Saturday, September 16, 2006

Recent Economic Data

You've probably noticed this week that there has been some economic data released that appears to be somewhat positive (housing & durable goods) - leading to a rise in many stock markets. On the surface - after reading mainstream articles on this data - it would seem that the bottom to this recession is in sight. The problem is - once again - that if you study the data yourself - you'll see that nothing in this data should make anyone feel we're somehow turning a corner. I have copied two of Chris Martenson's recent articles on this subject. As always - Chris is simply analyzing the data - and then telling the truth. He's not trying to 'spin' the data so it sounds positive.

Also - even though stock markets appear to be rebounding on this data - the bond markets aren't buying it. The following is from a Wall St. Journal article in this morning's paper.

"If there really are signs of financial recovery, nobody told the bond market.

Corporate debt is still priced for disaster. Investment-grade nonfinancial U.S. corporate bonds rallied in January but now have stalled, with spreads about four percentage points over Treasurys, based on Markit iBoxx indexes. More worryingly, even as bank stocks have climbed, with the KBW index gaining 54% from its lows, U.S. senior bank-bond spreads remain at their widest levels since Lehman Brothers collapsed.

But leveraged loans as measured by the LCDX index remain unloved, with the index, at 74% of face value, still close to its all-time lows. Meanwhile, corporate defaults are surging: S&P by March 20 had recorded 47 defaults globally so far on the year, nearly triple the number seen in the same period of 2008.

Bonds are pricing in unheard-of and devastating levels of default. Deutsche Bank recently calculated dollar investment-grade corporate bonds were pricing in a five-year default rate of 40% assuming average recovery rates. Even if one makes the unlikely assumption that bondholders recover nothing after default, prices suggest a 25% default rate over five years. The worst five-year investment-grade default rate since 1970 is just 2.4%. The average is 0.9%.

On that basis corporate debt is almost absurdly cheap -- and so a lot of investors are pumping money into the market. That this has failed to fuel a rally in the credit markets similar to that in equities should ring warning bells for stock-market investors. What is holding back the credit markets is a lack of demand for financial debt -- a sure sign that all still isn't well in the banking system."

jg - March 26, 2009

More Fuzzy Reporting: New Home Sales Misrepresented

Wednesday, March 25, 2009, 12:47 pm, by cmartenson

If you read my recent blog post on existing home sales, you may experience déjà vu reading this one. My point in exposing the ways in which “news” is spun to the positive, instead of realistically, is to help you see the ways in which we are still being systematically misled. I consider this to be important to reveal because while problems are still being identified, realism is more important than optimism.

Would you tell an overweight man with chest pains that “it’s probably heartburn and that most people are just fine after experiencing chest pains” or would you advise them to obtain a careful examination of their condition?

Here, we are going to give the patient a close examination.

As I am typing this, the stock market is rallying as it basks in some very favorable news on New Home Sales. Here’s the news:

NEW YORK ( -- Sales of newly constructed homes unexpectedly rose in February, rebounding nearly 5% after sinking to the lowest level on record in January, according to a government report released Wednesday.

Once again, we’ll examine this “unexpectedly” claim by using another excellent chart from Calculated Risk (I love that site!). This time, again, we will note that New Home sales always, always, rise in February as compared to January.

See those purple lines? Nearly every one of them slopes upwards from left to right. Six out of seven of them. And even the 2006 number might be a bit off because it looks like some of the February activity might have slipped into March. [Edited by CHM at 2:00 3/25/09 to reflect my oversight of the 2006 purple bar]

This means that February quite ordinarily and usually has greater home sales than January. Just like we discussed before.

We might also note that this February is waaaaaaaaayyyyyy below any prior February. Further, from a second chart at Calculated Risk we can observe that this February’s New Home sales is the lowest ever recorded since records started being kept in 1963.

Yet here’s how this information was summarized in the CNN.Money article linked to above:
Wednesday's report was the latest in a series of better-than-expected readings on the housing market.

So is this news really “better than expected” or is it the “worst new home sales data on record”?
Before you answer, I want you to consider the source of the data itself. The Census Bureau collects the new home sales data but they are notorious for two practices. The first is that they DO NOT subtract cancellations from the data series. That is, they count as “sales” any and all contracts signed to buy a new house. Many of those, recently 30% to 50% depending on the builder and region, are canceled prior to completion and are not actually sold.

