2010 May | The Big Picture

Unemployment Rate Correlation with Mortgage Delinquency

By Barry Ritholtz - May 24th, 2010, 11:55AM

You may have missed a terrific chart Bill showed over the weekend at Calculated Risk: States: U-6 Unemployment Rate vs. Mortgage Delinquency Rate. Its a state by state look at the correlation between mortgage delinquency and U6 Under/Unemployment.

I would describe the correlation between the two as significant but not overwhelming. However, we must also recognize that there is a real world lag between the loss of income caused by a firing or a decrease in available hours, and any subsequent mortgage delinquencies. Perhaps a 4 or 6 quarter shift in the U6 data would show a tighter correlation.

The chart (below) goes a long way in challenging those who live on anecdotal tales of gainfully employed profligate spenders who are living the high life by not paying their mortgages. To the contrary, the data shows that the income loss associated with unemployment (and underemployment) is a significant factor in mortgage delinquency.

Additionally, note the two outliers in terms of delinquency: Florida and Nevada, with the former a recourse (but homestead) state and the latter a non recourse state.

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Unemployment Correlation with Mortgage Delinquency

click for ginormous chart

chart courtesy of CalculatedRisk
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If anyone wants to produce evidence of the contrary, I am willing to post an alternative explanation.

Anyone who sends me anecdotal tales, be forewarned I have a voodoo doctor who enjoys jabbing hot needles into the crotch region of the innumerate . . .

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Source:
States: U-6 Unemployment Rate vs. Mortgage Delinquency Rate
CalculatedRisk , May 23, 2010

http://www.calculatedriskblog.com/2010/05/states-u-6-unemployment-rate-vs.html

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Category: Consumer Spending, Data Analysis, Real Estate.

Cashin on Possible Double Bottom

By Barry Ritholtz - May 24th, 2010, 10:28AM

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Category: Video.

Existing home sales good but inventories keep on coming

By Peter Boockvar - May 24th, 2010, 10:27AM

Still experiencing the influence of the home buying tax credit, April Existing Home Sales totaled, 5.77mm annualized, 150k above expectations and up from 5.36mm in March. However, due to a sharp inventory rise of 418k, the months supply rose to 8.4 from 8.1, the 2nd highest reading since last summer. The medium home price was $173,100, up 4% y/o/y to the most since Sept ’09. Evidence of the influence of the tax credit which only applies to 1st time buyers, the NAR estimates that 1st time buyers bought 49% of homes in April, up from 44% in March while investors bought just 15% down from 19% in March. The balance were repeat buyers. Distressed homes were 33% of total sales vs 35% in March. Bottom line, the data is old news because now the market is subject to good ole fashioned supply and demand where still subdued prices and lower mortgage rates will face off against a still tough labor market, no tax credit and still big supply.

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Category: MacroNotes.

Ratings Agencies Still Broken

By Barry Ritholtz - May 24th, 2010, 9:15AM

The WSJ has a longish article that takes a cursory look at the agencies. It does not provide much in the way of new insight into the Nationally Recognized Statistical Rating Organization (NRSRO).

It does inform us, however, that ratings shopping is not only still going on, but has been made easier, courtesy of the credit crisis.

Here is the WSJ:

“The fate of ratings-shopping now hangs in the balance. The financial-regulation overhaul bill passed by the Senate on Thursday would limit the ability of bond issuers to pick firms to rate their securities. But the House version of the bill contains no such provision, and some key lawmakers have raised concerns about the idea. It remains to be seen whether the proposal will survive as the two chambers begin efforts Monday to reconcile their differences.

Critics say the system for providing critical information to bond investors continues to be compromised by a big conflict of interest: Bond issuers pay ratings firms, so raters have an incentive to give inflated grades to attract or maintain business. Investors who rely on ratings to assess a bond’s risk usually aren’t told if other raters were shown deals but didn’t end up rating them.

An examination of recent bond deals and interviews with people involved with the ratings process indicate that while ratings firms have become more cautious about giving top ratings to complex bonds, bond issuers and their investment bankers still shop around to obtain the most favorable treatment.

