Percent Job Losses in Post WWII Recessions

Goods-Producing Workers vs Government Payroll

Market Sentiment

According to the American Association of Individual Investors, their member survey reports bearishness at its lowest level in years.

When one side of the trade is too crowd, you'd better to be on the other side.

Housing Market Bottomed ?

Look at the Case-Shiller index's bottom after the last housing bust in 1989-90 (as the 20-city index did not exist back then, we used the 10-city index). The index bottomed in September 1993 - more than two years after the U.S. economy had begun to recover - at a value of 75.81. Nominal gross domestic product (GDP) rose by 109% between the third quarter of 1993 and the third quarter of 2009.

However, the population rose by about 20%, so nominal GDP per capita rose by 74%. (Real GDP per capita rose by 27%, a pretty mangy performance over 16 years.) House prices can be expected to inflate about as fast as nominal GDP per capita, in a large country like the United States where space is not yet at a premium.

Thus the Case-Shiller Index this time around might be expected to bottom at 132 (75.81 x 174%). Its current value is 157, so we can expect a further 16% drop, even if you assume the bottom is no lower than after the milder housing downturn of 1989-90. That bottom will probably be reached around the end of 2011 if the 1990-93 post-recession pattern plays out.

Deflation vs. Inflation

Debt Overhang Will Reduce Consumption

In the U.S., consumer spending represents about 70% of GDP. After decades of an inflationary “crack-up” boom, people are stuffed to the gills with consumer debt. But it appears that its long build-up has turned down, which is a message businesses should heed.

Many consumer businesses have already received the new message of our times: Consumers want value for their money. The days of widespread upper-end fashion and lavish dining are largely relics of the past. Don’t believe me? Take a look at charts of bebe Stores (BEBE), Abercrombie & Fitch (ANF), Morton Restaurant Group (MRT) and Ruth’s Hospitality Group (RUTH). Consumers’ changing preferences are reflected in their charts, but we’re most likely only at the forefront of decreased consumption!

A review of the past 30 years of debt/disposable income and debt service payments in the chart below shows that they still remain at elevated levels (courtesy of Gary Shilling’s Insight www.agaryshilling.com). Back in 1982, consumers averaged 60% debt-to-income and debt service payments were only 10.5% of disposable income. We witnessed a substantial rise in debt from 1994 through 2006, but that trend has been in reverse for several years now.

The massive U.S. unemployment numbers also create an interesting dynamic. Typically when one loses a job, debt will initially ramp up as the unemployed use debt to offset the lost income. But for many, the loss of a job becomes a life-changing event: Their attitude towards debt in general and the desire to consume begin to wane. So while there may only be 15 million officially unemployed, there are many more that have gone through the unemployed experience lately, which should dampen their desire to consume for years.

Will we return to the early 80s and early 90s level of debt-to-income ratios? Or will it be even worse this time? Imagine the levels of corporate bankruptcies and job losses that would accompany a decline to below a 60% debt-to-income ratio. That would mean that consumers would reduce their outstanding debt by half. Such a scenario is one of the reasons why we at EWI believe that the current recession is not over yet -- and, in fact, believe that it has only just begun.

Commercial Real Estate

Tysons Galleria operator files record bankruptcy

General Growth Properties, owner of premier malls such as Tysons Galleria in McLean, filed the largest real estate bankruptcy in U.S. history Thursday, but analysts say the move is not a sign of retail Armageddon.

General Growth, like many homeowners, paid top dollar in a rush to buy properties earlier in the decade and now finds itself awash in debt with its asset values shrinking.

The company built up $27 billion in debt during its spending spree - which included the acquisition of Columbia, Md.-based Rouse Co. five years ago for $11.3 billion - and became the second-largest mall operator in the nation.

"This is a crisis of capital," said Malachy Kavanagh, a spokesman for the International Council of Shopping Centers. "And the inability to refinance debt really doesn't have anything to do with the slowdown in sales."

