A Note on the Housing Market

Click for a larger image.

The existing home sales market is by far the largest of the housing markets. Notice that over the last roughly 2 years the pace of sales has stabilized between (roughly) a 5.25 million and 5.75 million annual pace. That is what a bottom looks like.



New home sales appear to have bottomed at the end of this year and are now increasing.

The increase we've seen in both of these numbers will likely drop over the next few months; home buying typically increases up to the end of the summer when before the start of the school year.

There has been a lot of internet chatter about the shadow inventory: these are homes that are in the process of being foreclosed on but have not yet been sold. In other words -- there are a slow of homes out there ready to hit the market to create another set of problems.

The WSJ did an analysis of this problem. Here is their conclusion:

As of July, mortgage companies hadn't begun the foreclosure process on 1.2 million loans that were at least 90 days past due, according to estimates prepared for The Wall Street Journal by LPS Applied Analytics, which collects and analyzes mortgage data. An additional 1.5 million seriously delinquent loans were somewhere in the foreclosure process, though the lender hadn't yet acquired the property. The figures don't include home-equity loans and other second mortgages

Moreover, there were 217,000 loans in July where the borrower hadn't made a payment in at least a year but the lender hadn't begun the foreclosure process. In other words, 17% of home mortgages that are at least 12 months overdue aren't in foreclosure, up from 8% a year earlier.

Some borrowers may be able to catch up on their payments or receive a loan modification that helps them keep their home. There has also been an increase in short-sales, transactions in which at-risk borrowers sell their homes for less than the loan amount, with the lender's approval. In some cases, lenders have decided not to foreclose because the home's value is so low. These factors could mean fewer foreclosures.

Foreclosed homes are partly responsible for the recent increase in home sales. But foreclosures also push down home values. According to Collateral Analytics, a housing research firm, homes that have been foreclosed on typically sell at a 10% to 50% discount.

.....

But the number of foreclosures is expected to increase in the fourth quarter as mortgage-servicing companies determine who is eligible for a loan modification and who isn't. "We are going to see a spike from now to the end of the year in foreclosures as we take people out of the running" for a loan modification or other alternatives, says a Bank of America Corp. spokeswoman. Foreclosure sales had dropped to "abnormally low" levels in response to government efforts to stem foreclosures, she adds.

The recent Case Shiller indicates that prices are increasing on a month to month basis


And decreasing at a lesser rate on a year over year basis:



My guess is the following will happen. Prices will be under pressure for some time. However, prices have also moved to a level where prices are very affordable and where they are attractive investment purchases. In other words, the sales pace will at worst remain stable.

Getting it wrong about the CS-CPI

- by New Deal democrat

One of the most interesting alternate measures of the economy was first posted a couple of years ago by Tim Iacono of The Mess that Greenspan Made. The CS-CPI is the consumer price index, with the Case Schiller house price index substituted for owner's equivalent rent. In that manner it captures the impact of price changes in the biggest asset most consumers will ever buy, on the inflation rate.

I have mentioned several times how research into the Roaring Twenties and Great Depression showed that it was when the year-over-year rate of inflation (really, deflation) bottomed and started back up, that the economy started to recover. I correctly suspected that the same scenario would play out this summer.

But I always suspected that the "real" bottom in the economy might be when the CS-CPI bottomed, meaning that the deflationary pressure on all things bought or sold by average Americans, including houses, was beginning to ease. I hadn't read any updates about the CS-CPI since February, but a post within the last week by Mish, claiming that the CS-CPI was at an all-time low, caused me to take another look.

Well, it turns out that Mish simply reprinted the very same graph, and the very same text, he had used back in February -- and it makes a big difference.

I have calculated the CS-CPI for January of this year (cited by Mish) and compared it with the CS-CPI now (calculating OER as 25% of total CPI, and once obtaining the value for the remaining 75%, re-doing the calculation using the Case-Schiller index, just updated this morning). It turns out the CS-CPI bottomed earlier this year. In January the CS-CPI was (-10.1%). Now it stands at (-5.3%).

In summary, the deflationary pressures on average American families are decreasing. And Mish's latest post is simply wrong.

China Turns Inward For Growth

From the WSJ:

Chinese businesspeople like Mr. Tseng are adapting to what they believe will be a lasting consequence of America's deep recession. Savings by suddenly frugal U.S. households soared to an annualized $566 billion in the second quarter, more than quadruple the rate at the start of 2008. While that is important to rebuilding U.S. financial health, it is also sucking demand out of the world economy. China's exports, after growing for years at a steady 20%-plus rate, recorded a year-over-year drop last November. They kept falling, and in August were down 23% from a year earlier.

Spending by Chinese consumers, meanwhile, is holding up pretty well, partly because of heavy stimulus spending by a government flush with cash. Urban household spending in China was up 9.2% in the first half of 2009, not far off the country's average overall growth in recent years.

This shifting dynamic shows how the global economic turmoil is pushing China, the world's second-largest exporter after Germany, to become a more inward-focused economy. Even once world growth gets back on track, China is likely to run into limits on how much more it can expand its export market share, economists say. The World Bank expects that slower export gains in the future will shave about two percentage points off China's historical growth rate of 10%.

With the recession, Chinese exporters have been taught the dangers of a narrow business model. "The lesson we learned from the financial crisis is not to put all your eggs in one basket. We relied too much on the U.S. market," says Mr. Tseng, a 42-year-old native of Taiwan. "If we had started domestic sales earlier, our business wouldn't have declined so much this year."

Chinese domestic demand isn't a panacea for exporters. For one thing, domestic demand itself can suffer to some extent when exports decline, because the jobs of so many Chinese are linked to export industries. In addition, China's consumers simply don't have the money to drive the global economy in the same way as big-spending New Yorkers and Parisians.

