Saturday, April 28, 2012

Weekly Indicators: April ends in a sea of green edition

- by New Deal democrat

In the rear view mirror, first quarter GDP was reported preliminarily at +2.2% on an annualized basis.  This was below expectations.  The biggest negative was government spending on all levels including a marked decrease in military spending due to the end of the war in Iraq.  This was still positive enough to push YoY GDP back above 2.0%.  Durable goods orders, a leading indicator, came in strongly negative, although this is a volatile series.  This in part appears to be an inventory correction.  Case Shiller home prices continued to decline YoY, but the m/m change in the seasonally adjusted data was positive.

Fittingly for April, the high frequency weekly indicators this week were a sea of green with a few yellows from unwanted data dandelions. Housing and employment continued to be the most significant areas.

Housing reports were positive:

 The Mortgage Bankers' Association reported that the seasonally adjusted Purchase Index increased -2.7% from the prior week, and were flat YoY. The Refinance Index reversed part of its huge gain from the prior week, falling -5.6%.This index is at the upper end of its 2 year generally flat range. Because the MBA's index was substituted for the Federal Reserve Bank's weekly H8 report of real estate loans in ECRI's WLI, I've begun comparing the two. This week for the fourth week in a row after 4 years of relentless decline, real estate loans held at commercial banks were up, +1.0% on a YoY basis. On a seasonally adjusted basis, these bottomed in September and are now up +1.7%.

 YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker were up +3.7% from a year ago. YoY asking prices have been positive now for close to 5 months. This week Case Shiller reported only the second month-over-month gain in housing prices in 5 years, excepting the months of the $8000 housing credit. For the last few months my mantra on house prices has been "something's gotta give." Either the list prices indexes (showing gains) or the repeat sales indexes (showing losses) had to turn. Right now it looks like the list price indexes which are being vindicated.

 Two of the three Employment related indicators were positive, while the third was strongly negative, appearently due to a seasonality issue:

 The Department of Labor reported that Initial jobless claims rose another 6,000 to 388,000 last week, the highest report since January. The four week average also rose by 6250 to 374,750. For the third week in a row, this is mirroring the big increase in April last year. In fact, for the entire last year the YoY% decrease in initial claims has been between 8% and 12%. So long as we stay in that range, I am satisfied that we are seeing a quirk of seasonality rather than a more ominous sign. Here is a graph highlighting in red the possible unadjusted second quarter seasonality for the last two years:

 The Daily Treasury Statement showed that for the first 19 days of April, $129.1 B was collected vs. $128.0 B a year ago, the first YoY gain in 3 weeks. In the last 20 reporting days, a more valid measure, $136.9 B was collected vs. $131.6 B a year ago, an increase of $5.3 B, or +4.0%.

 The American Staffing Association Index rose one more point to 91. It is rising and continues to remain close to its pre-recession readings of 2007. It is possible that it could exceed all readings but those of 2006 by June sometime.

 Sales remained solidly positive.

The ICSC reported that same store sales for the week ending April 21 rose+0.8% w/w and +3.6% YoY. Johnson Redbook reported a 2.7% YoY gain. Shoppertrak did not report. The 14 day average of Gallup daily consumer spending remained favorable at $74 vs. $64 in the equivalent period last year.

Money supply was positive:

 M1 rose +0.4% last week, and was up +1.4% month over month. Its YoY level increased to +18.2%, so Real M1 is up 15.6%. YoY. M2 was up +0.3% for the week, and was up +0.6% month over month. Its YoY advance remained at +9.9%, so Real M2 was up 7.3%. Real money supply indicators continue to be strong positives on a YoY basis.

Bond prices fell (a positive) and credit spreads were flat:

Weekly BAA commercial bond rates fell -.04% t0 5.15%. Yields on 10 year treasury bonds also fell -.04% to 2.00%. The credit spread between the two remained flat at 3.15%. This is significantly off its October lows, but has declined a bit since one month ago.

Rail traffic was mixed, with the same explanation as for the last month:

The American Association of Railroads reported a +0.6% increase in traffic YoY, or +3000 cars. Ex-coal, overall traffic was up by 22,500 cars, or +3.6% YoY. Intermodal traffic was up 12,600 carloads, or +6.0%.  Railfax's graph of YoY traffic continued to show that rail hauling of cyclically sensitive materials remains in strong improvement.

