Summary: Reports from the Federal Reserve Banks indicate that overall economic activity contracted further or remained weak. However, five of the twelve Districts noted a moderation in the pace of decline, and several saw signs that activity in some sectors was stabilizing at a low level.
Manufacturing activity weakened across a broad range of industries in most Districts, with only a few exceptions. Nonfinancial service activity continued to contract across Districts. Retail spending remained sluggish, although some Districts noted a slight improvement in sales compared with the previous reporting period. Residential real estate markets continued to be weak. Home prices and construction were still falling in most areas, but better-than-expected buyer traffic led to a scattered pickup in sales in a number of Districts. Nonresidential real estate conditions continued to deteriorate. Difficulty obtaining commercial real estate financing was constraining construction and investment activity. Spending on business travel declined as corporations cut back. Reports on tourism were mixed. Bankers reported tight credit conditions, rising delinquencies, and some deterioration of loan quality.
Folks, a “slowing rate of decline” is another way of saying “things don’t suck as bad”. It by no means should be taken to mean “things are getting better”.
Just be careful if you are putting money to work. Make sure the prices you pay reflects economic reality, not what you hope is going to happen
For anyone who thought housing might have been stabilizing, here is a cold dose of reality. The bottom line? If you bought a house in California after 2005 and want to sell it for what you paid, you’ve got a decade to get it ready.
From the WSJ:
Some of the nation’s largest mortgage companies are stepping up foreclosures on delinquent homeowners. That will likely lead to more Americans losing their homes just as the Obama administration’s housing-rescue plan gets into gear.
J.P. Morgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), Fannie Mae (FNM) and Freddie Mac (FRE) all say they have increased foreclosure activity in recent weeks. Those companies say they have lifted internal moratoriums which temporarily halted foreclosures.
It continues:
Foreclosure sales had dropped in the second half of 2008 as mortgage companies delayed taking action against delinquent borrowers. But sales have been edging up this year, according to LPS Applied Analytics, which tracks loan performance. Foreclosure-related filings increased by nearly 6% in February from the month earlier, and were up almost 30% from February 2008, according to RealtyTrac. The backlog of seriously delinquent loans has been growing.
Completed Foreclosures Jumped 44% in March
In California, notices of trustee sales, which are preludes to foreclosure sales, climbed by more than 80% to 33,178 in March, from February, according to data from ForeclosureRadar.com and the Field Check Group. The increase reflects both the expiration of foreclosure moratoriums and a California law enacted late last year that temporarily delayed default and foreclosure notices, says Mark Hanson, president of the Field Check Group, a research firm.
Ronald Temple, co-director of research at Lazard Asset Management, expects home prices to fall 22% to 27% from their January levels. More than 2.1 million homes will be lost this year because borrowers can’t meet their loan payments, up from about 1.7 million in 2008, according to Moody’s Economy.com.
Mortgage-servicing companies, such as J.P. Morgan Chase and Wells Fargo, collect mortgage payments and work with troubled borrowers, both for loans they own and those held by investors.
J.P. Morgan Chase has increased foreclosure actions since the expiration of a moratorium on new foreclosures that began on Oct. 31, and a later moratorium put in place at President Obama’s request. The Oct. 31 moratorium delayed foreclosures on more than $22 billion of Chase-owned mortgages involving more than 80,000 homeowners.
Remember this chart from last October?
It hasn’t significantly changed people. These loans, when they reset will mean payments double or triple their current level for homes not worth near the amount of the loan. Result? People will continue to walk away from homes.
This time bomb is still sitting out there just waiting. Delaying current foreclosures like the administration tried last October is just a fool’s game that now will result on a wave of foreclosures rather than the steady trickle we would have seen. A wave of foreclosures will lead to panic among investors, homeowners and business owners. That panic will lead to rushed and poor decisions.
Let the markets work. It will not be pretty or easy but interfearing in them inevitably makes things far worse than they would have been otherwise.
This is brilliant stuff. Hayek is the author of “Road to Serfdom”.
John Chamberlain characterised the period immediately following World War II in his foreword to the first edition of The Road to Serfdom as ‘a time of hesitation’. Britain and the European continent were faced with the daunting task of reconstruction and reconstitution. The United States, spared from the physical destruction that marked Western Europe, was nevertheless recovering from the economic whiplash of a war-driven economic recovery from the Great Depression. Everywhere there was a desire for security and a return to stability.
