Another edition of our new series: Blog Spotlight.
We put together a short list of excellent but somewhat overlooked
blog that deserves a greater audience. Expect to see a post from a
different featured blogger here every Tuesday and Thursday evening,
around 7pm.
Up next in our Blogger Spotlight: Kash Mansori teaches economics at Salem College, in North Carolina. In addition to teaching at small liberal arts colleges, Kash also enjoys research and writing on current topics in finance, macroeconomics, politics, and public policy. His blog, The Street Light, has a tendency to illustrate his fondness for charts and graphs. And yes, Kash is this economist's real name.
Has the Fed managed to raise interest rates by
exactly enough to bring the US economy down to a "soft landing"? There was
substantial disagreement among economists about Friday's
GDP report, with some arguing that it was a harbinger of a looming recession,
while others argued that it was still consistent with the soft landing scenario,
and didn't
really contain anything to worry about.
We won't know which camp was
closer to the truth for many months. But in the mean time, I can't help but be
reminded of the discussions happening among economy-watchers in mid- to
late-2000. The situation in 2000 was somewhat similar to today's economy in some
ways; in particular, the Fed had been raising interest rates for some time in an
attempt to cool the economy and bring down incipient inflation without pushing
the economy into a recession, and many observers were of the opinion that they
had succeeded. To help refresh your memory, here are some excerpts from the news
at the time (sorry, I haven't tracked down links):
August 10, 2000 The Boston
Globe Economy Slowing for 'Soft
Landing; Fed Reports Braking in Key Growth Areas: The hard-charging US
economy slowed in the late spring and early summer, the Federal Reserve reported
yesterday, suggesting a "soft landing" for the 10-year expansion indeed could
replace the traditional boom-and-bust dynamic...
September 2,
2000 The Washington Post Economic Growth Gradually Slowing; Reports May Reduce
Chance of Rate Hike: More clearly than ever, three new economic reports
out yesterday show the U.S. economy coming in smoothly for a soft landing. A
series of increases in short-term interest rates by the Federal Reserve and
other forces have combined to slow economic growth just enough to keep inflation
largely at bay without significantly raising the risk of a recession.
The
reports all pointed in that direction, according to a number of analysts, who
also said the way events are unfolding suggests that Fed policymakers won't be
raising rates again anytime soon.
September 18, 2000 The Wall Street Journal Economic Data Continue to Augur Soft Landing:
October 28, 2000 Cleveland Plain
Dealer Economy Cools to Rate
Suggesting Soft Landing: The economy shifted into a much lower gear
during the summer, registering its slowest speed in more than a year and
reflecting a drop in government spending and weaker business investment... "We
have downshifted ... but we're not on the brink of a recession," said Paul
Kasriel, chief economist for Northern Trust Co. The report, he said, is
consistent with the Federal Reserve's desire to bring the high-flying economy
down to a more sustainable rate of growth.
October 29, 2000 The Atlanta Journal and Constitution Stock market fall hurts, but 'soft landing'
helps
November 27, 2000 Business Week This Political Shock Won't Upset the Soft
Landing: THE FED SEEMS CONTENT that the slowdown is leading toward the
desired soft landing, although policymakers are still not convinced that the
threat of rising inflation is abating. After hiking its overnight rate from
4.75% in June, 1999, to 6.5% in May, 2000, the Fed at its Nov. 15 policy meeting
continued to leave interest rates unchanged. The Fed admitted that the economy
could slow to a pace even below its long-run trend, generally taken to be 3.5%
or so. However, it said that the slowdown in demand to date has not been
sufficient to alter its view that the risks in the outlook are weighted toward
conditions that could generate higher inflation.
...The bottom line is
that, yes, the economy is slowing as the Fed's efforts to pull off a soft
landing bear fruit. And little indicates that this nation's ongoing political
shock will rattle the economy, especially since the fundamentals remain quite
sturdy. The Greenspan Fed pulled off a soft landing in 1994, and it will very
likely succeed again in 2001 -- regardless of how long it takes to elect a
President.
