It's getting better...

Everything is going better. Sales of new houses, the housing Price Case Shiller Index ticks up., and so on.

The less bad news was helped along by the steep drop in interest rates to 50-year lows. And the corresponding drop in mortgage rates, due to the Federal Reserve’s massive buying of $1.25 trillion worth of mortgage-backed securities and $200 billion in agency debt. Then there are Treasury subsidies and guarantees for Fannie and Freddie to the tune of $280 billion.

An $8,000 tax credit for new home buyers may seem small against the $150,000 average house price, but it is a noticeable part of 20% down on a $100,000 home. Has the economy really turned the corner? And what will happen once the US government is closing the money spigots…

Before getting too exited: loans at least 90 days past rose for the 13th quarter (that’s more than 3 years) in a row. We’re now at 4.35%, the highest level recorded in the last 26 year.

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Inspiration

In case you were out on Friday, Meredith Whitney was at it again calling for continued bank failures. This time she is calling for some 300 to be the tally. But now Nouriel Roubini is out playing Dr. Doom again with the greater and greater case for more bank failures and for a double-dip recession. Speaking of recessions, the World Health Organization has a swine flu recession scenario out. It may sound a lot like the SARS recession call of 2003 and 2004.

Further:

• S&P 500 at new 2009 high. Up 50% from March closing low.
• Shoemaker Crocs still soaring... at new 52-week high and up 548% from March low.
• Natural gas hits 15-year low relative to "real money," gold.
• Major nanotech play Vecco Instruments at new 52-week high.

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The Baltic Dry Index revisited

The Baltic Dry Index is a strange animal.
Some analists think that it is a measure for international trade flows.
The Baltic Dry Index, or BDI, is an index that tracks a blending of rates to ship dry goods - basic raw materials like iron, coal and grains - on three different-sized boats on the four main shipping routes.
Conventional wisdom - or perhaps just tradition - has analysts looking at the BDI as a leading indicator of how commodities and the global economy will perform. The old adage is that no one hires a ship unless they have something to transport, and if people are transporting things, that means they're buying and selling.

However, the correlation between commodities and/or stock indices seems to be weak. Even when you compare the BDI to the shipping companies themselves the relation is minor. Look to the Claymore/Delta Global Shipping Index ETF (ticker: SEA).

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Inspiration

We're close to option expiration. And markets are rallying.

• Solar leader First Solar getting crushed on accounting worries and declining margins... now at four-month low.
• China rebounds overnight... up 4.5%.
• Natural gas trading... near seven-year low.

• Big Pharma leader Wyeth reaches another new high... up 26% this year

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This feels not good...

The Bank of International Settlements published its outlook for the economy.
Here’s a snippet

So far, the crisis has developed in five more or less distinct stages of varying intensity, starting with the subprime mortgage-related turmoil between June 2007 and mid-March 2008 (Graph II.1). Following this first stage, during which the primary focus was on funding liquidity, bank losses and writedowns continued to accumulate as the cyclical deterioration slowly translated into renewed asset price weakness. As a result, in the second stage of the crisis, from March to mid-September 2008, funding problems morphed into concerns about solvency, giving rise to the risk of outright bank failures. One such failure, the demise of Lehman Brothers on 15 September, triggered the third and most intense stage of the crisis: a global loss of confidence, arrested only after unprecedented and broad-based policy intervention. Stage four, from late October 2008 to mid-March 2009, saw markets adjust to an increasingly gloomy global growth outlook amid uncertainties over the effects of ongoing government intervention in markets and the economy. Stage five, beginning in mid-March 2009, has been marked by signs that markets are starting to show some optimism in the face of still largely negative macroeconomic and financial news, even as true normalization.

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Is this institution broke?

Oh my...

Hello to the lads of Saxo Bank.
According to an August 12 report from investment bank Saxo Bank, the three bank failures on August 7 decreased the FDIC's Deposit Insurance Fund (DIF) to a measly $648.1 million. Well, five more banks failed last Friday, bringing the total this year to 77. And in the largest bank failure since Washington Mutual, Alabama-based Colonial BancGroup depleted the DIF by $2.8 billion. Community Bank of Nevada also failed, sucking another $781.5 million from the DIF. So according to Saxo Bank's numbers, the FDIC is officially bankrupt...

But in the FED we trust. The government will print more money in order to keep this institution alive. However, more trouble is brewing as the number of non-performing loans is still on the rise.

