by Calculated Risk on 6/10/2013 12:32:00 PM

Just an update: Back in March I wrote: Business Cycles and Markets . In that post, I pointed out that IF an investor could predict recessions and recoveries (even without being precise), they could significantly outperform the market.

I also pointed out that calling recessions and recoveries is NOT easy.  A recent example would be ECRI's recent series of incorrect recession calls. If investors sold when ECRI first made their recession call in Sept 2011, they would have a missed around a 40% increase in the market!

For an investor, one bad business cycle call like that would wipe out most of the advantages from trying to time cycles.

Of course I disagreed with ECRI's recent recession call (I disagreed with their incorrect recession call in 2011 too - I wasn't even on recession watch then and I'm not on recession watch now).

One of my goals with this blog is to try to call the next recession, but I don't think that will happen for some time.  Right now I'm optimistic on the economy, especially once most of the fiscal drag is behind us.  Of course I might miss the next cycle - no one has a crystal ball.

by Calculated Risk on 6/10/2013 09:29:00 AM

Note: This is not Mortgage Equity Withdrawal (MEW) data from the Fed. The last MEW data from Fed economist Dr. Kennedy was for Q4 2008.

The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity - hence the name "MEW", but there is little MEW right now - and normal principal payments and debt cancellation.

For Q1 2013, the Net Equity Extraction was minus $85 billion, or a negative 2.8% of Disposable Personal Income (DPI).

Click on graph for larger image in new window.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.

There are smaller seasonal swings right now, perhaps because there is a little actual MEW (this is heavily impacted by debt cancellation right now).

The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined further in Q1. Mortgage debt has declined by almost $1.3 trillion since the peak. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance. With residential investment increasing, and a slower rate of debt cancellation, it is possible that MEW will turn positive again in the next year or two.

For reference:

Dr. James Kennedy also has a simple method for calculating equity extraction: "A Simple Method for Estimating Gross Equity Extracted from Housing Wealth". Here is a companion spread sheet (the above uses my simple method).

For those interested in the last Kennedy data included in the graph, the spreadsheet from the Fed is available here.

by Calculated Risk on 6/09/2013 09:50:00 PM

An interesting article from Nick Timiraos at the WSJ: Housing's Up, but Is Foundation Sound?

The housing-market recovery is here but there's a growing debate among bulls and bears over how long it will last ...
...
Population growth will require 14 million additional housing units this decade, around three-quarters of them single-family homes, according to Zelman & Associates, a research and advisory firm. Analysts at Zelman estimate that only 5.7 million of those units will be built by 2015, meaning the U.S. would need to add two million homes a year over the last four years of the decade—spurring a big boost of construction that would ripple through the economy.

"There's just not enough shelter," says Ivy Zelman, the firm's chief executive.
...
Joshua Rosner, managing director of Graham Fisher & Co., draws attention to several forces that had helped housing—and the economy—expand over the past few decades but whose end will now hinder growth.

Mr. Rosner first highlights the end of the "democratization" of credit. On the way up, lenders extended loans on better terms to more borrowers during a period in which interest rates were also declining. ... Housing and consumption enjoyed a one-time boost as baby boomers moved from one-income to two-income households during the inflation spells of the 1970s and as those consumers entered their peak consumption years in the 1980s. Those forces fueled homeownership, renovations and second-home buying.

Now, those tailwinds are becoming headwinds, Mr. Rosner says. The democratization of credit ended during the bust, and a new period of much tighter credit standards has replaced it.

I don't expect 2 million units per year at the end of the decade, but I do think the housing recovery will continue.

Weekend:
• Schedule for Week of June 9th

The Asian markets are green tonight with the Nikkei up 2.9%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P futures are down 2 and DOW futures are down 16 (fair value).

Oil prices have moved up a little recently with WTI futures at $96.14 per barrel and Brent at $104.65 per barrel.

by Calculated Risk on 6/09/2013 03:33:00 PM

From Reuters: U.S. Midwest gasoline price spike expected to linger

Gasoline prices at the pump in several U.S. Midwestern states have spiked close to record highs this week and were expected to stay near those levels for several weeks due to unexpected outages at key regional refineries ... price spikes have moved east from Midwestern states such as North Dakota, Minnesota and Nebraska, where some cities experienced record high prices a few weeks ago, but the reason is the same -- refineries are undergoing maintenance work.

And from Reuters: Steady average gas price belies local ups and downs-survey

The average price for a gallon of gasoline slipped 1.81 cents to $3.6385 on June 7, according to the Lundberg Survey of about 2,500 gas stations across the country. ... 

Oil prices were up this week, with WTI up to $96.03 per barrel, and Brent at $104.56.

Using the calculator from Professor Hamilton, and the current price of Brent crude oil, the national average should be around $3.45 per gallon. That is almost 20 cents below the current level according to Gasbuddy.com. There are probably some seasonal factors not included in the calculator, but if crude oil prices stay at the current level, we should expect national gasoline prices to fall below $3.50 per gallon.

Note: If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent.

