Monday, 12/10
October Pending Home Sales
Consensus - Prior
MoM -1% - +0.2%
Declining home prices are causing people to delay purchases, but lower mortgage rates may provide some support
Tuesday, 12/11
October Wholesale Inventories
Consensus - Prior
MoM +0.5% - +0.8%
Higher oil prices likely to provide a boost to inventory valuations
FOMC Meeting
Expected to lower target rate from 4.5% to 4.25%
Discount window rate expected to drop 50bp, reducing penalty to 25bp
Wednesday, 12/12
October Trade Balance
Consensus - Prior
-$57.3B - -$56.5B
Higher oil prices and a weaker dollar helping widen trade gap
Ignoring prices and focusing on volume, the gap should narrow
November Import Price Index
Consensus - Prior
MoM +2% - +1.8%
YoY +11% - +9.6%
Import prices rising twice as fast as export prices
Oil prices rose 11% MoM in November
The last time import prices rose over 10% YoY was in 1987
November Monthly Federal Budget
Consensus - Prior
-$80B - -$73B
Thursday, 12/13
Initial Jobless Claims
Consensus - Prior
332k - 338k
Continuing Claims
Consensus - Prior
2590k - 2599k
Four week moving average of initial claims at 340k, a one year high
November Producer Price Index
Consensus - Prior
MoM +1.5% - +0.1%
YoY +6.2% - +6.1%
Core PPI (Excluding Food and Energy)
Consensus - Prior
MoM +0.2% - unch
YoY +1.8% - +2.5%
Monthly increase in headline PPI expected to rebound to highest monthly increase of past year
Annual headline inflation at highest level since 17 year peak of 6.9% reached in 2005
Gasoline prices in the PPI may surge 25% MoM due to seasonal factor boost (twice size of nominal price gain)
Finished food prices expected to rise +.4% MoM
Potential for a rebound in light truck prices
November Advance Retail Sales
Consensus - Prior
+0.5% - +0.2%
Less Autos
Consensus - Prior
+0.6% - +0.2%
Gas station sales should rise 4% based on gas price rise
Ex-auto and gasoline sales expected to remain respectable at +.3%MoM
Surveys indicate consumers expect to reduce spending this holiday season
Data from Thanksgiving weekend looked OK with Wal-Mart rising
October Business Inventories
Consensus - Prior
+0.3% - +0.4%
Manufacturing inventories rose +.1%
Friday, 12/14
November Consumer Price Index
Consensus - Prior
MoM +0.6% - +0.3%
YoY +4.1% - +3.5%
Core CPI (Excluding Food and Energy)
Consensus - Prior
MoM +0.2% - +0.2%
YoY +2.3% - +2.2%
Higher gasoline prices pushing up headline inflation
Tenant rent expected to subside to +.3% from +.45% spike last month
Increased foreign tourism supporting higher hotel prices
Medical and education costs remain elevated
November Industrial Production
Consensus - Prior
+0.1% - -0.5%
Modest recovery anticipated as manufacturing data remains mixed to weaker
November Capacity Utilization
Consensus - Prior
81.7% - 81.7%
Saturday, December 8, 2007
Friday, December 7, 2007
Consumer Sentiment Continues to Deteriorate
The University of Michigan Consumer Confidence Index dropped again in early December, falling to 74.5 (consensus 75) from 76.1 in November. The index has now fallen to the lowest level since October 2005, where it tanked at 74.2 after Hurricane Katrina. Other than the brief dip in 2005, the index hasn't been this low since the early 90s.
The drop was due to a further deterioration in the economic outlook, falling for 66.2 in November (versus a summer peak of 81.5 in July) to 63.2 in the preliminary December survey. Current conditions actually recovered slightly to 92.1 from 91.5 last month. Current conditions peaked at 105.1 last May.
Inflation expectations rose back to their highest levels of the past two years. The one year outlook increased to 3.5% from 3.4% last month, and five year expectations rose from 2.9% to 3.1%. This data reinforces the Fed's concerns about inflation, and will make it harder for the Fed to cut rates more than 25bp next week.
Consumer spending will be watched carefully in light of this data.
The drop was due to a further deterioration in the economic outlook, falling for 66.2 in November (versus a summer peak of 81.5 in July) to 63.2 in the preliminary December survey. Current conditions actually recovered slightly to 92.1 from 91.5 last month. Current conditions peaked at 105.1 last May.
Inflation expectations rose back to their highest levels of the past two years. The one year outlook increased to 3.5% from 3.4% last month, and five year expectations rose from 2.9% to 3.1%. This data reinforces the Fed's concerns about inflation, and will make it harder for the Fed to cut rates more than 25bp next week.
Consumer spending will be watched carefully in light of this data.
Employment Data Slightly Better Than Expected
Though the number of new jobs created in November slipped by 75k from the prior month, they were still stronger than expected at 94k (consensus 80k). This is in line with the 93k pace of monthly job creation now shown for July and August of this year, and also the six month average of 94k monthly growth. The household survey showed an increase of 696k new jobs, pushing up the employment ratio to 63% from 62.7% in October. The participation rate rose to 66.1% from 65.9% the prior month. Revisions of prior months data erased 48k in previously announce job gains.
In addition, the unemployment rate held steady at 4.7% for the third month in a row, rather than creeping up to 4.8% as expected. The unemployment rate had reached a five year low of 4.4% last March. An increase in the labor force of 297k increased the augmented unemployment rate to 7.4% from last month's recent low of 7.3%.
