by Calculated Risk on 3/09/2011 09:00:00 AM

This is the new UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: Pulse of Commerce Index^TM

Click on graph for larger image in new window.

This graph shows the index since January 2000.

Press Release: February PCI Continues to Signal Slow Growth

The Ceridian-UCLA Pulse of Commerce Index™ (PCI), issued today by the UCLA Anderson School of Management and Ceridian Corporation fell 1.5% on a seasonally and workday adjusted basis in February, after falling 0.3% in January. The PCI in the first two months of 2011 has now given up all of December’s exceptional 1.8% gain. Because of the very strong performance in December, however, the three month annualized moving average in the index was still up 5.4% over the previous three month period. Furthermore, February marked the 15th consecutive month of year-over-year growth in the index. Both of these data points suggest that the economic recovery is intact, but it remains tepid.
...
Over time, the PCI has shown a strong correlation with Industrial Production and with the goods components of GDP. The PCI results over the past two months suggest a small decline in industrial production in February when that data is released by the Federal Reserve on March 17.
...
The February daily data were impacted by the massive snowstorm that was centered in the heavily-trucked Midwest early in the month. However, the daily data also suggests that much of the volume that was “lost” during the first week of the month was “found” later in the month, meaning that weather was not the major reason for the decline in the PCI this month.
...
February’s spike in fuel prices likely did not contribute to weakness in the PCI this month. However, if the trend persists, higher prices will likely have an impact in the coming months as consumers are robbed of spending power. As a leading indicator for shipping and production, the PCI is very sensitive to this dynamic and should provide an early indication as higher fuel prices impact the broader economy.
...
The Ceridian-UCLA Pulse of Commerce Index™ is based on real-time diesel fuel consumption data for over the road trucking ...

This index was useful in tracking the slowdown last summer and the back-to-back monthly declines in this index are concerning. The rail traffic reports have shown a shift to intermodal traffic (more rail traffic using shipping containers) and that might be negatively impacting the diesel fuel index.

Note: This index does appear to track Industrial Production over time (with plenty of noise) and this suggests a weak reading for February. Industrial Production for February will be released March 17th.

by Calculated Risk on 3/09/2011 07:00:00 AM

The MBA reports: Mortgage Applications Increase in Latest MBA Weekly Survey

The Refinance Index increased 17.2 percent from the previous week and was the highest Refinance Index observed since the week ending January 14, 2011. The seasonally adjusted Purchase Index increased 12.5 percent from one week earlier and was the highest Purchase Index recorded this year.
...
The average contract interest rate for 30-year fixed-rate mortgages increased to 4.93 percent from 4.84 percent, with points decreasing to 0.87 from 1.29 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in graph gallery.

This graph shows the MBA Purchase Index and four week moving average since 1990.

On a weekly basis, this is the highest level since December. The four-week moving average of the purchase index is still at 1997 levels, and even with the large percentage of cash buyers recently, this still suggests fairly weak home sales through April.

by Calculated Risk on 3/08/2011 08:39:00 PM

• From the WSJ: Europe Blinks on Bank Test

The new European Banking Authority ... has told regulators and bankers that the exams are likely to rely on each country's definition of an important capital ratio known as Tier 1 ... some skeptical bankers and regulators worry, it could undermine the effort to end the European financial crisis.

New stress tests, similar concerns.

• From the NY Times: Opposition in Libya Struggles to Form a United Front

• From the WSJ: U.S. Sees Stalemate Emerging in Libya

• From al Jazeera: Libya Live Blog - March 9

• WTI oil at $104.66 per barrel

Earlier:
• CoreLogic: 11.1 Million U.S. Properties with Negative Equity in Q4
• NFIB: Small Business Optimism Index increases in February

by Calculated Risk on 3/08/2011 05:42:00 PM

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.

Click on graph for larger image in new window.

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.

S&P 500 Annualized Return, including dividends
Return from Start Date			Recession Timing Senstivity
Start Investing	Buy and Hold	Recession Timing	Two Months Early	One Month Early	One Month Late	Two Months Late
Jan-70	8.94%	12.64%	11.70%	12.36%	12.56%	12.01%
Jan-80	9.98%	12.92%	12.77%	12.78%	13.12%	12.38%
Jan-90	7.72%	11.43%	11.04%	11.33%	11.36%	10.78%
Jan-00	0.14%	5.32%	5.92%	5.65%	5.46%	5.61%

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 now using buy-and-hold even though the market is still below the January 2000 average price of 1425. The positive return is due to dividends.