The energy choke collar remains engaged:

Gasoline prices fell for the second straight week, down .05 to $3.87. Oil rose to $104.93. Both of these remain above the point where they can be expected to exert a constricting influence on the economy. Gasoline usage, at 8496 M gallons vs. 9148 M a year ago, was off -7.1%. The 4 week moving average is off -4.2%. Since one year ago gasoline usage was beginning its big decline, these are actually relatively negative numbers.

 The high frequency indicators for the global economy also were positive:

 The TED spread fell back .02 to 0.380, at the bottom of its recent 2 1/2 month range. This index remains slightly below its 2010 peak. The one month LIBOR declined .001 to 0.239. It is well below its 12 month peak set 3 months ago, remains below its 2010 peak, and has returned to its typical background reading of the last 3 years.

The Baltic Dry Index at 1156 was up 91 from one week ago. It is now about 1/3 of the way back from its February 52 week low of 670 to its October 52 week high of 2173. The Harpex Shipping Index rose 6 to 416 in the last week, and is up 41 from its February low of 375.

 Finally, the JoC ECRI industrial commodities index rose strongly from 122.31 to 124.96. This indicator appears to have more value as a measure of the global economy as a whole than the US economy.

With one exception, the high frequency indicators give no hint of any meaningful deterioration in the economy.  To the contrary, the lion's share were positive.  The Oil choke collar remains engaged, and the non-winter winter and the quest for energy efficiency are affecting several areas of rail loads.  The only true negative comes from initial jobless claims, and the evidence there is that there is a seasonal issue (either due to the Oil choke collar or left over from readings during the recession) that is responsible.

Friday, April 27, 2012

Weekend Weimar, Beagle and Pitbull

It's that time of the week again. NDD will post the indicators on Saturday. I'll be back on Monday. Until then....

The US' Austerity in Charts -- Or, "Where is the Government Takeover Again?"

This chart is from Krugman:

This is actually pretty important - and it's a point we've made a few times.  A big reason for the high unemployment rate is the cut in government jobs, especially at the state and local level.  As Krugman notes:

If public employment had grown the way it did under Bush, we’d have 1.3 million more government workers, and probably an unemployment rate of 7 percent or less.

A few notes on GDP: OK, but not good enough

  - by New Deal democrat

By now I'm sure you've read several analyses elsewhere of this morning's GDP report.  I have no desire to duplicate those analyses, but wanted to add a few points relevant to what this means to everyman and everywoman.

1.  This is just a preliminary estimate.  In two months we could find out it was actually 1% or actually 3%.  And there will be even more revisions in a year or two.

2.  Assuming the final result is close to this estimate, we have an economy that grew enough in the first quarter to consistently add jobs - so this confirms that payrolls reports from January through March.

3.  What "socialism?"  Government spending actually subtracted from the result.  Nice to know that government austerity ... oh, never mind.

4.  Residential investment added to the growth.  This is more confirmation that the housing bust has already bottomed.  This is very good for the longer term, since residential construction is one of the premier long leading indicators of the economy.

5.  Median wage growth in the first quarter was +0.5%.  For the last year, median wages have only grown 1.7%.  You simply cannot sustain a consumer economy for too long on this kind of paltry growth.

So the verdict is, Ok but not nearly good enough, which pretty much summarizes this recovery which is getting close to 3 years old.

In passing, despite the Pied Piper of Doom's vile description of Bonddad as an apologist for the "status quo," the fact is Bonddad and I called for the creation of a new WPA almost exactly 3 years ago, and we've both called for massive spending programs funded by long term bonds (currently priced at 2% yields) to bring the US's failing infrastructure into the 21st century.  Imagine where we'd be now if that had happened.  Sigh.  Oh, well.

Why Austerity Doesn't Work

From Krugman:
For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.

Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. Or as I put it way back when, the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.

The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.

So, about that doctrine: appeals to the wonders of confidence are something Herbert Hoover would have found completely familiar — and faith in the confidence fairy has worked out about as well for modern Europe as it did for Hoover’s America. All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment; the confidence fairy is nowhere to be seen, not even in Britain, whose turn to austerity two years ago was greeted with loud hosannas by policy elites on both sides of the Atlantic.

 None of this should come as news, since the failure of austerity policies to deliver as promised has long been obvious. Yet European leaders spent years in denial, insisting that their policies would start working any day now, and celebrating supposed triumphs on the flimsiest of evidence. Notably, the long-suffering (literally) Irish have been hailed as a success story not once but twice, in early 2010 and again in the fall of 2011. Each time the supposed success turned out to be a mirage; three years into its austerity program, Ireland has yet to show any sign of real recovery from a slump that has driven the unemployment rate to almost 15 percent
Krugman has been all over this story -- he was arguing against austerity long before I started writing about it.  Plus, he is, after all, one of the premier economists on the planet.  And he's right.  The argument that confidence would return  because of budget cutting is absolute garbage.  However, let me go a bit deeper and explain why.