This had been a wild card in the recovery game -- China becoming a demand center for consumer goods. The logic is simple: the country has experienced on of the largest growth spurts of any economy in some time. Some of that money has translated into higher living standards and an incredibly high savings rate. But as people see their incomes increase, they want more things. This is called the wealth effect and its a natural by-product of a growing economy.

There is no formula for how much of the growth will translate into increased consumer spending. That makes this idea a wild card for the next world expansion. But don't be surprised to the Chinese consumer taking on a larger role as the world economy recovers.

Treasury Tuesdays

Notice there are two upward sloping trendlines that connect the lows on the long term chart. Also note that prices have held above that support even though prices have sold-off.


A.) Prices have run into upside resistance before only to be rebuffed.

B.) Prices crossed over the 200 day EMA, indicating a more from bear to bull market.

So -- what gives with the Treasury market? Frankly, I though the large amount of supply that is hitting the market (and will continue hitting the market) would provide strong enough downward pressure to keep prices moving lower. But that has not happened. Despite record issuance, bond purchases continue to keep up with increased supply. That means there is plenty of demand for the new issues (at least for now). In addition, there is continued talk of the stock market rally being tired/in need of a sell-off etc... So long as there is talk along those lines, Treasuries will be an attractive investment alternative to stocks.

Today's Markets

Prices rebounded today on M&A news. Notice that prices moved to the 61.8% Fibonacci line and the sold off a bit.



1.) Prices gapped a bit higher at the open.

2.) Prices moved higher with strong bars on (3) higher volume.

4.) Prices consolidated moves higher.

5.) Prices found upside resistance at the 61.8% Fibonacci level.



On the daily chart we have good and bad news. The good news is prices rebounded from technically important levels (an upward sloping trend line). The bad news is occurred on low volume.

Why I'm Bullish: K.I.S.S. Edition

- by New Deal democrat

Since today is a dead economic news day, and since Bonddad and Invictus have weighed in on the linchpins for their current economic views (Bonddad noticed right track/wrong track numbers getting better, Invictus notes headwinds facing the average wage-earner/consumer), I thought I would add my own post simply stating why I am bullish on the economy.

As an initial point, though, I want to say that my viewpoint is not really much different from that of Invictus. Whether or not there is a "Recovery" really just hinges on two quarters of GDP growth, which I think will be satisfied by Q3 and Q4 2009. Like Invictus, however, I am extremely concerned by the headwinds faced by ordinary American working families. I have written several times this year how there cannot be "sustained" growth without the participation of the average consumer, and a consumer constrained by debt payments and miserly wage increases in not going to give us that sustained growth. It boils down to how long there can be substantial growth without broad participation. I suspect, to paraphrase Bonddad, it will proceed in "fits and starts" until the situation changes.

After the economy fell off a cliff last fall, the next question was, how deep is the abyss. And sure enough, things kept falling and falling and hey, wait a minute! Retail sales just rose in January! That was when I first suspected that the bottom of the cliff might not be too far off, and I wrote about it near the end of February.

But I also wrote a series looking at economic indicators of the Roaring Twenties and Great Depression, and that convinced me that if the Fed and the new Administration didn't screw up, the rate of deflation might bottom in or about July, and in the face of a positively sloped yield curve, that would signal the end of the "Great Recession." That is indeed what has happened.

OK, now to the K.I.S.S. part. Way back when I first started to be involved as an individual investor, I realized that there was no way the individual could compete with the resources available to the Big Boyz. What I wanted to do, was focus on a few measures that would take me no more than 1/2 hour a week and give me 80% of the information that the Big Boyz had. Very soon, among a few other things, I was led to the yield curve in the bond market, and the CPI and PPI, as predictors of the stock market, but also the broader economy.

In periods of inflation, the yield curve in the bond market has an almost flawless record -- since WW2, the only time it was incorrect was when the yield curve inverted in the mid to late 1960s. Aside from that, whenever the yield curve was positive, then 1 year later the economy was growing. Whenever it was inverted, one year later the economy was in recession. (Later Doug Kasriel of Northern Securities added the parameter of real M1 growth, and that made it an absolutely perfect record).

Last year blogger Theroxylandr posted a graph from Ned Davis research showing one very important exception -- the yield curve was positive throughout the entire 1930s, even during most of the "Great Contraction" from 1930-32. That was a potent wake-up all to examine how the yield curve performed in times of deflation, and hence my subsequent series on Economic Indicators during the Roaring Twenties and Great Depression. That series yielded two vital insights:

1. A positive bond yield curve does portend economic growth in a deflationary scenario, provided the deflation is easing, i.e., price changes are rising towards inflation.

2. An inverted yield curve in the presence of even 3 months of deflation is the Death Signal. In the last 90 years, it has only occurred twice. The first time was in 1928. The second time was in early 2007.

With those provisos, a positively sloped yield curve has pefectly predicted conditions over the next year for the last 90 years.

Always.

Every.Single.Time.

So, where do the yield curve and inflation stand now? Here's the graph:



The first thing to notice is that the yield curve is wildly positive. 3 month rates are still close to zero (red line), while the 10 year bond is between 3-4% (blue line). This is a portent of potent growth ahead for the next 12 months, provided we don't relapse into further deflation.

The second thing to notice is the relationship of CPI and PPI. Before recessions, both tend to rise, and PPI tends to exceed CPI. As recessions wear on, the relationship reverses, with both declining, PPI moreso than CPI. At the bottom (in deflationary busts), or shortly thereafter (in inflationary recessions), both start to increase, but YoY PPI is still well below YoY CPI. That's where we are now.

Barring speculators and/or the Chinese government thinking that somehow $100+ Oil is a neat thing, which seems pretty unlikely; or wages being actually cut (which is a possibility, but I suspect the threat is easing), we are in for a period of substantial GDP growth between now and next summer.

Rail Traffic Incrased In Third Quarter

The above chart is from Railfax and it shows that rail traffic increase in the third quarter. The reason this is important is simple: when an economy increases activity it has to ship more stuff from point A to point B. The increase in activity is a good overall sign, which explain why the above chart is so important.







