Economic Charts

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Saturday, September 18, 2010

Revival of Easy Credit and Risk to the Economy

Is this another bad sign of things to come?  FHA is ramping up their loan machine again.  The FHA is a federal insurance agency that insures home loans for the banks against default.  The agency is supposed to use only the funds that it takes in from premiums for insurance (which is attached to FHA sponsored mortgage payments).  The following is a statement from the FHA's website on how they work:
FHA loans do not come directly from the FHA. Instead, the FHA is in the business of guaranteeing loans—reducing the risk to lenders and offering increased borrowing power to qualified applicants.
So how is the FHA funded, well here is a quote from the FHA site:
The FHA is not funded by tax dollars, but from the revenue generated by FHA mortgage insurance. 
In an article in IBD and Yahoo news it is pointed out that the FHA is taking on more loans and their underwriting requirements are more loose than Fannie Mae and Freddie Mac (hard to believe).
FHA-backed loans are by definition risky. They require only 3.5% down and are meant for first-time buyers who can't qualify for conventional loans.  In the last six months, FHA's share of the market has trended up, more so than loans backed by Fannie Mae and Freddie Mac. 
After going through 2007 - present, do we really need more risk entering the markets.  Mortgage defaults have already been rising toward the end of August - beginning September, per Realtytrac.  The number of foreclosures sold in July vs. June was down -73.77%, meaning we have a lot of inventory staying in the market.   New foreclosures in August vs. July was up 4.18%, bringing more inventory onto the market.  A stated reason for the number not being higher than 4.18% by some economists is because the banks and government simply cannot handle all the foreclosures coming in.

Pictures Courtesy of Realty Trac

Due to these and other economic events, it is predicted that home prices will fall further from here, making it possible for more homeowners to want to walk away from their under water mortgage.
And as FHA's volume of home purchases relative to Fannie and Freddie has continued to go up, its share of the mortgage market is at least 30% now.
What does this mean if a large portion of these mortgages default?  Up till now it has been stated that the FHA does not take money from tax payers to support its efforts.  If major defaults come, does this change or do they cut back on funding for the other areas of its operations?
FHA Budget Areas Courtesy of the FHA
In July, 75% of FHA's insurance volume was for home purchases vs. 59% in the six months ending in March. 
This seems like a dangerous path when defaults are rising, as it is easier to walk away from a mortgage that you put little to nothing down for.  It would seem we are positioning the FHA to require a bailout in the near term future.  [ Read more ... ]

Pension Gaps Loom Larger

Many of America's largest pension funds are sticking to expectations of fat returns on their investments even after a decade of paltry gains, which could leave U.S. retirement plans facing an even deeper funding hole and taxpayers on the hook for huge additional contributions.  It would seem that overstating the expectations of returns keeps the gap smaller, if the pensions were to actually reduce their forecasts it would force the gap, to be made up, ever larger.  Therefore, it pays for a pension fund to overstate ensuring this house of cards can continue to statnd.  Some pension funds are ratcheting down their figures, but not enough (usually by half a percent).  From 2005 to 2009 returns were undershot by 50% of expectations, the coming years do not hold much hope for higher returns either.  Reasons are that money in the stock market are not returning as much as anticipated (due to a poorly performing market) and bonds have been held down at a very low rate of return on the fixed income side.  Pensions public and private are already in crisis, this "eyes closed" attitude to reality may cause larger problems for pension funds as reality of the market returns going forward become more dismal and may prove to be the next joker inline for a bailout.  The gap on returns would have to see considerably higher interest rates on fixed income assets and a strong bull market to make up the gap over a long period of time (as their premise of return was based on a strong bull market continuing).  Who knows what is to become of our markets as American investors continue to feel burned by manipulation in the markets and an unleveled playing field vs. the Market Makers.  We may experience a sideways movement in the markets for some time until investor confidence returns, which could potentially widen the gap for pension funds. [ Read more ... ]

Elizabeth Warren on the Consumer Protection Agency

Elizabeth Warren presents here views on the Consumer Protection Agency and why we need it.  Obviously we don't need another government organization hampering the markets, but as she points out there are already 7 which have been pretty useless.  If the new agency is replacing these 7 and can work on a smaller budget this would be seen as a benefit as it brings in spending.  It is desired that this agency could actually be more productive than current 7,  in an environment (Republican or Democrat) that seems to hamper real progress for America as a whole.  She raises some valid points defending government in other areas and the need for it certain agencies.   Overall we need to reduce government spending and find ways to do things smarter, if we are going to be a productive producing and services economy.

