July Durable Goods Add Support to Recession View

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


After an existing home sales report yesterday revealed that the U.S. housing market is currently in worse shape than it was at the bottom of the Credit Crisis/Great Recession, July's durable goods report today further confirmed that the U.S. economy is sinking into a recession.

The headline number, an increase of 0.3%, seemed OK if not particularly good. Only a single item, a huge 76% increase in commercial aircraft sales, was responsible for keeping the number above zero however. Durable goods orders ex transportation fell 3.8% in July. The transportation number, particularly the aircraft sales component, is highly volatile. A strong number one month can be followed by a very negative number the next month. As for the rest of the components of the report, some were eyepoppingly bad.

Machinery orders, which fell 15%, were the weakest number in the report. It wasn't just the extent of the drop that made it so awful, but more importantly it was the biggest decline on record. Yes, the drop was larger than the decline that took place at the bottom of the Credit Crisis/Great Recession when the U.S. economy was falling off a cliff. Computer orders were down 12.7%. Capital goods orders were down 8.0%, the biggest drop since January 2009, just after the Credit Crisis/Great Recession bottom. Orders for electrical equipment and appliances were down 5.9%.

Altogether, July durable goods orders indicate that the manufacturing sector of the U.S. economy is rapidly turning south. This is particularly troubling because it was manufacturing that had the biggest upturn in the last year (the four times larger service sector didn't improve nearly as much). What will provide economic growth, now that manufacturing is weakening? An even more important question is: If some of the manufacturing numbers are as bad as or worse than the bottom of the Credit Crisis/Great Recession and this is also true of the real estate market, how is it possible that the U.S. economy is not currently in another recession?

Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Existing Home Sales Collapse in July

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Existing home sales plunged a record 27% in July, falling to the lowest level in 15 years. Inventories of unsold homes rose by an even greater 40% and were at their highest point in over a decade. A spokesman for real estate industry group NAR described the market's disastrous performance, which took place in every region of the country, as a "pause".

Once again analysts missed the number by a mile, being far too optimistic. Predictions were for a drop of 14%, a pretty bad figure in and of itself, but little more than half the actual result. The severe drop was also well telegraphed by a 30% decrease in pending home sales in May. Pending home sales tend to turn into existing home sales around two months later. May pending home sales dropped because of the expiration of the federal government's home buying tax credit on April 30th. It is now quite obvious that all this credit accomplished was to motivate people who were already going to buy a new home to do so sooner rather than later and it didn't create any additional sales. Just another example of how the federal government is wasting tax payer money on ineffective stimulus programs.

The most amazing thing about July's existing home sales is that they were worse than anything that took place during the bottom of the Great Recession when the U.S. economy was shrinking at more than a 6% annual rate. Even at the bleakest point, existing home sales were around the 4.5 million level. This July they fall to a 3.8 million annualized rate. Moreover the drop from June was severe in every region of the United States - down 23% in the South, down 25% in the West, down 30% in the Northeast and down 35% in the Midwest.  At the same time, inventories of unsold homes rose from 8.9 months supply in June to 12.5 months in July. Year over year, July 2010 home sales were down 26% from July 2009. Despite the across the board collapse in demand, median home prices somehow defied the fundamental laws of economics and rose 0.7% to $182,600.

There are three important messages from the July existing home sales numbers. First, the housing market has not yet hit bottom and it could be a long time before this takes place. Secondly, the numerous government programs to stimulate the housing market- and this includes driving mortgage rates to record lows - have failed to make things better. Third, if the housing market is in worse shape than at the bottom of the Great Recession, then we are either already in another recession or about to enter one.

Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

More Evidence for a Double Dip Recession

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The U.S. economy continues to look weaker and serious problems with the financial system are still lurking in Europe. EU countries are trying to outdo each other to see who can increase taxes and cut spending the most. Copper, known as the commodity with a PhD in economics, is in a confirmed sell off.

U.S. Existing Homes Sales were released this morning and they came in well below expectations. This is only one of a number of reports lately where analysts have proven to be much too bullish. Despite the federal government tax credit that was juicing up home sales, they still managed to drop 2.2% (the credit expired on April 30th, but buyers have until June 30th to close and the sales figures are based on closings). The annual sales rate in May was 5.66 million units, compared to over 7 million in 2005. Inventories of homes for sale managed to drop just below 4 million last month. In 2005, they were under 3 million and the year before barely over 2 million. So a lot less homes are being sold now and there are a lot more homes available for sale. A number of sources are claiming that both HUD and the big banks are holding back on foreclosures to prevent the inventory of unsold homes from becoming even worse.

