Domestic Product figures for the third quarter today. Real GDP, adjusted for inflation, fell by an annualized rate of 0.25% in the third quarter 2008 compared to the second quarter 2008. This is better than expected. Economists had expected a 0.50% drop. The second quarter grew by a revised 2.80%. This is the second time in a year that Real GDP has been negative (fourth quarter 2007 declined by 0.17%). Adjusted for both inflation and population, real per capita GDP fell at an annualized rate of 1.19% in the fourth quarter 2007. It barely rose by 0.02% in the first quarter 2008, rose by 1.92% in the second quarter, and fell by 1.28% in the third quarter.

So far the current possible recession has been very mild. However, looking at the numbers behind the GDP reveals a harsher picture. Consumer spending in the third quarter fell sharply by an annualized rate of 3.17%. This is the first drop in personal consumption expenditures (PCE) since the recession of 1990-1991. Real GDP dropped by only $7.4 billion from the third quarter to the second quarter. PCE dropped by $66.1 billion. This was offset by a net increase in exports of $31.1 billion. Helped by the weak dollar, exports rose by $22.3 billion. Recently the dollar has strengthened and the global economies have weakened. Also contributing was a new record for spending on national defense of $550.6 billion in the third quarter. This was an increase of $22.5 billion over the second quarter. In percentage terms of GDP spending on national defense is at the highest level since 1993.

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S&P Case-Shiller home price index continues to slide

The S&P Case-Shiller home price index for August 2008 was released today by Standard and Poors. The composite-10 declined 1.10% from July 2008 and declined by 16.97% from August 2007. The composite-10 is now down 21.96% from its peak. All 20 individual markets are still down year over year with Las Vegas and Phoenix down the most at -29.49% and -29.45% respectively. Charlotte and Dallas are down the least year over year at -2.24% and -2.00% respectively. 2 markets were up in August compared to the previous month (Boston and Cleveland). The markets with the biggest declines from the peak are also declining the fastest; and some of the markets that declined the least are starting to rise. 8 markets have now dropped over 25% from their peak.

You can click on the images for a larger view.

The CME futures market is pricing in a further drop of -10.08% by next August for the composite-10. The home price index is not seasonally adjusted. In the last 20 years, home prices have averaged appreciation of 5.29% a year. March through August are typically the strongest months for appreciation and home prices have on average appreciated by 4.40% during that 6 month period. September through February are the weakest months; home prices have on average appreciated by only 0.89% during that 6 month period. In 2007, the declines were moderate in the first half of the year and started rapidly declining in August. The composite-10 did not record a 1% loss month over month until October 2007.  Right now we are declining at a faster pace than we did last year at this time.  And this was before the credit crisis intensified in September and October.  The month to month change in the composite-10 bottomed in February when it declined by 2.80% in one month and peaked in June with a 0.61% decline over the previous month. S&P Case-Shiller index uses a three month average. The existing homes report issued by the National Association of Realtors gives a glimpse of how home prices are doing (although it uses median prices instead of the more accurate method of paired sales that is utilized by S&P Case-Shiller).  Prices peaked in June 2008 and dropped by 2.2% month over month in July, by 3.4% in August, and by 5.7% in September. The CME futures market is pricing in that housing will bottom at 150 in November 2010. This is a 15.1% further drop from August 2008's mark of 176.6. The CME futures are pricing in that the home price index will recover to 160 by September 2012.

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New home sales in September are up slightly from previous month; decline in prices is picking up steam

The U.S. Census Bureau and the Department of HUD announced today that the new single family home sales for September 2008 were at a seasonally adjusted annual rate of 464,000. This was 2.7% higher than August 2008 and 33.1% less than September 2007. Economists were expecting that sales would fall to 450,000.  The median sales price fell to $218,400 in September down 0.9% from August 2008 and down 9.1% from September 2007.  This is the steepest rate of decline since median prices peaked in March 2007.

Months Supply fell to 10.4 in September, from 11.4 in August. Months Supply is the amount of time it would take to completely sell the new homes inventory if no new homes were built and if the sales pace continued as is. Supply and Demand is balanced at 6 months. The current level will continue to put pressure on home prices both for new homes and existing homes.

The financial crisis really picked up steam in October.  New home sales typically rise in October from September.  It will be interesting to see what happens to new home sales  for October.