The second is that their “sampling methodology” is so error prone that they have to put a very wide range on their pronouncement. Where you read in the news “4.7% gain!!!” here’s the reality:

Sales of new one-family houses in February 2009 were at a seasonally adjusted annual rate of 337,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.7 percent (±18.3%)* above the revised January rate of 322,000, but is 41.1 percent (±7.9%) below the February 2008 estimate of 572,000.

The margin of error, meaning that the Census Bureau is only 90% sure that the reported figure lies somewhere within this range, is plus or minus eighteen point three percent.
This means it could have been a minus 13.6% drop or it could have been a 23% gain. With a range this wide, we might wonder how much weight we should individually give to the reported number at all.

Certainly I would personally never report something as 4.7%, implying precision to the first decimal position to the right, when I was only 90% sure that I was accurate two full spots to the left of the decimal point.

Once again, I must regretfully conclude that the same sort of accounting shenanigans that I have been consistently decrying over the past 5 years are alive and well and on full display down there in DC even today.

While I am an optimistic person for a lot of reasons, I do not share an affinity for false optimism based on Fuzzy Numbers that so many in DC and the mainstream press seem to cling to.

I prefer a blend of realism and optimism that come together around a true understanding of the problems as they are actually configured, not as we might wish them to be. If the patient is sick, let's find out why and not delude ourselves.

File these New Home Sales articles as just more Jiminy Cricket reporting.
More Fuzzy Numbers - Durables

Wednesday, March 25, 2009, 3:10 pm, by cmartenson

Okay, this is really just desperate and sad. No I am not referring to my fixation on parsing government numbers, although I suppose I could be, but instead to government statistical wizardry and the press' unquestioning rhetorical support for these tortured numbers.

First up, here’s the verbiage:

WASHINGTON (Reuters) -- New orders for long-lasting manufactured goods unexpectedly rebounded in February, rising for the first time in seven months, according to a government report on Wednesday that could bring some cheer to an economy mired in recession.

Here’s the NY Times’ opening take on the situation:

In a glimmer of surprisingly upbeat economic data, manufacturing orders for goods like metals, machines and military equipment rose last month for the first time after six months of declines, the government reported on Wednesday.

That’s quite amazing. Durables “unexpectedly rebounded” bringing the cheer of “a glimmer of surprisingly upbeat economic data” to an economy mired in recession.

Well, it turns out that there’s another little game that is frequently played with these numbers and it’s called “the downward revision”. The game is played like this. In a prior month, in this case January, a slightly “better than expected number” is posted causing the stock market to react with glee (at least temporarily).

Later on, that number is adjusted wildly downward thereby creating a lower benchmark to “beat” next time, hopefully causing the stock market to again react with glee. I’ve been watching this “beat by a penny!” game played for years with both earnings announcements and government releases. The funny part is, it works every time. A friend of mine has dogs that he prefers to lock away in a back room when guests come and he fools them into willingly entering that room with treats. It too works every time. That’s my mental image for this process.

At any rate, here’s the game in more detail. The first thing is to set the “expected number” off of the original reported number. In the example below I have arbitrarily set the baseline durables number to “100” for demonstration purposes.

As you can see below, the reported January number was “95.5” in this example and then economists set their consensus expectation for a final reading of 94.4 which was a minus 1.2 percent decline from 95.5.
Now that the expected reading of 94.4 has been set, the next task is to then lower the bar so that it can be easily beaten. Below we see two rows of example data. The upper row reflects the fact that the January data was revised downward somewhat heavily to minus 7.3 percent. The lower row shows how the February data beat that revised number by 3.4% which led to all the happy articles quoted above.
But with sharp eyes we might note that if economists expected a reading of 94.4 but we got a report of 95.9 that this only represents a difference of 1.6%. This is a LOT lower of a difference than the reported difference between minus 1.2% and plus 3.4% which is a gap of 4.6%.

Further, we might say that since the data is so noisy and since February will almost certainly be subjected to revisions, that we shouldn’t compare “reported” to “revised” at all. Instead we might want to compare “reported” to “reported”. What happens if we do?
Then the surprisingly cheery gain evaporates into statistical insignificance.

Put graphically, the “cheer” reported by the media seems comical and overreaching, and possibly desperate and sad. I’ve taken the liberty of using a red arrow to point out the source of cheer.


It also bears noting that the durables number is a very noisy data series and any and all monthly “wiggles” are really not worth focusing on. The year over year change, however, can be quite revealing.

On that front, February 2009 orders were down 28.4 percent from the year prior.
One might question how an economy based on exponential expansion will fare with such a wrenching downward adjustment instead of the expected and preferred percentage gains.
Also, one might wonder how Jiminy Cricket has managed to sneak into so many press rooms all at once.

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