Dec 7th, 2000 The
Economist Slowing down, to
what?: The latest economic figures are consistent with a soft landing. As
Mr Greenspan made plain in his speech, an economic slowdown is what the Fed has
been aiming to achieve by raising interest rates six times in the past 18
months. By creating economic slack, this should stop inflation rising further.
And despite the share-price jump this week, recent market edginess will usefully
remind investors about risk and so deter reckless investment.
The markets
are also right that few economists are actually predicting a hard landing. The
average forecast for growth in 2001 by 15 economists polled by The Economist
this week was 3.0%.
For reference, we now know that the US economy
experienced negative economic growth between July and September of 2000, and
officially entered a recession in early 2001.
My point is a relatively
simple one: I don't think that we have nearly enough evidence yet to conclude
that the Fed has acheived a soft landing for the US economy. Any guesses about
how rough the landing will be will thus have to be based on guesses,
predictions, and assumptions about how consumers and businesses will behave over
the next several months. So I would be hesitant to congratulate the Fed on its
successful soft landing until we know (maybe by mid-2007) if the relatively
optimistic suppositions about future consumer and business behavior were
right.
It's also worth noting that even as late as November 2000, the
signals from the Fed and the interpretation of Fed-watchers were that the
chances were that the next interest rate move by the Fed would be an increase.
Now we know, of course, that they were compelled to decrease interest rates just a few
weeks later. So despite the Fed's rhetoric to the contrary, I would still be
cautious in believing that the Fed's next move in the current episode will end
up being another increase.
Rev Shark looks askance at the many theories floating around about Government intervention in the Equity and Energy markets: Debunking Conspiracy Theories:
"With the election just a week off, there is a lot
of talk in certain quarters about how the market is being "manipulated"
for political gain. The theory is that the Republicans are driving the
market up in order to give the impression that economic conditions are
good, which would in turn cause voters to support the incumbent party.
That certainly explains the market action and has a great appeal to the
conspiracy theorists but is it realistic?
I have a great
aversion to the idea of conspiracies simply because I don't believe
that its possible for a large number of politicians and bureaucrats
with big egos to keep anything a secret."
The most cogent analysis I have seen about the sudden drop in Energy prices comes via Tim Iacono's Friends in High Places? Iacono's argument is backed by the details of how and when the widely followed Goldman Sachs Commodities Index (GSCI)dropped its gasoline exposure in half. What was originally made out to be a minor shift in the types of gasoline blends turned out to be a major reduction in exposure for the GSCI -- and done in a rather surreptitious manner.
Goldman made a little change in their commodities index, and that caused $6 billion in unleaded gasoline futures to be dumped onto the NYMEX.Read it and decide for yourself how "improbable" a manipulation of the energy markets actually is.
Quite frankly, while I detest the intereference in the political process, I must admit to admiring the ingenuity and audacity of Goldman Sachs. As far as I can tell, either it was a brilliant ploy to impact the energy markets two months before elections, or the index is run by a bunch of naive, ham-fisted idiots, blissfully unaware of what they wrought so close to mid-term elections. So my own answer about energy manipulation turns on the question whether Goldman Sachs is a sharp collection of rocket scientists/traders, or a bunch-o-morons.
As to manipulations in the equity markets, I am undecided about that. I will note that several people far more experienced than I -- and far less cycnical, too -- have been commenting about the "Preternatural bid underneath." I may have to assemble some of the more cogent commentary along those lines.
Of course, the Fed does control money supply, and while it is understandable their providing additional liquidity during the rate tightening phase (i.e, more money supply as rates go higher) the most recent firehose of cash hitting the past few months since the pause is a bit harder to rationalize . . .
Rumors of a new touchscreen Apple iPod have been around for years: The big issue as to the viability of this as a real product were fingerprints smearing the touchscreen. As hrmpf.com noted:
Apple has previous described new iPod designs (in patent applications) which
incorporate a touch sensitive surface into the display. There seems a scepticism
on the web about designs becoming reality due to the problems of screen smudging
and scratching.
