by Calculated Risk on 9/20/2010 09:40:00 PM

From Graham Bowley at the NY Times: Ex-Physicist Leads Inquiry into Flash Crash

[The] long-awaited report on the so-called flash crash, in partnership with the Commodity Futures Trading Commission, is due to be published in the next two weeks.
...
[The SEC's Gregg Berman says] the report will zero in on a specific sequence of events that preceded the crash. He says it will tell a clear story about what happened in the markets on that stomach-churning day, beyond simply pointing a finger at the perils of the kind of high-speed computer trading that dominates today’s markets.

“The report will clearly demonstrate how market conditions and events prior to the flash crash led to the extreme price moves,” he said.
...
“Many market participants told us, ‘We’re not quite sure what happened over all, but this is what my firm saw and the actions we took,’ ” Mr. Berman said. “It was like ‘C.S.I.’ We wanted to interview everyone around.”

Hopefully the explanation will be clear and understandable.

by Calculated Risk on 9/20/2010 04:17:00 PM

The European bailout fund, called the European Financial Stability Facility (EFSF), received the expected AAA rating today.

From the NY Times: European Bailout Fund Gets Top Rating From Credit Agencies

The European Financial Stability Facility, as the fund is known, was rated AAA by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. Standard & Poor’s said its understanding was that “guarantees from member governments supporting the repayment of E.F.S.F. obligations will be unconditional, irrevocable and timely, and thereby consistent with our criteria for sovereign guarantees.”

The ratings are preliminary because no member state has yet called on the facility for help, and it has thus issued no debt.

The facility will not be "pre-funded", but will only raise funds when a member state asks for help.

Key European analysts had expected that countries would wait until the rating was secured before asking for help. Now there is a focus on Ireland and Portugal - the two countries most likely to ask for help in the near term.

The yields for Ireland and Portugal 10 year bonds are now above the crisis levels back in May.

And from Bloomberg: Honohan Says Irish Government Must Cut Deficit at Faster Pace

The extra yield that investors demand to hold 10-year Irish bonds over German bunds today exceeded 400 basis points for the first time as the government struggles to convince investors it can cap the cost of bailing out its banking system. Portugal is also being punished by investors, with the spread on its bonds also touching a record today. That’s fueling concerns that both countries may have to follow Greece and ask the European Union and the International Monetary Fund for a rescue.

“We think there is a measurable risk that Ireland and Portugal will access the EFSF and IMF, but probably only early next year,” Goldman Sachs Group Inc. Chief European Economist Erik Nielsen said in a note yesterday.

And something else to watch from the WSJ: ECB Steps Up Its Bond Buys Amid Worries

The European Central Bank has increased its purchases of government bonds amid rising concerns in financial markets about the ability of Greece, Ireland and Portugal to repay their debts.
...
Bond buys by the ECB, though higher in recent weeks than during much of the summer, are still a fraction of what they were when the program started.

by Calculated Risk on 9/20/2010 01:08:00 PM

Moody's reported today that the Moody’s/REAL All Property Type Aggregate Index declined 3.1% in July. This is a repeat sales measure of commercial real estate prices.

Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index.

Notes: Beware of the "Real" in the title - this index is not inflation adjusted. Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices.

Click on graph for larger image in new window.

CRE prices only go back to December 2000.

The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).

It is important to remember that the number of transactions is very low and there are a large percentage of distressed sales.

Commercial real estate prices (as measured by this index) fell 7% combined in June and July.

The index is now down 43.2% from the peak in October 2007.

The index is only 0.9% above the October 2009 low.

by Calculated Risk on 9/20/2010 11:31:00 AM

From NBER: NBER Business Cycle Dating Committee Announces Trough Date

The Business Cycle Dating Committee of the National Bureau of Economic Research ... determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II.

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date.

This is somewhat subjective - and I thought they'd wait longer because the committee usually waits until some of the key indicators have returned to pre-recession levels. This time no indicator has reached the pre-recession level, and some are still very low (like personal income less transfer payments).

by Calculated Risk on 9/20/2010 10:00:00 AM

The National Association of Home Builders (NAHB) reports the housing market index (HMI) was at 13 in September. This is the same low level as in August and below expectations. The record low was 8 set in January 2009, and 13 is very low ...

Note: any number under 50 indicates that more builders view sales conditions as poor than good.

Click on graph for larger image in new window.

This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the September release for the HMI and the July data for starts (August starts will be released tomorrow).

This shows that the HMI and single family starts mostly move in the same direction - although there is plenty of noise month-to-month.

Press release from the NAHB: Builder Confidence Unchanged in September

Builder confidence in the market for newly built, single-family homes held unchanged in September from the previous month's low level of 13, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today.

"In general, builders haven't seen any reason for improved optimism in market conditions over the past month," noted NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Mich. "If anything, consumer uncertainty has increased, and builders feel their hands are tied until potential home buyers feel more secure about the job market and economy."

