Archive for the ‘US’ Category

Mortgage Delinquencies Point To Trouble Ahead

July 7th, 2010 Michael McDonough Comments off

Many investors hoped a modest decline and a leveling off in mortgage delinquencies the end of last year signaled a top for the index, but those hopes were dashed when delinquencies for all types of mortgage hit a new high during the first quarter.   Fears were further exacerbated yesterday when Lender Processing Services released their ‘Mortgage Monitor’ for May, which showed a 2.3% increase in total delinquencies, indicating the first quarter’s sharp rise may not have been a one off event.  Even more worrisome is the fact the according to LPS the amount of mortgages delinquent by 0 to 30 days rose 10% after showing some improvement during the first quarter.  According to the Mortgage Bankers Association (MBA) the national delinquency rate presently stands at 10.1%.  The rate for prime mortgages is 7.3%, and for subprime 27.2%, all of which rose during the first quarter.  Rising delinquency rates—likely due to significant under employment—means foreclosures will be a lingering issue well into the future.

Source: MBA

As an aside, it has been suggested that up to 31% of total foreclosures are actually strategic defaults, where buyers are underwater on their mortgages and essentially give up their homes to their lenders rather than paying off the mortgage now valued more than their home.  Surprisingly this could actually have a somewhat positive impact on the economy, although not the lenders, as it frees up cash flow for the borrower to consume other products—personal consumption is the largest component of U.S. GDP growth.


S&P Now vs. The Great Depression

July 6th, 2010 Michael McDonough Comments off

Recently I’ve come across several headlines comparing recent activity in the stock market to what occurred during the Great Depression, so I ran the numbers.  The attached chart tracks the S&P 500 20 months prior (t-20) to its respective high prior to the Great Depression and the recent recession; ‘t’ indicates the actual high.  You can then compare the performance of the SPX during both downturns on a monthly basis (t+1, t+2, etc…) from the highs.  I am no technical strategist, but other than the initial fall I fail to see any similarities between now and then.  During the Great Depression the S&P lost nearly 90% of its value over 34 months; the S&P is presently 33 weeks off of its high and is down only 34%, and even at the lowest level was down only 53%.  Surprisingly, it took the SPX until the early 1950’s following the Great Depression to recoup the losses the SPX has already regained since the start of the recent recession.  The bottom line is a more responsive central bank and coordinated government actions may have helped us escape the full pain of the 1920s, but we still have a long steep hill to climb before we move away from the danger zone.  Let’s not forget the effects from reversing fiscal stimulus and unprecedented monetary policy responses—that helped stave off deeper loses—are still unknown and could eventually weigh down the markets.    

Source: Bloomberg


Monthly Job Growth Almost Never Exceeds 400K

July 1st, 2010 Michael McDonough Comments off

Historically, payroll growth rarely exceeds 400K in any given month, even in the best of times, not good news considering the US has lost 8mn jobs since the start of the recession. Some analysts have discussed a best case scenario where payrolls rise by 1mn a month, bringing us back to the pre-recession peak within eight months, however, in reality this is a near impossibility. Since 1939 there has been only one instance of monthly job growth above the million mark, and as it turns out that stellar number was caused by 700,000 AT&T workers returning from a 22 day strike–meaning far fewer than 1mn jobs were in reality created. In a much more likely scenario where payroll growth averages 200K a month it would take over three years to return to the pre-recession peak; this figure doesn’t even count population growth that has taken place during that period. The attached chart breaks down the frequency of monthly payroll gains and losses from 1939 to now, and certainly doesn’t paint a rosy picture for the labor market.

Categories: Labor Market, US Tags:

Unemployment Rate Unlikely to Budge until 3mn New Jobs Created

June 30th, 2010 Michael McDonough Comments off

Disheartened job seekers who fled the labor market in mass during the height of the recession have begun to return putting pressure on the US unemployment rate.   Based on a simple interpolation the U.S. labor force today should total 157.2mn, however due to the exodus of job seekers the labor force presently amounts to only 154.4mn a difference of 2.8mn. Calculating the unemployment rate on this ‘would-be’ labor force would increase the ratio to 11.3% from its current level of 9.7%.  Meaning until the nearly 3mn gap in the labor force is closed the unemployment rate will remain under constant pressure, especially if job seekers return fast than jobs are being created, a very likely scenario.  It’s not surprising that the current consensus forecast for June’s unemployment rate is for an increment to 9.8% from 9.7%. The charts below show the ‘would-be’ labor force level and the estimated unemployment rate based on this level versus the actual rate.  Keep in mind that the recent upswing in non-farm payrolls has benefitted from U.S. census hiring, and should begin to recede in June.


ECRI Weekly Leading Index Pointing Toward a Double-Dip

June 29th, 2010 Michael McDonough Comments off

Those looking for evidence of an upcoming double dip recession may have found their canary.  The Economic Cycle Research Institute’s (ECRI) Weekly Leading Index is pointing to serious trouble ahead for U.S. economy with the index falling seven consecutive weeks moving into negative territory.  According to Laksham Achutan, managing direction of ECRI, “The continuing decline in [the index’s] growth rate to a 56-week low underscores the inevitability of the slowdown.”  Looking at the historical relationship between growth and the ECRI’s index, Laksham’s views may not be unfounded.  Over the past several years the index has done a fairly robust job at predicting turns in the U.S. economy, and if you believe the current trend things are about to get much worse.  Unlike the Conference Board’s Leading Economic Indicator Index the ECRI’s Weekly Leading Index is timelier released on a weekly basis with only a one week lag.   The next release will be this coming Friday. 