Via GMSV, we see new patent app by Apple approaches the issue somewhat differently: Apple may "abandon the iconic wheel that has become virtually synonymous with its popular iPod music players."
Mercury News writes that the company had "previously explored replacing the click wheel with a virtual one as part of a touch-sensitive display. But now Apple appears to be looking at a third option: a touch-sensitive frame surrounding the display. Rather than click a physical button or press a virtual one on the screen, users would touch an area on the frame to operate their iPod."
Here are the details:
"This application has designs for a new iPod/Tablet/Phone (or dare I say it,
Newton-like device) which put the touch sensitive areas into the bezel
surrounding the iPod’s screen (as well as on the screen and sides of the device). The user interface seems particularly
well conceived and relies on on-screen indicators of the control surface’s
function. In addition to buttons the surfaces can act as scroll surfaces. The
interface works by the user selecting a control to change (in the picture below-
position in the song, volume, balance) and then, using the bottom surface to
scroll, adjusting the element in real time (Fig. 19).
And the various patent drawing are below:
>
Cody Willard directs us to this Apple Insider piece giving much more fdetails on the Patent App . . .
iPod's click wheel: Has it been framed? PATENT FILING SHOWS NEW NAVIGATION METHOD Troy Wolverton Mercury News http://www.siliconvalley.com/mld/siliconvalley/15885367.htm
"In every presidential election year, voters and investors alike focus on the race for the White House, and rightfully so. You see, as shown in the accompanying chart from Ned Davis Research, the historical data depicts market returns that vary greatly under Republican or Democratic leadership.
The same data also suggest that while presidential races may dominate the statistical landscape, a more interesting interaction between politics, the public and stock prices is likely to take shape. And it has very little to do with who wins or who loses."
I am assuming that while there may be correlation between parties and
market performance, there is no specific proof of causation, i.e., these policies cause those returns. My 2nd assumption is that the Federal Reserve Chair is more important than Congres or the Presidency to Markets. And in
terms of data sets, 106 years -- ~26 presidential terms -- is a bit
light. This might be really interesting after 500 years, though.
Regardless of those reservations, this is quite fascinating: >
Gains (%) for Stocks by Party of the President and Majority Party in Congress 03/04/1901–10/23/2006
Political Variable
Stocks (DJIA)
Democratic President
7.19%
Republican President
3.85%
Democratic Congress
6.46%
Republican Congress
3.51%
Dem Pres, Dem Cong
6.53%
Dem Pres, Rep Cong
9.60%
Rep Pres, Rep Cong
1.54%
Rep Pres, Dem Cong
6.37%
All Periods Buy & Hold
5.34%
Sources: van Kampen, Ned Davis Research
>
The most interesting aspect of the current research into party control has little to do with which party has Congress or the White House -- its when Congress is in session or not:
"Using historical pricing on the Dow Jones Industrial Average (DJIA), the Standard and Poor’s 500 Stock Index (S&P 500), the Center for Research in Security Prices (CRSP) Equal-Weighted Returns Index and Value-Weighted Returns Index, Ferguson and Witte* find that, “Depending on the index, daily returns when Congress is in session range from 1 to 4 basis points per day. When Congress is out of session returns range from 5 to 15 basis points a day.”
Media spin aside, in a striking conclusion Ferguson and Witte remind their readers that, “Fully 90 percent of the historical capital gains on the DJIA occurred on days when Congress was out of session"
We are tempted to make the tongue-in-cheek observation that when Congress -- of either party -- is in session, it is dangerous to your portfolio's health!
>
UPDATE October 31, 2006 10:11 am
And as we have discussed in the past, it is important to consider Multiple Variables in Market Analysis. Who controls the Congress or Presidency is but one issue out of 100's if not 1,000's, and perhaps a minor one at that . . .
