Housing and Employment are vital to the health of the American consumer. The first represents a primary wealth vehicle while the latter provides a main source of cash flow to purchase staples and discretionary goods and services. Credit, whether it be for consumers or businesses or government, is the lifeblood of our economy. Thursday’s notes and observations deal with these two themes.
Notes for May-28-2009
- For the week of May-23-2009, initial Jobless Claims pulled back slightly but remain high at 623k vs. 635k consensus and 631k previous week. The 4 week moving average is 626.75k vs. 628.5k previous week. Continuing claims jumped for their 19th consecutive week, up 110k to 6.608mm.
- GM to announce plant closures: Monday, GM will announce 14 plant closures. By the end of next year, it intends to close 16 factories and cut 21k jobs.
- Visteon (NYSE:VC) files Chapter 11 Bankruptcy: This top auto parts supplier to Ford (NYSE:F) is reorganizing itself and feels that it can fund itself from existing cash flow operations and financial support from Ford.
- For the month of April-2009, New Home Sales, a key indicator for housing market trends and influence on consumer purchases for furniture and appliances, came in at 352k vs. 360k consensus and 356k previous data in March 2009. Despite the slight dip, one positive note is the 4.2% reduction in supply which now sits at 10.1 months compared to 10.6 months last month. Median prices also rose 3.7% for the month to $209.7k but are still down -14.9% year-over-year.
- Foreclosures, a menace to society and the American dream: The Mortgage Bankers Association (MBA) reports that 12% of homeowners are behind in their payments or in foreclosure. But this story has nothing to do with sub-prime because the prime fixed rate market now represents the largest percentage of foreclosures. Almost 6% of fixed rate loans to borrowers with solid credit are now in the foreclosure process. At least half of the ARMs made to borrowers with weaker credit ratings are also in foreclosure. Geographically, the troubled spots remain California, Nevada, Arizona, and Florida which collectively represent about 46% of the nation’s new foreclosures.
- For the month of April-2009, Durable Goods surpassed expectations. New orders were up +1.9% and +0.8% ex-transportation component of the report. Relative strength was found in communication equipment (up 6.9%) and transportation (up 5.4%) while weakness in computers & electronics (down 2.7%). On an annualized basis, new orders are down at -24.4% but show slight improvement from -26.5% in March; ex-transportation components are at -23.3% vs. 22.4% in March; and non-defense capital goods orders contracted -32.8% vs.33.1% in March.
- Baltic Dry Index: The BDI is up another 134 points to 3298. Nothing to complain about here… China’s rising demand for raw materials (e.g. iron, ore, coal, and grains) is the primary driver for the BDI.
- EIA Petroleum Status Report: Inventories for the week of May-22-2009 reflected a draw-down of 5.4mm barrels of oil vs. last week’s 2.1mm barrel draw-down. Gasoline stocks declined 600k barrels.
- Treasury Bill Announcements: $31bn in 3 month T-Bills auction on June-1-2009; $31bn in 6 month T-Bills auction on June-1-2009; and $26bn in 1 year T-Bills auction on June-2-2009. That’s a total of $98 billion in new short-term debt. Most of this is revolving. Due to the concern for rising government debt, I will start monitoring these numbers and the market’s reaction to gauge their potential impact on the economy.
- Commercial Paper Market Says "Show Me the Money!": Reuters reports that the market for outstanding short-term business loans is at its lowest level since 2001. For the week of May-27-2009, it shrank $35.9bn to $1.28trn. In August 2007, the inflection point for the financial credit crisis, the commercial paper market peaked at $2.2trn.
Comments for May-28-2009
- Housing: While new home sales were not bad relative to the previous 3 or 4 months and their decline may be exhibiting signs of a bottom, the story on foreclosures and impending pressure on the prime (forget about sub-prime!) market is a cause for concern. If foreclosures increase, then this new source of added supply will certainly stymie the recovery in new home sales.
- Employment: In connecting the dots with Jobless Claims, anything with a 600k handle should always be a cause for concern and this has been the case since the start of the year. Today’s continuing claims compared to mid-April are about 495k higher and do not bode well for this week’s unemployment numbers. The unemployment report could easily surpass 9% and does not even factor the auto sector layoffs that are bound to manifest from the likes of GM, its peers, and suppliers. These ripples or waves have yet to break and make their own impact. I have a feeling that many analysts and economists will need to redo their financial calculus.
- Impact of Energy Prices on Consumer Spending Habits: Higher energy prices are somewhat of a nuisance tax for consumers and have the potential to influence discretionary spending patterns. Last week’s draw-down in oil and gasoline stocks on the cusp of the summer driving season tells leads me to ask if oil will challenge resistance levels at $70 - $71. Two fundamental supply forces supporting higher oil prices are 1) refineries operating at lower capacity rates and 2) OPEC’s lower output. Throw in some inter-market analysis of an increasingly weaker dollar and this also buoys oil prices. Of course, countering this argument is the IEA’s assessment that U.S. crude oil inventories are only 1.8% below their highest level in two decades and that offshore tankers contain enough oil to meet U.S. energy consumption demands for at least a week. At some point this tsunami of black liquid will get dumped on the market and the implications are bearish for oil. However, with hurricane season approaching and geopolitical instability rising in Nigeria, traders may want to sandbag just a little longer to facilitate rising prices.
- Credit Markets & Liquidity: Credit is the lifeblood of the American economy and our government or businesses would cease to exist in the forms that we recognize them if it were to stop flowing. From a contrarian perspective, I actually view the current lack of commercial paper credit as a positive. Assuming that things do not get worse and the markets can resolve this problem, then businesses can start borrowing to finance the growth of their existing operations. This is another linchpin for real recovery. Remember, there are two markets, i.e. the stock market and the real economy. However, whenever government issues debt on a gargantuan scale, it competes with the private sector and deprives it the opportunity to access investment capital. If this all sounds perverted, it is and explains part of the rationale for the current dysfunctional state of the credit markets.
Well, that’s my take on economic data and related news events. I anticipate a more prolonged economic recovery process than others are estimating.
(These notes and comments are not intended to be a comprehensive analysis, but instead merely highlight current themes and events for the convenience of readers and encourage them to make and share their own conclusions.)
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