The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Here is my quote of the day:

“Those so-called adults who fuss about short sales are really silly. What competent grown-up would short a stock after – that’s after – it has fallen 10%. Don’t these people understand how the stock market works?

Selling short on an uptick is sound, to say nothing of having been tried and true for decades. What in the world is dangerous about that? When these same bureaucrats let them play in the derivatives daisy fields to their wallets content.”

-Justin Mamis

Existing Home Sales totaled 5.05mm annualized which was 450k below expectations and down from 5.44mm in Dec. It’s at the lowest level since June and follows the recent downward trend in the purchase index (now at lowest since 1997) of the weekly MBA data and Wednesday’s record low New Home Sales data. Both single family and condos/co-ops saw a fall and in every region. Months supply rose to 7.8 from 7.2 and to a 4 month high but was solely led by a rise in single family inventories. Condos/co-ops saw months supply fall to 9 from 9.4. The absolute # of homes available for sale fell to 3.265mm, the lowest since Mar ’06. The median price was flat y/o/y at $164,700 but matches the lowest level since May ’02. Bottom line, lower prices, $1T of MBS purchases and a home buying tax credit are not enough to offset the lack of confidence and tough labor market in generating sustainable sales growth.

Feb Chicago PMI was a better than expected 62.6 up from 61.5 in Jan and vs the consensus of 59.7. It is now at the highest level since Apr ’05 but measures the direction of improvement, not the degree. The components though were mixed. New Orders fell 4.2 pts but still remain above 60 for a 5th straight month at 62.2. Also, inventories fell 6.3 pts to 42.4 but is still the 2nd highest reading since late ’08. Employment fell almost 7 pts to 53 but is above the key 50 level for a 2nd straight month for the 1st time since Aug/Sept ’07. Backlogs rose 4.2 pts to 58.5 to the highest since Dec ’07 and is above 50 for a 3rd month. Prices Paid rose 1.5 pts to 67.7, the most since Sept ’08. Bottom line, the data confirms that mfr’g remains the source of our incipient recovery. While some key components fell from Jan, they jumped from Dec. The Q4 GDP report revealed how much inventories were an influence and today’s # shows that it will continue into Q1.

Following the very weak Conference Board Consumer Confidence figure on Tuesday and the 4 month low in the ABC confidence poll, the final Feb U of Michigan confidence figure was little changed (73.6) with the preliminary (73.7) but was a touch below expectations of 73.9 and down from 74.4 in Jan. From Jan, Current Conditions rose by .7 pts but the future Outlook fell by 1.7 pts. One year Inflation expectations are at 2.7%, down .1% from Jan. From the initial report of a few weeks ago and which makes up 60% of the final #, Current Conditions fell by 2.3 pts, partially offset by a 1.5 pts gain in the Outlook. Bottom line with all these confidence figures, they are all greatly influenced by the labor market and how one feels doesn’t necessarily lead to action and its why these data points are more anecdotal in nature and historically not market moving.

Existing Home Sales totaled 5.05mm annualized which was 450k below expectations and down from 5.44mm in Dec. It’s at the lowest level since June and follows the recent downward trend in the purchase index (now at lowest since 1997) of the weekly MBA data and Wednesday’s record low New Home Sales data. Both single family and condos/co-ops saw a fall and in every region. Months supply rose to 7.8 from 7.2 and to a 4 month high but was solely led by a rise in single family inventories. Condos/co-ops saw months supply fall to 9 from 9.4. The absolute # of homes available for sale fell to 3.265mm, the lowest since Mar ’06. The median price was flat y/o/y at $164,700 but matches the lowest level since May ’02. Bottom line, lower prices, $1T of MBS purchases and a home buying tax credit are not enough to offset the lack of confidence and tough labor market in generating sustainable sales growth.

Feb Chicago PMI was a better than expected 62.6 up from 61.5 in Jan and vs the consensus of 59.7. It is now at the highest level since Apr ’05 but measures the direction of improvement, not the degree. The components though were mixed. New Orders fell 4.2 pts but still remain above 60 for a 5th straight month at 62.2. Also, inventories fell 6.3 pts to 42.4 but are still the 2nd highest reading since late ’08. Employment fell almost 7 pts to 53 but is above the key 50 level for a 2nd straight month for the 1st time since Aug/Sept ’07. Backlogs rose 4.2 pts to 58.5 to the highest since Dec ’07 and is above 50 for a 3rd month. Prices Paid rose 1.5 pts to 67.7, the most since Sept ’08. Bottom line, the data confirms that mfr’g remains the source of our incipient recovery. While some key components fell from Jan, they jumped from Dec. The Q4 GDP report revealed how much inventories were an influence and today’s # shows that it will continue into Q1.

The FDIC is proposing a test program of principle reduction for negative equity homeowners.

But why is the FDIC required? An intriguing private sector solution would be a negotiated principle reduction between borrower and lender — no government intervention is needed.

Let’s begin exploring this idea by looking at a Washington Post article from today (FDIC to test principal reduction for underwater borrowers):

“The Federal Deposit Insurance Corp. is developing a program to test whether cutting the mortgage balances of distressed borrowers who owe significantly more than their homes are worth is an effective method for saving homeowners from foreclosure.

