by Calculated Risk on 1/18/2010 11:05:00 AM

In late 2008 we discussed that the dramatic decline in oil prices would lead to a sharp decline in domestic investment in petroleum exploration and wells. Sure enough domestic investment was cut by 50% in the 2nd half of 2009 ...

The following graph compares real oil prices (data from the St. Louis Fed, adjusted with CPI) and real investment in petroleum exploration and wells in the U.S. (data from the BEA).

This doesn't include investment in alternative energy sources.

Click on graph for larger image in new window.

Not surprisingly there is a strong correlation between oil prices and investment. With oil prices now around $80 per barrel again, domestic investment will probably increase in 2010.

The increase in oil prices is also concerning. Notice that large increases in oil prices have frequently been followed by recessions. This is a topic that Professor Hamilton has researched and discussed several times over the years, see: Will rising oil prices derail the recovery? Of course oil prices are still far below the peak.

Note: right scale doesn't start at zero to show the correlation between the series.

by Calculated Risk on 1/18/2010 08:46:00 AM

A couple of quotes from an article by James Hagerty in the WSJ: Is Slashing Mortgage Principal the Answer?

... Assistant Treasury Secretary Michael Barr ... suggested that there would be a risk that such a [principal] program would change a lot of borrowers’ behavior. “Most people, most of the time, make their mortgage payments ... even if they’re underwater,” Mr. Barr noted. “You have to be quite careful not to design a program that induces more people to walk away” ...

This is a major concern. A couple weeks ago I wrote: New Research on Mortgage Modifications and Principal Reduction

Imagine what would happen to Wells Fargo or Bank of America if their borrowers found out that the banks would substantially reduce their principal if they were 1) underwater (negative equity), and 2) stopped making their payments. The delinquency rate and losses would skyrocket!

Because of this risk, a macro principal reduction program is very unlikely.

And another quote from the WSJ:

Tom Capasse, a principal at Waterfall Asset Management LLC, a New York-based investor in mortgages, says it’s too late to prevent a “seismic shift” in borrower behavior ... “There used to be a scarlet D on your forehead if you defaulted,” says Mr. Capasse. “Now it’s a badge of honor.”

Not quite a "badge of honor", but the widespread acceptance of "walking away" has been one of the greatest fears of lenders for some time.

by Calculated Risk on 1/17/2010 10:06:00 PM

From Eric Dash at the NY Times: Wall St. Weighs a Constitutional Challenge to a Proposed Tax

In an e-mail message sent last week to the heads of Wall Street legal departments, executives of the lobbying group, the Securities Industry and Financial Markets Association, wrote that a bank tax might be unconstitutional because it would unfairly single out and penalize big banks ... [and]has hired a top Supreme Court litigator to study a possible legal battle ...

Privately, executives at several large banks said they believed a legal battle was doomed to fail in Washington and risked escalating public rage over the bailouts of the banks.

The fee is imposed only on banks with "more than $50 billion in consolidated assets", and on the liabilities "excluding FDIC-assessed deposits and insurance policy reserves". It is hard to imagine that would be unconstitutional.

by Calculated Risk on 1/17/2010 06:22:00 PM

Since the NAHB Housing Market Index for January, and Housing Starts for December will both be released this week, here is a graph showing the relationship between the two series:

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 December release for the HMI and the November data for single family starts.

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

I know I'm a broken record, but residential investment is one of the best leading indicators for the economy, and the best indicators for RI are the NAHB HMI, housing starts, and new home sales. And these indicators are moving sideways (at best).

Note: The largest components of residential investment are new home construction, and home improvement. This includes brokers' commissions and some minor categories.

by Calculated Risk on 1/17/2010 01:00:00 PM

The last half of every month is filled with real estate related data, and this week the NAHB Housing Market Index (builder confidence for January) will be released on Tuesday, Housing Starts for December and the ABI Architecture Billings Index on Wednesday, and the Moodys/REAL Commercial Property Price Index for November will be released sometime this week.

Expectations are for housing starts to be essentially flat in December, from MarketWatch:

The consensus forecast of economists surveyed by MarketWatch calls for a 3% decline in starts to a seasonally adjusted rate of 555,000 from 574,000 in November.

In other economic news, the Producer Price Index will be released on Wednesday, the Philly Fed survey on Thursday, and the DOT's estimate of vehicle miles for November will be released this week.

The markets will be closed on Monday for Martin Luther King Jr. day.

And a summary of last week ...

BLS: Near Record Low Job Openings in November

Click on graph for larger image in new window.

This following graph shows job openings (yellow line), hires (purple Line), Quits (light blue bars) and Layoff, Discharges and other (red bars) from the JOLTS. Red and light blue added together equals total separations.

Notice that hires (purple line) and separations (red and light blue together) are pretty close each month. When the purple line is above total separations, the economy is adding net jobs, when the blue line is below total separations, the economy is losing net jobs.

According to the JOLTS report, there were 4.176 million hires in November, and 4.340 million separations, or 164 thousand net jobs lost. The comparable CES report showed a gain of 4 thousand jobs in November (after revisions).

Option ARM Recast Update

The following data is from Amherst Securities:

This chart shows the expected payment shock coming in 2010 and 2011 from Option ARMs. This chart includes projected increases in LIBOR (if LIBOR stays low, the shock will not be as high), and the recast due to reamortizing the loan over the remaining period.

For more details, see: Option ARM Recast Update and More on Option ARMs

On negative equity, this graph from Amherst shows the CLTV for various mortgage products. Note that subprime and Alt-A had a somewhat higher percent of borrowers with negative equity than prime - but Option ARMs (red) borrowers are mostly in negative equity!

As Laurie Goodman at Amherst Securities noted, Option ARM borrowers were a self selecting group (people stretching to buy homes) and that is why most have negative equity in their homes.

Industrial Production, Capacity Utilization Increase in December

This graph shows Capacity Utilization. This series is up from the record low set in June (the series starts in 1967), and still below the level of last year.

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

Industrial production is still 10.7% below the level of December 2007.

Here is the report from the Fed: Industrial production and Capacity Utilization

Trade Deficit Increases in November

This graph shows the monthly U.S. exports and imports in dollars through November 2009.

Both imports and exports increased in November. On a year-over-year basis, exports are off 2.3% and imports are off 5.5%.

Overall trade continues to increase, although both imports and exports are still off significantly from the pre-financial crisis levels. Net export growth had been one of the positives for the U.S. economy - but now imports are growing faster than exports.

Here is the Census Bureau report on trade.

Other Economic Stories ...

From Fitch: U.S. CMBS Delinquencies up 42bps; Peak Not Until 2012

HUD Probes FHA Lenders: HUD Inspector General Probes Morgage Companies with Significant Claim Rates

Rail Traffic in 2009: Lowest since at least 1988

From RealtyTrac: 2009 was Record Year for Foreclosure Filings

From Tom Petruno at the LA Times: California's debt rating cut to A-minus by S & P on budget woes

From The Times: Britain's recession the steepest for 88 years

And from Statistischen Bundesamtes Deutschland: Germany experiencing serious recession in 2009

Retail Sales decline slightly in December

From Treasury: Fact Sheet: Financial Crisis Responsibility Fee

Unofficial Problem Bank List Increases to 582

On Q4 GDP: Q4 GDP: Beware the Blip and from Professor Krugman: Blip

Best wishes to all. My thoughts are with the people of Haiti.