Yves Smith looks at the problem of how to handle the prospect of the financially weaker members of the European Union possibly defaulting. neither the PIIGS nor their colleague states want to take the steps they may need to take. Markets however are sending a clear message, “Do Something!” The risk goes beyond the direct damage from the potential losses from holding these countries debts. European banks are already shaky, with shaky assets and still a lot more leverage than is safe. I believe Europe’s bear market is likely back on.

European banks are shaky? How provincial of me not to mention our own banks. The coming wave of defaults in the Alt-A and Prime mortgage space are not getting enough attention, Yves helps out there as well. Not only are the losses coming (pretending loans are good only works until they actually default) but the banks are in for some serious lawsuits from all kinds of parties that bought the toxic loans. First in line are Freddie and Fannie. They will still lose at least 400 billion, but they’ll take a good chunk out of the banks hide on the way down.

the phrase “credit specialists at Citi” is not exactly the kind of thing which instills enormous confidence in analysts and investors these days

I think that is an understatement. They want to sell another fancy derivative designed to remove all risk if there is a systemic crisis when, of course, those supposed to pay up will certainly have the money to do so….Right?

Please imagine me banging my head against the keyboard. And no, the response of the Citi Spokesman doesn’t make me feel any different, in fact, it makes me feel worse.

The term liquidity is the pixie dust the financial commentariat uses to obscure what is really going on. I maintain, and have throughout the last few years, that our difficulties have not been a liquidity crisis (though many who had no business exposing themselves individually to liquidity drying up for them certain had a liquidity crisis) but a solvency crisis. David Merkel points out that liquidity always exists, it just goes where the marginal credit buyer  has gone. Where insolvency risk seems to be increasing, the marginal buyer can become very scarce and will provide it to areas seemingly exposed to less risk. At the end of the day it is solvency that is our problem, and until we solve that liquidity will go to those perceived to be least at risk. Right now that is the government and those they are backing.   Hence a credit crunch for much of the economy.

Speaking of credit, consumer credit has now declined for 11 straight months. A record, and by a long shot. (Click image for a larger version.)

In the “no big surprise department,” and paralleling the argument I made at the time, it has now been shown that the ban on short selling during the crisis did not help support prices and damaged stock market liquidity. In the no surprise at all department the biggest complainers turned out to have fundamental problems that short sellers were pointing out accurately (much better than our regulators.) The loudest complainer of all, Overstock.com and their bizarre CEO, Patrick Byrne. The upshot, they have been cooking their books for years, just like the short sellers were claiming.

Cross posted at The View from the Bluff

Technorati Tags Citibank, derivatives, Economics, Employment, finance, short selling

Click Image for Animation

Technorati Tags Economic Indicators, unemployment

Employment as measured by the “establishment survey,” was down by 190,000; and Many feel it is an improvement that we are not falling as fast.

Well, let us take a moment to look under the hood of these numbers. First, while the establishment survey was down 190k, the number of unemployed soared by 558,000, to 15.7 million, as measured by the household survey. The establishment survey is taken from large businesses while the household survey calls individual households. It is the household survey that sets the unemployment rate. The establishment survey of companies doesn’t count the self-employed and undercounts employees of small businesses. So the economic picture is probably worse than the headlines when it comes to jobs.

Let’s look at the establishment survey. The actual change in unemployment for October was 641,000, not 190,000 which is seasonally adjusted. The so-called birth-death ratio added 86,000. Who knows if that is a reasonable statistical adjustment. While we should adjust the number seasonally, in the real world the jobs were still lost.

The total (U-6) employment rate has climbed to a record high of 17.5%. This is complied by adding in those employed part time for economic reasons. Total job losses since the onset of the recession now are approximately 10.5 million.

From John Mauldin we get this report from Greg Weldon (www.weldononline.com). Greg points out one of the issues with just looking at unemployment, because if you have not looked for a job in four weeks they no longer count you as unemployed:

Moreover, when we combine the monthly change in the number of Unemployed, with the number Not in the Labor Force, we might consider the result to be a proxy for the actual ‘change’ in the underlying labor market situation … in which case, October’s figure of 817,000 represents the fourth LARGEST yet, behind last month’s (September’s) second largest figure of 1,021,000 … for a two-month combined figure of 1.838 million, in newly Unemployed, or no longer ‘in’ the Labor Force …

… the second LARGEST two-month total EVER posted, barely trailing the December-08/January-09 total 1.955 million.