Some in the industry say ratings shopping may even have gotten easier in the wake of the financial crisis. S&P, Moody’s and Fitch Ratings are no longer as dominant in the business of rating bonds as they were, in part because they have pulled back partially from the mortgage market. Other players such as Toronto-based DBRS Ltd. are pushing to gain market share. Investors are often willing to buy a bond rated by one company, so issuers know that they can go to a bunch of ratings firms and pick the best one, says Jack Chen, a former Moody’s analyst who now runs his own consulting firm.”

You might have suspected that the prime enablers of the credit crisis would be more of a focus of Congress . . .

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Source:
Ratings Shopping’ Lives as Congress Debates a Fix
AARON LUCCHETTI and SERENA NG
WSJ MAY 24, 2010
http://online.wsj.com/article/SB10001424052748703315404575250270972715804.html

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Category: Bailouts, Credit, Regulation.

The Fate Of The Euro

By James Bianco - May 24th, 2010, 8:30AM

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The Economist – The euro-zone crisis: Europe’s three great delusions
The continent’s leaders have still not grasped how much they need to do to save the euro
The first is shoot-the-messenger syndrome. Too many European politicians lay all the blame on speculators, hedge funds, rating agencies and the rest for “unwarranted” attacks on the euro. Such thinking has informed Germany’s decision to ban “naked” short-selling of government bonds. The German regulator itself admits that this practice played little part in the Greek mess. The ban will apply only in Germany, whereas most short-selling happens in London. If it has any impact at all, it will merely make it harder to sell government bonds.
The second delusion might be termed excessive faith in shock-and-awe. … In truth, Greece’s debt problem is one of insolvency, not illiquidity—and insolvency cannot be rectified by piling on more debt, however shocking and awesome the amount. Instead, euro-zone governments and regulators should start planning now for an orderly debt restructuring, including the imposition of losses (“haircuts”) on banks that hold Greek debt.
The third and most disturbing delusion is that deeper structural reform is not necessary; everything will be fine if only Greece and other euro-zone laggards cut their budget deficits. Several notorious fiscal reprobates are promising Angela Merkel that they will whip themselves into line. This is both masochistic and cowardly.

Comment

There is a misguided belief that yet another bailout package will be announced this weekend and this one will finally solve the crisis. There is already a $1 trillion bailout in place, larger than the TARP. This was the sixth emergency bailout announced this spring and the largest. Each one was designed to “wow” the markets after the previous one was deemed inadequate.

This kind of thinking misses the point of the problem of the crisis. See the highlighted part above. This is a solvency crisis. Letting Greece or other PIIGS countries borrow more money is not the answer. Greece has already been bailed out and does not need to borrow from the capital markets until 2013 (they will get their loans from other Euro-zone countries directly). So, the Greeks are already “covered” as part of the 750 billion euro deal announced two weeks ago.

The problem is the market is not buying this “fix too much debt with more debt” approach. More bailouts are not the answer. Austerity is the answer.

