Recent Economic Data ... UGLY

It's been about a week since a real post. Far too long for my millions and millions of my readers. Sometimes it is good to poke fun at oneself as it pulls you away from the desperate times we are all facing.

Homes Sales

US data for January certainly dashed all hopes that housing activity had found a bottom. I spoke to a couple of people (unnamed for their own good) who were challenging my collegue JJ's questioning the bottom that they were touting. From my recallection these are the same people that use 9 recessions (all post WWII) to establish trends such as duration and magnitude of this recession. Anyway existing home sales fell, the application for purchase index fell, new home sale fell and as such month of inventory rose. All this means prices have much further to drop. This will not be good for growth as it will continue to drive savings rates back to trend levels to compensate for the drop in net worth. I expect we will see US savings rates above 10% before we are done this deleveraging process.

Mortgage Rates

The 30 year mortgage has moved back to around 5% (4.99% last week). Even though mortgage applications have been volatile it appears that approximately 70% of new apps are to refinance at lower rates or lock in a variable rate product at an attractive rate. The remaining 30% are primarily bargain hunters looking for distressed / foreclosed situations. It would appear that prices have to fall to a point where the buyer can purchase a property, rent it and make a profit. In asset bubbles the "make a profit" point is lost as the mania has investors believing that "it is different this time" and that prices will rise for ever. We forget Finance 101 which taught us Cash is King.

This buy or rent scenario leads me to an interesting point. In overbuilt areas with foreclosures rising there would appear to be a flood of rental properties hitting the market. Wouldn't this push down rental prices (simple supply and demand) and therefore lowering what an investor would be willing to pay? Therefore the bottom in housing prices in these areas may be lower than we think. Be wary of the stress tests!!!!!

Bond Holders

Is anyone else entirely tired of Bill Gross at Pimco crying about his financial holdings? Why shouldn't the bond holder take a haircut just like the equity holder? The assertion that this can't happen is ridiculous. Of the "bondies" that I know I would argue they are more technical than the majority of my equity friends. They know exactly what they were doing here. About half of the liabilities of of Citi, B of A and JPM are funded out of the bond market. Why should the US taxpayer subsidize $1.5 trillion of debt if the deposits at these institutions are to be protected? The burden on the US citizen clearly continues to escalate.

The problem for governments across the world isn't necessarily Mr. Gross's voice but it is the voice of all the pension funds, insurers and money market funds heavily invested in financial service bonds. To wipe out equity holders is one thing but to wipe out pensions via bond default is another. It equates to systemic risk to the system. I guess we should not lose sight of the Great September Debaucle that was Lehman Brother and that the US relies on foreign institutions both public and private as a source of funding. Who says this isn't political???

As far a pension funds go, I look forward to how actuarial assumptions are about to change in our low interest rate environment. Won't pensions have to take more risk in order to meet future obligations? I read this as equity investments. Yikes. Have fun at those investment committee meetings.

Durable Goods

Just plain aweful. The main point to take out of the data is the weakness in both imports and exports. Global it is. Here is a look across the world:

Imports Exports

Germany -3.6% -7.3%
U.K. -5.9% -5.5%
Japan -31.7% -45.7%
Taiwan -56.5% -44.1%

I could go on but you get the point. This leads me to GDP revisions as I cannot see this trend ending any time soon.

GDP Revision

I'll say sorry in advance for the rant you are about to witness. Government statisitical data is a complete joke. If you, the investor, do not take the time to look into what inputs they have used and how they are calculated it is your own fault for not understanding the magnitude and seriousness of the mess we are in. While GDP has its problems my prime target is the Birth/Death Ratio in the employment numbers. One just has to look up what this plug figure is to "get" while at economic turns (either positive to negative or vice versa) or when the rate of change or slope gets steeper it either understates (going from negative to positive) or in our case has overstated (both steep slope and positive to negative change) the strength of US employment.

Back to the GDP revision. As seen above the global consumer is retrenching. It should be no surprise that the consumer spending component of GDP was revised lower and inventories were revised higher. This should lead to lower prices going forward as inventory levels are too high and need to be reduced. The price reductions we have seen should get more aggressive. It will be interesting to see at what price the consumer steps in?

Unemployment

Weekly claims continue to trend higher. News of layoffs continue - read any paper around the world to get a flavor. Not a good trend. This should push the official unemployment number. Lets not forget how interconnected this number is. Higher inventory levels will lead to more layoffs. Psychologically if a consumer is concerned of losing a job they will be less inclined to purchase anything (house, car, clothes etc) and dramatically increase their savings rate and pay down debt. The trend is not our friend.

To quote Dave Rosenberg from Merrill "...any rally is to be rented and not bought".