US Home Price Declines Continue

According to the latest Case-Shiller Home Price Index, US Home Prices continued to fall in October and the rate of decline actually picked up. Whilst I thought US home prices would continue to fall, I thought there would be a moderation in the depth of the year over year declines by now, from the report.

“The bear market continues; home prices are back to their March, 2004 levels.” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “Both composite indices and 14 of the 20 metro areas are reporting new record rates of decline. As of October 2008, the 10-City Composite is down 25.0% from its mid-2006 peak, and the 20-City Composite is down 23.4%.

In October, we also saw three new markets enter the ‘double-digit’ club. Atlanta, Seattle and Portland are reporting annual rates of decline of 10.5%, 10.2% and 10.1%, respectively. While not yet experiencing as severe a contraction as in the Sunbelt, it seems the Pacific Northwest and Mid-Atlantic South is not immune to the overall demise in the housing market.”

Three of the metro areas have given back, on average, more than 30% of the value of homes since October of last year. Phoenix remains the weakest market, reporting an annual decline of 32.7%, followed by Las Vegas, down 31.7%, and San Francisco down 31.0%. Miami, Los Angeles, and San Diego were close behind with annual declines of 29.0%, 27.9% and 26.7%, respectively.

Monthly data also do not show much improvement in the national housing market. All 20 metro areas, and the two composites, posted their second consecutive monthly decline. In addition, six of the MSAs had their largest monthly decline on record – Atlanta, Charlotte, Detroit, Minneapolis, Tampa and Washington. Most of the positive monthly data recorded in the spring and summer months, merely reflects seasonal patterns in home prices, as opposed to a turnaround in the downward spiral in national home prices.

Whilst price drops are big, they have only returned to beginning 2004 levels which suggests to me that they have significantly further to go.

Impaired Assets Continue to Rise for Aussie Banks

Impaired assets continued to rise in the September quarter for Australian banks according to the RBA's quarterly bulletin. Actually it would be more accurate to say they shot up, rising by approximately $4.4 billion, the largest increase since September 1994.

However it is the percentage of impaired assets to total assets which is of most relevance. They also rose sharply to 0.52% from 0.36% in the June quarter. Despite the sharp increase it is still historically low and due mainly to specific impairments rather than system wide deterioration.

Impaired assets as a percentage of the total could go back close to the 1.0% level and still not be particularly bad. I have little doubt that it will get to those levels, it is only a matter of time.

The more interesting question is when does the normal deterioration in this part of the credit cycle turn into a system wide blowout as has happened in the US? Probably not until unemployment really starts to bite and households and corporates being defaulting on their debt on mass.

It is not clear if we will get to that point in Australia, but it cannot be ruled out as a possibility.

Protectionism on the Rise?

Optimists like to point out that we have learned the lessons of protectionism from the Great Depression. The argument goes, that the major countries of the world recognize the adverse effects of protectionism and will not resort to those measures again.

Hence the show of solidarity at the recent G20 meeting in October. However when the proverbial hits the fan, some individual nation states are quick to embrace protectionism. The following paragraph by David Rosenberg of Merril Lynch appeared in John Maudlin's Outside The Box this week:

Since the G20 meeting in Washington in October, five of those countries - Russia, India, Indonesia, Brazil and Argentina - have announced their intentions to raise import tariffs or otherwise restrict trade. Russia has announced plans to raise tariffs on autos; India has already lifted duties on iron, steel and soy; Brazil and Argentina are putting together a case within Mercosur for boosting external tariffs. Vietnam just raised taxes on steel imports to 12% from 8%. The EU said it may reimpose duties of 79% on a paper-binder component in retaliation against China. French President Sarkozy has established a $7.5 bln fund to invest in domestic companies so as to avoid foreign takeovers. China has reinstated export rebates and now we see that US steel, textile and paper markets intend to file complaints against Chinese imports, and did anyone notice that this auto-bailout excludes foreign companies?

For the record, I don't believe we are headed for another Great Depression but I do think we are in for the worst economic downturn since The Second World War.

Aussie New Car Sales Slide in November

Seasonally adjusted, Australian new motor vehicle sales fell -5.2% in November and are now down -17.8% from a year ago. Sales are now back to levels last seen in April 2003.

Clearly Australians are putting off large purchases, that obviously extends to the biggest purchase most households will ever make - a house. Despite the government's silly attempts to prop up real estate prices with incentives for first home buyers, housing prices and sales will continue to fall in Australia in coming quarters as the recession deepens and unemployment rises.

PWK Salvages PPC-1

Pipe Networks (PWK) announced on Friday that PPC-1, the proposed Guam to Sydney submarine cable system will go ahead as planned. A couple of weeks ago the project was in some doubt as the banks would not commit to the funding.

However, common sense prevailed and PWK management was able to bring together both customers and suppliers to work out a deal. The company reiterated previously announced guidance of NPAT of $11 for this financial year and said previously announced guidance for FY10 of NPAT of $17m would also be unaffected.

Obviously this is great news for shareholders, the stock has taken a beating on the back of fears that the project might not go ahead. As the company said:

"It is a testament to the commercial potential and importance of the project that an alternative agreement could be reached that side-stepped the debt markets for primary project financing. I congratulate the team who have been working tirelessly over the past three weeks to bring about this outstanding outcome."

If those aforementioned forecasts are met, this stock is currently very undervalued. Given Pipe's record to date, there is no reason to think they won't be. Whilst it is hard to look through the current economic malaise, for long term investors it is worth considering where this company will be in 5 years from now. With the PPC-1 cable giving PWK all kinds of expansion opportunities into the asian-pacific region, this is a company you will want to own.

US Recession May Carry over Until 2010

In recent weeks I made the case that the conventional view that is forming with respect to a second half 2009 turnaround for the US economy is overly optimistic. Below are a couple of interviews with people that carry a lot of weight in the economics and investment community.

Digging Out of the Recession
The first is Martin Feldstein, who I have talked about here on numerous occasions, he is of the view that we will be lucky to have seen the bottom of the current recession by this time next year.

The second interview below is a short clip with Wilbur Ross who thinks the notion of a second half recovery in 2009 is wishful thinking. Click the images to watch the clips.


Parting Shots

REF Profit Downgrade

Reverse Corp (REF) today announced that it expected 1H09 NPAT to be in the range of $7.5 - $8.5m or 8 - 9 cents per share. That compares to NPAT of $10.2m in 1H08. Whilst the AUD/GBP exchange rate for the current half has been worse than 1H08, these forecasts clearly demonstrate that REF is experiencing a slowdown in call volumes.

