Monday, February 11, 2008

Photo by Bob Jagendorf

Quote for the day:

Historians are like deaf people who go on answering questions that no one has asked them.

- Leo Tolstoy

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In the news:

Yahoo rejects a $44.6 billion takeover offer from Microsoft as too low.

The Dow Jones industrial average is adding Bank of America and Chevron, replacing Honeywell and Altria (formerly Philip Morris). Chevron was twice before in the index, once as Standard Oil Co. of California from 1924 to 1925, and then again from 1930 until 1999.

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Credit Card Delinquencies Rise and Growth Slows

The Wall Street Journal had an article on Credit Cards on their front page Friday. Here are some quotes:

America's love affair with credit cards may be headed for the rocks.

Credit-card delinquencies are rising across the nation, a sign that
some Americans are at the end of their rope financially.

In December, an average of 7.6% of credit-card loans were either at
least 60 days delinquent or had gone into default, up from 6.4% a year earlier,
according to research firm RiskMetrics Group.

Taking a look at consumer loans (including installment loans such as auto loans), delinquencies are about average. They can and probably will get a lot worse. During the past two recessions, delinquencies have risen during recessions and have peaked a few months after the recession. In the past consumer loan delinquencies have been more volatile than residential mortgages. Consumer delinquencies rose sooner and faster leading delinquencies in mortgages. This time around, it is the mortgage delinquencies that are rising faster.

Per the Wall Street Journal: "Yesterday, the Federal Reserve reported an abrupt slowdown in consumers' credit-card borrowings. In December, Americans had $944 billion in total revolving debt, most of it on credit cards, a seasonally adjusted annualized increase of 2.7%. That was off sharply from seasonally adjusted growth rates of 13.7% in November and 11.1% in October."

Revolving debt has grown at a pace of 7.5% this year. Monthly changes in debt are very volatile. Last month’s slowdown is not uncommon. October and November’s numbers were artificially high. Just this April, debt slowed to a growth rate of 0.6%. However the months before and after were at 10.0% and 12.8%.

Consumer debt goes through very pronounced cycles. Looking at consumer debt growth over since 1952, growth usually slows dramatically during a recession. Personal Income usually leads changes in consumer debt.

Looking at the rapid increases in mortgage delinquencies and the relatively moderate levels of consumer debt, it points to the housing crisis as being the driving factor. Consumer debt will follow, but it is not the cause.

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Friday, February 8, 2009

photo by J.A.L.E.X.


Quote for the day:

"Everyone has his day and some days last longer than others."

- Sir Winston Churchill

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In the news:

OPEC may cut crude production when it meets next month to keep the price above $80 a barrel.

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Pending Home Sales

The National Association of Realtors (NAR) released their Pending Home Sales figures for December 2007. Per the NAR, “A home sale is pending when the contract has been signed but the transaction has not closed. Pending sales typically close within one or two months of signing.” Once they close, they become an existing sale. Seasonally adjusted, the index slipped 1.5% to 85.9 and was 24.2% below the level in December 2006. The seasonally adjusted numbers mask the dramatic fall. Using Non-Seasonally Adjusted numbers, the index dropped from 72.6 to 54.8. The index was started in 2001. 100 was the average for 2001. In December 2007, pending sales were a little more than half of the average month for 2001. December is the slowest month of the year for sales, and an average December is about 70% of an average month of pending sales. In July 2007, Pending Sales dramatically slowed. For the first half of the year, they had dropped to 2001 levels. From July to the end of the year, they averaged 89.1% of the 2001 level. The December 2007 level of 54.8 was only 78.3% of Decemeber 2001's level of 70.

We are currently on pace for existing sales of around 4.8 million. The NAR is more optimistic.
Lawrence Yun, NAR chief economist, said sales activity is expected to remain soft through the first half of the year despite a generational low in mortgage interest rates. “Household formation was only half of what it should have been last year given the demographics of a growing population and sustained job growth, so there clearly is a pent-up demand from buyers who are on the sidelines,” Per the NAR, "Existing-home sales are projected at an annual pace of around 4.9 million in the first half of this year, rising notably to 5.8 million in the second half, and totaling 5.60 million for all of 2009."

Calculated Risk had a good post on existing sales. Here is his chart showing existing sales and inventory going back to 1969.

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Thursday, February 7, 2008

photo by mike138


Quote for the day:

"It's sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end."

- Warren Buffet yesterday at the Canadian launch of corporate-news firm Business Wire

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In the news:

Initial jobless claims decreased by 22,000 to 356,000 in the week ended Feb. 2, from a two-year high of 378,000 a week earlier. The median estimate of economists was 342,000.

Pending home sales fell 1.5% in December compared to November versus forecast of a 1% decline. New home sales fell to the lowest level in 12 years.

