Miller Tabak’s Peter Boockvar notes that “the Govt stimulus package has a depreciation tax credit that expires by year end — so companies have to now use it or lose it. That could have had an impact on order rates but we need more than one month’s data to see by how much.”

The housing data is still discouraging:

US Quarterly Foreclosures by Quarter

chart courtesy of RealtyTrac

The pain, though still concentrated is spreading across the country:

“Forty-eight of 50 states and 95 out of the nation’s 100 largest metro areas experienced year-over-year increases in foreclosure activity in the second quarter,” said RealtyTrac CEO James J. Saccacio in the press release announcing the Q2 report.

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Technorati Tags Durable goods, housing, Latest data

Technorati Tags consumer spending, Economic Indicators, Energy, Inflation, the economy

That is a pretty stunning collapse. Few things correlate with economic activity more than freight, and for rather obvious reasons.

While I have been very negative on the economy shorter term for some time, I will say I doubt this will be a particularly deep recession. On the other hand, I also expect it to be rather drawn out. Obviously I could easily be wrong on both counts.

I will repeat what I have said over and over, in a probabilistic world we cannot know the future, but we can say that the risks are rather high and we should all consider lowering the amount of risk we face. That means more cash in our savings accounts, more defense in your portfolios (if you are going to take risk, make it risk that doesn’t correlate with US financial markets) and reducing debt.

With both financial markets and housing prices I would be wary. Your situation may differ, but I keep hearing people say things must be attractive at this point. Housing is a much better deal than it was, etc.

That is exactly right, but I suspect that this also likely holds true. It is approximately 4 1/2 hours from Baton Rouge to Shreveport. Alexandria lies halfway between. When my children ask me how far we still have to go, while I undoubtedly have far less distance to go than when I started, I still have just as far to drive as I have already driven.

In many areas of the financial markets and housing things may be less expensive than they were, but they are still way too expensive and there is a lot more bad news coming down the pike.

Technorati Tags economy, freight, investing, markets

A robber in a ski mask blamed the bank for what he was about to do, The Associated Press reported Feb. 22.

“You took my house, now I’m going to take your money!” the assailant hollered. Talk about a reverse mortgage!

The FBI plans to review the bank’s foreclosure records for clues.

The suspect is presumed to be ARM’ed and dangerous.

The New York Times reports that bailing out homeowners is becoming increasingly talked about. This graphic explains why:

Alan Blinder wants the Feds to enter the mortgage business as they did in the great depression. Hat tip: Greg Mankiw

Edmund Andrews worries that Mortgage bailouts could create moral hazard issues. Uh, you think?

Tanta is pretty unimpressed, though she does give us some thoughts on the issues around making mortgage securitization less of a disaster than it has been this time around.

Dean Baker points out that plans to buy up the mortgages does carry some risk. Throw in his lack of conviction that raising the ceilings for the mortgages that Fannie Mae and Freddie Mac can purchase in areas with high-priced homes will help.

This post on worries about the credit worthiness of Fannie and Freddie shows the markets are pretty unsure about them as well.

Mark Thoma gives his thoughts here and here.

Yves Smith has the most realistic reaction to all these proposals for solving these issues. They probably will not work, expose us to moral hazard, and would be far more expensive than Alan Blinder believes. Many of the solutions look at this as a temporary problem of credit markets and people who couldn’t afford their homes. That is true, but more fundamentally homes need to come down in price. Plans that assume the need to stabilize home prices, or help out borrowers who are over extended, are building in failure. Prices will likely not stabilize, and probably shouldn’t. James Hamilton seems to agree as well:

To the extent that analysis is correct, a “pause” in the foreclosure process will be helpful only if house prices are finished falling. But house prices decline sluggishly in response to market pressure, given the unwillingness of many sellers to acknowledge the magnitude of their capital loss. Even if the number of homes sold were to rebound tomorrow, there would remain a large inventory of unsold homes that will continue to push prices down.

Calculated Risk looks at the merits of the various home price indexes. James Hamilton weighs in on the topic as well.

The National Association of Home Builders remains cautious about the market going forward despite a slight up tick in activity. The fact that permits fell, starts were flat, and for single families at the lowest level since 1991 might have something to do with it (pdf.).

As abandoned homes pile up neighbors in Minneapolis are being urged to “adopt” their neighbors homes .

Barry Ritholtz lets us know about Rotten Neighbor.com .

Some believe this whole mess is part of a fundamental shift in the American landscape, with cites doing better, suburbia declining and taking on some of the characteristics of decaying inner cities. Extreme, but some of it has a ring of truth as urban living becomes more desirable and desired.

But we could be Britain!

Britain’s housing market is a “house of cards” that is set to implode after years of reckless mortgage lending, chronic oversupply of new flats and widespread fraud, a leading analyst said yesterday. (The Times) (via Barry Ritholtz )

Now for a Little discussion of the past

One of the ongoing debates over the last few years has been the economic impact of home equity withdrawal through home equity lines of credit and loans, cash out refinances, etc. How important was it? Was it sustainable?

