Mish's Global Economic Trend Analysis

Burning Down the House; New Home Sales Consensus 330K, Actual 276K, a Record Low; Nationwide, Zero New Homes Sold Above 750K
Weekly Unemployment Claims Drop to 473,000, Last Week Revised Up to 504,000; 4-Week Average Rises to 486,750
10 Leading Retailers Close Stores; Exodus of Small Retailers Amidst Signs of "Free Rent"; 700,000 Drop Cable TV Subscriptions

Burning Down the House; New Home Sales Consensus 330K, Actual 276K, a Record Low; Nationwide, Zero New Homes Sold Above 750K

Posted: 26 Aug 2010 12:04 PM PDT

I failed to comment yesterday on the huge miss by economists on consensus new home sales, but Rosenberg has some nice comments today in Breakfast with Dave.

Burning Down the House

Once again, the consensus was fooled. It was looking for 330k on new home sales for July and instead they sank to a record low of 276k units at an annual rate. And, just to add insult to injury, June was revised down, to 315k from 330k. Just as resales undercut the 2009 depressed low by 15%, new home sales have done so by 19%. Imagine that even with mortgage rates down 100 basis points in the past year to historic lows, not to mention at least eight different government programs to spur homeownership, home sales have undercut the recession lows by double-digits.

in the aftermath of a credit bubble burst and a massive asset deflation, trauma has set in. The rupture to confidence and spending from our central bankers' and policymakers' willingness to allow the prior credit cycle to go parabolic has come at a heavy price in terms of future economic performance. Attitudes towards discretionary spending, credit and housing have been altered, likely for a generation.
The scars have apparently not healed from the horrific experience with defaults, delinquencies and deleveraging of the past two years — talk about a horror flick in 3D. The number of unsold homes on the market exceeds four million and that does include the shadow bank inventory, which jumped 12% alone in August, according to the venerable housing analyst Ivy Zelman.

Nearly 1 in 4 of the population with a mortgage are "upside down" and as a result are now prisoners in their own home. We have over five million homeowners now either in the foreclosure process or seriously delinquent. The government's HAMP program was supposed to bail out between 3 and 4 million distressed homeowners and instead we have only had a success rate of fewer than half a million.

Now back to the new home sales data. Every region in the U.S. was down, and down sharply. The homebuilders did not cut their inventory levels and as a result, the backlog of new homes surged to 9.1 months' supply from 8.0 months in June, which means more discounting and margin squeeze is coming in the homebuilder space. As it stands, median new home prices were sliced 6% in July and this followed on the heels of a 4.7% drop in June. And, at $235,300, average new home prices are down to levels last seen in March 2003, down nearly 30% from the 2007 peak. If the truth be told, if we are talking about reversing all the bubble appreciation that began a decade ago, then we are talking about another 15% downside from here. The excess inventory data alone tell us that this has a realistic chance of occurring.

The high-end market, in particular, is under tremendous pressure. In fact, it is becoming non-existent. Guess how many homes prices above $750k managed to sell in July. Answer — zero, nada, rien; and for the second month in a row. Only 1,000 units priced above 500,000 moved last month. That's it! Over 80% of the homes that the builders managed to sell were priced for under $300,000. Just another sign of how this remains a full-fledged buyers' market — at least for the ones that can either afford to put down a downpayment or are creditworthy enough to secure a mortgage loan (keeping in mind that 25% of the household sector does have a sub-600 FICO score).

This is going to sound like a broken record but it took a decade of parabolic credit growth to get the U.S. economy into this deleveraging mess and there is clearly no painless "quick fix" towards bringing household debt into historical realignment with the level of assets and income to support the prevailing level of liabilities. We are talking about $6 trillion of excess debt that has to be extinguished, either by paying it down or by walking away from it (or having it socialized).

New Privately Owned Housing Units Started

click on any chart for sharper image

Single Family New Home Sales

Building Permits

Inventory is up, sales are down, sentiment has soured, and tax credits have gone poof.

Prices will follow.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Weekly Unemployment Claims Drop to 473,000, Last Week Revised Up to 504,000; 4-Week Average Rises to 486,750

Posted: 26 Aug 2010 09:01 AM PDT

Weekly unemployment claims fell 31,000 from the last week's revised total of 504,000 (revised up by 4,000). For a welcome change, an economic number actually came in better than economist projections.

