I avoid discussing investment strategy except in very round terms. With a hat tip to Bespoke who conducted a roundtable with key financial bloggers to forecast 2010 investing environment – here is a summary of their projections:
Good luck with your 2010 investments. What is clear to me is that one major economic event can destabilize the entire economy as it is held together with band aids. But the data is saying the economy is healing. The more it heals, the better it will resist economic shocks.
This healing process will take years because of the extent of the economic injury.
The red herring issue in 2010 is a rise in the Fed interest rate. Our New Normal economy is not credit driven to the same degree as before, and a rise in the rates will have an unusually small impact on the economy.
I offer no economic warnings as we witness our economy crawling out of the abyss. I see no evidence (yet) of any double-dip or “W”. The strength of the underlying economy, after taking a break in September and October, has improved in November.
But screw the NBER – this recession continues. It will end when we start seeing job growth equal to population growth. It will end when a sector other than utilities, financial services or education / health care begins to expand.
And it the recession will not end until the super coincident index (CFNAI-MA3) from the Chicago Fed rises above +0.20. It has currently risen to -0.77, and is discussed in the next paragraph.
Chicago Fed Index Improving Again
The Chicago Fed National Activity Index (CFNAI) for November 2009 (pdf) is again beginning to show improvement:
The index’s three-month moving average, CFNAI-MA3, increased to –0.77 in November from –0.87 in October. November’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The level of activity, however, remained in a range that has historically been consistent with the early stages of a recovery following a recession. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.
This index is telling you that the economy had a major improvement in July 2009 and since then has degraded somewhat. This index is now telling you we are again closing in on real economic expansion.
The CFNAI is one index that has confirmed the Dow movements in this 21st Century (see Economic Indicators Suggest Investing Caution).
The CFNAI is shown as the blue line, the Dow is red.
GDP Revised Down & Now 4Q 2009 GDP Growth Seems Stronger
The third release of 3Q 2009 GDP was revised downward to 2.2% from 3.5% (first release) and 2.8% (second release). But the third release of GDP is accompanied by detailed National Income and Product Accounts (NIPA) tables which allows a better understanding of the GDP makeup.
In addition, the November 2009 (pdf) personal income and expenditures were released – this happens to be one of the components of the NIPA which is maintained on a monthly (not a quarterly) basis. As we know, even at the New Normal levels, the consumer is still THE economic driver.
Personal income increased $49.7 billion, or 0.4%, and disposable personal income (DPI) increased $54.1 billion, or 0.5%, in November, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $47.9 billion, or 0.5%. In October, personal income increased $33.6 billion, or 0.3%, DPI increased $50.2 billion, or 0.5 percent, and PCE increased $63.5 billion, or 0.6%, based on revised estimates. Real disposable income increased 0.2% in November, the same increase as in October. Real PCE increased 0.2 percent in November, compared with an increase of 0.4 percent in October.
Already the increase in 4Q 2009 personal income through November is almost equal to the entire increase of 3Q 2009.
The increase in 4Q 2009 personal expenditures through November already exceeds the entire 3Q 2009 increase by 50% - and we still have December data to go.
And with this release of GDP and personal income accounts, the business end of the National Income and Product Accounts (NIPA) were released for 3Q 2009 in detail for the first time.
Now we know that the major contributors to economic growth from the business sector were utilities, financial services, and education / health care. To complete the picture of 3Q 2009 GDP growth was consumer spending and government spending.
The headwinds for 3Q 2009 growth were agriculture, construction, manufacturing, and retail sales which all were still contracting.
The November 2009 (pdf) advance durable goods data press release:
New orders for manufactured durable goods in November 0.2% ….. this was the second monthly increase in the last three months.
Shipments of manufactured durable goods in November, up three consecutive months, increased 0.3%
Unfilled orders for manufactured durable goods in November, down fourteen consecutive months, decreased 0.7% …. this was the longest streak of consecutive monthly decreases since the series was first published on a NAICS basis in 1992.
