The week's economic reports

The biggest jump in the unemployment rate in 22 years and another decline in nonfarm payrolls highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index down 2.8 percent to 1,361, now down 7.3 percent for the year, and the yield of the 10-year U.S. Treasury note fell 12 basis points to 3.94 percent.
ISM Manufacturing: The nation's leading indicator of manufacturing activity declined for the fifth month in the last six but remains only slightly below the level of 50 that delineates expansion from contraction.

The ISM manufacturing index rose one point last month, from 48.6 in April to 49.6 in May, led by new orders that rebounded from 46.5 to 49.7.

Now five months into 2008, the average ISM reading is 49.0, the lowest average level since 2003, however, readings in the low-40s are normally associated with recessions leading many to believe that conditions in the manufacturing sector, while weak, do not indicate a recession.
Employment continued to contract reading just 45.5, consistent with the continuing loss in manufacturing jobs as indicated in the labor report on Friday where a net loss of 26,000 manufacturing positions was reported.

Exports, the only category aside from prices that has stayed consistently above 50 over the last year or so, rose from 57.5 in April to 59.5 in May, the highest level since early in 2004. Exports continue to be a bright spot in the manufacturing sector that is otherwise struggling with slack demand and rising prices.

And on the subject of prices, the prices paid metric rose to a whopping 87.0, its highest level since early in 2004, as the vast majority of companies in the survey are experiencing increases in the prices they are paying for raw materials.

Labor Report: The Labor Department reported a sharply higher unemployment rate, from 5.0 percent in April to 5.5 percent in May, and the jobless rate now stands at its highest level since 2004. The rise in the unemployment rate was the largest monthly increase in 22 years, a development that came as a surprise to both financial markets and economists.

Many of those in the "no recession" camp have pointed to the still relatively low unemployment rate as the key bit of evidence in their argument. Clearly, the "no recession" case was weakened by this report.

The unemployment rate reflected an increase of 861,000 unemployed and a 577,000 gain in the labor force. A portion of the sharp overall increase has been attributed to the combination of problems with seasonal adjustments and graduating college students entering the labor market, however, the higher unemployment rate is now consistent with most other labor market indicators whereas, previously, it was not.

Nonfarm payrolls fell 49,000 in May after drops of 88,000 in March and 28,000 in April, which were revised downward by a combined 15,000.
So far in 2008, payrolls have declined by 324,000 and, on a year-over-year basis, only a 0.2 percent increase in jobs remains. Job losses occurred in all the usual categories - trade, transportation, and utilities down 41,000, construction down 34,000, and manufacturing down 26,000 - but the 39,000 job loss in professional and business services reversed much of the promising gains of previous months.

On the positive side of the ledger, education and health services payrolls increased 54,000 and government employment rose by 17,000. While the former has been a consistent area of job growth for years, government job creation has swung wildly from month to month. With many state governments now freezing hiring or cutting jobs, a reversal in government employment could produce some very big overall negative numbers in the months ahead.

Interestingly, the ADP employment report has been showing private sector job gains for some time now, a development that is increasingly at odds with the government labor data.

Summary: It's hard to get past a jump from 5.0 to 5.5 in the unemployment rate. That sort of thing tends to make people sit up and pay attention, something that was long overdue for many analysts who somehow were under the impression that the recent economic downturn would be one of the most shallow and short-lived on record.

During a week that contained not a single report on the nation's battered housing market and aside from Friday's dreadful labor report, the economic news was not really that bad last week. Initial jobless claims fell to new multi-month lows and the ADP employment report continues to show modest job growth. The ISM manufacturing index remains just below the expansion/contraction level with a healthy export sector and the ISM services index posted its second consecutive reading indicating expansion. Productivity exceeded expectations and consumer credit was about as expected.

However, without a doubt, employment is the most important economic statistic and, so far, it has lived up to its reputation as a "lagging" indicator - the time lag being made even worse by what are likely to be massive downward revisions to the payrolls data set to begin in October covering the period from March 2007 to March 2008.

While workers may complain about soaring food and energy prices, being "squeezed" takes on a whole new meaning when the income side of the ledger changes dramatically, as it has for hundreds of thousands of Americans already in 2008 and perhaps twice that amount after all the payroll data has been revised beginning this fall.

The Week Ahead: The coming week will be highlighted by reports on retail sales on Thursday and consumer prices on Friday. Also scheduled for release are reports on pending home sales on Monday, the trade deficit on Tuesday, import/export prices on Thursday, and consumer sentiment on Friday.