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Inspiration

Good to know:

• Crude oil down more than 4% on Friday.
• Chinese stocks starting to show cracks... big China ETF (FXI) down 7% this month.
• Junior mining stocks surging... Western Copper, L and L, Minatura Gold, Continental Minerals, and Bayou Bend all make fresh highs.
• Cotton falls maximum allowed on Friday after hitting 11-month high earlier in the week.

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It's going better, isn't it?

Everything goes better.
That’s what we have to believe.
But:

From HousingWire.com

The number of foreclosure notices delivered to homeowners increased nearly 7% from June to July, and are up 32% from July 2008, according to Irvine, Calif-based RealtyTrac's Foreclosure Market Report.
Foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 360,149 US properties during the month, about one in every 355 households.
“July marks the third time in the last five months where we’ve seen a new record set for foreclosure activity,” RealtyTrac CEO James Saccacio said in a statement. “Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we’re seeing significant growth in both the initial notices of default and in the bank repossessions.”

From Bloomberg

Sales at U.S. retailers unexpectedly fell in July as a boost from the cash-for-clunkers automobile incentive program failed to overcome cuts in other spending.
The 0.1 percent decrease in sales, the first drop in three months, followed a revised 0.8 percent gain in June that was larger than previously estimated, Commerce Department figures showed today in Washington. Purchases excluding automobiles fell 0.6 percent, also more than anticipated.
Today’s report underscores the threat to spending from the continued deterioration in the job market; a separate government report today showed more Americans than forecast filed claims for unemployment insurance last week. Retailers such as Wal-Mart Stores Inc. and Macy’s Inc. are cutting costs and inventories to bolster profits as households cut back on non-essential items.

From the Wall Street Journal

Only last week, Ginnie announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this “phenomenal growth.” Ginnie Mae’s mortgage exposure is expected to top $1 trillion by the end of next year—or far more than double the dollar amount of 2007. . . Earlier this summer, Reuters quoted Anthony Medici of the Housing Department’s Inspector General’s office as saying, “Who would have predicted that Ginnie Mae and Fannie Mae would have swapped positions” in loan volume?
Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.
Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.
On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices. It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory. The IG says the FHA may need a “Congressional appropriation intervention to make up the shortfall.”
… Then there is the booming refinancing program that Congress has approved to move into the FHA hundreds of thousands of borrowers who can’t pay their mortgage, including many with subprime and other exotic loans. HUD just announced that starting this week the FHA will refinance troubled mortgages by reducing up to 30% of the principal under the Home Affordable Modification Program. This program is intended to reduce foreclosures, but someone has to pick up the multibillion-dollar cost of the 30% loan forgiveness. That will be taxpayers.
In some cases, these owners are so overdue in their payments, and housing prices have fallen so dramatically, that the borrowers have a negative 25% equity in the home and they are still eligible for an FHA refi. We also know from other government and private loan modification programs that a borrower who has defaulted on the mortgage once is at very high risk (25%-50%) of defaulting again.

From DNAIndia.com

An outspoken Communist Party official in China has confirmed long-held suspicions that GDP data was being massaged and exaggerated by regional party leaders to show higher economic growth, in the process "squandering social resources."
In a brutally honest and searing speech recently, Wang Yang, the reformist-minded party secretary of Guangdong province in southern China, laid bare the dishonest means party leaders at the provincial level were employing "to polish their numbers." Since Wang is one of the few provincial party leaders who is also a member of the decision-making central Politburo, his words -- and the fact that even the official media has reported them -- is being seen as a signal that Beijing is wary of the accuracy of GDP data reported by the provinces.
"Some of our GDP data sure looks rosy," Wang told party officials. "But they do not amount to growth of social wealth; in fact, social resources are being wasted to show GDP growth." For instance, he said, provincial party officials build a bridge, which contributes to GDP; they then "dismantle" and rebuild the bridge, each time contributing to GDP. "We may have boosted our GDP this way, but this is a huge waste of social resources."
Likewise, he said, some regional governments registered GDP growth by encouraging "polluting industries", and then showed even higher growth by cleaning up the pollution.
Wang said that such practices, which went against "the laws of a market economy", were causing him deep disquiet. "Amidst the economic downturn, when everyone is eager to show 'rosy' numbers, all manner of backward productive forces are being revived," he said.
Chinese policymakers have set a target of 8% GDP growth for this year, and going by the 7.9% GDP growth reported for the first half of 2009, that looks like it will be achieved. But independent economists have expressed scepticism about the authenticity of the official data.
Others have voiced concern that an excessive preoccupation with the pace of growth (as opposed to the quality of growth) was spawning structural distortions in the Chinese economy.
Indicatively, the provincial GDP data for the first half of 2009, released by China's 31 provinces over the past week, adds up to 1 trillion yuan higher (or about 10% more) than the national GDP data released by Beijing earlier this month. Strikingly, 24 of the 31 provinces reported growth rates higher than the national average --- which, while not statistically impossible, is highly improbable, according to economists.
Party leader Wang argues that instead of artificially boosting GDP data, provincial leaders should focus on "restructuring and transforming" the industrial structure -- that is, move away from labour-intensive, low-technology, polluting and energy-inefficient industries.