Gains for Stocks, Industrial Production, Inflation, Bonds and U.S. Dollars ($),
by Party of President and Majority Party in Congress" Ned Davis Research Report T_50, 03/04/1901 to 10/23/2006”
Congress and the Stock Market Michael Ferguson
and Hugh Douglas Witte University of Cincinnati and
University of Missouri, March 13, 2006 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=687211
"David Lereah is the Chief Economist and Senior VP of the National Association of Realtors (NAR). Mr. Lereah regulary makes statements regarding the housing bubble. The media regulary turns to him for real estate quotes. He is very influential. Mr. Lereah tells half truths and manipulates facts and figures. He cannot be trusted as he is a paid shill."
Geez, its as if people pay attention to what you say and make you accountable.
Kevin over at Minyanville imagines what the subsequent title revisions will look like in the future:
2007: "Why the Real Estate Boom Will Not Bust and How
Foreclosures are Technically Part of the Continuing Real Estate Boom, In a
Way."
2008: "Why the Real Estate Boom in Distressed
Properties Will Not Bust (except in certain local markets) and How You Can Use
Leverage to Profit From It."
2009: "Why the Phrase "Real
Estate Boom" is Often Misunderstood to Mean Higher Prices and How You Can Pray
for Them."
2010: "Why the Real Estate Boom Will Soon
Bounce Back and How to Eventually Profit From It."
2011:
"Why Did I Have to Write "The Real Estate Boom Will Not Bust Through the End of
the Decade" and How Did I Not Realize How Long A Decade Really
Is?"
2012: "Oh, Dear God, Please, Please Let the Real
Estate Boom Bounce Back... and How You Can Profit From
It."
2013: "Please, Please, Just Let the Real Estate Boom
Come Back This One Time for This One House and How You Can Break Even From
It."
2014: "Why I Am Willing to Accept a Small Loss of 35%
On the Real Estate Boom and No Longer Care About How to Profit From
It."
2015: "Why Can I Maybe Borrow a Couple Dollars Off You
Until the Real Estate Bust is Over?"
Don't pay attention to the statistically aberrant GDP number reported Friday.
Its actually much worse.
Thanks to a "statistical fluke," GDP was actually less than 1%:
"Last quarter's annualized 26 percent increase in auto production shocked Joe Carson, now director of economic research at AllianceBernstein LP in New York. Without the gain, the economy would have grown at an annual rate of 0.9 percent, not the 1.6 percent the Commerce Department reported today.
The increase in output came despite cutbacks announced by General Motors Corp., Ford Motor Co. and others. A drop in the wholesale price of SUVs and light trucks as the automakers cleared leftover 2006 models made production look stronger than it actually was, said Carson. The economic fallout from the auto-industry cutbacks will instead come this quarter, he said."
What brought this aberrational data point about? The number crunchers in the Commerce Department rely on wholesale prices for light trucks. The 5.5% decrease in SUVs had the effect of making output look stronger -- but only when adjusted for inflation. In reality, these were firesales to move product off the lot.
Consider this related tidbit: AutoNation, the largest dealership and sellers of new cars in the country, said it expects to cut 2007 purchases from the big 3 by 30%.
Bottom line: If we have to torture the data to get to just 1.6% GDP, imagine what is actually going on in the economy.
This is the primary reason we have "obsessed" so much on Real Estate. Without the massive contribution of residential housing to the overall economy -- from job creation to transactional business to MEW -- there simply is not a whole lot of growth to be found elsewhere.
Other noteworthy items in the Q3 GDP report: There was an unexpectedly large accumulation of inventories. This implies manufacturing output will slow further in Q4, as manufacturers trim production this quarter to reduce the increased inventory build up.
Also of note: The GDP Deflator came in at 1.8%, significantly below the expected 2.8%. When it appears we have less inflation, then output looks greater. The deflator has not been below 2% since Q2 2003. In case you were wondering, the deflator is not ex-energy.