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Existing home sales rise on lower prices

The National Association of Realtors released the existing home sales figures for September 2008 today. Sales increased to a seasonally adjusted annual rate of 5.180 million units in September, up 5.50% from August 2008 and up 1.37% from September 2007.  This is the first time sales have increased on a year to year basis in 30 months.   The median sales price was $191,600 for September down sharply from $203,100 in August (down 5.7%) and down from $210,500 in September 2007 (down 8.98%).  According to Lawrence Yun, NAR chief economist, “compared to a fairly small share of foreclosures or short sales a year ago, distressed sales are currently 35 to 40 percent of transactions. These are pulling the median price down because many are being sold at discounted prices.”  March through August are the strongest months for home prices.  We are now entering the weak time for home prices.  The market turmoil is not helping things either.

Month's supply fell from 10.6 to 9.9 in September.  Month's supply is normally lowest in the winter months.  There is still a huge oversupply of homes that the industry has to work through before supply and demand is balanced. 

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Sales tax collection continues to decline

The rate of decline in Sales and use tax collection paused in September after declining sharply in August.  Using a weighted composite for the four largest states (California, Texas, New York, and Florida), the decline in real growth rose slightly to an annual decline rate of -3.28% in September which was up from the rate of -3.59% in August. Texas grew at a rate of 3.87% after adjustments for inflation in September down from 4.06% in August.  This is down from the hot pace of 8.37% it averaged for 2007. New York declined at a annual rate of -2.98%. California's decline was at -5.52% in September.  California declined on average of -2.03% in 2007. Florida continued its steady fall, declining -8.98% in September. The growth rate in Florida has been lower than the previous month for 23 months straight. Florida averaged a decline of -2.70% in 2007.

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New home starts down sharply; supply is still rising

The U.S. Census Bureau and the HUD Department announced the new homes construction stats for September 2008 today. Total building permits were at a seasonally adjusted annual rate of 786,000 which was 8.3% below August 2008 and was down 38.4% from a year ago. 1 unit permits were at a seasonally adjusted annual rate of 532,000 which was down 3.8% from the previous month and down 38.9% from a year ago. 1 unit permits are at their lowest annual rate since August 1982. Total housing starts were at a seasonally adjusted annual rate of 817,000 which was down 6.3% from the previous month, and down 31.1% below September 2007. 1 unit starts were at 544,000 which is down 12.0% from August 2008 and down 41.9% from a year ago. Housing completions were at a seasonally adjusted annual rate of 1,097,000 (1 units were at 806,000) which was 11.7% above the previous month, and 20.4% below September 2007.

Permits and starts of new homes are starting to be less than demand. Completions are still higher than the current level of sales.  Soon months supply will start to inch down, but we are still far away from supply and demand being balanced.  New homes are also adversely affected by the large surplus of existing homes. 

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Retail Sales down sharply in September

The U.S. Census Bureau announced today that retail and food services sales for September 2008 with seasonal adjustments was down 1.16% from August and down 1.03% compared to a year ago. This was almost double the decline that economists were expecting of -0.7%.  Retail sales without including autos (excluding autos makes the data less volatile) was down 0.60% compared to the previous month and up 3.61% compared to the previous year.

Retail sales adjusted for inflation declined by 6.23% in September compared to the previous year.  This is the worst annual decline since January 1991.  Retail sales was holding up fairly well in spite of the financial crisis.  Retail sales adjusted for inflation didn't turn negative until August 2008.  Even then it was negative by a tame 0.18%.  However, we are now clearly in a recessionary state.  This data also came before the massive declines in the stock market this month.  The negative wealth effect will put extra pressure on future retail sales numbers.

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A look at historical values on S&P 500 Earnings and Home Prices

Throughout the housing bubble, Robert Shiller's book, “Irrational Exuberance”, has served as my compass. In particular, his graph of U.S. home prices adjusted for inflation going back to 1890 was etched in my mind.

In his book, he talked about a home price index that was constructed in Amsterdam with over 300 years of data from 1628 to 1973. He writes “Real home prices did roughly double, but took nearly 350 years to do so…the annual real price increase was only 0.2%.” He released a graph , combining the Amsterdam data with data from Norway and the U.S., in a paper he published later.

Every month I update the S&P Case-Shiller Home Price Index and include what the CME Futures market is pricing in for prices in the near future. Here is a link to my most recent post on the Indexes.

Robert Shiller also had graphs of the S&P 500 going back to 1871. His website at http://www.irrationalexuberance.com/ has spreadsheets that get updated every so often. Here are two of his graphs that I updated with data through today's close.

Going back to 1881, the average P/E ratio using the trailing 10 years of real earnings has been 16.34. As of today, the current P/E ratio is 16.98. Whether or not the stock market is fairly valued right now is in great debate (as shown by the huge gyrations of the stock market in recent weeks). It really depends on what you think will happen to earnings and how severe the slowdown will become. Here is a graph showing the earnings for the S&P 500 going back 20 years.