I think those of us who worried about it can claim that it is now fairly clear it wasn’t sustainable. So let us go down memory lane and look at what was of such concern by the end of 2005:

Notice the two previous big drops came with pretty large economic downturns. The drops worsened the downturns and the downturns worsened the drops. That seemed pretty obviously something to be concerned about, but we negative Nellie’s were told to pipe down time and again. By this Summer that trend was reversing :

The problem for the market:

One would expect to see profit margins coming under pressure, even without the mortgage meltdown. Historically a housing downturn has been bad for the economy, despite claims by some that it would be “contained” and is a small part of the overall economy. Once again, that is without the mortgage and credit market meltdown we are now experiencing:

Nevertheless people still argued that Mortgage Equity withdrawal was somehow different than other debt because it was being used on improvements. Well that economic engine has gone into reverse:

ORLANDO, Fla. – Those fancy home fix-ups touted in cable TV shows and home magazines are losing their luster with consumers.

With the shakeout in the housing market, homeowners are worried they won’t get their money back from high-dollar redos.

And lenders are less willing to finance pricey home improvements.

That has caused a decline in nationwide remodeling.

“We saw a downturn in 2007, and 2008 looks every bit as tough for the industry,” said Kermit Baker, a researcher with Harvard University’s Joint Center for Housing Studies. “After some almost record-breaking growth, the market has stalled.”

Per capita home remodeling expenses in the region that includes Texas jumped almost 50 percent between 1996 and 2006. But since then, spending for home upgrades has fallen.

In a quarterly comparison, nationwide home remodeling expenditures have fallen about 10 percent since their high in 2006.

Researchers blame the downturn in the overall housing market for dampening the desire for home redos.

“Homeowners have been scaling back on their remodeling plans as the overall market has weakened,” Mr. Baker said.

“Homeowners are concerned that they may be overimproving their homes relative to their neighborhood and prices in the market.”

Studies back up those concerns. Average returns on a home remodeling project have fallen from 82.5 percent in 2003 to 70 percent last year.

With home prices depressed in many neighborhoods, homeowners are especially worried that they won’t get the bucks back they spend on luxury features such as saunas, European cabinetry and imported tile floors.

“There are some signs that the emerging weakness may be greater at the upper end of the market,” Mr. Baker said. “We are seeing more of a return to basics.”

That means less costly improvements and standard maintenance, he said, rather than “some of the sexier kitchen and bath projects.”

Tanta goes back over the argument at length at Calculated Risk, but obviously it has not been sustained. Nor was any where near all the equity withdrawn going to improvements on homes, so we can expect declines across a range of goods and services.

Tellingly, banks and lenders now agree on that fact:

Last year, 34 percent of borrowers said they used their home equity lines to pay off other debt and 29 percent used them for home renovation, according to a survey of lenders by BenchMark Consulting International. Another 31 percent used them to pay for other things, such as medical bills, weddings or vacations.

Paying off other debt in many cases only meant freeing up the ability to run those credit accounts up again. The assumption being that home appreciation would continue so they could do it again, or just plain didn’t have any plan at all. So the banks are now freezing people’s Home Equity Lines of Credit :

Larry F. Pratt, chief executive of First Savings Mortgage in McLean, said most mortgage documents he has seen give lenders wide latitude to suspend or freeze credit lines.

“A layperson would not recognize the language because it’s not that blatant,” Pratt said. “It talks about deterioration of the value of the asset or the value of the collateral. . . . It’s not boilerplate language by any means.”

Across the nation many borrowers are upset. This will put a crimp in consumer spending moving forward.

Hat tip: as always some of this is from Abnormal Returns. Even if not, go there.

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Technorati Tags bailout, credit crisis, Economics, economy, home equity, home equity loans, housing, subprime

NYS Commissioner of Insurance has suggested splitting the Muni bond business from the rest of the insurers. FGIC seems to now think that isn’t a bad idea. Of course, since Elliot Spitzer has told them all to find sufficient capital in the next three to five days, they may have little choice.

Barry Ritholtz thinks this pretty much will lead to ending them as viable organizations:

What’s left is can best be described as a poorly run, derivative hedge fund led by people who have no business running a hedge fund of any sort, much less one of the poorly run derivative variety. But the fact that the NYS insurance commissioner is suggesting this should tell you that this has reached a level of government involvement that cannot bode well for our friends at ABK, MBIA and FGIC

Those vaunted rate cuts which Risk and Return was skeptical would be the driving force behind our economic path?

The Federal Reserve’s interest-rate cuts last month have failed to lower borrowing costs for many companies and households, increasing the chance of further reductions from the central bank.

Companies are paying more to borrow now than before the Fed reduced its benchmark rate by 1.25 percentage point over nine days in January, based on data compiled by Merrill Lynch & Co. Rates on so-called jumbo mortgages, those above $417,000, have increased in the past month, making it tougher to sell properties and risking further price declines.

Barry again:

Bill King noted a similar story on ABC News:

[Monday] night, the lead story on ABC evening news (World News) was ‘though the Fed has cut interest rates sharply in recent weeks, banks and credit card companies are hiking rates on consumers.’

Chase, Bank One and Bank of American were cited. The ABC News reporter said banks are hiking consumer interest rates and fees to cover losses on their crappy paper.

Yes, it’s that blatant and transparent.

Lovely. We get all of the wonderful inflationary effects of rate cuts — but none of the economic benefits.

Can you say “The Fed is pushing on a string?”
(Very good children. I knew you could)

True, though my own opinion is the Fed never has as much strength to push as we think they do. Way too much time is spent on what the Fed is doing. Granted, even though I know better, I do it as well.