For the econ-wonks out there, the Technical notes are always rich with intrigue, and this report is no different:
For many of the key series used to prepare the advance estimate of GDP, including retail sales, unit automobile and truck sales and inventories, manufacturers' shipments of nondefense capital goods (other than aircraft), manufacturers' inventories of durable goods, federal defense spending, and consumer, producer, and international price indexes, actual data are available for all months of the quarter.
For the key series shown in this table, actual data for the third month of the quarter usually are not available in time for inclusion in the advance GDP estimate. BEA makes assumptions for the source data that are not yet available; assumptions for September 2006 are shown in the last column of the table. For most series shown, the data for August are preliminary and subject to further revision. Occasionally, the data for earlier months are also subject to revision."
This assumptions/estimates is what typically happens for the first GDP release (remember, the number will get reported 3 times: this Advance GDP, Prelim, and then Final). What this could mean is that by the time the subsequent revisions are completed , we could be showing zero growth.
That's right, 0% GDP is in the range of possible Q3 outcomes (I suspect we will be in 0.5%-1% range)
More questions on the deflator; Maybe this will help -- Have a look at the past 5 quarters:
Q3 '05
Q4 '05
Q1 '06
Q2 '06
Q3 '06
3.3
3.3
3.3
3.3
1.6
Something looks a bit funny in that series . . .
>
UPDATE October 30, 2006 10:10am
I keep getting emails asking me "What is the GDP Deflator, and why does it matter?"
The short answer is that it is an economic metric that converts output
measured at current prices into constant-dollar GDP. The idea is to measure output, not inflation.
For the longer example, lets use an example: Freedonia's biggest product is widgets. In Q1, they sold $100 worth of widgets ; In Q2, they sold $110 worth of widgets, or $10 more.
The trick in calculating Freedonia's GDP is figuring out how much of that $10 increase is due to increased output, and how much is due to inflation. To oversimplfy, the deflator "deflates" the price increases out of the total, so all that is left is GDP gains. It is the "implicit price deflator for GDP." (Does that clarify this?)
Another week, another milestone: The Dow added 87 points, or 0.7%, closing up for the week despite Friday's hiccup. Barron's Trader column notes this was the "fifth straight week of gains, as gauged by the Dow and S&P 500, while the Nasdaq Composite rose 0.4%, its fourth weekly gain in the last five, to reach 2350."
The Bulls can point to Earnings, which continued to be excellent, a few notable exceptions aside. Guidance is where the Bears can rest their case.
No matter: another week pregnant with earnings, and quite a bit of economic data: NAPM , Construction Spending and ISM mid-week, Productivity and Factory Orders Thursday, then everyone's favorite, Non Farm Payroll (tho Given the massive revisions NFP has seen, perhaps we should be putting less stock in these initial numbers).
That's what's upcoming; Here's what's outgoing: an Autumnal linkfest!
• The rally from the Summer lows has shifted leadership -- the past few weeks has seen Energy and Materials stock re-assert themselves in: Two-horned bull?"
• Options Scorecard: An updated look at more than 120 companies that have come under scrutiny for past stock-option grants.
• I did not you know this: The Street.com is now rating stocks: TheStreet.com Ratings
• The full article is a rather fascinating discussion of today's "lower upper class," which is seething about the
ultra-wealthy: Revolt of the fairly rich
• Seinfeld at the FOMC: Something about nothing also could describe the meeting of the FOMC. Nothing changed in terms of the target rate for federal funds, which has stood at 5 1/4% since last July. And the statement: a lotta yada, yada, yada.
• All this aside, Treasuries saw gains the 2nd Week in a row as Fed Leaves Rate Unchanged
• Barron's Alan Abelson cites research by Merrill Lynch's David Rosenberg regarding the recent "stabilization" in Housing. It turns out that the only thing which is stabilizing is inventory -- but at extremely high levels (If no Barron's go here)
• Election Update, part 3 Tradesports some changes: up almost 2 points GOP has a 36.1% chance of retaining control of the House; GOP odds were up nearly 4 points for retaining control of Senate remains at 73.9%.