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BusinessWeek – Come Together
The euro zone’s crisis can only be solved by unity, says ECB President Jean-Claude Trichet. So why is everyone talking about blowing it up?
Anyone trying to predict the outcome of Europe’s financial crisis should pay close attention to Jean-Claude Trichet. As head of the Bank of France in 1999, he helped create the euro. After seven years babysitting the new specie as president of the European Central Bank in Frankfurt, Trichet and the euro are as intertwined as a man and a currency can be. He is too invested to let it break apart on his watch. Whatever emotional tug the 67-year-old Trichet may feel, though, is counterbalanced by his devotion to sound money and central bank independence. He doesn’t want to debase the euro just to keep shakier members of the zone on board. Even as the financial crisis spiraled out of control, he refused to support weak governments—Greece, Spain, Portugal—by buying up their debt. That restraint burst on May 10. A run on Greek government bonds had begun to spill over into Portuguese, Spanish, and even Italian sovereign debt, raising fears of a self-feeding downward spiral. That day, Trichet reversed course and announced the ECB would begin buying sovereign bonds after all, “to ensure depth and liquidity.” That, along with a 750-billion-euro loan package from EU countries, stopped the run and gave the euro some breathing room.
The Wall Street Journal – Falling Euro Spurs Cautious Intervention Talk
Officials in the U.S. and Europe concerned about the euro’s decline are cautiously talking about a policy tool they haven’t used in a decade: intervening in currency markets. Policy makers have been content to let markets set the value of the euro, which has fallen about 17% since early December, worrying U.S. exporters who face European competition and raising fear of inflation in Germany. Expectations of the prospects of intervention pushed up the euro to near $1.26, after the currency had slipped below $1.23 earlier. Late in the day, the euro traded at around $1.25. Marco Annunziata, chief economist at UniCredit in London, figures the euro would have to fall to about $1.10 in a week or so to prompt policy makers to act. Such a fall could shake markets globally, boost interest rates in Europe, and threaten to undermine a global recovery.
The Telegraph (UK) – Whatever Germany does, the euro as we know it is dead
Angela Merkel’s ban on short-selling is just a distraction from the horror to come
For Angela Merkel, leader of the eurozone’s richest country, a queue is forming of high-quality adversaries. As she tips German Geld und Gut into the furnace of a rescue package for the euro, while going it alone in a misguided ban on market “manipulators”, the brass-neck Chancellor has infuriated domestic voters, angered her EU partners (in particular the French) and invited the so-called wolf pack of global traders to do its worst. In one respect, Mrs Merkel is right: “The euro is in danger… if the euro fails, then Europe fails.” What she has not yet admitted publicly is that the main cause of the single currency’s peril appears beyond her control and therefore her impetuous response to its crisis of confidence is doomed to fail. The euro has many flaws, but its weakest link is Greece, whose fundamental problem is that for years it spent too much, earned too little and plugged the gap by borrowing in order to enjoy a rich man’s lifestyle. It flouted EU rules on the limits to budget deficits; its national accounts were a moussaka of minced statistics, topped with a cheesy sauce of jiggery-pokery.
The Wall Street Journal – Editorial: The Fear Returns
Europe’s policy panic is feeding another financial panic.
Anyone who thought that last week’s IMF-EU bailout would calm markets has had a rude awakening this week, especially after yesterday’s global selloff in stocks. It rarely gets uglier than a 3.6% one-day fall in the Dow and 4.1% on the Nasdaq. Even more ominous is the return of fear in the credit markets, with interbank risk spreads hitting their widest levels since spring 2009. Investors are fleeing riskier assets and moving back to the relative safety of the dollar and U.S. Treasurys, which means less credit available to finance business and risk-taking. The plunge of the euro has exacerbated this flight to the greenback, and the rapid exchange-rate movements of recent weeks are always more disruptive to investment decisions and capital flows than conventional economic wisdom cares to admit. Feeding the financial panic is the policy panic, especially in Europe. Instead of keeping cool, political leaders are restricting short sales, banning hedge funds, and proposing to raise taxes on any euro that moves somewhere that politicians don’t like. All of this only speeds the flight out of euro assets. German Finance Minister Wolfgang Schäuble should try not speaking for a day, and see if the euro rises.

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Category: Think Tank.

Ok, what next for markets?

By Peter Boockvar - May 24th, 2010, 7:56AM

Ok, what next for the markets? It will be the near term reaction to European budget cuts and whether bond investors are encouraged enough by them to buy sovereign new issues over the next few months to allow these countries to continue to finance themselves (and thus avoid tapping the bailout money) and whether global economic activity can overcome and continue to grow. This week, Portugal, Netherlands, Germany and Italy will all sell debt, the Shanghai index rallied sharply overnight following comments from a Chinese official that they should ease off the tightening pedal (commodity prices hanging in this morning) and we will digest a slew of US economic data that won’t yet include the fireworks of the last few weeks but will measure the state of things going into it. 3 mo US$ LIBOR rose to .51% from .497%, a fresh 10 month high and a reflection of the growing nervousness on the part of banks with other bank balance sheets.

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Category: MacroNotes.

Bad Analogies, Herd Instinct, Confirmation Bias

By Barry Ritholtz - May 24th, 2010, 7:15AM

Still recovering from all the travel, but the comic below cracked me up. The only thing Scott Adams missed were a few emotional anecdotes . . .

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Be back in a few . . .

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Category: Humor, Psychology/Sentiment.

FDIC Problem Institutions

By Barry Ritholtz - May 23rd, 2010, 12:30PM

Nice variation on a theme, from Ron Griess of the Chart Store:

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click for larger graphic

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Category: Credit, Regulation.