While I keep sending you to Barry today, you might as well let him educate you on why the retail sales number that cheered some for a moment on Wall Street are actually looking pretty disastrous. Start here, finish there.

Hat tip: As always, some of this is from Abnormal Returns. Even if not, go there.

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Technorati Tags Economics, economy, Federal Reserve, Inflation, monetary policy, monoline insurers, retail sales

Click image to enlarge.

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Technorati Tags index data, Market Data

Reactions:

Barry Rithotlz- Q4 GDP: El Stinko!

• Consumption slowed to 2% from 2.8% in Q3; I suspect that only partly reflects real growth, meaning its partly inflated by price rises;

• U.S. exports continue to increase: Up 3.9% for the Q. Overseas trade added nearly half a point to Q4 GDP;

• Overall, the US economy grew 2.2% for the full year 2007 — the slowest since 2002 (1.6%)

• Inventory build, which drove the 4.9% Q3 data, was totally absent. It sliced 1.25% from GDP, after adding nearly a point in Q3.

• Inflation remains sticky: Price index for personal consumption expenditures rose by 3.9% in Q4 after a tepid 1.8% in Q3. This was the second highest PCE # since 2001

• Q4 business spending rose 7.5%. Investment in structures went 15.8% higher (which seems an awful lot to me); Equipment/software purchases rose by 3.8%.

• Biz spending decelerated in the fourth quarter from Q3’s hotter 9.3%.

Calculated Risk:

Since PCE came in at only 2.0%, clearly there was a sharp slowdown in December, and the growth from the last month of Q3 to last month of Q4 was probably negative – suggesting a recession might have started in December.

Edit: The ADP employment data is also available this morning, showing nonfarm private employment grew by 130,000 in January, and without a downward revision, those numbers are definitely not recessionary.

More on those ADP Numbers.

Bespoke delves into historical US GDP numbers.

Real Time Economics notes the weakness was highly influenced by inventory liquidation.

Manufacturers however are feeling pessimistic.

Calculated Risk breaks down the impact of non residential investment.

Dean Baker pretty much chalks up the consumer spending necessary to keep the GDP positive to spending on flat screen TV’s!

Stefan Karlsson says that trade adjusted real GDP turned negative, and thus the recession is underway.

Nouriel Roubini agrees.

The Fed Cuts!

Written before the cut was announced, Yves Smith of Naked Capitalism notes the Fed was already nearing negative real interest rates, and by some measures was already there.

James Hamilton gives us his research on when to expect the rate cuts to affect the housing and mortgage markets. Blog partner Menzie looks at how this is supposed to help and sees it as a positive, but a muted one.

Real Time Economics jumps in with several posts:

• Greenspan doesn’t think central banks have the power to prevent a recession:
  • “Global forces can now override most anything that monetary and fiscal policy can do,” he said in an interview with Germany’s Die Ziet, published today. “Central banks have increasingly lost their capacity to influence” long term interest rates, he said. He added that the solution to bank vulnerability to exotic investments is to have “far higher capital.”
• Personally I am on Greenspan’s side here. The Fed is just not as important or as powerful as people think.
• The Federal Reserve’s lone dissenter about today’s rate cut was Richard Fisher.
• Finally we have a roundup of reactions from various economists.
• Worries about those pesky inflation expectations.
  • The Federal Reserve’s aggressive rate cuts in the last 10 days are having one unpleasant side effect: they’re boosting bond investors’ concern about inflation.

Investors reacted with enthusiasm, and then promptly collapsed. Actually, yesterdays charts were really bizarre. I expected the sell-off, but the market was strangely flat, then spikes up, then down.

Barry Ritholtz thought it was odd as well. Today was a different matter. A very strong day.

Errata

Credit default insurance has gotten much more expensive.

From Abnormal Returns I am copying this mini roundup on an issue that is finally getting substantial coverage these last few weeks:

More talk about the potential demise of the monoline bond insurers. (A Dash of Insight, Big Picture, FT Alphaville, naked capitalism)

Justin Wolfers has a question:

are those who are using the R-word suggesting that the “Great Moderation” is over, or simply that we are facing an especially unusual set of adverse business conditions? Or was there never any real change in the structure of the economy, and the last couple of decades have been simply a statistical fluke?

Who doesn’t own some of this stuff?

The company wrote off $275 million in investments in the quarter, which could rise to as much as $417 million, said Rebecca Goldsmith, a spokeswoman for the New York-based drugmaker …

“Some of the underlying collateral for the auction rate securities held by the company consists of sub-prime mortgages,” the company said today in a statement. If credit and capital markets continue to deteriorate, Bristol-Myers said, it “may incur additional impairments to its investment portfolio, which could negatively affect the company’s financial condition, cash flow and reported earnings.”

Fiscal Stimulus

Jason Furman vs Steven Landsburg on fiscal stimulus.

Alex Brill tells Greg Mankiw a secret behind the numbers.

Menzie Chinn gives her take.

Hat tip: As always, some of this is from Abnormal Returns. Even if not, go there.