• Two interesting (free!) articles from the WSJ:
-You can look at Campaign Cash Clues to see where the parties are defending or giving up. Biggest surprise: GOP has stopped investing in Ohio
• I haven't read Bob Woodward's State of Denial, the 3rd part of his Bush at War trilogy. It seems that every other person on my train is carrying the book.
• No cash = no inspiration = no rocket sauce: Jack Black schools all of you on the truth about piracy (save your emails, its a parody). JB & Kyle also have a new movie out: Tenacious D's The Pick of Destiny
That's all from my corner of the North Shore of Long Island, where lots of rain and plenty of fallen leaves combine to make driving treacherous -- and unlike Ice or Snow, ABS won't help if you skid on wet leaves. Drive safe!
I've been discussed the declining middle class for some time now -- see The Disconnect and Economic Classes for a more detailed chat on the subject.
I'll have more on this later in the week -- but for now, I wanted to throw up some charts up.
I always snicker when I hear a politico scratch their head about why the opinion polls are so negative, despite "good growth and low unemployment." Aside from the fact those stats are somewhat "gamed," we also know there are additional issues. Consider our modern bad habits -- excess consumption, too much debt, too little security -- of all types.
Its no wonder much of the middle class is less than enthralled with the present environment:
Source:
New Study: Middle Class in Turmoil Economic risks up sharply for most families since 2001 - September 28, 2006 Christian E. Weller and Eli Staub http://www.americanprogress.org/pressroom/releases/2006/09/middleclassturmoil.html
Yes, it remains true: Indexing is a better strategy than active investing. Passive beats most Humans. Various academic and market studies continue to demonstrate this:
"This year through September, only 28.5 percent of actively managed large-capitalization funds — which try to beat the market through stock selection — were able to outpace the S.& P. 500 index of large-cap stocks, according to a new study by S.& P. In the third quarter alone, it was even worse, with only one in five actively managed large-capitalization funds beating the index.
That isn’t terribly surprising, said Rosanne Pane, mutual fund strategist at S.& P., because active managers tend to have difficulty beating indexes when market leadership changes. And in the third quarter, many stocks that had paced the market for much of this decade began to fall behind. Small-company stocks were finally beaten by shares of big, blue-chip companies; sectors like energy also started to lose ground.
Still, such transitional periods aren’t the only good times for indexing. S.& P. research shows that while active management fared poorly in the third quarter, it has actually been lagging behind the indexes for a considerable period.
Over the five years through the end of the third quarter — a span that included both bull and bear markets — only 29.1 percent of large-cap funds managed to beat the S.& P. 500. What’s more, only 16.4 percent of mid-cap funds beat the S.& P. 400 index of mid-cap stocks, and 19.5 percent of small-cap funds outpaced the S.& P. 600 index of small-company shares. “The long term does seem to favor the indexes,” Ms. Pane said."
Why do investors bother? Aside from the few who are unaware of the research, my guess is many are attracted by the glory of being part of the 65% that manage to beat the market every so many years:
Source: Standard & Poor's; Data thru 9/30/06
>
For the rest of the time, we all want to be special -- in the 20-40% or so who do manage to outperform the indices most years.
Of course, it's likely a different 20-40% each year, and is more likely a function of style or asset class (Emerging market, Small Cap, Value, etc.)
Yes, that's right: another example of how when your emotional side trumps your rational side, you forfeit gains. Don't be too hard on yourself, you are only Human.
Barron's Alan Abelson cites research by Merrill Lynch's David Rosenberg regarding the recent "stabilization" in Housing. It turns out that the only thing which is stabilizing is inventory -- but at extremely high levels.
To get inventory numbers down to a balance between supply and demand requires a 10% drop in home prices (and hence, more sales), and a 20-25% drop in new Home Starts.
