by Calculated Risk on 3/09/2011 11:29:00 AM

The eurozone debt crisis summit scheduled is on Friday and this meeting is to prepare for the next meeting of all 27 EU leaders in Brussels on March 24th and 25th - so I expect no major announcement on Friday.

However it is interesting that To Vima quoted Prime Minister Georgios Papandreou as telling his cabinet that these meetings are "all or nothing", implying a comprehensive solution or ... ?

Also from To Vima this morning: Nightmare: 14.8% Unemployment

Explosive growth of unemployment recorded in Greece, with a total number of unemployed is at 733,645, according to data from the Greek Statistical Authority (ELSTAT) that were released Wednesday.

The percentage of registered unemployed reached 14.8% in December 2010 an increase of one percentage point compared with November.

The number of the employed workforce in the country fell to 4.23 million from 4.3 million the same period. Record low unemployment, record the ages of 15 -24 which rose 39% from 28.9% compared with December 2009.

This is politically untenable.

And on Ireland, the new government's plan is worth reading "Towards Recovery: Programme for a National Government 2011-2016". Here is an excerpt from page 6:

In our engagement with the lenders, we will pursue a number of different strategies to achieve this end.

• We will seek a reduced interest rate as part of a credible re-commitment to reducing Government deficits to ensure sustainability of our public finances.
...
• The Government accepts that enabling provisions in legislation may be necessary to extend the scope of bank liability restructuring to include unsecured, unguaranteed senior bonds.emphasis added

Sounds like haircuts ...

The Greek ten year yield is at 12.9% (up again today). The Irish ten year yield is down a little to 9.5%.

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%).