Monday, November 24, 2014

Black Knight: House Price Index down slightly in September, Up 4.6% year-over-year

by Bill McBride on 11/24/2014 01:14:00 PM

Note: I follow several house price indexes (Case-Shiller, CoreLogic, Black Knight, Zillow, FHFA, FNC and more). The timing of different house prices indexes; Black Knight uses the current month closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic), excludes short sales and REOs, and is not seasonally adjusted.

From Black Knight: U.S. Home Prices Down Slightly for the Month; Up 4.6 Percent Year-Over-Year

Today, the Data and Analytics division of Black Knight Financial Services​ released its latest Home Price Index (HPI) report, based on September 2014 residential real estate transactions. The Black Knight HPI combines the company’s extensive property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of more than 18,500 U.S. ZIP codes. The Black Knight HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales.
The Black Knight HPI declined 0.01% percent in September, and is off 10.2% from the peak in June 2006 (not adjusted for inflation).

The year-over-year increases have been getting steadily smaller for the last year - as shown in the table below:
MonthYoY House
Price Increase

The press release has data for the 20 largest states, and 40 MSAs.

Black Knight shows prices off 41.0% from the peak in Las Vegas, off 34.3% in Orlando, and 31.7% off from the peak in Riverside-San Bernardino, CA (Inland Empire). Prices are at new highs in Colorado and Texas (Denver, Austin, Dallas, Houston and San Antonio metros). Prices are also at new highs in Honolulu, HI, Nashville, TN and San Jose, CA.

Note: Case-Shiller for September will be released tomorrow.

Dallas Fed: Texas Manufacturing "Posts Slower Growth" in November

by Bill McBride on 11/24/2014 10:37:00 AM

From the Dallas Fed: Texas Manufacturing Activity Posts Slower Growth

Texas factory activity increased again in November, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, fell from 13.7 to 6, indicating output growth slowed in November.

Other measures of current manufacturing activity also reflected slower growth during the month. The capacity utilization index fell sharply from 18.1 to 9.8. The new orders index also declined notably from 14.2 to 5.6, although more than a quarter of firms continued to note increases in new orders over October levels. The shipments index was 12.1, nearly unchanged from its October reading.

Perceptions of broader business conditions remained positive this month, while outlooks were less optimistic. The general business activity index held steady at a solid reading of 10.5. The company outlook index dropped from 18.2 to 8.8, due to a smaller share of firms noting an improved outlook in November than in October.

Labor market indicators reflected continued employment growth and longer workweeks. The November employment index posted a sixth robust reading, coming in at 9.6.
emphasis added
The last of the regional Fed surveys (Richmond) will be released tomorrow. So far the surveys have been solid in November.

Chicago Fed: Index shows "economic activity was near its historical trend" in October

by Bill McBride on 11/24/2014 08:41:00 AM

The Chicago Fed released the national activity index (a composite index of other indicators): Index shows economic growth decelerated in August

Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) moved down to +0.14 in October from +0.29 in September. Two of the four broad categories of indicators that make up the index decreased from September, and two of the four categories made negative contributions to the index in October.

The index’s three-month moving average, CFNAI-MA3, declined to –0.01 in October from +0.12 in September. October’s CFNAI-MA3 suggests that growth in national economic activity was near its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.
emphasis added
This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Chicago Fed National Activity Index Click on graph for larger image.

This suggests economic activity was close to the historical trend in October (using the three-month average).

According to the Chicago Fed:
What is the National Activity Index? The index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

Sunday, November 23, 2014

Sunday Night Futures

by Bill McBride on 11/23/2014 07:30:00 PM

From Professor Hamilton at Econbrowser: Lower oil prices and the U.S. economy

Last year Americans consumed 135 billion gallons of gasoline. That means that if prices stay where they are, consumers will have an extra $108 billion each year to spend on other things. And if the historical pattern holds, spend it they will.
[A]nother thing that’s changed is that much more of the oil we consume is now being produced right here at home. While lower prices are a boon for consumers, they pose a potential threat to producers ... Nevertheless, there should be no question that at this point this is a favorable development on-balance for the U.S. economy. We’re still importing 5 million more barrels each day of petroleum and products than we are exporting. Importing fewer barrels, and paying less for the barrels we do import, is a good thing.
Overall a nice boost for the U.S. economy.

• At 8:30 AM ET, the Chicago Fed National Activity Index for October. This is a composite index of other data.

• At 10:30 AM, the Dallas Fed Manufacturing Survey for November.

Schedule for Week of November 16th

From CNBC: Pre-Market Data and Bloomberg futures: currently the S&P futures are up slightly and DOW futures are also up slightly (fair value).

Oil prices were up a little over the last week with WTI futures at $76.58 per barrel and Brent at $80.04 per barrel.  A year ago, WTI was at $94, and Brent was at $108 - so prices are down more than 20%  year-over-year.