First, the "austerians" assume that all government spending is bad and that all private sector spending is more efficient and effective.  This is a pretty bold assumption not born out by the facts. 
By way of example (and contrast), here are two charts from the Great Depression:

The first chart shows total, real GDP while the second shows YOY GDP growth rates.  This chart shows that by 1937, real GDP was higher than 1929 GDP largely because of the tremendous growth seen in GDP which is illustrated by the lower chart.  And - in case you're wondering -- the 1938 slowdown was caused by (drum roll please) austerity policies (you might want to read the Depression section in A Monetary History of the US by Milton Friendman to get a better idea of what happened). Many of the projects that were created during this period are still with us an paying dividends, such as Hoover Dam.

Second, as demonstrated by the recent EU and UK experience, austerity slows growth (see here and here).  This in turn creates a negative feedback loop -- lower GDP lowers demand and investment, which lowers GDP, etc...  Put another way, austerity continues to lower confidence instead of raising it because no one wants to invest in a slow growing economy.

Third, consider this chart of government spending from the CBO:

It shows government spending as a percentage of GDP going back to 1971.  Notice that this number has -- for the last 40 years -- been about 20%-21% of total GDP.  Some of this is mandatory spending some of it is discretionary.  But the point is this: it's always been there and it's a part of the economy.  This is one of the reasons I talk so much about the GDP equation (C+I+X+G=GDP), hoping that taking readers back to their days of basic math will somehow jog their memory regarding the policy implications of simple addition (which is regrettably lost on many people).   

Moreover, government provides things we use on a regular basis that have short term and long term implications.  The short term implications are things like income for people in the form of social security and unemployment benefits.  People spend these on a regular basis in order to live.  Then there are less visible (but still incredibly important) things like infrastructure and educational support which have pronounced long-term benefits for the country by bolstering and developing the physical and personal elements of the economy.  Both of these areas -- physical and personal infrastructure -- are seriously lacking in the US and need immediate attention if we're going to compete with countries in the 21st century.  

And yet, at a time when we need the investment for both a short and long term reasons (which we always do; the reasons are now simply more pronounced); people have forgotten about the need for and importance of this type of macro-level investment, instead arguing for a policy that does not work in any way shape or form -- at least if you look at the data coming out of the UK and the EU.  Put another way, you've put your hand on the stove, turned the


Morning Market Analysis

The SPYs spent 12 days consolidating between the 136-139 level.  However, yesterday, prices popped higher, breaking out of the range.

The daily chart shows prices moving beyond the trading range along with a buy signal about to emerge from the MACD.  However, given the fundamental backdrop, I'm not thrilled by this rally and need to see a lot more evidence to even think about getting excited.

The above chart of the IEFs is a big reason to not get excited about the move.  Treasury prices are at high levels in reaction to the underlying economic situation.  This is going to take money out of equities.

In addition, consider the EDE charts above.  Only the Chinese market (second from top) is showing any propensity to rally; all the other markets are at best treading water.

Thursday, April 26, 2012

Bonddad Linkfest

  1. Orders for Big Ticket Items Fall 4.2% (Marketwatch)
  2. Conference Boards Australian LEI unchanged (Conference Board)
  3. Latest Australian CB Minutes (RBA)
  4. Business climate indicator for the EU (EU)
  5. Topping or Consolidation (BP)
  6. Fed Statement (FRB)
  7. Bernanke has a lot of explaining to do (FT)
  8. South Korean growth slips to 2.8% (FT)
  9. Draghi calls for growth compact (FT)
  10. BoJ easing will remain in Japan (FT)

Should We Be Concerned About the Following?

There have been a few economic statistics over the last few weeks -- coming from the US -- that are concerning, although certainly not fatal.  Consider the following:

Durable goods orders peaked in January a bit below the 216,000 level, but are now declining.  For the last 5 months, the number has clustered around the 208 level.

Initial claims have spiked this month.  While the overall series is still down, these upward moves are concerning, especially considering the weaker reading coming from the latest US employment report (+120,000).

Industrial production has stalled for the last three months.

The above data series are extremely noisy, so it's important not to read too much into the monthly gyrations.  At the same time, all of these are occurring at the same time, which is, in and of itself, a concerning development.  