The year over year chart shows a decline but a decline that is decreasing. Also note this is a great example of the shortcomings of year over year statistics at turning points. The first chart shows an increase in the 3rd quarter from 2nd quarter levels. This is a good indicator for the third quarter and adds yet another indicator that the economy is coming out of a recession.

Time Capsule Post: Open in One Year

Fast forward one year from now, to late summer/early fall 2010. According to most accounts, at that point we should be about one year removed from the trough of economic activity, otherwise known as the end of the recession. So let's say, for the sake of argument, that the recession ended in June, at the end of the second quarter (also, not coincidentally, the latest quarter for which we have some GDP numbers).


What should GDP look like in the first four quarters after a trough? What has it looked like in the past?


Average GDP in the first year of recovery -- going back nine recessions -- is, believe it or not, 7.11%. Raise your hand if you think we'll hit that bogey this time around. After the 2001 recession, however, GDP over the next four quarters averaged only 2.63%, and I fear we won't even do that much this time around.


Interestingly -- and this is the point of the post -- one category has led out of recession seven of nine times, and that is PCE. In the two first-years that PCE did not lead us out -- 1950 and 1980/81 -- Inventories did.


Here is what the average first year looks like:



So, the consumer has led us out of recession by averaging a 3.4% annualized contribution to GDP in seven out of nine (78%) recessions. Inventories, at two out of nine, place a distant second, and nothing else even comes close.

As David Rosenberberg recently put it:

Sustained recoveries hinge on the consumer. While the inventory cycle is key, the word cycle means more than a one-quarter bounceback in auto assemblies from depressed levels -- by definition a cycle implies a trend. So while Inventories play a supporting role after a recession ends, it is only perpetuated if the consumer revives. On average, consumer spending is responsible for over three percentage points of the bulk of growth in the first year of recovery. Housing is also a key contributor. But the consumer has already shown us that it is heading into a secular period of frugality and savings, while housing, notwithstanding signs of an upturn that are really little more than noise on a fundamental downtrend, is in a secular decline. Usually, government plays a small role, but this time around, it may be the only actor in the play, and what multiple does that deserve is a very good question, especially now that Uncle Sam's generosity is supporting a record of nearly 20% of personal income.

Headwinds

Invictus

I’ve made no secret of the fact that I have serious reservations about the sustainability of any strength in our economy. I’ve tried to document and chronicle most of the reasons for my doubts as I’ve seen them. (See any of my previous posts here or my hundreds of posts over at Blah3.com.)

I had a long talk with Bonddad this week about the nature of my skepticism. It all boils down to the consumer. Here is a follow-up to our conversation, and here are more of the reasons I'm not sold on recovery.

We know that the consumer has been 70% of GDP. I’ve written about it both here and elsewhere. We know that the consumer took his Debt/Income ratio to a very unsustainable 136% (now 129%), and that it was debt-financed consumption that contributed mightily to our current woes as we spent beyond our means and saved, literally, nothing for some time. I recently demonstrated that just to return Debt/Income to its trendline (114%) would involve retiring roughly $1.6 trillion, and getting back to the mean is virtually unthinkable. We know that the median age of boomers is now 52, and that this cohort is likely more concerned with retirement planning and rebuilding his/her nest egg than with aggressive consumption or aggressive investment strategies.

Beyond that, as I saw Joseph Stiglitz pointing out yesterday on Bloomberg television, this was not a recession caused by any of the typical reasons (e.g. manufacturing/inventory hiccup or the Fed hitting the brakes a bit too hard). This recession was born of the popping of a massive credit bubble that was years – if not decades – in the making, and will likely be years in the unwinding.

On to some interesting charts I saw this week in David Rosenberg’s work, and have taken the liberty of replicating. They (obviously) all support my thesis.

Above is yet another indicator of how weak the labor market is, as we see the number of people working part-time for economic reasons is easily at an all-time high. Yes, the labor market is usually a lagging indicator, but as I recently documented, its weakness this time around is far greater than we’ve seen in any post-war recession.

In part because of the slack in the labor market, we are now experiencing wage deflation, as “organic” income is on the decline:

Organic wages are on the decline. “Transfer payments” – more largesse from the government – are the only component of income that’s growing. (Note that I’m not arguing the government should not be stepping in, just pointing out that wages, dividends, interest income, etc., are all declining.)

Couple the decline in income with the fact that credit is now (very understandably) contracting:

As a result of both declining income and contracting credit, it stands to reason that Personal Consumption Expenditures would drop, and in fact they have:

I previously mentioned the median age of boomers, and in the past have written about the increase over the past several decades in Durable Goods/Household (now at about $37,000). Part of this growth was attributable to Boomers moving through their peak consumption years, which are now behind them.

Let’s take a look at another very interesting chart that flows from the increase in Durable Goods/Household: Vehicles on the Road/Licensed Drivers:

The question needs to be asked: How many more vehicles/driver are we going to put on the road? How many cars/driver do we really need? Further, I will respectfully disagree with Bonddad and state for the record that there’s little doubt in my mind that Cash for Clunkers pulled forward some (perhaps unquantifiable) amount of future sales. The run rate didn’t go from ~9MM annually to ~13MM annually on its own. Unfortunately, it appears we’re headed back down toward ~9MM again, so it’s hard to believe the Clunker program didn’t cannibalize some Q4 sales. Keep in mind, too, that scrappage is about 12MM vehicles/year so we are, in fact, taking cars off the road, which would be consistent with the trend of the chart above beginning to turn down.

The U.S. Homeownership rate, which had peaked at 69% and is now on the way down, still has a way to go on the downside (probably to about 65% or so):

Now, none of this is to say that the recession may not “technically” be over. However, as Paul Krugman recently noted, that may indeed be irrelevant. Based on some correspondence with members of the National Bureau of Economic Research’s Business Cycle Dating Committee, I’m led to believe that they’re inclined to view growth from all sources – be it it private sector or government – equally. So the life-support the government has provided may well be enough to “officially” declare an end to the recession. What the private sector looks like absent the public support, however, is another story altogether, and one that has yet to be told. That is the crux of my concern: How do crippled consumers take the handoff from the government when stimulus programs and funding begin to wind down and end. And therein lies the story of what I believe might well be a double-dip, or at the very least sub-par growth for as far as the eye can see.

