Archive for July, 2009

2Q09 Advanced GDP Better Than Estimates on Government Expenditures

July 31st, 2009 Michael McDonough Comments off

The 2Q09 advanced GDP estimate came in at an annual rate of -1.0%, or better than analysts most recent estimates.  This reading is much improved compared to last quarter’s -6.5% reading.  However, looking behind the headline, a big jump in government expenditures offset what was a substantial decline in personal consumption, which contributed -0.9% to this quarter’s advanced GDP estimate.  Weakness in the labor market is most likely the leading factor behind the decline in consumer spending. Therefore, the US economy is likely to continue improving, but at a moderate pace, until we see a significant recovery in the employment situation.  Initial claims data, which is a good forward looking indicator for payrolls, has begun to improve, but remains at levels indicative of continued weakness for the unemployment rate.

Contributions to the Change in 2Q09 GDP:

GDP -1.0
Personal Consumption Expenditure -0.9
Gross Private Domestic Investment -2.6
Net Exports of Goods & Services 1.4
Government Consumption & Expenditures 1.1
Categories: Data Release, GDP, US Tags:

Claims Continue to Rise, Due to Erroneous Adjustment Factors

July 30th, 2009 Michael McDonough Comments off

Initial Claims rose 25K to 584K, as the index continues to adjust for erroneous seasonal adjustment factors stemming from early auto plant closures.  The good news these askew effects have by now likely all been washed out, so we should once again be able to rely on claims as a reliable indicator.  On that note, this week’s claim number is still far below the 4wk moving average–from before the incorrect seasonal adjustments–, which in my view shows there has been some improvement in the initial claims data.  But, given the still elevated numbers it will continue to have an adverse effect on payroll data.  Finally, continuing claims declined for the third consecutive week reaching 6.197mn.

As an aside, I recently found a chart in US Today, which highlighted the anticipated GM plant closures along with the total number of employees effected (see below).  To that I added each states unemployment rate.  It was no surprise to find that most of the plants effected are located in states, which have unemployment rates well above the national average.  These economies will likely remain depressed for sometime and will continue to be impacted by the downturn in the auto sector.

(Source USA Today & BLS)
City Plant status Population GM workforce Unemploy. Rate
Pontiac, MI Closing by October (assembly) 66,095 1,470 15.2%
Spring Hill, TN On standby (assembly) 26,230 2,671 10.8%
Wilmington, DE Closing by end of July (assembly) 72,592 1,060 8.4%
Grand Rapids, MI Closed (stamping) 193,396 912 15.2%
Indianapolis , IN Closing by Dec. 2011 (stamping) 808,466 762 10.7%
Ontario, OH Closing by June 2010 (stamping) 5,200 860 11.1%
Livonia, MI Closing by June 2010 (engine) 91,220 118 15.2%
Flint, MI Closing by Dec. 2010 (components) 112,900 646 15.2%
Ypsilanti, MI Closing by Dec. 2010 (powertrain) 21,464 1,364 15.2%
Parma, OH Closing by Dec. 2010 (components) 77,947 1,026 11.1%
Fredericksburg, VA Closing by Dec. 2010 (components) 22,818 81 7.2%
Massena, NY Closed in May (castings) 10,539 35 8.7%
National 1,508,867 11,005 9.5%

Oil Prices Likely to Recede by Year’s End

July 29th, 2009 Michael McDonough Comments off

Oil prices are likely to continue facing downward pressure as the year progresses, stemming from an oversupply amid weak demand.  The downward pressure placed on oil prices will probably be exacerbated later this year due to seasonal factors, which include the end of the summer driving season.

First off, I would like to point out that despite a significant decrease in demand for oil products US crude oil production has actually continued to rise (see chart).

Oil pro vs conSource: EIA

This probably implies that the excess supply is being stored in inventories, which in fact have been rising quite substantially (see chart).

InventoriesSource: EIA

Now here is what’s interesting, despite falling energy demand and growing supply, WTI prices have begun to experience a resurgence over the past several months (see chart).

WTISource: EIA

What does this mean?  It is my belief that oil prices are being bolstered partially by speculators, refiners’ overly optimistic purchases of crude oil stemming from what is typically higher seasonal demand associated with the summer driving season, and a weaker dollar.  But, a weakened labor market has subdued consumers’ willingness to spend, forcing consumers to rethink travel plans, and reduce gas expenditures. Thereby, putting us in the awkward position where we have a growing oil supply, without any offsetting increments in demand. Yet, oil prices have begun to rise.