The program would be aimed at a growing population of homeowners who are underwater on their loans, estimated at more than 20 percent of borrowers, or 11 million homeowners. Economists consider these borrowers among the most vulnerable to foreclosure, and some industry officials worry that more of them will simply walk away from their mortgages, or “strategically default,” rather than spend a decade or more trying to regain positive equity.

Under the FDIC program, borrowers would be eligible for a reduction in their mortgage balances if they kept up their payments on the mortgage over a long period. The performance of those borrowers would be compared with borrowers given more traditional mortgage relief packages, such as those that cut the interest rate on loans.”

It only requires basic math skills for all parties to recognize that it is in the banks interest to avoid foreclosures. Underwater borrower with this knowledge — and the cojones — should let the bank know they understand simple math: Foreclosures = 50% bank loss.

They can then “engage in an arm’s length, Wall Street style negotiation.” Not precisely a threat, but simply laying out clearly what the mortgagee’s options are.

Imagine if a negative equity home-ower said to their lender:

“The fact is you lose ~50% (40-60%) on a foreclosure sale of a 2004-08 vintage mortgage.Since Morgan Stanley and other who have defaulted and walked away from money losing commercial real estate transactions they could not renegotiate, I am going to do the same: Unless you cut a substantial percentage of the principal (~20-30%) owed, then I will choose to strategically default (walk-away).”

I suggest bypassing the FDIC and going straight to your lender. Where the FDIC could be of assistance would be to prod the lender to consider the alternative to foreclosure.

My guesstimate is that of the 5 million probable future foreclosures, this mod would be applicable to about 20% of them. Note that a recent report from the Office of the Comptroller of the Currency implies that banks have figured this out: In Q3 of 2009, 13% of loan mods included a principal reduction, up from 10% in Q2 ’09.

Of course, if Congress didn’t force FASB tio eliminate mark-to-market on holdings, the banks wouldn’t be able to, Japanese style, wait the whole mess out over the next decade or two.

There are additional elements involved.

Read the rest of this entry »

Real Q4 GDP was revised to a better than expected 5.9% from the initial reading of 5.7%. Nominal GDP however was left unch at 6.3%. Helping the real revision was a reduction of .2% in the price deflator, a big boost to spending on equipment and software from an original gain of 13.3% to a revised 18.2% rise. Inventories were also less of a drag than expected as they fell $16.9b from the initial reading of $33.5b, adding .5 of a % pt to the revision. In total for Q4, inventories added 3.9 % pts to GDP, 66% of the gain. Taking out this influence, Real Final Sales were revised down to a gain of 1.9% from 2.2%. The offset to the headline upward change was a reduction to personal spending from 2% to a gain of 1.7%. A higher than expected trade deficit cut estimates by .2% pt. Gov’t Spending was also revised lower led by state and local govt’s. Net-net, the report highlights the huge influence of inventory changes and still sluggish consumer spending but the data is old news with Q1 2/3 over

The driver of the global economic recovery, Asia, revealed some good economic data overnight. Japan and Singapore reported better than expected industrial production, Thailand had a 31.4% rise in Jan exports, Australia said bank lending rose twice expectations in Jan and Taiwan had the strongest leading indicator figure since July. All of their respective stock markets rallied in response. Also of interest, a Chinese newspaper said China is ‘stress testing’ a rise in the Yuan and its impact on manufacturing as the pressure and focus on them to revalue its currency continues to grow. While the US$ is lower vs the euro, the pound is down for the 9th of the last 11 days vs the US$ after Jan government spending rose more than expected and offset a slightly better than forecasted rise in Q4 GDP. US Q4 GDP is not expected to be revised from its original print of 5.7%. Chicago PMI, Existing Home Sales and UoM confidence will be key today.

The 5.9% in line report (seasonally adjusted annualized pace) up from the original 5.7% report. Don’t be surprised if this gets revised down, like Q3 was . .  .

The revision shows final sales in the US were weaker than originally reported last month. Business investments and exports were higher, but Inventories were bigger (meaning, the reduction of inventory backlog was also slower). Nearly two thirds of GDP growth for Q4were changes in inventories — not final sales.

Rex Nutting points out that even with the big Q4 GDP, U.S. GDP was down 2.4% in 2009 — the worst showing since 1946 (down 10.9%). Rex also notes “In 2009, business investment fell the most since 1942, while imports fell the most since 1946.”

via Barron’s Econoday

Source:
Something’s Gotta Give: Rising Retail Profits Meet Falling Consumer Confidence
Aaron Task
Yahoo Tech Ticker Feb 25, 2010

http://finance.yahoo.com/tech-ticker/something’s-gotta-give-rising-retail-profits-meet-falling-consumer-confidence-430880.html

Global Weather Volatility means I am stuck in the house again, as a storm coming up from the South (!) has dumped nearly another foot of snow on us.

Had the temperature been 2 degrees cooler this week, we would have had another 2 feet of snow. Meanwhile, Vancouver doesn’t have enough snow for the Olympics.

More shortly . . .

click for larger photos