Below is a graph from for nationwide gasoline prices. Nationally prices are around $2.82 per gallon (down about 30 cents from a year ago).  If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

Orange County Historical Gas Price Charts Provided by

Update: Business Cycles and Markets

by Bill McBride on 11/23/2014 11:47:00 AM

For fun ... recently we've seen another recession call for 2015, this time from the Jerome Levy Forecasting Center (following their an incorrect recession call in 2011). Over the last few years, there were several incorrect recession calls from ECRI and others. I disagreed with all of them, and I wrote I wasn't even on recession watch then, and I'm not on recession watch now!

But why do we care? Here is a repeat of a post I wrote in early 2011 (with updated tables and charts):

From 2011 [updates in brackets]: Here is something very different. This is NOT intended as investment advice.

Why is there so much focus on the business cycle? For companies, especially cyclical companies, the reason is obvious – it helps with planning, staffing and investment.

But why are investors so focused on the business cycle? Obviously earnings decline in a recession, and stock prices fall too. The following graph shows the year-over-year (YoY) change in the S&P 500 (using average monthly prices) since 1970. Notice that the market usually declines YoY in a recession.

Note: Because this is “year-over-year” there is a lag to the S&P 500 data. [Graph updated to November 2014]

SP 500 Year-over-year Change Click on graph for larger image.

So calling a recession isn’t just an academic exercise, there is some opportunity to preserve capital.

Not all downturns in the stock market are associated with recessions. As an example, the 1987 market crash was during an economic expansion. And the stock bubble collapse lasted from March 2000 through early 2003 – and the only official economic recession during that period was 7 months in 2001.

Although I don’t give investment advice, I think investors should measure their performance with some index. Warren Buffett likes to use the S&P 500 index, so I also used the S&P 500 for this exercise.

Imagine if we could call recessions in real time, and if we could predict recoveries in advance. The following table shows the performance of a buy-and-hold strategy (with dividend reinvestment), compared to a strategy of market timing based on 1) selling when a recession starts, and 2) buying 6 months before a recession ends.

For the buy and sell prices, I averaged the S&P 500 closing price for the entire month (no cherry picking price – just cherry picking the timing with 20/20 hindsight).

I assumed an investor started at four different times, in January of 1970, 1980, 1990, and 2000 [UPDATE: added 2010 start].

Note: Table columns for sensitivity corrected (ht YT)

S&P 500 Annualized Return, including dividends
Return from Start DateRecession Timing Sensitivity
Start InvestingBuy and HoldRecession TimingTwo Months EarlyOne Month EarlyOne Month LateTwo Months Late

The “recession timing” column gives the annualized return for each of the starting dates. Timing the recession correctly always outperforms buy-and-hold. The last four columns show the performance if the investor is two months early (both in and out), one month early, one month late, and two months late. The investor doesn’t have to be perfect!

Note: This includes dividends, but not taxes. Also I assumed no interest earned when the investor is out of the market (money in the mattress).

The second table provides the same information, but this time in dollars (assuming a $10,000 initial investment). Notice that someone could have bought the S&P 500 index in January 2000, and they’d be up about $150 [November 2014 Update: Up $16,410] now using buy-and-hold even though the market is still below the January 2000 average price of 1425 [Update: Now well above January 2000].

S&P 500: Value of $10,000 Investment, including dividends
Value based on Start DateRecession Timing Sensitivity
Start InvestingBuy and HoldRecession TimingTwo Months EarlyOne Month EarlyOne Month LateTwo Months Late

Unfortunately forecasters have a terrible record of predicting downturns. The running joke is that forecasters have predicted 9 of the last 5 recessions! Although a forecaster doesn’t have to be perfect, they still have to be right. And that is very rare.

As economist Victor Zarnowitz said way back in 1960: “The record of predicting turning points — changes in the direction of economic activity — is on the whole poor." Forecasting hasn't improved much since then.

As an example, here are some comments from then Fed Chairman Alan Greenspan in 1990 (a recession began in July 1990):
“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].”
Chairman Greenspan, July 1990

“...those who argue that we are already in a recession I think are reasonably certain to be wrong.”
Greenspan, August 1990

“... the economy has not yet slipped into recession.”
Greenspan, October 1990
I'd say he missed that downturn. Of course Wall Street and Fed Chairmen are notoriously bad at calling downturns.

But the track record for calling recoveries isn’t much better. ... Calling recessions is a mug’s game, but I like to play. I was very lucky with the [2007] recession, but the key wasn’t calling the end in June 2009 (I thought it ended in July), but looking for the bottom in early 2009 (that is why I posted several times in early 2009 that I was looking for the sun).

This is NOT intended as investment advice. I am NOT an investment advisor. Just some (hopefully) fun musing ...

[Final Update: If investors sold when ECRI first made their recession call in Sept 2011, they would have a missed around a 75% increase in the market  This shows why trying to add recession timing is difficult; investors have to be correct on the business cycle - and most forecasters and investors are wrong].

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