However, 473,000 claims can hardly be considered encouraging. It is solidly in territory that suggests the economy is shedding jobs.

Weekly Claims Report

Please consider the Weekly Unemployment Claims Report

In the week ending Aug. 21, the advance figure for seasonally adjusted initial claims was 473,000, a decrease of 31,000 from the previous week's revised figure of 504,000. The 4-week moving average was 486,750, an increase of 3,250 from the previous week's revised average of 483,500.

Unemployment Claims

The weekly claims numbers are volatile so it's best to focus on the trend in the 4-week moving average, that number went up. It will go up if the current number is higher than the number form 5 weeks ago, and down if the current number is lower than the number 5 weeks ago.

The trend has been up for a while. Three weeks from now, the 4-week moving average will decline as long as the number is lower that last week's print of 504,000.

4-Week Moving Average of Initial Claims

The 4-week moving average is still near the peak results of the last two recessions. It's important to note those are raw numbers, not population adjusted. Nonetheless, the numbers do indicate broad, persistent weakness.

4-Week Moving Average of Initial Claims Since 2007

No Lasting Improvement for 9 Months

There has been no lasting improvement since November 2009, over nine months ago.

To be consistent with an economy adding jobs coming out of a recession, the number of claims needs to fall to the 400,000 level.

At some point employers will be as lean as they can get (and still stay in business). Yet, that does not mean businesses are about to go on a big hiring boom. Indeed, unless consumer spending picks up, they won't.

Questions on the Weekly Claims vs. the Unemployment Rate

A question keeps popping up in emails: "How can we lose 400,000+ jobs a week and yet have the unemployment rate stay flat and the monthly jobs report show gains?"

The answer is the economy is very dynamic. People change jobs all the time. Note that from 1975 forward, the number of claims was generally above 300,000 a week, yet some months the economy added well over 250,000 jobs.

Also note that the monthly published unemployment rate is from a household survey, not a survey of payroll data from businesses. That is why the monthly "establishment survey" (a sampling of actual payroll data) is not always in alignment with changes in the unemployment rate. At economic turns the discrepancy can be wide.

With census effects nearly played out, It may be quite some time before weekly claims drop to 400,000 or net hiring that exceeds +250,000.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

10 Leading Retailers Close Stores; Exodus of Small Retailers Amidst Signs of "Free Rent"; 700,000 Drop Cable TV Subscriptions

Posted: 26 Aug 2010 02:46 AM PDT

Signs of weak consumer discretionary spending are popping up in multiple places. For example Subscriber growth suddenly stops for cable TV industry

According to data gathered by market research firm SNL Kagan, cable companies saw a noticeable drop in the total number of subscribers during the second quarter of 2010, a first for an industry that has thus far seen nothing but growth.

The number of cable subscribers dropped by 711,000, according to SNL Kagan, with six out of eight cable providers reporting their worst quarterly subscriber losses to date. Other parts of the industry were able to add just enough subscribers to make the net loss more like 216,000. Cable's share of the pay-TV market dropped slightly too, from 63.6 percent to just 61 percent during the quarter.

Exodus of Small Retailers Amidst Signs of "Free Rent"

The Toledo Blade comments 'Free rent' signs of trouble

Commercial real estate agent Joe Belinske never thought retail life could be like it is today on Monroe Street near Westfield Franklin Park mall. "Monroe Street used to rent itself. People never put out 'For Lease' sign. You didn't have to market it," said Mr. Belinske of CB Richard Ellis/Reichle Klein, a Toledo commercial real estate firm.

But these days all along the Monroe Street-Talmadge Avenue corridor - the Toledo area's crown jewel of commercial real estate - times are tough. "For Lease" signs have proliferated on Monroe from Sylvania Avenue past Talmadge to the Target shopping plaza. Some of the signs feature a shocking indicator of hard times: "Free rent."

Area rents have fallen significantly, and what was the price for hidden space in strip malls that looked away from the road, is the going price for better sites that look straight out onto Monroe.

