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News on the Housing front continues to marginally improve. This is not yet a positive number, but it is getting less worse.

Existing-home sales fell 3.6% from May 2008. Sales in May 2009 rose 2.4% from April to 4.77 million. Note that these are apple and orange comparisons — revised to unrevised numbers. Once again, the prior monthly number was revised downwards (4.68 million down to 4.66 million).

Some more data points:

• Total housing inventory at the end of May fell 3.5% to 3.80 million existing homes available for sale;

• Inventory is a 9.6-month supply at the current sales pace, down from a 10.1-month supply in April.

• First-time buyers accounted for 29% of transactions, down from 45% last month, but up from 20% a year ago;

• Prices fell 16.8% for the national median existing-home from a year earlier;

• Distressed properties declined to 33% of all sales in May from 45% in April;

• Single-family home sales rose 1.9% (seasonally adjusted annual rate of 4.25 )million in May, but are 3.0% below (4.38 million-unit level) May 2008;

• Median existing single-family home price was $172,900 in May, down 16.1% from a year ago.

One of the more bizarre aspects of the news release was Lawrence Yun’s call for appraisers “familiar” with local neighborhoods:

“Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales. In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”

That is outrageous.

Consider:  The NAR remained notably silent during the appraisal corruption during the boom; Home sales based on loans to people who couldn’t afford them that drove prices higher were fair basis for appraisal comparables — but when these same homes are sold — inevitably through forclosure auctions,  REOs or distressed sales — they should be ignored? Only up, not down?

Even worse, they seem to be calling for a return to “local” (i.e., friendlier) appraisals — like the good ole’ days. You remember the “friendlier” era of corrupt appraisals that were rife during the credit bubble?

Am I reading this correctly? It looks like code for USE APPRAISERS (i.e., CORRUPTIBLE) WHOM YOU KNOW.

I thought I was inured to the idiocy of the NAR and the fetid stank of corruption that their press releases come with, but even I am astonished by the filth emanating from their offices today.  Shame on you  . . .

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Existing Home Sales, May 2009 (NSA)

Chart courtesy of Barron’s Econoday

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Previously:
Fraud in Real Estate, Mortgages & Homebuilders (August 17th, 2008)

http://www.ritholtz.com/blog/2008/08/fraud-in-real-estate-mortgages-homebuilders/

Nonfeasance in Financial Oversight (August 18th, 2008)

http://www.ritholtz.com/blog/tag/an-appraiser-from-new-york-who-sits-on-the-appraisal-foundation-board-that-writes-qualification-guidelines/

Source:
May Existing-Home Sales Continue Rising Trend
NAR, June 23, 2009

http://www.realtor.org/press_room/news_releases/2009/06/ehs_continue

This week’s Outside the box looks at some very interesting research done by two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O’Rourke of Trinity College, Dublin They give us comparisons between the Great Depression and today’s downturn. They continue to update their data from time to time, the link to their work is at http://www.voxeu.org/index.php?q=node/3421. I have not previously heard of www.voxeu.org, but it is a collection of the work of well regarded international economists that seems quite interesting for those who enjoy readings in the dismal science.

This week’s OTB will print long, but it is primarily charts. Please note that I have re-arranged some of the new charts to cut down on space because of some duplications. Word count is not all that much and it reads well. I will be referring to their work in future letters as well. Have a great week!

John Mauldin, Editor
Outside the Box

A Tale of Two Depressions

New findings:

• World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
• World stock markets have rebounded a bit since March, and world trade has stabilized, but these are still following paths far below the ones they followed in the Great Depression.
• There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
• The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
• Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.

Comparing the Great Depression to now for the world, not just the US

This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences. Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices. In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.

Updated Figure 1. World Industrial Output, Now vs Then (updated)

Source: Eichengreen and O’Rourke (2009) and IMF.

Read the rest of this entry »

Barron’s Editor Michael Santoli speaks about the slump in trading during the summer.

Oh to be a fly on the wall over the next two days listening to the FOMC discuss the current state of the economy, their programs in place to help jump start it and what their game plan is looking forward. But, whatever comes out of it tomorrow, keep one thing in mind. The Fed will not stop until the economy starts growing again and will thus, in my opinion, continue to be a big support for hard assets, notwithstanding the multi day pullback that shook the tree of an over crowded trade. Milton Friedman’s belief that inflation is a monetary phenomenon is currently being put to the ultimate test by a Fed Chairman that seems to think otherwise and believes the ‘output gap’ is the key inflation influence, rather than the stability of the US$ or lack thereof and commodity prices. Today’s WSJ editorial section highlights the debate. The fed funds futures are pricing in a 10% chance of a 25 bps hike by Sept. May Existing Home Sales are key today. The Treasury comes to market with a 2 year note auction. July German Consumer Confidence rose for a 2nd month and was higher than expected. Euro region services and mfr’g composite index was a touch less than expected but did rise to the highest level since Sept ’08.

