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Totally OT, CR, but I thought you would get a kick out of this WaPo article and this comment by a UBS analyst:
James O'Sullivan, economist at UBS Securities in Stamford, Connecticut, still follows the indexes closely although he has noticed some dichotomies with other aspects of the housing market.
"Clearly there has been a complete breakdown of the relationship between the purchase index and home sales in recent months, with home sales clearly falling in 2007 even as the purchase index shows it rising," he said.
I seem to recall you took some heat over coming to the same conclusion a while back....
MaxedOutMama, Thanks. Goldman Sachs had an excellent analysis out today saying the same thing (unfortunately I don't have permission to post it). Their conclusion was the same as mine: the Purchase Index is useless right now - but should become useful again in the future once all the turmoil is behind us.
Best Wishes.
CR-
""The subprime area is a total unmitigaged disaster and it's going to get worse," Gundlach told Morningstar's annual investment conference in Chicago."
Business & Financial News, Breaking US & International News | Reuters.com
the Purchase Index is useless right now - but should become useful again in the future once all the turmoil is behind us.
IOW, we should disregard it for the next decade or so.
I think the 2007 Q1 GDP number is highly "misleading" as a measure of economic activity (more accurately, it's misunderstood). Most people look at 0.6% growth as meaning that economic activity barely grew. I don't think this is the case - rather, I believe economic activity probably grew at closer to a 2.0% annualized rate.
The problem (as I understand it) is that the GDP also acts as a balance sheet, and in Q1 imports were a big downward drag on the headline growth number.
In other words, it wasn't that our economic growth was so slow - costs just grew faster than our output.
This is part of the reason I think Q2 will look better.
So people who are looking for a real slowdown in economic activity, or even an outright contraction, are going to be very dissapointed.
At least for the next month or two.
Ac,
I suspect you are right. The recent estimates I have seen of 3.5-4% second quarter growth only make sense to me if you combine the two quarters and average something like 2.25% real growth. Did we really flatten out through March and then surge through June? It just doesn't smell right. As always, we'll see.
One more CR, as Tanta once said in regard to another of these buys at the top....the guys in Cleveland were likely laughing their asses off after their deal closed, as I'm sure is the case with whomever sold this to COF-
Capital One Cutting 2,000 Jobs Amid Loan Losses (Update2) - Bloomberg.com
Also, on the topic of housing, the "high frequency" data (which I've found reliable thus far) continue to look ominous. ZipRealty inventory keeps marching onward and upward. And this week we get another "Wall of Green" in the housingtracker inventory column:
Wall of Green
Thats interesting. I thought the 0.6% value for Q1 was the annualized calculation. Guess I was wrong.
Regarding Q1 & Q2 GDP --
GDP measures the production of the economy, so imports are excluded, which makes sense if by growth in the economy we mean growth in production. If imports go down, that would reflect lower consumption, but have no effect on production. Correct? So lower imports shouldn't affect GDP.
By the way, with the price of oil up significantly this quarter, the dollar value of imports will probably be up significantly, no? It's hard to see how the effect of higher oil prices can be anything other than negative with regard to GDP overall.
So what am I missing? We do know that that we are underestimating imports as a total percentage of manufacturing production, as documented by Mandel in the recent Business Week cover story. CR mentions this, but says that most analysts estimate its effect at only around 0.2%.
So tell me again why GDP doesn't measure economic growth?
CR,
Was the GS info subscription based or does the does the mighty firm come to a "blogger" for the truth....
Or the bigger question do they tip well or are they holding reserves to add collateral to their CDOs...
Cheers!
CR:
More confirmations about the role of illegal workers in the construction business.
"Developer Louis Breland is finishing the first phase of a $750 million beach condo project."
"Subcontractors could not function without immigrant laborers for painting, rebar and steel work. They are the best workers," he said. "Without them, the cost of construction would be 10 times as much and nothing would get built
Yahoo! 404 - Page Not Found
I suspect you are right. The recent estimates I have seen of 3.5-4% second quarter growth only make sense to me if you combine the two quarters and average something like 2.25% real growth. Did we really flatten out through March and then surge through June? It just doesn't smell right. As always, we'll see.