The workweek held steady at 33.8 hours while average hourly and weekly earnings rose at their fastest pace since June, growing +.5% MoM, or eight cents. Over the past year, earnings have risen 3.8% on both an hourly and weekly basis. The manufacturing workweek extended to 41.3 hours from a low last month of 41.2 hours, with overtime holding steady for the fourth month at 4.1 hours. In aggregate, hours worked rose +.1% MoM. This data will not raise any inflation concerns with the Fed.
As has been the trend, most of the new jobs were created in the service sector (+127k vs 192k the prior month). Other areas showing gains of at least 30k new jobs last month include trade and transport, business services, and the government. Four areas saw job shedding - goods producing (-33k), construction (-24k), financial (-20k), and manufacturing (-11k). Temporary help grew 11k versus 28k in October. Retailers added 24k new jobs, for the first increase in this category in four months. Factory payrolls fell -11k, supporting signs of weakening manufacturing data.
In addition, the unemployment rate held steady at 4.7% for the third month in a row, rather than creeping up to 4.8% as expected. The unemployment rate had reached a five year low of 4.4% last March. An increase in the labor force of 297k increased the augmented unemployment rate to 7.4% from last month's recent low of 7.3%.
The workweek held steady at 33.8 hours while average hourly and weekly earnings rose at their fastest pace since June, growing +.5% MoM, or eight cents. Over the past year, earnings have risen 3.8% on both an hourly and weekly basis. The manufacturing workweek extended to 41.3 hours from a low last month of 41.2 hours, with overtime holding steady for the fourth month at 4.1 hours. In aggregate, hours worked rose +.1% MoM. This data will not raise any inflation concerns with the Fed.
As has been the trend, most of the new jobs were created in the service sector (+127k vs 192k the prior month). Other areas showing gains of at least 30k new jobs last month include trade and transport, business services, and the government. Four areas saw job shedding - goods producing (-33k), construction (-24k), financial (-20k), and manufacturing (-11k). Temporary help grew 11k versus 28k in October. Retailers added 24k new jobs, for the first increase in this category in four months. Factory payrolls fell -11k, supporting signs of weakening manufacturing data.
Thursday, December 6, 2007
Today's Tidbits
Subprime ARMs Cause Mortgage Delinquencies to Jump
From RBSGC: “Q3 Mortgage Delinquencies increase to 5.59% vs. 5.12% prior -- highest since mid-1986. Subprime delinquencies up to 16.3% vs. 14.8% in Q2. Subprime ARMs up to 18.8% vs. 16.95% prior. Foreclosures for Subprime ARMS at 10.4% vs. 8.0% prior.”
From Lehman: “Mortgage delinquencies and foreclosures continued to rise amid falling home prices, weak housing demand and tighter lending standards. The share of mortgages more than 30-days delinquent rose 0.5pp to 5.6%, the highest since 1986. The pain was concentrated in subprime mortgages, particularly those with adjustable rates. The percent of subprime mortgages delinquent jumped 1.5pp to 16.3% as delinquencies for ARMS surged 1.9pp to 18.8%. The percent of homes that entered the foreclosure process in Q3 jumped to a record high of 0.78% as delinquent borrowers struggled to refinance or make a sale to avoid foreclosure. Subprime ARMs accounted for 43% of foreclosures started in the quarter. The data was also skewed on a regional basis. About 34% of subprime adjustable rate mortgages entering the foreclosure process were in either California or Florida.”
Rating Agency Comments on Government’s Subprime Modification Plan
From Bloomberg: “U.S. Treasury Secretary Henry Paulson's plan to freeze some subprime mortgage rates in an effort to stop a wave of foreclosures may lead to ratings cuts on some mortgage bonds, Standard & Poor's said. ``Simply freezing interest rates on some U.S. first-lien subprime mortgage loans would have a negative impact'' on ratings of some residential mortgage-backed securities, analysts at New York-based S&P wrote in a report today. S&P said modifications to the loans will mean reduced payments available to investors from creditworthy borrowers. The proposal comes as the number of Americans who fell behind on their mortgage payments rose to a 20-year high in the third quarter, according to the Mortgage Bankers Association. Adjustable-rate mortgages account for 70 percent to 80 percent of securitized subprime mortgages from 2005 through the first half of this year, S&P said in its report. The U.S. plan may ``help stabilize mortgage default rates and mitigate the risk of future downgrades of highly rated tranches,'' said Glenn Costello, a managing director in the residential mortgage-backed securities group at Fitch Ratings in New York. ``However, the implications for the lower-rated tranches of these transactions are unclear at this time.'' S&P, the largest ratings company, said bondholders may benefit from mortgage modifications if they result in fewer foreclosures… The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.59 percent, the highest since 1986, according to a report today from the Washington-based bankers trade group. New foreclosures hit an all-time high for the second consecutive quarter in a survey that goes back to 1972.”
From RBSGC: “So why are we less than convinced that Bush/Paulson have saved the housing market? As we understand it, the Treasury has signed-off, the Banks agree, and the Servicers have bought in as well -- but who has talked to the investors? Paulson commented the investors are 'on board', but at exactly what cost and how do the frozen interest rates impact the creditworthiness of these deals? -- According to a report released today by S&P, this plan will have a negative impact on some of these deals. Still seems to be plenty of details to work out. There are far more uncertainties about the plan than there are known facts. Moreover, as we have stressed from the onset of the subprime concerns, it is NOT just this small group of American's which represent a small fraction of the US's consumption that will impact the economy -- but rather the broader credit and confidence issues that now plague the system. While a bailout of this nature may keep a few subprime borrowers in their homes, it will surely make borrowing more expensive (pricing in this new Paulson Freeze risk), doing little to address the declining home prices and tightening credit faced by other homeowners.”
