by Calculated Risk on 3/28/2009 03:30:00 PM

The following is a section on housing from John Mauldin's newsletter: Why Bother With Bonds?. I'd like to correct a few mistakes, not to embarrass Mr. Mauldin - we all make mistakes - but hopefully to illustrate a few points about the housing data.

From Mauldin:

Housing Sales Improve? Not Hardly

I opened the Wall Street Journal and read that new home sales were up in February. Bloomberg reported that sales were "unexpectedly" up by 4.7%. I was intrigued, so I went to the data. As it turns out, sales were down 41% year over year, but up slightly from January.

But if you look at the data series, there was nothing unexpected about it. For years on end, February sales are up over January. It seems we like to buy homes in the spring and summer and then sales fall off in the fall and winter. It is a very seasonal thing.

Uh, the numbers from the Census Bureau are seasonally adjusted. From the Census Bureau report:

Sales of new one-family houses in February 2009 were at a seasonally adjusted annual rate of 337,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.7 percent (±18.3%)* above the revised January rate of 322,000, but is 41.1 percent (±7.9%) below the February 2008 estimate of 572,000.
emphasis added

Mauldin continues with the error:

If you use the seasonally adjusted numbers, you find sales were down 2.9% instead of up 4.7%. But the media reports the positive number. Interestingly, they report the seasonally adjusted numbers for initial claims, which have been a lot better than the actual numbers. Not that they are looking to just report positive news, you understand.

As best I can tell, Mauldin is using the decline in inventory (from 340 thousand to 330 thousand) as the Seasonally Adjusted Annual Rate (SAAR) sales numbers. That shows a decline of 2.9%, but that is inventory - not sales.

The Not Seasonally Adjusted (NSA) monthly sales number are 27 thousand in February, compared to 23 thousand in January. An increase of 17.4%! If Mauldin is looking for an example of the media cherry picking SA vs. NSA, this isn't it.

Back to Mauldin:

Plus, as my friend Barry Ritholtz points out, the 4.7% rise was "plus or minus 18.3%". That means sales could have risen as much as 23% or dropped 13%. We won't know for awhile until we get real numbers and not estimates. Hanging your outlook for the economy or the housing market on one-month estimates is an exercise in futility, and could come back to embarrass you.

Barry is correct - this is the 90% confidence interval from the Census Bureau. And I agree we should always be cautious with just one month of data.

More Mauldin:

But that brings up my final point tonight, and that is how data gets revised by the various government agencies. Typically with these government statistics, you get a preliminary number, which is a guess based on past trends, and then as time goes along that data is revised. In recessions like we are in now the revisions are almost always negative.

There is no conspiracy here. The people who work in the government offices have to create a model to make estimates. Each data series, whether new home sales, employment, or durable goods sales, etc., has its own unique sets of characteristics. The estimates are based on past historical performance. There is really no other way to do it.

So, past performance in a recession suggests higher estimates than what really happens. Then, the numbers in the following months are revised downward as actual numbers are obtained. But the estimates in the current months are still too high. That makes the comparisons generally favorable, at least for one month. And the media and the bulls leap all over the "data," and some silly economist goes on TV or in the press and says something like, "This is a sign that things are stabilizing." It drives me nuts.

First, the preliminary estimate is not a "guess"; the esimate is based on a sample. As more data is received, the estimate is refined, and the confidence interval narrows - but it is always an estimate (it is never "real numbers" or a "guess").

Mauldin is correct about new home sales revisions being negative during the housing bust (something I've written about many times).

Click on graph for larger image in new window.

This graph shows the change from the preliminary release to the most recent release. Usually the revisions can be either positive or negative, but during the housing bust almost all the revisions were negative. For the two most recent months, the revisions have been positive, but there are more revisions to come.

Mauldin's conclusion is:

Ignore month-to-month estimated data. The key thing to look for is the direction of the revisions. If they are down, as they have been for over a year, then that is a bad sign. Further, one month's estimates are just noise. Look at the year-over-year numbers. When the direction of the revisions is positive and the year-over-year numbers are starting to stabilize, then we will know things are starting to turn around.

I agree with his comment on revisions, although it takes several months to know if the data is being revised up or down.