I can agree with that - Q1'07 didn't feel that different to me than Q4'07 nor does it fell that different right now for that matter.
Maybe the smart thing is to look at it as a 'moving average' of some type.
Pointless I guess, folks see in the number what they want to see.
Hazard wrote:
Thats interesting. I thought the 0.6% value for Q1 was the annualized calculation.
It is an annualized calculation.
ac,
Amazing numbers for Philadelphia and Baltimore, given that those are WEEKLY changes.
GDP measures the production of the economy, so imports are excluded...
Dan, I think this is just plain wrong. Take a look at this image from econbrowser:
Contributions to Real GDP
So tell me again why GDP doesn't measure economic growth?
Are changes in inventory, imports, and exports a measure of economic growth? If the price of imported oil increases and drags down the GDP, does that mean the economy slowed? I don't know that these things necessarily correspond to changes in output.
I could be misinterpreting the calculations, but in the data I downloaded from the BEA I see changes in import and export costs being used in the GDP calculation.
That makes me think that the GDP is only partly a measure of economic activity.
Waht would the impact be on US 2nd Quarter GDP if both consumer spending and capital spending is negative in June?
It would seems to me that whether the 2nd Qtr GDP growth is 0% or 3% depends on the June's consumer spending spending.
Leverage isn't the only juice.
Bush's immigration plan puts a governmental seal of approval on another source of juice: illegal immigration.
And illegal immigration may not be a cause of the housing crisis on the demand side, but it sure as hell is on the supply side.
Inflation is coming from overseas. So are the problems in the GDP.
Bernanke turns a blind eye?
Interestingly, the market and the euro are betting he will.
A fantasy is a wish.
--Sigmund Freud
ac,
I think GDP can be measured from the "supply side" or from "demand side". The way it is calculated and presented is from the demand side. However, in order to present the "domestic" (D) part of the GDP, the trade balance effect must be taken into account. Some part of the "foreign supply" is contained in, e.g., the consumption component, hence it must be subtracted.
CR, for some time I have been curious what your opinion is about some of the statistical "magic" applied to the calculation of the GDP, like imputed rents or famous imputed free checking account service?
The sub-prime meltdown has been Re-Contained.
Cambridge Place's Caliber Fund Shuts on Subprime Loss
June 28 (Bloomberg) -- Caliber Global Investment Ltd., a $908 million fund managed by Cambridge Place Investment Management LLP, will close after losses on U.S. subprime- mortgage debt.
I wonder how much it is leveraged, the amount of leverage out there in the subprime space seems to be very large.
"The board has concluded that the company should pursue an orderly return of all of its capital to investors over the next 12 months in order to maximize value for shareholders,'' the Caliber statement said.There is insufficient demand currently for investment through listed investment companies exposed to this asset class.'' "
Cambridge Place's Caliber Fund Shuts on Subprime Loss
CHICAGO, June 27 (Reuters) - The subprime mortgage problem will worsen over the next year and the rate of loan delinquencies could rise further, an influential fund manager specializing in mortgage backed securities said on Wednesday.
Jeffrey Gundlach, chief investment officer at the Trust Company of the West (TCW) who oversees about $60 billion in assets, also said the worsening subprime woes would slow the economy down and lead to a cut in interest rates.
"The subprime area is a total unmitigaged disaster and it's going to get worse," Gundlach told Morningstar's annual investment conference in Chicago.
Contained, just in a bigger container, for now.
Check back in one week, one month and one year for the new size of the container.
TCW is a major holder of CFC.
some time ago a major holder of CFC bailed out in bond deal.
I wonder who that major holder was. Soon we will know.
more on the pull-back-
Bridge Too Far - WSJ.com
I find it hilarious that many have taken the stage to declare that the credit environment is benign, this is a blatant lie.
The credit environment is getting tighter by the day and the shift to increased concentration on leveraged loans/first lien debt is the first sign of fear in this space.
