Wednesday, 31 December 2008

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.

Tuesday, 30 December 2008

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.

Wednesday, 24 December 2008

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.

Tuesday, 23 December 2008

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.

Sunday, 21 December 2008

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.

Friday, 19 December 2008

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
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
Parting Shots

Wednesday, 17 December 2008

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.


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.

Friday, 12 December 2008

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.

Thursday, 11 December 2008

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:



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.


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.


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%.


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.

Wednesday, 10 December 2008

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.

Tuesday, 9 December 2008

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.

Monday, 8 December 2008

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.

Saturday, 6 December 2008

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.

Friday, 5 December 2008

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.

Wednesday, 3 December 2008

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.

Tuesday, 2 December 2008

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.

Monday, 1 December 2008

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.