The company also reiterated that they intend to keep their dividend policy of paying out up to 100% of profits in dividends. If we take the mid point of the company's guidance range and assume the company can match it's first half performance in the second half, we come to NPAT for the full year of $16m. That represents a decline of about 20% from last year.

Last month when I bought some more REF shares I said that even if REF cut their dividend by a third to 16 cps for the full year, it would still represent a very attractive yield. Given the new guidance, a full year dividend of 16c per share seems likely as that represents a payout ratio of 92%, well within REF's stated policy and guidance.

An 8c dividend for the first half is in the bag given the guidance, the question is whether earnings deteriorate futher in 2H09.

Punching in a $16m NPAT for FY09, I value the stock at $1.56 per share, that is assuming a dividend payout ratio of 100% going forward and a reduction in ROE from just over 200% to about 180%.

The good news is that the market had already priced in a pretty bad outlook for REF. The realization that buying shares of REF today will earn you a dividend yield in the range of 15% is still an attractive proposition. The longer term issue for REF is can they successfully grow the business through geographic expansion and higher penetration rates in existing markets. To date, the company has had mixed success with it's growth plans.

US Housing Plunges to Record Lows

US Housing Starts fell to their lowest level on record since the census bureau started keeping records in 1959. From the Cesus Bureau:

Building Permits:

Privately-owned housing units authorized by building permits in November were at a seasonally adjusted annual rate of 616,000. This is 15.6 percent below the revised October rate of 730,000 and is 48.1 percent below the revised November 2007 estimate of 1,187,000.


Housing Starts:

Privately-owned housing starts in November were at a seasonally adjusted annual rate of 625,000. This is 18.9 percent below the revised October estimate of 771,000 and is 47.0 percent below the revised November 2007 rate of 1,179,000.

Completions:

Privately-owned housing completions in November were at a seasonally adjusted annual rate of 1,084,000. This is 3.3 percent above the revised October estimate of 1,049,000, but is 22.8 percent below the revised November 2007 rate of 1,404,000.

So once again the bottom-callers were disappointed but they are getting closer to being right. The low level of starts implies that excess inventory is being worked off. Making a dent in the sizeable amount of inventory is key to seeing a turnaround in starts. We may see a bottom in starts sometime in late 2009 but don't expect a V shaped recovery.

US Jobless Claims HIt Fresh 26 Year Highs

US initial jobless claims hit a fresh 26 year high in the latest week. Initial Claims hit 573k, the highest level since November 1982.

Continuing Claims also rose sharply in the latest week to 4.43 million, the highest level since December 1982. It is worth noting that the workforce is larger than it was in 1982, so that should be kept in mind when comparing to prior periods. That said, as claims continue to rise we can expect more nasty employment reports in the months ahead.

From November 1981 through January 1983, the 4 week moving average of intial jobless claims averaged over 500k. So far in this recession intial claims have been over 500k for just one month. Those looking for an abatement in jobless claims as a sign the economy is turning around, will be waiting for some time.

China Will Save Us........Not, Part II

Last month I noted that China will not save the Australian economy. Actually I've been talking about it for more than a year. We got some more evidence that the Chinese economy is slowing sharply yesterday. From Bloomberg:

China Makes `Stable' Economic Growth Top Priority

Exports fell for the first time in seven years last month, China said today, adding to evidence that recessions in the U.S., Europe and Japan are driving the world's fourth-largest economy into a slump. China announced a $583 billion stimulus package in November and cut interest rates after the economy grew at the slowest pace in five years in the third quarter.

``The difficulties in the Chinese economy are growing and the downward pressure on economic growth is increasing,'' the report said. ``Businesses are facing greater difficulties, and it's become harder to maintain stable agricultural development and continue to increase farmers' incomes.....''

....Exports declined 2.2 percent in November from a year earlier, the customs bureau said in a statement on its Web site today. Imports plunged 18 percent, pushing the trade surplus to a record $40.1 billion.

Just for some context, forecasters were expecting exports to rise 15% and imports were expected to be up 12%. Many have talked about the Chinese economy slowing from a double digit rate to something like 6-7%. I doubt anyone has factored in 3-4%. Especially the overly optimistic forecasters in the Australian government and the Reserve bank.

Aussie Employment drops in November

Australian employment fell in November for only the third time in the last 18 months in November according to an abs report today:

SEASONALLY ADJUSTED ESTIMATES (MONTHLY CHANGE)

EMPLOYMENT

decreased by 15,600 to 10,750,000. Full-time employment increased by 8,800 to 7,695,300 and part-time employment decreased by 24,400 to 3,054,600.



UNEMPLOYMENT

increased by 7,900 to 496,600. The number of persons looking for full-time work increased by 5,900 to 344,700 and the number of persons looking for part-time work increased by 2,000 to 151,900.



UNEMPLOYMENT RATE

increased by 0.1 percentage point to 4.4%. The male unemployment rate increased by 0.1 percentage point to 4.1%, and the female unemployment rate increased by 0.1 percentage point but in rounded terms remained at 4.8%.



PARTICIPATION RATE

decreased by 0.2 percentage points to 65.1%.

That long downward sloping unemployment rate that we have gotten used to seeing is is in for a sharp turnaround in the next 12 months. Morgan Stanley are predicting an Australian unemployment rate of 9% sometime in 2010, that may seem extreme now but it is not out of the realm of possibility.

Bloomberg Interview with Martin FeldStein

Martin Feldstein, is the former head of the NBER, the committee that makes the ultimate decisions on whether the US eocnomy is in recession. This interview covers a variety of topics from the US Auto Bailout, to housing and how bad the currrent recession will be.

Feldstein is of the belief that forecasts of a turnaorund in the middle of next year are overly optimistc and he sees the recession lasting much longer. That is the my view as well. The idea that the US can spend it's way into prosperity I find naive at best. Feldstein was early with his call on the current recession and talks a lot of sense. Well worth a watch.

The Recession We Couldn't Avoid

There is no doubt in my mind that the Australian economy is now in recession. Paul Keating once remarked that the 1990's recession was "the recession we had to have", I'm calling this one, the recession we couldn't avoid.

According to the Australian Industry Group, the Manuafacturing sector has been in contraction for 6 months, the services sector for 8 months and the construction industry for 9 months. Yesterday we saw the ANZ job ad series plunge in November. Today the NAB business survey was awful. From the report:

• Business confidence edges down to a new record low (including the 1990/91 recession).