"The stall in the nation's housing market continues," agreed NAHB Chief Economist David Crowe. "Builders report that the two leading obstacles to new-home sales right now are consumer reluctance in the face of the poor job market and the large number of foreclosed properties for sale."

by Calculated Risk on 9/20/2010 08:33:00 AM

From Mokoto Rich at the NY Times: For the Unemployed Over 50, Fears of Never Working Again (ht Ann)

Of the 14.9 million unemployed, more than 2.2 million are 55 or older. Nearly half of them have been unemployed six months or longer, according to the Labor Department. The unemployment rate in the group — 7.3 percent — is at a record, more than double what it was at the beginning of the latest recession.

After other recent downturns, older people who lost jobs fretted about how long it would take to return to the work force and worried that they might never recover their former incomes. But today, because it will take years to absorb the giant pool of unemployed at the economy’s recent pace, many of these older people may simply age out of the labor force before their luck changes.

It is hard for people in their 50s to change careers, or rebuild their savings after a long period of unemployment. And, as in the story, they may end up taking Social Security early - just to get by - and that means they will receive a significantly lower monthly payout than if they waited until 66. A very tough situation.

by Calculated Risk on 9/19/2010 08:47:00 PM

From the Financial Times: Junk bond prices hit pre-crisis levels

Strong investor demand for junk bonds has pushed the average price on such corporate debt to its highest level since June 2007, when companies could borrow with ease at the height of the credit boom.
except with permission

And from the WSJ: Bond Markets Get Riskier

Bond markets are growing riskier as investors seeking steady returns bid up prices and ignore some early warning signs similar to those that flashed during the credit bubble.

Last week, prices on high-yield, or junk, bonds, hit their highest level since 2007, nearly double their lows of the credit crisis. Nine months into the year, companies have sold $172 billion in junk bonds, already an annual record, according to data provider Dealogic.

This seems like investors chasing yield - and that is making it easy to sell junk bonds. Oh well ...

by Calculated Risk on 9/19/2010 02:45:00 PM

Note: The previous post is a summary of last week with graphs.

Four key housing reports will be released this week: the September homebuilder confidence survey (Monday), August housing starts (Tuesday), August existing home sales (Thursday), and August new home sales (Friday). Also the FOMC meets on Tuesday.

----- Unscheduled, but likely -----
Making Home Affordable Program (HAMP) for August and the “Housing Scorecard”

Moody's/REAL Commercial Property Price Index (CPPI) for July.

----- Monday, Sept 20th -----
10 AM: The September NAHB homebuilder survey. This index collapsed following the expiration of the home buyer tax credit. The consensus is for a slight increase to 14 from 13 in August (still very depressed).

----- Tuesday, Sept 21st -----
8:30 AM: Housing Starts for August. Housing starts also collapsed following the expiration of the home buyer tax credit. The consensus is for a slight increase to 550K (SAAR) in August from 546K in July.

10:00 AM: the BLS will release the Regional and State Employment and Unemployment report for August.

2:15 PM: The FOMC statement will be released. I don't expect any significant changes to the statement compared to the statement following the August meeting.

----- Wednesday, Sept 22nd -----
Early: The AIA's Architecture Billings Index for August will be released (a leading indicator for commercial real estate). This has been showing ongoing contraction, and usually this leads investment in non-residential structures (hotels, malls, office) by 9 to 12 months.

7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. This index declined sharply following the expiration of the tax credit, and the index has only recovered slightly over the last couple months - suggesting reported home sales through at least October will be very weak.

10:00 AM: 10:00 FHFA House Price Index for July. This is based on GSE repeat sales and is no longer as closely followed as Case-Shiller (or CoreLogic).

----- Thursday, Sept 23rd -----
8:30 AM: The initial weekly unemployment claims report will be released. Consensus is for about the same as last week (450 thousand).

10:00 AM: Existing Home Sales for August from the National Association of Realtors (NAR). The consensus is for an increase to 4.1 million (SAAR) in August from 3.83 million in July. Housing economist Tom Lawler is projecting 4.1 million SAAR. In addition to sales, the level of inventory and months-of-supply will be very important (since months-of-supply impacts prices).

10:00 AM: Conference Board's index of leading indicators for August. The consensus is for a 0.1% increase in this index.

1:00 PM ET: Former Fed Chairman Paul A. Volcker gives the Keynote address at the Chicago Fed and IMF Thirteenth Annual International Banking Conference

----- Friday, Sept 24th -----
8:30 AM: Durable Goods Orders for August from the Census Bureau. The consensus is for a 1.0% decline in durable good orders.

10:00 AM: New Home Sales for August from the Census Bureau. The consensus is for a slight increase in sales to 290K (SAAR) in August from 276K in July.