Inventories of manufactured durable goods in November, down ten of the last eleven months, decreased 0.2%
I keep keying on the fall of unfilled orders. Here is the deal – orders are down 20% while backlog is only down 10%. Manufacturers are working off backlog – it is like a hibernating bear living off of fat. There is still too much capacity – too many employees in durable goods for the amount of new orders.
One of three things will happen, either demand will pick up, capacity will be reduced more, or some combination thereof.
Here is a look at historical unfilled order to shipment ratios.....
If we have a normal recovery, durable goods manufacturers production will not stabilize until after 2012. This same picture of durable goods excess capacity is uniform through the entire goods production business segment.
Consider this a headwind for a normal recovery.
Received the following press release from US Treasury which was interesting:
WASHINGTON – Today, the U.S. Department of the Treasury received repayments on its Troubled Asset Relief Program (TARP) investments in Wells Fargo (WFC) and Citigroup (C) in the sum of $45 billion, bringing the total amount of repaid TARP funds to $164 billion. Wells Fargo repaid $25 billion under the Capital Purchase Program (CPP) and Citigroup repaid $20 billion under the Targeted Investment Program (TIP), both of which will wind down at the end of this year. Treasury now estimates that total bank repayments should exceed $175 billion by the end of 2010, cutting total taxpayer exposure to the banks by three-quarters.
In addition, effective today, Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation and Citigroup terminated the agreement under which the U.S. government agreed to share losses on a pool of originally $300 billion of Citigroup assets. This arrangement was entered into in January of this year under Treasury’s Asset Guarantee Program (AGP) and was originally expected to last for 10 years. The U.S. government parties did not pay any losses under the agreement and will keep $5.2 billion of $7 billion in trust preferred securities as well as warrants for common shares that were issued by Citigroup as consideration for such guarantee. With this termination, the AGP is being terminated at a profit to the taxpayer.
Treasury currently estimates that TARP programs aimed at stabilizing the banking system will earn a profit thanks to dividends, interest, early repayments, and the sale of warrants. Total bank investments of $245 billion in FY2009 that were initially projected to cost $76 billion are now projected to bring a profit. Taxpayers have already received over $16 billion in profits from all TARP programs and that profit could be considerably higher as Treasury sells additional warrants in the weeks ahead.
If bull-crap were music, the National Association of Realtors (NAR) continues to produce top 10 hits. Here is their news release for November 2009 sales:
Existing-home sales rose again in November as first-time buyers rushed to close sales before the original November 30 deadline for the recently extended and expanded tax credit, according to the National Association of Realtors®. Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 7.4 percent to a seasonally adjusted annual rate of 6.54 million units in November from 6.09 million in October, and are 44.1 percent higher than the 4.54 million-unit pace in November 2008. Current sales remain at the highest level since February 2007 when they hit 6.55 million.
What the NAR is not saying destroys their credibility. This is seasonally adjusted data which is corrupted from many sources including but not limited to unusually high foreclosure rate, government tax credits, and unusually long mortgage approval cycles extending the results of the buying season.
Looking at the unadjusted data.....
We see home prices falling. They did spike up at mid-year (in my opinion, due to a change in the selling mix towards higher priced homes). Prices are down MoM and YoY.
Volumes are definitely up YoY and backlog down - but why would home prices still be falling if volume was up? Backlog is only for homes actually for sale with a realtor. Many sellers have hunkered down hoping for a market improvement and there are a lot of foreclosures in the pipeline. In fact, we have almost an unlimited supply of homes which can be brought to market.
Many analysts believe there are 7 million homes in a foreclosure shadow inventory which will be dumped on the market between now and 2012. I believe there are an additional 10 million homes that the boomers will have to unload between now and 2025. With pre-recession home volumes in the 7 million per year range – there is a lot of excess inventory coming on the market.
And we do not have as many home flippers (buy, hold for a short period, and sell for a profit) as before. What would the real annual home sales volume be without flippers? 5 million? This makes the real market smaller than we realize.