Rising Auto Delinquencies Signal Economic Problems
From The Wall Street Journal: “Delinquencies in the auto-loan market are ticking up to their highest level in several years…About $575 billion in loans for new and used cars are made annually…About 4.5% of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent as of the end of September, up from 2.9% the previous month…That is the biggest one-month jump in at least eight years. Lehman says 12% of subprime borrowers…were delinquent on their 2006 auto loans as of September. That is the highest level since 2002 and up from 11.1% the previous month…Car loans differ from home loans in one crucial way…everyone understands that the car behind a car loan is an asset destined to lose value. The typical delinquent borrower in a car loan isn’t a speculator but someone who became unable to make what previously seemed like a manageable payment. That is why car delinquencies are closely linked to the health of the economy…Some subprime auto lenders, such as Capital One Financial Corp., say they are seeing higher risks in parts of the country where home prices are falling the hardest, such as California and Florida.”
Measuring Household Economic Health
From Merrill Lynch: “Real estate wealth falls $128B in 3Q. Housing wealth fell in 3Q for the first time since 1Q 1993, by $128B, as the 7.3% QoQ annualized increase in mortgage debt far outstripped the meager 1% gain in the value of real estate assets… There was a downward revision to real estate wealth of about $120B per quarter on average since 1Q 2006. This pared the estimated wealth impact back about about 0.1ppt over that time, although we estimate that the contribution to real consumer spending remained at a hefty 1.2 percentage point in 2006. Since home prices rolled over this year, as reported by the Case-Shiller home price index, we estimate that the housing wealth effect has now largely disappeared and is starting to become a drag on consumer spending. Household debt hits new record high. Total household net worth recorded a $624B increase, which was the lowest gain in 5 quarters. Providing an offset to the real estate shortfall, the value of financial assets grew 6.4%, led by a recovery in corporate bonds and further gains in deposits. Equity holdings declined by 2.5% QoQ annualized in 3Q, the third consecutive quarterly decline and are barely changed from one-year-ago levels. The balance sheet ratios continued to deteriorate. Household debt to personal disposable income (PDI) hit another new high, rising to 138% in 3Q. This metric has risen by 22 points since the Fed cut the funds rate to 1% back in 2003. Debt to assets rose to 19.5% from 19.4% (another historic high), while net worth to PDI, rolled over, falling to 571.7% from 573.1%.”
Where is the Money Going? Details from the Flow of Funds Report
From JP Morgan: “The detailed and comprehensive analysis of the nation's finances contained in the Flow of Funds provides a useful tool for assessing what was a wrenching quarter for the financial system. The intriguing aspects of this report lay in the details. In fact, the headline numbers would suggest last quarter was business as usual: overall debt of the nonfinancial sector increased at a 9% rate, a pace about 1-1/4% point faster than the previous quarter and in line with the average rate seen over the last few years. The composition reflected a faster pace of business debt growth -- up to 11.9% from 10.7% -- and slightly slower household debt growth -- down to a 6.9% pace from 7.6% the prior quarter. The slowing in household debt growth was attributable to a slowdown in net home mortgage borrowing which moved down to a $691 billion pace from the previous quarter's $800 billion rate. The slowing in home mortgage borrowing over the last year has been relatively gradual and home equity extraction (the change in home mortgage debt outstanding less estimated debt on newly constructed housing) has drifted lower to around a $274 billion pace last quarter. While mortgage debt growth has slowed in a fairly linear manner, the sources of mortgage financing have changed abruptly. Most striking has been the decline in importance of ABS issuers as a source of mortgage finance. Qualitatively, that is not surprising, but the numbers are striking nonetheless: ABS issuers went from acquiring home mortgages at a $318 billion pace in Q2 to shedding mortgages at a $197 billion pace last quarter. Overall ABS-issuer acquisitions plunged from a $486 billion rate to a $50 billion pace. The GSEs directly and indirectly stepped in to fill the gap left by ABS-issuers. Directly, GSE mortgage pools acquired mortgages at a record pace of $605 billion last quarter. Indirectly, the Federal Home Loan Banks (FHLB) lent to the banking system at a staggering $746 billion pace last quarter (the previous record had been a $141 billion pace), an infusion of funds that supported a pick up in mortgage lending by depository institutions, particularly savings institutions which accelerated their mortgage lending to a $138 billion pace. Household wealth increased $625 billion last quarter. The increase in wealth due to holding gains on real estate assets shrunk to virtually zero last quarter [Editor note – because they use OFHEO home price data, the true value of real estate assets was probably lower than reported], after being as large as $500 billion/quarter earlier in the expansion. Instead, the increase in wealth last quarter owed to net investment in physical and financial assets and holding gains on equity in noncorporate business. Turning from housing and households to the business sector, money market mutual funds expanded at a stunning $1.26 trillion pace last quarter, besting the previous record quarter by several hundred billion dollars. This growth led them to be healthy purchasers of a broad array of assets including open market paper (essentially CP) making them one of the few sectors that were net acquirers of CP last quarter. The nonfinancial corporate sector set a new record in net equity buybacks, repurchasing shares at an $846 billion pace. Corporate bond issuance stepped down to a still-strong pace of $212 billion and borrowing from banks jumped, to $212 billion as well. In spite of the increase in borrowing, leverage in the nonfinancial corporate sector drifted down and debt/net worth dipped to 42.0% -- a 22-year low.”
