The Good News of 2008

The year ends on a sour note. The bubbles have burst. Hopefully the last bubbles for a while.

Where is the good news? Well, most of the leading indicators are still in free fall. But there is one that is shining bright. Probably the best of them, the yield curve.



The yield curve warned us that bad times were on the way.  See The Yield Curve As Leading Indicator.

The current positive slope to the yield curve suggests that the current storm will pass.

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Source:

Chart courtesy of Bloomberg

© 2008 Michael Cale

No Signs of a Turnaround Yet

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Source:
Chart courtesy of St. Louis Fed

© 2008 Michael Cale

Those Pesky Bondholders

If only those people who loaned us (GMAC) their money would cooperate! The ungrateful rabble!

GMAC bondholders had a deadline of midnight on Dec. 26 to decide to approve a restructuring plan that would allow the company to access federal bailout funds. No word on the outcome of the vote. GMAC seems to be stalling for time.

Shareholders seem reluctant to exchange their pre-bailout bonds for equity in the post-bailout bank holding company. Smart bondholders. They don't like risk. Risk Bad. Yield Good.


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Source:

Leslie Wayne. No Word on GMAC Vote As Deadline Expires.
New York Times. December 28, 2008.
http://www.nytimes.com/2008/12/29/business/29gmac.html?ref=business

© 2008 Michael Cale

Updated Bear Chart

Dshort.com has updated the Four Bad Bears chart to include the subsequent recovery.



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Source:
http://dshort.com/

© 2008 Michael Cale

Government Planners Not Good At Arithmetic

Caroline Baum at Bloomberg has an excellent piece this week on the proposed economic stimulus plan.

In this snippet, she quotes former Treasury Secretary Paul O'Neill.

The Obama administration’s goal of creating 3 million new jobs by January 2011 will run smack into “the natural demographic flow, which will add 3.2 million people to the workforce” in the same time period, O’Neill said. In effect, “we are going to spend $750 billion, the number of unemployed will rise and the (unemployment) rate will go down slightly.”

O’Neill did the math so you don’t have to. Each job “will cost $250,000, which doesn’t suggest much labor intensity for the dollars spent,” he said. “It makes me wonder if any of the planners or commentators are good at arithmetic.”

They’re not good at arithmetic. And one wonders about their facility with economics.¹

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Source:
1. Caroline Baum. Obama’s Job-Creation Program Flunks Basic Math.
Bloomberg. December 24, 2008.
http://www.bloomberg.com/apps/news?pid=20601110&sid=akZbz4hvE7TA

© 2008 Michael Cale

Consumers Still Spending On Necessities

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Source:
EconomPic Data: Personal Consumption; Necessities Reign Supreme

© 2008 Michael Cale

Merry Christmas 2008

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Source:

Between the Lines. 'Tis the season for cracking jokes about share prices
UK Telegraph. December 16, 2008.
http://blogs.telegraph.co.uk/betweenthelines/blog/2008/12/16/tis_the_season_for_cracking_jokes_about_share_prices

© 2008 Michael Cale

An End to the Dividend Anomaly

Another excellent chart by Doug Short.

For more than a hundred years, the dividend yield of the S&P 500 index was volatile, but oscillated about a 5% yield.  But in 1982 and after, the average yield dropped significantly and stayed low.

Doug correctly notes that this was about the time that a new bull market began, the 401k was created, and the oldest Baby Boomers were turning 35.

Another factor was the 1982 rule change that allowed companies to purchase their own stock.  Before this time, this was illegal and seen as a form of stock price manipulation.

This congruence of factors led to decades of low dividend yields.  This trend may reverse with the continuing bear market.  Companies may use higher yields to attract risk-averse investors back to equities.

For more, see Dividends Matter.

So far this year, dividends have reduced equity losses by about 10%.  The S&P 500 is down about 40% this year compared to 30% for the S&P High Yield Dividend Aristocrats Index.