Is the US/China Trade Balance Stabilizing?

The above chart is simply US exports - Chinese imports.  What's interesting is that it appears to have three stages:

1.) 1985-2000; the slow build-up.
2.) 2000-2009/10: a massive move into an increased trade deficit where we see China become an incredibly strong and important trading partner
3.) the 2009/10 period to today -- a possible leveling-off.

It's still too early to make a firm conclusion from the data.  It's also important to remember that the US economic position for the last three years has fundamentally changed to one of slow growth and lower consumerism.  However, consider that Chinese labor is no longer cheap:

But while China’s industrial subsidies, trade policies, undervalued currency and lack of enforcement for intellectual property rights all remain sticking points for the United States, there is at least one area in which the playing field seems to be slowly leveling: the cheap labor that has made China’s factories nearly unbeatable is not so cheap anymore.

 China has experienced sporadic labor shortages, which in turn have driven up its once rock-bottom labor costs. This trend is particularly evident in the weeks following China’s Spring Festival, or New Year, when more than 100 million rural migrants return to the countryside to spend the year’s biggest holiday with family. Coaxing those same migrants back into the urban work force has proven increasingly difficult.

This year has been no exception. Although nearly two weeks have passed since the Lantern Festival that officially marks the end of the 15-day holiday, cities across China are still facing a serious labor shortfall. In order to lure new workers and retain the old, some companies give employees sizable bonuses just for coming back to work, while others offer cash for every new employee they bring along with them. And in many areas, wage increases ranging from 10 to 30 percent have become the norm.

Despite all this, cities like Beijing, Shenzhen and Guangzhou are still short hundreds of thousands of migrant workers. Shandong Province is missing a full third of its migrant work force, and Hubei Province reports a loss of more than 600,000 workers. Last week, the Chinese government released a report describing this year’s post-Spring Festival labor shortage as not only more pronounced than in years past, but also longer-lasting and wider in scope.

Numerous factors underlie China’s mounting labor woes. Until now the country has been able to achieve its stunning economic growth by shifting large numbers of farmers into nonagricultural jobs. Over the past several years economists have warned that China may be reaching the so-called Lewis Turning Point — the stage at which the rural surplus labor pool effectively runs dry and wages begin to rapidly increase.
A shortage of labor means higher cost.

OK, make that 101 false prophecies . . .

- by New Deal democrat

 The Pied Piper of Doom, March 7, 2012 (after Barry Ritholtz published Bonddad's "Message to political bloggers: please stop writing about economics, you really suck at it"):
I don't think you'll be seeing much more of that "other" blogger's economic spin on behalf of the status quo over at Ritholtz' blog, going forward. (A little birdie told me that. And, I think it's an accurate statement. We shall see...)
Barry Ritholtz' The Big Picture blog, April 25, 2012:
People Are Finally Figuring Out: Austerity Is Stupid by Hale Stewart.

Honestly, he's such an easy target ... but so  much fun ....

Morning Market Analysis

Given the news from the UK, let's start with their market:

The UK ETF is actually trading in a fairly tight trading range between ~16.8 and 17.75.  Prices are right above the 200 day EMA and the shorter EMAs are tangled with the 200 day. EMA.  The MACD has given a buy signal, but it's still in negative territory, so ideally prices should move through resistance before going long.  And then there's that recession thing ...

The British pound was trading in a range between 155 and 159 until it broke ouy a week ago.  The upside move was caused by the BOE's minutes indicating that no further easing was coming done the pike.  Given the overall tenor of the British economy, I would expect to see a sell-off soon, with prices moving to at least the 10 day EMA.

The French market broke support at the 21 level, moved to the 19.75 area and has since rebounded.  Prices are now entwined with the EMAs.  Given the political situation in France, this is a very difficult market to read.

Emerging Europe has been in a downward sloping channel for the last month and a half.  Prices are now below the 200 day EMA, and the shorter EMAs are below the 200 day EMA and are moving lower.  Money is leaving the market, and momentum is weak.  Prices have found support at the 50% Fib. level.

The good news in all the equity charts above is that we're not seeing a massive and sharp sell-off.  Instead, buyers are moving in to buy on the dips, indicating there are still enough people who see value in the markets.  Given the weakening position of the European economy overall, that, in and of itself is a good thing.