Banks Become Reluctant Lenders
From The Wall Street Journal: “…the market for credit, the lifeblood of a modern economy isn’t functioning well…For years, banks and investors lent freely. They took big risks for surprisingly little reward (known as “low risk premiums” in the patois of the trade). Now, they’re shunning risk. Big banks are reluctant to lend even to each other for more than a few days, and are hoarding cash. In a symptom that the financial fever hasn’t broken, interest rates for one- and three-month loans among banks are up sharply. The Fed and the European Central Bank are now forced to consider the economic equivalent of alternative medicine…The problem goes beyond mortgages. Rising delinquencies for credit cards and home-equity and auto loans are bound to make banks, credit-card issuers and other lenders wary. “Banks are having to eat into their capital base in order to reserve for growing losses, “…”And that means they have less money to lend.” The Fed’s weekly numbers show that bank lending is still increasing. But a lot of that is unwilling lending. Some banks are making loans under old promises to finance customers if they couldn’t access financial markets. Others are taking on to their books loans made through complicated off-balance-sheet entities, and now have to set aside capital as a result. At a time when they’d rather reduce their portfolio of loans, that unwilling lending seems certain to lead them to pull back, if they haven’t already, on lending to consumers and businesses.”
Is Goldman Sachs’ Emphasis on Teamwork Responsible for Its Success?
From The Financial Times: “[Goldman Sachs] has a highly developed culture of teamwork rather than a star system. John Thain, the former Goldman co-president who has just moved from the NYSE Group to head Merrill Lynch, says that one of his first tasks is to instil more teamwork. This matters when it comes to risk management. The atomised culture of many banks works fine when times are good and small teams can be trusted with capital with which to build businesses. But it creates a distorted incentive to take - and to hide - excessive risks. Goldman bankers say it is impressed upon them that they must tell others of any concerns they have about clients or investments: the biggest offence is to keep secrets. The reward for honesty is that Goldman is slow to punish those who make well-intentioned errors. The collective approach was in evidence when David Viniar, Goldman's chief financial officer, gathered a group of trading heads and risk controllers at the end of last year to discuss whether the bank was over-exposed to the weak US housing market. After everyone had talked over the bank's overall trading positions, its leaders astutely decided to hedge its mortgage book.”
MISC
From Bank of America: “The 4-week moving average of claims is the highest since October 2005.”
From RBSGC: “Monster Index slips to 183, lowest since July.”
From Lehman: “Japanese investors were net sellers of $7.9bln in overseas bonds during the week ending 12/1, largest net sale since September 2006.”
From UBS: “Sub-3% 2yr yields and sub-4% 10 year yields are not the stuff to stir the long-term passions of the portfolio community. Investors have brought Treasury yields to where they are this morning because they've had to, not because they wanted to. We see it as a matter of days or weeks before we see portfolios migrate away from the Treasury market and back into the clutches of the fancier-dressed (and yielding) credit markets. The overbought long end of the Treasury market should suffer the most as investors finally find the steel to flee 4.25% 30yr rates.”
From Deutsche Bank: “The Fed reported that total CP outstanding fell USD10.2bn last week with ABCP down USD23bn to levels last seen in 2005.”
From RBSGC: “Retail Sales fell most since March, says ShopperTrak, down 4.4% in week ending Dec 1 vs. year ago. Online spending slowed, up 17% vs . up 26% for same period last year.”
From Citi: “The decline in housing-related employment is picking up speed. These sectors have shed an estimated 375,000 jobs from their spring 2006 peak, with nearly
half the declines in the past three months.”
From RBSGC: “Toll Bros, builder, reports 1st loss in 21 yrs.”
From Deutsche Bank: “The VIX is at its lowest level in a month.”
End-of-Day Market Update
From UBS: “Treasuries fell sharply late in the session, and the 2s30s curve flattened 3.5bps as of 3pm. 2-year yields are again above 3% while 10yr yields rose to close over 4.00% as well. The catalyst was the unveiling of the Bush/Paulson subprime rescue bill and the subsequent +175 point rally in the DJIA. We saw very little customer flows of note. Despite crude oil rising above $90/barrel again, TIPS saw very little activity as well, and breakevens were little changed on the day. Today's Treasury volume was a miserly 82% of the 30d average… Swaps saw 2-way flow on curve trades, and front end spreads narrowed moderately. Agencies saw very little flow, and finished mixed to Libor on the day. Mortgages had moderate activity, with the 6 coupon tightening 4 ticks to Treasuries and 2 to swaps, 5.5's tightening 1 to Treasuries and trading in line to wasp, and 5's widening 2 to Treasuries and 3 to swaps.”
Three month T-Bill yield rose 2 bp to 3.07%.
Two year T-Note yield rose 9 bp to 3.02%
Ten year T-Note yield rose 5 bp to 4.01%
Dow rose 175 to 13,620
S&P 500 rose 22 to 1507
Dollar index fell .05 to 76.36
Yen .42 to 111.32 per dollar
Euro rose .003 to 1.464
Gold rose $7 to $802
Oil rose $3 to $90.40
*All prices as of 5pm
From RBSGC: “Q3 Mortgage Delinquencies increase to 5.59% vs. 5.12% prior -- highest since mid-1986. Subprime delinquencies up to 16.3% vs. 14.8% in Q2. Subprime ARMs up to 18.8% vs. 16.95% prior. Foreclosures for Subprime ARMS at 10.4% vs. 8.0% prior.”
From Lehman: “Mortgage delinquencies and foreclosures continued to rise amid falling home prices, weak housing demand and tighter lending standards. The share of mortgages more than 30-days delinquent rose 0.5pp to 5.6%, the highest since 1986. The pain was concentrated in subprime mortgages, particularly those with adjustable rates. The percent of subprime mortgages delinquent jumped 1.5pp to 16.3% as delinquencies for ARMS surged 1.9pp to 18.8%. The percent of homes that entered the foreclosure process in Q3 jumped to a record high of 0.78% as delinquent borrowers struggled to refinance or make a sale to avoid foreclosure. Subprime ARMs accounted for 43% of foreclosures started in the quarter. The data was also skewed on a regional basis. About 34% of subprime adjustable rate mortgages entering the foreclosure process were in either California or Florida.”
