All Things in Moderation

Vital Statistics:

Jobs Friday. Yesterday’s ADP report did indeed signal a stronger jobs report today. Nonfarm payrolls were up 200k, and Nov was revised down. The unemployment rate dropped to 8.5% from 8.7%. Manufacturing was up 23k, and construction was up 17k. On the service side, retailwas up 28k and transport was up 50k. This could be temp jobs related to the holidays, so take the report with a grain of salt when trying to draw conclusions for the economy as a whole.

I think Scott posted something from James Pethokoukis yesterday regarding Obama’s plan to have the GSEs refinance everyone who is current in their mortgage, no questions asked. The hitch in this plan is the originator. Anyone who originates a conforming mortgage for the GSEs has what is called put-back risk. In other words, if it turns out that the originator had done a poor underwriting, the GSE can force the underwriter to buy it back. And for that reason, no originator is going to refi underwater mortgages or people with dented credit. Even if Obama winks at the originators and says “don’t worry about put-back risk,” I doubt that would be enough comfort, since the rules can always be changed retroactively, and any banker with grey hair will remember the supervisory goodwill fiasco from the S&L crisis. Plus, what is the upside of refinancing an underwater loan for 4.2%? The same as the upside of refinancing a 80% LTV loan for 4.2%. In other words, there is no compensation for taking Obama risk. Which is why it won’t have the effect he hopes it will.

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Markets are down slightly on a couple of lukewarm bond auctions in France and Hungary. This also begins pre-announcement season, where companies who are going to miss their quarterly numbers fess up. Today’s names: Tesoro, J.C. Penney, and Eli Lilly.

Initial Jobless Claims continued their 375k a week pace, lower than the 400k pace we had been accustomed to. The ADP number was way better than expected, forecasting 325k jobs being created in December, vs expectations of 178k.

The Fed released a white paper yesterday discussing the US housing market and possible policy responses to it. I have not read it yet, and I will give you my take when I have finished it. They do suggest that the GSEs relax refinancing guidelines, and that the government find a way to encourage foreclosures to be turned into rental properties. Anecdotally, here in the Northeast, I do find that banks are very reluctant to move off of their offering prices in short sale situations, which signals they know something is in the works.

Today is the first Thursday of the month, which means retailers are giving their comp sales numbers. The winners: Macy’s, The Limited, Zumiez. Losers: J.C. Penney, Target, Kohl’s, The Gap, and American Eagle. Margin pressure continues to signal that the consumer is very value conscious and that promotional activity drove sales.

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Vital Statistics:

Markets are giving back some of yesterday’s gains on a slow news day.

The Fed announced yesterday that they will be more transparent in forecasting interest rates in the future. The ironic thing is that when I studied money and banking way back in the day, the view was that if the market perfectly anticipated Fed policy, it would be ineffective. The Fed had to surprise the market for policy to have its full effect. I believe this will probably be temporary – the Fed knows it has to extricate itself from the financial system and that rates eventually have to go up. The Fed is going to ensure that increases are well-telegraphed and that people have ample time to adjust.

Not a lot of economic data this morning. We will have jobless claims tomorrow and payrolls / unemployment on Friday.

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Vital Statistics:

Markets are rallying on thin volume as market participants focus on a lack of bad news out of Europe. Sovereign yields are slightly higher across the board. Investors may also be taking a view that the ISM report (due at 10:00 am) will be better than expected.

On the “glass half-empty” side of the ledger, the WSJ has an article on Bridgewater’s view on the economy – and it doesn’t bode well. Money quote:

“What you have is a picture of broken economic systems that are operating on life support,” Mr. Prince says. “We’re in a secular deleveraging that will probably take 15 to 20 years to work through and we’re just four years in.”

In Europe, “the debt crisis is [a] long ways from over,” he says. The economic and financial morass will mean interest rates in the U.S. and Europe will essentially be locked at zero for years.

Dalio is long gold, Asian emerging market currencies, and high quality government bonds. The article goes on to say that they believe there is money to be made in US Treasuries. That is a defensive portfolio.

The NYT has an article discussing the dismal state of the US consumer. The article echoes the Bridgewater piece that debt remains a headwind for the US economy. This analysis isn’t new – economists have been talking about it since the crisis began. But how much progress has been made in consumer deleveraging? A couple charts suggest that things are not as bad as it seems.

Chart: Consumer Debt as a percent of GDP:

The above chart shows the progress being made in deleveraging, but it ignores one huge issue – what determines spending – the amount you owe or the amount you pay? Lower interest rates have allowed homeowners with equity to refinance at much lower rates. If you look at debt service – the amount people actually pay – it is down quite a bit.

Chart: Ratio of Debt Service Payments to Disposable Income:

While the dour mood of the job market will undoubtedly influence consumer spending, low interest rates have at least increased borrowing capacity, which may come into play when the consumer’s mood shifts.

********EDIT:

ISM is in, better than expected (53.9 vs 53.5 expected). Good manufacturing report. Best news: bit jump in employment, rebounding back to Spring levels. Construction Spending was also up 1.2%, better than the .5% estimate.