Several large signature properties - the closed Circuit City store and former Lone Star Steakhouse on Monroe, and the Smokey Bones Barbeque and Grill on Talmadge - have remained closed for more than 18 months.

Also worrisome, commercial real estate experts say, is it seems like more small retailers have left the retail corridor than have arrived in the last few years.

10 Leading Retailers Close Stores

Daily Finance reports 10 Big Retailers Closing Stores

Both Saks (SKS) and Abercrombie & Fitch (ANF) said they were closing stores in several parts of the country. Meanwhile, other stores like the struggling Blockbuster video rental chain, continue to slash stores by the dozens. American Apparel (APP), which is close to defaulting on its loans, just may be next.

Consumers just aren't shopping the way they used to. Even Wal-Mart Stores (WMT), which typically fares well during tough economic times, is worried. "The slow economic recovery will continue to affect our customers, and we expect they will remain cautious about spending," said president and CEO Mike Duke in a statement that was released during the company's second quarter earnings report.

Retail Closing Scorecard

Saks 5: The lux department store company plans to close two Saks Fifth Avenue stores in Plano, Texas, and Mission Viejo, Calif. That's in addition to stores in San Diego, Portland, Ore., and Charleston, S.C., that Saks closed a month earlier. CEO Steve Sadove said there may be more store closings to come this year.

French Connection 17: The clothing company with the edgy "FCUK" ads closed all but six of its U.S. stores as part of a reorganization. It says it will focus on selling its clothes at department stores. It also closed all 21 of its stores in Japan and sold its Nicole Farhi apparel line.

A&P 25: The Great Atlantic & Pacific Tea Co. (GAP) said it will close 25 grocery stores across five states by the end of the third quarter as part of a turnaround strategy.

American Eagle Outfitters 28: American Eagle Outfitters followed Abercrombie & Fitch into the adult market with its Martin + Osa chain, but just like Abercrombie's Ruehl, it didn't work out. American Eagle announced in the spring that the 28 M+O stores and the online business would shut down.

Winn-Dixie Stores 30: Winn-Dixie Stores (WINN) announced in late July that it will close 30 older and under-performing stores by Sept. 22.

Bebe Stores 48: The women's apparel chain announced in July that it would shutter all 48 PH8 stores after a year of flagging sales.

Men's Wearhouse 50-60: CEO George Zimmer told analysts that the company now plans to close 50 to 60 Tux stores this year.

Abercrombie & Fitch 110: Abercrombie & Fitch will close nearly 60 under-performing stores in 2010, most of them towards the end of the year. In a recent conference call, CFO Jonathan Ramsden said another 50 stores could close in 2011. The company already closed 11 stores during the first half of the year, mainly at its flagship Abercrombie & Fitch and Abercrombie stores.

Charming Shoppes 100-120: Charming Shoppes (CHRS), the parent of apparel stores Lane Bryant and Fashion Bug, plans to close 100 to 120 stores this fiscal year. After announcing a rough end to 2009, management said it planned to reduce its real estate costs by renegotiating with its landlords. As part of those initiatives, CFO Eric Specter said the company has begun reviewing its lineup of stores, looking for locations that are under-performing and will close those where it can't get better lease terms.

Blockbuster 500-545: Under assault by video-on-demand and online video rentals, Blockbuster (BLOKA) announced earlier this year that it plans to close 500 to 545 stores in 2010. That's in addition to the 374 it closed last year.

There are more details in the article.

Retail Sales Numbers

Please keep those store closings in mind when retail sales numbers are reported.

The numbers are typically reported as percentage increases and decreases of "same store sales". If retailers all close weak stores, reported "same store sales" go up. However, total aggregate sales don't.

Moreover, one also needs to factor in store closings. From the Toledo article "Several large signature properties - the closed Circuit City store and former Lone Star Steakhouse on Monroe, and the Smokey Bones Barbeque and Grill on Talmadge - have remained closed for more than 18 months."

Some of those sales vanished into thin air, some of it went to other stores exaggerating "same store sales".

This is the reason one must analyze sales tax revenue instead of relying on "same store sales" for consumer spending estimates.

Finally, think of the number of people that will be laid off when those stores are closed, and also think what those store closings will do to lease prices.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Thursday, August 26, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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