Orange County Historical Gas Price Charts Provided by GasBuddy.com

by Calculated Risk on 6/09/2013 11:24:00 AM

I've been watching for sale inventory very closely this year. My guess is inventory probably bottomed early this year. Inventory in many areas is still very low, but when more inventory comes on the market, buyer urgency will wane - and price increases will slow.

Several real estate agents have told me that they think more inventory is about to come on the market in their selling areas based on their discussions with potential sellers. I wouldn't be surprised if inventory builds all year (usually inventory peaks in July or August). We also might see less demand from cash flow investors who have bid up the low end.

Note: I'm confident that prices have bottomed (post-bubble), but if more inventory comes on the market, we will probably see more seasonal price declines this winter than last winter.

Jim the Realtor thinks this home might be a "Canary in Coal Mine" for the $1+ million market in North County San Diego. He thinks this house would have sold quickly earlier this year, and he will be watching to see when it goes pending (it has only been only the market a few days):

by Calculated Risk on 6/08/2013 06:25:00 PM

Yesterday on the employment report:
• May Employment Report: 175,000 Jobs, 7.6% Unemployment Rate
• Employment Report Comments and more Graphs


A few more employment graphs by request ...

Duration of Unemployment
This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more.

The general trend is down for all categories, but only the less than 5 weeks is back to normal levels. 

The 6 to 14 weeks category declined to 1.7%, the lowest since May 2008, but this is still above the "normal" level of under 1.5%.

The long term unemployed is at 2.8% of the labor force - the lowest since May 2009 - however the number (and percent) of long term unemployed remains a serious problem.

Unemployment by Education
This graph shows the unemployment rate by four levels of education (all groups are 25 years and older).

Unfortunately this data only goes back to 1992 and only includes one previous recession (the stock / tech bust in 2001). Clearly education matters with regards to the unemployment rate - and it appears all four groups are generally trending down.

Although education matters for the unemployment rate, it doesn't appear to matter as far as finding new employment (all four categories are only gradually declining).

Note: This says nothing about the quality of jobs - as an example, a college graduate working at minimum wage would be considered "employed".

Diffusion Indexes
 The BLS diffusion index for total private employment was at 59.8 in May, up from 55.6 in April.

For manufacturing, the diffusion index increased slightly to 45.7, up from 45.1 in April.

Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS. From the BLS:

Figures are the percent of industries with employment increasing plus one-half of the industries with unchanged employment, where 50 percent indicates an equal balance between industries with increasing and decreasing employment.

Job growth for total private employment was fairly widespread in May.   This is a good sign for the economy.  However, for manufacturing, more companies were decreasing employment than adding jobs again in May.

by Calculated Risk on 6/08/2013 11:01:00 AM

The key report this week will be May retail sales to be released on Thursday.

For manufacturing, the May Industrial Production survey will be released on Friday.

For prices, PPI for May will be released on Friday.

----- Monday, June 10th -----
No economic releases scheduled.

----- Tuesday, June 11th -----
7:30 AM ET: NFIB Small Business Optimism Index for May. The consensus is for an increase to 92.3 from 92.1 in April.

10:00 AM: Job Openings and Labor Turnover Survey for April from the BLS.

This graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Jobs openings decreased in March to 3.844 million, down from 3.899 million in February. The number of job openings (yellow) has generally been trending up, but openings are unchanged year-over-year compared to March 2012. 

Quits were down in March, and quits are mostly unchanged year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").

10:00 AM: Monthly Wholesale Trade: Sales and Inventories for April. The consensus is for a 0.2% increase in inventories.

----- Wednesday, June 12th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

----- Thursday, June 13th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for an increase to 350 thousand from 346 thousand last week.

8:30 AM ET: Retail sales for May will be released.

This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 26.4% from the bottom, and now 10.6% above the pre-recession peak (not inflation adjusted)

The consensus is for retail sales to increase 0.5% in May, and to increase 0.4% ex-autos.

10:00 AM: Manufacturing and Trade: Inventories and Sales (business inventories) report for April.  The consensus is for a 0.3% increase in inventories.

----- Friday, June 14th -----
8:30 AM: Producer Price Index for May. The consensus is for a 0.2% increase in producer prices (0.1% increase in core).

9:15 AM: The Fed will release Industrial Production and Capacity Utilization for May.

This graph shows industrial production since 1967.

The consensus is for a 0.2% increase in Industrial Production, and for Capacity Utilization to increase to 77.9%.

9:55 AM: Reuter's/University of Michigan's Consumer sentiment index (preliminary for June). The consensus is for a reading of 84.5, unchanged from May.

by Calculated Risk on 6/08/2013 08:46:00 AM

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for June 7, 2013.