• Business conditions sharply down again - to levels last seen in late 1992.

• Forward orders fall sharply (again) to 1991 lows and capacity utilisation falls significantly.

• Medium term expectations also sharply lower – including lower capital & hiring plans.

• Survey implies negative growth in domestic demand and non-farm GDP in Q4 2008.

• NAB’s measure of credit availability suggests little change in credit availability.

• Confidence down everywhere – as are conditions, with the exception of mining & transport.

• Global forecasts for 2009 cut to 1¾% (from 2.4%) with sharply lower growth in USA & Europe.

• Australian GDP forecasts cut due to the lower start point in Q4 2008 and weaker global growth. We now expect growth in 2009 of only 0.5% - implying recession in the non- farm economy (at least).

• We also expect more fiscal policy action, weaker labour markets and an even more aggressive RBA. We now forecast the RBA to cut rates to 3% in early 2009 (previously 3¾%).

NAB is a little more realistic than ANZ, NAB is basically calling a recession, at least in the non-farm sector. A 0.5% GDP growth rate next year is probably still too optimistic, but even that implies a couple of quarters of negative growth. NAB has also come down to my forecast for the RBA's cash rate of 3%.

All the myths about the mining sector and our leverage to China's booming economy have been shattered. As is the idea that our financial and property sector is somehow immune. Welcome to the recession we couldn't avoid.

ANZ Job Advertisements Fall Sharply in November

The ANZ job advertisement series fell the most ever in a single month in November. Total job ads fell -8.6% in November, newspaper ads were down -12.0% while internet ads fell -8.4%. From the report:

Annual growth in newspaper ads is now the weakest since 1991, the last
time the economy experienced recession. Annual growth in job ads during the recessions of 1982 and 1991 fell to around -50%, so annual growth as at November 2008 remains above those past recession points.”

Yes for now it remains above those levels, how about in 6 months time?

“Over the last two months, newspaper job advertising has declined by the most in the 30-year history of the survey. This tells us that hiring intentions have been heavily impacted by the latest wave of uncertainty and financial distress caused by the global financial crisis. There is a reliable relationship between newspaper job advertisements and employment over the following six months. If the recent weakness in job ads is sustained, it would be consistent with a contraction in total employment over the first six months of 2009. This of course would result in a much more rapid rise in the unemployment rate than we are currently forecasting.

Who would have thought? An economist underestimating the impact of the global credit crunch. Given the tepid GDP number for the third quarter I think there is good chance that the Australian economy officially entered a recession sometime in October or November. That was quicker than I had anticipated and attests to how sharply the global economy deteriorated in late September into October. We can begin to expect some declines in employment in coming months and the unemployment rate to start a long steady climb.

US Job Losses Worst in 34 Years

US job losses in November were the worst since December 1974 according to the bureau of labor statistics report today. US non-farm payrolls fell -533,000 in November, whilst September and October numbers were revised down by an additional -199,000. Details in brief were as follows:

construction -82,000
manufacturing -85,000
service providing -370,000
retail trade -91,000
professional and business services -136,000
education and health services +52,000
leisure and hospitality -76,000
government +7,000

In total -163k goods producing jobs were lost whilst -370k were lost in service providing industries. That is important as service providing jobs had been holding up relatively well. So we can safely say that job losses are now across the board and the recession has infected just about every sector of the economy.

Adding November job losses and the revisions to prior months together, an additional -732k more jobs were lost from last month. So why then did the unemployment rate only rise to 6.7%? The unemployment number is calculated from a different survey. This survey, the household survey, showed the ranks of the unemployed rose by just 252k whilst 422k job seekers left the labor force.

The differences between the household survey and the establishment survey (used to calculate the non-farm payrolls number) tend to get ironed out over time. So don't be surprised to see a jump in the unemployment rate to more than 7% next month.

The stock market action following the report was bullish from the glass half full perspective. Over the last couple of weeks, the economic data has been getting sharply worse, however the stock market has managed to rally despite such news.

The glass half full perspective would cite this as a sign that the bottom is in for the stock market. When the market no longer goes down on bad news but continues to go up, it's a sign that the market has discounted the worst. The other idea gaining credence is as follows; because the US economy is already a year into the recession, then we are closer to the end of the recession than the beginning, and because historically stocks turn up on average, 5 months before the end of the recession, stocks are primed to take off.

The severe recessions of 1973 - 75 and 1981 - 82 both lasted about 16 months, so if we thought the current recession was similar to those then we might buy into the reasoning outlined above. However I believe the recession will be longer than any of those in the post WWII era, probably lasting most if not all of 2009. Thus any rally in the next couple of months will ultimately fail.

US Jobless Claims Hit 26 Year Highs

The 4 week moving averages for both intial Jobless Claims and Continuing Claims hit fresh 26 year highs in the latest week. Note the shaded area that has been added to the right hand side of each graph since the NBER offically announced the start of the recession earlier in the week.


There has been little doubt about the fact that the US economy has been in recession for months (except for a few pollyannas on CNBC, more on that later). The question now is how bad it will be . There are increasing comparisons to the recessions of 1982 and 1974, I think that comparison is a valid one and talk of the new great depression is exaggerated.

There is increasing talk about how the stock market looks forward and will turn up before the end of the recession. Somehow when that platitude is repeated people conveniently omit the 2001 recession after which stock prices did not recover for more than 12 months. MY guess is that the recession will be longer than most think, probably lasting for the bulk of 2009 and that the stock market will have a few more false starts before a bottom is found.

ADP Report Shows Biggest Job Losses in 7 Years

The ADP employment report for November showed 250,000 jobs were lost in the US economy, the biggest decline in the ADP series for 7 years. There is not much to say about the report except that it is ugly all round. For the second consecutive month jobs were shed in the small business sector, the one category that had been adding jobs for most of 2008. From the report:

This is the second consecutive monthly decline in small business employment reported by the ADP Report since November of 2002. Falling employment at medium and small firms clearly indicates that the recession has now spread well beyond manufacturing and housing-related activities.

Economists are expecting job losses of around 325,000 for Friday's Non-farm payroll report and given that the ADP report has been consistently on the low side of the BLS number, that looks like a fair estimate in light of today's ADP report.