Generalisations

By Barry Ritholtz - May 23rd, 2010, 10:30AM

Gaping Void:

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Category: Weekend.

Lessons for the Apprenticed Investor

By Barry Ritholtz - May 23rd, 2010, 9:30AM

Hey, I managed to track down all of the Apprenticed Investor series from the Street.com. Some of these really stand the test of time:

In this special series of articles from RealMoney contributor and market strategist Barry Ritholtz, learn about becoming a better investor — not just a better stock picker, but someone who knows how to preserve capital and manage risk. Learn the traps, pitfalls and common errors that befall all too many investors, while discovering the damaging myths that keep individuals from profiting in the market.

Don’t Just Do Something. Sit There!
Guessing at a bottom costs money. Studying the market until you see the right time pays off. More

Apprenticed Investor: Seven Steps for Handling Stock Tips
The Apprenticed Investor guide to what to do the next time you hear about a ‘sure thing.’ More

Apprenticed Investor: More Reading Ideas
Best books on economics, technical analysis, short-selling, fundamental analysis, life on Wall Street and more. More

Apprenticed Investor: Reading Is Fundamental
In part 1 of a series, a look at favorite books on investing, psychology and market history. More

There Are No Shortcuts
Authors promising the ‘secret’ of investing success are modern versions of snake oil salesmen. More

The Stop-Loss Breakdown
We review several other stop-loss strategies you can use to prevent losses from getting out of hand. More

Protect Your Backside
Limiting losses in ‘disaster’ stocks is a crucial element of money management. More

Trading Diary, Part II
Keeping track of how well you are doing with what you purchase is a key to long-term success. More

Write this Down
Keeping a trading diary is a great way to learn from your mistakes and avoid future ones. More

Time Waits for No One
Something’s amiss if you spend more hours planning your weekend than managing your money. More

Bended Knee
Before getting emotional and the dishes start flying, consider a pre-nuptial agreement for stocks. More

Six Keys to Stock Selection
A checklist to see whether a given stock is worthy of your time and investment dollars. More

Curb Your Enthusiasm
An unusual academic study reminds us why too much emotion can harm returns. More

The Zen of Trading
Trading is an active endeavor. These 10 rules will make your trading more effective. More

Surviving Earnings
Examining why results from IBM, Apple, Intel and Yahoo! were greeted so differently. More

Nothing Doing
If you don’t have an edge, staying on the sidelines is usually the right thing to do. More

Tracking Elephants, Part II
The nontechnician’s guide to technical analysis. More

Tracking Elephants, Part I
Knowing what institutions are buying and selling is crucial information revealed in the charts. More

Lose the News
The value of the financial news complex seems to be hugely misunderstood by investors. More

Folly of Forecasting
Take what the pundits say with a grain of salt, myself included. More

The Zen of Trading
Trading is an active endeavor. These 10 rules will make your trading more effective. More

Don’t Speak, Part II
More worst things investors say, or the highly ineffective habits of stockholders. More

Bite Your Tongue
The 10 worst things investors say, part 1, or the highly ineffective habits of stockholders. More

Prepare for Battle
It is folly to think you can easily best the sharpest, best-equipped, fastest traders. More

Know Thyself
Human nature often runs counter to successful investing, so resist your instincts. More

Bull or Bear? Neither
Find your style, but don’t cede your money to the siren call of conviction. More

The Wrong Crowd
The investment universe is filled with all types. Here are the ones you should be avoiding. More

Your Fault, Reader
Take responsibility for your trades. More

Expect to Be Wrong
In the present-day realm of investing, the near obsessive focus… More

Other Stories by Barry Ritholtz:

A Not-So-Efficient-Market Hypothesis (Dec 1, 2004)
An old theory begins to lose its hold on Wall Street. More

Can Sidelined Cash Cause a Blow-Off Top? (Dec 10, 2004)
The short-term implications of excess hedge fund cash may be bullish, up to a point. More

The Importance of Flexible Convictions (Jan 11, 2005)
A core investment approach is important, but successful investors adapt to a changing environment. More

Analysts Still Underestimate Apple (Jan 13, 2005)
Most sell-siders simply don’t ‘get’ Steve Jobs’ company and the potential of the Mac. More

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Category: Apprenticed Investor.