In a separate report, more people have dropped out of the Obama administrations HAMP (Home Affordable Mortgage Program) that have stayed in it. At best, this program is delaying foreclosures and it appears unlikely that it will ultimately prevent very many - all at a huge cost to the American taxpayer of course.

Meanwhile in Europe, the future stall engine for the world economy, the UK announced its plans to eliminate its budget deficit in five years. Higher taxes and big spending cuts are the approach it will be taking. Capital gains taxes will be raised from 18% to 28% (investing capital will flow to countries with lower rates) and the VAT will go up from 17.5% to 20%. Similar moves are taking place throughout the EU.

There seems to be no realization on the other side of the pond that higher taxes are a negative for economic growth. The proposed spending cuts will also have the same impact. Significantly lower economic growth and lower tax receipts are not being projected for the future however by the Europeans. Obviously they are going to be as surprised as they were by the euro crisis. Problems in the region's financial system have not gone away as is.  Fitch today slashed its view on BNP Paribas, the largest bank in the eurozone.

The augurs of a renewed recession can also be found in the ECRI weekly leading indicators, which indicated a growth rate of -5.7% last week (this number shouldn't be interpreted literally) and by looking at the price of copper. It is amusing to see the spokesperson for the ECRI trying to explain away the negative implications of the ECRI's leading indicators after the company has spent decades building up their credibility. It's enough to make one wonder if the company is changing its emphasis to providing economic cheerleading instead of an accurate view of the U.S. economy?

The price behavior of copper is confirming the ECRI data. Copper is more sensitive to economic activity than any other commodity. If you look at a chart of its ETF JJC, you will notice that the 50-day moving average crossed the 200-day on Monday producing a classic technical sell signal. Over time, copper has proven itself to be a lot smarter than the politicians that run the world's economies.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Housing Hype Fades with Sales Numbers

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


During last summer and fall, the mainstream media was filled with glowing reports of recovery in the U.S. housing market. Government programs were juicing the numbers, which doesn't represent recovery of anything, but that wasn't the spin the media put on increased home sales. Special tax credits, which are still in place, were behind the better numbers. They are losing their affect though and the housing market is already beginning to turn down again.

According to the NAR (National Association of Realtors), existing home sales fell 0.6% in February to a seasonally adjusted 5.02 million units. This is the third monthly drop in a row. The impact of the 'seasonal adjustments' seems to have caused sales in the snow-buried Northeast and Midwest to rise significantly during the month. The overall number would have been much worse without the supposed strong sales in those geographic areas. Inventories of homes on the market, which are not seasonally adjusted, jumped 312,000 to 3.59 million. This represents an 8.2 month supply based on current sales rates. The median sales price was $165,100, down 1.8% year over year.

While the federal government has a number of programs to prop up the housing market, including funneling questionable mortgages through the FHA (Federal Housing Administration) and its blank-check support of nationalized and money-bleeding Fannie Mae and Freddie Mac, the first-time home buyers credit was the most immediate impetus for increased sales during the second half of 2009. The credit was originally slated to expire on November 30th, but at the last minute was extended to this April 30th and expanded to include non first-time buyers. Nevertheless, sales started to dip after November. It is now clear that the credit merely sped up purchases that were already going to take place and higher sales last fall mean lower sales early this year.

Existing home sales peaked in 2005 at 7,075,000. The latest number at 5,020,000 represents and almost 30% drop - and we are now entering the fifth year since the top. The pattern of sales from the homebuyer's tax credit indicates that it was too little to fix what is a massive systemic problem. House prices went too high during the bubble, actually doubling or more in a four-year period in some cities, and they need to come down to market clearing prices. Until this happens, the market cannot recover and grow again, nor can the overall U.S. economy.

Disclosure: None

NEXT: Will Expanding Euro Crisis Continue to Benefit U.S. Stocks

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Home Sales Fall Expectedly

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


U.S. home sales figures for December were out this week. Existing Home Sales fell 16.7% and New Home Sales fell 7.6%. The mainstream media reported the numbers as a surprise. There was nothing surprising about them at all. The U.S. real estate market was being propped up with special government tax credits and when it looked like those credits would disappear at the end of November, homebuyers disappeared with them.