It is hard for me to make a bullish case for oil in the near-term given the current environment, so I won’t.  Today’s crude inventory levels helped to support this view, it showed a significant and unexpected rise in US crude oil inventory levels and a decline in demand for gas. As the summer driving season winds down, bringing with it even further pullbacks in gasoline purchases,  refiners will likely trim down crude oil procurement.  This should effectively remove an important pillar of support for WTI prices at their current levels.  At the same time, this will likely chase a number of speculators away from the market.

Upside risks to this forecast would include a strong and sudden demand increment by US consumers, or a sudden drop in relatively sticky supply.  Of course capacity and other global factors could come into play for this analysis, but we will save that for another article.


Durable Goods Fall 2.5% in June, But There’s Better News in the Details

July 29th, 2009 Michael McDonough Comments off

June’s Durable goods orders were down 2.5%, the biggest drop in 5 months, on the back of weak demand for transportation and communication equipment. The Bloomberg consensus forecast stood at -0.6%. Making matters worse, May’s number was revised down to 1.3% from 1.8%.  There was some good news in the details at least; Durable good ex-transport products was actually up 1.1% in the month, and orders excluding transport and defense good was actually up 1.4% (vs 4.3% in May), well above the consensus forecast of 0.2%. Durable goods orders ex-tranps and defense goods tends to be a good forward looking indicator toward business spending.  Given this information the headline drop may seem more pessimistic than the actual data.  But, nevertheless still bad. Futures were trading down sharply on the news.

Durable Good Orders (y/y)

Durable Goods Orders
Source: US Census Bureau

California Budget Furloughs Put Into Perspective

July 28th, 2009 Michael McDonough Comments off

As a quick exercise I wanted to put into perspective the magnitude of California’s requirement for state employees to take three days of furlough a month.  The average state employee in California earns US$65,000 per year.  This program will impact roughly 210,000 of the states 359,000 employees.  This means over the course of one year these employees will each lose out on 36 days of pay, equating to roughly US$9,000/year or about 14% of total income.  Therefore, the estimated burden shared by these 210,000 employees will be roughly US$1.8bn, or more than the GDP of a small country like Belize.  I am slightly amazed when I think that these employees not working 36 days out of the year could exceed the GDP of a nearby country, albeit a small one.  This will of course have some adverse effects on the CA economy in terms of consumer spending and sentiment, but will be far outweighed by the state’s already dreary employment trend leading to an unemployment rate of 11.6%, coupled with a national malaise on consumer spending.


Consumer Confidence Comes in Below Expectations

July 28th, 2009 Michael McDonough Comments off

The Conference Board’s Consumer Confidence index fell to 46.6 in July from 49.3.  The Present Condition Index fell to 23.4 from an initial reading of 25.0, while the Expectations Index fell to 62.0 compared to an initial reading of 65.5. Weakness in the labor market was likely the primary driver behind these declines.  This is the second consecutive month of declines for the index.

Lynn Franco, Director of The Conference Board Consumer Research Center: said, “Consumer confidence, which had rebounded strongly in late spring, has faded in the last two months. The decline in the Present Situation Index was caused primarily by a worsening job market, as the percent of consumers claiming jobs are hard to get rose sharply. The decline in the Expectations Index was more the result of an increase in the proportion of consumers expecting no change in business and labor market conditions, as opposed to an increase in the percent of consumers expecting conditions to deteriorate further. However, more consumers are pessimistic about their income expectations, which does not bode well for spending in the months ahead.”


Case Shiller Shows First M/M Gain Since 2006

July 28th, 2009 Michael McDonough Comments off

The S&P Case Shiller Index rose 0.5% in May, the index’s first monthly gain in three years.  But, the index is still down by 17.1% on a year over year basis.  14 of the 20 cities in the index experienced gains with Cleveland leading the pack with an increment of 4.1%, followed by Dallas with a 1.9% rise.  Las Vegas and Phoenix have remain the weakest cities with year over year declines of 32% and 34%, respectively.  Despite the yearly declines, May’s uptick versus April is yet another indication that the housing market has bottomed, and may soon begin a recovery.   A weak labor market and high levels of foreclosures continue to act as housings biggest risk.  But, these are currently being offset by tax incentvies, attractive mortgage rates, and relatively low home values.


Unusual Rally in DryShips (DRYS)

July 27th, 2009 Michael McDonough Comments off

I noticed an unusual rally in DryShips (DRYS) today, which closed up an astonishing 13.6%.  At first I attributed this advance to positive sentiment stemming from better than anticipated new home sales, coupled with speculation over the company’s earnings data and a higher BDI, but after looking at the performance of the rest of the sector, which was good, but not stellar, I began to wonder.