S&P 500: Value of $10,000 Investment, including dividends
Value based on Start Date			Recession Timing Senstivity
Start Investing	Buy and Hold	Recession Timing	Two Months Early	One Month Early	One Month Late	Two Months Late
Jan-70	$339,280	$1,342,310	$950,340	$1,210,260	$1,304,750	$1,067,150
Jan-80	$193,970	$441,850	$423,920	$424,650	$465,830	$379,830
Jan-90	$48,290	$98,880	$91,820	$96,930	$97,610	$87,390
Jan-00	$10,150	$17,840	$19,000	$18,470	$18,100	$18,390

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. Here is a hilarious video of CNBC's Dennis Kneale calling the bottom correctly in June 2009 (although he was wrong about house prices). Note all the bloggers who disagreed with him - and they were all wrong.


Calling recessions is a mug’s game, but I like to play. I was very lucky with the recent 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 ...

by Calculated Risk on 3/08/2011 01:15:00 PM

Bloomberg reports that Moritz Kraemer, S&P managing director of European sovereign ratings said more downgrades are possible and that a Greek default is "a possibility.” No surprise. (no story yet)

From Reuters on the March 11th summit: EU summit to take only minor steps on debt crisis

The top item on the agenda for the 17 heads of state and government is to agree a "competitiveness pact", a deal Germany and France are pushing the rest of the euro zone to adopt to show their commitment to overhauling their economies.

From the WSJ: Expectations Low for EU Talks

"There will be an agreement because one has to be reached. But I fear that it will not stand up to market expectations, and this could intensify debt problems in the euro zone in the future," said a senior euro-zone government official who is party to the talks.

"Germany will likely get less than expected in the competitiveness pact so, it will give less as far as the EFSF is concerned. And this is where the problem lies."

The next meeting of all 27 EU leaders will be in Brussels on March 24th and 25th.

The EFSF end in mid-2013, but the two year yields are already showing significant stress. The Irish 2 year yield hit a record 8.1% this morning, and the Greek 2 year yield is at 16.4%.

More records for ten year yields too. The Greek ten year yield is at 12.8% (up sharply today). The Irish ten year yield is 9.6%. And the Portuguese 10 year yield is 7.6%. All new records.

Here are the Ten Year yields for Spain, and Belgium (record 4.35%).

by Calculated Risk on 3/08/2011 10:11:00 AM

CoreLogic released the Q4 2010 negative equity report today.

CoreLogic ... today released negative equity data showing that 11.1 million, or 23.1 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2010, up from 10.8 million, or 22.5 percent, in the third quarter. The small increase reflects the price declines that occurred during the fourth quarter and led to lower values. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the fourth quarter. Together, negative equity and near-negative equity mortgages accounted for 27.9 percent of all residential properties with a mortgage nationwide....

The consensus is that home prices will fall another 5 percent to 10 percent in 2011. If so, the most that negative equity will rise is another 10 percentage points, all else equal. What’s important is not just the share of at-risk loans (i.e., loans with less than 10 percent equity) but current price movements.
...
The aggregate level of negative equity increased to $751 billion in Q4, up from $744 billion last quarter but still below $800 billion a year ago. Over $450 billion of the aggregate negative equity dollars include borrowers who are upside down by more than 50 percent.
...
"Negative equity holds millions of borrowers captive in their homes, unable to move or sell their properties. Until the high level of negative equity begins to recede, the housing and mortgage finance markets will remain very sluggish," said Mark Fleming, chief economist with CoreLogic.

Here are a couple of graphs from the report:

Click on graph for larger image in graph gallery.

This graph shows the distribution of negative equity (and near negative equity). The more negative equity, the more at risk the homeowner is to losing their home.

About 10% of homeowners with mortgages have more than 25% negative equity.

The second graph from CoreLogic shows the aggregate dollar volume by percent of negative equity. Of the $751 billion in negative equity in Q4, over $450 billion of the aggregate negative equity dollars are for borrowers who are upside down by more than 50%. Just under $200 billion more is for borrowers who have 25% to 50% negative equity.

All of these borrowers are at high risk for foreclosure.

The third graph shows the break down of equity by state. Note: Data not available for Louisiana, Maine, Mississippi, South Dakota, Vermont, West Virginia and Wyoming.

In Nevada, over 65% of homeowners with mortgages owe more than their homes are worth. Arizona and Florida are around 50%. Michigan, Georgia and California are all over 30%.

by Calculated Risk on 3/08/2011 08:10:00 AM

From National Federation of Independent Business (NFIB): NFIB Small Business Optimism Index -- Slow and Steady: Continues Gradual Rise in February

The Index of Small Business Optimism gained 0.4 points in February, rising to 94.5, not the hoped-for surge that would signal a shift into “second gear” for economic growth.
...
“Weak sales” still get the most votes by owners as their top business problem.
...
Most notably, hiring and future plans to hire were solid and hopefully presage a string of steady job creation months this year. While historically weak, these relative gains signal good news for a sector still deeply encumbered by weak sales.
...
“This is not a reading that characterizes a strongly rebounding economy,” said NFIB chief economist Bill Dunkelberg.

Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy.

Click on graph for larger image in new window.