The intellectual environment was no more steady. The rise and subsequent defeat of fascism had provided an extremely wide flank for intellectuals who were free to battle for any idea short of ethnic cleansing and dictatorial political control. At the same time, the mistaken but widely accepted notion that the unpredictability of the free market had caused the depression, coupled with four years of war-driven, centrally directed production, and the fact that Russia had been a wartime ally of the United States and England, increased the mainstream acceptance of peace-time government planning of the economy.
Hayek employed economics to investigate the mind of man, using the knowledge he had gained to unveil the totalitarian nature of socialism and to explain how it inevitably leads to ‘serfdom’. His greatest contribution lay in the discovery of a simple yet profound truth: man does not and cannot know everything, and when he acts as if he does, disaster follows.
He recognized that socialism, the collectivist state, and planned economies represent the ultimate form of hubris, for those who plan them attempt – with insufficient knowledge – to redesign the nature of man. In so doing, would-be planners arrogantly ignore traditions that embody the wisdom of generations; impetuously disregard customs whose purpose they do not understand; and blithely confuse the law written on the hearts of men – which they cannot change – with administrative rules that they can alter at whim. For Hayek, such presumption was not only a ‘fatal conceit’, but also ‘the road to serfdom’.
For my money, you can ignore everything coming out of Washington on the subject and simply listen to Wal-Mart’s (WMT) CEO. Matt Laure actually does a good job here. As much as I criticize him here, he deserves kudos when deserved.
Key Points:
– “A lot of stress still in the system” – “This is not a V recession that we just bounce out of” – “When people start buying more expensive cuts of meat, we may be coming out of it” – Children’s apparel sales stronger than adults. “Mom and Dad will sacrifice but they will not deny their children” – On increasing Wii sales, “Outside entertainment is being cut back on”
This goes to my assertion that the recent market rally is overblown and contrary to recent pronouncements from Obama and Bernanke (green shoots showing), we are far from the end of this.
Those buying equities today must be extremely careful they are buying them based on the actual current situation of the company, not what you HOPE the economy will be doing in 6 months to justify today’s price. After a 20% market run, should the economy be as bad as today in October (very likely), you will have discovered you overpaid today for that stock.
My recent purchases of General Growth Properties (GGP), RHI Entertainment (RHIE) and Natural Gas (UNG) (yesterday) do not depend on an economic turnaround to justify their current valuations or the case for appreciation. All three have an investment thesis independent of the overall economy and should it improve, it only enhances the thesis.
Unless we get a dramatic correction in the market, I just think that is the only play right now for the vast majority of stocks out there.
Disclosure (“none” means no position):Long all stocks listed above
Markets have rallied and the common refrain is “the worst is over”. But, “things not sucking that bad” ought not to be the reason for a 20% market rally. We are a long time from being out of the woods…….a long time..
Participants’ projections for the change in real GDP in 2009 had a central tendency of -1.3 to -0.5 percent, compared with the central tendency of -0.2 to 1.1 percent for their projections last October. In explaining these downward revisions, participants referred to the further intensification of the financial crisis and its effect on credit and wealth, the waning of consumer and business confidence, the marked deceleration in global economic activity, and the weakness of incoming data on spending and employment. Participants anticipated a broad-based decline in aggregate output during the first half of this year; they noted that consumer spending would likely be damped by the deterioration in labor markets, the tightness of credit conditions, the continuing decline in house prices, and the recent sharp reduction in stock market wealth, and they saw reductions in consumer demand contributing to further weakness in business investment. However, participants expected that the economy would begin to recover–albeit gradually–during the second half of the year, mainly reflecting the effects of fiscal stimulus and of Federal Reserve measures providing support to credit markets.
Looking further ahead, participants’ growth projections had a central tendency of 2.5 to 3.3 percent for 2010 and 3.8 to 5.0 percent for 2011. Participants generally expected that strains in financial markets would ebb only slowly and hence that the pace of recovery in 2010 would be damped. Nonetheless, participants generally anticipated that real GDP growth would gain further momentum in 2011, reaching a pace that would temporarily exceed their estimates of the longer-run sustainable rate of economic growth and would thereby help reduce the slack in resource utilization. Most participants expected that, absent further shocks, economic growth would eventually converge to a rate of 2.5 to 2.7 percent, reflecting longer-term trends in the growth of productivity and the labor force.