The move will not affect shoppers or residents of planned communities such as Columbia, which the company manages. The Columbia property is not included in the bankruptcy filing, the company said.

"Our shopping centers and other properties will continue to offer the same great visitor experience for which our company is so well known," Adam Metz, General Growth's chief executive officer, said in a statement Thursday.

The company owns more than 200 malls, including locally the Shops at Georgetown Park and Harborplace & the Gallery in Baltimore. Other properties include Faneuil Hall in Boston and South Street Seaport in New York.

Shop owners in Tysons Galleria said they remain upbeat and credited General Growth for its management of the upscale mall.

"What they did at this mall was practically a 100 percent face-lift," said Aram Itani, owner of exclusive women's apparel store Aram Boutique.

"The ideas they implemented, the type of accounts they brought in, it just became such a beautiful center. It's unfortunate the economy is under such stress," said Mrs. Itani of Potomac.

Deflation vs. Inflation (2)

Here is a series of real (inflation-adjusted) monthly close charts of the Nikkei225 and the S&P500 since 1970 with their respective annualized rates of inflation shown below. This series also includes an overlay chart with the two index peaks aligned. The overlay retains Japan's inflation to illustrate a point discussed later in this post.

Consumer Debt

Commercial Real Estate

Although roughly half the size of the residential housing market, the commercial real estate market is still twice the size of the total U.S. stock market, so its problems are too large to ignore. They include:

Lower Prices. The commercial real estate market didn’t top until late 2007, about a year and a half AFTER the top in residential real estate prices. But, since the top, prices are now down close to the same percentage, as the chart shows. During May and June commercial real estate prices have fallen 16%!

Financing Trouble. Almost 40% of the financing for retail, industrial and office space flowed through the securitization market. The securitization market has largely been shut down, effectively turning off liquidity for purchases and refinancing. As a result, in the first quarter of 2009 the delinquency rate on commercial properties rose 43%, and sales volume in the US fell 83% year-over-year in the second quarter of 2009.

Rising Supply. General Growth Properties, the second-largest shopping mall owner in the country, became the first large-scale bankruptcy in April. Vacancy rates are at a 20-year high, which is putting additional downward pressure on prices and rents.

Many loans that lenders hold on commercial property are classified as “whole loans,” so it behooves the banks to keep them out of foreclosure. A “whole loan” is carried on the banks’ books at par until it actually enters the foreclosure process. But, because the prices of properties have fallen so far, the underlying collateral is now likely to be less than the banks’ exposure should the loans sour. As a result, banks are attempting to delay foreclosures by modifying commercial real estate loans through interest rate reductions. Unlike the residential market, commercial properties have multiple tenants, so there’s at least some cash flow coming in. This cash flow is one reason banks are willing to modify troubled commercial loans. This stalling suggests that there are significant unrecognized commercial real estate losses currently hidden on banks’ balance sheets.

Bank Assets

The above chart is Treasury Holdings as a percentage of US Chartered Bank Assets since 1952.

"Today, banks hold federal agency securities, backed mostly by mortgages, mortgage-backed securities, plain old mortgages they financed themselves, and a few business loan contracts."

Deflation Has Been Averted?

Deflation indicators:
"Are the sources of credit (banks) lending more, and are the receivers of credit (consumers) taking on more debt? "

FHA Delinquency and Default Rate

Off the wire this morning:

FDIC Deposit fund had negative $8.2B balance in Q3

FDIC is broke. Bankrupt!


Let see the follow table:Will FHA be the next broken government agency? If you see my last post about Home Values projection chart, you probably know what the anwser would be.

116 Years History of Home Values

If we go back to 110, there will be another 21% drop from current 140 level. If we over shoot down to 90 level, there will be 35.7% decrease in next 5 to 10 years.

This Time Is Different ?

"THIS TIME IS DIFFERENT"
http://www.amazon.com/This-Time-Differen...

