April 2007

This economy (and the stock market, too) is mostly running on cheap credit, so watching lenders throwing good money after bad is the key in understanding where we are. The main events of this week:

  • GDP came at 30% below consensus. When a stock misses estimates by 30% it is usually punished. Let see how investors will punish this weak GDP
  • Immediately after GDP report Rick Santelli said the word “stagflation” 10 times on CNBC
  • Q1 GDP had only two positive components – jump in aircrafts (because of collapsing dollar) and strong consumer spending (because stock market is high and gas expensive)
  • Housing numbers early in the week were ugly
  • Employment is still holding
  • Emerging problems of Japanese economy reduce the risks of carry trade unwinding

What to watch next week:

  • Stock market is mostly running on destruction of equity by private acquisitions. Watch if the stream of crazy money is not drying yet
  • Remember, May is the month when the first huge wave of ARM mortgages will reset. If you think you already saw ugly mortgage defaults, think again
  • What consumer did in April? Auto sales?
  • Usually I’m not watching nonfarm payrolls data, as it is not a leading indicator. But this time we are getting so close to recession that I expect that in one of those coming months nonfarm payrolls will suddenly plunge

We have more data about commercial real estate securitization bread and butter – credit default swap index CMBX.

Last week I’ve posted about problems with series 2. Now it stands a little better:

CMBX-NA-A 2 update 2

CMBX-NA-A 2 index

But we have more news. Today the series 3 was released, here is the announcement. The problem is with pricing.

25-Apr-07 Overview
Index Series Version Coupon RED ID Spread High Low
CMBX-NA-A 3 3 1 62 137BEOAC8 60.64 60.64 60.64
CMBX-NA-AA 3 3 1 27 137BEPAC5 26.07 26.07 26.07
CMBX-NA-BBB 3 3 1 200 137BESAC9 183.93 183.93 183.93
CMBX-NA-BB 3 3 1 500 137BEMAB4 505.36 505.36 505.36
CMBX-NA-A 2 2 1 25 137BEOAB0 49.86 59.50 12.88
CMBX-NA-AA 2 2 1 15 137BEPAB7 21.21 23.67 8.75
CMBX-NA-BBB 2 2 1 60 137BESAB1 124.00 163.42 45.00
CMBX-NA-BB 2 2 1 180 137BEMAA6 384.21 423.57 160.00
CMBX-NA-AA 1 1 1 25 137BEPAA9 18.90 22.00 8.29
CMBX-NA-BBB 1 1 1 76 137BESAA3 85.00 105.50 34.58

The spread of A paper increased from 49.86 to 60.64. BBB paper spread is 183 comparing with 124 for series 2, and so one. It clearly looks that the secondary market demands much more profit for the risk, comparing with levels it was happy just few weeks ago.

The proper protection of all mortgage papers with credit default swaps is mandatory, but the sharp increase in the spread is eating into profits. This is a bright yellow light on the crossroad.

The best fool-proof leading recession indicator I know so far is a combination of CPI-adjusted money supply and 12-month moving average yield curve. It missed no recessions yet and never gave a false warning as well. Btw, it points to recession now, which means it is coming sometimes this year.

The earliest mention of this metric I saw in Mish blog here and here. But I also found the same metric to be attributed to Northern Trust’s Paul Kasriel – here and here.

I see Mish findings to be dated January 9th, while Kasriel published his paper in April. I would say Mish came first and should get all the kudos.

Can you guys sort out this question please, between you?

With yesterday Target warning we finally get a yet blurry picture of consumer slowdown in April, after heroic spending efforts in March.

Earlier WalMart warned of April slowdown, too. And WalMart and Target together are covering the shopping habits of lower-middle class. Add here ShopperTrak’s weak April data and so far we have 0:3 score in consumer-recession game.

I’ll give you an interesting chart:

rates to dollar
It’s a ratio of yield of 10-year Treasury note to US dollar.

When economy is good, this ratio trends lower: when rates go up (down), dollar goes up (down), too. When foreign investors are not happy about our economy, they will sell dollars even when rates are high.

I see some sort of trendline from lows of Jul/05 to the highs of May/06, when stock market was making a major dip. Now, when Dow Jones is around all-time high , the index is at 6 months high, i.e. foreign investors are not bringing as much money as they used to. Most likely it’s a result of credit tightening after “subprime” fiasco.

The latest survey from housingtracker.net is out. The inventories for sale are horrible, just horrible. Quite many of the cities in the survey have inventories already approaching record levels – and this is only April, not July. In the next two days we have existing and new home sales. Even if we make a narrow escape this time and numbers won’t be as bad as I think, the next month release will be just horrible.

The lands of scumsters, dumpsters and next fools. Time is coming to learn on our own faults, if we prefer to not learn on someone else faults.

Events of this week:

What to watch the next week:

  • We have a big housing week. Expect existing home sales so-so, inventories on the rize. Expect new home sales below expectations
  • Meritage Homes and Pulte Homes report
  • Watch REITs. Panic with CMBX-NA CDS indexes may put them down. Watch CMBX index at markit.com

Today I saw a chart very similar to late February panic in the subprime CDS market in late February. That time I’ve got a very timely warning to predict the February 27 crash few days in advance.

It’s deja vu all over again:


The CMBX-NA-A 2 index, protecting commercial mortgage CDO papers of Banc of America, Citigroup, Morgan Stanley, Wachovia and few others. This is class A paper, investment grade.

The loss of 23 bp in just few days with coupon income of 25 bp represents the loss of 11 months of income. It’s not that bad as subprime crash February 23rd, when 5 years of income was erased in one day, but it’s a lot. Btw, Chinese stock index fell after that, like it fell today. Interesting.

If this chart doesn’t get back tomorrow then I predict good market crash next week. This chart means run, run, run!

Edit: There is another blog about CMBX/CMBS. It tells that total outstanding value of those mortgages is $770 bln. So yesterday crash is no joke. Let see how it unfolds.

This is a very funny article. 19 hours before the Philly Fed manufacturing index was released, the India Daily published:

Rising Philadelphia Fed data for April signal start of cyclical manufacturing upturn within a large secular deflationary downturn

Peter Oberois

Apr. 19, 2007

The Philadelphia Fed data is encouraging. The improved April data over March shows the start of manufacturing recovery. The stock market however is overbought and extremely over priced. What is quality of this manufacturing recovery?

I think the guy in India decided that the index will come as improvements over last month reading of 0.2. He was so confident that he wrote the article and went to sleep.

You guess what happened next – the index came as 0.2. No improvement. This guy is funny :-)

I’m watching housingtracker.net on regular basis and all the winter and early spring the real time housing market data was bad, but not ugly. With Monday update it became closer to what I would call ugly, it was a sharp deterioration of data.

The inventories increased sharply and in many cases are trending into uncharted territory.

  • The list of major cities where inventories are above the last year maximum (most ugly):
    • Atlanta :-( :-( :-(
    • Chicago :-( :-(
    • Dallas :-( :-(
    • Houston :-( :-(
    • Las Vegas :-( :-( :-(
    • Miami :-( :-( :-( :-(
    • Phoenix :-( :-( :-(
    • St. Louis :-(
  • Cities where inventories are already at last summer level, but below the maximum (not so ugly yet):
    • Baltimore :-(
    • Detroit :-( :-(
    • LA :-(

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