by Calculated Risk on 12/14/2010 08:50:00 AM

On a monthly basis, retail sales increased 0.8% from October to November(seasonally adjusted, after revisions), and sales were up 7.7% from November 2009.

Click on graph for larger image in new window.

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

Retail sales are up 12.8% from the bottom, and only off 0.3% from the pre-recession peak.

The second graph shows the year-over-year change in retail sales (ex-gasoline) since 1993.

Retail sales ex-gasoline increased by 6.9% on a YoY basis (7.7% for all retail sales).

Here is the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for November, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $378.7 billion, an increase of 0.8 percent (±0.5%) from the previous month, and 7.7 percent (±0.7%) above November 2009. Total sales for the September through November 2010 period were up 7.8 percent (±0.5%) from the same period a year ago. The September to October 2010 percent change was revised from +1.2 percent (±0.5%) to +1.7 percent (±0.2%).

This was above expectations for a 0.6% increase (and October was revised up). Retail sales ex-autos were up 1.2%, above expectations of a 0.6% increase.

Retail sales are almost back to the pre-recession peak in November 2007.

by Calculated Risk on 12/14/2010 07:52:00 AM

From National Federation of Independent Business (NFIB): Small Business Optimism improves in November

Overall, small business owners continued to report more improvements in the economic environment, but the gains were small. The Index of Small Business Optimism gained 1.5 points, but the reading of 93.2 is still very weak, closer to a recession reading than indicative of a recovery. Although the November reading is higher than the prior 34 months, it is still lower than the November - December, 2007 readings by over a point, and those were the lowest 2007 readings as the Index fell all year signaling the coming end to the expansion in December. So the Index has climbed from its recession low of 81 but is far short of even the average value of the Index prior to the start of the recession, and far below values that have typified a recovery period.

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. Although the index increased to 93.2 in November (highest since December 2007), it is still at recessionary level according to NFIB Chief Economist Bill Dunkelberg.

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

Hiring plans have turned positive again and are the highest level since mid-2008. According to NFIB: "Over the next three months, nine percent plan to increase employment (up one point), and 12 percent plan to reduce their workforce (down one point), yielding a seasonally adjusted net four percent of owners planning to create new jobs, a three point gain from
October.."

And the third graph shows the percent of small businesses saying "poor sales" is their biggest problem.

Usually small business owners complain about taxes and regulations (that usually means business is good!), but now their self reported biggest problem is lack of demand.

Overall this survey is showing improvement, but at a very slow pace.

by Calculated Risk on 12/13/2010 10:15:00 PM

The Senate voted 83 to 15 for cloture on the bill containing the proposed tax legislation. Here is the roll call. (This means further debate will be limited to 30 hours). The actual vote will probably be on Wednesday. The House is expected to vote later in the week.

And the economic schedule for tomorrow:

7:30 AM: NFIB Small Business Optimism Index for November. This index has been showing that small businesses remain pessimistic.

8:30 AM: Retail Sales for November. The consensus is for a 0.6% increase from October. (0.6% increases ex-auto).

8:30 AM: Producer Price Index for November. The consensus is for a 0.6% increase in producer prices.

10:00 AM: Monthly Wholesale Trade: Sales and Inventories for October. The consensus is for a 0.9% increase in inventories.

2:15 PM: FOMC Meeting Announcement. Here is a preview - no changes are expected to either interest rates or QE2.

by Calculated Risk on 12/13/2010 06:45:00 PM

A couple of new research papers ...

• From Julapa Jagtiani and William W. Lang at the Philly Fed: Strategic Default on First and Second Lien Mortgages During the Financial Crisis

The researchers look at the data and notice that a large percentage of borrowers who are in default on their first mortgage and still making payments on their 2nd. They ask "Why might households default on their first mortgage but not default on their home equity loans?"

They offer several explanations, and conclude:

Our results overall suggest that people default strategically as their home value falls below the mortgage value; they exercise the put option to default on their first mortgage. However, they tend to keep their HELOCs current in order to maintain the credit line available to them, particularly for those who have already used their credit card lines.

Another possible explanation that the authors didn't explore is that the 2nd is recourse, and the borrower has sufficient other assets and believes the 2nd lender will pursue them.