Bottom line … basis this measure AND the ‘Total Unemployment Rate,’ we could conclude that not only is there NO ‘improvement’ in the labor market, but moreover, that it continues to DETERIORATE, intently.

Of course, unemployment is typically a lagging indicator, but not always. In a “balance sheet” recession where home price declines, rising defaults (yes they are still rising) credit losses, a wave of foreclosures as large or larger than the subprime tsunami and deleveraging are in motion, unemployment rising at the rate we are seeing now is likely to be a significant drag for years to come.

Looking back at 1982, which so many people told us was far worse than today could ever be, we see households dealing with similar “levels” of unemployment with more than three times the debt load and half the savings. Workers are finding it takes longer to find work than in 1982. The count of people jobless for six months or longer stands at a record 5.6 million.

There was a bright spot, though it is so early we might see it revised down or a statistical aberration. Temporary employment grew by 33,700 jobs, its third straight month of gains after steep losses earlier this year. Typically employers add temporary workers before hiring permanent ones.

The even uglier fact. Average hours worked still stands at 33, a record low. Two important things to be gleaned form that number:

1. The unemployment number is much lower than it otherwise would be because workers hours have been cut rather than jobs lost.
2. Hiring is likely to be slower than normal as early on we will see hours worked rise rather than bring in new employees.

So how are companies beating their estimates amidst all this gloom? First off, they always beat their estimates. They are not beating the estimates of a year ago, or six months ago, or even three months ago. They are beating the estimates which keep getting chopped almost until they are reported. The estimates six months out from now are unlikely to be met, but by then they will be reduced yet again.

Still, profits are better than many expected six months ago, even if they are worse than the analysts estimates from then as well. Why? John Forsyth gives us the skinny:

The genius of American business for doing more with less has been evident in the parade of earnings reports showing profits improving far more than the revenue that produces them. The secret: Productivity soared at a 9.5% annual rate in the third quarter, a stunning increase that was nearly half again as much as economists had projected. Business cut labor costs at a 5.2% annual rate, with total hours falling at a 5% pace. Fewer workers worked fewer hours.

That is a recipe for deflation and slow growth if it doesn’t reverse. Profits can only be improved by cost cutting for so long, and the carnage amongst workers is made even worse.

Charts are courtesy of Barry Ritholtz. Also posted at The View From the Bluff.

Posted via email from Risk and Return’s Posterous

Technorati Tags economy, Employment, investing

Here is part I:

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Technorati Tags credit crisis, deflation, Economic Indicators, Economics, housing, Housing Market, Inflation, investing, markets, monetary policy, Risk, subprime

Click for larger version of charts.

Technorati Tags economy, Employment, New York Times

“We have counted $45 billion in construction projects in the area, by far a record number for the region,” Scott says. While other parts of the country struggle economically, the Capital Region is experiencing growth in part from its expanding petrochemical industry.

The film industry is also growing.

The recently released Louisiana Economic Outlook highlights:

• Overall, Louisiana should gain 37,200 jobs in 2008, a 1.9 percent growth rate, and a similar growth in 2009, the report said. It also predicts Baton Rouge will add 14,800 jobs in 2008 and 2009. Even though it is a 2 percent growth rate, it is not as heady as the roughly 20,000 jobs Baton Rouge added within 18 months of Hurricane Katrina.