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Vital Statistics:

Another low-volume day is on tap with no economic data. Tomorrow, we have initial jobless claims, and if they are good, that may be the excuse portfolio managers use to do a little window dressing on the second-to-last trading day of the year. Separately, Italy had a good bond auction, selling 9 billion euros of debt. Bid to cover was 1.7, and the 10 year yield dropped 14 basis points.

Is the US going to bail out Europe? A commentary piece in this morning’s WSJ suggests we already are. We are lending to the ECB through currency swaps, which aren’t technically loans. The ECB then lends dollars to the sick banks of Europe.

Money quote from the article: “This Byzantine financial arrangement could hardly be better designed to confuse observers, and it has largely succeeded on this side of the Atlantic, where press coverage has been light. Reporting in Europe is on the mark. On Dec. 21 the Frankfurter Allgemeine Zeitung noted on its website that European banks took three-month credits worth $33 billion, which was financed by a swap between the ECB and the Fed. When it first came out in 2009 that the Greek government was much more heavily indebted than previously known, currency swaps reportedly arranged by Goldman Sachs were one subterfuge employed to hide its debts.“

When is the next Humphrey-Hawkins anyway?

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Vital Statistics:

Hope everyone had a good Christmas.

Markets are up this morning in thin holiday trading. Needless to say, not a lot of news this Tuesday morning after the holiday.

Case-Schiller was released this morning, and the results are slightly lower than expected. The 20 city index dropped 3.4% at an annual rate to 140.3, which puts the US real estate market back to May of 2003 levels. Denver and Washington DC were up in Oct, while Detroit and Atlanta experienced 2% + declines. Remember, there is a lag with CS, so these numbers are October numbers and we are going into a seasonally weak period. I wouldn’t be surprised to see prices take out the post recession lows this spring.

On the bright side, consumer confidence has rebounded smartly from this summer’s lows. The conference board consumer confidence level came in at 64.5 vs. street expectations of 58.9. While we are still at extremely depressed levels historically, the mood has brightened considerable with the index jumping from 40.9 in Oct to 64.5 in Dec. Interestingly, the retail ETF (XRT) yawned at the number – I would have expected to see analysts take up their comp sales estimates for Dec. Retailers will report Dec comp sales on Jan 5.

Chart: Consumer Confidence

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That is all.

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Morning Report

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Markets are up slightly on very light volume (around 110 million shares as of 10:15). We had a slew of economic data this morning. 3Q GDP and personal consumption came in light, but jobless claims and leading economic indicators were better. The markets will probably focus on LEI, as it is forward looking and Q3 data is old news. University of Michigan Consumer Sentiment came in better than expected, but still shows that the consumer is in a foul mood.

Last, FHFA Hous Price index dropped in October by .2%. This index is pretty narrow – it only looks at conforming mortgages, but this is the center of gravity for the real estate market. It shows the Midwest outperforming the coasts.

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Vital Statistics:

S&P futures are slightly weaker on a miss by Oracle and European weakness. Oracle blamed the miss on customers delaying purchases and economic weakness in Europe. Analysts are forecasting a drop in corporate IT spending in Q112. Separately, RIMM is up over 9% on reports that they are an acquisition target by AMZN, and that MSFT and NOK considered a joint bid.

Speaking of takeovers, a lot of merger arbs expected the Obama FTC and DOJ to be aggressive antitrust enforcers, similar to the Clinton Administration, when Robert Pitofsky headed the FTC. (Anyone remember Staples / Office Depot?). Well, the Obama Administration finally blocked one – the Verizon / T-Mobile Deal. The Bush Administration had a particularly benign view of antitrust – allowing the merger of Whirlpool and Maytag / Quaker Oats and Pepsi among others. Obama more or less continued the benign view that the Bush Administration followed. It will be interesting to see if this is part of a trend.

The National Association of Realtors just released existing home sales data for November, including revisions going back to 2007. Due to errors in methodology, existing home sales have been overstated by about 14% – 15% for the last few years. Other data in the report: there are about 2.58 million homes for sale, or a 7-month supply. The median existing home price dropped 3.5% YOY to $164,200. 29% of all home sales were foreclosures or short sales. While the naturally bullish NAR is trying to put a happy face on the data, it shows the housing market still has a long way to go in order to reach normalcy. It also demonstrates how much the government efforts to limit foreclosures have depressed sales and delayed the necessary process of moving the distressed inventory. House prices won’t recover (and the economy won’t experience a robust recovery) until the shadow inventory has traded.

Chart: US Existing Home Sales (Seasonally Adjusted Annual Rate)

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Vital Statistics:

Housing starts were better than expected at 685k, which more or less matches the post-recession high of 687k. Trouble is, a normal number is closer to 1500, and these “highs” are lower than the troughs in the last 8 recessions. So, yes it shows that housing is maybe, conceivably, hopefully picking itself up off the mat, but we are still in a deep freeze.

Joe Nocera is back on the revisionist history beat with an editorial claiming that Fannie and Fred didn’t have a role in the crisis. I propose that all liberal columnists who write columns defending Fannie address the American Dream Commitment, which was a $ 2 trillion piece of social engineering policy that has been thoroughly swept under the rug. Just because the media refuses to address it doesn’t mean it didn’t exist.

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