Market Perspective

About a week or so I posted a chart of the Dow, basically showing sideways movement.  For all that think the market is rallying, think again (small recovery in the channel).  As you can see in the Dow and the S&P charts we are in the upper bound of this channel.  Again, the real channel in the Dow below is actually smaller (as it should have more touch points).  The Dow chart basically should have a real channel like the S&P chart (I will correct this in the future).
It will be interesting to see if we break out of this channel or if we break down from here this upcoming week.  I noted, from several interviews this past week, that the buying has been into weaker volume.  Historically the end of September, beginning of October is a bad time in the market (roughly that time frame).  

From a larger perspective, look at the chart in the S&P that covers over a decade (below).  We can see the run up in the 90's and the fall back down, we also not the run up to 2007 and the leg down (Much steeper) and the current sideways movement from a monthly perspective.  I hear a lot from people, unwilling to face their real losses since 2007, that they have made up all the losses from then.  I wonder how this is when we have not closed the gap to the high.  Turns out their dollar value is up (due to their and their employers contributions) to the level they were at before the 2007 crash.  Well that isn't a gain, that is gains+contributions (more from the contribution side of the house).  Until they face their losses, they will never be willing to make smart moves with their money going forward.

Peter Schiff on the Markets

A brief video from Peter Schiff on the markets, where he tackles many angles of the market action this week, including; gold, bonds and policy.

Here is a chart of this weeks action in the dollar index, as Peter refers to in the video.  Each candle represents one week.  We have a little ways to go to hit the lows we saw around November of 09, but we seem to be getting there relatively quickly.  Peter makes the point that the dollar would have lost more, but Japans intervention this week held the dollar up.  For those of you whom don't know what Japan did this week, they did a massive sell off of the Yen to force strength in the dollar and weakness in the Yen.  Why would they do this? Because as their currency gains strength, their exports become more expensive (bad for the Japanese people, but good for exports).  Given the commitment of U.S. policy to weaken the dollar, I don't see the Yen weakness staying that way too long.  If you look at this weeks candle (pretty large already), it makes you wonder how much lower we would have gone.

Failed Bank Update

This week we saw an uptick in bank failures from the prior week.  We lost 6 more banks this year totaling 125 failed in 2010.  This was a 5% increase week over week.  States that had banks fail were; 1 in WI, 1 in OH, 1 in NJ and 3 in GA.

Pento Back on CNBC Discussing Obama's Policys and the Market

After a rough experience on CNBC by Erin Burnett, Michael Pento is back on CNBC.  This time the discussion is about how to correct the markets.  Main theme is, if the President were to fix the economy then Wall Street and Main Street would be satisfied with the President.  Michael makes comments about getting rid of Ben Bernanke and putting someone in that position that is not so enamored with printing money.  Another big point that is made by Michael is that we need to rebuild our manufacturing base and lower wages to compete with China, we also need to allow our markets to correct.  Keith Boykin makes the comment that "we are all greedy and selfish, we all wants something but don't want to pay for it".  This comment has an element of truth to it, but why should we pay for this debt that was created by expanded government spending in the last 10 years, which doubled the spending budget within that period.  I read an  article previously that if we cut spending to the levels of a decade ago, we would be in a budget surplus and could start paying down our debt.  At some point the piper is going to have to be paid, one way or another.  Enjoy the video.

Friday, September 17, 2010

Bernie Marcus on the Markets

I find Bernie to be pretty down to earth and discusses small business challenges in the U.S. currently and what is to come with Cap and Trade, regulations and Healthcare.  Bernie says most small businesses, that are not laden with debt, can get loans but do not want them.  Bernie's comments on "the bear in the kitchen for businesses is the national debt".  Company's are uncertain on the economy because the amount of debt is being accumulated and view that the government will make businesses pay for it.

Thursday, September 16, 2010

Rigged Markets?

CNBC interview with Robert Greenfield CEO of the NASDAQ on confidence in the markets.  Robert makes a statement that small investors he doesn't believe that investors believe the markets are rigged (wow, blinders are wonderful).  Investors are on the sidelines due to a belief in manipulations and unfair advantages by the Market Makers.   Surprisingly 87% of 1000 people believe the markets are rigged.
I sure hope he gets that fair market someday, cause it isn't here today.