Here are the details:
"In truth, the big October Surprise that the conspiratorial crew anticipated so anxiously is that there was no October Surprise. Unless you count the really punk showing of the economy in the third quarter disclosed last week, with GDP limping to a 1.6% annual gain, the worst performance since the first quarter of 2003, when the recovery from recession was still trying to find its legs. Even with its demonstrated ineptitude, though, it's hard to see the administration conspiring to engineer 1.6% growth.
Merrill Lynch's David Rosenberg nailed the GDP figure when the consensus among the soothsayers on the Street ran to 2.3% and some of the more exuberant types were forecasting 3%.
The incredibly shrinking housing market is unmistakably beginning to exert a vicious drag on the economy as a whole. And that's despite the uptick in the housing stocks, buoyed by talk that the sharp decline in home sales is beginning to bottom out. The talk, it should be noted, comes from analysts desperate to see some signs of life in their group and realtors who are starting to worry about meeting their next mortgage payments. (They couldn't help themselves: They weren't able to resist the lure of adjustable-rate mortgages.)
We imagine neither bunch drew much comfort from the news that prices of existing homes in September suffered their biggest fall in 35 years. October, we're afraid, has been more of the sae.
For his part, David Rosenberg isn't buying the notion of a bottom in housing. He points out that existing house sales last month sank to their lowest level since January '04 and over the past six months have plunged at a 20% annual rate. Only seven times in the past four decades have prices absorbed that sort of pounding and, significantly, in five of those instance, the economy really took it on the chin.
At best, David says without enormous conviction, the inventory of unsold homes and condos up for resale may be stabilizing -- but at awesomely high levels. At last tally, backlogs of houses for sale weighed in at 7.1 months for single- family homes and 8.6 months for condos, a striking 60% higher than the level a year ago. And he points out that if "the inventory situation was truly a good- news story, then home prices wouldn't still be falling." Sounds eminently logical to us... To judge by past housing cycles, to get to a reasonable balance between supply and demand, he believes, will require at least a 10% drop in home sales and prices and 20%-25% fewer housing starts. Declines of that magnitude, he reckons, would nick the consumer's balance sheet by something between $2.2 trillion and $4.5 trillion. That's "t" as in trillion.
Pretty gruesome prospect. And no small reason why we see a recession looming next year." (emphasis added)
One last tidbit -- Rosenberg also makes the obvservation that the vast majority of the 10 million households
that bought an existing home since June 2005 are now underwater on their purchases.
What are the repurcussions of this? If you can afford to stay put, then none. Make your payments, and you will eventually be fine.
In the event of a sale, they take a small hit, perhaps losing some (or all) of what they put down to make the purchase. If they did a no money down, they may not be able to sell the house themselves, as they won't be able to transfer title with a post-sale balance on the existing mortgage. That only happens if a house sells for less than the mortgage price.
The real problem is with those 37% or so of buyers who used variable APRs and/or the Interest Only (I/O) mortgages. As the market value of the asset comes down, they may not have sufficient equity in the property to do a refinance or a conversion from I/O or APR to a traditional 30 year fixed.
Both of the above examples are why we are seeing an ongoing increase in foreclosures.
Pretty gruesome, indeed.
>
Source: October Surprise Alan Abelson UP AND DOWN WALL STREET Barron's October 30, 2006 http://online.barrons.com/article/SB116198805085606512.html
I was having a conversation about the blog redesign with a colleague (a media consultant). After we discussed the Stock Trader's Almanac dedication, she said words to the effect of "Hey, soon you will have some media quotes about The Big Picture."
I told her I had already accumulated quite a list of them, and she was aghast -- that's precisely the right word -- that they were not prominently displayed somewhere on the blog.
Anyway, here's the short list -- I am not sure whether to embed them in a side column, or to display them as a link. She wants to splash them across the top, but that's simply too much for me.