It's an odd world

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A reader writes a letter

This is a classic.
From the FT letters page

From Mr Eric Keetch.

Sir,

In a sleepy European holiday resort town in a depressed economy and therefore no visitors, there is great excitement when a wealthy Russian guest appears in the local hotel reception, announces that he intends to stay for an extended period and places a €100 note on the counter as surety while he demands to be shown the available rooms.

While he is being shown the room, the hotelier takes the €100 note round to his butcher, who is pressing for payment.

The butcher in turn pays his wholesaler who, in turn, pays his farmer supplier.

The farmer takes the note round to his favourite “good time girl” to whom he owes €100 for services rendered.

She, in turn, rushes round to the hotel to settle her bill for rooms provided on credit.

In the meantime, the Russian returns to the lobby, announces that no rooms are satisfactory, takes back his €100 note and leaves, never to be seen again.No new money has been introduced into the local economy, but everyone’s debts have been settled. Is this “quantitative easing”?

Eric Keetch,London W4, UK

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More about the slowdown ...

From Dave Rosenberg

In the strangest of days, the stock market sold off, but the dollar sold off too. Usually when the equity market goes down, the dollar improves from a flight to safety. This time around, the flows were into the Yen. And despite the decline in the dollar, things that are priced in dollars all went south, from copper (China's imports of copper fell in July for the first time in six months — and by 15%!), to gold, to oil (don't look now but crude is down four months in a row). The CRB index got clocked two points and based on the performance of the Baltic Dry Index, more declines are likely over the near-term. Only the 11bps rally in the U.S. 10-year Treasury note made sense (then again, this is in the face of a $75 billion supply calendar). But the 3-year T-note auction did go very well (amazing what can happen after the market cheapens up like it did) with a strong bid-to-cover ratio of 2.89 (versus an average of 2.52 at the last seven auctions) and a record 62.5% indirect bidding, which was the strongest since this maturity was brought back into the fold in November 2008 (now that was impressive). What happened to the foreign buyers' strike?

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Almost weekend

While all European countries are selling gold within the boundaries of the Washington Agreement, there is one country which didn’t sell one ounce and still sits on 2451 Tonnes gold That’s Italy.

And than this one:

From The Telegraph

Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.
"A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

"No doubt Ireland has been the victim of a savagely tight monetary policy - given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

Oh dear. Can I stand this?

Time to turn off this thing and running to the local pub.

Friends and tourists all together: lets sing and have a pint

And you, dear reader, a good weekend and take care.

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Oh dear, my local pub...

From Bloomberg:

"The U.S. recession may not be coming to an end and there is a risk the economy may experience a “double-dip” contraction, said Martin Feldstein, a professor of economics at Harvard University. “There is a real danger this is going to be a double dip and that after six months or so we’ll have some more bad news,” Feldstein, the former head of the National Bureau of Economic Research and Reagan administration adviser, said today in an interview on Bloomberg Television. “We could slide down again in the fourth quarter.” The economy could “flatten out” or “even be positive” in the third quarter, and then it’s likely to contract again in the last three months of the year as the effects of the federal stimulus program wear off and companies finish rebuilding inventories, he said."


Oh dear… reading this, hurts:
From the UK Times:

"The rate of pub closures is accelerating, with 52 going out of business every week at a cost of 24,000 jobs over the past year, figures show. Almost 2,400 pubs and bars have vanished from villages and towns in the past 12 months, according to research for the British Beer & Pub Association (BBPA). Local pubs serving small communities have been the worst hit, the association said. The number of closures represents the steepest rate of decline since records began in 1990 and has risen by a third compared with the same period last year, when 36 pubs were closing every week."