The structure of the Federal Reserve is such that positions are staggered, and appointments usually come along only every so often:

The seven members of the Board of Governors of the Federal Reserve System are nominated by the President and confirmed by the Senate. A full term is fourteen years. One term begins every two years, on February 1 of even-numbered years. All terms end on their statutory date regardless of the date on which the member is sworn into office.

Consider this Fed factoid: Due to a combination of several resignations and upcoming re-appointments, a few expired terms, and the ordinary appointments, Barack W. Obama has an extraordinary chance to reshape the FOMC.

Note this Washington Post article from December, 2008:

“In January 2010, Obama can either reappoint or replace Chairman Ben S. Bernanke when his term expires and make the same decision about Vice Chairman Donald L. Kohn when his term ends in June of that year. Fed governors serve a 14-year term, though in practice most leave after a few years.

Thus within 18 months of taking office, Obama will likely have appointed five of the seven Fed governors. The central bank is designed to be independent from politics, so a president’s best chance of influencing how the Fed will regulate banks or respond to economic changes is through these appointments.”

What makes this a cause for concern is the bad advice on all things economic that has been Bush Obama has been getting from the bankster twins, Summers and Geithner.

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Hat tip Matt!

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Source:
Obama Takes First Shot at Reshaping Fed by Naming Board Member
Neil Irwin
Washington Post, December 19, 2008; Page D01

http://www.washingtonpost.com/wp-dyn/content/article/2008/12/18/AR2008121801695.html

Board Members

http://www.federalreserve.gov/aboutthefed/bios/board/default.htm

See also:
Bernanke Set to Defend Record as Reappointment Debate Begins
Scott Lanman
Bloomberg, June 23 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUBTI6OxeEVA

For you travelers whisking thru the security lines at US airports, I have some bad news: Back in line with the rest of the proles:

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Hat tip Andrew!

The money tide isn’t pushing prices up: The Federal Reserve has expanded the monetary base by 114% over the past 12 months, but Economics Editor Peter Coy argues that deflation is still a greater threat than inflation:

Good Evening: U.S. stocks today suffered their broadest and deepest retreat since the March lows. That this weakness in equities was confirmed by the action in other parts of the capital markets and was accompanied by rising volume and volatility levels may mean that a correction of the March-June rally is now under way. A gloomy economic outlook issued by the World Bank was the given excuse for today’s decline, but the green shoots crowd has more to worry about than official forecasts. Bullish sentiment reached elevated levels this month, as did the supply of equity sales by corporations and their officers. Whether this pullback in the major averages is mild or something more severe may therefore depend upon the risk appetites of those who’ve been on the sidelines.

Digesting the World Bank’s updated (and more downbeat) economic projections wasn’t much of a problem for Asian markets, but European equities were certainly under pressure last night. Our stock index futures were off less than 0.5% a couple of hours before trading began today, but the post-expiration selling pressure kept building until the major averages were forced to open between 1% and 2% lower this morning. As there was nothing in the way of economic news to contemplate, market participants were forced to consider whether or not to take seriously the prognostications of the World Bank’s many economists. To some, the early downdraft in the major averages suggested a causal link, but I find it hard to believe that investors would suddenly put so much stock in a staff that has heretofore been either wrong, ignored, or both. Should investors now believe the ratings agencies, too?

Equities never did recover from their early sinking spell, and Monday’s few rallies were as weak as they were brief. Once the S&P penetrated the 900 mark in the late morning, it was never able to regain the “9 handle” before the bell. Energy, materials and transportation (read: economically sensitive) names led the swoon, and the only sectors showing any resilience were the defensive ones. Technicians also went home in a bad mood. Once it became apparent just before the closing bell that the widely watched S&P would likely close below its 200 day moving average, the whole tape finished with a closing flush to the downside. By day’s end, the averages were down between 2.35% (Dow) and 4.7% (Dow Transports) on brisk volume. The VIX spiked (as did other measures of volatility — see below) and the other markets seemed to confirm that investors are now afraid the green shoots may wilt. Treasuries were firm all day, as yields fell between 7 and 10 basis points. The dollar also became a perceived safe haven, and commodities received a sharp rap on the knuckles. Weakness in the energy and grain markets pulled down the CRB index by 2.7% today.

It took less than two trading sessions for me to abandon the “counter-punching” strategy I stated I would employ until the outlook became less murky. Today’s session tells me that other investors are unwilling to be quite as patient, so I’ve reverted back to my usual cautious stance toward the capital markets. One of the factors that I’ve mentioned before — increased supply of shares due to all the secondary issues coming to market since May — has become a bigger cause for concern now that insiders are also rapidly unloading shares (see below). Furthermore, the credit spreads that had been narrowing since March have started to widen again in the last week (see below). And finally, some measures of investor sentiment reached levels that displayed less fear than at almost any time since this bear market began in October of 2007. As can be seen in the Credit Suisse risk appetite charts you will find attached, the “equity only” measure of risk appetite actually touched the euphoria zone earlier this month. Other mid month surveys showed bulls once again outnumbering bears by a 2 to 1 margin.