"Barry Ritholtz pens The Big Picture, a must-read blog, and is a regular guest on financial television, where he tries to
provide a counterweight of rationality to the typical ravings heard
there." -Randall W. Forsyth, Barron's Up and Down Wall Street Daily
"My favorite market blogger" -Larry Kudlow, CNBC's Kudlow & Company
~~ "Mixes technical analysis with macroeconomics
to come up with some insightful calls on the direction of the stock
market."
"One of the brightest minds and irreverent voices on Wall Street today. . .truly is one Wall Street’s important thinkers
and rising stars." -Stock Traders Almanac
~~~
"The base camp for new explorers of investing blogs.
Accessible and unintimidating, the Big Picture tackles both the economy
and the financial markets with a conversational style and ample
references to pop culture." -Associated Press
Yesterday's increase in New Home Sales caught some economists by surprise. I look at those sorts of numbers suspiciously.
Any time I want some insight into any particular datapoint, I find it instructive to go to the actual government source's website, and simply click around. If you do this with a skeptical eye, you may learn some really interesting facts.
That's what I did with the New Home Sales yesterday, simply looking at the release and trying to figure out what they were really saying thru the bureaucratic jargon and legalese. You don't need to be a forensic accountant (but it couldn't hurt).
Here's what I found:
1. The reported increase in sales was 5.3 percent. The margin of error was ±15.6%. Therefore, the likely change in sales ranged from +20.9% to -10.3%. Since this range contains zero, "the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease."
2. Recently reported increases have been subsequently revised downwards, primarily due to cancellations. Sales in June, July and August were revised down by 67,000.
3. Year-to-date sales are down 16.5%.
4. Commerce department does not do an "Apples-to-Apples" comparison. They report initial New Home Sales (pre-cancellations) versus the prior months adjusted (post-cancellations). This has the effect of lowering the older months data, thereby making the present monthly gain appear larger.
A more consistent methodology might be to compare unrevised data with unrevised data. So for September, we might look at sales of new one-family houses in August 2006 as initially reported -- annual rate of 1,050,000 (seasonally adjusted); Then we look at sales of new one-family houses in September 2006 as initially reported: an annual rate of 1,075,000 -- just under 2.4%, as opposed to the reported 5.3%. Note this is still statistically insignificant, given the ±15.36% margin of error.
Note that the year over year estimates -- down 14.2% percent (±12.2%) below the September 2005 puts zero beyond the margin of error. The range year over year is between down 2% to down 26.4%.
Lastly, watch inventory. Rex Nutting points out that "The supply of inventory peaked at 7.2 months in July. Inventories of unsold homes are up 14.4% in the past year. The number of unsold completed homes rose to a record 157,000 in September, up 47% in the past year."
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Lastly, a quick word on New Home Prices: The reported sales prices were pretty awful. Again, we go to Rex Nutting: "Median sales prices dropped 9.7% in the past year to $217,100, the lowest price in two years. It's the largest percentage decline in median prices since December 1970. Median prices for existing single-family homes are down 2.5% in the past year, the largest decline ever recorded."
Here's the amusing part: Despite the huge price drop, the reported price changes actually understates the actual price changes. This is due to Builder Incentives. Have a look at some of the freebies builders have been using to get sales going: Sub zeros, pools, BMWs, even paying the property taxes for 2 years!
Candy bar companies don't like to raise prices, so they simply make the candy smaller, selling them for the same price; Curb Your Enthusiasm fans might note how many fewer Cashews go into a can of mixed nuts ("The whole cashew/raisin balance is askew!").
Builders do the opposite: They add cashews for the same price. Some feel the psychology of lowering prices scares off potential buyers -- or at least frightens them into sitting back and waiting. To avoid the appearance of decreasing prices (or to make them appear less severe), they offer more -- increasing what they are selling -- only without apparently charging for them.
This getting more for the same cost is price deflation -- just as paying the same amount for a smaller Almond Joy or less cashews is price inflation.
New Home Pricing today – more cashews – is even more Deflationary
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