Monday, May 30, 2011

notes on the week ending May 28th

Delinquency Rate

you may have seen a headline this week to the effect that sales of new homes rose in april; if it was from one of the shill news sources the story likely didnt even tell you that sales normally rise in april over march and they'll likely rise again in may & june...what such an article probably didnt tell you that this april tied april 1982 for the least new home sales of any april on record at 32,000, which doesnt come close to the 116,000 new homes sold in april 2005...signed contracts for existing home sales, which were expected to be flat, "unexpectedly" crashed 11.6% to a 7 month low of 81.9 in april from a revised 92.6 in march, which had first been reported at 94.1; the reasons given by the NAR were higher gas prices & above normal rainfall...the WSJ economics blog reports that 14.3 million homes are now vacant year round, and estimate that at todays pace, it will take 13 years to clear the glut, a much longer time than i've seen for other such inventory estimates... LPS, the firm that tracks mortgage performance, reports that 7.9% were delinquent in april, up slightly from march but below levels hit earlier; an additional 4.14%, or about 2.2 million homes, were in the foreclosure process...of those reported delinquent, 40% had not made a house payment in over a year; in a foreclosure pipeline LPS described as "bloated", 31%  of those in foreclosure have been in the process for over two years (click adjacent chart)

the most widely followed index for commercial property, moody's, reported that prices for commercial real estate fell to a post-recession low in march; 4.2% lower than february prices, and they're now averaging 47% off the late 2007 highs...almost a third of all sales of such property (office buildings, malls, & the like) were considered distressed, meaning the owners were facing foreclosure or had stopped making payments; subsequently fitch ratings said they expected defaults in CMBS (commercial mortgage backed securities) to hit a new new record this coming year, after a 20% jump of such defaults in 2010...coincidental to those reports, the FDIC reported that the number of "problem banks" rose to 888 in the first quarter (the unofficial problem bank list is at 997 as of 5/27); as we've discussed previously, community banks are heavily invested in commercial property loans, so the spate of bank closings on "FDIC fridays" are far from over...

we continue to see weak data out of other economic reports as well; the chicago Fed index of the nation's economic activity sunk in april to its lowest reading since last august; first time claims for unemployment, which were hoped to fall back below 400K, came in at 424,000, and most of the excuses for the "temporary" higher numbers have already been used; and GDP growth for the first quarter was unrevised at 1.8% annually, when a rise to 2.2% had been expected...the alternate measure, GDI, tells us that GDP grew by only 1.2%, which leaves us still below pre-recession levels...furthermore, oft quoted MacroAdvisors revised their forecast for the 2nd quarter down from 3.2% to 2.8%; most economists believe that a 3% growth in GDP is needed to decrease unemployment...

joe biden is apparently leading the white house negotiations on raising the debt ceiling (make no mistake, it must be raised) but if the parties are any closer it hasnt been evident in the rhetoric coming from congress...the GOP has introduced a bill in the house to raise the debt ceiling which will be voted on next week, but that is widely seen to be theatrical, as they all plan to vote against it...although the governments borrowing costs remain low (yields on treasuries were down further), there has been a spike in credit-default swaps used to hedge against a government default...

since the Fed has been buying the lions share of newly issued government debt since QE2 began, and since QE2 will be ending in june, there has also been some discussion as to whether the Fed would initiate another round, or a QE3; however, at the april FOMC meeting most of the discussion was around how to undo the quantitative easing that's already been done; i was remiss in not mentioning it last week, but there are several links discussing the "exit strategy" right at the beginning of last weeks post...as i pointed out when QE2 started, this is where the difficulty comes in; monetary easing of this nature and to this degree has never been attempted before, and how to undo this tripling of the Fed's assets without reversing the positive effects QE2 is alleged to have had will be moving into uncharted monetary policy territory...

this week the CFTC charged a US commodities trader, parvon energy, and it's swiss and british affiliates, with manipulation of oil prices in early 2008; this story seems to have created a lot of confusion in the press, because everyone wanted to report that the speculators had made money driving oil prices up, where in fact the opposite had happened; what the traders are alleged to have done is accumulated a commanding position (2/3rds) of the forward contracts for physical WTI inventory in Cushing OK, creating an impression of a tight market...at the same time they had a much larger short position in the futures market; thus when they dumped their physical inventory at a loss of $15 million, their short position paid off $50 million on the declining oil price (ie, those speculators who were betting on a higher price because they believed supplies were tight lost their bets)...as i pointed out when i first discussed speculation, in the futures market, there always has to be equal numbers of contracts betting that oil would go down from any set price as there are betting that it would go up; the only way to truly drive prices is to manipulate physical inventory, whether it be by holding tanker loads of oil off the market, keeping your oil in the ground, or as in last years wheat price run up, spooking governments into hoarding more grain than they would immediately need...

  what does strike me as odd about this is that the two traders charged, Wildgoose and Dyer, are really small fish, and their UK affiliate arcadia is nowhere the size of a major manipulator such as BP; i wonder if they were taken down because they stepped on the toes of a big oil player, such as BP, goldman or glencore...but its likely we'll never know, because the house has voted to cut the CFTC budget just as the investigation into the wild oil price swings of '08 is getting underway...

much as observers have been saying all along, TEPCO finally confirmed that fukushima reactors 2 and 3 had also melted down, also probably within hours of the quake; so we now have at least 3 nuclear reactors without solid containment leaking radioactive water into the groundwater and hence into the ocean; a japanese study found the soil contamination in the evacuation zone at a level comparable to chernobyl, so although there are significant differences in the 2 nuclear accidents which make direct comparisons difficult, it now seems we have another disaster on or near the same level which has made a large area of Ukraine uninhabitable...the latest plan i've seen for containment is still to erect a steel framework around the site and place a giant polyester tent-like cover around the reactor buildings, which they hope to finish by the end of the year...the wisdom of that plan may yet be called into question, with the strong category 4 typhoon Songda bearing down on the open reactors as i write this...

Euro Bond Spreads the rifts in europe continued to widen this week; first, with 21% unemployment and most cities occupied by austerity protesters, the spanish socialists were defeated by the peoples party; in german elections, the anti nuclear greens placed second in a regional election in which merkel's party placed third; then greece was again downgraded by fitch & S&P warned on italy...IMF is now refusing to release the next loan tranche for greece unless the EU agrees for a years worth of funding into 2012, which the dutch, finns and germans wont agree to...as of friday nothing seemed settled, and peripheral borrowing cost continued to hit new highs (click adjacent chart)...if you want a play by play of the weeks events in europe, which moved as fast as i could track them, check the last 4 or 5 dozen articles linked in this weeks blogpost...

the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me...

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