by Calculated Risk on 9/13/2011 05:27:00 PM

There are two key meetings this week: 1) a video conference tomorrow with German Chancellor Angela Merkel, French President Nicolas Sarkozy and Greek prime minister, George Papandreou, and 2) a meeting of European finance ministers on Friday with Timothy Geithner making an appearance.

Also Greece is expected to resume talks with the trioka - European Commission, IMF and ECB officials - in the next day or so.

From the WSJ: Merkel Quells Speculation on Greek Default

German Chancellor Angela Merkel ... stressed that Germany remains committed to financing Greece through the euro zone's bailout funds until Greece can repair its own finances through austerity measures. She gave a thinly veiled rebuke to German politicians, including her own economics minister and Deputy Chancellor Philipp Rösler, who have suggested in recent days that Greece should be allowed to go bust.

"I think we will do Greece the biggest favor by not speculating much, but instead encouraging Greece to implement the commitments it has made," Ms. Merkel told RBB Inforadio

And from the NY Times: Europe Scrambles to Ease Greek Debt Crisis

[T]he president of France and the chancellor of Germany will hold a video conference call Wednesday evening with the Greek prime minister, George A. Papandreou, officials announced Tuesday, with the prospect of a further restructuring of Greek debt hovering in the air.
...
Timothy F. Geithner [will] make a rare, if not unprecedented, appearance at a meeting of European finance ministers, to be held Friday in Wroclaw, Poland.

The Greek 2 year yield is at 76.7%. The Greek 1 year yield is at 134.6%. Ouch.

by Calculated Risk on 9/13/2011 02:02:00 PM

From Diana Olick at CNBC: Huge Surge in Bank of America Foreclosures

Bank of America is ramping up its foreclosure processing, sending out far more notices of default to borrowers in August than in previous months ... Mortgage and housing analyst and strategist Mark Hanson alerted me to unusually high legal default filing activity ... [BofA responded to Olick]

"It appears the numbers you noted to me this afternoon generally track with our own numbers for key categories. It should be noted it’s driven more in key states like California and Nevada than overall, and certainly the progress we’re seeing is limited to non-judicial states. Judicial states continue to move very slowly, with key states like New Jersey only beginning to start processing foreclosures again this month."

RealtyTrac ... is also confirming a surge in overall notices of default in its August numbers

As Olick notes, this might be a short term pickup. However other servicers have told me they are staffing up - and we will probably see foreclosure activity pickup late this year or early in 2012.

by Calculated Risk on 9/13/2011 10:15:00 AM

CoreLogic released the Q2 2011 negative equity report today.

CoreLogic ... released Q2 negative equity data showing that 10.9 million, or 22.5 percent, of all residential properties with a mortgage were in negative equity at the end of the second quarter of 2011, down very slightly from 22.7 percent in the first quarter. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the second quarter. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide. The new report also shows that nearly three-quarters of homeowners in negative equity situations are also paying higher, above-market interest on their mortgages.

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. The more negative equity, the more at risk the homeowner is to losing their home.

Close to 10% of homeowners with mortgages have more than 25% negative equity. This is trending down slowly - the decline is apparently mostly due to homes lost in foreclosure.

The second graph from CoreLogic shows the cumulative distribution of mortgage rates for borrowers with positive and negative equity.

From CoreLogic: "Negative equity significantly limits the ability of borrowers to capture the benefit of the low-rate environment. There are nearly 28 million outstanding mortgages that have above market rates and are in theory refinanceable¹. Twenty million borrowers with positive equity, or 53 percent of all above-water borrowers, have above market rates. Eight million borrowers with negative equity, or nearly 75 percent of all underwater borrowers, have above market rates."

¹ "The definition of an above market rate was 5.1%, which is roughly the current mortgage rate of 4.1% plus a 100 basis point refinance trigger."

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

From CoreLogic: "Nevada had the highest negative equity percentage with 60 percent of all of its mortgaged properties underwater, followed by Arizona (49 percent), Florida (45 percent), Michigan (36 percent) and California (30 percent).

The negative equity share in the hardest hit states has improved. Over the past year, the average negative equity share for the top five states has declined from 41 percent to 38 percent. Nevada had the largest decline over the last year, with the negative equity share dropping from 68 percent to 60 percent. The reason for the Nevada decline is the high number of foreclosures that led to lower numbers of remaining negative equity borrowers."

by Calculated Risk on 9/13/2011 09:00:00 AM

This is the UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: Pulse of Commerce Index Remains in Idle – Down 1.4 Percent in August

The Ceridian-UCLA Pulse of Commerce Index™ (PCI), issued today by the UCLA Anderson School of Management and Ceridian Corporation fell 1.4 percent in August on a seasonally and workday adjusted basis, following a 0.2 percent decline in July.