The analysts have been caught off guard by the severity of the credit crunch. Back in April, analysts thought that 2008 Q2 earnings would be higher than the peak in 2007 Q3. Here is a graph from my April 2008 post. 2008 Q1 and Q2 earnings were substantially lower than forecasted. For the last year, analysts have constantly been surprised by earnings and have consistently overestimated earnings for the last 12 months. Last week's plunge was in part due to the fact the market was realizing that there will be a slowdown in earnings due to the credit crunch. The million dollar question is how much and how long the slowdown will be.

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Pending home sales were up in August; NAR lowers their price forecast yet again

The Pending Home Sales Index for contracts signed in August 2008 on a seasonally adjusted basis was at 93.4 up 7.36% from August 2008 and also up 8.86% compared to August 2007's figure of 85.8.

Without seasonal adjustments, the index was up 4.97% compared to August 2008. 2001 was previously the slowest year for pending home sales on record. August 2008 was 6.57% below August 2001's sales pace. July 2008 was 12.77% below the 2001 level.

The increases in pending sales was mostly due to a large increase in the West. Seasonally adjusted the West saw an increase of 18.4% month over month and 37.8% year over year. The rest of the regions averaged an increase of 4.8% month over month and 2.2% year over year. This is due to a large decrease in home prices in the West in August. Median home prices in the West dropped from $282,000 in July to $251,600 in August, a drop of 10.8% month over month. The rest of the country averaged a drop of 0.9% in August month over month.

It appears the housing cycle may be moving from a period of declining sales and declining prices to one of increasing sales with declining prices. According to Lawrence Yun, NAR chief economist, said “What we’re seeing is the momentum of people taking advantage of low home prices, with pending home sales up strongly in California, Nevada, Arizona, Florida, Rhode Island and the Washington, D.C., region." He says "It’s unclear how much contract activity may be impacted by the credit disruptions on Wall Street, but we’re hopeful most of the increase will translate into closed existing-home sales.” Pending home sales in August were entered into before the credit crisis erupted in September.

The NAR made a downward adjustment in their median home sales price forecast for 2008 from $203,600 to $200,700. The NAR is forecasting 2009 median home sales prices to be at $206,300 (versus their projection last month of $208,500 and their projection in August of $215,800 for 2009). In June they had dropped their 2008 forecast by 4.1% from $213,700 to $205,000. We are now entering into a period where pending home sales slow down dramatically. The credit crisis isn't helping things either.

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The unemployment rate is unchanged; nonfarm payrolls post large decline

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 497,000 for the week ending September 20th. This is the highest initial claims have been since September 2001. The four week average of initial claims, which is not as volatile, was at 474,000 up from the previous week's mark of 462,500.

Continued claims for unemployment insurance increased to 3,591,000 for the week ending September 13th up from the previous week's number of 3,543,000. This is the highest it has been since September, 2003. The four week average for continued claims was also up to 3,528,500 from 3,481,750.

Unemployment is on the rise. According to "The Employment Situation" for September 2008 released today by the U.S. Department of Labor, the unemployment rate was 6.1% in September unchanged from August. Since 1948, the unemployment rate has never risen by more than .5% in a 12 month span without entering into a recession. The unemployment rate is now up 1.4% in the last twelve months and is up 1.7% from its recent low. Nonfarm payrolls decreased by 159,000 in September and decreased by 73,000 in August. Nonfarm payrolls have declined for 9 straight months with a net loss of 760,000 jobs. Over the last ten years, nonfarm payrolls have increased by an average of 107,000 jobs a month to keep up with the increasing population. Nonfarm payrolls rarely decrease outside of recession periods and it is even more rare for consecutive declines. Excluding periods right before, during and after recessions, nonfarm payrolls have declined consecutively only two times: 3 consecutive times in 1951 and 2 consecutive times in 1952.

At least in regards to employment, the U.S. is in a state of recession. Some sectors, like manufacturing, are just now starting to slow down. The unemployment rate will most likely continue to rise in the coming months.

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Withheld taxes post weak growth; further slide is likely

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending September 30, 2008 was 1.41% higher than a year ago after being adjusted for inflation. This is up from August's rate of 0.76%. This is significantly lower than the rate in 2006 and 2007 where 12 month's withheld taxes grew on average by 4.5% a year.

So far, withheld taxes in this current downturn is resembling the slowdown during the 2001 recession.  Withheld taxes is still currently growing.  If the downturn continues, there could be a long ways to go before reaching the bottom.  Especially if this turns out to be a stronger recession than the one in 2001.

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