RBA Slashes Cash Rate to 4.25%

Cast your mind back to October 7th this year when the RBA pulled out a surprise 1% rate cut and the markets cheered pushing the XAO up more than 1% toward the 4600 level. At that time I noted that we had seen this movie before and to be:

wary of the dead cat bounces that inevitably follow rate cuts in this type of environment

So here we are today sitting 1000 points below the levels of early September and the we get another 1% rate cut , however this one couldn't even inspire a late afternoon rally, although it should be noted that the US was down almost -9% the previous evening.

Back in early September when the RBA tentatively cut the cash rate by 25 bps, I noted that they waffled on about inflation when inflation was not a problem at all, it was the slide toward deflation that was the concern.

So how is it that just 3 months ago the RBA was concerned about inflation and they have now cut the cash rate a full 3% since that time?

Quite simply the RBA is reactionary and data dependent, they are unable or unwilling like all central banks, to get out in front of a problem. But now that they have we can see that like the Fed, the RBA is a one trick pony, all they can do is try and reflate by cutting interest rates. However as has happened in the US that has little effect in a deflationary environment, and the reason why the Fed has now started to just print money.

Don't get me wrong, I'm not advocating that central banks should be able to anticipate problems and cut or raise rates well in advance. In fact I think central banks should be scrapped, or at least the futile exercise of interest rate tinkering should be done away with. My point is not to look to the central bank for forecasts about the future of the economy as they are always playing catch-up to reality.

Australian Economy Continues to Tank

The monthly performance of manufacturing index released today fell to a new record low of 32.7, well below the dividing line of 50 that separates expansion from contraction. Highlights from the report:

• Recent results reflect an accelerating loss of consumer and business confidence, driven by worsening news on the global economy, falling household wealth, and the weak housing sector. This climate is being reflected in falling demand for manufactures.

• November’s fall in the Australian PMI® reflects declines across all components of the index. Production fell for the sixth consecutive month and more strongly than in recent months. This reflected the ongoing decline in new orders, which fell rapidly and for the seventh consecutive month. In line with the easing of production,employment fell for the ninth month in November.

• On the positive side, wages growth eased slightly and selling price growth was broadly stable. Input cost growth rose marginally.

• Inventories fell moderately, while supplier deliveries fell solidly. Exports fell sharply in line with the decline in global manufactures trade.

• Manufacturing activity fell in all states with New South Wales the best and Tasmania the worst performing states.

Also released today, the TD securities Melbourne Institute inflation gauge which showed a drop of -0.6% in November, the biggest decline in six years. That brings the year to November reading down to 3.0% from 5.0% just a couple of months ago. Some comments from the TD securities:

''The substantial turnaround in inflation fundamentally changes the economic and policy outlook," Joshua Williamson, senior strategist at TD Securities, said in a statement. "The previous inflation problem has been turned on its head."

Actually, for anyone paying attention inflation was never a problem. As mentioned back in March, inflation is a lagging indicator and the stagflationary conditions being experienced 6 months was just the transition from inflation to deflation.

So market pundits were busily rushing about like lemmings forecasting up to 125 basis points of cuts at tomorrow's RBA meeting and rejigging their estimates of where the cash rate may end up in this cycle. The market has been well ahead of these fools already forecasting a cash rate of 2.75% by May of next year.



My own forecast of a cash rate of 3% now looks like it might be on the high side as the RBA comes to grips with the realization that they will be dealing with deflation in 2009 rather than inflation.

XAO Has Worst November in 25 years

Although October was a horrible month for stocks, the last week of the month saw the market rally hard and look likely to set the stage for a sustained rally in November. A lot of fears eased and confidence returned. At the time I made the comment that I get suspicious when others get comfortable.

That suspicion was warranted as the XAO fell a further -7.8% in November and at one point being down more than double that amount. What happened? Well it appears that US government, far from having solved the current crisis, is simply making it up as they go along. Citibank, after repeated claims that they were fine, wasn't and has now essentially been nationalized.

Australian banks too, made visits to the confessional about exposures to failed institutions. Allco Finance Group (AFG) appointed a voluntary administrator in early November followed a couple of days later by ABC Learning Centres (ABS) with Babcock and Brown (BNB) soon to follow I suspect. Even with the rally in the last week of November it was the worst November in the last 25 years surpassing the -7.3% decline in November 1988.

But thankfully, president elect Obama rode to the rescue and has appointed a wonderful economic management team to save the day. Yes, in case you are wondering, I'm being sarcastic. The idea that a guy at the center of action over the past 18 months, Timothy Geitner, is well equipped to take over the reigns of Treasury Secretary is counter intuitive.

The logic goes that Geitner has been in the thick of things starting with the LTCM bailout in 1997 right up to the present day bailouts of Bear Stearns, Fannie and Freddie and Citigroup. He is someone who is "not afraid to take action" and will get the job done. Yes but what good is taking action and getting the job done if the job you do is second rate? I'd actually prefer someone who took no action. The time to take action was years ago. Where was Mr "not afraid to take action then?" Anyway, enough of that rant.

What can we expect in December? As we did in October, we ended November on a positive note. Volatility has declined and a semblance of confidence has returned to the markets. Still, even with the rally in the last week of November, the XAO is down a monumental -30% since the end of August. One aspect of the current bear market that has been missing since that time is a sustained bear market rally lasting a number of weeks rather than the 4 or 5 day rallies to date.

Once again I have no strong convictions about short term market movements, nor does my investment philosophy depend on it. During October, the XAO was officially down more than -50% from the November 2007 peak. Was that the bottom? We won't know until well after the fact. I suspect it won't be. When the market comes to grip with the fact that Obama has no silver bullet to fix all that ails us and the analysts get their head around how bad earnings will be in 2009, I think we will at the very least, retest the lows seen in October sometime in the next few months.

However, Since we have not had a sustained bear market rally for some time, I think December could be it. Therefore I'm going to call the XAO higher in December but ultimately it will prove to be just another bear market rally. Also, Don't forget to have your say in this month's poll.

US Home Prices Continue to Fall

The September report of the S&P/Case-Shiller Home Price Index showed home prices down -17.4% from a year ago for the 20 city index and are off -18.3 for the 10 city index. From their peaks, the 10 city index is down -23.4% whilst the 20 city index has plunged -21.8%. From the report:

“The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals.” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s.

“All three aggregate indices and 13 of the 20 metro areas are reporting new record rates of decline. Looking at the returns of the U.S. National Index, prices are back to where they were in early 2004. As of September 2008, the 10-City Composite is down 23.4% from its peak, the 20-City Composite is down 21.8% and the National Composite is down 21.0%.”