Participants anticipated that labor market conditions would deteriorate substantially further over the course of this year, and nearly all expected that unemployment would still be well above its longer-run sustainable rate at the end of 2011. Participants’ projections for the average unemployment rate during the fourth quarter of 2009 had a central tendency of 8.5 to 8.8 percent, markedly higher than last December’s actual unemployment rate of 7.2 percent–the latest available figure at the time of the January FOMC meeting. Nearly all participants’ projections were more than a percentage point higher than their previous forecasts made last October, reflecting the sharp rise in actual unemployment that occurred during the final months of 2008 as well as participants’ weaker outlook for economic activity this year. Most participants anticipated that output growth in 2010 would not be substantially above its longer-run trend rate and hence that unemployment would decline only modestly next year. With economic activity and job creation generally projected to accelerate in 2011, participants anticipated that joblessness would decline more appreciably that year, as is evident from the central tendency of 6.7 to 7.5 percent for their unemployment rate projections. Participants expected that the unemployment rate would decline further after 2011, and most saw it settling in at a rate of 4.8 to 5.0 percent over time.
It was just last October the Fed thought things would be better than they are now. By this summer they were predicting improvement. Now, we are looking at “end of the year”. Soon it will be “early 2010”. Every time the Fed talks, the projection time for recovery gets pushed out.
If the consumer is not spending, it is all moot. We the consumer are 2/3 of all economic activity. Until we begin to spend again, nothing gets appreciably better. Note the Fed projection of 8.5% to 8.8% unemployment for 2009. Um…we are already there as of March. That means the number will get worse and then the forecast the Fed made in February will have to be downgraded again.
With higher taxes coming down the road for those with the greatest ability to spend, one ought not assume that recovery time is right around the corner.
Look’s like CNBC got on the Natural Gas (UNG) bandwagon yesterday. The trader in the video picks EOG (EOH), Chesapeake(CHK) and Quicksilver (KWK). I disagree.
Why? Remember the Chesapeake CEO said under $7 or $8 for natural gas no one makes money? Well, that mean gas can rise near 100% before most producers start turning a profit. Because of that, I would avoid the producers here. If gas rallies to $6 from its current sub $4 level, these guys still do not make any money and the thesis for buying the stock remains null. I like either the pure gas, (UNG) OR the Oil (USE) and Gas Services plays like last week’s Exterran Holdings (EXH).
Here is the speech Fed Chairman Ben Bernanke will give today. Pay attention to the section on inflation. I am very concerned at the almost dismissive attitude about the possible inflation risk.
We have had unprecedented action by the Fed and Treasury and the supply of money has exploded to before unimaginable levels yet, the thought of hyper-inflation is met with an “oh we’ll just withdraw liquidity lickety split”. Oh…that easy is it?
But, what if the inflation is met with no growth? Then what do we do? All the commentary of the subject just assumes growth returns and Fed action then foloows the playbook. Withdrawing liquidity in a no growth (or negative growth) environment suppresses activity and then will cause another perhaps deeper recession and this one is accompanied by rising prices (see late 1970’s). For those not sure, this is very bad.
Why isn’t anyone asking Bernanke about this scenario? I have watched the Congressional hearings and the question has not come up save for Ron Paul and he is dismissed as a kook for lack of a better word.
I know Wesbury has been a perma-bull and for that many folks discount what he has to say. With that being said, he does nail the current situation (problem) with the US Government and its attempts to “fix” things.
In the first quarter of the year, 271 auto dealers in the U.S. went out of business, according to the National Automobile Dealers Association, as car buyers stayed away from showrooms and credit remained tight.
At the end of the quarter, there were 19,738 auto dealers in the U.S., the dealer group said, down from 20,009 at the end of last year. It said it expects about 1,200 dealers, mostly sellers of domestic brands, to go out of business in 2009, roughly 20% more than last year.