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Oil and gold contest update #3

Looking at the movement of the yellow diamonds in the chart below, you don't really get a very good feel for how exciting it's been over the last few weeks for oil and gold prices (well, maybe not so exciting for gold, but certainly for oil).
However, looking at the price levels, you get a very good idea of what's been going on.

Today's closes at about $138 for a barrel of oil and $902 for an ounce of gold are far above and below, respectively, the average guesses made back in April of $119 for oil and $997 for gold. It's been an interesting two months since that time.

The current top ten is shown below. Congrats CW and TP - it's too bad there are more than three weeks left to go. You'd almost think that the guy running these contests knows something that the contestants don't - he always seems to be in or near the top ten (but hasn't won yet). Hmmm...
It appears that the final column (square root of the sum of the squares of the percent differences) shows a different leader than the second to last column (simple sum of percent differences). Since the calculation in the final column would knock yours truly down a few notches, we sure won't use that one to determine a winner (unless of course it starts helping me).

[Note: If memory serves, the simple sum of the percent differences is the official calculation - the last column is being provided just to see what it looks like. And, if I win, the second place finisher gets the prize, but I get the braggin' rights.]

Recall that the prize here is a free one-year subscription to the companion investment website Iacono Research , valued at $159, where the model portfolio had another very good week and now sports a gain of over five almost six percent on the year - 10 or 12 percentage points clear of the major U.S. stock market indexes and most international equity indexes.

In case any readers are interested, the $129 per year special rate has been extended until the middle of June in conjunction with the presentation made at the New York Hard Assets Conference last month.

I'm making available again here for the next week - click below for details.

The Return of the $129/year Rate -- Until June 14th Only!

The next contest update will probably be next Friday since the contest only has a few weeks left to run and this is about the time that the weekly updates start. For a complete list of guesses and other details about the contest see here and here.

The excitement is really starting to build...

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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Household assets and liabilities

Some of us non-economists have long thought that an economy based on keeping asset prices forever rising faster than debt was not only impossible but dangerous. The latest data from the Federal Reserve's Z1 report shows that the same problems from earlier in the decade are back only this time both real estate and stocks are falling.
These are all year-end figures, so the peak in household assets in 1999 actually grew a little bit in 2000 prior to the modest overall decline in the years following. The reason for just the "modest" overall decline was due to housing - note the expanding violet area that greatly helped to offset the contracting green area up until equity markets rebounded in 2003.

Of course, the debt doesn't go away nearly as fast as the asset value as shown below.

Since only the first quarter data is available for 2008, extrapolating out through the rest of the year would paint a quite dismal picture - higher debt and perhaps much lower real estate assets.
There's got to be a better way to run an economy.

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Unemployment rises at fastest pace in 22 years

Normally, the unemployment rate isn't given much attention around here, however, when it posts its biggest monthly increase in 22 years - from 5.0 to 5.5 percent - then it's worth making up an extra chart. The jobless rate is now at its highest since October 2004.
The household survey indicated the number of unemployed rose by 861,000 last month to 8.5 million. A year ago, the unemployment rate was 4.5 percent and the number of unemployed stood at 6.9 million.

The establishment survey indicated a total job loss of 49,000 in May, continuing the string of declines that now totals 324,000 during the first five months of 2008. Data for both March and April were revised to show slightly larger declines than initially reported.
Job creation occurred in the usual areas - health care and government, which, in many cases are one and the same. Where would the nation be without sick people and the ability to borrow/create the money needed to pay for their care?

There was also little change in where job losses occurred in May. Payrolls declined in construction for the 16th month out of the last 20 and, for manufacturing, this marked the 23rd consecutive month of net job losses.
Retail trade (within the Trade, Transportation, and Utilities group above) has taken a decided turn for the worse over the last six months posting consecutive declines of 25K, 16K, 43K, 27K, 39K, and then 27K last month.

This will likely take a bit of the wind out of the sails of the Federal Reserve as they contemplate raising interest rates later this year to "fight" the inflation that they've created over the last nine months.

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The California SUV Fill Up Index - skipping to $4.30

By the end of the day, we'll have hit the 1,000 mark for miles driven this week and we'll have looked at more than our fair share of prices outside gasoline stations in the Golden State. It is with much confidence that the California SUV Fill Up Index is being advanced directly to $4.30 per gallon, skipping past the $4.20 level.

Thankfully, we don't drive an SUV. It's painful enough watching the fuel pump run all the way up to $68 - what must it be like to see it register $168?

Do they go that high?

A few years ago, the pumps would automatically shut off at $60, but they've obviously changed that.

Does anyone know if/where they stop now?