Looking at year-over-year numbers is useful, but I think we can also look cautiously at the monthly numbers too. We needn't do this in a vacuum. Here is what I wrote early this year: Looking for the Sun

New home sales is a little more difficult because of the huge overhang of excess inventory that needs to be worked off. But some people will always buy new homes, and we can be pretty sure that sales won't fall another 270 thousand in 2009 (like in 2008), because that would put sales at 60 thousand SAAR in December 2009. That is not going to happen.

So, at the least, the pace of decline in new home sales will slow in 2009. More likely sales will find a bottom - to the surprise of many.

And here was my take on the recent report: New Home Sales: Is this the bottom?. An excerpt:

This graph shows the February "rebound".

You have to look closely - this is an eyesight test - and you will see the increase in sales (if you expand the graph).

Not only was this the worst February in the Census Bureau records, but this was the 2nd worst month ever on a seasonally adjusted annual rate basis (only January was worse).

Note: Once again, I'm not trying to embarrass Mr. Mauldin, but hopefully this helps in looking at the housing data.

by Calculated Risk on 3/28/2009 11:44:00 AM

By popular request, here is a graph comparing four significant bear markets: the Dow during the Great Depression, the NASDAQ, the Nikkei, and the current S&P 500.

Click on graph for larger image in new window.

This graph is from Doug Short of dshort.com (financial planner):

"The Mega-Bear Quartet and L-Shaped Recoveries".

Note: updated today.

by Calculated Risk on 3/28/2009 09:54:00 AM

From the LA Times: FDIC orders changes at six California banks

[T]he Federal Deposit Insurance Corp. disclosed Friday that it had ordered six more California banks to clean up their acts in February after the agency examined their books and operations.
...
The number of such regulatory actions has been increasing rapidly.
...
By the end of 2009, two-thirds of the state's banks will be operating under cease-and-desist orders or other regulatory actions, Anaheim-based banking consultant Gary S. Findley predicts.
...
Most banks targeted in such actions eventually tighten up operations and continue in business or merge with stronger institutions, but regulators are preparing for a major wave of failures.
...
In addition to public cease-and-desist orders, banks are subject to a variety of regulatory sanctions, including so-called memorandums of understanding, which are informal directives to correct problems. Regulators don't release those memos, but banks sometimes disclose them to shareholders.

So far 21 FDIC insured banks have failed this year, and 3 in California. There will probably be many more ...

by Calculated Risk on 3/27/2009 10:18:00 PM

From the NY Times: U.S. Expected to Give More Financing to Automakers

The Obama administration will probably extend more short-term aid to General Motors and Chrysler on Monday ...

The administration is expected to set a short deadline — weeks rather than months — to compel the automakers, their lenders and the U.A.W. to reach agreement.

Both G.M. and Chrysler are close to exhausting the loans they received since December. ...

G.M.’s request for up to $16.6 billion more in federal loans will be treated separately from Chrysler’s request for an additional $5 billion ...

The announcement on Monday will usher in a more intensive period of oversight by the government of G.M. and Chrysler ...

Another week, another bailout.

by Calculated Risk on 3/27/2009 07:20:00 PM

Just some quick words of advice from Jon Stewart (Dec 13, 2000): (ht Martin)

by Calculated Risk on 3/27/2009 05:17:00 PM

Update: from Soylent Green Is People

Bright, warm Spring Friday...
Bank failures blight like crab grass...
Spray Round-Up on all....
From the FDIC: SunTrust Bank, Atlanta, Georgia, Receives the Insured Deposits of Omni National Bank, Atlanta, Georgia

Omni National Bank, Atlanta, Georgia, was closed today by the Office of the Comptroller of the Currency, which then appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.
...
As of March 9, 2009, Omni National Bank had total assets of $956.0 million and total deposits of $796.8 million. At the time of closing, there were approximately $2.0 million in uninsured deposits that potentially exceeded the insurance limits. ...
...
The cost to the FDIC's Deposit Insurance Fund is estimated to be $290 million. Omni National Bank is the twenty-first bank to fail this year. The last bank failure in Georgia was FirstCity Bank, Stockbridge, on March 20, 2009.

This is the follow-up to the earlier post.

by Calculated Risk on 3/27/2009 04:43:00 PM

First, a quick market update ...

Click on graph for larger image in new window.