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Technorati Tags credit, Data, Economics, Federal Reserve, fiscal policy, GDP, housing, monoline insurers, recession, stimulus

Banks May Need $143 Billion for Insurer Downgrades: Banks that raised $72 billion to shore up capital depleted by subprime-related losses may require another $143 billion should credit rating firms downgrade bond insurers,according to analysts at Barclays Capital. Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Assurance Corp. are cut one level from AAA, and six times more for downgrades by four steps to A, Paul Fenner-Leitao wrote in a published report. (Bloomberg)

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Technorati Tags AMBAC, Barclays, bond insurers, counterpaty risk. monoline insurers, MBIA, subprime

China turned in yet another double digit year:

China’s economy grew by 11.4 per cent in 2007, the highest pace in 13 years, but the trend of decelerating exports to a slowing US recorded in the final two quarters is expected to be carried into moderating growth this year.

China’s economy has now grown at double-digit rates for five straight years, an achievement hailed by the government as a “hard won gain” of difficult policy decisions.

New York Insurance officials are pressuring banks to bail out the insurers:

Leading US banks are under pressure from New York state’s insurance regulator to provide as much as $15bn to support struggling bond insurers, people familiar with the matter said on Wednesday night.

I am not sure if that is the right move for the banks, but you have to think they are saying to themselves, “How lovely, we pay these guys to insure bonds, when they cannot pay us they want us to provide the money they need to pay us back. Just lovely.”

The Congress has passed a stimulus bill. Of course, when are the checks supposed to arrive? In June. Haven’t I spoken about the time issue before? I think I have. Yes.

Steven Dubner has a similar observation, and some support. Bruce Bartlett throws in this chart to illustrate history supports we skeptics (click image to enlarge)

Which goes to prove that recessions end and stimulus rarely appears until after they are over.

Are we in recession? Calculated Risk looks at a little covered set of data from the Philadelphia Federal Reserve Bank.

Bespoke compiles some data to help us understand how a Bear Market behaves. That is part of my next post, I have some thoughts on that as well.

I stand by the claim that as investors we should pretty much discount fiscal stimulus as a plus any time soon. Greg Mankiw doesn’t think things are bad enough for this to do much good in any case, and potentially is a long run negative.

Tyler Cowen discusses the law of unintended consequences:

Dubner and Levitt have an article in the NYTimes with three examples of the law of unintended consequences, the Americans with Disabilities Act made it more costly to hire people with disabilities and reduced their employment, ancient Jewish sabbatical law intended to help the poor has made them worse off, and the endangered species act has resulted in habitat destruction.

If it isn’t a law it is certainly a key risk factor.

Oh, and about that fraud, 7.1 Billion dollars worth by a single trader.

Which leads Barry Ritholtz to feel the Fed intervened for the wrong reasons. I lean his way on this. In fact, this kind of makes the point that he is right.

Hat tip: as always, some of this is from Abnormal Returns. Even if not, go there.

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Technorati Tags bond insurers, China, Federal Reserve, fiscal policy, fiscal stimulus, Links, recession

Of course prices have just started to decline. First you have to have sales volume decline and inventory build up:

Sales of existing homes fell in December, closing out a horrible year for housing in which sales of single-family homes plunged by the largest amount in 25 years. The median home price dropped for the entire year, the first time that has occurred in four decades.

The National Association of Realtors reported that sales of single-family homes and condominiums dropped by 2.2 percent in December to a seasonally adjusted annual rate of 4.89 million units.

For the year, sales of single-family homes were down by 13 percent, the biggest drop since a 17.7 percent plunge in 1982. The median price for a single-family home dropped 1.8 percent to $217,000.

That was the first annual price decline on records going back to 1968. Lawrence Yun, the Realtors’ chief economist, said it was likely that the country has not experienced a decline in housing prices for an entire year since the Great Depression of the 1930s.

No region escaped:

For December, sales were down in all regions of the country. Sales fell by 4.6 percent in the Northeast, 1.7 percent in the Midwest, 1 percent in the South and 2.1 percent in the West.

The inventory of unsold homes dropped by 7.4 percent, raising hopes that backlogs that had hit record levels were starting to be reduced, a key factor necessary to prompt a rebound in the market.

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Technorati Tags existing home sales, Housing Market

What does this mean for investors. Quite a number of things – none of which are particularly good over the long term:

1) Why Cut today? What was the motivation for today’s cut? Would waiting 7 days have done anything. other than allowing some of the excesses to get wrung out of the system?

2) Equity Market Dysfunction? Is it that the equity markets are not working properly? Likely not. Are rates too high? I doubt that’s the reason for any of our economic woes. Then what is it – are lowered equity prices a problem?

Globally, equity markets have been in the process of “Repricing Risk” – why is the Fed disrupting that? Further, there is now a recognition that S&P500 earnings were priced way too high – especially in the event of a European and Asian slow down. That lowered “E” in the P/E adjustment is also under way.

3) TANSTAAFL: The free lunch crowd (a/k/a Long & Wrong) has been chanting for Fed cuts. However, these are not with0out consequences, as Inflation remains a pernicious threat.

Here’s a question: What goes to $5 a gallon first – Milk or Gasoline? How about $6?

4) How Independent is the Fed? The Fed is supposed to be an independent entity, whose mission is a) price stability (inflation) and b) maximizing employment (growth).

However, today’s action reveals an apparent third obligatory goal – protecting investors and market prices. I had no idea that back-stopping speculators and hedge funds was part of their mandate…

5) Capitulation? The Market gapped 400 points, and is now climbing higher (off 300 as I type this). My second biggest concern is that the Fed merely delayed the inevitable. This market saving cut prevented a thorough, 5% wash out. In other words, all the Fed did was prevent a healthy capitulation.