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The "Master of Garblements"

In a brief discussion with Dr. Edward Leamer, UCLA Economist and Director of the Anderson Forecast, the other day, the whole idea of former Fed Chairman Alan Greenspan and the word "mess" in the same sentence was something of a nonstarter.

Not that I tried to start anything, but, when asked, I offered a few thoughts (perhaps more on this subject sometime next week.)

As is the case for many other economists, it must be difficult to accept any criticism of one of the leaders in your field.

That's understandable.

Judging by his new book, Robert D. Auerbach doesn't seem to have that problem as he recounts major instances of Fed mismanagement exposed by Henry B. Gonzalez (D-TX).

He has some harsh words for not only all Federal Reserve Chairmen over the last 30 years but for the institution itself.

Caroline Baum at Bloomberg explains:

As chairman of the House Banking Committee from 1989 to 1994, he relentlessly pressed for public scrutiny of what he called a secretive agency wielding enormous power, writes Robert D. Auerbach in his convincing first-hand chronicle of Gonzalez's battle, ``Deception and Abuse at the Fed.''

Auerbach, who teaches at the Lyndon Baines Johnson School of Public Affairs of the University of Texas at Austin, did two stints as a staff member of the House Banking Committee. His time there spanned four Fed chairmen: Arthur Burns, G. William Miller, Paul Volcker and Greenspan.

None of these chairmen comes off well here. Greenspan, ``the master of garblements,'' fares the worst. His ``skill in presenting imprecise, sometimes near-meaningless, conflicting, yet learned-sounding views won him over-the-top adulation for his insights and abilities,'' Auerbach writes.

These evasions and deceptions allowed Greenspan to avoid accountability, which is the thrust of Auerbach's critique. The Fed has 19 decision makers -- seven governors in Washington and 12 regional bank presidents. They are accountable to no one.

The party host/bartender analogy is as good as ever here - as long as everyone's having a good time, no one really cares who the host is or how they provide the liquor.

Once the booze stops flowing and everyone starts sobering up - that's when people start asking questions.

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Countrywide stock and home prices

The last in the series (unless anyone has any suggestions).

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The California SUV Fill Up Index at $4.10

The very real possibility that the Hummer H2 will someday have to be removed from the list below is quite a sad one. When the California SUV Fill Up Index was resurrected a few months ago, it was found that the H1 was no longer in production and other gas guzzlers (actually diesel in the case of the H1) where going the way of the dodo bird.

That's just sad.

What's also sad is that we'll log about 800 miles this week.

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Ed McMahon, Countrywide, and Britney

It's not often that a member of "The Greatest Generation" is dragged down by the same forces that plague their children and grandchildren today.

One such case is the nexus of Ed McMahon, Countrywide Financial, and Britney Spears in a sad story of a broken neck, late mortgage payments on a multimillion dollar Beverly Hills home, and the Britney effect.

This morning the Associated Press reported that former Johnny Carson sidekick Ed McMahon is currently fighting the foreclosure of his home in a gated community atop Mulholland Drive.

The mortgage lender? Countrywide.

The neighbor? Britney Spears

According to the report, the six bedroom, five bathroom house has been for sale for two years and the current asking price is $6.25 million.

As an indication that the former Star Search host may share more with the younger set than many others of his generation (e.g., spending beyond his means), there appears to be a little problem of about $644,000 in late payments on a $4.8 million mortgage.

A $4.8 million mortgage?!?

To an 85-year old?

Apparently a run of bad luck that includes a number of divorces over the last twenty years and a broken neck about a year and half ago have been instrumental in Mr. McMahon's recent financial troubles.

According to Wikipedia, "in the 1990s, McMahon was reputed to be worth in excess of US$200 million in real estate holdings (particularly in Malibu) and real estate partnerships, although his net worth declined somewhat, due to several divorce settlements and a nationwide drop in real estate."

It's not clear whether or not McMahon and his current wife Pamela will remain in the house. However, one thing is clear - the sale of the house and squaring things with mortgage lender Countrywide isn't being made any easier with the paparazzi hanging around down the street waiting to get a shot of Britney.

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Wither the Hummer?

Say it isn't so!

Four dollar gasoline is causing General Motors to consider dumping one of the most important brand names of our time - one that historians will forever associate with the current era of American overconsumption and general excess.

Is this the end of the line for the Hummer?

What do they think we are a bunch of wooses?

If GM does go through with the sale of its Hummer division as part of a "strategic assessment" of the brand that has served as a lightening rod for the debate about so many topics over the last few years, look what future generations will be missing:




There's lots more here at Google Images.