As I had predicted quite some time ago, the HY space is widening and will continue to widen, end-tickets in the pe and lbo space will become far more distant and further stress balance sheets, the default rates will increase dramatically over the next 24 months as the economy slows, and once again, the claims of "no big deal", "small percentage of overall lending", etc will cover the headlines. The stress that will occur in this space will be unprecedented due to the irrespaonsilble lending practices inherent with flawed models and greed driven by the front-end payday.
Fear one thing, people who wish to ignore reality and feed you Kool-aide like "banker", one who was close to diapers and playing with the colored magnets on the refrigerator during 87.
Chicago Tribune, today
...The investors in the hedge fund that goes down can be those ordinary Joes on the block," said Harvey J. Goldschmid, a former commissioner with the Securities and Exchange Commission who now is a professor at Columbia Law School.
"In theory hedge funds are about wealthy people investing," he said. "But, by practice, pension funds, endowments and other financial institutions invest in them, and a few big hedge funds going down can spread an awful lot of harm among real people."
Indeed, pension funds and other endowments had about $1 of every $10 sunk into alternative investments last year, such as hedge funds and private-equity funds, according to consulting firm Greenwich Associates. Similarly, large hedge funds get about 24 percent of their investments from endowments, foundations and pension funds.
That might not sound like much until you put it in perspective. Hedge funds manage about $1.5 trillion of assets, if not more, analysts said, and that has given the matter a sense of urgency for Wall Street's top players....
Q4 2006 - "Soft landing"
Q1 2007 - "Containment"
Q2 2007 - "Orderly selling"
Kia delays bond sale
. Bloomberg. Darn it! That's the GA plant.
Neal, I've been thinking about the subprime containment problem. Maybe we should use some of those Chinese shipping containers to build a large subprime containment facility. If we cut off the tops and just let the sun work on the contained subprime contents, maybe in 10 years or so it would less noxious to the environment and we could use it for fertilizer or mulch.
Don't tell me about containment when us Georgians may get our plant delayed.
ac, like poszi said, net imports are substracted from consumption to determine GDP. That's because imports weren't supposed to be included in GDP to begin with, but measuring consumption and backing out imports is easier than the alternatives.
Michael Mandel is arguing that the government statisticians aren't subtracting the correct amount of imports, and that therefore GDP is overstated, especially in manufacturing...
I miss the good 'ol days, when we spent so much time beating up on the home builders:
"NEW YORK (Reuters) -- Beazer Homes USA Inc. said Wednesday it fired its chief accounting officer Michael Rand due to violations of the company's ethics policy stemming from attempts to destroy documents.
In a regulatory filing, the sixth largest U.S. home builder said its board's audit committee was conducting an internal investigation of the company's mortgage origination business and related matters."
CNNMoney.com: 404 Page Not Found
More dried up liquidity:
Carlyle Postpones $415 Million IPO of Mortgage Fund (Update2) - Bloomberg.com
but why they keep calling it "sub-prime" ? Is it only just 20% of the mortgage market that is expiriancing problems ?
Will we see higher rates for new mortgages - so far the the uptick in morgage rates can be attributed to the rise in yield on the 10Yr note. (ticker : ^TNX or $TNX)
another (non housing realted) bond postponment:
Kia delays bond sale
Mom: sorry for the double post. did not see your post.
kb homes-
"Our second quarter results reflect the current oversupply of new and resale housing inventory, a difficult situation compounded by aggressive competition and continued weak demand," said Jeffrey Mezger, president and chief executive officer. "Housing affordability challenges and tighter credit conditions in the subprime and near-prime mortgage market have also exacerbated current market dynamics, keeping prospective buyers out of the market, slowing the absorption of excess supply and further delaying a housing market recovery. Pricing pressure intensified in many of our markets during the second quarter, compressing margins and requiring inventory impairment charges in certain of our communities. While we cannot predict when market conditions will improve, we remain committed to our operating disciplines, prudent fiscal decision-making and strategies that enhance our financial flexibility to navigate the current tough market environment."
MarketWatch.com
MOM-
MarketWatch.com
hidden infaltion:
On June 5, General Mills said it would reduce the size of some cereal boxes to increase prices per ounce
The price increase amounts to about 3 percent, according to an estimate by Christopher Growe, an A.G. Edwards & Sons Inc. analyst in St. Louis. General Mills won't disclose how much it raised prices beyond calling it a ``small single-digit'' rise.