Source: Bloomberg


Categories: GDP, US Tags:

Consumer Confidence To Remain Range Bound, Despite Friday’s Marginal Improvement

June 28th, 2010 Michael McDonough Comments off

Despite Friday’s better than anticipated confidence number it’s unlikely the
index can show sustained gains until initial jobless claims move well below
current levels.   As the attached chart highlights, in 2009, as claims began to
fall, confidence began to rise off of crisis lows.  However, since the start of
2010 this trend came to an abrupt halt.  Both indices have since traded in a
relatively confined range with claims remaining north of levels indicative of
sustained job growth.  What’s shaping up to be a jobless recovery will weigh on confidence impacting everything from retail to home sales over the months ahead.  Additionally, mundane income growth, which has primarily been bolstered through increasing government transfer payments—set to slow over the months ahead—could put additional pressure on confidence without significant, albeit doubtful, gains in private pay over the near-term.


‘What’flation, 2Y Treasuries Yielding 67bps

June 25th, 2010 Michael McDonough Comments off

Inflation doves can look no further than near record low yields on 2-year Treasuries to squelch inflation hawks ‘premature’ concerns.  The 2-year yield is reflecting the fact that the recovery will remain lukewarm, with downside risks outweighing the contrary, essentially opening up hunting season on Fed hawks—already in small supply. While hawk hunting may be the primary fundamental driver behind recent yields another technical factor may also be playing a role. Chatter on the trading floor is indicating that, private sector deleveraging coupled with a slower pace of government debt issuance is leaving investors with fewer alternatives, helping push yields down across the curve. 

Over the near-term, negative sentiment derived from a housing market left out to pasture, issues in Europe, the gradual removal of government stimulus—a key crutch to recent growth— and a plethora of other geopolitical risks should keep yields and inflationary fears in check for the foreseeable future, while the risk of deflation and an eventual return to negative GDP growth remain all too real.

Categories: Fed News, US Tags: ,

Why Homebuilder Stocks Haven’t Plunged

June 23rd, 2010 Michael McDonough Comments off

The amount of new homes for sale in the U.S. reached a multi-decade low in May helping boost U.S. homebuilders.  To find a point in time where fewer new homes were on the market you would have to go all the way back to the early 70’s/late 60’s (see chart).  While the sales pace of new home doesn’t bode well for the very short-term outlook for home builders the miniscule amount of new homes on the market means that as buyers return—once labor markets improve—home builder demand will likely spike.  The low level of inventories also implies short-term homebuilder risk could be somewhat limited, giving them more room to wait out the ongoing soft patch.  While I am in no way a housing bull; the outlook for homebuilders could be worse, and the group will likely continue to trade range bound until a clearly employment picture develops.  To monitor this I will be watching weekly jobless claims and housing starts over the months ahead. 


Source: Bloomberg

The next shoe to fall will be May’s pending home sales, released on July 1st, which measures contract signings for existing home sales during the month.  I expect the decline in pending home sales will likely be at a smaller magnitude than we saw in today’s new home sales release partially due to no shortage in existing homes and much large monthly sales volumes.  Since the onset of the housing crisis buyers have generally preferred existing homes as they provide better value per dollar compared to their new home counterpart; one could compare it to buying a used car vs. new.   


Risk Makes a Comeback

June 14th, 2010 Michael McDonough Comments off

Investors are feeling more at ease with the uncertainty facing global market.  The AUD/JPY exchange rate—a popular FX carry trade and risk metric—has moved off of its recent lows of less than 74 to a level of 79.4.  At the same time, 3M LIBOR halted its climb, and has remained fairly steady around 0.54%, albeit still more than double early March levels.  Investors growing appetite for risk partially stems from a successful Spanish three year government bond auction last week, which received a surprisingly strong bid to cover of 2.1, while still yielding an elevated 3.3%–compared to less than 2% for bonds of a similar duration in March.  Spain is scheduled to reopen EUR3.5bn of 10Y and 30Y bonds on June 17th.  With a relatively quiet week on the data front—barring the auctions in Spain and a European summit on Thursday—traders will likely continue adding on risk, pushing European spreads down; US Treasury yields up, all boding well for growth correlated assets, including equities.   

Source: Bloomberg

Categories: Europe, US Tags: , , , ,

Building Material Sales Add Volatility to Retail Sales

June 11th, 2010 Michael McDonough Comments off

Unusual volatility in the sale of building materials has exaggerated retail sales over the past three months.  While this doesn’t change the prevailing trend, sales in both April and March would have appeared far less optimistic than reported.   Building material sales climbed 8.0% in both March and April-a pace not seen since March 2004-plummting -9.3% in May.  In April the surge in building material sales, despite broad-based weakness in most other retail components permitted retail sales index excluding automobiles andgasoline to rise 0.6%. However, as you can see from the attached chart, if you excluded building materials from the index retail sales ex-autos and gas in Aprilwould have fell -0.2%, compared to the reported 0.6% rise.  Using the same parameterssales in May, sales would have risen an anemic 0.1% (still better than the -0.5% decline reported in today’s release).   Reducing the recent volatility caused by building material sales, the trend still points toward a lackluster summer selling season without significant, albeit unlikely, improvements to household balance sheets.

Source: Bloomberg