Credit Cards Defaults and Consumer Credit

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From the NY Times:

Every major credit card issuer has been approving fewer new applicants, reining in credit lines and canceling unused accounts. And Meredith A. Whitney, a prominent banking analyst, expects credit card lenders to cut the lines of credit they extend to borrowers by a total of $2.7 trillion through 2010. That is equivalent to a 57 percent reduction in the credit they made available two years ago at the height of the boom.

Within the card industry, all eyes are now focused on the sharp increase in unemployment. At Citigroup, executives noted that the company’s 10.2 percent credit card charge-off rate for the first quarter had broken its “historic correlation with unemployment” and showed no sign of letting up.

American Express, Bank of America and Capital One Financial showed first-quarter loss rates that hovered around 8.5 percent, roughly tracking the unemployment rate. All three said they expected higher losses in the coming months. Even Chase Card Services, which charged off just 7.7 percent of its card loans in the first quarter, expects its loss levels to surpass unemployment by the end of the year.

Consider that with this table of consumer credit from the Federal Reserve:

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Consumer credit contracted in 4Q08 and is on track to do so in 1Q09.

And these charts from the senior loan survey:



Finally, here is a chart of consumer loan demand:



Here's what the survey said about the information portrayed in the charts:

Consumer lending. Large percentages of domestic banks again reported a tightening of standards and terms on both credit card loans and other consumer loans over the previous three months. Nearly 60 percent of respondents indicated that they had tightened lending standards on credit card loans, about the same proportion as in the January survey. About 50 percent of respondents, down from 60 percent in the January survey, reported tightening standards on other consumer loans. About 50 percent of respondents reported having reduced the extent to which credit card accounts were granted to customers who did not meet their bank's credit-scoring thresholds, and a similar fraction reported pulling back from granting other kinds of consumer loans to such customers. Roughly 55 percent of the respondents, a somewhat higher proportion than in the January survey, reported having raised minimum required credit scores on credit card accounts over the previous three months. About 45 percent of respondents reported having raised minimum scores on consumer loans other than credit cards, and about 65 percent of banks, compared with 45 percent in the January survey, indicated that they had lowered credit limits to either new or existing credit card customers. In contrast to the substantial net tightening reported for consumer loan standards and terms, only about 5 percent of domestic banks, on net, indicated that they had become less willing to make consumer installment loans over the previous three months; this proportion is down from 15 percent in the January survey and 45 percent late last year. Regarding demand, about 20 percent of respondents, on net, indicated that they had experienced weaker demand for consumer loans of all types over the previous three months-substantially less that the percentage so reporting in the January survey.

So -- lenders are tightening their lending standards but are more willing to make loans. My guess is they simply want to make more prudent loans right now as opposed to the "you have a pulse so you get a loan" philosophy of the last few years. Considering the destruction of the consumer's balance sheet over the last few years (massive debt combined with asset deflation and weak job prospects) it's going to be harder for people to get loans.

Some of this is also the result of a higher savings rate:


All of this adds up to a declining year over year total of consumer credit outstanding, both for revolving and total credit.






Anyone that thinks consumer spending is going to get us out of the recession is sadly mistaken.

Two More Points in Employment

From economicpic data, notice the huge jump in the number of people who are part time for economic reasons.

From Economists Blog we see that household employment increased last month for the first time in 11 months.

What do these mean? I still think they all add up to the following: short term things are easing. This means we'll see a lower rate of job losses. However, it's going to be a long time before we see a pick-up in employment.

More on Employment

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The above chart is from the PDF news release from the BLS. Notice we can break down the graph into three zones. The first is zone 1 where we saw moderate job losses, but no more than 200,000 in a month. Then we see the massive contraction that occurred at the end of last year with escalating losses. Then there are the five months of extremenely heavy job losses from November through March of this year. Finally, we see the peak rate of contraction over the last 6 months.

Let's combine that graph with this one:



The 4-week moving average is clearly forming a top.

However....


The rate of job destruction is the worst we've seen since the last 1950s. This tells us the worst is not over. In addition,


Average weekly hours is dropping, telling us that employers are still trying to limit the amount of people they have to lay-off by first cutting hours.

Bottom line: I still think we've put in a bottom for now. However, I also think it's going to be an extremely long road to economic recovery on the jobs front. I don't see a big wave of rehiring. What I do see is the possibility of another "jobless" recovery on the horizon.

Market Mondays

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The QQQQs have been the leading index for this rally. However, there are some possible problems developing with the QQQQs leading status.


First, notice that prices have clearly broken the 3-month uptrend that started in early March.



Here's a closer look at the trend break. Notice that prices have moved through the trendline and are now sitting right around the 10 and 200 day SMA. Also note the volume spike over the last three trading days -- especially the day when prices fell. That tells us that traders were looking to get out.



A look at the daily chart shows the clear trend break along with the possible formation of a quick double bottom.

