Will be back next week

photo by Per Ola Wiberg..(PO...or Powi)


I will be offline for the rest of this week. I will be back online Monday, June 23.

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Sales Tax revenue is flat

Sales and Use Tax is mixed for the four largest states in the U.S. In California, sales tax collections for the last 12 months is down 3.54% compared to a 12 month period ending a year ago. Florida is down 5.76%. Both California and Florida are in a recession. Texas continues to show strong growth and is up 6.63%. New York is also growing at a pace of 2.67%. The composite of all 4 weighted for GDP contribution is flat at a -0.09%. Together these 4 states account for about a third of U.S. GDP.

Sales and Use tax revenue has stalled. Even in Florida and California, the acceleration downward has leveled off. We appear to be in a wait and see mode.

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Inflation for May is not bad if you don't drive

The U.S. Department of Labor reported the inflation numbers for May today. Before seasonal adjustments, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.84% in May over April and was 4.18% higher than May 2007. Core CPI (CPI less food and energy) before seasonal adjustments was up by 0.06% compared to April and up 2.31% compared to a year ago. Seasonally adjusted, CPI-U rose 0.65% over April versus expectations of 0.5% and core CPI rose 0.20% the same as expected. "Not a bad number if you don't drive," quipped Meny Grauman, an economist for CIBC World Markets.

The Fed is starting to talk tough on inflation. Earlier this week, Fed chief Ben Bernanke said "The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations." He also said that the Fed would "strongly resist an erosion of longer-term inflation expectations." The Fed is facing a dilemma; inflation is poking its ugly head and the economy is running at a slow pace. Inflation has yet to rise in the core numbers, but inflation is making its presence felt.

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Retail sales for May came in strong

The U.S. Census Bureau announced today that retail and food services sales for May 2008 with seasonal adjustments was up 1.02% over April and up 2.40% compared to a year ago. Retail sales without including autos (excluding autos makes the data less volatile) was up 1.18% compared to the previous month and up 4.61% compared to the previous year.

The month over month numbers were strong. Economists had expected an increase of only 0.7% excluding auto sales. Interestingly the year over year the growth rate actually declined as the increase in May 2007 over April 2007 was even stronger than the increase this year. When including autos and adjusting the numbers for inflation, retail sales declined by 1.2% in May compared to the previous year.

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Option ARMs: The Next Real Estate Crisis

Business Week calls Option ARMs The Next Real Estate Crisis. The article opens with this analogy:

The American homeowner must feel like one of those characters in an old cartoon who has just been hit by a falling piano. After dusting himself off and touching the large bump on his head, he probably doesn't expect another piano to be dangling overhead. But he'd be wrong.

The piano is the impending crisis caused by Option ARMs resetting to higher payments. These previous posts of mine took a look at Option ARMs: original post and an update.

The Business Week article gives us an update on some key statistics:

According to Credit Suisse (CS), monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010. Some of these loans have already started to recast. About 13% of option ARMs that were issued in 2006 were delinquent by 60 days by the time they were 18 months old, Credit Suisse said.

About a million borrowers have option ARMs, but only a fraction have already fallen due. [NOTE: should read "only a fraction have already recast."]

Among the states expected to be worst-hit is already battered California. Today, outstanding option ARM loans in the U.S. total about $500 billion, about 60% of which were sold to California homeowners, according to Credit Suisse.

Previously I had posted Credit Suisse's chart on resetting ARMs. This chart did not account for the payments recasting when the balance had grown larger than the recast amount of 110%, 115% or 125%.

The Business Week article now has Credit Suisse's updated chart accounting for recasts. According to the chart, the amount of Option ARMs recasting will rise from the current pace of about $2 billion a month to about $4 billion a month by the end of this year to about $10 billion a month by the end of next year. This is roughly $120 billion resetting in 2008 and 2009 with another $80 billion in 2010.

I posted this chart from IndyMac in my original Option ARM post. To update the status of the top 6: Washington Mutual stripped their CEO of the chairman title, Countrywide is being bailed out by Bank of America, American Home Mortgage went bankrupt, Wachovia fired their CEO, IndyMac is struggling to survive, and Capital One shut down their mortgage division. The others on the list are feeling the pain as well.

The mortgages that are resetting now have huge payment shocks. In an example I used in this post, a borrower with a first payment due in January 2005 had a beginning payment of $574.06 a month. The loan in that example reset in February 2008 to a payment of $1,468.43. That is a huge difference. Especially if the borrower could only afford the teaser payments. Many borrowers that took out these type of loans expected real estate prices to rise faster than their negative amortization. Instead, their loans are hitting 110% or 115% of their original balance causing resets and real estate prices instead of going up faster, have declined.