The first graph shows the small business optimism index since 1986. The index increased to 94.5 in February from 94.1 in January.

Although still fairly low, this is the highest level for the index since December 2007.

This graph shows the net hiring plans for the next three months.

Hiring plans increased slightly in February. According to NFIB: “The percent of owners reporting hard-to-fill job openings rose two points to 15 percent, indicating that a reduction in the unemployment rate is likely within the next few months. Plans to create jobs strengthened; up two points to a net 5 percent of all firms. While this is still low, it is 15 points better than the recession low reading of negative 10 percent, reached in March 2009."

Weak sales is still the top business problem with 28 percent of the owners reporting that weak sales continued to be their top business problem in February. In good times, owners usually report taxes and regulation as their biggest problems.

The recovery is sluggish for this index (probably because of the high concentration of real estate related companies), but this is the highest level for the optimism index since December 2007.

by Calculated Risk on 3/07/2011 08:44:00 PM

I appreciate the mention from Time: The 25 Best Financial Blogs. Professor Hamilton's introduction to my blog was much too kind. Thanks!

The editors at Time.com asked if I'd write a review of one of the other blogs on their list, although they wouldn't tell me who was on the list. They asked me to send them a short list of blogs I'd like to write a review for, and then they'd pick one.

The top two blogs on my short list were Hamilton's Econbrowser (with Menzie Chinn), and Mark Thoma's EconomistsView(with Tim Duy who writes FedWatch) - two of my favorite economic blogs. I'm shocked that EconomistsView is not on the Time.com list.

I wish I'd written a better review of Econbrowser - I was under the weather last week, and they edited my piece extensively (it needed editing).

From my unedited review: "In a recent research paper, “Historical Oil Shocks”, Dr. Hamilton reviewed several oil shocks and the impact on oil prices and the economy – a timely topic. He has discussed the paper in several blog posts, including a discussion of the possible impact of the events in Libya on oil prices and the U.S. economy (see “Libya, oil prices, and the economic outlook”). Hamilton’s analysis shows the events so far “are not in the same ballpark as the major historical oil supply disruptions”, but he cautions that geopolitical changes might continue to spread."

Great analysis. Best wishes to all.

by Calculated Risk on 3/07/2011 06:00:00 PM

American Banker has posted the 27 page draft servicer settlement agreement that the state attorneys general sent to the servicers last week.

Settlement Terms (27 page PDF)

And from Cheyenne Hopkins at American Banker: Cheat Sheet: How the State AGs Want to Revamp Mortgage Servicing

The 27-page term sheet handed to the five largest mortgage servicers last week is a detailed, dense list of requirements that, if implemented as proposed, would fundamentally change the relationship between servicers, investors and borrowers.

The term sheet, obtained by American Banker and available here, is just the opening bid in an ongoing negotiating process between the servicers and various state and federal agencies attempting to punish them for significant issues uncovered in the foreclosure process. While some of the details of the term sheet have been made public already, the sheer breadth and depth of the proposed requirements were not clear until now.

The article has a nice summary of the document.

by Calculated Risk on 3/07/2011 02:18:00 PM

This is "D list" data and doesn't show much improvement in February.

From the Association of American Railroads: February Freight Rail Traffic Continues to Make Gains. The AAR reports carload traffic in February 2011 was up 4.2% compared to February 2010 and intermodal traffic (using intermodal or shipping containers) was up 10.3% over February 2010.

U.S. freight railroads originated 1,135,396 carloads in February 2011, an average of 283,849 per week (see chart below). That’s up 4.2% (46,054 carloads) over February 2010 and up 2.7% (29,400 carloads) over February 2009.

Click on graph for larger image in new window.

This graph shows U.S. average weekly rail carloads (NSA).

From AAR:

On a seasonally adjusted basis, U.S. rail carloads were down 3.0% in February 2011 from January 2011. That’s the biggest month-to-month decline
since April 2009, but we cannot be certain that the weather effect was completely captured by the seasonal adjustment process. Even if the seasonally adjusted decline is legitimate, it could just be one of those “two steps forward, one step back” kind of things.

As the first graph shows, rail carload traffic collapsed in November 2008, and now, over 18 months into the recovery, carload traffic has only recovered a little.

The second graph is for intermodal traffic (using intermodal or shipping containers):

In February 2011, U.S. railroads averaged 220,458 intermodal trailers and containers per week, for a total of 881,830 for the month. That’s up 10.3% (82,267 intermodal units) over February 2010 and up 21.4% (155,487 units) over February 2009.

Seasonally adjusted U.S. rail intermodal traffic was up 0.1% in February 2011 from January 2011. ... in seasonally adjusted terms, the recovery in U.S. rail intermodal traffic has been much stronger than the recovery in U.S. carload traffic.
excerpts with permission

Intermodal traffic is fairly strong, but carload traffic has barely recovered.