Let’s have a quick look if the pub in the harbor is still there…

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Credit cards vs employment: beware

As the unemployment rate surges (not only in the US but everywhere), we see in the US the continuing high correlation between credit cards delinquencies and unemployment. This is not boding well.
There appears to be universal agreement that the unemployment rate will remain very high well into 2010. Does this mean consumers and banks have tougher sledding ahead than the “green shoots” theorists are currently pricing in?

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Credit cards

Some statements are really worth quoting. Take this one from the Pragmatic Captialist:

It is not the banks that I am so concerned about, but the consumer. As much as the bankers want you to believe this is a crisis about them - it’s not. It’s a crisis about you - the consumer. The banks simply exacerbated the problems. The credit card issue gets to the real heart of the issue and the troubles that the U.S. consumer is likely to face for years to come.

To illustrate this, we found a chart in The Economist about the credit card return on assets (in %). It is not getting any better.

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He's back...

David Rosenberg said good-bye to Merrill Lynch just one week ago. But he’s back working for a small Canadian boutique and a must-read report.
We cite:

Since the rebound from the March 9th lows was again led by the four sectors that led the decline during the bear phase – financials, consumer discretionary, materials and industrials – it stands to reason that this was just another counter-trend rally

The fact that the best performing stocks were the ones with the lowest quality ratings and with the largest short interest says a lot about the nature of this rally as well — the 50 heaviest shorted stocks tripled the advance among the 50 least shorted stocks — that its sustainability is in doubt. In other words, this was a rally built largely on short covering
For the near-term, it matters little because the testing process does seem to be in place right now and this carries with it well-established investment patterns. Over the past year, we have seen four other testing phases (they all failed as the market did break to new lows). Under the proviso that the S&P 500 hit an interim peak back on May 8th at 930 (it is down 3% since, even with yesterday’s bounce), here is what the recent historical record tells us to expect (at a minimum, take profits).
• The average length of the testing phase is 53 calendar days and 38 business days (versus 45 calendar days and 33 business days for the interim bear market rallies).
• On average, the S&P 500 undergoes a correction of more than 20%.
• The sectors that led during the rally, corrected most during the selloff. This means that financials, consumer discretionary, materials and industrials should underperform in the next few months, while health care, consumer staples, utilities and telecom services should emerge as the leaders.

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The worst is over - Goldman Sachs

The advanced Goldman Sachs Global Leading Indicator (GLI) is out tomorrow and is important. Goldman Sachs analysts think that we are now past the low point in the economic cycle, although in most regions we are still far from expansionary territory. The GLI has shown two months of sequential improvement for the first time since 2006 and the momentum component has moved into positive territory. Here is the picture that illustrates that momentum:

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The China Syndrome

We hear a lot of stories about China and how they are fighting the crisis by storing metals and oil. But how is the economy really doing?
Here for we look to the China container trade via China ports data (from www.transport-trackers.com) . Although these data are from jan/feb 2009 we observe that they’re really falling from a cliff.

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Load my boat

Sometimes we can look to this worldwide crisis from a different angle. We have a picture from vesseltracker.com. It shows the container ships off the coast of Singapore. Green means: yes there is activity, red says: we’re just hanging around. It’s another way to show us how limited shipping activity is on the largest parking lot on earth.
From International Economy:

The world's busiest port for container traffic, Singapore saw its year-over-year volume drop by 19.6 percent in January 2009, followed by a 19.8 percent drop in February. As of mid-March 2009, 11.3 percent of the world's shipping capacity, sat idles, a record.

If this anecdote proves to be symptomatic, where will the rally in the container stocks leading us?
We look to DRYS.

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Ireland: not a bright spot for the moment

Everyone has his unemployment worries, these days. Most well known are the US, but if we look to the Irish unemployment rate than the Emerald Isle is in nothing short of their American counterpart.

Share prices are going bonkers over here. Thank you. AIB and Bank of Ireland stock prices quadrupled over the pas few month. Everybody is telling in the pub that this is due to the planned bail-out of the government. Maybe, but I rather think shorters covered their positions. As everywhere else in Europe.

What if the government ends up with 70% of AIB shares?

Time to buy. These guys are not so weak as everybody assumes.

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Worrying

The BIS published a paper on leverage and procyclicality. The graph of household indebtedness, although open for a lengthy discussion, gives an illustration of what is coming. Debt is climbing and/or assets are shrinking..
Especially in the States. And in a lesser extent also for the UK.

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