Dec 31th
From journalism.org via Good.is, a great graphic representation of the news stories covered by 55 outlets during 2009. The size of the box corresponds to the volume of reportage, while the colors represent the categories into which they’re grouped. The interactive version is available here: http://awesome.good.is/transparency/web/0912/all-the-news/flash.html
(Hat tip to Ritholtz.com)
This holiday-shortened week saw only one economic release of significant interest.
| RELEASE | PERIOD | ACTUAL | EXPECTED (consensus) | LAST | HIA COMMENT |
| (leading, coincident, or lagging indicator) | |||||
| S&P Case-Shiller 20-city Home Price Index (lagging) | October | 146.6 | NA | 146.5 | The rate of price declines fell for the sixth consecutive month, down -7.3% compared to the same month last year. All 20 cities showed year-over-year improvement in the rates of decline and 7 showed month-over-month price raises. Prices stand at their autumn 2003 levels. |
The rebound in reported house prices seen since June appears to be fading, with the rate of change flattening. Prices fell -32.6% from their 2Q06 peak to their April 2009 trough; with the recent improvement the peak-to-date decline through October is -29.0%. As with other lagging indicators, this data is a bit stale and projections made from it may be suspect.
It’s clear by the chart below that the methodology used to calculate the various house price indices varies; for instance, the Federal Housing Finance Agency uses the values of both purchased and refinanced homes, while the Case-Shiller and the National Association of Realtor’s report on existing home sales use only sales of previously owned homes sold to a different buyer. We believe the Case-Shiller methodology to be preferable to the other indices. {Note that the graph normalizes data series presented in dollars and index points to allow for comparison.}
Dec 29th
While we greatly enjoy our profession, the image below encapsulates our thoughts on working the final week of the year.
|
RELEASE |
PERIOD |
ACTUAL |
EXPECTED (consensus) |
LAST |
HIA COMMENT |
|
(leading, coincident, or lagging indicator) |
|||||
| GDP (lagging) |
3Q09 final |
2.2% |
2.7% |
3.5% |
The lowered estimate of third quarter economic activity was primarily driven by downward revisions to consumer and business spending. |
| Existing Home Sales (leading) |
November |
6.54M |
6.25M |
6.10M |
Sales spiked as first-time buyers and those purchasing “distressed” homes drove demand. |
| Consumer Spending (leading) |
November (MoM) |
0.5% |
0.6% |
0.7% |
On an inflation-adjusted basis, MoM spending rose 0.2%. |
| Univ of Michigan Consumer Sentiment (leading) |
November |
72.5 |
73.5 |
73.4 |
American consumers’ opinion about the economy remained quite sour in November, although this was the highest reading in 3 months. |
| New Home Sales (leading) |
November |
355K |
440K |
430K |
New home sales tumbled 11% MoM at the same time the prior two months were also revised lower. |
| Durable Goods Orders (leading) |
November |
0.2% |
0.5% |
-0.6% |
Orders excluding transportation rose 2.0% month-over-month. |
“FINAL” GDP
This release is a look into the relatively distant past; the 1.3% variance between the initially released figure and today’s final one demonstrates the sometimes substantial revisions that change the image as the picture becomes more clear. This was our third and last look at 3Q GDP, which was revised downward more than expected. If the obvious stimulative effect of “cash-for-clunkers”, the first-time homebuyer’s tax incentive, and other measures were removed, the growth rate would clearly be significantly lower. The downward revisions to consumer and business spending are troubling, since (1) business investment is a precursor of stability in the manufacturing sector, widely touted as likely to be a key driver of the US economy out of recession, and (2) as we have consistently observed, since the US consumer represents about 70% of economic activity, demand from that sector is critical. As a reminder, these are the same categories that were also revised lower in last month’s second, “preliminary” GDP release. Given the historical nature of this data, however, conclusions to be drawn are tentative at best.