Does Blogger suck, or is it me?

[Note to commenter on original post: The Boss asked me to hold the post until Monday, so I took it down and rescheduled it. Sorry for having lost your comment.]

Market Mondays

Let's take a look at last week's action. As always, you can click on all images for a larger image.



1.) Prices were in a slight uptrend for the first almost three days.

2.) Prices were in a tight range (from roughly 106.60 to 107.40) on Tuesday and Wednesday as the market awaited the Fed's decision.

3.) Once the Fed announced its decision the market tried to rally but couldn't maintain upward momentum. The rally stalled, fell through the trend line thereby breaking the weekly trend and continued falling. Note that prices consolidated in a triangle pattern at the beginning of Thursday only to continue falling. Triangles are both reversal and continuation patterns.

4.) Notice the incredibly high volume that occurred on the sell-off. This tells us that bears were in complete control. In addition, it also tells us that people were looking for a reason to sell.

5.) After the sell-off prices again consolidated in a pretty tight range (104.60 to 105.40).

6.) Prices wanted to move lower but couldn't. They eventually rose and then sold-off to resistance established earlier in the day.



There are two trend lines are important to this market. The first (2) connects the lows from early March and early July. The second connects the lows of early July and early September. Currently, prices are resting right at the first trend line in addition to the 20 day EMA.


Notice that prices at points 1, 2, and 3 display a similar pattern. They all involved a sell-off to points just below the 20 day EMA. The primary difference between the first two and point three is the volume. Point three has a higher volume level than either 1 or 2.

File Under: Where Have I Heard That Before?

Hmmm...the NY Times sounds vaguely familiar.

The Bonddad Blog, July 6, 2009:

Perhaps the most interesting piece of work Rosie produced recently was an analysis of how many unemployed individuals we currently have for each job opening. Rosie looked at the Job Openings and Labor Turnover Survey (JOLTS) data from the BLS and the number of unemployed (also via the BLS).

Rosie refers to this as “The Truest Picture of Excess Labor Supply,” and it’s hard to argue with that description. The Household Survey reports about 14 million unemployed, and the JOLTS reports about 2.5 million current job openings. Scary stuff.

The Bonddad Blog, Sept. 11, 2009:

The Bureau of Labor Statistics (BLS) puts out several reports. One of them – the Job Openings and Labor Turnover Survey (JOLTS) – doesn’t get wide play. In that report, BLS reports on the number of job openings (among other things). If we combine that report with some information from the Current Population Survey (CPS) – specifically the number of unemployed Americans – we can see the following:




Unfortunately, the JOLTS series only goes back ten years, but the picture this paints of slack in the labor market is not a pretty one, with fully six Americans vying for every job opening.

NY Times, Sept. 27, 2009:

Job seekers now outnumber openings six to one, the worst ratio since the government began tracking open positions in 2000. According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed.

Weekend Vacation Photos

These are some random photos from our Alaska trip. They're in no particular order. Hope you like them -- and I'll be back on Monday.

The Week in Review: A mixed bag

- by New Deal democrat

Here we are at Friday afternoon again, and before Bonddad posts his much awaited photos and calls it a weekend, let's quickly recap the week.

Unlike last week, which was a full-throated battle cry of bullish data, this week was more of a mixed bag:

- Leading economic indictors for August went up 0.6% and July was revised higher 0.3%, but the underlying data is mainly already known.

- Initial Jobless Claims fell to 530,000, suggesting that the economy is getting closer to the point where it actually starts to create more jobs than it loses.

- Existing Home sales fell slightly in August. The market was apparently expecting Nirvana, and this hiccup (sales are still up YoY for the third month) helped cause a sell-off.

- Durable goods orders (which Bonddad sometimes calls "the Boeing report" because of the heavy influence of aircraft orders) fell -2.4%, taking back about half of the July gain. Ex-aircraft, the series was unchanged. The decline in capital new orders is troubling, but was already factored into the August LEI report so may have no effect.

- U. of Michigan consumer confidence for September rose to 73.5, up from August's 65.7, far above expectations. More importantly, the leading indicator of consumer expectations rose to 73.5, its highest since before the Recession.

- New Home Sales were reported up by the Census Bureau to 429,000 a whopping 3,000 more than the revised July report, i.e., not nearly as much as had been expected.

- the weekly Railcar report showed stabilization after last week's decline. YoY figures generally continue to improve.

- the American Trucking Association reported that its "Truck Tonnage Index increased 2.1 percent in August, matching July’s increase of the same magnitude.... Compared with August 2008, SA tonnage fell 7.5 percent, which was the best year-over-year showing since November 2008."

- Shoppertrak reported that "year-over-year retail sales declined 4.5% for the week ending Sept. 19, ... [but] current sales for the month of September versus last year are only down 1.0%."

The takeaway this week is that the Recovery proceeds but subject to what Bonddad has called "fits and starts." The leading components so far suggest that September's LEI will remain positive, but significantly weaker than the last 5 months.

In the meantime, let's wait on Bonddad's pix and have a nice weekend!

A Look At Getting Better/Getting Worse Numbers

The above chart is from Pollster.com. It is a combination of all the big polls regarding how people feel about the economy. This is one of the first polls that caught my eye back in the late spring. I hadn't looked at it since the election. When I saw the then big swing between March and May I was very surprised. This occurred at the same time we were seeing a dip in the 4-week moving average of initial unemployment claims. These two factors were what first convinced me the economy was bottoming out.