Rating Agency Comments on Government’s Subprime Modification Plan
From Bloomberg: “U.S. Treasury Secretary Henry Paulson's plan to freeze some subprime mortgage rates in an effort to stop a wave of foreclosures may lead to ratings cuts on some mortgage bonds, Standard & Poor's said. ``Simply freezing interest rates on some U.S. first-lien subprime mortgage loans would have a negative impact'' on ratings of some residential mortgage-backed securities, analysts at New York-based S&P wrote in a report today. S&P said modifications to the loans will mean reduced payments available to investors from creditworthy borrowers. The proposal comes as the number of Americans who fell behind on their mortgage payments rose to a 20-year high in the third quarter, according to the Mortgage Bankers Association. Adjustable-rate mortgages account for 70 percent to 80 percent of securitized subprime mortgages from 2005 through the first half of this year, S&P said in its report. The U.S. plan may ``help stabilize mortgage default rates and mitigate the risk of future downgrades of highly rated tranches,'' said Glenn Costello, a managing director in the residential mortgage-backed securities group at Fitch Ratings in New York. ``However, the implications for the lower-rated tranches of these transactions are unclear at this time.'' S&P, the largest ratings company, said bondholders may benefit from mortgage modifications if they result in fewer foreclosures… The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.59 percent, the highest since 1986, according to a report today from the Washington-based bankers trade group. New foreclosures hit an all-time high for the second consecutive quarter in a survey that goes back to 1972.”
From RBSGC: “So why are we less than convinced that Bush/Paulson have saved the housing market? As we understand it, the Treasury has signed-off, the Banks agree, and the Servicers have bought in as well -- but who has talked to the investors? Paulson commented the investors are 'on board', but at exactly what cost and how do the frozen interest rates impact the creditworthiness of these deals? -- According to a report released today by S&P, this plan will have a negative impact on some of these deals. Still seems to be plenty of details to work out. There are far more uncertainties about the plan than there are known facts. Moreover, as we have stressed from the onset of the subprime concerns, it is NOT just this small group of American's which represent a small fraction of the US's consumption that will impact the economy -- but rather the broader credit and confidence issues that now plague the system. While a bailout of this nature may keep a few subprime borrowers in their homes, it will surely make borrowing more expensive (pricing in this new Paulson Freeze risk), doing little to address the declining home prices and tightening credit faced by other homeowners.”
Rising Auto Delinquencies Signal Economic Problems
From The Wall Street Journal: “Delinquencies in the auto-loan market are ticking up to their highest level in several years…About $575 billion in loans for new and used cars are made annually…About 4.5% of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent as of the end of September, up from 2.9% the previous month…That is the biggest one-month jump in at least eight years. Lehman says 12% of subprime borrowers…were delinquent on their 2006 auto loans as of September. That is the highest level since 2002 and up from 11.1% the previous month…Car loans differ from home loans in one crucial way…everyone understands that the car behind a car loan is an asset destined to lose value. The typical delinquent borrower in a car loan isn’t a speculator but someone who became unable to make what previously seemed like a manageable payment. That is why car delinquencies are closely linked to the health of the economy…Some subprime auto lenders, such as Capital One Financial Corp., say they are seeing higher risks in parts of the country where home prices are falling the hardest, such as California and Florida.”
Measuring Household Economic Health
From Merrill Lynch: “Real estate wealth falls $128B in 3Q. Housing wealth fell in 3Q for the first time since 1Q 1993, by $128B, as the 7.3% QoQ annualized increase in mortgage debt far outstripped the meager 1% gain in the value of real estate assets… There was a downward revision to real estate wealth of about $120B per quarter on average since 1Q 2006. This pared the estimated wealth impact back about about 0.1ppt over that time, although we estimate that the contribution to real consumer spending remained at a hefty 1.2 percentage point in 2006. Since home prices rolled over this year, as reported by the Case-Shiller home price index, we estimate that the housing wealth effect has now largely disappeared and is starting to become a drag on consumer spending. Household debt hits new record high. Total household net worth recorded a $624B increase, which was the lowest gain in 5 quarters. Providing an offset to the real estate shortfall, the value of financial assets grew 6.4%, led by a recovery in corporate bonds and further gains in deposits. Equity holdings declined by 2.5% QoQ annualized in 3Q, the third consecutive quarterly decline and are barely changed from one-year-ago levels. The balance sheet ratios continued to deteriorate. Household debt to personal disposable income (PDI) hit another new high, rising to 138% in 3Q. This metric has risen by 22 points since the Fed cut the funds rate to 1% back in 2003. Debt to assets rose to 19.5% from 19.4% (another historic high), while net worth to PDI, rolled over, falling to 571.7% from 573.1%.”