1:00 PM: Richmond Fed President Jeffrey Lacker speaks on the economic outlook at the 2010 Kentucky Economic Association Annual Conference

4:30 PM: Fed Chairman Ben Bernanke speaks at the Conference Co-sponsored by the Center for Economic Policy Studies and the Bendheim Center for Finance, Princeton University, Princeton, N.J: "Implications of the Financial Crisis for Economics"

After 4:00 PM: The FDIC will probably have another busy Friday afternoon ...

by Calculated Risk on 9/19/2010 10:30:00 AM

A summary of last week - mostly in graphs:

Industrial Production, Capacity Utilization increased in August

From the Fed: Industrial production and Capacity Utilization

Industrial production rose 0.2 percent in August after a downwardly revised increase of 0.6 percent in July [revised down from 1.0 percent]. ... The capacity utilization rate for total industry rose to 74.7 percent, a rate 4.7 percentage points above the rate from a year earlier and 5.9 percentage points below its average from 1972 to 2009.

Click on graph for larger image in new window.

This graph shows Capacity Utilization. This series is up 9.6% from the record low set in June 2009 (the series starts in 1967).

Capacity utilization at 74.7% is still far below normal - and well below the the pre-recession levels of 81.2% in November 2007. (Note: this is actual a decrease before the revision to July)

Note: y-axis doesn't start at zero to better show the change.

The second graph shows industrial production since 1967.

This is the highest level for industrial production since Oct 2008, but production is still 7.2% below the pre-recession levels at the end of 2007.

The increase in August was about consensus, however the sharp downward revision to July puts this below consensus.

Retail Sales increased in August

On a monthly basis, retail sales increased 0.4% from July to August (seasonally adjusted, after revisions), and sales were up 3.6% from August 2009. Retail sales increased 0.6% ex-autos.

This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline).

Retail sales are up 8.4% from the bottom, but still off 4.3% from the pre-recession peak.

Retail sales are still below the April level - and have mostly moved sideways for six months.

CoreLogic: House Prices declined 0.6% in July

From CoreLogic: CoreLogic Home Price Index Remained Flat in July

This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.

The index is flat over the last year, and off 28% from the peak.

The index is 6.1% above the low set in March 2009, and I expect to see a new post-bubble low for this index later this year or early in 2011.

Ceridian-UCLA: Diesel Fuel index declines in August, "signals struggling economy"

Press Release: August PCI Decline Signals Struggling Economy, but no Double-Dip

This graph shows the index since January 1999.

This is a new index, and doesn't have much of a track record in real time, although the data appears to suggest that the recovery has slowed - even stalled - over the last 4 months.

Consumer Price Index increases 0.3%, core rate unchanged in August

The Cleveland Fed has released the median CPI:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.1% (0.6% annualized rate) in August. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.2% annualized rate) during the month.
...
Over the last 12 months, the median CPI rose 0.5%, the trimmed-mean CPI rose 0.9%, the CPI rose 1.1%, and the CPI less food and energy rose 0.9%.

Click on graph for larger image in new window.

This graph shows three measure of inflation, Core CPI, Median CPI (from the Cleveland Fed), and 16% trimmed CPI (also from Cleveland Fed).

They all show that inflation has been falling, and that measured inflation is up less than 1% year-over-year. Core CPI was flat, and median CPI and the 16% trimmed mean CPI were up 0.1% in August.

Other Economic Stories ...

From NFIB: Small Business Confidence Remains Low

From the NY Fed: Manufacturing Index declines slightly in September

From the Philadelphia Fed: Philly Fed Index shows contraction in September

From MarketWatch: U.S. Sept. consumer sentiment falls to 66.6

LA Port Traffic in August: Imports Surge, Exports down year-over-year

No increase to Social Security Benefits for 2011 (unofficial)

The two key housing problems

Unofficial Problem Bank List increases to 854 institutions

Best wishes to all.

by Calculated Risk on 9/19/2010 07:25:00 AM

Let me start with an excerpt from Chirs Mayer and Todd Sinai's piece in Sept 2005: Bubble Trouble? Not Likely

Chicken Littles have squawked that the sky -- or the ceiling -- is about to fall on the housing market. ... Yet basic economic logic suggests that this apparent evidence of a bubble is anything but. Even in the highest-price cities, housing is, at most, slightly more expensive than average.

And from Glenn Hubbard on Face the Nation in August, 2005

I don't think we're likely to see a large nominal price collapse, that is largely falling house prices, but I think we'll see much slower rates of growth in house prices after 2005.

Since I was one of those "Chicken Littles", I'm curious how those views on housing worked out?

And now Glenn Hubbard and Chris Mayer recycle the poorly conceived Morgan Stanley proposal: How Underwater Mortgages Can Float the Economy

[W]e propose a new program through which the federal government would direct the public and quasi-public entities that guarantee mortgages — Fannie Mae, Freddie Mac, Ginnie Mae, the Department of Veterans Affairs loan-guarantee program and the Federal Housing Administration — to make it far easier and quicker for homeowners to refinance.

This program would be simple: the agencies would direct loan servicers — the middlemen who monitor and report loan payments — to send a short application to all eligible borrowers promising to allow them to refinance with minimal paperwork. Servicers would receive a fixed fee for each mortgage they refinanced, which would be rolled into the mortgage to eliminate costs to taxpayers.

At least they mention the existing refinance programs already in place (that was an improvement on MS)!

But the rest of Tom Lawler's criticism still holds: “Slam-Dunk” Stimulus? MS = Missing Something!!!!