6) Pushing on a String? My biggest fear is that we close down 500 points anyway. That would be the worst of all worlds: A compromised, political Fed, working on behalf of speculators, to the detriment of ordinary taxpayers, is proven to be a paper tiger. That scenario would but the “F” in Fugly.

7) Decoupling US Equities from Global Slowdown? Other markets were down much more than the US. But that makes sense, seeing as they have been a whole lot more than the US over the past 5 years . . .

Bill Gross echoes Barry and I:

“It’s a sad testament to think the Fed has to cut interest rates eight days in front of a meeting to salvage the equity markets. The U.S. economy is in a rather sad state of affairs in that it depends on housing and stock prices to keep going.”

-Bill Gross, founder and chief investment officer, Pacific Investment Management Co. (PIMCO)

Paul Desmond in the Wall Street Journal builds on the theme:

In many ways, this is what a classic bear market looks like: After a long period of exuberance, a downturn hits one part of the economy — in this case, the housing market and mortgage-backed securities. Eventually, that leads to broader losses, even for strong companies, and markets begin a prolonged grind downward. . .

The current market looks a lot like the beginning of past bear markets, such as the ones that began in 2000 and in the 1970s and 1987, said Paul Desmond, president of market-research firm Lowry’s Reports in North Palm Beach, Fla. First, the most troubled stocks decline — home builders and financial stocks in the current case — and then others gradually get hit, including small stocks, retailers, technology stocks, and foreign stocks. Finally even stocks of strong companies are affected.

What happens, Mr. Desmond says, is that trading volume and price movement get heavier and heavier for stocks that are declining, and lighter and lighter on the buying side, as more investors look for a way out. When the selling reaches a climax, the bear market is nearing an end, but Mr. Desmond says he doesn’t see any sign of a climax yet.

“We feel we have been in a bear market since July. Everything that we have seen since then has just been a progression, almost like a disease that you are monitoring and the disease is spreading,” he says. “We are still a long way from a major bottom.”

He is watching for a sign of panic selling, but says it hasn’t gotten to that point yet. “Everything we are seeing looks like a typical bear market,” he says.”

Update: Barry has two interviews with Paul:
Q&A: Paul Desmond of Lowry’s Reports
Part II — Q&A: Paul Desmond of Lowry’s Reports

Technorati Tags Barry Ritholtz, bear market, decoupling, Employment, equity markets, Federal Reserve, Inflation, interest rates, monetary policy, Paul Desmond, stocks

“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

Fortunately, the Fed has some ideas on what they should–and shouldn’t–do. Bernanke’s remarks came with a warning that any fiscal bailout “could prove quite counterproductive” if it’s not done in a timely manner or if it’s not temporary.

Brian Wingfield goes inside the fed chiefs mind:

Translation: Get to work immediately and spread out the costs over time. The price tag? Bernanke says a $100 billion package would have a “significant” impact on the economy.

Here he explains why he is dubious:

“It’s very difficult to engineer a well-timed fiscal stimulus,” says Vincent Reinhart, a former Federal Reserve economist, now a scholar with the American Enterprise Institute. The 2000 recession was resolved by a “happy accident” of circumstances, he says. President Bush ran for office on a proposal to cut taxes, which helped the economy just as it was slowing. At the same time, the Fed took an expansionary view of monetary policy, cutting interest rates to spark growth (fueling a housing boom, which is at the core of the current downturn).

It might be difficult to time such an economic rescue correctly this time around. “You’re just not sure when you start the process where you’ll end up when legislation’s involved,” says Reinhart.

I have made my own concerns known. Read them, my guess is it is pretty much the gist of what Bernanke is driving at, and probably he is managing his public perception more than expecting it to make any large difference. Either way, I don’t expect it to have any meaningful positive effect on longer term investment results. Douglas Elmendorf is skeptical as well:

One circumstance in which fiscal stimulus is an appropriate complement to monetary stimulus is when achieving full employment with higher interest rates is better than achieving full employment with lower interest rates. In particular, further cuts in short-term U.S. interest rates heighten the risk of investors deciding to flee U.S. assets. The result would be further turmoil in financial markets and a large and quick drop in the value of the dollar, which would be disruptive to the U.S. economy and foreign economies and might slow economic growth further. Moreover, any decline in the dollar puts upward pressure on inflation (beyond any inflationary pressure from the level of employment) because higher prices for imported goods act as a negative supply shock.

However, he does cite some potential positives.

Meanwhile housing starts were even worse than expected, and expectations were pretty bad to begin with:

Home construction plunged in December, tumbling to its lowest point in 16 years, while a sign of future groundbreakings also dropped sharply.

Housing starts decreased 14% to a seasonally adjusted 1.006 million annual rate, after falling 7.9% in November to 1.173 million, the Commerce Department said Thursday. Originally, Commerce reported November starts 3.7% lower at 1.187 million.

The big decline surprised Wall Street. The median forecast of economists surveyed by Dow Jones Newswires was a 5.0% drop to a 1.130 million annual rate. The level of 1.006 million was the lowest since 996,000 in May 1991.

Commercial property is not looking immune either:

The credit crunch that roared through the residential real-estate market is starting to bite commercial projects, too.