The above chart shows two trends. The first occurs from March to May and shows an increase from 10% to 25% of respondents who said the economy was getting better. The second goes from mid-July to now that shows a more gradual increase from 25% to about 35%. Conversely, the number of people who said things are getting worse decreased from 70% to 50% in the March to May period and the number again decreased another 5% to 45% in the July to current period.

These numbers are not stellar. However, they do track with the rest of the economic numbers that we are seeing which show a clear bottoming in economic activity. It's also important to remember a very important point: the US economy is not going to turn around in one day -- or even a year. We went through the worst economic shock since the Great Depression; something of that magnitude does not lead to quick recovery. But, things are definitely on the right track now.

When will the Economy Start to add Jobs? (VI.) A Conclusion and a Prediction

- by New Deal democrat

This is the Sixth of Seven articles in which I am examining when economic growth (GDP) will translate into job growth (the 7th will deal with the unemployment rate). In the first 4 articles I examined 5 potential leading indicators of job growth. In the 5th article, I showed how the leading indicators fit together temporally. What remained is the issue of whether there was enough "ooomph", enough strength, to push job growth over the top. Certainly I can say that historically when an indicator has reached level X, that has always occurred at the same time as actual job growth, but then it is no longer a leading indicator, just a contemporaneous report.

But jobs, or Employment, is one of 4 "Coincident Economic Indicators" (actually, the biggest, accounting for just over 50% of the index) kept by the Conference Board, along with Industrial Production, Real Income (a/k/a Personal income minus transfer payments), and Manufacturing and Trade Sales. Three of those four are also thought to be what the NBER tracks to determine if there is a recession or not. The difference is that the NBER includes our "holy grail", Real retail sales, as opposed to the Conference Board's Manufacturing and Trade Sales. This means, we have an excellent tool to estimate when Employment might turn positive, because it is this Index of Coincident Economic Indicators that is the exact thing that the Leading Indicators are supposed to lead!

Here is where the Leading vs. Coincident Indicators stood before this week's report:



Here is the St. Louis Fred's index of each of the 4 coincident indicators as of last month:



As of this week, while the Coincident index moved sideways, the Leading index is now up ~+2.3% YoY. If it merely meanders sideways for the next 3 months, it will be up over 4% YoY (and barring a sudden stock market meltdown, it looks like it will rise again in September). In comparison, the LEI was ~+5% when jobs started to be added even during the 2002-3 "jobless recovery."

More importantly, the Leading index is designed to lead the Coincident index by about 6 months, give or take 3 months. For our purposes, simply put, the Coincident index should cross zero at some point during that time frame. That means that the average of the 4 series should be at the same reading -- 0% YoY -- at about that time.

So therefore, for purposes of this analysis, I am making the following assertions that I believe are reasonable and probable:

(1) The average of the 4 Coincident Economic Indicators, which include Employment, will cross 0% YoY at some point between October 2009 and April 2010.
(2) Manufacturing and Trade sales (used by the Conference Board as a coincident indicator) will track Real retail sales (used by the NBER to date Recessions) closely, with a several month lag.
(3) the 4 coincident indicators will improve by roughly the same percent (or at least not diverge more than in previous recoveries) in order to arrive at the average of 0.
(4) Jobs will follow a relatively stable trend of improvement - there will be no wild fluctuations.
(5) Per my previous analysis, if both Industrial Production and Real retail sales advance more than 2.5% from their bottoms, Employment must be growing.

I am also varying the weighting given by the Conference Board to calculate the Coincident indicators slightly for ease of calculation.

With those parameters set, let's begin.

I. The above parameters mean, in summary, that in order for Employment not to bottom by the month Coincident Indicators average 0% YoY, both Industrial Production and Real retail sales must not have advanced 2.5% from their bottoms, BUT nevertheless, Industrial Production, Real income and Wholesale and Trade sales must be up sufficiently over zero as a group to compensate for Employment still being negative YoY.

For that set of parameters to be met, one of the two categories already advancing -- Real retail sales (wholesale and trade sales) and/or Industrial Production -- must stall (so that they are not both over 2.5% from their bottoms). But if one of them stalls, then to have a weighted average of zero at the crossover month, then the other of the two, together with the other laggard, Real Income, which only makes up about 15% of the index, must inexplicably surge by at 10%(!) (if we use the January 2010 crossover date), or 2% (if we use the easier 9 month target of April 2010) to make up for both the negative Employment number and the negative Industrial Production or Retail sales number.

The odds of all those conditions being met appear quite small. Even in the 2002 "jobless recovery," Industrial Production rose at most 1.7% and Real income 1.4% before the Coincident Indicators rose above 0% YoY. Thus, if the Leading Index simply works as designed, Employment must either be zero or higher YoY by January (give or take three months), or else Employment can still be negative YoY at that time but Real retail sales and Industrial Production must be at least 2.5% higher from their bottoms. Either way, it appears a extremely likely that by the time the Coincident indicators cross 0% YoY, Employment must have bottomed.

II. There is still one last item to consider, and that is whether there is a reasonable "glide path" or trend line that would be consistent with a bottom in employment as well as the weighted average growth of Coincident indicators being 0% YoY at the crossover month.

Since this past January, Employment is down -2.2%, Industrial Production is down -2.7% , Real income is down -2.3%, and Manufacturing and Trade sales, not shown, is down -6.3%. (940,862 Million in January, vs. 914,303 in June). To arrive at a weighted average of 0%YoY in January 2010, each of the above must improve on average 2.8%. In the case of Employment, that would mean the economy growing an average of 756,000 jobs each month for the next 5 months! That's not going to happen.