As newer readers may not know, this blog has a particular affinity for Hummers, all starting with a sequence of pictures taken in a hotel parking lot a few years back. Here's the one that showed up on Venezuealan television just before the government shut the TV station down.

Seriously, that really did happen - someone had doctored the photo to make it look like the Venezuelan government was staging Hummers for some sort of an invasion or something - it was all quites strange.

For the complete history of Hummers at TMGTM, see this item from last year.

Ahhhh... memories.

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Revolving credit and home prices

The second in a series. Next up: Countrywide Stock and Home Prices.

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Boone and Baum on scapegoats and "bad" speculators

Bloomberg carries two stories today about the recent speculation over speculators. That is, the question of how big a role the nefarious "index speculators" are playing in the recently soaring prices of commodities such as energy and agricultural products and, more importantly, what should be done about it.

Boone Pickens says that, when it comes to crude oil - the world's most important commodity - this is much ado about nothing and the entire discussion diverts attention from the real problem of demand exceeding supply:

A U.S. probe into whether speculators manipulated oil prices up to more than $135 a barrel is a ``waste of time,'' billionaire hedge-fund manager Boone Pickens said yesterday.
...
``There's nothing to it to start with,'' Pickens said in interviews at an American Wind Energy Association conference in Houston. ``That's not what's happened. You have 85 million barrels a day of oil available in the global energy market and 86.4 million barrels a day of demand. So the price of oil is going to go up until you can kill demand.''
...
``What you're trying to do is trying to find a scapegoat and place blame for it when what you have is demand that is greater than supply,'' Pickens said.

Meanwhile, Caroline Baum presents a much more balanced view - a rarity to be sure for this issue - noting the arguments by investors in airline stocks (Michael Masters) as well as those who fret about government action only making the long-term supply-demand picture worse.

It's one thing to identify a problem; it's quite another to legislate or regulate a solution. History is replete with examples of the unintended consequences of government interference in the market. Capping gasoline prices in the 1970s, for example, led to long lines and fuel shortages.
...
``Commodity futures markets were set up for physical producers and consumers,'' Masters said in a phone interview last week. ``If commodities are an asset class, they should be regulated like capital markets.''

Masters says he thinks Congress should modify ERISA (Employee Retirement Income Security Act), the 1974 law that sets minimum standards for public pension plans, and prohibit them from investing in commodities because of the damage it's doing to the country.
...
Today's soaring food prices are causing riots and unrest in developing nations. For the 1 billion people who live on $1 a day and spend half that on food, a doubling of food prices is the difference between eating and starving. Surely the government has to do something about speculation.

To the contrary, speculators ``are performing a social service,'' said Paul DeRosa, a partner at Mt. Lucas Management Co. ``The thought of conservation without higher prices is ridiculous and logically inconsistent.''

There does seem to be a groundswell of support for the government to step in and do something about soaring prices that show up everywhere but in the Labor Department's inflation statistics.

Of course, the larger (and much more important) issue is not addressed by either Pickens or Baum, namely, the remarkable disparity over the last few years between the rate of increase in the supply of paper money all around the world and the rate of increase in the supply of commodities.

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Job creation and home prices

The first in a series this week. Next up: Revolving Credit and Home Prices.

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More financial innovation please

Well, credit and debt is the lifeblood of our consumer economy and you just knew that somehow, someway, after the housing bubble met its pin, lenders would find a way to keep lending money to consumers.

Financial innovation has evolved.

Out with the subprime and Alt-A loans and in with the reverse mortgages and life settlement agreements.

This front page story($) in today's Wall Street Journal tells just how difficult it is for some people these days to get by without borrowing some money from somewhere and, sadly, it's probably not going to get any better any time soon.

As consumers max out their credit lines and banks clamp down on lending, many older and middle-class Americans are resorting to pricey, often-risky alternatives to stay afloat. Some are depleting their retirement accounts, tapping 401(k)s for both loans and hardship withdrawals. Some new fast-cash options allow homeowners to squeeze equity from their houses -- without the burden of monthly payments. One new product offers a one-time payment. In exchange, the company shares in as much as 50% of any future gain or loss in the property's value, typically collecting proceeds when the house is sold.
...
Reserve Solutions Inc. of New York offers debit cards to help workers access funds from preapproved 401(k) loans.
...
Despite the risks, business in the fast-cash lane has been accelerating. In 2007, 18% of workers had taken a retirement-plan loan within the past year, up from 11% in 2006, says a recent survey by Transamerica Center for Retirement Studies.

Those debit cards hooked up to 401ks sound a lot like those credit cards that accessed home equity lines of credit a few years back.

Of course, many of those cards don't work anymore.