The part in bold is interesting. Home prices are only back to levels they were in early 2004 as depicted in the chart below. Whilst the year over year declines may slow and even reverse in coming months, house prices will continue to come down to more affordable levels as the huge inventory of unsold homes is worked off.

Whalen - No Bank is too Big to Fail

I'm fast becoming a fan of Chris Whalen of institutional Risk Analytics. He pulls no punches and talks common sense. In this segment he makes the case that noone is too big to fail and the likes of Citigroup should be liquidated rather than being put on life support. Unfortunately I think Whalen's points are falling on deaf ears. The quote below from Chris Whalen is one of the most salient statements I've heard in a long time:

We have got to stop pretending that size gives you a pass on economic reality

Citi Bailout

Citibank Gets Bailout

The United Socialists of American government decided to bailout Shitigroup by guaranteeing $306 billion of Citigroup's assets and injecting a further $20 billion in equity.

Citigroup Gets Guarantees on $306 Billion of Assets

Citigroup Inc., facing the threat of a breakup or sale, received $306 billion of U.S. government guarantees for troubled mortgages and toxic assets to stabilize the bank after its stock fell 60 percent last week.

Citigroup also will get a $20 billion cash injection from the Treasury Department, adding to the $25 billion the company received last month under the Troubled Asset Relief Program. In return for the cash and guarantees, the government will get $27 billion of preferred shares paying an 8 percent dividend. Citigroup rose as much as 41 percent in German trading today....

....The government’s preferred shares come with warrants to buy 254 million Citigroup shares at $10.61 each, allowing taxpayers to profit if the stock rallies following the government’s investment, according to a term sheet that accompanied the agencies’ statement. Citigroup is required to pay a quarterly dividend of no more than 1 cent a share for the next three years, down from 16 cents in the most recent quarter.

....Terms of the asset guarantees mean Citigroup will cover the first $29 billion of pretax losses from the $306 billion pool, in addition to any reserves it already has set aside. After that, the government covers 90 percent of the losses, with Citigroup covering the rest from assets, including residential and commercial mortgages, leveraged loans and so-called structured investment vehicles....

Let's be clear, Citigroup is insolvent, it's as simple as that, along with Fannie and Freddie and AIG they are being propped up by the government. I guess we should expect a pop in Citigroup stock folowing the bailout announcement, however you definitely wouldn't buy Citigroup stock for yield, since they won't be paying much in the way of diviends in the next 3 years. And if you think Citigroup is going to have any earnings in the next year, think again. They'll be taking writedowns and making losses for at least another 12 months.

Claims by CEO Pandit just last week that Citi had adequate capital ring hollow, and for anyone paying attention that was obvious. As I said yesterday and have been saying for a month, the capital injections under the TARP program would not even come close to being adequate because of the amount of losses linked to toxic assets on bank balance sheets.

Bloomber Interview with Niall Ferguson

Niall Ferguson is a historian and professor at Harvard and fellow at Oxford. Unlike a lot of academics his head is not lost in some ivory tower. He has made some fairly accurate predictions of what has come to pass in the last 18 months. He has also written some excellent books on financial history.

In this interview he talks about his latest book and more specifically how bubbles were created in the past. Also of interest was his comment about the latest problems in the banking sector. Ferguson is of the opinion that the reason the US banking sector is still cratering is becasue they have yet to own up to the massive losses they are carrying and that the injections of capital to date are not enough.

I am of the same opinion and expressed that view a month ago in Bank Injections just the Beginning. In my humble opinion, this is exactly the reason why Citigroup is on the brink of implosion. They have so much in the way of losses from bad assets coming down the pike that the $25 billion injection by the US government is far short of what they need to stabilize the company's balance sheet. I wouldn't be surprised if they need an AIG like amount of money to see them through.

Initial Jobless Claims Highest Since 1992

Last week US intial Jobless claims hit a 7 year high, just one week laterand they hit a 16 year high. Initial Jobless claims hit 542,000 in the week of November 15th pushing the 4 week moving average through the 500k mark. I've extended the graph above back 10 years to show how high jobless claims got in the nasty recession of the early 1980's.

Turning to continuing claims, in the latest week they punched through the 4 million level, the highest level since December 1982.


Forecasts of double digit unemployment in the US would need to see intial claims push through the 600k mark stay there for some time, whilst continuing claims would head up through 4.5 million. we are not there yet, but it can't be ruled out in the current environment

Doublling Down with REF

"When stocks go down and you can get more of them for your money, people don't like them anymore." Warren Buffet.

What Buffet was getting at in this quote is that whilst people are willing to pay for a stock at say $2 they are unwilling to buy them when they fall to $1, even though you can get more of them for the same amount.

That's not to say that you should double down on any stock because the price halves. However, if the fundamentals remain in tact and you are paying a price significantly below intrinsic value, then why wouldn't you buy more? That is at least my rationale for purchasing another 10,000 REF shares today for $0.98.

I first purchased REF shares back in February at $2.22, at that time I was a little overly optimistic about earnings growth. Not because I thought the business would do better but I didn't anticipate the strong AUD which affected REF's GBP profits, from which they derive the bulk of their earnings. That exchange rate has improved in 1H09 to an average of0.454 as opposed to an average of 0.468 in 2H08. However it is still above the average for FY08.

Consensus earnings estimates are forecasting a decline of about -7.1% for FY09 and a cut in the dividend from $0.24 to $0.21. No, that is not a misprint, the stock is currently $0.96 and is forecast to deliver a FY09 dividend of $0.21 cps, for a dividend yield of almost 22%.

Using the consensus number, I value the stock at around $1.80 - $1.90. Remember this company has a return on equity in excess of 200%, has no debt and generates a trememdous amount of free cashflow which they pay out as dividends.

Of course, the effect of the current economic malaise is as yet unknown, however even if the company were to slash their dividend by a third from last year's level, at current prices you would still be receiving a 16% dividend yield. If earnings and divdends were halved, a scenario I think is very unlikely, you would still be getting a 12% yield. That's much better than I can currently get in the bank and thus an offer I can't refuse.

Missed this yesterday but thought it worthy of a mention the emphasis in bold is mine. From Westpac.com.au:

The annualised growth rate of the Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, was 1.1% in September, well below its long term trend of 3.9%. The annualised growth rate of the Coincident Index was 1.6%, also below its long term
trend of 3.6%.

This is a very disturbing fall in the growth rate of the Leading Index. The growth rate fell from 3.5% in August 2008 to 1.1% in September 2008. That represents the largest percentage point fall between two months since the mid 1980's – sharper even than we saw in the 1990/91 recession.