Wednesday, April 25, 2012

UK In Technical Recession; Or, No REALLY, Austerity is an Incredibly Stupid Idea

I wrote the first 1/2-2/3 of this story over the weekend,hence the reason for the somewhat backwards presentation of material.  The GDP graphs do not include the latest information.  However, it goes without saying (so I'll go ahead and say it), yet another country is learning a lesson the hard way.

It's another successful austerity program!

From the April 4-5 meeting minutes of the Bank of England:
According to the third ONS estimate, GDP had fallen by 0.3% in the fourth quarter of 2011, 0.1 percentage points weaker than reported in the second release. The ONS had also revised down the path for household consumption during 2011 such that the level at the end of the year was 0.5% lower than previously estimated. Together with an upward revision to households’ income, this implied a sizable revision upwards to the estimated household saving rate. This now appeared to have fallen back only modestly since its peak in 2009.

The top chart shows total GDP, which is still below pre-recession levels.  Also note there were two years of decline (2009 and 2010) with a slight increase in 2011.  The second chart shows the quarter to quarter growth, which shows that in three of the last give quarters UK GDP has shrunk.

The good news in the above statement is the increased savings rate which means two things going forward:

1.) Consumers have increased spending power if they choose to use it, and
2.) The deposit base is increasing, which increases bank reserves.  This can lead to an increase in overall credit, assuming there is an increase in demand.
In line with the usual pre-release arrangements, the Governor informed the Committee that manufacturing output had fallen by 1% in February and that output in January had been revised down. This was somewhat at odds with the more positive message from the corresponding business surveys. The data on service sector output in January were consistent with solid growth in services in the first quarter of 2012. The CIPS/Markit indices for manufacturing, services and construction had all risen in March and the composite expectations balance had reached its highest level in over a year. The BCC Quarterly Economic Survey had recorded rising sales balances for both manufacturing and services in the first quarter. And the Bank’s Agents had reported a broad-based, if still modest, pickup in output growth over the previous three months. Consistent with these reports, household and corporate broad money growth had increased in January and February on a three-month annualised basis.

The above chart shows the YOY percentage change in UK Industrial production, which has been negative for the few months.  The divergence between the Markit survey and IP numbers can be explained by looking at the internals of the Markit report:

In short, UK manufacturing increased because it filled old orders and replenished inventories.  In addition, the UK's primary market -- the EU -- is slowing down.  The Market economists comments highlight the basic conclusion to draw: manufacturing won't be a drag, but nor will it be a strong contributor to the economy in the first quarter.
For the second month in a row, the ONS had reported a particularly large contraction in construction output, which it estimated to have fallen by around 12% in each of December and January on a non-seasonally adjusted basis. Even if activity were to rise strongly in February and March, measured construction output was likely to show a very sharp fall in the first quarter as a whole. This was at odds with other indicators of construction activity from CIPS/Markit, Experian and the Bank’s Agents, which had generally pointed to much smaller declines around the turn of the year. Although construction orders had been weak, the Construction Products Association was expecting only a modest reduction in output during the year as a whole.
Here are the relevant data points from Markit:

Only time will tell who is right.  However, an increase in construction spending would be most welcome as this has an ancillary economic effect down the line.
In the absence of revisions to the latest vintage of data, the contraction in measured construction output was likely to depress measured GDP growth significantly in the first quarter. Indeed, it was possible that the ONS’s preliminary estimate for GDP could record a fall in aggregate output. In the second quarter, some activity was likely to be lost because of the extra bank holiday associated with the Queen’s Diamond Jubilee celebrations. With output having already contracted in the fourth quarter of last year, the Committee could not rule out the publication of official data showing GDP falling for three successive quarters. Nevertheless, the Committee’s judgement was that, abstracting from both the puzzling weakness in measured construction output and the impact of one-off factors, the economy appeared likely to be expanding, albeit only modestly, in the first half of the year
And now, just to add the icing on the cake, we learn that the UK is in a technical recession (from the office of national statistics)
  • The chained volume measure of GDP decreased by 0.2 per cent in Q1 2012
  • Output of the production industries decreased by 0.4 per cent in Q1 2012, following a decrease of 1.3 per cent in the previous quarter
  • Construction sector output decreased by 3.0 per cent in Q1 2012, following a decrease of 0.2 per cent in the previous quarter
  • Output of the service industries increased by 0.1 per cent in Q1 2012, following a decrease of 0.1 per cent in the previous quarter
  • GDP in volume terms is flat in Q1 2012, when compared with Q1 2011
As explained by Reuters:
Britain's economy has fallen into its second recession since the financial crisis after an shock contraction at the start of 2012, heaping pressure on Prime Minister David Cameron's government as it reels from a series of political missteps.

