Parsing the Expected & the Unexpected

This week has seen an avalanche of economic and company specific data. Some of it expected, some of it unexpected. For example it was expected that Merrill Lynch would have a shocker of a quarter. From Bloomberg:

Merrill Posts Record Loss on $16.7 Billion Writedown

Merrill Lynch & Co., the biggest U.S. brokerage, reported a record loss after $16.7 billion of writedowns on assets infected by subprime mortgages.

The fourth-quarter net loss of $9.83 billion, or $12.01 a share, compared with earnings of $2.35 billion, or $2.41, a year earlier, the New York-based firm said today in a statement. The loss was almost three times bigger than analysts estimated and resulted in the first full-year loss since 1989, sending Merrill down 10 percent in New York trading, the biggest decline since the 2001 terrorist attacks....

The fourth-quarter's writedowns included $11.5 billion to account for the plummeting value of subprime mortgages and related bonds called collateralized debt obligations. Merrill also reduced the value of bond insurance contracts by $3.1 billion, saying provider ACA Capital Holdings Inc.'s credit rating had been slashed below investment grade, making it a less- reliable counterparty....

The emphasis in bold is mine. I haven't seen other financial institutions do this kind of thing yet but given that AMBAC and MBIA are on borrowed time with respect to their AAA credit ratings, there is potential for some very serious repercussions from this.



How about some unexpected? On the positive unexpected side, weekly jobless claims dropped significantly. From the Department of Labor:

UNEMPLOYMENT INSURANCE WEEKLY CLAIMS REPORT

SEASONALLY ADJUSTED DATA

In the week ending Jan. 12, the advance figure for seasonally adjusted initial claims was 301,000, a decrease of 21,000 from the previous week's unrevised figure of 322,000. The 4-week moving average was 328,500, a decrease of 11,750 from the previous week's revised average of 340,250.

The advance seasonally adjusted insured unemployment rate was 2.1 percent for the week ending Jan. 5, an increase of 0.1 percentage point from the prior week's unrevised rate of 2.0 percent.

The advance number for seasonally adjusted insured unemployment during the week ending Jan. 5 was 2,751,000, an increase of 66,000 from the preceding week's revised level of 2,685,000. The 4-week moving average was 2,725,750, an increase of 28,250 from the preceding week's revised average of 2,697,500.

Initial Claims were not only down, they were significantly down, however continuing claims remain elevated. I heard rumblings that seasonal factors may have distorted the initial claims number. A couple more weeks of low numbers could mean an upward revision to December payrolls next month.



Next, the market was expecting continued crappy housing data, just not this crappy, from the US Census Bureau, firstly Permits:

Privately-owned housing units authorized by building permits in December were at a seasonally adjusted annual rate of 1,068,000. This is 8.1 percent below the revised November rate of 1,162,000 and is 34.4 percent below the revised December 2006 estimate of 1,628,000.

Starts

Privately-owned housing starts in December were at a seasonally adjusted annual rate of 1,006,000. This is 14.2 percent (±8.3%) below the revised November estimate of 1,173,000 and is 38.2 percent (±4.9%) below the revised December 2006 rate of 1,629,000.

Completions

Privately-owned housing completions in December were at a seasonally adjusted annual rate of 1,302,000. This is 7.7 percent (±10.3%)* below the revised November estimate of 1,411,000 and is 31.0 percent (±5.8%) below the revised December 2006 rate of 1,887,000.

Sorry, didn't have time to add pretty graphs and stuff, but you can go to Calculated Risk for their always excellent analysis on US Housing.



Then, as expected there was Bernanke on the Hill testifying before Congress and calling for fiscal stimulus, however the big one that caught everybody by surprise was the awful Philly Fed index. Analysts had expected it to come in at -1.0 but came in at -20.9. From the Philadelphia Fed:

Indicators Suggest Weakening

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, fell sharply from a revised reading of -1.6 in December to -20.9, its lowest reading since October 2001

The graph below comes from Calculated Risk. As they note, the current reading does not conclusively prove a US recession is either imminent or in progress (e.g note the -20 reading in 1995), however I don't need much more convincing.