The point is on Friday the QQQQs did not advance with the other indexes. That lack of confirmation can be a warning sign that the trend is about to change. Considering the strength of the run we've had so far a sell-off would be welcome. However, there is nowhere near enouch data to make a firm call. So far, this is just an anomily we should be aware of.

Weekend Beagle and Weimar

It's that time of the week. Don't think about the markets or the economy. To that end....


Sham-Weimar --- made in Germany so you know its good



See you on Monday morning

The Stress Tests, Part II

Let's move to the latest report from the Treasury Department. It indicates several problems.

1.) "Each potential BHC (bank holding company) was instructed to estimate potential losses on its loan, investment securities, and trading portfolios." Does anyone see a problem here? The banks estimated the losses. That's a great example of the fox guarding the hen house.

2.) Consider the following table:



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This is the set of assumptions provided to the firms that were "a common set of indicative loss rate ranges for specific loan categories under conditions of the baseline and the more adverse economic scenarios. Firms were allowed to diverge from the indicative loss rates where they could provide evidence that their estimated loss rates were appropriate."

Where available, let's compare these rates to information from the latest Quarterly Banking Profile from the FDIC.



Above is a chart for the non-current rates on loans secured by 1-4 family residences. This is the current experience. The numbers in the table are for the cumulative two year loss rate in percent. Currently, the actual experience of first lien mortgages are right in line with the baseline scenario. The first lien and HELOCS are below. It's extremely important to remember these numbers don't exactly correlate -- one is a quarter over quarter change and one is a cumulative two year scenario.

Above is a chart of non-current C and I loan rates.



Above is a chart for currrent credit card loss rates.

Remember with all of these chart we have to convert the current numbers into a "cumulative 2-year loss rate". But, given current numbers the collateral assumptions aren't bad.

The Stress Tests Part I

Yesterday the Federal Reserve issued the stress test report. This is all I'm going to write about today because it's really important news. But before we get to the results, let's look at the actual stress test used by the Fed to see what the basic scenario was.

Let's start with their GDP assumptions. Here is the chart of their baseline and more adverse GDP projections:




I'm assuming that "4 quarter percent change" is the same as year over year percent change. Notice the economy is already performing worse than expected in the GDP stress tests.




The current unemployment rate is more in line with the worst case scenario






The Fed's worst case scenario of home prices assumes a 22% year over drop this year. That is -- in December of this year prices will be 22% lower than in the 4th quarter of 2008. Prices are already falling at a roughly 18% year over year rate in February. Lots of people were excited when the Case Shiller number didn't set a record low in the latest report.

So

GDP is already performing more poorly than the Fed's stress test.

The worse case scenario for unemployment is the most realistic possibility.

Home prices are already closer to the Fed's worst case scenario than the median baseline forecast.

Bottom line: the worst case scenario is the most realistic scenario.

Employment -539,000

From the BLS:

Nonfarm payroll employment continued to decline in April (-539,000), and the unemployment rate rose from 8.5 to 8.9 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Since the recession began in December 2007, 5.7 million jobs have been lost. In April, job losses were large and widespread across nearly all major private-sector industries. Overall, private-sector employment fell by 611,000.

Let's break these down.

Unemployment increased .4 percent. Over the past 12 months, that number has increased 3.9%.

The best read of job creation from the last expansion is total growth of 8.2 million. Now we've lost almost 70% of those jobs that have been created. That's a record.

All undustries -- save education and health care -- lost jobs

So -- the numbers overall were terrible. Let's look at some charts.

The unemployment rate is now the highest it been since the early 1980s recession

People unemployed for 5-14 weeks is now at the absolute highest level in in the last 30 years


The number unemployed for 15 weeks is now at the absolute highest level in over 30 years



The number unemployed for 27+ weeks is now at the absolute highest level in 30 years


The median weeks of unemployment is now the nearly the highest its been in 30 years



U6 which is "Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers" is now atthe highest level since 1994.

Forex Fridays

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It's been really interesting watch the weekly chart evolve. Prices formed a double top over the last 6-9 months but have since fallen from the second peak. Notice how both the RSI and MACD printed a lower point on the second peak giving a possible signal that a double top was forming. Prices have fallen from the double peak and formed a bear flag. However prices are now below that level as well.



The daily chart gives us a better reading of the bear flag break down. Notice following events in the following order.

1.) Prices hit the top line of the bear flag. The stochastics give a sell signal

2.) Prices break through the lower line of the bear flag

3.) Prices rebound into the 10 and 20 week SMA but the Stochastics say sell. Also note the MACD has started to move sideways and is getting closer to giving a sell signal

4.) Once prices break through the lower support line the stochastics are less imporant because they are more of a pattern signal. Now the MACD becomes more important

5.) The MACD gives a sell signal a bit after prices move through the lower supoprt line.

Today's Markets

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Was today a reversal day?