Britain's Conservative-Liberal Democrat coalition has seen its support crumble after weeks of criticism over unpopular tax measures in last month's budget, and is under further pressure from revelations about its close links with media tycoon Rupert Murdoch.

 With local elections taking place on May 3, there could hardly be worse timing for Wednesday's news from the Office for National Statistics that Britain's gross domestic product fell 0.2 percent in the first quarter of 2012 on top of a 0.3 percent decline at the end of 2011.

Most economists had expected Britain's economy to eke out modest growth in early 2012, but these forecasts were upset by the biggest fall in construction output in three years, coupled with a slump in financial services and oil and gas extraction.
For a good summation of the report and what this means, here is a link to the FT Money Supply Blog

Housing overview part 2: prices

- by New Deal democrat

  In the first part of this overview, we looked at housing sales and construction, with its attendant effects on employment and GDP. It appears that 6 years after the housing bust started, we are finally seeing a modest uptrend from a very low level.

 Now let's look at housing prices. If sales and construction are 3 years after their worst levels, the debate about prices is whether we are bottoming now or there is further to go. There are a number of indexes, all relying on different methods. There are asking prices indexes, median and mean sales price indexes, and repeat sales indexes. Within each type there are seasonally adjusted and non-seasonally adjusted metrics. I'll look at each of the three groups in turn.  If you want to avoid the verbiage and the graphs,  skip to the conclusion for a list describing the results.

 List prices 

 The theory here is that sellers have to price to meet the market. If they are doing so, then the trend in list prices will lead the trend in sales prices, since sales are consummated months after the property is listed. There are three of these, two non-seasonally adjusted and one seasonally adjusted.

 Every week I report the Housing Tracker YoY change. This is a non-seasonally adjusted index of 54 markets with data back to the peak of the housing bubble. This index began telegraphing a bottom by last summer, and turned positive on a YoY basis in December, as shown in this index below: 

Month2007 2008 2009 2010 2011 2012
January ----7.5%-11.5%-5.8%-8.7%+2.9%
February ----7.8%-12.0% -5.2%-8.4%+4.1%
March ----8.3% -10.9%-5.0%-7.3%+3.7%
April -2.7% -8.6%-9.6%-5.0%-6.8%---
May -3.5% -9.1% -8.1%-5.0%-5.6%---
June -5.0%-9.8%-7.0%-5.0%-4.4%---
July -5.4% -10.4%-6.1% -5.1%-4.2%---
August -6.0% -10.6%-5.5%-6.1%-2.8%---
September -6.2% -11.1%-5.1%-6.6%-1.7%---
October -6.7% -11.4% -4.5%-7.0%-0.9%---
November -6.6%-11.7%-4.5%-6.7%-0.7%---
December -7.2% -11.4%-5.6% -7.8%+1.1%---

 The NAR just entered this fray, by a non-seasonally adjusted index made up of all of its listings. The NAR's index showed that asking prices were still negative, down 2.5% in December 2011, but turned positive YoY by February, up 6.82%. As of its last report for March, asking prices were up 5.56% YoY. 

Most recently the Trulia asking price index debuted. This is a seasonally-adjusted index. In their inaugural report for March 2012, they indicated that asking prices had bottomed in January:
Nationally, asking prices on for-sale homes – which lead sales prices by approximately two or more months – were 1.4 percent higher in March than one quarter ago. Prices increased month over month 0.9 percent in March and 0.6 percent in February. The Trulia Price Monitor is seasonally adjusted, so these monthly and quarterly increases are on top of typical springtime price jumps. . . . According to the Monitor, asking prices had been declining prior to February and reached a low in January. Throughout 2011, asking prices rose slightly in several months of the year, but never more than 0.2 percent in a month. Asking prices in March were 0.7 percent below their level one year earlier.
Here's their graph of seasonally adjusted monthly changes in asking prices for the last year:

 Median and mean sales prices

There are three of these indexes.  The first only takes into account new home prices.  None are seasonally adjusted, so we have to look at YoY trends.

Each month the Census Bureau reports on new home sales, and yesterday reported for March. The report includes both mean and median home prices on a non-seasonally adjusted basis. Both the YoY median and mean prices turned positive in February and remained positive in March. Median sales prices are now up 6.3% YoY, as shown in red, left scale in the graph below, along with the actual monthly median price, blue, right scale:


 Mean sales prices are also positive by 11.7% YoY.