Yesterday, Ian Bruce Eichner, the developer of a twin-tower casino resort in the heart of Las Vegas, defaulted on a $760 million loan from Deutsche Bank AG after he failed to get refinancing. The default on the loan supporting the $3 billion Cosmopolitan Resort Casino is a signal of trouble for Mr. Eichner, who gained notice during an earlier real-estate downturn in the early 1990s when he lost several projects in New York City.

Merrill Lynch also did worse than the already awful expectations. My emphasis:

The company recorded a net loss of $9.83 billion, or $12.01 a share, compared with year-earlier net income of $2.3 billion, or $2.41 a share. Write-down expectations were running as high as $15 billion. The company recorded $7.9 billion in mortgage-related write-downs in the third quarter.

Net revenue was negative $8.19 billion because of the write-downs.

The mean per-share loss estimate of analysts polled by Thomson Financial was $4.93 on revenue of $399 million.

Twelve dollars in losses a share!

In addition people are wondering about this whole “de-coupling” thesis (also here.)That is the idea that emerging markets and other countries overseas can avoid a downturn if the US slides into a recession. I admit to being skeptical as well, though I suspect they will only slow down, and while they will be volatile, they will not decline as much as US markets will if things get really ugly.

(ed.- haven’t you already said they were ugly?)

Uglier than people have thought, but I am no longer so lonely and markets have discounted the possibility of recession, not it actually happening. That is a key distinction people have missed. I regularly hear that markets have a recession “in the price.” That is why they have gone lower. If so, then why do prices keep going lower when more bad news hits? Markets discount the probability of something. Shares have declined as investors have felt that probability rising, as it becomes more obvious that profits will decline they will go lower still. If things get worse, it will get a lot uglier in the markets. An actual recession is not in the price.

In fact, the prices in my mind still imply earnings growth over the long term which are unreasonable for the broader indices.

Of course, a good question is, are bonds the answer? I don’t think so, and Doug Kass is downright bearish (H/T:Abnormal Returns.)

The bond market is in a bubble that is reminiscent of (and quite possibly as extreme as) other bubbles during previous eras.

From my perch, the only issue is the timing of this trade.

Surprisingly, today’s 3.68% yield on the 10-year U.S. note is lower than the yield during the recession of 2001. This low yield appears to be artificially affected by a number of temporary and backward-looking factors.

His rationale for this shows the uncertainties surrounding this asset class, though I am not sure now is the time to sell. Let us just say we have deemphasized bonds as a defensive measure and concentrated on other techniques. Bonds have been a drag on our portfolios since November, and so far this year. So we are pretty happy with that choice. The other ways of dealing with this have been far more effective. I expect that will remain true.

What about the risk from insurers of debt I have mentioned before? It is looking grim for them as well. Calculated Risk looks at the latest PR from AMBAC:

Translation: You thought 14% was a steep yield for MBIA to pay on the surplus notes (See: “How many other AAA rated companies are raising money at 14%?”). With this possible downgrade, we might not be able to raise capital even at 20%!

Also note, from Merrill this morning, the $3.1B credit valuation adjustments related to hedges with financial guarantors (ACA financial). There is no party in counterparty. (thanks to BR!)

I did notice that little tidbit on Merrill, which goes to the biggest known risk that hasn’t really hit yet, all those insurers, including investors behind credit default swaps, who may not be able to pay up! What is the level of counterparty risk?

Funny you should ask, because the ratings agencies say they don’t know (my emphasis below)and probably will not know:

The complexity of the global financial system and the imbalance of information available to market participants means the ability to track risk has declined “probably forever”, Moody’s Investors Service said . “It is extremely unlikely that in today’s markets we will ever know on a timely basis where every risk lies,” analysts at the ratings agency, led by chief international economist Pierre Cailleteau, wrote in a report.

Read the whole thing.

Various links from Abnormal Returns:

Tech spending does fall in a recession. (Silicon Alley Insider)

You think?

News you should (already) know. A study finds that “..clowns are universally disliked by children.” (Scientific American)

You think?

A new primer on behavioral economics. (Odd Numbers):

From a new blog by M.I.T. economist Dan Ariely tied to his new book Predictably Irrational. I read and would highly recommend the book if you’re looking for case after case of the failure of rational man.

Definitely going on my blogroll.

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Technorati Tags AMBAC, behavioral finance, Ben Bernanke, clowns, Emerging Markets, Federal Reserve, fiscal policy, fiscal stimulus, housing, MBIA, Merrill Lynch, Moody's, recession

This suggests that one of main differences between OFHEO and Case-Shiller was that Case-Shiller included many non-agency homes financed with subprime loans. These homes saw more appreciation during the boom, and are now seeing larger price declines.

Whatever the reasons, the Case-Shiller index seems to more accurately reflect the current price declines in the housing market, as opposed to the OFHEO index. And this has significant implications for the economy.

The Fed uses the OFHEO index to calculate the changes in household real estate assets. If the OFHEO index understated appreciation during the boom that means households have MORE real estate assets, and more equity, than the current Flow of Funds report suggests.

That sounds like good news, but … that also means that during the housing boom, the wealth effect was larger, and the impact on GDP greater, than current estimates. This also means – if OFHEO understated appreciation – that the negative wealth effect, and the drag on GDP, will be probably be greater than expected during the housing bust.

I have long preferred the Case-Shiller Index, this gives me even more comfort in doing so. If you can call a bigger bubble and a bigger decline comforting.