Changes and comments from surferdude808:

As CR posted yesterday, another bank controlled by Capitol Bancorp, LTD (Ticker: CBCRQ), 1st Commerce Bank, North Las Vegas, NV ($20 million) was closed intra-week. According to a report by SNL Securities, the FDIC used its authority that was received within the Federal Deposit Insurance Corporation Improvement Act of 1991 to close 1st Commerce Bank. Normally, the FDIC must wait for the chartering authority to close a bank. However, this authority allows the FDIC to close a bank to limit losses to the insurance fund when the chartering authority is delayed in terminating the charter. As reported, it has been more than a decade since a bank has been closed in this manner and this is only the fourth time the FDIC has exercised this authority since enactment of the legislation. Capitol Bancorp had been litigating the closure of 1st Commerce Bank and had obtained an injunction that was extended until June 10th, but the FDIC stepped around that action. While the FDIC accelerated the closing to limit losses to the insurance fund, 1st Commerce Bank has a failure cost estimate of $9.4 million, which is inordinately high at nearly 47 percent of the bank's assets.

The fate of the remaining seven banks controlled by Capital Bancorp is uncertain. So far, the four failed banks of Capitol Bancorp have cost the FDIC insurance e fund an estimated $44.2 million. The FDIC could assess the $44.2 million failure cost against the seven banks under cross guarantee authority. At March 31, 2013, the seven banks had cumulative equity of $51.8 million. Thus, an assertion of cross guarantee by the FDIC would likely lead to a closing of the seven banks. Some observers believe the FDIC has been generous in not asserting its cross guarantee authority. The geographic dispersion of the franchise, the unusual capital structure of the banks, or the lack of a single buyer could contribute to the piecemeal closings. The most vulnerable units appear to be Bank of Las Vegas, Henderson, NV ($247 million) and Sunrise Bank of Arizona ($206 million). We will continue to monitor the status of the remaining operating banks of Capitol Bancorp.

Meanwhile, the Unofficial Problem Bank List had a net reduction of one institution to 760 after two removals and one addition. Assets total $277.5 billion, which is the first weekly increase since the last week of January 2013. A year ago, the list held 923 institutions with assets of $355.7 billion.

The other removal from failure this week was Mountain National Bank, Sevierville, TN ($437 million Ticker: MNBT), which had a much more pedestrian estimated failure cost at 7.7 percent of assets. The addition was Colonial Bank, FSB, Vineland, NJ ($633 million Ticker: COBK).

Except for any potential follow through closings, we anticipate a quiet week for changes as the OCC will likely wait until June 21st to publish its actions through mid-May 2013.

by Calculated Risk on 6/07/2013 06:54:00 PM

From the FDIC: First Tennessee Bank, National Association, Memphis, Tennessee, Assumes All of the Deposits of Mountain National Bank, Sevierville, Tennessee

As of March 31, 2013, Mountain National Bank had approximately $437.3 million in total assets and $373.4 million in total deposits. ... The FDIC estimates that cost to the Deposit Insurance Fund will be $33.5 million. ... Mountain National Bank is the 16th FDIC-insured institution to fail in the nation this year, and the first in Tennessee.

Friday is here.

Earlier on the employment report:
• May Employment Report: 175,000 Jobs, 7.6% Unemployment Rate
• Employment Report Comments and more Graphs

by Calculated Risk on 6/07/2013 04:57:00 PM

From the Association of American Railroads (AAR): AAR Reports Increased Rail Traffic for May, and Week Ending June 1

The Association of American Railroads (AAR) today reported that total U.S. rail traffic increased for the month of May 2013 as well as for the week ending June 1, 2013. May 2013 saw the first year-over-year monthly total carload increase in 16 months, and the 42nd straight monthly increase in intermodal traffic.

Intermodal traffic in May totaled 1,214,116 containers and trailers, up 3 percent (35,790 units) compared with May 2012. The weekly average of 242,823 units for May was the highest weekly intermodal average for any May in history. Carloads originated in May totaled 1,401,584, up 0.7 percent (9,551 carloads) compared with the same month last year.
...
“The economy is still not firing on all cylinders, and rail traffic in May reflects that,” said AAR Senior Vice President of Policy and Economics John Gray. “Pockets of rail traffic growth, such as autos, nonmetallic minerals, and commodities related to crude oil extraction are being countered by continued weakness in steel-related commodities, paper, and grain, among others.
emphasis added

Click on graph for larger image.

This graph from the Rail Time Indicators report shows U.S. average weekly rail carloads (NSA).  Green is 2013.

Total U.S. rail carloads rose 0.7% (9,551 carloads) in May 2013 over May 2012 to 1,401,584 carloads, their first year-over-year monthly increase in 16 months. U.S. rail carloads averaged 280,317 per week in May 2013, up from 277,181 in April 2013 and 278,407 in May 2012 ...

Once again, petroleum and petroleum products led the way — their carloads on U.S. railroads were up 42% (20,837 carloads) in May 2013 over May 2012. ...

U.S. rail carloads of lumber and wood products fell 1.8% (288 carloads) in May 2013, just their second year-over-year decline since 2009.

Note that lumber was a little weaker than a year ago - a rare year-over-year decline.

Graphs and excerpts reprinted with permission.

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

Intermodal traffic is on track for a record year in 2013.

Year-to-date intermodal volume on U.S. railroads through May was 5,261,051 units, up 4.1% (207,236 units) over the same period in 2012.

Earlier on the employment report:
• May Employment Report: 175,000 Jobs, 7.6% Unemployment Rate
• Employment Report Comments and more Graphs