• Population shifts in Louisiana will continue to aggravate labor shortages, with incentives emerging to keep older workers in the work force and more outsourcing and immigration encouraged. Shortages will be worst in the construction field.
• New Orleans will continue to add jobs at a rate of about 1,000 a month, a growth rate of about 2.4 percent, and the city’s economy will be buoyed by about $16 billion in planned projects.
• Lafayette will leverage an expanding energy economy and hospital and retail growth to create 6,300 new jobs over the next two years, making it one of the state’s hottest metro areas.
• Shreveport/Bossier City should gain 5,800 jobs during the two-year cycle, but a decision to make Barksdale Air Force Base the permanent home for the military’s cyberspace command could make the forecast “wildly too pessimistic” the Outlook authors said.
• Lake Charles is fully recovered, from a job standpoint, from the effects of Hurricane Rita, and will gain 2,800 jobs during the next two years. A $1.4 billion synthetic gas manufacturing plant could become the city’s largest single capital investment.
• High energy prices and shipbuilding activity also will boost Houma, where an expected 5,200 jobs will be created in 2008 and 2009. Oil prices will vary from $58 to $72 a barrel, the report predicts, though recent prices have spiked to the upper $80s.
• More modest growth is forecast in Alexandria (700 to 1,000 new jobs per year) and in Monroe (about 650 new jobs a year).
• Job growth of about 1.8 percent is predicted in the 35 or so mostly rural parishes, though growth will be stronger in St. Mary (energy, fabrication and casino growth); Tangipahoa (retail and service growth spillover from New Orleans) and Vernon (prospects for a potential 4,000-person brigade to be added to Fort Polk).

For a full summary, please click here (pdf).

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Technorati Tags Baton Rouge, business, Economics, economy, Employment, industry, jobs, Louisiana

Trying to get defensive? The Wall Street Journal notices some of the same things we have been talking about that make it difficult, while the New York Times picks up on another theme of ours, the relative attractiveness of growth stocks. I take issue with these statements:

defensive-minded value stocks

growth stocks, which are riskier and throw off less dividend income than value shares?

Value stocks are not necessarily less risky, nor a better value. Value investing may be less risky, value stocks however may or may not be a value. By most measures value stocks have never been so highly valued, especially relative to growth stocks. Nor can it be said value stocks are less volatile. Some are, some are not. I am a value investor, but growth stocks, especially high quality (low debt; high, stable profit margins) look like more of a value to me. The rest of the article supports that contention despite these clichés.

Barry Ritholtz looks at the markets and sees parallels with the “Five Stages of Grief.” I think he probably has that about right. He also points us to this interesting graphic on volatility (click on the image for a larger version.)

Source:
http://www.nytimes.com/imagepages/2008/01/05/business/20080106_soapbox_graphic.html

In looking this over one sees that despite the increase in volatility last year, it seemed much more volatile than it was because we were at historically low levels. I am a glass half empty guy on this. I think we will see volatility increase even more.

At Abnormal Returns the question is asked, how did you do last year?

If you can’t conduct this exercise, what are you doing? Surfing the investment blogosphere for stock tips or economic forecasts? Those will in all likelihood not make you a better investor in the coming year. Knowing how your mutual funds, ETFs, investment advisors, or your own individual stock picks did against a reasonable benchmark should tell you a great deal about your investment process.

Frankly, few people I meet have any idea how they did last year. Statements do not provide time weighted rates of return, and most investors I meet think they did better than they really did. James Picerno makes the point:

While such a goal [superior risk-adjusted returns] isn’t impossible, it’s devilishly difficult to achieve for the long run. Ironically, most investors probably have no clue just how difficult the task. Why? Because one can only recognize the depth of the challenge by routinely analyzing a living, breathing portfolio over the course of time. Daily analysis is ideal, although weekly or even monthly data will suffice over long periods. In any case, unless you’re crunching the numbers regularly, and comparing your results to a benchmark, it’s easy to overlook just how elusive successful investment strategy can be.

We make few changes in our portfolios once we set things in motion each year, but I dig into the details on a daily basis, and we discuss it at our weekly Investment Committee meeting in detail. The details of how and why performance is achieved are crucial in the decision about what comes next, and whether ones strategy is really properly aligned, or whether active risk management is really what one should be doing at all.

An area we will be discussing with great vigor at our yearly investment conference is the direction of the dollar. One of our more profitable themes has been the decline of the dollar. The New York Times finds many people have decided that theme may have run its course. I look forward to our own debate on this.

To finish up let us look at some suggested blog world reading. Steven at Value Blog Review lists his favorite investment blogs for the year, some of my favorites are included. The same goes for Steve Waldman’s list.

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Technorati Tags Dollar, Economics, exchange rate, finance, growth stocks, investing, returns, Risk, today's links, value stocks, volatility