Given the return of this long lost sense of investor complacency, it is not surprising that the stock market has started to correct its 3 month sprint off its March low. The crucial unknowable for investors is how far this pullback will carry. Wall Street did its level best to create plenty of supply as prices rose, with secondary issues pouring forth in record amounts during the past month or so. Now that investors have requested “no mas” to all this newly minted paper, at what price levels will demand revive? As of today, the S&P is now down more than 5% from its June peak; a 10% drop would take the index just below 860. Below 850 might signal a retest of the bear market lows, so if there is indeed a large mass of sideline money just waiting for a dip, we should soon be seeing it put to work.

Then again, highly correlated moves (stocks and commodities going one way, while the dollar and bonds go the other) like the ones we’ve seen since this bear market began have a way of causing investors to hit “cancel” when their buy tickets are close to getting filled. Perhaps some are waiting to see if Bernanke & Co. whisper sweet nothings into Mr. Market’s ear after this week’s FOMC meeting; others are waiting for a bottom in housing before they jump in. And, of course, existing longs are waiting for new longs to join them, but few may want to be caught holding the bag with banks, insurance companies, and insiders once again selling shares. It will be fascinating to see how all this waiting plays out, but about the only thing any of us knows for sure is that this renewed volatility threatens summer vacation plans for the third year in a row.

– Jack McHugh

U.S., Europe Stocks Fall, Commodities Drop on Recession Concern
VIX, VStoxx Surge as World Bank Report Sends Equities Tumbling
Insiders Exit Shares at the Fastest Pace in Two Years
Wells Fargo Leads Biggest Jump in Company Risk in Three Months

In the June 29, 2009 issue of The New Yorker, Connie Bruck slashes and burns her way behind-the-scenes at Countrywide Financial. She paints a somewhat sympathetic portrait of the Man with a Tan, Angelo Mozilo.

His driven personality eventually led him to disdain risk management on the altar of market share. As the 2000s progressed, his increasingly bad judgment and poor decision-making skills led to the end of his reign in disgrace and now scandal.

Excerpt:

“Mozilo had gained full control of Countrywide in 2000, after the retirement of his partner, David Loeb, and he relished the freedom. The company had recently moved its corporate headquarters from Pasadena to Calabasas, an hour’s drive north of downtown Los Angeles, where it occupied a sprawling Mediterranean-style villa at the foot of the Santa Monica Mountains. The senior executives’ offices were on the third floor, where the corridors were lined with Hudson River School paintings, by Thomas Cole, Frederic Edwin Church, and others. In the executive dining room, lunch was served each day, at a long table that seated twenty, with Mozilo at the head . . .

Under Mozilo’s leadership, Countrywide’s growth had been astonishing. Between 2000 and 2003, the company tripled its workforce, to more than thirtyfour thousand. The company changed its name from Countrywide Credit Industries to Countrywide Financial Corporation—a proclamation that it was no longer a mere mortgage company. A fullfledged diversified financial-services company, it owned a bank, sold title insurance, and traded securities. Mortgages, however, remained the core of its business, and, according to Inside Mortgage Finance, it was the third-largest home-loan provider in America, after Wells Fargo and Washington Mutual. Mozilo wanted Countrywide, which he always referred to as his “baby,” to be No. 1, a position it occupied briefly, in the early nineties, before being overtaken by the competition. Mozilo was aiming to achieve a market share—thirty to forty per cent—that was far greater than anyone in the financial-services industry had ever attained. If he succeeded, Countrywide’s rivals would be severely diminished and its continued hegemony assured. Mozilo had always wanted to build a company that would last a century or more.

For several years, Countrywide continued to thrive. In 2004, the company edged out Wells Fargo to become the largest home-mortgage provider. In 2005, Fortune placed Countrywide on its list of “Most Admired Companies,” and Barron’s named Mozilo one of the thirty best C.E.O.s in the world. The following year, American Banker presented him with a lifetime-achievement award. But, as 2007 progressed, subprime defaults escalated rapidly, and Wall Street bankers abandoned the mortgage-backed securities they had prized, and their supplier, too. In August, they cut off Countrywide’s short-term funding, a move that constricted its ability to operate, and a few months later Mozilo was forced to choose between bankruptcy or being acquired by Bank of America. (In January, 2008, Bank of America announced that it would buy the company for four billion dollars, a fraction of what Countrywide was worth at its peak.)”

It only goes downhill from there . . .

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Source:
Angelo’s Ashes
Connie Bruck
THE NEW YORKER, JUNE 29, 2009

http://www.newyorker.com/reporting/2009/06/29/090629fa_fact_bruck

PDF: Man-with-a-tan-6-29-09