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Back to the Southland

So, we're off to Southern California for a few days. Things will be a little bit spotty here during that time but, thanks to the new Blogger time-delay feature, posts should continue to show up on a somewhat regular basis.

This will be our first trip back to the Southland since moving northward just over a year ago - it should be fun.

I'll be on a panel at the Reuters AdvicePoint Forum CA in Long Beach on Tuesday afternoon along with Jon Lansner of Lansner on Real Estate (O.C. Register) and Marc Lacter of LA Biz Observed.

The rest of the agenda is here (don't know how I got top billing in our group...)

If our remote control still functions properly for the entry of the gated community where we used to rent a house, we'll probably go have a look around at some of the $900K errrr... $800K ummm ... $700K uhhh ... $600K houses for sale or in foreclosure.

Wow. I hadn't looked in our old zip code at foreclosure.com in quite some time - there are now 17 houses in foreclosure or pre-foreclosure out of about 300 in the development.

That's a lot, isn't it?

Hopefully we'll have enough money to pay for gas along the way.

The fuel light on the car came on about a week ago and the last time we had it out it showed "DTE 22", meaning that the gas station down the road better be open when we go by. Well, actually, it's all downhill, so we could probably coast all the way down to the bottom of the hill if need be.

We should make it.

But lots of people aren't making it to the next gas station, apparently. What you see below is the reason why - that's about what prices are around here.
It seems that a few dollars doesn't take you as far as it did years ago. Does anyone else remember handing over $3 to a gas station attendant so you could go another 100 miles or so in a VW bug?

Not long ago I saw a teenager hand a ten dollar bill to a gas station clerk and then proceed to dispense fuel into a Ford Expedition. What would that be good for, maybe 30 miles?

It seems like we're all frogs and the water is getting pretty hot, yet most of the frogs don't understand what's happening to them. This AP report explains:

Brent Saba had just dropped a church group off at Philadelphia International Airport on Sunday morning and was heading north on Interstate 95 when it happened: His 15-passenger van ran out of gas.

Saba, a 24-year-old church pastor, made it to the shoulder just past the Ben Franklin Bridge and waited more than 30 minutes for someone to stop and lend him a cell phone. Then he waited a while longer for AAA to arrive with fuel.

With gas prices hovering at $4 a gallon, motorists like Saba are putting less fuel in their tanks — then coming up empty on the highway.

Though national statistics on out-of-gas motorists don't exist, there's plenty of anecdotal evidence that drivers unwilling or unable to fill 'er up are gambling by keeping their tanks extremely low on fuel.

In the Philadelphia area, where the average price for a gallon of regular broke $4 on Friday, calls from out-of-gas AAA members doubled between May 2007 and May 2008, from 81 to 161, the auto club reported.

"The number one reason is they can't stretch their money out from week to week," said Gary Siley, the AAA mobile technician who helped Saba.

"Some of them are embarrassed. ... They say, 'I was trying to make it till Friday,' and they couldn't do it," said Siley, who has assisted numerous out-of-gas motorists.

If they would just get those "index speculators" out of the commodity futures markets, maybe everything will return to normal.

Maybe.

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The Economist weighs in on the price of oil

This week's cover isn't nearly as good as what appeared last week, but, just in case you haven't gotten enough already, there's one more story about oil prices in the current issue of The Economist.

The image you see to the right (that goes along with the cover story) may have some "Magazine Cover Indicator" prognosticators sitting up to take notice, but it is the curious comments in the lead story that are of more import.

In a well-reasoned look at oil markets over the last few decades and the last few months, they note the following:

Stuck for answers, politicians have been looking for scapegoats. Top of the list are the speculators profiting from other people's hardship. Some $260 billion is invested in commodity funds, 20 times the level of 2003. Surely all that hot money has supercharged the demand for oil? But that is plain wrong. Such speculators do not own real oil. Every barrel they buy in the futures markets they sell back again before the contract ends. That may raise the price of “paper barrels”, but not of the black stuff refiners turn into petrol. It is true that high futures prices could lead someone to hoard oil today in the hope of a higher price tomorrow. But inventories are not especially full just now and there are few signs of hoarding.

Then they go on to dismiss the entire notion of "peak oil":

Others fear that oil is pricey because it is running out. But there is little evidence to support the doctrine of “peak oil” in its extreme form. The Middle East still seems to contain a sea of the stuff. Even if new finds elsewhere have been rarer and less accessible than in the past, vast quantities of oil could now be profitably stripped from tar sands and shale.

Maybe they would be accepting of "peak-oil lite"?

ooo

This week's cartoon:

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