Data Diary

Housing finance – home buyers are heading into hibernation

Posted on 10 March 2010 | No responses

No surprise that first home buyers have deserted the auction turnstiles with the scaling back of government hand-outs. Depends on how you spin the numbers – doesn’t look too bad from the perspective of the number of FHB (pronounced Fah-BUB) loans to total loans written:

Could almost argue that it’s back to business as usual.  But it’s not.  The number of FHB loans written was down 33% from the January 2009 level and 56% from the May peak.  The last time there were fewer FHB loans was in February 2005.

So in part the poor numbers for FHB’s have been hidden by a fall in non-first home buyers.  The number of loans to this latter group was down 9.5% from January 2009 and was at its lowest level since January 2001!

This can’t all be down to the government closing the purse a little.  It may be that while housing is a necessity, demand isn’t infinitely inelastic.  Perhaps prices are pushing to levels where buyers can’t finance new loans (remember there has been some tightening in credit standards) or at least are taking pause to consider whether it is sensible given recent price moves.

Certainly while the number of loans may have dwindled, the average size of loans in aggregate is still on the rise.  So while the average loan size for FHB fell to $284k (from $290k in December), the average non-FHB loan was still rising at $282k (and up 14% year-on-year).

With the media and property analysts trumpeting the stellar house sale results of the last couple of months, there must be some truth to the tattle that the offshore buyers are driving the market.  Wonder whether the government is going to publish data on this?

Technical analysis has a new tool?

Posted on 10 March 2010 | No responses

Reflecting on yesterday’s post about the rise of data visualization technologies, got to thinking about how technical analysis might respond to these developments. After all, if anyone is studying patterns in the financial markets, it’s those that use technical analysis.

I’ll admit to dabbling in the black arts on occasion (spent enough time on trading desks to know that it has it’s place in the world) but would not consider myself more than a brown belt at best. Be that as it may, thought I’d try and explore how Google Motion Charts might be useful in bringing together different threads. For example, consider the following chart that maps the worlds largest miner’s share price against trends in traded volume:

I know it’s a little crowded – heck, Rorschach would have a field day with this.  Notwithstanding, the aim is to explore whether the tool has merit – and in that spirit, I’d suggest the short answer is yes, but…

As for BHP, is the current low volume rally signalling a non-confirmation of current prices?  Or, as was the case in previous rallies, are we due a more rapid push higher to complete the current move?

And for those that want to torment the real thing – following is the motion chart. I know some of you are time challenged so to make it abundantly clear “Click the play button at the bottom left of the chart“. (I am actively seeking ideas on how we can further develop this tool – so any suggestions would be more than welcome.)

Visualizing data – tracking bubbles with bubbles

Posted on 9 March 2010 | 1 response

Hal Varian has been spruiking the idea that the sexiest job in the world is that of the data scientist (in the New York Times). While we can only speculate as to whether Google’s Chief Economist is talking his own book, he makes a valid point – that new skills and techniques will be required to explore the overwhelming abundance of information in the ‘big data’ age.

Leaving aside the statistical task that the owners of big data have before them, the challenge is to define new ways of presenting information – both to express voluminous information in a coherent fashion and to explore the possibilities offered by our more interactive and dynamic technologies.

This is something that the financial media are slowly awakening to.  Take for example, The Economist’s house price indicator (click here) and Bloomberg’s overlaying of interactive graphics (for example, click here).  Or simply read the advertisement for a graphic designer for Bloomberg’s multimedia group (here).

The great thing is that the democratizing power of the web means that we all can participate in the evolution – consider for example the following chart that I created with Google’s Motion Chart gadget:

I’d recommend taking some time to play with it – the original idea was to track bubbles with bubbles – try trailing individual countries by clicking on them or switching to a dynamic bar chart.  The ability to easily remodel the variables being expressed in different dynamic formats hints at the possibilities.