Chart courtesy of Stockcharts.com

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Source:

Doug Short. A Short History of Stock Dividends.
December 19, 2008.
http://dshort.com/

© 2008 Michael Cale

Deflation Yields

The panic of 2008 has brought us short-term Treasury yields of nearly zero percent.

The yield on 10-year Treasuries closed at 2.14%.



The markets seem to be pricing in either a Japan-esque deflation (see Rhymes with Japan); or we are just seeing a panicked scramble for safety.

Time will tell.

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Source:

All charts courtesy of Stockcharts.com

© 2008 Michael Cale

Rhymes with 1930's

In a move right out of the playbook that brought us the Great Depression, several countries are taking steps to restrict free trade.

We are advancing to the political stage of this global train wreck. Regimes are being tested. Those relying on perma-boom to mask a lack of democratic or ancestral legitimacy may try to gain time by the usual methods: trade barriers, sabre-rattling, and barbed wire.¹

Tariffs are rising in Russia, India, and Vietnam. China is subsidising steel exports and has lowered the Yuan peg.

France, Argentina, and Brazil are all taking protectionist steps.

In hard times, analysts say, nations are more inclined to take steps that inhibit trade, often with dire consequences. Trade restrictions imposed by countries trying to protect domestic industries in the 1930s, for instance, escalated into a global trade war that deepened and prolonged the Great Depression.²

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Sources:

1. Ambrose Evans-Pritchard. Protectionist dominoes are beginning to tumble across the world.
Telegraph. December 22, 2008.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3870089/Protectionist-dominoes-are-beginning-to-tumble-across-the-world.html

2. Anthony Faiola and Glenn Kessler. Trade Barriers Toughen With Global Slump.
Washington Post. December 22, 2008.
http://www.washingtonpost.com/wp-dyn/content/article/2008/12/21/AR2008122102171.html

© 2008 Michael Cale

Muni Bonds Compelling

The gap between municipal bond yields and 5-year Treasuries is extreme.

Chart courtesy of EconomPic Data: Muni Market Whacked

This is panic buying of Treasuries and extreme selling of Municipal bonds by large investors.  Or, possibly, the market is pricing in the risk of widespread bond defaults by cities nationwide.

When investors are panicked and selling, I will often take the opposite side of that trade when I can.

A diversified portfolio of municipal bonds such as BBK, which I own, currently has a yield of 9.6%.  Other muni funds are IMC and DSM.

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At the time of publication the author held a long position in BBK.

Source:

EconomPic DataMuni Market Whacked
December 16, 2008.
http://econompicdata.blogspot.com/2008/12/muni-market-whacked.html

© 2008 Michael Cale

Fed Moves

The surge in liquidity being pumped out by the Fed has resulted in a dramatic collapse in money turnover.



There's a lot more money in the financial system, but it's not moving.



Had the monetary base spiked and turnover remained steady, we would be experiencing Zimbabwe-ish inflation.

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Source:
Charts courtesy of : St. Louis Fed

© 2008 Michael Cale

Leading Indicators Drop Again

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Source:

Tim Quinlan. Leading Indicators: No Immediate Relief in Sight.
Wachovia.Economics Group December 18, 2008.
http://www.wachoviasec.com/wachoviasec/WSICommentary/12-18-08_indicator.pdf

© 2008 Michael Cale

I'll Have the Volatility With Extra Volatility

We all know the market has been volatile lately. But how volatile?

As of last week, there have been 17 trading days during the previous 60 days where the S&P 500 index has moved 5% or more.

If we look at the period of market history that excludes the last two months, we would have to go back 50 years to find 17 trading days with that much movement.

We've left the post-WWII era. Our historical perspective must be much wider to understand our situation.  After World War I, there was an enormous credit bubble as America and Wall Street loaned to all comers in an effort to rebuild Europe.

That bubble ended and, like all bubbles, it ended painfully.  Now, another credit bubble has ended.  

Post-war market comparisons are worthless.