Many dealers closed as their lenders tightened terms and costs outstripped revenue, while some consolidated stores or closed up shop voluntarily. Light-vehicle sales in the first three months of the year were down 38%, with sales of domestic brands down 46%, compared with declines of 31% for Asian auto makers and 27% for European brands.
General Motors Corp. (GM) said 198 of its dealers closed in the first quarter, bringing its total to 6,177 at the end of March.
Chrysler LLC said it shaved dealer numbers by 82 during the first quarter to about 3,218 at the end of March. In the last quarter of 2008, Chrysler, majority-owned by Cerberus Capital Management LP, lost 74 dealers. In its viability plan in February, Chrysler estimated that 27% of its dealers were in financial trouble.
Ford Motor Co. (F) declined to provide the number of dealers the company had at the end of March. Last year, 269 dealers of all of Ford’s brands closed, bringing the company’s total at the end of December to 3,787.
Some brands are expanding their dealer networks even in the current depressed environment. BMW AG’s Mini, for instance, plans to open 13 outlets this year.
Already the largest US auto dealer, AutoNation’s market share continues to grow as the decimation of the dealer ranks continues. The industry is already at about a 9 million annual unit number now. The longer it hold here, the worse the damage will be for dealers.
It is also an unsustainable number. Most information I see has just the basic replacement number of vehicles that need to be sold each year at 13 million. That means there is tremendous growth down the road for the industry as a whole. Now that growth will most likely not come from Detroit and AutoNation has been ahead of the curve there as they are well on their way to having Detroit account for about 20% of sales. For those who do not know, AutoNation is the #1 Mercedes dealer in the US and a top BMW dealer.
Will the market growth happen this year? Probably not until the end of it at the earliest. The key point to take away it that it does have to eventually climb back to those levels and when it does, AutoNation is going to be sitting at the the table with a much larger share of the pie than it currently does.
Disclosure (“none” means no position):Long AN, none
Watch the following video from the Harvard Business School. It speaks to consumer behavior and marketing in recessions.
Professor Quelch in it says that recessions are the time to “expand your voice” through marketing. It is also a time for redefine or entrench your message with consumers as picking up 1 point of market share in a recession is much cheaper than in an upswing. It is during recession that consumer behavior becomes entrenched.
Quelch says, “Recessions are not a time to hunker down….”
This goes back to my post from last week on Target (TGT), Wal-Mart (WMT) and Sears Holdings (SHLD).
Wal-Mart is using the recession to hones its value message with consumers and the results have been nothing short of perfect for them. Sears is using it to redefine itself and the best place for consumers to shop for appliances and it is working as they have picked up market share for three consecutive months there.
Wal-Mart’s message since before the recession started was “Save More…Live Better” and it has resonated with consumers. It re-routed billions of dollars from expansion to improving the look of aging stores. It has a new focus on electronics and is now currently selling Apple’s (AAPL) iPhone.
Sears, while not blanketing consumers with messages, has been very pointed with its “Blue Crew” appliance folks and the price guarantee that allow the consumer to search the internet at Sears to assure themselves they are getting the lowest price. It has spent money improving and rolling out a top notch website tp increase its web presence. Both are working.
Can anyone tell me what Target has done during the current downturn to capture market share or in this case just keep up with Wal-Mart? Target used to be a “nicer WalMart”. It was viewed as cleaner and almost as affordable. Now that Wal-Mart has improved its stores and brought in better merchandise, Target is just viewed as “a more expensive Wal-Mart”. In tough economics times, that is not the place to be in especially when most of your locations sit across the street from the other guy’s.
At least in my area Target’s electronics section is woeful compared to the new redesigned one at Wal-Mart. Since this area seems to be the last bastion of consumer spending, this is now a huge plus for Wal-Mart at Target expense. Target used to be hip, with the iPhone, Wal-Mart now is.
What message is Target projecting to the consumer? I can’t name it. Too be honest I do not remember the last time I saw a Target ad on TV. Can you? If I am, I am certainly not remembering the message it attempted to send me so in that case whatever it said was not effective.
Target in a sense has gone “fetal”.
If Target is banking on consumers returning to prior shopping habits “once things get better”, they ought to watch Professor Quelch, that just is not that way it happens…
Disclosure (“none” means no position):Long WMT, SHLD, None