Where is the Money Going? Details from the Flow of Funds Report
From JP Morgan: “The detailed and comprehensive analysis of the nation's finances contained in the Flow of Funds provides a useful tool for assessing what was a wrenching quarter for the financial system. The intriguing aspects of this report lay in the details. In fact, the headline numbers would suggest last quarter was business as usual: overall debt of the nonfinancial sector increased at a 9% rate, a pace about 1-1/4% point faster than the previous quarter and in line with the average rate seen over the last few years. The composition reflected a faster pace of business debt growth -- up to 11.9% from 10.7% -- and slightly slower household debt growth -- down to a 6.9% pace from 7.6% the prior quarter. The slowing in household debt growth was attributable to a slowdown in net home mortgage borrowing which moved down to a $691 billion pace from the previous quarter's $800 billion rate. The slowing in home mortgage borrowing over the last year has been relatively gradual and home equity extraction (the change in home mortgage debt outstanding less estimated debt on newly constructed housing) has drifted lower to around a $274 billion pace last quarter. While mortgage debt growth has slowed in a fairly linear manner, the sources of mortgage financing have changed abruptly. Most striking has been the decline in importance of ABS issuers as a source of mortgage finance. Qualitatively, that is not surprising, but the numbers are striking nonetheless: ABS issuers went from acquiring home mortgages at a $318 billion pace in Q2 to shedding mortgages at a $197 billion pace last quarter. Overall ABS-issuer acquisitions plunged from a $486 billion rate to a $50 billion pace. The GSEs directly and indirectly stepped in to fill the gap left by ABS-issuers. Directly, GSE mortgage pools acquired mortgages at a record pace of $605 billion last quarter. Indirectly, the Federal Home Loan Banks (FHLB) lent to the banking system at a staggering $746 billion pace last quarter (the previous record had been a $141 billion pace), an infusion of funds that supported a pick up in mortgage lending by depository institutions, particularly savings institutions which accelerated their mortgage lending to a $138 billion pace. Household wealth increased $625 billion last quarter. The increase in wealth due to holding gains on real estate assets shrunk to virtually zero last quarter [Editor note – because they use OFHEO home price data, the true value of real estate assets was probably lower than reported], after being as large as $500 billion/quarter earlier in the expansion. Instead, the increase in wealth last quarter owed to net investment in physical and financial assets and holding gains on equity in noncorporate business. Turning from housing and households to the business sector, money market mutual funds expanded at a stunning $1.26 trillion pace last quarter, besting the previous record quarter by several hundred billion dollars. This growth led them to be healthy purchasers of a broad array of assets including open market paper (essentially CP) making them one of the few sectors that were net acquirers of CP last quarter. The nonfinancial corporate sector set a new record in net equity buybacks, repurchasing shares at an $846 billion pace. Corporate bond issuance stepped down to a still-strong pace of $212 billion and borrowing from banks jumped, to $212 billion as well. In spite of the increase in borrowing, leverage in the nonfinancial corporate sector drifted down and debt/net worth dipped to 42.0% -- a 22-year low.”
Banks Become Reluctant Lenders
From The Wall Street Journal: “…the market for credit, the lifeblood of a modern economy isn’t functioning well…For years, banks and investors lent freely. They took big risks for surprisingly little reward (known as “low risk premiums” in the patois of the trade). Now, they’re shunning risk. Big banks are reluctant to lend even to each other for more than a few days, and are hoarding cash. In a symptom that the financial fever hasn’t broken, interest rates for one- and three-month loans among banks are up sharply. The Fed and the European Central Bank are now forced to consider the economic equivalent of alternative medicine…The problem goes beyond mortgages. Rising delinquencies for credit cards and home-equity and auto loans are bound to make banks, credit-card issuers and other lenders wary. “Banks are having to eat into their capital base in order to reserve for growing losses, “…”And that means they have less money to lend.” The Fed’s weekly numbers show that bank lending is still increasing. But a lot of that is unwilling lending. Some banks are making loans under old promises to finance customers if they couldn’t access financial markets. Others are taking on to their books loans made through complicated off-balance-sheet entities, and now have to set aside capital as a result. At a time when they’d rather reduce their portfolio of loans, that unwilling lending seems certain to lead them to pull back, if they haven’t already, on lending to consumers and businesses.”
Is Goldman Sachs’ Emphasis on Teamwork Responsible for Its Success?
From The Financial Times: “[Goldman Sachs] has a highly developed culture of teamwork rather than a star system. John Thain, the former Goldman co-president who has just moved from the NYSE Group to head Merrill Lynch, says that one of his first tasks is to instil more teamwork. This matters when it comes to risk management. The atomised culture of many banks works fine when times are good and small teams can be trusted with capital with which to build businesses. But it creates a distorted incentive to take - and to hide - excessive risks. Goldman bankers say it is impressed upon them that they must tell others of any concerns they have about clients or investments: the biggest offence is to keep secrets. The reward for honesty is that Goldman is slow to punish those who make well-intentioned errors. The collective approach was in evidence when David Viniar, Goldman's chief financial officer, gathered a group of trading heads and risk controllers at the end of last year to discuss whether the bank was over-exposed to the weak US housing market. After everyone had talked over the bank's overall trading positions, its leaders astutely decided to hedge its mortgage book.”
MISC
From Bank of America: “The 4-week moving average of claims is the highest since October 2005.”
From RBSGC: “Monster Index slips to 183, lowest since July.”
From Lehman: “Japanese investors were net sellers of $7.9bln in overseas bonds during the week ending 12/1, largest net sale since September 2006.”
From UBS: “Sub-3% 2yr yields and sub-4% 10 year yields are not the stuff to stir the long-term passions of the portfolio community. Investors have brought Treasury yields to where they are this morning because they've had to, not because they wanted to. We see it as a matter of days or weeks before we see portfolios migrate away from the Treasury market and back into the clutches of the fancier-dressed (and yielding) credit markets. The overbought long end of the Treasury market should suffer the most as investors finally find the steel to flee 4.25% 30yr rates.”
From Deutsche Bank: “The Fed reported that total CP outstanding fell USD10.2bn last week with ABCP down USD23bn to levels last seen in 2005.”
From RBSGC: “Retail Sales fell most since March, says ShopperTrak, down 4.4% in week ending Dec 1 vs. year ago. Online spending slowed, up 17% vs . up 26% for same period last year.”