The NAR's existing home sales report also includes sale prices. According to the NAR, sales prices for existing homes on a non-seasonally adjusted basis turned positive YoY in March, up 2.5%, as shown in the graph below:

Radar Logic is another non-seasonally adjusted index of sales, based on prices paid per square foot. They reported on Monday that:
Radar Logic 25 MSA Composite data reported on residential real estate transactions (condos, multi and single family homes) that settled as late as February 20 and averaged for the month indicates that with increasing spring transactions has come an increase of prices (the typical trend) with the national index increasing 0.71% since January but falling 3.76% below the level seen in February 2011.
This is still the best YoY comparison in the Radar Logic series in over a year, as shown by the red shaded area in the graph below:


 Repeat sales indexes

There are five sources of repeat sales and other indexes which control for price or quality of house.  The first is not seasonally adjusted, so we must look YoY.  The other 4 are seasonally adjusted, so a turn in trend can be spotted without waiting for the YoY metric to turn.

CoreLogic makes use of repeat sales transactions to create a House Price Index which is not seasonally adjusted. Their last report:
shows national home prices, including distressed sales, declined on a year-over-year basis by 2.0 percent in February 2012 and by 0.8 percent compared to January 2012, the seventh consecutive monthly decline. Excluding distressed sales, month-over-month prices increased 0.7 percent in February from January. The CoreLogic HPI® also showed that year-over-year prices declined by 0.8 percent in February 2012 compared to February 2011.
Here is the graph of their most recent data:


Yesterday the FHFA, which gathers seasonally adjusted house prices,  reported that
U.S. house prices rose 0.3 percent on a seasonally adjusted basis from January to February ...  While prices in January were unchanged according to initial estimates reported in the last [House Price Index] release, the January result has been revised downward to reflect a 0.5 percent decrease. For the 12 months ending in February, U.S. prices rose 0.4 percent, the first 12-month increase since the July 2006 - July 2007 interval. 
That this repeat sales index has bottomed can be easily seen in their accompanying graph:

  FNC is not actually a repeat sales index but FNC "has developed a hedonic index based on the data collected from public records and blended with data from appraisals." It is reported for 10, 30, and 100 metropolitan areas. It's last report covers February 2012, and indicated that "prices on non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales) continue to slide, down 0.8% from February or 3.0% from a year ago."  As shown in the graph below, this is the least negative comparison in two years:


Lender Price Services (LPS) has a House Price Index which controls for houses for sale in a variety of price brackets in order to avoid problems with the median result based on the mix of houses for sale.  Its last report was for January, their updated LPS HPI national average home price index declined 3.2% YoY, as indicated in their graph below:

This was still not as great as the typical 5.2% YoY decline of the past 2 years.

  Finally, we come to the Case-Shiller home price indexes. Yesterday almost every report focused on the data that "the 10- and 20-city composites were each down 0.8% in February from a month earlier, and fell 3.6% and 3.5% respectively from the year-ago period." In so doing they completely missed what was perhaps the most significant installment of this report in 5 years.

Beginning in 2007 the seasonally adjusted Case Shiller reports fell every single month until the implementation of the $8000 housing credit. During the period of that credit, prices rose, only to resume their relentless fall the moment the credit ended. In fact, through January 2012, only one month - April 2011 - had risen from the month prior. Until yesterday. In February, both the 10 and 20 city composite price indexes rose from January, as shown in the graph below:


 Except for the fact that there seems to be a statistical glitch in the Case Shiller report for March of the last 3 years, causing each March to break trend to the downside by about 1%, it looks very much like the Case Shiller home price indexes have made a bottom with yesterday's report.

When we collate all of the indexes above, a compelling picture emerges:

Seasonally adjusted indexes:

  List price - Trulia - bottomed in January

  Repeat price - FHFA - bottomed in February 2011
                         FNC - 3.2% decline YoY (but least in two years)
                         LPC - 3.0% decline YoY
                         Case Shiller - bottomed in January?

Non seasonally adjusted indexes:

  List price - Housing Tracker - YoY positive in December 2011
           - YoY positive in February

  Median and mean sales price indexes:
                -  Census Bureau - positive in February, off and on for 2 years
                   NAR - turned positive in March
                   Radar Logic 3.76% decline YoY (but least in one year)

  Repeat sales indexes:
                - Core Logic 2.0% decline YoY in February (least in two years)

All of the list prices indexes and all but one of the median/mean sales price indexes appear to have bottomed.  One of the repeat sales indexes has bottomed, and the most famous - the Case Shiller index - looks very close to a bottom if it didn't just happen.  Three other repeat sales indexes continue to show declines, but in two of them the rate of decline is rapidly abating.