After a couple minutes of investigation I came across an article on Reuters titled  PREVIEW-Drybulk earnings to be mostly in line with expectations, in which Oppenheimer’s shipping analyst Scott Burk stated he believes DryShips (DRYS) and Excel Maritime (EXM) have the highest potential to exceed earnings estimates given the companies’ exposures to spot shipping rates. DRYS is now up 17.0% on a weekly basis. He also indicated that Diana Shipping would be the least likely to beat expectations.

Of course reaction to this piece probably led to its fair share of short covering and speculation toward Friday’s earnings release, but I at least feel confident that I found the catalyst for today’s move.  Given the motivation behind today’s rally it is unclear whether we can expect to see continued buying in DRYS tomorrow in advance of this week’s earning release.

Dry Bulk Shipping
Index 1D% 1W% 1M% 1Y% Weighting
DBSI 7.5% 10.6% 19.9% -55.6%
DSX 2.6% 2.8% 8.5% -47.1% 20%
DRYS 13.6% 17.0% 19.2% -90.3% 32%
EGLE 5.3% 16.4% 29.8% -78.1% 5%
EXM 5.2% 6.1% 39.2% -72.5% 8%
GNK 2.6% 7.6% 16.4% -57.8% 14%
NM 7.1% 4.3% 12.5% -47.2% 8%
PRGN 4.7% 3.2% 18.7% -70.6% 2%
SB 3.6% 7.9% 20.3% -55.3% 8%
SBLK 10.5% 9.9% 4.6% -59.4% 4%

New Home Sales Rise 11%, Crushing Market Expectations

July 27th, 2009 Michael McDonough Comments off

New Home Sales rose by 11.0% in June, realizing an annual rate of sales of 384,000 units versus last month’s revised pace of 346,000.  This was the index’s largest gain in eight years. New home sales increased in every region, excluding the south.  The supply of new homes in June fell to 8.8 from 10.2 in May.  The median price for homes declined 5.8% to US$206,200 from US$221,600 in May.  This data coupled with positive surprises in other housing indicators, including starts and existing home sales, are indicative of a bottom in the housing sector.  Attractive mortgage rates, low home values, and tax incentives have been helping to bolster the sector, while weakness in the labor market and foreclosures continue acting as the sector’s strongest headwinds.


Economics Week Ahead: GDP & Earnings Steal the Show

July 25th, 2009 Michael McDonough Comments off

We have a rather tumultuous week in terms of economic data, which will focus on the US housing sector, consumer confidence, durable goods, and US GDP. The week kicks off Monday morning with the US Census Bureau reporting June’s new home sales. Recent housing data has been indicative of a bottom for the sector, so it will be important to see whether new home sales data confirms this trend. Mid-week the market will focus on June’s durable goods, with investors looking for any signs of a potential turnaround in industrial production, which experienced a 13.6%yoy decline in June. The week’s main economic event will take place on Friday with the Commerce Department’s release of the advanced 2Q09 GDP estimates. They will also be releasing changes to the benchmark methodology, which could cause some revisions to past data. But again, this week’s earnings calendar will overshadow most of the week’s economic news. Big names reporting this week include Chevron, Walt Disney, Travelers, Verizon, Viacom, Exxon Mobile, Amgen, Norfolk Southern, Genco Shipping, DryShips, Visa, and International Paper. There will also be a record US$115bn long-dated Treasury auction occurring this week, which coupled with better than anticipated earnings has put some downward pressure on Treasury prices.

Monday July 27th:

10:00AM: New Home Sales (Risk: Upward, Market Reaction: Significant): Attractive mortgage rates combined with tax incentives and relatively low home prices should place some upward pressure on this release, but sustained weakness in the labor market will prevent this index from realizing its full potential. The current Bloomberg consensus for new home sales is 350K, compared to last month’s reading of 342K.

Tuesday July 28th:

7:45AM: ICSC-Goldman Store Sales (Risk: Negative, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales. Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure. Last week’s number indicated a 0.5% gain in store sales over the previous week.

10:00AM: S&P Case Shiller Home Price Index (Risk: Neutral, Market Moderate: xx): The S&P Case Shiller HPI is reported monthly, but on a two month lag. Last month’s report showed the rate at which home prices were declining began diminish, with some major cities even experiencing modest gains. I anticipate this month’s release will reaffirm that trend. But, we would still need to see significant improvements in those regions, which were the hardest hit by the drop in prices, before we can see a strong overall recovery.