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Source:

Tom Petruno. Market Statistic of the Year.
Los Angeles Times. December 12, 2008.
http://latimesblogs.latimes.com/money_co/2008/12/investors-know.html

© 2008 Michael Cale

Heading Toward Zero

The Fed meets this week and is widely expected to lower interest rates.

But the market has already lowered the effective Federal Funds rate. It is nearly a full percentage point below the 'official' rate.

The Fed is not fighting this diversion. Bernanke and company will begin to catch up this week.  Maybe not all the way, but they will take a big bite out of the gap.

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Source:

All charts courtesy of St. Louis Fed

© 2008 Michael Cale

Friday Bank Death Watch

Bank failures #23 and #24 for the year took place this week.  

Georgia's 5th bank failure this year was Haven Trust in Duluth, GA.  Sanderson State Bank in Sanderson, TX was the other belly-up bank.

The estimated costs to the FDIC insurance fund for the year is nearly $12.6 billion.

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Sources:

FDIC. BB&T Company Acquires All the Deposits of Haven Trust Bank, Duluth, Georgia.
Press Release. December 12, 2008.
http://www.fdic.gov/news/news/press/2008/pr08134.html

FDIC. The Pecos County Bank Acquires All the Deposits of Sanderson State Bank, Sanderson, Texas .
Press Release. December 12, 2008.http://www.fdic.gov/news/news/press/2008/pr08135.html

© 2008 Michael Cale

The Bear Bottoming Process

dshort.com takes a look at the bottoming process that takes place at the end of a bear market.


Chart courtesy of http://www.dshort.com/

Assuming we're near the end of this bear, we are about 9 weeks into what could turn out to be a bottoming process. Other historical downturns took from 6 weeks to 8 months to form a bottom before beginning to climb higher.

Other data points:
1956  8 weeks
1961  5 months
1966    6 weeks
1968  6 weeks
1974  2 months
1982  5 months
1987  7 weeks
2000 8 months

You can see charts for all these periods here.

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Source:

dshort.com The Bear Bottoming Process.
December 9, 2008.
http://www.dshort.com/

© 2008 Michael Cale

Inept Government Meets Inept Journalism

The Broward County Florida School Board met this week.  In a shameless example of incompetence, they passed a raise for school workers that will cost over $11 million. They also formally requested a federal bailout.  They did it on the same day.

The inept journalist nod goes to Nirvi Shah (or possibly the responsible editor), who covered both stories separately.  A mention of the bailout was completely missing from the pay raise story and vice verse.  The stories ran on the same day.

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Source:

1. Nirvi Shah. Raises OK'd for thousands of Broward schools workers.
Miami Herald. December 9, 2008.
http://www.miamiherald.com/news/miami-dade/breaking-news/story/805453.html

2. Nirvi Shah. Broward schools seek federal bailout.
Miami Herald. December 9, 2008.
http://www.miamiherald.com/466/story/805914.html

© 2008 Michael Cale

Housing Price Update

Price Change from peak as of Q3:

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Source:

Wachovia Economics Group, When Will This Horror Show Come to an End?.
Annual Outlook. December 10, 2008.
http://www.wachovia.com/ws/econ/view/0,,4558,00.pdf

© 2008 Michael Cale

Fannie Knew

Well, we can say this about Fannie and Freddie - they weren't all completely corrupt/incompetent/ignorant.

Check out this internal company slide from a 2005 presentation:



So what did the wise leaders do? Reduce risk? Nope.

But this revelation, courtesy of the House Oversight Committee, shows what company executives knew at the time. (Follow the link for the full presentation as well as internal company email).

The excuses of the executives ring hollow. They are corrupt political insiders taking advantage of a pseudo-corporation to loot from shareholders, investors, and taxpayers.

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Source:

U.S. House of Representatives. Committee Holds Hearing on Collapse of Fannie Mae and Freddie Mac
Committee on Oversight and Government Reform. December 9, 2008.
http://oversight.house.gov/story.asp?ID=2252
http://oversight.house.gov/documents/20081209103003.pdf

© 2008 Michael Cale

A Scramble For Safety

Investors scooped up all the short-term Treasuries they possibly could this week. Demand was so high that they lent their cash to the government at 0% interest.

