by Calculated Risk on 11/20/2008 10:41:00 AM

Until recently the manufacturing sector (except the automakers) was holding up pretty well. Not anymore ...

Here is the Philadelphia Fed Index for November activity released today: Business Outlook Survey.

Conditions in the region's manufacturing sector continued to deteriorate, according to firms polled for this month's Business Outlook Survey. Most broad indicators declined again in November, following sharp decreases in October. ... Most of the survey's indicators of future activity slid further into negative territory this month, suggesting that the region's manufacturing executives expect continued declines over the next six months.
...
The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from -37.5 in October to -39.3 this month. This index, which fell a dramatic 41 points last month, is now at its lowest level since October 1990.
...
The current employment index fell notably this month, declining seven points, to -25.2

Click on graph for larger image in new window.

This graph shows the Philly index vs. recessions for the last 40 years. The manufacturing sector is clearly in recession - although still not as bad as during earlier recessions.

by Calculated Risk on 11/20/2008 10:19:00 AM

The three month LIBOR declined slightly to 2.15% from 2.17%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (slightly better)

The yield on 3 month treasuries increased to 0.01% from 0.1054%. (worse). Essentially zero - flight to quality!

The 10-Year Treasury Note yield is at 3.14%.

The effective Fed Funds rate was at 0.38% (yesterday). At some point, I'd like to see the effective Fed funds rate close to the target rate (currently 1.0%) and the 3 month yield within 25 bps of the target rate.

But for now, the Fed appears engaged in quantitative easing.

The TED spread: 2.09. (unchanged)

The TED spread is stuck above 2.0, and still too high. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is around 0.5.

The two year swap spread from Bloomberg: 103.0, down slightly from 105.30 (unchanged). This spread peaked at near 165 in early October, so there has been significant progress, but I'd like to see this below 100.

Spreads between 30 Year Corporate and Treasury Yields

This graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury. The Moody's data is from the St. Louis Fed

There are periods when the spread increases because of concerns of higher default rates (like in the severe recession of the early '80s), but the recent spread is unprecedented. Worse

Weekly Fed Balance Sheet (updated weekly on Thursday afternoon)

The Federal Reserve assets increased $139 billion last week to $2.214 trillion.

The A2P2 spread increased to 4.83 from 4.65 (Worse). New record high for this cycle!

This is the spread between high and low quality 30 day nonfinancial commercial paper.

The Fed is buying higher quality commercial paper (CP) and this is pushing down the yield on this paper (0.43% yesterday!) - and increasing the spread between AA and A2/P2 CP. So this indicator has been a little misleading. Also the recession is creating concern for lower rated paper. Still, if the credit crisis eases, I'd expect a significant decline in this spread.

Note:on quantitative easing, see Bernanke's paper from 2004: Conducting Monetary Policy at Very Low Short-Term Interest Rates One thing is clear - the target Fed funds rate is pretty much meaningless right now.

by Calculated Risk on 11/20/2008 09:29:00 AM

From Bloomberg: Bond Risk Soars to Record as Markets Return to ‘Crisis Mode’ (hat tip Justin)

The cost of protecting corporate bonds from default surged to records around the world as the prospect of U.S. automakers filing for bankruptcy protection fueled concern of more bank losses and a deeper recession.

“Markets are back in crisis mode,” said Agnes Kitzmueller, a Munich-based credit strategist at UniCredit SpA, Italy’s biggest bank. “There is fear in the market.”

Click on cartoon for larger image in new window. This cartoon from Eric G. Lewis, a freelance cartoonist living in Orange County, CA. was inspired by Professor Duy's post last night: Fed Watch: Policy Adrift

by Calculated Risk on 11/20/2008 09:13:00 AM

From MarketWatch: GMAC moves to tap government funding

GMAC LLC, the financial arm of General Motors Corp., said Thursday that it has applied to become a bank-holding company so it can access some of the emergency cash available through the U.S. Treasury's Capital Purchase Program.

by Calculated Risk on 11/20/2008 09:02:00 AM

It was just six months ago that continued claims hit 3 million; that was a big story. Now continued claims are over 4 million ...