From Citi: “The decline in housing-related employment is picking up speed. These sectors have shed an estimated 375,000 jobs from their spring 2006 peak, with nearly
half the declines in the past three months.”
From RBSGC: “Toll Bros, builder, reports 1st loss in 21 yrs.”
From Deutsche Bank: “The VIX is at its lowest level in a month.”
End-of-Day Market Update
From UBS: “Treasuries fell sharply late in the session, and the 2s30s curve flattened 3.5bps as of 3pm. 2-year yields are again above 3% while 10yr yields rose to close over 4.00% as well. The catalyst was the unveiling of the Bush/Paulson subprime rescue bill and the subsequent +175 point rally in the DJIA. We saw very little customer flows of note. Despite crude oil rising above $90/barrel again, TIPS saw very little activity as well, and breakevens were little changed on the day. Today's Treasury volume was a miserly 82% of the 30d average… Swaps saw 2-way flow on curve trades, and front end spreads narrowed moderately. Agencies saw very little flow, and finished mixed to Libor on the day. Mortgages had moderate activity, with the 6 coupon tightening 4 ticks to Treasuries and 2 to swaps, 5.5's tightening 1 to Treasuries and trading in line to wasp, and 5's widening 2 to Treasuries and 3 to swaps.”
Three month T-Bill yield rose 2 bp to 3.07%.
Two year T-Note yield rose 9 bp to 3.02%
Ten year T-Note yield rose 5 bp to 4.01%
Dow rose 175 to 13,620
S&P 500 rose 22 to 1507
Dollar index fell .05 to 76.36
Yen .42 to 111.32 per dollar
Euro rose .003 to 1.464
Gold rose $7 to $802
Oil rose $3 to $90.40
*All prices as of 5pm
Wednesday, December 5, 2007
Factory Orders
Factory orders unexpectedly rebounded in October, rising +.5% MoM (consensus unchanged), for the largest monthly gain since July. In addition, September's figure was revised higher to +.3% from the prior reported gain of +.2% MoM. Unfortunately, it appears that much of the increase is attributable to higher commodity prices rather than increasing volumes.
New orders for manufactured goods have now risen in four of the past five months. Excluding cars and airplanes, new order demand rose +.6% MoM in October. Shipments rose +1% MoM in October, and have now risen in three of the past four months. Unfilled orders continue their multiyear string of gains, rising +1% MoM, to another new record high. The unfilled orders to shipments ratio rose to 5.2 months on continued aircraft backlogs. Unfilled transportation equipment orders rose 1.1% MoM.
Durable goods orders fell -.2% MoM, creating a three month string of declines. But the pace of decline has eased from the 1.4% drop in September. Most of the weakness has been due to computers and electronic equipment, which fell -7.1% MoM in October. Durable goods shipments rose for the first time in three months, increasing by +.8% MoM, again primarily due to an increase of 2.2% MoM in computers and electronics.
Non-durable goods orders rose +1.3% MoM. Shipments of non-durable goods rose +1.3% MoM, to a record high, continuing a string of gains over the past six months. Chemical products led the increase. Petroleum shipments rose 1.8%. Since shipments are measured in dollars spent, most of the increase was probably due to higher prices.
Factory inventories rose +.1% MoM, down from the +.6% increase in September. The inventory to sales ratio declined to 1.23 months in October versus 1.24 months in September. Inventories of durable goods have been rising for three of the past four months, increasing a revised +.3% MoM in October, and are currently at record high levels. Inventories of non-durable goods fell -.3% MoM, with food products leading the decline.
The manufacturing sector remains under stress as a slowing economy causes companies to become more cautious on investment. There are also increasing indications that more companies are having trouble finding financing, which further reduces demand. The manufacturing ISM index now stands at a ten month low.
New orders for manufactured goods have now risen in four of the past five months. Excluding cars and airplanes, new order demand rose +.6% MoM in October. Shipments rose +1% MoM in October, and have now risen in three of the past four months. Unfilled orders continue their multiyear string of gains, rising +1% MoM, to another new record high. The unfilled orders to shipments ratio rose to 5.2 months on continued aircraft backlogs. Unfilled transportation equipment orders rose 1.1% MoM.
Durable goods orders fell -.2% MoM, creating a three month string of declines. But the pace of decline has eased from the 1.4% drop in September. Most of the weakness has been due to computers and electronic equipment, which fell -7.1% MoM in October. Durable goods shipments rose for the first time in three months, increasing by +.8% MoM, again primarily due to an increase of 2.2% MoM in computers and electronics.
Non-durable goods orders rose +1.3% MoM. Shipments of non-durable goods rose +1.3% MoM, to a record high, continuing a string of gains over the past six months. Chemical products led the increase. Petroleum shipments rose 1.8%. Since shipments are measured in dollars spent, most of the increase was probably due to higher prices.
Factory inventories rose +.1% MoM, down from the +.6% increase in September. The inventory to sales ratio declined to 1.23 months in October versus 1.24 months in September. Inventories of durable goods have been rising for three of the past four months, increasing a revised +.3% MoM in October, and are currently at record high levels. Inventories of non-durable goods fell -.3% MoM, with food products leading the decline.
The manufacturing sector remains under stress as a slowing economy causes companies to become more cautious on investment. There are also increasing indications that more companies are having trouble finding financing, which further reduces demand. The manufacturing ISM index now stands at a ten month low.