The housing sales volume area under the curve is definitely better in 2009 than 2008. In my opinion this was caused by lower interest rates and more realistic price expectations by sellers.
The home value slide will continue at least to mid-year 2010. Then we will be closer to a Fed rate hike and the impact of that hike will be more obvious. The sidebar graphic is courtesy of Bank of Tokyo – Mitsubishi UFJ which is not predicting a home value recovery until 2011. I am not optimistic this will come to pass. Here is additional insight from BTMU:
Some analysts believe that Generation Y could play a significant role in driving home sales as the oldest are now entering home buying age. But as we pointed out this generation also has much less income than prior generations at the same age so we believe Generation Y will be a bigger driver of the rental market, as opposed to the housing market. Household formation rates have slowed dramatically, which is also reflective of this generation’s choice to not move out of their childhood homes at all. In addition, Generation Y will likely approach home buying with a much different mindset than prior generations because they’ve seen first hand that a home is not a safe asset with guaranteed future returns. Better to rent and be free of all that mortgage debt that now carries such a negative connotation.
The big trouble for GDP is new home sales. The existing home sales issues do not impact GDP, but new home sales are included in GDP. The news release for November 2009 (pdf) new home sales:
Sales of new one-family houses in November 2009 were at a seasonally adjusted annual rate of 355,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.3 percent (±11.0%) below the revised October rate of 400,000 and is 9.0 percent (±15.3%) below the November 2008 estimate of 390,000. The median sales price of new houses sold in November 2009 was $217,400; the average sales price was $280,300. The seasonally adjusted estimate of new houses for sale at the end of November was 235,000. This represents a supply of 7.9 months at the current sales rate.
Not one indication that even the stimulus helped builders. Look at past recessions and the amount of new homes sold. The data is eye opening and is another element of the New Normal.
The weekly Mortgage Bankers Association mortgage application data for the week ending 18 December 2009 fell to its lowest level this year for new mortgage applications – and has declined approximately 30% since the beginning of October. The 30 year fixed mortgage rate is unchanged at 4.92%.
Our One Green Shoot Still Lives
Although it might never make a huge impact on GDP, it is remarkable that exports continue to grow coming out of this recession – and imports continue to wither. Who knew?
The Port of Los Angeles and the Port of Long Beach – America’s major transit point for containers have issued their November 2009 container count data. These counts are 20 foot container equivalent units (TEU).
As container count volumes are seasonal, the only way to compare them is YoY. For imports, we are getting the same staircase effect that has been happened in most months – this simply means there is no noticeable improvement in the volume of goods coming into America.
But for exports, the volumes are beginning to increase YoY. Okay, I admit it is not a dramatic improvement – but it is an improvement and the largest export quantity of TEUs in November for any year ever other than 2007. In the eyes of the NBER, the recession began in December 2007 one month later.
Shipping counts are supporting the government’s claim that the value of exports are increasing.
But transport news is not all good. The only domestic transport metric which I can find real time data – railroads – is not supporting the concept that an expansion of economic activity is occurring.
Not only are rail counts falling off, but is 15% to 20% under the pre-recession levels.
Jobs continue to be the burr under my saddle. Few seem to comprehend that the job creation machine has disconnected from what we call economic growth. Economic growth is not creating jobs in the 21st century.
For the week ending 19 December 2009, initial unemployment claims continue to drift down towards the magic number of 450,000 initial claims per week where some analysts are suggesting employment starts growing again.
I do not trust the claims data we will see through the holiday season. I am waiting to see the data for the first few weeks of January 2010.
Additional Economic Data this Week
Bankruptcies this week: Citadel Broadcasting, TLC Vision, Imperial Capital Bancorp, Pacific Coast National Bancorp
Economic Forecasts Published this Past Week
The Economic Cycle Research Institute (ECRI) released their Weekly Leading Index which declined slightly. Lakshman Achuthan, Managing Director at ECRI added:
With WLI growth remaining robust, the economy will keep improving in the months ahead.
Hat tip to Steve at MEMETICS & MARKETING™ for editing support.