“The August number supports the pattern of sluggish economic growth coming out of a recession, which is something that we’ve seen in the past. What we’re experiencing is the ‘new normal,’ where the U.S. economy will continue to stumble forward until a new growth engine is identified. Essentially, the economy is in need of an innovation burst.” [said Ed Leamer, chief economist for the Ceridian-UCLA Pulse of Commerce Index and director of the UCLA Anderson Forecast.]

“The PCI continues to prove its value in providing insight into the U.S. economy. While previously being flat, recent, seven-day-average diesel volumes have dropped by 2 percent from July 23 to August 19, excluding the holiday impact. However, the last week of August suggests some improvement.”

Click on graph for larger image in graph gallery.

This graph shows the index since January 2000.

The weakness in the PCI over the last several months called for a zero percent change in the July Industrial Production – the initial release of 0.9% was stronger, although subject to revisions. Due to the continued weakness evident in the PCI, the forecast for August Industrial Production is a 0.26 percent decline when released on September 15.
...
The Ceridian-UCLA Pulse of Commerce Index™ is based on real-time diesel fuel consumption data for over the road trucking ...

This index has declined for two consecutive months after increasing slightly earlier in the year. The little bit of good news was the reported improvement during the last week of August.

Note: This index does appear to track Industrial Production over time (with plenty of noise).

by Calculated Risk on 9/13/2011 07:54:00 AM

From the National Federation of Independent Business (NFIB): Small Business Confidence Takes Huge Hit: Optimism Index Now in Decline for Six Months Running

Confidence in the economy among small-business owners tumbled in August, as NFIB’s monthly Small-Business Optimism Index dropped a whopping 1.8 points, settling at a disturbingly low 88.1. The Index has now been in decline for a full six months. Unlike previous months, August’s decline comes in the immediate aftermath of the debt ceiling debate ...

Sales remain the largest problem for small firms—a full quarter identifying “poor sales” as their top business problem.

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 graph gallery.

The first graph shows the small business optimism index since 1986. The index decreased to 88.1 in August from 89.9 in July.

Optimism has declined for six consecutive months now.

The second graph shows the net hiring plans for the next three months.

Hiring plans were still low in August, but positive and improving.

According to NFIB: “While the readings remain historically weak, we can find a grain of encouragement as we look at hiring prospects. Over the next three months, 11 percent plan to increase employment (up 1 point), and 12 percent plan to reduce their workforce (also up 1 point), yielding a seasonally adjusted net 5 percent of owners planning to create new jobs, which is a 3 point improvement over July."

Weak sales is still the top business problem with 25 percent of the owners reporting that weak sales continued to be their top business problem in August.

In good times, owners usually report taxes and regulation as their biggest problems.

The optimism index declined sharply in August due to the debt ceiling debate. This index has been generally slow to recover and has declined for six consecutive months - probably due to a combination of the recent economic weakness, and also the high concentration of real estate related companies in the index.

by Calculated Risk on 9/12/2011 11:22:00 PM

From the LA Times: Europe fears Greece is heading inexorably toward default

European politicians, who denied for months that bankruptcy was an option as Greece struggled to bring down an enormous budget deficit, are now beginning to acknowledge the possibility.

Nervous investors appear to increasingly believe default is just around the corner. They have withdrawn billions of dollars from Europe's stock markets over the last few weeks.
...
Banks in France and Germany scrambled to assure investors that they could survive their exposure to sovereign debt

And a discussion of the German views from Der Spiegel: Germany Plans for Possible Greek Default

The tougher talk is much more than show. The rest of Europe is losing patience with Athens. ...

The disappointment runs particularly deep in Berlin, where the government's crisis-management policy has clearly been going around in circles. In the beginning, the chancellor said that the Greeks ought to help themselves out of their own crisis. Then came the first and subsequently the second aid package. The new approach, the government said, was to rescue Greece so that the other debtor nations would be spared.