• From Christopher M. James as the SF Fed: Mortgage-Backed Securities: How Important Is “Skin in the Game”?

This economic letter explores the importance of lenders having "skin in the game". The recent financial regulation require securitizers to retain at least 5% of the credit risk for residential MBS. The author looks at several deals where the originator had some risk (through affiliated deals) and concludes:

Overall, these results suggest significant performance differences based on the loss exposure of the mortgage originator. In short, skin in the game matters for performance. More important, because in this study the residual interest retained by the sponsor is 3% or less of the total value of the securitization, these findings suggest that a 5% loss exposure requirement is likely to have a significant impact on loss rates.

This appears to support the "skin in the game" requirement.

by Calculated Risk on 12/13/2010 03:39:00 PM

• Tax Legislation

If you are bored, here is the C-Span Link for the Senate vote.

From the Senate rules: "Under the cloture rule (Rule XXII), the Senate may limit consideration of a pending matter to 30 additional hours, but only by vote of three-fifths of the full Senate, normally 60 votes."

Most estimates are the cloture vote will receive close to 70 votes (the vote will stay open for some time because of bad weather). Then there will be 30 hours of additional "debate" (talking to an empty chamber) and then the final vote in the Senate will probably be on Wednesday.

Both Senators Reid and McConnell agreed to keep the Senate in session over the weekend and into next week, if needed, to make sure the bill passed. The only question is what will happen in the House?

• From Reuters: ECB eyes seeking capital hike - sources

The European Central Bank is considering requesting an increase in its capital from euro zone member states, euro zone central bank sources told Reuters, as a cushion against any potential losses from its bond buying.

The ECB has been buying bonds of weaker euro zone countries (probably mostly Greece, Ireland, and Portugal).

by Calculated Risk on 12/13/2010 12:36:00 PM

There have been quite a few bearish articles recently about the muni market. Not long ago there were even some "scary charts" showing a sharp sell off for the muni market, and at that time Bond Girl pointed out the correction was not because of imminent muni defaults, but because of the end of the Build America Bond (BAB) program.

For those who want to know more about munis, here is an ubernerd post from Bond Girl at Self-evident.org: Default and bankruptcy in the municipal bond market (part one)

I am just writing this post to demystify a process that evidently needs demystifying. ...

One of the more frustrating aspects of muni market coverage in the news and blogosphere is the tendency to talk about municipal debt as if only one type of bond is issued and traded. There is actually considerable diversity among borrowers in the muni market (e.g., they are not all government entities), and by extension, the types of commitments that are made for the repayment of the debt. Although the relative health of the muni market has macroeconomic consequences, this is in many ways a market that defies generalization. (That’s one reason I find the muni market unusually interesting ...) The defaults that have taken place both before and during the economic downturn are what finance-types would refer to as storied credits. I often see people describing Jefferson County, Alabama, as the “canary in the coal mine” of muni defaults. Suggesting that Jefferson County, which was the center of a widely-publicized securities fraud case, is a typical muni credit is kind of like portraying Enron as a typical corporate credit. ... Another example would be Florida dirt bonds, which are backed by special assessments on property in a severely depressed market. These are not borrowers that were forced to establish their spending priorities or were muddling through difficult times; these are borrowers that experienced sudden and catastrophic losses and derived their revenues from limited sources.

Types of municipal bonds

The obvious starting place on this topic is to explain the types of muni bonds that are issued. Municipal bonds are broadly divided into two classes: general obligation (GO) and revenue bonds. The difference between GO and revenue bonds is the specific security that is pledged to repay the debt. (Bonds may also be issued with more than one kind of security and may involve a moral obligation pledge that implies contingent financial support from another entity with stronger credit.) GO bonds are secured by the full faith and credit of the issuer, meaning that the borrower is committing to raise taxes and other revenues sufficient to cover the amount owed.

Revenue bonds are secured by a defined stream of revenues. Whether the principal and interest on these bonds is paid in a timely manner depends upon: (1) the reliability of the specific revenues pledged; and (2) whether that revenue stream has been pledged toward other debt or is used for other purposes.

It is important that you understand what kind of bond you have. ...

There is much more on munis at the post.