Chapter 14 - The Aftermath of Financial Crisis, is the most important to a stock trader; for it attempts to create benchmarks for the aftermath of the present crisis based upon past historical examples. Although other banking crisis are given coverage, particular emphasis is placed upon what the authors consider “The Big Five”...

1) Spain 1977
2) Norway 1987
3) Finland 1991
4) Sweden 1991
5) Japan 1992

The take away isn't very pleasant. On average, housing has declined in price for 6 years by 35.5%. Stocks declined for 3.4 years by 55.9%. Unemployment increased by 7 percent taking 4.8 years to bottom.

Note: the US started at 4% unemployment, so don't be surprised to see 11%. As we know, that is only the “official” rate.

GDP drops of 9.3% in 1.9 years. Public debt increases 86% mainly due to higher expenditures and lower tax income, and not due to bank bail-out costs.

So, if the start of the crisis is 2007; unemployment should bottom in 2012, and housing in 2013. Although, the vast majority of the pain has already been felt; except for the debt which will likely continue to soar.

That being said, the current crisis is not average. It is somewhere between “The Big Five” and “The Great Depression.” Maybe attempting to compare it to an average anything is wrong-headed. After all, Japan is one of the five and it has failed to conform to the average.

Deflation vs. Inflation

Charts from: www.dshort.com


The October 2009 Consumer Price Index for Urban Consumers (CPI-U) is 216.177. The annualized inflation rate computed from this number is -0.18%, which marks the eighth consecutive month of deflation.

Why does Fed so desperately want inflation? Because our economy can not recover in deflation. But even with so much stimulus money we put into the market, we just can not boost the CPI up enough.

There is no inflation yet, and we are still in the deflation nightmare. Investors have been told to buy gold to fight inflation. If there is no inflation, why do we fight it? And if we are in inflation, why only gold price made new high? Platinum, Silver, Copper, and agricultural products are still below last year's high, and oil and the CRB index are still below their highs of October 21.

We may see a little improvement in next few months, but the overall economy has a long way to come out of the deflation.

S&P500 P/E Ratio

TTM P/E ratio = 47.6
P/E10 ratio = 20.4

Again: "A more cautionary observation is that every time the P/E10 has fallen from the first to the fourth quintile, it has ultimately declined to the fifth quintile and bottomed in single digits. "

Previous post: S&P500 P/E Ratio October 7, 2009

Third Quarter GDP = 3.5% ?

Yesterday's headline news:"Real gross domestic product increased at an annual rate of 3.5% in the third quarter of 2009"

Wow, not bad. Hold on, wait a second ......

"Motor vehicle output added 1.66 percentage points"

That is "cash for clunkers", isn't it?

"Real federal government consumption expenditures and gross investment increased 7.9%"

OK, here comes the simple math:
3.5% - 1.66% - (7.9% * 30%) = -0.53%

US Debt in Real Time

Check this website out: www.usdebtclock.org

100 Failed Banks

"Spotlight: Bank Failures" from Time.com

"Even as the Dow Jones Industrial average returns to the 10,000 mark, the financial crisis is alive and kicking in the banking business. In the next week or so, the U.S. will reach a somber milestone: 100 banks down the drain in 2009."

"The worst is far from over. The FDIC says 416 banks are at risk of failure, up from 117 a year ago. Soured commercial real estate loans alone may generate a fresh $600 billion in losses by 2013. Veteran bank analyst Gerard Cassidy of RBC Capital Markets expects as many as 1,000 lenders to go bust in total."

"Two years ago, the FDIC had about $52 billion in its deposit-insurance fund. Today that fund is technically broke."

" 'bad banks are more like fish than wine,' says Bert Ely, a bank-industry consultant and an FDIC critic. 'They get smellier with age.' "

I would say that the number of failed banks would easily reach 250 to 300 early next year. Also pay attention to the Triple Negative MACD divergences in Dow Jones US Financials Index chart.