The growth rate is signalling a very weak growth outlook through at least the first half of 2009. It is consistent with Westpac's view that growth in the first half of 2009 will be barely positive with a decent risk that the first two quarters of growth in 2009 could be negative.

So basically Westpac is toying with the idea of the first Australian recession in almost 2 decades. With the US going ino the worst recession since at least 1981-2 how can Australia possibly avoid at least a mild one?

US Building Permits & Starts Hit Lowest Level in History

The bottom callers must be exhausted by now. US Housing records continue to be smashed. Today, both US housing starts and building permits hit new historic lows. Records have beeen kept since 1959. Click here for the October report on Starts, Permits and Completions:

Firstly Building Permits:

Privately-owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 708,000. This is 12.0 percent below the revised September rate of 805,000 and is 40.1 percent below the revised October 2007 estimate of 1,182,000.

Single-family authorizations in October were at a rate of 460,000; this is 14.5 percent below the September figure of 538,000.

That beats the previous low of a SAAR of 709,000 set back in March 1975.


Housing starts:

Privately-owned housing starts in October were at a seasonally adjusted annual rate of 791,000. This is 4.5 percent below the revised September estimate of 828,000 and is 38.0 percent below the revised October 2007 rate of 1,275,000.

Single-family housing starts in October were at a rate of 531,000; this is 3.3 percent below the September figure of 549,000.

That beats the previous low of a SAAR of 798,000 in January 1991.


Completions:

Privately-owned housing completions in October were at a seasonally adjusted annual rate of 1,043,000. This is 10.2 percent below the revised September estimate of 1,161,000 and is 25.6 percent below the revised October 2007 rate of 1,401,000.

Single-family housing completions in October were at a rate of 760,000; this is 7.7 percent below the September figure of 823,000.

Completions have not yet hit record lows but remember that completions lag starts so you can expect them to go quite a bit lower in the coming months. didn't hear any bottom calling today, maybe they've finally given up?

Aussie New Car Sales Continue to Slide

New Motor Vehicle Sales Fell a seasonlly adjusted -0.5% in October and are now down -10.6% from a year ago, the biggest year over year decline in 7 years. Don't expect those year over comparisons to get anything but worse in the short to medium term.

Macquarie Bank 1H09 Profit down 43%

Macquarie Bank today announced that 1H09 profit fell -43% from the previous year to 217 cents per share. However that headline number disguises the extent of the deterioration in MQG's business. In the review section of the Appendix 4D, the company had this to say:

Subsequent to balance date there has been a further significant deterioration in equity markets which has impacted the market prices of our co-investments in listed specialist funds. If the market prices at the date of this report had been used in the Group's assessment of recoverable amount rather than the 30 September 2008 prices then profit after tax would have been reduced by approximately $130 million.

So Assuming that the value of MQG's satellite funds are not going to revcover materially in the next 6 months, MQG's forecast profit of 483 cents a share is looking to be on shaky ground. For some reason the stock ralled more than 16% today, probably because whilst the result was bad, there were no nasty surprises.

I'll repeat something I said many times last year and early this year when I talked about US banks and the outlook for profits going forward. The easy money leverage up environment is gone, and since Macquarie has largely depended on that for growth they will have to get used to a lower earnings base for the next few years.

Imminent Earnings Meltdown

I've been closely following US corporate earnings for a better part of a year now, and for good reason. More than a year ago I argued that analysts are perennial optimists and are unable to anticipate changes in the earnings cycle and thus when a change occurs they have to play catch up.

more than a year later and they are still playing catch up. Just 4 months ago, analysts expected 3Q08 S&P500 operating earnings to show a double digit increase. As of last week, 91% of S&P500 companies have reported earnings and have registered a decline of -21.6%.



Notice in the graph above how sharply earnings expectations declined as the reporting season got underway. That trend is now playing out in the graph of 4Q08 expectatons below.



Earlier in the year when 4Q08 earnings expectations were expected to rise in excess of 70% I said that was ridiculous and they would end up being slashed. As of last week those expectations are a more realistic 26%. However that is still way too high.

A couple of months ago I would have said a 10 - 15% increase in 4Q08 earnings would have been possible given that earnings dived off a cliff in 4Q07, thus making the current quarter's comparisons much easier. However, now I believe 4Q08 earnings will be much worse.


As seen above 4Q07 represents the trough in earnings for the current cycle. However, in light of the tsunami of downgrades for 4Q08 in the last couple of weeks, I am confident that the $15.22 of earnings in 4Q07 will be breached to the downside in 4Q08. In fact 3Q08 may even come close when you consider that more than $2.30 was lopped off 3Q08 operating earnings just in the latest week.

Why will 4Q08 be so bad? Take a look at the chart below from Zacks.com: What this shows is the ratio of earnings upgrades to earnings downgrades for S&P500 FY08 earnings. A number greater than 1 means more upgrades than downgrades whilst a revisions ratio of less than 1 means more downgrades than upgrades.


As you can see, the revisions ratio for the S&P500 is currently at 0.33, which means for every upgrade there are 3 downgrades for FY08 earnings. Healthcare is the only sector with more upgrades than downgrades. In the consumer discretionary sector, there are 6 times the number of downgrades as upgrades. This, in my opinion, will result in 4Q08 earnings falling below $15.Why the sudden huge increase in earnings downgrades? Until recently, most of the earnings destruction was in the finacial sector, however that has now spread across the entire economy.

So what you say, the stockmarket has already discounted a horrible fourth quarter and is looking ahead to 2009. If you go back to the chart showing actual and forecast S&P500 earnings, you can see the nice linear path that analysts have mapped out for future earnings to return to record highs by 4Q09. Mark my words, there is no way in hell US corporate earnings will be reaching record highs by the end of next year, that is fantasyland stuff. But don't take my word for it, take a look at the revisions chart for FY09 below.


The revisions ratio for FY09 is currently at 0.13 which means that there are a staggering 8 downgrades for every upgrade to FY09 earnings. Even the healthcare sector has more downgrades than upgrades.

As shown below, FY09 earnings forecasts have started to fall precipitously in the last few months. Currently FY09 S&P500 operating earnings are forecast at $91.85. That is way too high, my best guess at the moment would be somewhere in the vicinity of $60.


Slap a 12 multiple on S&P500 earnings of $60 and you get an S&P level of 720. Thus it is easy to see how the S&P500 can go substantially lower from current levels. This is not a forecast but just an indication that the stockmarket can go signifcantly lower and still not be ridiculously cheap.