EXISTING HOME SALES
Government stimulus is clearly underpinning the housing market, where buyers rushed to “get under the wire” to receive the first-time homebuyers credit, initially scheduled to expire in November. According to the National Association of Realtors, over half of November’s buyers were “first-time”. Scavenging was also a driver of sales volume, with 33% of November sales either “short sales” or foreclosed homes. All-cash purchases were 19% of the total. It’s reasonable to assume that without sharply higher interest rates or other negative factor intervening, we’ll see another surge of first-time buyers in March and April.
The housing market’s also being supported in a less obvious way, through the Federal Reserve’s purchase of mortgage-backed securities, a key mechanism for providing liquidity to lenders and keeping mortgage interest rates down. Those purchases, however, expand the Fed’s balance sheet and exacerbate longer-term inflationary concerns. This program, like many of the other extraordinary liquidity programs in which the government has engaged, is slated to end in early 2010; it’s an easy bet that rates will rise as we approach that date and thereafter.
Positively, the reported estimate of existing homes for sale continued to fall; the measure now stands at 6.5 months. However, it must be kept in mind that the reported figures ignore the massive overhang of foreclosed and delinquent properties that have yet to be officially put on the market. According to one researcher, the actual supply is around 2 years’ worth, a far stronger headwind for the economy to lean against.
CONSUMER SPENDING
Consumer spending continued on its gradual uptrend, albeit at a slower rate than expected. November’s increase was lead by nondurable items, which jumped 1.4% month-over-month. The personal savings rate remained at 4.7%, the same as in October. We believe it’s exceptionally unlikely that the American consumer will resume spending at pre-recessionary levels anytime soon (perhaps for many years), given the elevated unemployment level and other sources of economic distress; however, stabilization and moderate growth in spending driven by increases in wages and employment while simultaneously reducing outstanding credit and raising the savings rate is our fervent hope.
CONSUMER SENTIMENT
Within the U of M Consumer Sentiment Index, the measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it is a good time to buy big ticket items such as cars and homes, leapt to 79.1 in November from 68.8 in October and 73.7 in September. The index of expectations six months from now, which more closely projects the direction of consumer spending, rose slightly to a still-dismal 68.9 from 66.5.
NEW HOME SALES
The margin of error for New Home Sales month-over-month decrease was 11.0%, so as usual the initial estimate should be taken with a grain of salt. Also, the decline was not distributed evenly across the US, as the Midwest region saw an uptick. As with existing home sales, the spike in new home sales can in part be attributed to the recently-extended and expanded first-time homebuyer tax credit. Without the seasonal adjustment new home sales are down year-to-date -23.9%.
The inventory-to-sales ratio now stands at 7.9 months, up from October but down from a peak of 12.4 months. As with the existing home sales data, it must be kept in mind that the reported figures ignore the overhang of foreclosed and delinquent properties that have yet to be officially put on the market. The sudden downward move in the new homes sales figures is a reminder of the perils of predicting a rebound in the housing market by extrapolating trends based on sketchy data.
DURABLE GOODS ORDERS
Orders for new long-lived goods maintained their reputation for volatility, spiking higher in November after a plunge in October and an earlier surge in September. Growth in new orders appeared broad-based, including communications equipment (+4.0%), computers & electronics (+3.7%), machinery (+3.5%) and electrical equipment (+3.2%). Weakness was centered in the transportation equipment, especially nondefense aircraft (-32.6%) and defense aircraft (-3.2%). Over the past 12 months durable goods orders have dropped -21.6%.
Durable goods inventories continued to fall in November, frustrating those that have for months have predicted increases in production to restock. The relatively broad based gains in new orders and the slow but (relatively) steady growth in the industrial sector may portend the end of this trend, however. The tentative resumption of business spending, whether demand originates from overseas or domestic sources, will help underpin broader economic growth, especially when companies begin hiring.
Dec 24th
With tongue planted firmly in-cheek, we announce Harmonic’s calendar for the remainder of 2009.
Actually, we expect to be in the office daily except tomorrow and next Friday. Kevin, Chris and I wish everyone Happy Holidays!
I found this humorous, but ominous. Personally, my vote’s for Usain Bolt.
BTW, they also made Hitler POY in 1938 and Stalin in 1942 and W was POY twice: 2000 and 2004.