Wall Street is starting to address the potential problems involving Option ARMs. The recent surge in delinquencies is helping draw attention to this sector of loans.

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Wednesday, June 11, 2008

photo by fmc.nikon.d40


Quote for the day:

This is the end
Beautiful friend
This is the end
My only friend, the end

Of our elaborate plans, the end
Of everything that stands, the end
No safety or surprise, the end
I'll never look into your eyes...again

- The Doors, The End

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I have decided to eliminate the photo and quote of the day posts from my daily routine and will focus on my regular posts instead.

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Trade deficit increases in April

The Department of Commerce announced that the goods and services deficit rose to $60.9 billion up from the revised figure of $56.5 billion in March. The increase in exports of $5.0 billion was offset by the increase in imports of $9.4 billion. The goods deficit increased $4.5 billion from March to $72.9 billion and the services surplus increased by $0.1 billion to $12 billion.

The deficits with our biggest trade partners all increased last month. China was up to a $20.2 billion deficit (from $16.1 billion in March), OPEC was $15.6 ($14.1), the European Union $8.5 ($7.5), Japan $7.6 ($7.5), Canada $7.6 ($6.4), and Mexico $6.8 ($6.0).

Adjusted for inflation, the trade deficit for the last twelve months ending in April declined slightly from the deficit for the one year period ending in March. The annual change in Personal Income adjusted for inflation in April rebounded a bit from its freefall over the last few months. However, the increases in personal income are negligible compared to our trade deficit (unlike in the past when it more than offset our trade deficit). With the increases in commodity prices and the weaker dollar we are continuing to borrow from the future to fund our current lifestyle.

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Tuesday, June 10, 2008

photo by ellhoisa


Quote for the day:

Most people would succeed in small things if they were not troubled with great ambitions.

- Henry Wadsworth Longfellow, Driftwood

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In the news:

The dollar hit a 3 month high against the yen after Federa Reserve Chairman Ben Bernake said economic risks have faded and that the central bank will strongly resist waning confidence in stable prices. The futures market is pricing a 55% chance the Fed will raise rates at its August 5th meeting.

The U.S. trade deficit hit $60.9 billion up from a revised $56.5 billion in March. This is the highest deficit since March 2007. Economists had expected the deficit to reach $60 billion.

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Pending Home Sales improve; NAR revises home price forecast down sharply

Today, the National Association of Realtors (NAR) released the Pending Home Sales Index for April. Seasonally adjusted, the index was up to 88.2 from 83.0 in March and was down 13.1% from 101.5 in April 2007. Not seasonally adjusted, the index was down 13.8% versus a year ago. Last month the index was down 21.7% year over year. Sales are starting to show traction with lower sales prices.

2001 was the previously the slowest year since the index was started. In April 2008 the index was 11.8% lower than April 2001 and in March 2008 the index was 19.5% lower than March 2001. Compared to historical months, sales are starting to show improvement over the first few months of the year.

The NAR also releases their economic forecast at the same time as their pending home sales update. Every month they have been slowly revising their projections for housing prices downward. In March their forecast for the median prices for 2008 was $216,300; April was $215,800; May was $213,700. They have now revised their 2008 estimate down to $205,000. The median sales price for the first quarter 2008 was $198,700 and for April it was $202,300. In order to have the median sales price come to their projection, they had high projections for the third quarter of 2008. In March their forecast the median prices for the third quarter 2008 was $228,700; April was $229,600; May was $226,300. They have now dropped their third quarter forecast to $208,400. In previous posts I had questioned how and when they would revise their forecasts closer to reality. The answer was quickly and quietly. Here is how they addressed their revisions:

"After unprecedented home price declines in the first half of the year, many markets can anticipate stabilizing price trends in the second half. The aggregate median existing-home price is likely to decline 8.4 percent in the first half of this year, and then begin to stabilize in the second half before rising 4.4 percent next year to $213,900."

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Monday, June 9, 2008

photo by camshafter


Quote for the day:

"They raised billions of dollars they said they didn't need to replace losses they said they didn't have."

- David Einhorn of hedge fund Greenlight Capital on Lehman Brothers

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Lehman Brothers on Monday sold $6 billion of stock and convertible securities to strengthen its balance sheet as the company prepares to post a $2.77 billion quarterly loss.

Pending home resales jumped 6.3% in April after a 1% drop in March. This was the biggest jump since 2001 after being at the lowest level on record last month.

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