US Retail Sales Fall off a Cliff in October

As expected retail sales fell off a cliff in October dropping -2.8% from a lower revised September number. That is the fourth straight month of falling retail sales, a trend that has not been seen since 1974. This attest to just how tapped out the US consumer is as unemploymnet rises sharply and access to credit is much tougher.

The mainstream view is that the US economy will turn around in the second half of 2009, funnily enough if you remember, that was what was expected to happen in the second half of 2008.

Initial Jobless Claims Hit 7 Year High

I used to often post about US initial jobless claims when trying to demonstrate why the US was heading for recession. I haven't done so for some time because it is obvious to all and sundry that the US economy is in a deep recession.

In the latest week to November 8th, intial jobless claims rose to 516,000, the highest since September 2001. Continuing claims hit 3.897 million, the highest level since January 1983.

If this recession is going to be as bad as the early 1980's we should expect intial claims to exceed 600k and continuing claims to punch through 4.5 million. KWhilst the employment data is backward looking it pays to keep an eye on the weekly jobless claims number as it is the most current barometer of employment conditions.

CBA Profit Warning ... I mean Trading Update

CBA today released their quarterly trading update for September which you could easily mistake for a profit warning. Here is the money quote:

While there is no evidence of systemic credit issues, the Group‟s exposure to Lehman Brothers, Allco Finance Group Limited and ABC Learning Centres Limited will result in significantly higher first half provisions.

Significantly higher than what? The first half of 2008? If that were the case you'd have to think that 1H09 would at least match the level of 2H08. Currently consensus estimates have CBA's FY09 profit basically flat compared to FY08. That is looking doubtful after today's announcement.

On the positive side, deterioration across CBA's entire asset portfolio has been relatively mild. However the risk is of course that the Australian economy gets materially worse, unemployment rises and therefore credit impairments. Given the recent barrage of negative economic data that is much more of a possibility than most mainstream economists expect, and know how well the mainstream has done over the past 18 months.

Still, if I had to pick one Australian bank to invest in over the long term, it would be CBA. After today's routing the stock is now yielding over 8%. But can that dividend yield be relied upon?

Update: I just spied this smh.com.au article which suggests CBA's total provision for bad debts could rise to as much as $2.3 billion in 2009, more than double that in 2008. That would definitely mean the current projected dividend yield won't hold up.

Making it up as you go along

That sums up neatly what the US treasury and Federal Reserve have been doing for the past year. Confirmation came yesterday with secretary treasury Paulson's announcement that the original use of bailout funds has now been scrapped in favour of capital injections.

When will the mainstream media get their collective heads out of their arses and figure out what most people with a modicum of common sense have long known? Paulson doesn't have a clue what he is doing. Back in July 2007 I labeled Paulson a comedian for his repeated claims that the subprime problem would be "contained". This story from marketwatch.com put his latest moves this way:

But in a striking admission, Paulson said that buying up mortgage assets "is not the most effective way" to use government funding....

...Alex Merk, president of Palo Alto Calif.-based Merk Investments, a mutual-fund firm, said that market participants were frustrated with Paulson's communication skills and changing tactics.

"He's been flip-flopping on every plan and it doesn't look like he has a plan," Merk said in an interview.

Yes Alex, that would be because he doesn't have a plan, he's making it up as he goes along. The proposal to buy toxic assets from banks was not a well thought out idea to begin with, refer to my previous post in September for the reservations I had about the proposal. So what are they going to use the funds for instead?

Some of the money saved from not buying mortgage assets will now be used to shore up the market for credit-card receivables, auto loans and student loans, according to Paulson.

In other words it's just a free for all, bring us your huddled masses and every other piece of toxic crap out there. Not surprisingly the markets pushed the major US indices down more than -5% followed by a -5.4% drop in Australia today. You can't instill confidence in financial markets with a make it up as you go along approach.

How Bad Can it Get for Retail?

Hot on the heals of the Circuit City bankruptcy announced on Monday, Best Buy today announced a sharp revision to it's full year profit forecast citing the worst times in 42 years of retailing. From Bloomberg:

Best Buy Cuts Annual Profit, Sales Forecasts on Slump

Best Buy Co., the largest U.S. electronics retailer, said full-year profit will be lower than it expected because of the recent turmoil in the financial markets and the U.S. economic slump

The shares dropped as much as 17 percent in early New York trading after the chain said profit for the year through February 2009 will be $2.30 to $2.90 a share. Revenue may range from $43.7 billion to $45.5 billion, Best Buy said today in a statement.

Sales at stores open at least 14 months may decline as much as 15 percent in the four months through February as consumers grappling with the worst financial crisis since the Great Depression cut back on spending. Circuit City Stores Inc., Best Buy’s largest electronics competitor, filed for bankruptcy protection Nov. 10 after suppliers cut off credit and demanded cash for shipments.

“In 42 years of retailing, we’ve never seen such difficult times for the consumer,” Brian Dunn, president and chief operating officer, said in the statement. “People are making dramatic changes in how much they spend, and we’re not immune from those forces.”

Best Buy forecast in September adjusted full-year profit of $3.25 to $3.40 a share on revenue of $47 billion. Analysts surveyed by Bloomberg estimated profit of $3.04 a share on sales of $46.4 billion.

Best Buy dropped $2.79, or 12 percent, to $21.09 at 8:29 a.m. in trading before the New York Stock Exchange opened.

With such a wide range given on profit numbers it's clear that there is very little visibility with respect to earnings in the next couple of quarters and in such an environment it is difficult for investors to have confidence buying stocks when CEO's are saying the type of things highlighted above.

Australian Business Confidences Plunges

Yesterday NAB released their monthly business survey for October, not surprisingly it was grim. Key points were as follows:

• Business confidence fell (a record) 21 points to a new record low of -29 index points.

• Business conditions also fell sharply - down 10 points to -11 index points – a level around the bottom of the slowdown in late 2000/early 2001 (-13 points).

• Trading conditions fell 11 points to an index reading of -10. Profitability fell 9 points to -13 index points and employment fell a relatively sharp 8 points to -10 index points.

• The latter is now indicative of labour shedding occurring and is more bearish than the official ABS employment estimates. All three sub components are at levels last seen in the 2001 slowdown.