10:00AM: Consumer Confidence (Risk: Downside, Market Reaction: Significant): Weakness in the labor market could adversely impact consumer confidence, overshadowing the recent spike in equity prices. Supporting this is the fact that last week’s Reuters/UofM Consumer Sentiment Index fell to 66 in July from 70.8 a month prior. It will also be important to monitor changes in the expectations index, which has remained elevated, and could help buffer any negative surprises in the current conditions index. The current Bloomberg consensus forecast for July’s consumer confidence reading is 50.0, versus an outcome last month of 49.3.

10:00AM: Janet Yellen, San Francisco Federal Reserve Bank President, speaks on the economic outlook to the Idaho/Oregon Bankers Association.

Wednesday July 29th:

7:00AM: MBA Purchase Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index. Last week the purchase index rose 1.3%; while the refinance index increased by 4.0% on rising, but still relatively low mortgage rates.

8:30AM: Durable Goods Orders (Risk: Downside, Market Reaction: Significant): This index could face some negative pressure this month as June’s ISM, Philly Fed, NY Fed indices all indicated contractions in new orders. The current Bloomberg consensus forecast is a month over month change of -0.5%, compared to last month’s reading of 1.8%. In May this index was down roughly 26%y/y.

8:30AM: William Dudley, New York Federal Reserve Bank President speaks to the Association for a Better New York on factors driving U.S. growth and inflation.

10:30AM: EIA Petroleum Status Report (Risk: Neutral, Market Reaction: Moderate): This report indicates domestic petroleum inventories, which could have a significant impact on the energy sector.

2:00PM: Fed Beige Book (Risk: Neutral, Market Reaction: Marginal): This report, which is released two weeks before FOMC meetings, outlines economic conditions across the Fed’s 12 districts. Indications of a return to growth for any of the fed’s districts could produce some positive headlines.

Thursday July 30th:

8:30AM: Jobless Claims (Risk: Downside, Market Reaction: Significant): As expected, initial claims experienced a significant uptick last week to 554K from 522K, after two solid weeks of declines. This increase will likely be continued this week as erroneous seasonal adjustments from early auto plant closures continue to correct themselves. Nevertheless, barring recent data, I due anticipate we will see a modest recovery in claims data over the coming months.

10:00AM: EIA Natural Gas Report (Risk: Neutral, Market Reaction: Moderate): This report highlights domestic natural gas inventories, which could have a significant impact on the energy sector.

4:30PM: Fed Balance Sheet & Money Supply (Risk: Neutral, Market Reaction: Marginal): Since the Fed’s shift to quantitative easing, the balance sheet has become one method to measure to the Fed’s effectiveness. The market will pay close attention to the reserve bank credit component, which measures factors supplying providing reserves into the banking system. Last week the Fed’s balance sheet decreased to US$2.024trn from US$2.057trn. The fed’s balance sheet has slowly been shifting away from emergency lending facilities to Treasuries, agency debt and mortgage-backed securities to help bring down interest rates.

Friday July 31st:

8:30AM: GDP (Risk: Neutral, Market Reaction: Significant): This will be the key release for the week as investors continue trying to gauge the longevity of the current recession. The current Bloomberg consensus forecast for Real GDP (Q/Q) SAAR is -0.7%, compared to a prior reading of -5.5%. Additionally, the Commerce Department will be releasing their benchmark revisions, which could cause some revisions to past data. In the eyes of the market, this release will likely support the view that there is light at the end of the tunnel. But, make no mistake about it, we are still in the midst of a prolonged recession, which though easing likely won’t abate over the next several months. This data will also reaffirm the Central Bank’s current accommodative policy stance.

8:30AM: Employment Cost Index (Risk: Downside, Market Reaction: Marginal): The current Bloomberg consensus forecast for the ECI is a quarter over quarter change of 0.3%, compared to a first quarter reading of 0.3%. Interestingly, last quarter’s growth rate was the lowest in the 27 year history of this index. Weakness in the labor market combined with cost cutting, affecting benefits, could place some additional downward pressure on this index.

9:45AM: Chicago PMI (Risk: Neutral, Market Reaction: Moderate): The current Bloomberg consensus forecast for the Chicago PMI Business Barometer Index is 44, versus June’s reading of 39.9. Any reading below 50 indicates a contraction. This index includes both manufacturing and non-manufacturing companies. It will be important to monitor the new orders, employment, and prices paid indices, all of which are currently well below the breakeven of 50.

3:00PM: Farm Prices (Risk: Neutral, Market Reaction: Marginal): Given the relationship between farm prices and food prices, this index could have implications on future headline CPI and PPI.

Enjoy the weekend!