This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

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

On Q1 GDP:

Earlier today the BEA released the February Personal Income and Outlays report. This report suggests Personal Consumption Expenditures (PCE) will probably be slightly positive in Q1 (caveat: this is before the March releases and revisions).

Since PCE is almost 70% of GDP, does this mean GDP will be OK in Q1?

Nope.

I expect Q1 2009 GDP to be very negative, and possibly worse than in Q4 2008. Right now I'm looking at something like a 6% to 8% decline (annualized) in real GDP (there is significant uncertainty, especially with inventory and trade).

The problem is the 30% of non-PCE GDP, especially private fixed investment. There will probably be a significant inventory correction too, and some decline in local and state government spending. But it is private fixed investment that will cliff dive. This includes residential investment, non-residential investment in structures, and investment in equipment and software.

A little story ...

Imagine ACME widget company with a steadily growing sales volume (say 5% per year). In the first half of 2008 their sales were running at 100 widgets per year, but in the 2nd half sales fell to a 95 widget per year rate. Not too bad.

ACME's customers are telling the company that they expect to only buy 95 widgets this year, and 95 in 2010. Not good news, but still not too bad for ACME.

But this is a disaster for companies that manufacturer widget making equipment. ACME was steadily buying new widget making equipment over the years, but now they have all the equipment they need for the next two years or longer.

ACME sales fell 5%. But the widget equipment manufacturer's sales could fall to zero, except for replacements and repairs.

And this is what we will see in Q1 2009. Real investment in equipment and software has declined for four straight quarters, including a 28.1% decline (annualized) in Q4. And I expect another huge decline in Q1.

For non-residential investment in structures, the long awaited slump is here. I expect declining investment over a number of quarters (many of these projects are large and take a number of quarters to complete, so the decline in investment could be spread out over a couple of years). And once again, residential investment has declined sharply in Q1 too.

When you add it up, this looks like a significant investment slump in Q1.

by Calculated Risk on 3/27/2009 04:09:00 PM

Form Bloomberg: Omni National Bank in Georgia Shut, 21st U.S. Failure (ht Brad)

Omni National Bank of Atlanta was seized by federal regulators, the 21st U.S. bank to fail this year ...

Omni National, with $980 million in assets, was shut by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. was named receiver, the OCC said today in a statement. ...

The failed bank had six branches in Georgia, Illinois, Florida and Texas, and two loan offices in Alabama and Pennsylvania, the OCC said. The lender opened in 2000. The FDIC, which arranges to sell the deposits and assets of failed banks, didn’t immediately identify a buyer for Omni National.

No word from the FDIC yet. Did Bloomberg jump the gun?

by Calculated Risk on 3/27/2009 02:39:00 PM

From Bloomberg: Default Rate Rises for Student Loans, U.S. Government Reports (ht Anthony)

Student-loan default rates for people who recently left school rose to 6.9 percent from 5.2 percent a year earlier as a deteriorating economy weighed on borrowers, the U.S. government said.

... The rate is based on borrowers who were to begin making repayments between October 2006 and October 2007, and who fell at least nine months behind by late September 2008.

Almost 232,000 of those borrowers entered default, a 13 percent increase from the previous year and a jump of 43 percent from two years earlier, the department said.

by Calculated Risk on 3/27/2009 11:34:00 AM

The BEA released vehicle sales for February this morning. Total auto and truck sales in the U.S. were 9.29 million (SAAR).

The automakers will release March sales numbers next Wednesday.

Click on graph for larger image in new window.

The first graph shows monthly vehicle sales (autos and trucks) as reported by the BEA at a Seasonally Adjusted Annual Rate (SAAR).

This shows that sales have plunged to a 9.29 million annual rate in February; the lowest since Dec 1981.

March 2009 sales will be down sharply from March 2008 too, but analysts will be looking for some stabilization on a seasonally adjusted basis.

This graph shows the total number of registered vehicles in the U.S. divided by the sales rate - and gives a turnover ratio for the U.S. fleet (this doesn't tell you the age of the fleet).

Currently this ratio is at 26.8 years, the highest ever. This is an unsustainable level (I doubt most vehicles will last 27 years!), and the ratio will probably decline over the next few years. This could happen with vehicles being removed from the fleet, but more likely because of a sales increase.

This suggests vehicle sales are much nearer the bottom than the top, and there will probably be some sort of modest rebound later this year.