Morning Market Analysis

After trading between 47.75 and 5 for nearly three months, the copper ETF fell through support and is now aw the 47 price level.  But, in addition to falling through support, prices have dragged EMAs lower.  In addition, prices are now below the 200 day EMA -- bear market territory.  While the overall loss is only 6%, the underlying technical damage is fairly bad.

Industrial metals -- which include copper, have been moving lower for about two months.  They're total move lower totals almost 10% and, like the copper chart, the move lower has brought the EMAs lower.

However, a net positive for both charts is each's respective MACD is about to give a buy signal.

Oil is in a very tight range and has been since the beginning of the month.  The only reason oil has not dropped like copper is that, even in a recession, there will still be some oil demand.

All three charts above indicate that traders are looking at a slowing economy.  However, also note there is no crash -- simply a slowdown at this point.

The real is at the lower end of an upward sloping channel that started last fall.  A convincing move lower would indicate that forex traders are betting on a weaker Brazil.

The Brazilian market is also continuing its move lower.  Prices are now right at the 200 week EMA and the lower Fibonacci fan. 

Tuesday, April 24, 2012

Is India's Growth in Trouble?

Over the last few weeks, several international blogs have written articles with a fairly common theme: India's growth is threatened from systemic policy paralysis.  First, here is the basic problem India faces:

The India population stands at over 1.2 billion people.  That means that GDP must keep growing at a fairly strong clip simply for the economy to tread water.  A fast rate of growth is imperative for the country to lift the standard of living for more and more people.

Yet, the annual rate of GDP growth is dropping.  While 6.1% is nothing to sneeze at, it must be placed into the population picture.  Remember, with a growing population, rapid growth (8%+) is mandatory.

However, there are signs of problems.  First, the central bank faces the classic policy squeeze of high inflation and slowing growth. 

Indian inflation remains between the 8% and 10% level, where it has been for the better part of a year.

To tame inflation, the Indian central bank has been raising rates, which obviously has a negative impact on overall economic growth.  

The above chart of the rupee shows the overall damage of this situation.  After falling neary 20% (from 24 - 19.5), the rupee rebounded nearly 15%.  However, since the mid-Spring, the rupee has been falling as investors have lost confidence in the economies ability to grow.

In addition, the possibilities for further growth seem to be lower.  The Reserve Bank of India made the following points in their latest policy announcement:
Early indicators suggest that growth may have bottomed out in Q3 of 2011-12 but recovery may be slow during 2012-13. Lower global demand, domestic policy uncertainties and the cumulative impact of monetary tightening lowered the growth rate to below seven per cent over the last two quarters. Industrial growth remains subdued due to supply-side bottlenecks, particularly in the mining sector, and moderation in investment demand. With measures being taken to remove supply-side bottlenecks, progress on fiscal consolidation could create conditions for a more favourable growth-inflation dynamic.
The growth slowdown has been driven by a sharp fall in investment, some moderation in private consumption and fall in net external demand. The drag from investment is likely to continue in the near term. Corporate investment intentions continued to drop during Q3 of 2011-12. Consultations with industry and banks suggest that new project investment continue to be sluggish. However, if increased capital outlays in the latest budget are speedily translated into government capital expenditure,it could crowd in private investment.
The balance of payments (BoP) came under significant stress during Q3 of 2011-12 as the current account deficit (CAD) widened substantially and capital inflows declined.This resulted in a drawing down of foreign exchange reserves.The wider CAD, increase in external debt,weakening net international investment position (NIIP) and deteriorating vulnerability indicators underscore the need for more prudent external sector management and demand management policies to limit the absorption impact that is keeping import demand high.While capital inflows have revived somewhat in 2012, BoP risks remain due to high oil prices and uncertainties in the global economy.

The above picture is not pretty; instead, it shows an economy that is in major trouble.  Consider the following points:

1.) Inflation is high, leading to
2.) Increased interest rates.  This leads to
3.) Lower domestic investment

So, business is holding onto cash instead of putting it to work.  That's before we get to the balance of payment (BoP) issue.  Less money is coming into the country for investment, meaning the RBI had to tap its foreign currency reserves, draining its position.

There have been some great blog posts on this issue that really cover the issues well.

India and RBI: reality bites (Beyond Brics)
India rate cut; that's it for now (Beyond Brics)
India's reforms: finish the job (Free Exchange)