Over the last 90 days analysts have cut KBH profit estimates by 50% (for the year)
during this time stock is down 5% ($42-$40)
Does this makes any sense ?
It used to be that such cuts (and now the loss) would cause shares to drop 30% or more.
"Real gross domestic product -- the output of goods and services produced by labor and property
located in the United States -- increased at an annual rate of 0.7 percent in the first quarter of 2007,
according to final estimates released by the Bureau of Economic Analysis. In the fourth quarter, real
GDP increased 2.5 percent. "
AC,
You seem to be referring to alternate measures of economic activity. Both real final sales and gross domestic purchases rose at a 1.6% rate in Q1. Final sales to domestic purchasers rose at a 2.5% pace, but that figure comes closer to leaving out trade, than any other major series, so leaves out a lot. I'm not sure why you equated "costs" with net trade.
There were two big factors that led to a markedly lower GDP reading in Q1 - net exports and inventories. Neither one shows up plainly at street level when we think about economic activity, so it is not a surprise if Q1 didn't "feel" slow. However, both factors do affect the pace of real economic activity over time. If demand for US exports or for inventories were to slow on trend, you'd notice.
By the way, traded is netted, not excluded. If the trade deficit is wider, it's measured as a drag. If it narrows, it's measured as an add.
By the way, the final GDP reading was +0.7%, with real personal consumption marked down, adding 0.1% less to GDP, inventories almost unchanged, and trade less of a drag by 0.2%.
personal consumption at 4.2% vs 4.4% consensus
CORE PCE QoQ at 2.4% vs 2.2% consensus
GDP Price Index 4.2% vs 4.0% consensus
so even "core" prices rose at 2.4% (vs the 2.2% projection and the 2% range in which the Fed "likes" to see it)
Do you rememeber the day when CPI rose 0.1% vs projected 0.2% ? In reality it was something 7/100,000 away from the 0.15% (considered 0.2%) and how th market rallied that day on the 0.1% vs 0.2% projection.
so what do we have today on the heal of yesterday 90 points gain ?
Yal - I really appreciate all your news posts, because I'd definitely have missed some. So please continue and no need to apologize to me!!
Risk Capital - thanks, that's one I'd have missed. The LTL's are probably due to reduced volumes and so are very important.
There were two big factors that led to a markedly lower GDP reading in Q1 - net exports and inventories. Neither one shows up plainly at street level when we think about economic activity, so it is not a surprise if Q1 didn't "feel" slow.
k harris,
This is precisely what I was trying to say. Maybe I didn't use the correct terminology, since I have no training in this field. I was looking at some old data I had when I was trying to figure out why the Q3 2006 GDP was so miserable. Not surprisingly there was a steep rise in oil prices that quarter and a big fat negative sign in the imports column of the spreadsheet IIRC.
Again, I say paying more for imported oil may mean an "unhealthier" economy, but not necessarily a slower one... at least in the short term.
AC,
In "real" GDP, oil prices are adjusted away. The only impact from oil prices on real GDP is the income effect. Real incomes fall when oil prices rise, so we have less left over to spend. To the extent that we all have access to lending and the confidence to make use of it, higher oil prices don't have to have any coincident impact on GDP. Over time, though, the impact through real incomes is unavoidable. Debt service eats into income, limiting spending capacity.
Kinda long-winded, but oil prices are not what dents real GDP in the first instance. Import volumes are what matter in the first instance.
FT on LBOs
...At some point, buyers would balk at the skimpy interest cover it has fallen to 1.3 times on large leveraged buy-outs, according to Standard & Poors LCD data....
FT.com / Lex - LBO financing
I guess this answers the question as to why do so many LBOs these days have PIKs (or did until last week!)
In "real" GDP, oil prices are adjusted away. The only impact from oil prices on real GDP is the income effect. Real incomes fall when oil prices rise, so we have less left over to spend.
k harris,
Are you saying that the effect of higher oil prices on the GDP occurs via the GDP deflator?