I found this part of the commentary to be of interest also;

Clearly, the most marked feature of the October survey is the unprecedented collapse in business confidence – after a number of months of relative steady (but weak) readings notwithstanding global turbulence. It appears that the continuing volatility in global equity markets, emergency financial packages, falling commodity prices, and continuing talk of global recession have finally broken business optimism and now fear reigns supreme. Indeed it is worth noting that confidence readings worse than the bottom of the 1990s recession has more to do with fear of the unknown than actual current outcomes. That said, the reading for business conditions for October does point to a further sharp slowing in activity – to levels similar to that reported at the bottom of the 2000/01 slowdown.

The emphasis in bold is mine. Based on available data the economy is not as bad as the sentiment indicates but that is of concern in itself as it begs the question, what does it portend for the future? NAB is saying that we are at least headed for a slowdown equal to 2000/01, that in my view will prove to be overly sanguine.

Can I be a bank too?

Seriously, you couldn't make this stuff up. American Express is now a bank, from Bloomberg:

American Express Wins Federal Reserve Approval to Become Bank
American Express Co. won Federal Reserve approval to become a commercial bank, gaining access to funds as credit losses build and sales of asset-backed bonds plummet.

The Fed waived a 30-day waiting period on the application ``in light of the unusual and exigent circumstances affecting the financial markets,'' according to a statement released yesterday in Washington. Chairman Ben S. Bernanke and his colleagues unanimously voted for the action.

I was going to have a rant about how ridiculous this is but Yves Smith did a great job of that over at Naked Capitalism.

Seriously, Amex becoming a bank? This is patently ludicrous. Amex poses no systemic risk, so they don't have a case for needing access to the Fed window. They once owned a bank in connection with their wealth management business, but that is a thing of the past.

The process has now become ludicrous. Amex gets to become a bank to help with its credit card business, which in case you have not been paying attention, has been cutting credit lines to existing customers en masse (I have heard of a case with eight figure net worth, infrequent user, impeccable credit score, who nevertheless had his credit line cut by 50%).

And since no credit card bonds were sold last month, the purpose of this exercise is so that Amex can borrow against its credit card receivables at the Fed window at preferred rates. I am not making this up.

Willem Buiter once said that US regs permitted the Fed to lend against any collateral, including a dead dog. We are getting perilously close to that.

America needs to get its consumption down, but apparently the powers that be are going to use any trick possible to try to keep the American shop-a-holic habit going.

More Visits to the Confessional for the Big 4

Back in February I asked the question Time to Buy the Big 4? and concluded that it wasn't. Then in August after even bigger declines I said Still Not Time to Buy Aussie Banks. If you bought the major banks back in August you haven't made any headway, but we have learned a few extra things we didn't know back then.

Firstly we knew Allco and ABC Learning Centres were in trouble but we didn't know they would be insolvent less than 3 months later. Below are the exposures of each bank to both.


It also should be noted that CBA holds 4.456m ABS hybrid notes at a carrying value of $220m whilst NAB has no direct exposure to Allco it does have exposure to entities within the Allco group. NAB also has a $20m exposure to the recently insolvent Rubicon group. In addition NAB made the following announcement today.

NAB to strengthen further its capital position

National Australia Bank (NAB) has launched an institutional placement of shares to raise approximately A$2.0 billion to strengthen its balance sheet and take advantage of organic growth opportunities. The placement has been fully underwritten by Goldman Sachs JBWere, Merrill Lynch and UBS AG, Australia Branch.

I must say I nearly fell off my chair laughing when I read the heading of the announcement. As if raising capital was a sign of strength. The truth is they need the capital to cushion the writeoffs coming down the pike.

I said months ago that the news for Australian banks would get worse before it got better. Now it is getting worse and is not likely to get better for some time and thus there is no reason to go out and buy the major banks with your ears pinned back just yet.

My Portofilo: Year 2, 12 month return

Well, what a difference a year makes. Last year I reported a 45% return and this year gave almost half of that back with a -21.3% return after brokerage and dividends. That compares to a decline in the XAO of -39% over the same period. The graph shows my relative poerformance compared to that of the XAO over the past 2 years.


The outperformance in the past year compared to XAO is due in most part to a timely trade in ANH taken back in January. The companies I have held on to, PWK and REF have both declined by more than -40%.


I'll continue to hold these companies as I think they are strong businesses and will outperform over the long term - and that is what my aim is. I want to own shares in strong businesses that will outperform over the full market cycle. If own such businesses then my overall portfolio should outperform that of the broader market.

A note of reality here. My portfolio is hardly what you would call a portfolio. There is a reason I only own shares in two companies and that is because I have had an unfavourable view of the markets for the best part of a year now - most of my assets are sitting in cash.

However, I expect to put some more cash to work in the coming year. There are already compelling valuations out in the market but I am also aware that they could get even more compelling as economic reality comes home to roost.

I don't expect the overall market to have a great year in 2009 but I do expect to able to add some good businesses with sound fundamentals at reasonable prices to my portfolio.

US Unemployment Rises Sharply in October

The US unemployment rate spiked sharply in October to 6.5% as US non-farm payrolls declined by -240k. Details of the report were as follows:

Construction -49,000
manufacturing -90,000
Retail trade -38,000
service providing -108,000
professional & business services -45,000
education and health services -21,000
leisure and hospitality -16,000
government +23,000


There is a reason why I always harp on about watching the revisions. The revisions to September and August were enormous. In total NFP's were revised down by a total of 179k. August was revised from a loss of -73k to a loss of -127k whilst Spetember was revised from a loss of -159k to a whopping -284k. As mentioned before, whilst the headline gets the most attention, the revisions give a more accurate picture of what is going on because they incorporate additional data that was not available previously.

Always a good source of amusement was the controversial Birth/Death model which claims that a net 71k new jobs were created in November.

Forecasts of the unemployment rate peaking at 8% are now common with 9% being floated around and some more extreme calls talking about the possibility of double digits. I'm now leaning towards a rate closer to 9%.

However, in terms of the stockmarket, you don't want to be waiting for the unemployment rate to top out before investing or it is likely that you will miss out on some of the upside. You want to focus on the point where the rate of job losses start to abate. That point will not be reached in the remainder of this year but may start to appear in the latter part of 1Q09. In the last US recession there were 3 consecutive months of of job losses exceeding -200k or more peaking with a loss of -325k in October 2001.

Given that this recession looks like being the worst since 1981, we can look forward to some ugly job reports probably showing job losses of more than -300k per month in the immediate future. The effect of layoffs on consumer spending and thus on profits is sure to be felt across the board in corporate America and in my opinion has not yet fully been discounted in stock prices.