Prices opened higher but then moved lower on several strong downward sloping bars. Prices levels out until a little after 12 when the moved lower on a gap down. Prices then moved lower until just before the close when they jumped into the 10 minute SMA

The reason I asked (rhetorically) is based on the above chart (a move higher that can't be sustained) along with this chart:



Which shows an engulfing pattern on today's price.

I should add -- the question is extremely premature.

Employment Overview

Here are some relevant charts and graphs. What started this post was the following chart:



That's a good looking chart of initial unemployment claims. The bottom line is we have enough data to make a call that the 4-week moving average appears to be topping out. That's a very good sign. But then there was this passage from the Econoday report:

Initial jobless claims showed improvement in the latest week but continuing claims set another record high. Continuing claims in the April 18 week jumped 133,000 to 6.271 million, another record level and the 15th straight increase. A month-to-month comparison, useful for a gauge on the April employment report, showed significant deterioration, up 704,000 from 5.567 million at mid-March. But initial claims appear to have peaked in March, suggesting that continuing claims may plateau within a few months. Initial claims for the April 25 week slipped 14,000 to 631,000, down from 645,000 the week before.

While initial claims are topping, continuing claims are still setting records. That indicates that while the immediate lay-off situation is improving the continuing situation is still poor at best. Here are some relevant charts from the BLS that explain the situation in mare and better detail. I have used (when possible) a time frame that goes back to 1960.

Let's start with the overall unemployment rate which currently stands at 8.5%. This is the second worst rate of unemployment in the last 30 years. Let's delve deeper into the data:



Above are the charts for the number of people unemployed for 15+ weeks and the number of unemployed for 27+ weeks. While the percentage of the population represented by this number would be lower now than in the early 1980s because of the population increase, the absolute number of both figures is at a historical record. That tells us that the rate of job creation -- the flip side of job destruction -- is deteriorating right now.

Above is a chart for the number of people who are part-time for economic reasons. Again -- the absolute number is at a nearly 30 year high.


Finally, the median weeks people are unemployed is high, currently standing at 11.2 weeks. The has been higher twice in the last 30 years.

So -- the rate of job destruction appears to be topping. HOWEVER, we're not out of the woods yet as the rate of job creation has yet to pick up.'

The Stress Tests Part I

Yesterday the Federal Reserve issued the stress test report. This is all I'm going to write about today because it's really important news. But before we get to the results, let's look at the actual stress test used by the Fed to see what the basic scenario was.

Let's start with their GDP assumptions. Here is the chart of their baseline and more adverse GDP projections:




I'm assuming that "4 quarter percent change" is the same as year over year percent change. Notice the economy is already performing worse than expected in the GDP stress tests.




The current unemployment rate is more in line with the worst case scenario






The Fed's worst case scenario of home prices assumes a 22% year over drop this year. That is -- in December of this year prices will be 22% lower than in the 4th quarter of 2008. Prices are already falling at a roughly 18% year over year rate in February. Lots of people were excited when the Case Shiller number didn't set a record low in the latest report.

So

GDP is already performing more poorly than the Fed's stress test.

The worse case scenario for unemployment is the most realistic possibility.

Home prices are already closer to the Fed's worst case scenario than the median baseline forecast.

Bottom line: the worst case scenario is the most realistic scenario.

Janet Yellen on the Recovery

From the San Francisco Fed:

I can point to a number of specific factors in this recession that are likely to weaken recovery. First, despite signs that consumer spending is stabilizing, the chance of strong and sustained consumption growth appears low. For years prior to the recession, households went on a spending spree of major proportions. This occurred during what has come to be called the “great moderation,” a period of about two decades when recessions were infrequent and mild, and inflation was low and stable. This may have lulled households into a false sense of security. The personal saving rate fell from around 8 percent two decades ago to almost zero in recent years as households financed their lifestyles by drawing on increasing stock market and housing wealth, and taking on higher levels of debt.

Now, the era of such low saving may be over. Falling house and stock prices have vaporized trillions of dollars in household wealth. The destruction of their nest eggs is prompting households to rebuild savings. The deleveraging of household balance sheets could restrain spending for years. Indeed, the personal saving rate is finally on the rise, averaging more than 4 percent so far this year. It wouldn’t surprise me if this effect persists, as the shock of the financial crisis convinces many households that they need to save higher fractions of their incomes for the long term. Of course, ultimately this would be good for economic growth, channeling resources from consumption to investment. That said, the transition could be painful if subpar consumption growth restrains the pace of economic recovery.

The above scenario is a big reason why I think the 2.1% increase in personal consumption expenditures last quarter was a misnomer -- or at least not the great sign that people think it was.

Today's Markets

Actually it's yesterday's market, but who's counting?

Again -- this is an incredibly bullish chart. Notice how prices move higher, consolidate gains and then move higher again. It's absolutely gorgeous.

Too bad I don't see the fundamental reason for this. Actually, along that from I'm now convinced I will never be a bull ever again.