If we extend the time at which Coincident Indicators cross 0% YoY to April (9 months after when LEI's turned positive YoY), then since April 2009 Employment is down -0.9%, Industrial Production is up +0.3%, Real Income down -0.1%, and Manufacturing and Trade Sales down -1.3%. To arrive at a weighted average of 0% YoY in April 2010, each of the above must improve on average +0.6% from their present readings (actually, to comply with my +2.5% requirement, Industrial Production must still improve 0.8%, which means that Real income does not need to improve at all). In the case of Employment, that would mean adding a total of 426,000 jobs in 8 months, for an average of 53,250 new jobs a month. This can be done by a positive move of +62,500 a month, giving us the following nonfarm payrolls over the next 8 months:
Sept. 09 -145,000, Oct. 09 -91,000, Nov. 09 -28,000, Dec. 09 +34,000, Jan. 10 +97,000, Feb. 10 +159,000, Mar. 10 +200,000, Apr. 10 +200,000.

The above is just an example, adding +426,000 to total payrolls to meet the "0% YoY change in Coincident Indicators" constraint. Remember, though, that the purpose of this series is to try to estimate when the economy will begin to add jobs -- i.e., net +1 jobs. Using Leading vs. Cooincident indicators is a tool to do so. In other words, there are plenty of other "glide paths" that add jobs - although less than 426,000, if Industrial Production and Real retail sales both improve more. We just don't have the tools to estimate them well, although they must also be consistent with the analysis above.

Extending our crossover point to April gives us a "glide path" for Employment that looks perfectly reasonable and doable, given the strength of the Leading Economic Indicators. A slightly more aggressive "glide path" might possibly give us a positive number in November, if the target crossover date is March instead of April.

Let's review my analysis of when the Economy will begin to add jobs:

(1) ISM manufacturing and Industrial Production both suggest that Employment may well make a bottom as early as October.

(2) Initial Jobless claims suggest 3 months or longer, as does the slow improvement of Real retail sales. This puts us in December or January.

(3) The most likely month to give a reasonable "glide path" of actual job growth as indicated by the Leading Economic Indicators vs. Coincident Indicators is December, or possibly November if there is enough strength in the economy.

A recent graph prepared by Raymond James Investments shows the trends very well:

Note the trend since the December trough in payroll losses. Interestingly, this breakdown shows that it was May, not June, that was the outlier in the trend, as service businesses (green) had few layoffs that month. Nevertheless, the overall trend suggests that services could begin to add rather than lose jobs as early as this month, September! Manufacturing, in accord with the ISM index, may follow as early as next month, October. That leaves construction as the ongoing drag on job growth, and the question becomes, when will growth in services and manufacturing be enough to overcome construction losses.

Based on my analysis above, November or December are when I believe that turning point will be reached, plus or minus one month in either direction. Let me be the first to acknowledge that this is not a scientific truth or certainty, but a best estimate based on a logical review of existing data with a long history that accommodates both traditional and "jobless" recoveries. Nevertheless, at least in terms of payroll growth, the analysis in these six installments cause me to predict that this will not be a "jobless recovery" for long.

In my last installment, I will look at Real Retail sales as it relates to Unemployment.

Forex Fridays

1.) Prices formed a double top with the first top at the end of last year and the second top at the beginning of this year. This is a reversal formation.

2 and 3.) These are support levels which prices have moved through.

4.) The MACD is deceasing and has been for the entire year.

5.) The RSI is decreasing and has been for the entire year.

6.) The EMA picture is bearish: all the EMAs are moving lower, the shorter EMAs are below the longer EMAs and prices are below all the EMAs.


1 and 2.) These are technical support levels which prices have moved through.

3.) Prices consolidated in a triangle formation. Triangles are reversal and continuation patterns; that is, they occur during a trend.

4.) The MACD have been decreasing all month but is about to give a buy signal by crossing over its signal line.

5.) The shorter EMAs are below the longer EMAs. The 20 and 50 day EMA are moving lower, but the 10 day EMA is starting to level out.

Bottom line: this is still a very bearish chart.

Today's Markets

I've included the above picture simply to show where technical support lies on the chart. Simply put, at current levels there are a lot of levels where prices could stop. In addition, prices have fallen about 2.75% from their peak of 108.


Also note the two primary uptrends are still intact.






Notice on the daily chart that we're coming off a double top formation (Number 2). Also note that there was a ton of volume (1) at the end of trading yesterday and the start of trading today.

Will the Real Growth Please Stand-Up?

I've seen a fair amount of commentary around the web that the latest retail sales number is less than legitimate because cash for clunkers obviously played a role in influencing the number. In response to that claim consider the following chart:


Click for a larger image

This is a chart of government consumption expenditures as a percentage of GDP. Both numbers are inflation-adjusted.

Government spending always has an influence on overall GDP. To those who would argue that we shouldn't count cash for clunkers growth I would pose the following question: Where is the line between government spending that we should count and government spending we shouldn't count?

My position is straightforward: cash for clunkers is a classic Keynsean style program that did what it was supposed to do: stimulate demand. The growth that resulted from the program is real -- it increased production in the auto sector added wages to auto employees etc.... In addition, I've never bought into the "you're cannibalizing future sales" with programs like cash for clunkers. I've never seen a valid largely because I don't see how you can actually measure the answer.

More Signs of an Energy Correction

Let's look at the chart of the gas futures ETF:


Like oil, prices have fallen through the long-term trend line.


A closer look at the chart shows that prices have moved through the 200 day EMA and lower support.

Initial Jobless Claims: You're reading the right blog

- by New Deal democrat

On Tuesday I said:

Additionally, as you can see in particular from the last graph, even mid-sized moves within a trend by Real retail sales are usually mimicked by the next month's Initial Jobless Claims -- see for example the late 2005 spike due to Katrina, and a similar, smaller spike in January of this year. Since Real retail sales soared in August due in large part to "cash for clunkers", it should be no surprise that Initial Jobless claims have fallen in each of the last two weeks, and may well continue to do so for several more.

This morning Initial Jobless claims fell to 530,000, the lowest since July 24's 524,000. The 4 week moving average fell to 553,500, the lowest since January of this year:

The number of U.S. workers filing new claims for jobless benefits unexpectedly fell 21,000 last week, government data showed on Thursday, and a less volatile unemployment claims gauge dipped to an eight-month low.