Of course this also means housing will be less expensive, as this graph of the Case-Shiller Index shows:

In the long run that is necessary for the economy to recover. More importantly we will have more affordable housing, a very good thing.

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Technorati Tags economy, housing, OFHEO, Robert Shiller, subprime

I have to agree with Frederic Mishkin of the Fed:

I think there is too much focus on what decision will be made about the federal funds rate target at the next FOMC meeting. What is important for pricing most financial assets is the path of monetary policy, not the particular action taken at a single meeting.

One of the great myths of the market is the over-agency of the Federal Reserve. In reality, the Fed is much less powerful than is commonly believed.

I think some people have to believe that there’s some mysterious group that’s in charge and running things. Ron Paul even blames the Fed for higher oil prices.

Nobel Laureate, Edward Prescott, wrote in the Wall Street Journal:

I am not saying that there are no real costs to inflation — there certainly are. And if we get too much inflation we can exact high costs on an economy (witness Argentina as an example). However, I am talking here of the vast majority of industrialized countries who live in a low-inflation regime and who are in no danger of slipping into hyperinflation. It is simply impossible to make a grave mistake when we’re talking about movements of 25 basis points.

I would add that even if they do not make a mistake it is unlikely to change the outcome for investors in any dramatic fashion. The Fed is just not the main determinant of asset prices, nor is the yield level of treasuries.

That doesn’t mean the Fed hasn’t made mistakes which have contributed to our present woes. Milton Friedman’s old partner, Anna Schwartz, brings out the wood (via Greg Mankiw)

As rebukes go in the close-knit world of central banking, few hurt as much as the scathing indictment of US Federal Reserve policy by Professor Anna Schwartz.

The high priestess of US monetarism – a revered figure at the Fed – says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. “The new group at the Fed is not equal to the problem that faces it,” she says, daring to utter a thought that fellow critics mostly utter sotto voce.

“They need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence,” she told The Sunday Telegraph. “There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for,” she says.

[...]

Her fame comes from a joint opus with Nobel laureate Milton Friedman: A Monetary History of the United States. It revolutionised thinking on the causes of the Great Depression when published in 1965. The book blamed the Fed for causing the slump. The bank failed to use its full bag of tricks to stop the implosion of the money stock, and turned a bust into calamity by raising rates.

“The book was a bombshell,” says British monetarist Tim Congdon. “Until then almost everybody thought the free-market system itself had failed in the 1930s. What Friedman-Schwartz say was that incompetent government bureaucrats at the Fed had caused the Depression.”

I guess restoring confidence that they won’t make things worse is better than nothing, but monetary policy in the range within which they operate will not be the answer, or the cause, for regulatory problems, investor and homeowner myopia and irresponsibility that has already occurred, or overvaluation.

“Steve Jobs is one powerful dude.” (Silicon Alley Insider) (From Abnormal Returns)

Mark Hulbert asks if we really want to assume that the bond market is wrong in betting that inflation will be below 2.5%?

Retail sales in December fell. Barry Ritholz points out:

Credit card debt turned up, the home ATM turned down, inflation was rampant, real income gains non-existent, the job market mediocre. On top of that, we had much higher prices for daily requirements like Food and Energy — and still, there was total denial about how healthy retail is.

How about a chart to back that up?

Obviously we don’t need to just worry about financials being rocked just by mortgages in the consumer space. Actually, I think corporate debt is going to be an issue as well, and of course the derivatives market, especially credit default swaps, are bound to become a major issue. Throw in all the insurers of this debt…I think we better move on.

Despite much wailing, the LBO loan market may not add much to Wall Street’s problems in the great scheme of things. See, I moved on. Million dollar losses seem so small now.

Meanwhile, in addition to the tens of billions evaporating from their earnings, banks such as Merrill and Citibank are busy diluting investor capital by selling huge chunks of ownership to overseas investors. Also read this followup. Probably the best their shareholders can ask for is to lose money and have future earnings sold to others. Better than bankruptcy I guess.

John Paulson bet against the housing market and cleaned up. Join the club John, though unfortunately our clients didn’t make quite the killing you did, but we are happy enough.

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Technorati Tags Alan Greenspan, Anna Schwartz, Barry Ritholtz, Ben Bernanke, Citibank, credit, debt, Economics, Edward Prescott, Federal Feserve, FOMC, Frederic Mishkin, Housing Market, Inflation, John Paulson, LBO, Merrill Lynch, Milton Friedman, monetary policy, mortgages, recession, Steve Jobs, subprime, Wall Street

Hedge-fund managers known as the Tiger Cubs because they learned to pick stocks at Julian Robertson’s Tiger Management LLC beat their peers in 2007 by profiting from the most volatile equity markets in five years.

Chase Coleman’s Tiger Global Management LLC in New York, which was backed by Robertson, returned 71 percent after fees, fund investors said. John Griffin, the former Tiger Management president who oversees $7 billion at New York-based Blue Ridge Capital LLC, posted a 65 percent increase.

Tiger alumni including Lee Ainslie, Andreas Halvorsen, Paul Touradji, Stephen Mandel, Bill Hwang and Chris Shumway showed gains last year ranging from 27 percent to 51 percent, said investors, who asked not to be identified because the returns aren’t public. The average stock hedge fund rose 10.7 percent last year, according to Chicago-based Hedge Fund Research Inc.