M1 and M2 Money Supply Update

Zerohedge is tracking M1 and M2 money supply trends now and point out that money supply, as well as the Feds Balance Sheet, should now be used as an indicator of overall economic health making this statement "Together with the Fed's balance sheet, we are now convinced that the second most important developing metric for the economy is a granular analysis of the key public monetary aggregates: M1+M2."  As money supply expands this causes the dollar to devalue as well as causes inflation (as you can buy less with your weakened dollar).  [ Read More ... ]

Adding Credence to the ISM Post

On September 2nd 2010 I posted "Analyzing the ISM" where I point out that the ISM headline number was reported to be 56.3, which was a positive number for the markets (caused a rally).  When you peel back the numbers though you found disturbing trends.  I pointed out how new orders were down (so were new export orders) and that inventory was building up.  I expressed concern in this area as this was a bad sign, which the main media reported as good news (the increasing inventory that is).  Also observed was a rise in prices for manufacturers for materials, was another bad sign.  Apparently, I was on to something, as ZeroHedge posted "Here is why the ISM will drop below 50 in the coming months" today.  The post presents a report from Goldman Sachs, that seems to be in alignment with my assessment, but introduces something I missed or lacked the data to form (the changes in inventory-to-shipment or I/S ratio).  This ratio compares the amount of inventory divided by the inventory shipping.  This data shows a stronger buildup of inventories and a weaker outlook on growth going forward.  [ Read more ... ]

Housing Dip Take 2

Along with fresh new decreases in home values due to excess inventories now we are seeing foreclosure activity resume its upward trend as predicted.  ZeroHedge says RealtyTrac reported overnight that general foreclosure activity (i.e., default notices, scheduled auctions and bank repossessions) — were reported on 338,836 properties in August, a 4 percent increase from the previous month. One in every 381 U.S. housing units received a foreclosure filing during the month.  [ Read More ... ]

Russell Napier on Currency's and Bonds

Philly Fed Index Shows Contraction In September

CalculatedRisk released a short article on the Philly Fed Index, which is indicated a contraction in new orders and shipments, as well as stalled growth.  Forecasts in the index was for 0.9, but actually came in at -0.7.  The Philly Fed index is a level of diffusion index based on surveyed manufacturers in Philadelphia.  A reading above 0.0 indicates a improving conditions and below 0.0 indicates worsening conditions.  [ Read more ... ]

Weekly Initial Unemployment Claims

The initial unemployment claims numbers were released this morning.  Remember Initial Claims is the number of people whom filed for unemployment insurance for the first time during the past week.  This is an indicator of a rising unemployment rate.  The actual number released today was 450k, which was under forecasts of 463k and down from last weeks revised number of 453k.  Again, as always, we need to wait for revisions.  Last weeks number was 451k Actual and the revision brought it up to 453k, this brought down the delta that was widening between actual and revised.
After a widening gap in the Delta between actual and forecast was previously hitting a high, the revision came back into line this week with a more acceptable margin of error.
On the surface, this looks like a good report as we see claims continuing to come down (less than the previous weeks momentum, but down none the less).  Again, need to monitor next weeks number and this weeks revised number to get a clearer picture.

Wednesday, September 15, 2010

Peter Schiffs Take on Todays Market Action

Peter talks about the Metals action today and a very volatile currency market today in the Japanese Yen, the Swiss Franc and the USD.  He also discusses how inflation is a reality today as other countries are seeing it (tying in to a prior post about the U.K. and inflation).

Tuesday, September 14, 2010

Currency Manipulation at its Finest

After years of the Yen appreciating against the dollar, the BOJ seems to have had enough and performed massive selling of the Yen to devalue it further.  The strengthening Yen really hurt the Japanese economy and the BOJ  (Bank of Japan) could no longer tolerate it.
In my years of trading forex, I don't think I have ever seen a chart that looks like that in such a short period of time.  Who ever was shorting the dollar just got their rear ends handed to them in the space of a little more than an hour.  Not the trade I would have wanted to get caught in.  This is one case where the trend wasn't your friend, it was a rabid dog that just bled you dry.  The Japanese stock market rejoiced in this intervention.  [ Read more ... ]

Another View of currency action today courtesy of  Notice $DXY, which is the dollar index, has really lost value today in a big way.