(hat tip to Bianco Research)
Dec 19th
A Cheaper Ticket
The second in a three part series on mutual funds.
Many people tend to associate value with price. As a general rule, the more something costs, the better the product or service is expected to be. First class airline tickets cost more, fine wines cost more, and so do nicer clothes, cars, and restaurants. At least that’s the belief. But that may not hold true when it comes to mutual fund investing. In many cases, you may end up getting less for more. That’s because in addition to the known fees like 12b-1’s and expense ratios, there are other costs that are more difficult to determine; like market impact and trading commissions. But there is a better way. Let me explain.
In a bull market, mutual fund managers are often eager to invest excess cash. However, it may take awhile to acquire the large number of shares the fund manager wants to own. And, much like a game of poker, the fund manager doesn’t want to show their hand and announce to the market how many shares they want to buy all at once. So they’ll break the trades up into small orders, or what’s known as block trading. As an example, the manager might place a trade for 5,000 shares, then 10,000, then six 2,000 share blocks and so on, to keep in line with other trade orders of the same stock. However, during the time it takes to make that large purchase with multiple small trade orders the stock could increase, causing the fund to buy shares at higher prices. This unintended cost is known as market impact and creates drag on the overall performance of the fund.
Conversely, when investors decide to sell their mutual fund shares, the fund manager must generate additional cash in order to give the shareholders their proceeds. These redemption requests, as they’re known, can also create market impact in a declining market. Take Citigroup (C) as a great example. As the stock market began to rapidly unwind in late 2008 and early 2009, Citigroup’s stock price went from a healthy $20 per share in late September of ’08 to a low of $1.02 per share in March of ’09. During this time of frenzied trading, some fund managers that held Citigroup that were forced to meet redemption requests (as you remember, many investors were fleeing the stock market) and were dumping the stock, regardless of its price.
So how do you know how much trading is being done in your fund? It’s not easy to accurately determine, but one item to look for is the turnover ratio, which works like this: a fund with a total value of $2 Billion that bought and sold $2 Billion worth of securities in one year would have a turnover ratio of 100%. If the ratio is closer to 25%, which is typical of a mutual fund with a buy and hold strategy, then the fund’s average holding period on a given security is about four years.
Now, mutual funds don’t get to do all that trading for free. The average commission a mutual fund pays is 5 cents per trade[1]. While this may not sound like much, commissions (and the correlating market impact) do have an effect on the overall return of the fund. How much though is harder to uncover because these hard dollar numbers are completely ignored when it comes to calculating 12b-1 fees, expense or turnover ratios. But most of information is out there, if investors are willing to study the prospectus and the accompanying Statement of Additional Information (SAI) which are usually available online for most funds. The prospectus gives you the fund’s asset levels, 12b-1 fees, expense and turnover ratios. The SAI discloses the meat of the financial data on the fund, letting investors see the breakdown of revenue and expenses, including what the fund spent, in total, on brokerage commissions as of December 31st of the previous year. The data’s not especially timely, but it’s available for review by diligent investors. By combining the two pieces of data (which few investors do) and with a great deal of math, an investor can uncover the overall cost of ownership.
That cost may be important to know as in one extreme example from 2004. In that year the Dreyfus Founders Passport Fund (FPSAX) made #1 on Forbes Dirty Dozen[2] list of most expensive funds to own, when it spent an astonishing 464% on brokerage commissions. This means that they theoretically traded every stock in the fund close to 4 ⅔ times in that year. This percentage, combined with the fund’s other operating expenses meant that someone with $100,000 invested in the fund would have paid a total of $10,771 to the fund in that year alone[3]! In this case, it would seem that you don’t get what you pay for; namely return. While the fund’s raw performance showed it was up close to 20% for the year, with all that trading, the investor really netted roughly 10% before taxes.