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Margin Debt and Short Interest

Margin debt rises and falls in relation to the rise and fall of the stock market. Here is a chart of the year over year change in Margin debt borrowed by customers of NYSE Dealers and the S & P 500 index.
This next chart compares the amount of Margin Debt compared to the S & P 500 calculated with dividends reinvested. The chart also shows the growth of Short Interest (betting that stock prices will go down instead of up).
CXOadvisory analyzed the relationship and found that there is a very high correlation between margin debt and the S &P 500. However, margin debt lags the S &P 500 slightly. Looking at the charts, margin debt still does provide indication of where we are in the economic cycles. Since 1960, margin debt has grown at a rate of 10% a year. Growth substantially above that has not been sustained. Rapid growth in margin debt is usually quickly followed by contractions. Most recessions have had contractions of margin debt of over 20%.

Short Interest is more sporadic. Sometimes it grows in tandem with the S & P 500. Other times it goes in the opposite direction as seen in this next chart.

Bespoke Investment Group analyzed the stocks that led the surge in stock prices last week. They found that the stocks with high levels of short interest led the rally. The rally was fueled by large amounts of short covering.

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Wednesday, February 6, 2008

photo by stfbfc

Quote for the day:

I love deadlines. I like the whooshing sound they make as they fly by.

- Douglas Adams

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In the news:

Worker productivity in the U.S. grew more than forecast in the fourth quarter easing inflation pressures.

Yahoo is evaluating Microsoft bid and a wide range of potential strategic alternatives.

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ISM's Non-Manufacturing Report Suggests Recession has Started

The Institute for Supply Management released their “Non-Manufacturing ISM Report on Business” today.


Business activity, the most commonly reported component of the report, dropped from 54.4 in December 2007 to 41.9 in January 2008. This was the largest drop since ISM started compiling data for this report in July of 1997. This is the second lowest reading for Business Activity. The lowest was in October 2001 when it dropped from 49.7 to 40.5 following the 9/11 attacks. It then rebounded to 49.4 in November of 2001.


Today, ISM debuted a new index called NMI (Non-Manufacturing Index). This index is an average of Business Activity, New Orders, Employment, and Supplier Deliveries. NMI for January 2008 was at 44.58, which is the lowest ever. It has only been below 48 two other times (both during the recession of 2001).


Here is a chart showing how NMI would have looked going back to 1997. You can click on the chart for a larger view.



Per Bloomberg, the Non-Manufacturing Sector reflects almost 90% of the economy (hat tip The Big Picture). Services are the biggest component of GDP comprising 40.2% of 2007 fourth quarter’s GDP. If these NMI numbers continue in the future, then it looks like January (or even December) will go down as the official start of the recession. Here is a chart comparing NMI to GDP and Services.

Finally here is a chart showing Employment in the Non-Manufacturing sector compared to the Unemployment Rate. From the limited data we have, it looks like ISM’s Employment figures are a leading indicator for the Unemployment Rate – it reaches the bottoms and tops faster. It seems that once the economy starts heading into a recession, things quickly snowball as the economy tries to be proactive (conversely things quickly improve on the way up). This comment from a respondent in ISM’s survey reflects that: "Recession fears taking hold as cost containment strategies have been dusted off from 2002." (Finance & Insurance)

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Tuesday, February 5, 2008

Quote for the day:

"Democracy must be something more than two wolves and a sheep voting on what to have for dinner."

- James Bovard (often attributed to Benjamin Franklin on the internet in error.)

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In the news:

Recession fears rise as ISM nonmanufacturing index plunges with the largest drop ever to 41.9% and is at the second lowest level ever recorded.

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Interest Spreads

With the Fed lowering the rates quickly over the last two weeks, the Federal Funds target rate is once again below the 10 year Treasury. It had been lower than the 10 year Treasury (making it an inverted yield curve) for most of the last year and a half. The yield curve has inverted in all 6 previous recessions.

The Fed Funds has dipped below the 10 year Treasuries 4 other times since 1962 without formally entering a recession. In 1966, the yield curve inverted without a recession, however, the S &P 500 dropped 23.7% from its high to low during that period. The Fed Funds also dipped below the 10 year Treasuries once in the mid-eighties and once in the mid-nineties and again in 1998 (Long Term Capital Management blowup). However in all cases the 1 year Treasury did not dip below the 10-year Treasury.

The TED Spread is the difference between the Treasury and the EuroDollar (T-ED). The TED Spread is a good barometer of the short term risk perceived by banks. It has come down a bit from its recent levels, but is still at an elevated level.

Companies receiving a Moody’s Baa ratings are considered to be medium grade risks. The spread between Moody’s Baa and the 10 year Treasury is at a high level right now showing the effects of the credit crunch. However, the Baa spread does not seem to have as much correlation with the S&P 500 and the economy. It often peaks a year after the recovery has begun.

It takes time for rate cuts to affect the economy. The yield curve often turns positive very early in the recession stage. In 1989, the yield curve turned positive right before the recession started. In 2001, the yield curve turned positive just weeks after the official start of the recession.

Here are charts going back to 1962. You can click on the charts for a larger view.

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