Non-Manufacturing ISM Slips in November
November non-manufacturing ISM fell more than expected to 54.1 (consensus 55) from 55.8 in October. This will be a concern for the Fed as it indicates the service side of the economy is slowing, which has been the strongest sector in recent years and accounts for around 88% of the economy (manufacturing 12%). The non-manufacturing ISM includes much of the housing market including construction and mortgage brokers. This is the lowest reading since last March, when the index briefly dipped to 52.4. Any reading above 50 indicates growth. One bright spot is that this morning's ADP report on payroll growth showed that all of the very strong increase in employment seen in their survey was due to the service sector, with service sector jobs growing 197k in November, and construction employment only falling by 3k jobs during the month.
By category, declines were seen in new orders, employment, new export orders, and imports. Gains were seen in prices paid (+13pts to 76.5), order backlogs, supplier deliveries, and both inventory measures. Only order backlogs and imports were running below 50, indicating outright contraction. Six industries reported decreased activity as opposed to ten which reported increasing activity.
By category, declines were seen in new orders, employment, new export orders, and imports. Gains were seen in prices paid (+13pts to 76.5), order backlogs, supplier deliveries, and both inventory measures. Only order backlogs and imports were running below 50, indicating outright contraction. Six industries reported decreased activity as opposed to ten which reported increasing activity.
Productivity and ULC Ease Fed Inflation Concerns
Great news for the Fed on productivity and unit labor costs for the third quarter of 2007. The revisions showed productivity being revised even higher than expected to +6.3% annualized (consensus 5.9%, prior estimate 4.9%), after the GDP estimate was revised higher earlier, and unit labor costs being revised down to -2% annualized. Third quarter GDP unexpectedly increased at the fastest pace in four years in the third quarter, at 4.9% annualized. Output was revised higher to 5.7% annualized from the preliminary estimate of 4.3%.
Third quarter productivity, at 6.3% annualized, is at the highest figure since the 10.4% annualized gain achieved in the third quarter of 2003, and a substantial improvement from the 2.2% growth pace of the second quarter. Productivity at non-financial companies doubled to 4.2% in the third quarter, annualized, from 2.1% in the second quarter. Manufacturing productivity also doubled from the prior quarter, increasing by 5% annualized versus 2.4%. Rising productivity indicates rising worker efficiency, and reduces inflationary pressures. Productivity gains peaked in 2002, and have been trending lower since then. But over the last four quarters, productivity rose 2.7%, after rising just 1% for all of 2006, creating some hope that productivity gains are on the upswing again.
Unit labor costs (ULC) fell even more than expected, declining -2% annualized in the third quarter versus the initial estimate of a -.2% decline and a revised consensus call for a -1.2% drop. This marks the first two quarter consecutive decline in ULC since before my data begins in 1992. Otherwise, this was the largest quarterly drop in ULC since the third quarter of 2003, when it fell -4.5% annualized. Lower labor costs also reduce inflationary pressures. Unit labor costs appear to have peaked in the first quarter at 4.3% YoY, and has now fallen to 3% YoY in the most recent quarter, making the trend in labor costs look much more benign.
Compensation in the third quarter improved, rising +4.2% annualized(down from an original estimate of 4.7%) versus the 1% growth rate of the prior quarter(originally reported as +4.4% annualized). But, the number of hours worked fell -0.6% annualized. This caused real compensation, after inflation, to rise at 2.3% pace, down from the 2.7% annualized gain of the second quarter. Over the past year, nominal compensation per hour has risen 5.8% YoY, but at only 3.3% YoY when adjusted for inflation.
Unfortunately, the third quarter improvements in GDP output, productivity and ULC are not expected to be repeated soon. Fourth quarter GDP growth is now estimated to come in at only +0.1% annualized, a precipitous fall from the third quarter's rapid 4.9% annualized pace, as the economy slows. A rising percentage of economists and consumers are now looking for a recession.
Third quarter productivity, at 6.3% annualized, is at the highest figure since the 10.4% annualized gain achieved in the third quarter of 2003, and a substantial improvement from the 2.2% growth pace of the second quarter. Productivity at non-financial companies doubled to 4.2% in the third quarter, annualized, from 2.1% in the second quarter. Manufacturing productivity also doubled from the prior quarter, increasing by 5% annualized versus 2.4%. Rising productivity indicates rising worker efficiency, and reduces inflationary pressures. Productivity gains peaked in 2002, and have been trending lower since then. But over the last four quarters, productivity rose 2.7%, after rising just 1% for all of 2006, creating some hope that productivity gains are on the upswing again.
Unit labor costs (ULC) fell even more than expected, declining -2% annualized in the third quarter versus the initial estimate of a -.2% decline and a revised consensus call for a -1.2% drop. This marks the first two quarter consecutive decline in ULC since before my data begins in 1992. Otherwise, this was the largest quarterly drop in ULC since the third quarter of 2003, when it fell -4.5% annualized. Lower labor costs also reduce inflationary pressures. Unit labor costs appear to have peaked in the first quarter at 4.3% YoY, and has now fallen to 3% YoY in the most recent quarter, making the trend in labor costs look much more benign.
Compensation in the third quarter improved, rising +4.2% annualized(down from an original estimate of 4.7%) versus the 1% growth rate of the prior quarter(originally reported as +4.4% annualized). But, the number of hours worked fell -0.6% annualized. This caused real compensation, after inflation, to rise at 2.3% pace, down from the 2.7% annualized gain of the second quarter. Over the past year, nominal compensation per hour has risen 5.8% YoY, but at only 3.3% YoY when adjusted for inflation.
Unfortunately, the third quarter improvements in GDP output, productivity and ULC are not expected to be repeated soon. Fourth quarter GDP growth is now estimated to come in at only +0.1% annualized, a precipitous fall from the third quarter's rapid 4.9% annualized pace, as the economy slows. A rising percentage of economists and consumers are now looking for a recession.
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