Initial claims for state unemployment insurance declined to a seasonally adjusted 530,000 in the week ending Sept. 19 from a revised 551,000 in the previous week. Analysts polled by Reuters were expecting claims to rise to 550,000 from a previously reported 545,000.

High-paid Wall Street analysts may have been surprised, but you weren't if you were paying attention to this blog.

By the way, this is one week's data, and comes nowhere near to satisfying my condition of the 4 week average dropping to 530,000 on a sustained basis before there will be actual job growth in the economy.

Thursday Oil Market Round-Up

Click for a larger image

Two very important points.

1.) Prices are now below the long-term trend line.

2.) Prices have sold off on high volume.




1.) Notice the 37.5 - 38.5 area has provided a ton of upside resistance.

2.) Prices dropped through three moving averages today on high volume. Notice how much higher today's volume was compared to the previous days.

3.) Notice how the upward sloping trend line has become resistance.

Today's Markets

OK -- guess when the Fed released their policy statement. No really, guess.

The markets popped higher at first, but then moved lower in a strong way on strong volume. Let's look at the key points.

1.) Prices move strongly higher on good volume. This is a long bar and it is a bullish sign.

2.) Prices print another long bar, this time moving lower stopping just above an EMA. This is a little more than half an hour after the big move higher and indicates the rally has failed.

3.) Prices rallied higher but ran into upside resistance at the 10 minute EMA. Prices then sold-off with a pretty long bar and closed just below the 50 minute EMA.

4.) Prices move through the 200 minute EMA and close below the EMA. This tells us we're probably going lower in a big way.

Richmond Fed Shows Expansion

From the Richmond Federal Reserve:

In September, the seasonally adjusted manufacturing index — our broadest measure of manufacturing activity — was unchanged from August's reading of 14. Among the index's components, shipments edged up one point to 22, new orders lost five points to finish at 13, and the jobs index picked up five points to end at 5.

Other indicators varied. The capacity utilization measure moved down six points to 16, and the orders backlogs and delivery times indexes turned negative, losing nine and five points, respectively, to end at −5 and −3. Our gauges for inventories grew more slowly in September. The finished goods inventory index trimmed four points to 18, while the raw materials inventory index dropped six points to 12.

Here is a chart of the overall index:



Notice the index is at levels associated with several other high points that occurred during the last expansion.

Let's look a little deeper into the numbers:



Click for a larger image

The volume of new orders has decreased for the last two months. While this isn't enough to call a trend, it does indicate the pace of activity may start to slow in the next several months. However, the employment index has increased over the same time period, which is positive. However, as Invictus pointed out yesterday, the future employment numbers indicate hesitation. The number of expected employees is still hovering around 0 and the expected average workweek is trending lower. My guess is there is little visibility at this point -- that is, no one has a clear idea of whether of not the economy will be producing orders over the next 3-6 months. That is to be expected at this point in the recovery; the economy is just turning around so there are still going to be a lot of questions regarding sustainability.

The 1949 Recession, and why it suggests this recovery won't be like the post 2001 recovery

- by New Deal democrat

Just about everyone seems to think that we live in an era of ever-lengthening "jobless recoveries." If you have followed me long enough, you know that I am usually skeptical of conventional wisdom, and frequently it turns out to be wrong. In that vein, I have become more and more convinced that the incipient Recovery will be unlike the recovery from the 2001 recession. My recent/ongoing examination of leading indicators for job growth as caused me to take a long look at another, similar recession to 2001: the first post-war recession of 1949.

Here is what more typical recessions and recoveries look like graphically:


Notice that both industrial production and real retail sales recover strongly after 3 of the 4 1970s era recessions, and employment follows almost immediately. In the weakest recovery, 1970, industrial production grew just slightly over 2.5% and jobs expanded, but slowly.

Yesterday I noted that in 1949, even though Real Retail Sales grew at a very slight rate throughout the recession, Industrial Production declined. Once both started to grow again, so did Jobs within several months thereafter:



And in 2002, at first Real Retail Sales grew, but Industrial Production did not. Then Industrial Production grew, but Real Retail Sales did not. As soon as both started to grow together, Jobs finally started to increase:



Although not shown on the two graphs above, there is another important series that behaved oddly during both recessions: housing. Housing starts continued to increase throughout the 2001 recession. In 1949, they declined for a few months into the recession, and then began to grow exclusively throughout the rest of the recession and beyond.

It's as if both recessions left ordinary consumers untouched. In fact, that's exactly what happened, both times.

The 1949 recession was discussed extensively in a Federal Reserve paper in 1956 (pdf) by Benjamin Caplan. Here are a few choice excerpts:

The commonly accepted view is that it was an inventory recession. What this means is that the forces which initiated the downturn had their major impact on the accumulation of inventories.
....
The postwar abnormal expansion in consumers' demand began to level off..... [but] Private fixed investment failed to maintain its rate of expansion and, on the contrary, developed a slight declining tendency. The 1948 drop in the rate of growth of demand at the same time that supply capacity continued to expand was only temporary. It was only a brief pause in the postwar boom. It did not take long to complete the relatively small market readjustments called for, such as price and inventory declines. Because of that fact, the recession turned out to be very mild. (p. 29)
....Preceding the decline in total output, there was thus a weakening in the rate of growth of final sales. When the downturn got under way, final sales did not decline but tended to level out for a while before resuming their upward progress. Consequently, the fluctuations in GNP were primarily in that part of output which does not go to final sales, viz, inventory. (p. 31)
....
over-all business sales reached their peak in August 1948, for durable manufacturers in December 1948, for nondurable manufacturers in June 1948, and for both types of retailers in December 1948;... [while] total business inventories (book value) increased steadily through 1948, reaching their peak in February.