Why Toilet Paper is Better Than Cash

I saw this article and just had to laugh at the title, but then you read it and it is some what serious.  Russell Napier writes in the WSJ about how putting money in the bank may earn you 0.5% while Kimberly Clark, the maker of toilet paper (and other personal items) pays 4.0% interest on your money and has never cut it dividend in the data going back to 1977.  He uses this to make the case that people will tire of not making money in interest from savings or bonds and pile back into the stock market seeking higher returns on their money.  This, in his mind, will spark a short term rally in the market.  Even though I find humor in what he is saying, I think the message isn't complete.  People didn't just pile out of the stock market due to the scars of losing more than half their 401k's and IRA's.   Some piled out because their is sufficient evidence that the market is rigged against them, by the big players (not an even playing field).  Now while getting paid a 4% dividend on your money sounds really great (and I like dividends) the potential losses in your principle is a greater concern with rumors of a double dip (which I think is becoming less likely in the short term due to market hype and distorted numbers announcements).  Lets look at how Kimberly Clark did in 2008/2009.
It took losses like the rest of the stock market and is almost back to where its high was in 2007.  From a peak of 71.94 in 2007 the stock lost 39% by March of 2009 to a low close of 43.92.  Currently it has clawed its way back to 66.46 toward the end of 2010, just 8.24% away from where it was.  Now you do have to think long term though and over the longer term here is how Kimberly Clark performed.
If you have many years to invest this looks pretty good.  Generally the stock has been moving in a sideways channels since 2000 (and upwards in the decade and a half prior)  and as long as your in on the low end of that channel, the 4% return seems very nice.  For my money, I'll sit this one out.  I think we need the government to level the playing field in the market so that everybody has a chance to win, besides the big boys who get a nice bailout when their investments go majorly wrong.   You can read more on Russell's article in the WSJ here.

Gold Sets a New Record

Gold was on a tear today.  Various people attribute it to rising inflation, to newly revived fiat currency concerns and even unwinding short positions from market manipulators.  Gold started around 1249 to 1250 today and rose to a new high of just under 1275.  Gold settled back down to around 1269 toward the end of the day.  Silver made similar moves, but has a long way to go to reach its all time high.  Very exciting day in the Metals markets.
Courtesy of

Pension Underfunding Hits $460 Billion Deficit

An article by ZeroHedge came out today about how Pension deficits hit $460 Billion and showed a $108 Billion deterioration in one month. This was due to a large decrease in corporate bond interest rates. They point out the assets of corporate pensions in relation to their deficit (known as the funded ratio) fell from 75.6% to 70.1% in August, the lowest in 10 years. [ Read more ... ]

Food Inflation in the U.K.

With all the talk of deflation (really in housing and some key areas), other areas of the economy may start or are seeing inflation in other areas.  Food has been an area where stores have been cutting costs, but now with some headwinds coming in Wheat from Russia and possible weakness in the dollars we will see higher prices in food.  The U.K. is already seeing rising prices in several areas.

Weekly Retail Sales

This weeks retail sales numbers are out.  Retail sales M/M measures the change in total value of sales at the retail level each month.  Core Retail Sales M/M measures the change in the total value of sales at the retail level, excluding autos.  These are viewed as a gauge of consumer spending, therefore an indicator of the health of the economy.  Core Retail Sales' removal of the auto sector is done to clear distortions in sales trends due to the volatile auto industry.  I think this becomes a bigger issue as an indicator over time as the younger generation is learning that saving is vital to their success and this economy can no longer consume what we don't need or cannot afford.  Core Retail Sales beat estimates of 0.3% to com in at 0.6% and Retail Sales stayed the same with a forecast of 0.4% and actual coming in at 0.4%. 
Interesting thing to note before I go into the numbers.  Revisions from June actually puts the prior months Retail Sales number at 0.13% instead of 0.4%, that would have missed forecasts and would have impacted markets negatively.  You need to watch the revisions to really see what is happening in the economy, not advanced estimates like these.  Another note, a lot of subcategory estimates were not available, which will change the numbers in revisions (up or down).  

Having said all that, the categories that did the best last month were; Food & Beverate +1.28%, Health & Personal Care +0.59%, Gas Stations +1.91%, Clothing +1.14%, Sporting Goods +0.9%, General Merchandise +0.4%, Food Services & Drinking Places +0.12%, Non-Store Retailers (Electronic Shopping) +0.57%.   Categories that did poorly last month were; Autos -0.67%, Furniture & Home Furnishings -0.49%, Electronics & Appliances -1.1%, Building Material & Garden Equipment 0%.
As you can see the areas doing well were pretty must have things like food, clothing (cold weather and school), Gas and Personal Care.  Outliers from this theory are the Sporting Goods and Food Services & Drinking Places, but could be attributed to the final summer month and sales on sporting goods and vacation season wrapping up.  Oddly 45 minutes after this news hit, Dow pre-market is down -13 points.  Looks like somebody actually read a report finally (we'll see with the day ahead).

Sunday, September 12, 2010

Fed Handouts on the Rise

King World News with Micheal Pento

Micheal Pento was silenced on CNBC for discussing the real issues in the Bond market.  King World News performed an interview with Mr. Pento and allows him to talk unfettered.  Mr. Pento discusses the over inflated bond market, why interest rates will go up and manipulation.  [ Listen here ... ]