The federal government's tax credit for homebuyers, originally only for new buyers, was renewed until next spring and extended to include people who already own homes. People shopping for homes didn't know that this would happen though, so they rushed to buy before the original November 30th deadline. It looks like the credit accelerated already intended purchasers, rather than actually creating new ones. Existing Home Sales figures started rising in April 2009 (there was a dip in August) and then they fell apart in December after the intended tax expiration date. The drop in Existing Home Sales was the largest in over 40 years.

The U.S. government has instituted a number of programs other than tax credits to directly or indirectly prop up the housing market. HERA - the Housing and Economic Recovery Act of 2008 - resulted in a purchase of an estimated $220 billion in mortgage backed securities by the Treasury Department and is the vehicle for keeping Fannie Mae and Freddie Mac afloat.  The feds provided $300 billion to the FHA for its 'Hope for Homeowners' program. The legislation was signed into law in July 2008 and was considered the solution to stabilizing the housing market; apparently hope was all that was delivered however. The Obama administration's 'Making Home Affordable' program from early 2009 was intended to offer assistance to seven to nine million homeowners with loan modification to prevent foreclosure. How successful have these programs been? New Home Sales fell 22.9% to 374,000 units in 2009 - a record low (sales were at a 1.4 million annual rate in October 2005). So far, foreclosures have hit a record 237,052 in the third quarter of 2009. Figures for the fourth quarter haven't been released yet.

Instead of spending huge amounts of taxpayer money to support the housing industry, it would be best to let prices adjust to realistic market levels.  It was government programs that created the housing bubble in the first place, which in turn led to the Credit Crisis. Home prices went to unsustainable levels based on historical trends. They need to come back down to those trend levels before the market can start a true recovery. Until that happens, the market will have to have continual government money pumped into it to keep sales and prices up. Even then, the housing situation can continue to deteriorate - and it shouldn't be unexpected when it does.

Disclosure: None

NEXT: The State of the Union for Investors

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

So Much for That Recovery

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The G20 meeting ends today and precious metals should be under pressure and the dollar should continue to rally. Traders are worried that some rumblings about supporting the U.S. dollar may come out of the meeting, although the Japanese Finance minister recently said he was uninterested in intervening to drive the Yen down. While something could be said, the likelihood that anything would be done in the near-term is less than nil. Currency intervention is expensive and the printing presses of the major central banks are already booked full-time to support government economic stimulus programs.

The much ballyhooed impending U.S. economic recovery seems to be crumbling. While this only means more government stimulus and money printing, gold and silver are selling off instead of skyrocketing on the news (no that doesn't make any sense). The U.S. Durable Goods report came out this morning and it was down 2.4% in August. A drop of 48% in highly volatile aircraft orders was mostly responsible for the decline , as was the 98% increase in aircraft orders last month that lead to the rise in July. Autos were still up 0.4% last month with the impact of the Cash for Clunkers program waning. Core capital goods, which are the key to what is really going on in the economy, were down 0.4% in August. They dropped by 1.3% in July. So far, there doesn't seem to be any solid evidence of a sustainable recovery in manufacturing.

The bad durable goods numbers followed a 2.7% drop in existing home sales in August that was announced yesterday. That report indicated that 31% of U.S. house sales were 'distressed' (foreclosures for example) and that sales were concentrated in the low end of the market. Well that sounds like a description of a healthy housing market doesn't it? As if the banking system didn't have enough trouble from residential real estate, worse news today came from a report on large bank loans (these are loans over $20 million). Of these, 22.3% are 'troubled'. That is up from 13.4% last year. As a reminder, the U.S. banking system is supposed to have been 'stabilized' according to the Federal Reserve.

While things may look bad in the U.S., they seem to be worse in Japan. Japan is an export based economy and exports there fell 36% in August. Car shipments were down 50% and steel down 43%. GDP was positive last quarter and Japan supposedly exited its most recent recession (one of many in the last two decades)...well, maybe not. The stock of Japan's largest brokerage house, Nomura, plunged 16% last night on the news that it was issuing more stock. This is the second new stock issue in 6 months. Japan has been 'stabilizing' it financial sector for 19 years now. The U.S. looks like it is heading toward long-term 'stabilization' as well.

NEXT: Precious Metals Watch

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.