On the labor front, unemployment in 1948 averaged slightly less than in 1947, about 2.0 million or 3.4 per cent of the labor force compared with 2.1 million or 3.6 per cent of the labor force. At the same time the civilian labor force expanded by over 1.3 million in 1948 compared with 1947. However, in the fourth quarter of 1948, layoffs began to appear in nondurable industries and in some consumer durable industries. (p. 34)

Just as in 1949 traditional producers built too much, and had to reduce inventories, even though consumer demand remained strong, so in 2001 the drastic overbuilding of fiberoptic and other infrastructure to take advantage of the New Internet Era, i.e., excessive capital expenditure by tech businesses, burst dramatically as such businesses as pets.com and wine.com, among other business "plans", blew up. If you were in one of the affected industries, you suffered terribly. If not, you sailed right through (I am not including in this discussion the exogenous shock of 9/11 which drastically curtailed all business and consumption activity for a brief period thereafter).

In short, consumption remained almost completely unaffected by both downturns. As a result, both were shallow and, in the case of 2001, it was barely a recession at all, as there were only two unconnected quarters of declining economic activity. Real retail sales stagnated (2001) or slowly rose throughout the recession (1949). Unemployment rose only slightly, and almost entirely due to the downturn in the specific productive industries. As the inventory correction ran its course, rising unemployment slowly abated.

Thus it is no surprise that the low point for Real retail sales actually occurred before the recession in 1949, and at the very beginning of the recession in 2001, and rising so slowly during the course of both economic downturns that that it gave rise to the two big outliers of its relationship with payrolls -- a 3 month lag for the onset and 9 month lead over payrolls in the 1949 downturn/recovery, and a 23 month lead over payrolls in the 2002-3 recovery. In essence the point at which employment began to decline and grow was lost within the "noise-to-signal" band of normal monthly variation in Real retail sales.

The contrast with the recent "Great Recession" could not be more stark. This was a consumer retrenchment with a vengeance! Production and employment reacted immediately to the downturn, dropping precipitously. Conversely, the Index of Leading Economic Indicators has similarly rocketed upward in the last few months, with private forecasting group ECRI just reporting that their index hit an all time high -- even higher than the rebound from the 1982 recession that featured 20% interest rates and 10%+ unemployment.

While I have already noted that employers seem to be "hoarding" jobs, waiting to see if the economic growth is sustainable, it is unlikely to go on long if the consumer retrenchment of September 2008 even partly reverses. In short, there is every reason to believe that this recovery will not behave at all like the recovery after the 2001 recession. If it is to approximate a "jobless" recovery, then the model is much more likely to be 1992 in which jobs did start to grow shortly after the recession ended, but not robustly enough to overcome rising unemployment.

About that "Mysterious Trading in Financial Shares"....

From the WSJ:

A year after the government sought to avert a market meltdown by rescuing some of the country's biggest financial firms, speculative traders are feasting on these companies' remains. Shares of two government wards, mortgage giants Fannie Mae and Freddie Mac, bounced between about 60 cents and $2 in August. Shares of Lehman Brothers, left to fail by the government and currently in bankruptcy proceedings, rose from five cents to 20 cents in recent weeks.

AIG, arguably, has been the biggest casino of all. In the past seven weeks, its common shares have careened between $13 and $55, surging past $54 on Tuesday before closing at $45.80.

The extraordinary price action is a dramatic display of an unintended consequence of the U.S. bailout of AIG. Last Sept. 16, the government propped up the faltering company by trading $85 billion in loans for an 80% stake in AIG in the form of preferred shares, which don't trade on the market. It allowed the other 20% of the company's equity -- its millions of common shares -- to continue to trade publicly.

Some analysts declared the deeply indebted company's common shares basically dead money. Many buy-and-hold investors bailed out. That has left AIG's common shares -- $6.2 billion worth, as of Tuesday -- trading most actively between short-term traders, who buy and sell based on market momentum and bet against each other in risky options trades. Often they use borrowed funds, amplifying their gains and losses.

Dominating the recent move in AIG stock were professional day traders like those at T3. But Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. also owned AIG shares during the run-up, according to people familiar with the matter. Fund managers including AllianceBernstein LP and Davis Selected Advisers also held the shares during a portion of the run-up, according to fund documents.

The internet can be a great tool because it allows people to access a large amount of information. I use it regularly for that purpose. In fact, the internet has opened up an entire world of information to many people.

However, this also means that a lot of people who don't know much about certain topics say really stupid and uninformed things which then become common knowledge. Case in point: sometime over the last few months there was an internet "fact" going around that there was mysterious trading in financial stocks. It must be a scheme by the government to manipulate the stock. It's a sign that the market is topping out -- the reasons and conclusions were everywhere.

When I first read this series of posts my trading and economic radar said "bullshit". The reason for the trading for anyone who knows well, anything about the markets, was simple: speculators were moving into the shares. And now we have the above story from the WSJ about that very topic.

Now, I'm sure there are some people who are saying "the WSJ is a propaganda tool of the government and corporate elite..." at which point we should just tune them out. These people are the economic equivalent of the "birther" movement -- people who just aren't that bright who now have a forum to demonstrate they just aren't that bright.

Wednesday Commodities Round-Up

I'm going to start using ETFs for this analysis. The reason is simple: they're publicly traded allowing more people to access the market.


Click for a larger image

DBA is an ETF that is comprised of corn, sugar, soy beans and wheat. Since the end of last year there has been a slight upward bias to the chart with a trend line labeled A above. Prices have moved above this line on several occasions only to return to the trend line. Prices have consolidated in two areas labeled B and C. Note the consolidation is still above the trend line. Finally, note that while it loos as though there is a possible head and shoulders formation, the formation is occurring at the low end of the pattern meaning this is not a reversal formation.



Notice that prices have struggled to get above the 200 day EMA, indicating this ETF is still in a technical bear market. Also note that all the EMAs are currently trending lower and the shorter EMAs are below the longer EMAs. This tells us the overall trend is still negative. However, also note that prices are in a general rising trend that will-- should it continue -- bring prices into a bull market.