Now the Germans have come full circle, and the prevailing emotion is fear of a never-ending debacle in Athens. "Enough is enough," says one senior government official ... With a mixture of resignation and fatalism, Merkel and Schäuble are facing up to the inevitable and thinking the previously unthinkable: Greece is going bankrupt, and not even its withdrawal from the monetary union can be ruled out anymore.
...
The planning for the day of reckoning is already underway, in departments at the Finance Ministry in Berlin as well as in task forces at the EU in Brussels. German Finance Ministry officials hope that a Greek bankruptcy would be manageable, as long as European politicians keep their cool and the bailout funds are increased as planned.

by Calculated Risk on 9/12/2011 07:37:00 PM

Note: I checked the BEA data (table Table 2.4.5U. Personal Consumption Expenditures by Type of Product), and the BEA shows U.S. consumers spent $377 billion in 2008 on "Gasoline and other motor fuel", and are on pace to spend $393 billion this year. So the headline number might be too high - also, as a percent of GDP, gasoline expenditures will be lower this year than in 2008.

From Ronald White at the LA Times: U.S. motorists may spend a record $491 billion for gasoline this year

Fuel prices have been high this year because of expensive oil and increased exports of gasoline and diesel to other countries. Gasoline prices may decline for a few weeks after the switch to winter blends, which are less costly to produce than summer blends. But gas price woes won't go away, experts said.

"The 30 days between now and mid-October will be the most hospitable days in the country for dropping prices," said Tom Kloza, chief oil analyst for the Oil Price Information Service. "But then the drumbeats will start about fears of a second Arab Spring [of political unrest]. Demand outside of Europe and the U.S. continues to rise. By spring, Americans will be wrestling with $4 gasoline in a lot of markets."
...
Both the U.S. and California averages were well short of the all-time highs set in 2008 of $4.114 and $4.588, respectively. But overall, drivers have shelled out more for fuel this year than in 2008 because prices rose faster this time and have stayed high longer.

The 2008 average U.S. price was about $3.25 a gallon, said Kloza, who came up with the estimate of $491 billion in gasoline costs for 2011. This year, Kloza said, the average price is about $3.66 a gallon.

by Calculated Risk on 9/12/2011 04:16:00 PM

Europe was the focus again today with no U.S. economic releases. This will be a busy week for economic data, especially later in the week:
• Schedule for Week of Sept 11th


Click on graph for larger image in new window.

The first graph shows the S&P 500 since 1990 (this excludes dividends).

The dashed line is the closing price today. The S&P 500 was first at this level in July 1998; over 13 years ago.

The second graph (click on graph for larger image) from Doug Short shows the wild market swings over the last few weeks.

by Calculated Risk on 9/12/2011 12:00:00 PM

Back in early 2009, I wrote a couple of posts arguing there would be an increase in auto sales - Vehicle Sales (Jan 2009) and Looking for the Sun (Feb 2009). Here is an update to the U.S. fleet turnover graph.

This graph shows the total number of registered vehicles in the U.S. divided by the sales rate through August 2011 - and gives a turnover ratio for the U.S. fleet (this doesn't tell you the age or the composition of the fleet, registered vehicles estimated).

The wild swings in 2009 were due to the "cash for clunkers" program, and the increase in the ratio this summer was due to the supply chain issues related to the tsunami in Japan.

Click on graph for larger image in graph gallery.

The estimated ratio for August was just over 20 years - still very high, but well below the peak of 26 years.

The turnover ratio will probably decline to 15 or so eventually.

The second graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is current estimated sales rate.

The current sales rate is still near the bottom of the '90/'91 recession - when there were fewer registered drivers and a smaller population.

Light vehicle sales were at a 12.12 million seasonally adjusted annual rate (SAAR) in August. To bring the turnover ratio down to more normal levels, unit sales will have to rise to 14 or 15 million SAAR.

Of course cars are lasting longer - note the general uptrend in the first graph - so the turnover ratio probably will not decline to the previous level. Also this says nothing about the composition of the fleet (perhaps smaller cars). But I do expect vehicle sales to continue to increase over the next few years.

by Calculated Risk on 9/12/2011 08:42:00 AM

The Greek 2 year yield is at 64.3%. The Greek 1 year yield is at 112%. Ouch.

The Portuguese 2 year yield is up to 16.2% (after falling below 12% in August). Also the Irish 2 year yield is at 9.5%.

The European markets are down with the DAX off almost 4%, and the FTSE 100 off close to 3%.

Here are the links for bond yields for several countries (source: Bloomberg):

Greece	2 Year	5 Year	10 Year
Portugal	2 Year	5 Year	10 Year
Ireland	2 Year	5 Year	10 Year
Spain	2 Year	5 Year	10 Year
Italy	2 Year	5 Year	10 Year
Belgium	2 Year	5 Year	10 Year
France	2 Year	5 Year	10 Year
Germany	2 Year	5 Year	10 Year