The DOL reports on weekly unemployment insurance claims:

In the week ending Nov. 15, the advance figure for seasonally adjusted initial claims was 542,000, an increase of 27,000 from the previous week's revised figure of 515,000. The 4-week moving average was 506,500, an increase of 15,750 from the previous week's revised average of 490,750.
...
The advance number for seasonally adjusted insured unemployment during the week ending Nov. 8 was 4,012,000, an increase of 109,000 from the preceding week's revised level of 3,903,000.

Click on graph for larger image in new window.

The first graph shows weekly claims. The four moving average is at 506,500. This is a very high level, and indicates significant weakness in the labor market.

Continued claims are now at 4.012 million, the highest level since 1982.

The second graph shows continued claims since 1989.

Note: Continued claims hit 4.7 million during the 1982 recession (not shown), although the population was much smaller then. The unemployment rate peaked at 10.8% in 1982 (compared to 6.5% currently).

This suggests that November will be another very weak month for employment.

by Calculated Risk on 11/20/2008 01:31:00 AM

Professor Tim Duy takes a hard look at Bernanke Fed Watch: Policy Adrift

I understand the Federal Reserve Chairman Ben Bernanke is considered something of a sacred cow, our one point of light in an uncertain world. An academic who cannot be questioned by other academics. A smart person who has mastered the Great Depression and therefore “knows” what to do, and is providing the leadership to do it.

I am beginning to question all of these assumptions.

... for now, I see a distinct lack of leadership from the Federal Reserve, and it suggests that Bernanke has used up his bag of tricks. And I don’t think that he knows what to do next. Indeed, Fedspeak is now littered with confusing statements that leave the true policy of the Federal Reserve in question.

Read it all ...

by Calculated Risk on 11/20/2008 01:18:00 AM

"The FOMC for many years has instructed the open market desk at the New York Fed to keep the actual Fed Funds rate close to the target Fed Funds rate. Clearly in recent weeks, it is not succeeding. As far as I can tell, it can't be trying."
William Poole, former President of Fed Bank of St. Louis

From Bloomberg: Bernanke's Cash Injections Risk Eclipse of Main Rate

``There has been a policy shift, but the Fed is not transparently announcing what it is doing and why,'' said former St. Louis Fed President William Poole, now a senior fellow at Cato. ``Monetary policy works best when the markets understand what the central bank is doing.''
...
``It is a move to quantitative easing, to force lots and lots of reserves into the banking system with the expectation that banks will start to trade them for a higher-yielding asset,'' said Poole, a Bloomberg contributor

Click image for video. Poole Sees Evidence of Unannounced Policy Shift at Fed (Source: Bloomberg)

by Calculated Risk on 11/19/2008 11:45:00 PM

General Growth Properties, the second largest mall owner in the U.S. behind Simon Property, has hired bankruptcy counsel ...

From the WSJ: Mall Owner Lines Up Bankruptcy Law Firm (hat tip crispy&cole)

Debt-laden mall giant General Growth Properties Inc. has hired the law firm Sidley Austin as bankruptcy counsel ... The move doesn't mean a Chapter 11 filing is imminent.
...
The company, which owns more than 200 U.S. malls, has struggled to repay debt it amassed during an acquisition binge near the market's peak.

by Calculated Risk on 11/19/2008 08:55:00 PM

The Dept of Transportation reports on U.S. Traffic Volume Trends:

Travel on all roads and streets changed by -4.4% (-10.7 billion vehicle miles) for September 2008 as compared with September 2007. Travel for the month is estimated to be 232.8 billion vehicle miles.

Click on graph for larger image in new window.

This graph shows the annual change in the rolling 12 month average of U.S. vehicles miles driven. Note: the rolling 12 month average is used to remove noise and seasonality.

By this measure, vehicle miles driven are off 3.0% YoY, and the decline in miles driven is worse than during the early '70s oil crisis - and about the same as the 1979-1980 decline. As the DOT noted, miles in September 2008 were 4.4% less than September 2007, so the YoY change in the rolling average will probably get worse.

The second graph shows the weekly U.S. gasoline prices from the EIA. This shows that gasoline prices really declined in October - but prices in September were still over $3.50 per gallon. So we will have to wait for the October vehicle miles report to see the impact of sharply lower gasoline prices.

Lower gasoline prices should mean more vehicle miles driven, but the weakening economy might offset the impact from lower prices.

by Calculated Risk on 11/19/2008 06:41:00 PM

Click on graph for larger image in new window.

Doug Short of dshort.com (financial planner) sent me this graph of "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

Interesting times ...