Of course, index Exchange-Traded Funds (ETF) also rise and fall in price as the securities in which they’re invested fluctuate. And there is some trading within the ETF. However, they are much more efficient in their structure. First, ETFs, unlike mutual funds, don’t have the redemption request aspect to them. If an individual investor wants cash for the ETF shares they own, they simply place a trade and sell them. This trading does not affect other investors that own the same ETF because ETF’s don’t pool their assets as mutual funds do. In this respect, trading an ETF is like trading an individual stock. The market impact friction has been removed. Secondly, with ETFs, trading commissions are minimal since the only time the ETF makes a trade is when there is a change to holdings in the underlying index. Otherwise, index ETF managers have no incentive to trade, which is one reason expenses on ETF’s are low.
So, mutual fund and ETF investors may each have a first class ticket (or investment in this case), but the ETF holder paid a lot less for it!
Harmonic Investment Advisors do not use mutual funds to create our clients portfolios. Harmonic uses exchange-traded funds and individual stocks and bonds because we understand that every dollar saved means more money in our client’s portfolio. To learn more about our strategies or about ETF’s, please contact us at 208-347-3345 or via email at chris@harmonicadvisors.com.
“Integrity / Independence / Insight”
http://www.retireearlyhomepage.com/mutualhiddencosts.html
[2] http://www.forbes.com/free_forbes/2005/0131/108tab.html
[3] Mutual Funds’ Hidden Costs
http://www.retireearlyhomepage.com/mutualhiddencosts.html
Dec 18th
The US Bureau of Labor Statistics today released state-by-state Unemployment data for November 2009. According to the BLS the seasonally adjusted unemployment rate for the state of Idaho was 9.1% for the month of November, an increase of 3.3% from November 2008. Over that period, employment fell by 24,900 workers, from 638,200 to 613,300.
The change in Idaho’s unemployment rate appeared roughly in line with the nation as a whole; the seasonally adjusted national unemployment rate rose 3.2%, to 10.0%, over the same period. However, Idaho’s rate remained below the national rate.
Eliminating the seasonal adjustment, Idaho’s labor force declined from 756,000 to 753,900 and the number of unemployed civilians rose from 44,000 to 67,600 on a year-over-year basis.
An analysis by industry using non-seasonally adjusted figures highlights the sharp contraction in the construction, manufacturing, mining & logging, and other industries within the state. Notably, the education & health services and information industries showed year-over-year job growth.
Dec 17th
The US Commerce Department’s Bureau of Economic Analysis today released state-by-state Personal Income data for the third quarter of 2009. While the data is somewhat stale, an analysis may provide insight into the structure of and changes within the economic situation of the citizens of the state of Idaho.
According to the BEA the seasonally adjusted total Personal Income for the state of Idaho was just under $49 billion in 3Q09. Of that total, $30.3 billion was from net earnings(1); $9.2 billion from dividends, interest and rent; and $9.5 billion from transfer payments.
Idaho Personal Income rose 0.2% from the second quarter of 2009, placing the state 27rd in terms of income growth.
After peaking in the second quarter of 2008, Idaho Personal Income fell through 1Q09 but now appears to have stabilized.
Idaho clearly has become more dependent on transfer payments, such as unemployment insurance and payments received as part of the American Recovery and Reinvestment Act of 2009, as the percentage of Personal Income derived from this source has risen while income from wages has fallen.
On a quarter-over-quarter basis, Idaho was slightly behind the US average. Personal income rose by 0.2% in Idaho compared to 0.3% nationally. The bulk of the Idaho’s income growth came from net earnings and dividends, interest and rental income.
(1) Wages + salaries + proprietors’ income + supplements to wages and salaries –social security contributions
Dec 30th
“Big Numbers”
Author: Kenn Lamson
Comments: 0
Forwarding from a website I occasionally visit a brief set of statistics that succinctly articulates the state of the US economy as 2009 draws to a close. Hat tip to Minyanville.com.
The numbers alone don’t hardly do the thing justice, but they come close:
*Expected. The record, set in 2008, was $3.30 billion.
(1) Six largest banks: Citigroup (C), Bank of America (BAC), JPMorgan (JPM), Goldman Sachs (GS), Wells Fargo (WFC), Morgan Stanley (MS).