The bills were sold at a high discount rate of zero percent, the Treasury Department said today in Washington. The government received bids for the bills totaling more than four times the amount sold.¹

This is pure panic - safety at any price.

Update: Treasury Bills Trade at Negative Rates as Haven Demand Surges

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Source:

1. Cordell Eddings and Daniel Kruger. Treasury Sells $30 Billion of Four-Week Bills at Zero Percent .
Bloomberg. December 9, 2008.
http://www.bloomberg.com/apps/news?pid=20601110&sid=adLrsq9KMJL8

Chart courtesy of StockCharts.com

© 2008 Michael Cale

The Safety Bubble

There's always a bull market somewhere.  Lately it's been in Treasury Bonds.

Prices up, yields down for 5-year, 10-year, and 30-year bonds.

As the Fed is expanding its balance sheet, it is creating money and buying Treasuries (and other assets).  Also, investors are scrambling for safety as they fear deflation.  

In the long run, this cannot last.  Investors will eventually tire of lending their money at low rates.  But deflation has gripped Japan for over a decade, so a Treasury bull market could go even further.

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Source:

All charts courtesy of Stockcharts.com

© 2008 Michael Cale

Friday Bank Death Watch

The FDIC announced the 22nd bank failure of this year.  All failed on a Friday.

This time it was First Georgia Community Bank of Jackson, GA.  This is the 4th bank failure in Georgia this year.  Only California has more bank failures, with five.

The FDIC estimates that this failure will cost the insurance fund $72.2 million, bringing the total for the year to $12.3 billion.

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Source:

FDIC. United Bank Acquires All the Deposits of First Georgia Community Bank, Jackson, Georgia.
Press Release. December 5, 2008.
http://www.fdic.gov/news/news/press/2008/pr08132.html

© 2008 Michael Cale

Where the Job Losses Are

No real surprises here.  The industries hardest hit with job losses so far are construction (especially homebuilding), and manufacturing (especially autos).

Chart courtesy of EconomPicData

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© 2008 Michael Cale

How Long Do Recessions Usually Last?

Ten months.

That's the average duration of U.S. recessions in the post-World War II period.  Yesterday we found out, officially, that the current recession began in December 2007.  So we are nearly a year into this one.

The two longest post-war recessions lasted 16 months (1973 and 1981).

Chart courtesy of NBER

But with the aftermath of the largest credit bubble in history, this recession could set a new post-war record for duration.

If we reach back to the post-World War I period, the average goes up to 13 months.   The large outlier here is the 1929 recession which lasted 43 months.  (Excluding that data point drops the average to 11 months).

Assuming we avoid a 1929-esque recession (not a sure thing) we're probably looking at no more than a two-year contraction.  If that's the case, it's almost half over.

 

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Source:

National Bureau of Economic Research. Business Cycle Expansions and Contractions
http://www.nber.org/cycles.html

© 2008 Michael Cale

It's Official - Recession Began December 2007

The recession officially began about a year ago.

http://www.nber.org/cycles/dec2008.html

Make sure to check out the FAQs in the announcement that debunks the erroneous definition of a recession as two quarters of negative GDP.

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Source:
National Bureau of Economic Research. Determination of the December 2007 Peak in Economic Activity.
December 1, 2008.
http://www.nber.org/cycles/dec2008.html

© 2008 Michael Cale

Four Big Bears

A nifty chart comparing the current bear market with three previous (mostly non-1930s) bear markets.

Here we have the current S&P 500 index compared with the 1929 Dow, the late-1980's Nikkei 225, and the 2000 Nasdaq.


Chart courtesy of dshort.com

These charts remind us that bear markets can last a long time. And it's not necessary to go back to the Great Depression for an example.¹

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Source:

1. dshort.com The Mega-Bear Quartet
November 30, 2008.
href="http://dshort.com/charts/bears/mega-bear-quartet-large.gif

© 2008 Michael Cale