“Across the board the Tiger Cubs were some of the best- performing funds last year because they’ve been able to provide two-sided alpha,” or gains on both rising and falling stocks, said Ted Wong, chief investment officer at Constellar Capital LLC in New York, which farms out money to hedge funds.

Market volatility, as measured by the Chicago Board Options Exchange SPX Volatility Index, almost doubled last year to the highest since early 2003. The price swings provided investors with more opportunities to profit from stocks they owned as well as those that they shorted, or bet would decline.

Robertson, 75, one of the most successful hedge-fund managers, returned an average of 25 percent over two decades. He gave back client capital in 2000 after 18 months of losses and redemptions caused assets to drop to $6 billion in March 2000 from $22 billion in August 1998.

$25 Billion

Robertson has since seeded about 30 fund managers, including Coleman and Hwang, who oversee a combined $25 billion. The group generated an average return of 55 percent before fees last year.

The Tiger Cubs are mostly stock-pickers in Robertson’s mold, relying on research to identify companies they deem inexpensive based on financial yardsticks such as earnings growth, and to bet against stocks they think are poised to fall. They pay special attention to the quality of a company’s management.

(H/T: The Big Picture)

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Technorati Tags Andreas Halvorsen, Bill Hwang, Chris Shumway, Hedge Funds, Julian Robertson, Lee Ainslie, Paul Touradji, Stephen Mandel, tiger cubs, Tiger fund, volatility

The following chart (click for much larger version) shows that in order to bring Massachusetts “real” home prices (as tracked by the OFHEO home price index for Massachusetts) in-line with the average annual return of 2.5% seen since the early 1970s, nominal prices have to complete a 16.8% decline (or 28.8% in “real” terms) from the latest peak.

To date, prices have only come off 3.5% so more downside seems inevitable.

[...]

Although the forecast I have provided shows prices declining through 2012, it’s always possible that the decline will either be slower or faster likely based on wider economic events (recession etc.) so I will continue to update this chart monthly with the latest actual data to get a sense of how the adjustment is actually occurring.

I believe that using the 2.5% average “real” rate of appreciation represents a very conservative guide as there is no evidence to suggest that this rate of appreciation can’t fall to 2.0% or even lower.

Consider for a moment that with the complete 16.8% decline, nominal home prices would simply revert back to where they stood during Q4 2003.

To put it another way, if prices do go back to trend it could be even worse. Massachusetts is not where the worst damage is likely to occur:

I will provide the same analysis and charts for many other areas around the country but with just a cursory look, there are areas like Miami, Phoenix, and Las Vegas that look simply hideous with truly tremendous corrections in store to put those markets back in-line with their historical averages.

Is that too pessimistic? Maybe, but this little tidbit keeps my optimism in check:

William Lyon Homes is a builder that operates in California, Arizona and Nevada. It just sold Resmark Equity Partners a portfolio of 604 home sites and five model homes in a handful of Southern California communities. The properties are finished or near-finished home sites. Resmark says the homes were being carried at a book value of $210.7 million as of November 30. The firm paid $90.6 million. That’s a 57% discount for those of you keeping score at home.

If you’ll recall, this post noted that at least one other real estate deal was done at 40 cents on the dollar. The “good” news? Real estate buyers are stepping up and purchasing residential property. The “bad” news? They’re paying dimes on the dollar for it, a sign that new and existing home prices have more room to fall.

Or this:

Lennar Corp.’s November sale of 11,000 properties in eight states set a price that may mark the bottom for the U.S. housing market: 40 cents on the dollar.

“That’s how much Morgan Stanley Real Estate paid for an 80 percent stake in the 32 communities, 60 percent less than the price at which the properties were valued just two months earlier. That’s also what some investors say they would pay for distressed land, communions, homes and whole developments, whether it’s now or later this year.

That doesn’t mean prices in general will go that low, but some markets are seeing these events. Here is a look at the overall market in California. Individual homes may not be there, but obviously they will likely go lower.

As for the view from the investment banks trying to get a handle on this UBS gets points for honesty, at least on this:

We cannot, at this time, accurately predict the future development of US residential mortgage markets and therefore the ultimate impact on our positions in sub-prime mortgage related securities.

Given Merrill Lynch is staring at another $15 billion in write offs and Citigroup is writing off another $20 billion I would suggest they are right about their ignorance.

Undoubtedly there will be more, as many of these losses cannot be written off given regulations designed to avoid “managing earnings” until they can satisfy regulators that the losses can be documented. Thus investors clamoring for firms to just come clean and get everything out in the open are unlikely to be satisfied. Since many of these loans will not start turning bad until the latest rounds of mortgage resets occur, and until the pain has gone on much longer and prices drop even more, we have a long way to go.

One effect, declining employment in finance. Despite the latest jobs numbers, which through statistical estimation (which usually lags turning points in employment) showed a gain in financial sector jobs, actually looking at the sector produces a rather different take. For example check out this headline:

Nearly 90,000 mortgage jobs eliminated
Countrywide shed most jobs in mortgage disaster;California hit hardest; more cuts expected.

What is frightening is that there are loan losses not directly related to the mortgage and housing mess that are still to come. More on that later.

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Technorati Tags Citigroup, Claifornia, Economics, housing, Lennar, Massachusetts, Merrill Lynch, Morgan Stanley, mortgages, OFHEO, real estate, recession, Shiller, William Lyon Homes

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