Apart from enabling a glimpse at the functionality, the chart does suggest that market capitalisation relative to GDP has some value as an indicator. The logic goes that the types of companies listed on a country’s exchange are indicative of the composition of its economy. In aggregate, the earnings growth potential of these companies will limit the maximum sustainable market capitalization of the country. The chart hints at this:

• Try trailing only Japan and Italy – both countries with aging populations, yet Japan with a higher technology component pushed through 100% market capitalisation to GDP in 1999/2000 and again 2006/2007.
• An interesting addition to the analysis would be to add debt within an economy.  Watching the inexorable climb of market cap to GDP for both the US and UK – incorporating debt might assist in understanding the relative accelerant provided by the credit bubble.
• The resource laden markets of Canada and Australia burned brighter than any other during the 2007 peak. They remain at historically expensive levels reflecting the emerging world’s demand for their dirt.
• Isolating individual market sectors might also be an interesting addition to the analysis – highlighting when a specific sector may have gotten ahead of itself.  For example, the financials in the US, UK, and well just about everywhere in 2007.

Conclusion

This type of analysis is likely to become more widely used and more accessible.  That’s a good thing.  Somewhat perversely though, such media probably requires more brainpower from its readers.  The charts might make information more accessible, but they are still compressing more information – that is, after all, the point.  The objective is to display the information in a way that enables our innate trend spotting skills to come to the fore. In this we are still the undisputed kings (Take the Financial Turing Test here).

For further reading on big data and data visualization:

• Special report by The Economist – on big data
• Dataspora blog – is big data at a tipping point?
• Wired Magazine – and the Petabyte age
• Harvard Business Review – Four way of looking at Twitter
• Many Eyes – collaborative data visualisation
• Gapminder – colloborative data visualisation too

Postscript to OECD CLI for January

Posted on 9 March 2010 | 1 response

David Rosenberg provides a brief “How to use the ECRI leading index for asset allocation” guide in this mornings Breakfast with Dave.  For ease of reference, following is the relevant bit, but you can always subscribe to his newsletters at Gluskin Shelf:

This is a handy indicator for asset allocation and sector rotation.  For example,when the ECRI index is above zero and rising to a peak, as was the case from mid-June to October 2009, the S&P 500 is on average up 22%, led by basic materials, consumer discretionary, financials, industrials and technology.

In the quadrant we are in now, which is from the peak down to zero, the S&P 500, on average, rises 1.3% and leadership alters towards consumer staples, health care and telecom.  On the cyclical side, industrials, energy, and tech still manage to outperform and do not relinquish that status until the ECRI index (smoothed) falls below the zero line.  In bond-land, all anyone needs to know is that we are now in the ECRI quadrant where the yield curve flattens.

And while we are referencing how others use these leading indexes, click here to view the December article where we tested Albert Edward’s suggestion that Japan’s experience through the 90’s would be instructive with respect to leading indicators.

OECD leading indicators for January

Posted on 8 March 2010 | No responses

Conflicting signals from the OECD’s leading indicators for January. While the aggregate indicator for the OECD plus six continues to lose momentum, the Asian majors are seeking a sustainable growth level post the surge of 2009..

The odds of the developed world of at least flattening it’s growth trajectory over the next 6 months are good. Whether Asia can maintain the rage in the face of slackening demand growth from the developed countries is open to debate. China may be enacting measures to slow their economy but strength from the likes of India could well take up the slack.

For Australia, the OECD’s leading indicator is still heading up, with a reasonable probability that it will mark out a top sometime in calender year 2010.

The 7.5% rule? – mean reversion in a range trading market

Posted on 5 March 2010 | No responses

Interesting analysis from the Contrary Investor (click here)

Funny, I’m coming around to the same range trading view – that we oscillate between fear based on fundamentals and greed based on liquidity.  That money printing and government stimulus (in its many and varied hues) is here to stay with the net result that equity markets will catch a bid on the inevitable downdrafts as new measures are brought into play.

So thought I’d play the same slideshow on the Australian equities market and see whether the 5% rule was a valid metric for our resource exporting economy.

The short answer is a resounding no.  I haven’t taken the time to highlight the single recession (1990) that occurred during the period – as clearly our market is a whole lot more volatile than the S&P500.  This could be partly to do with relative size and liquidity, but probably more importantly due to the higher resources component in our index. Resource prices are notoriously fickle and this is generally amplified through a mining company’s leveraged earnings (doesn’t mean to say that history will repeat – given lower gearing of the resources sector this time around and the ever present Chindia bid).

In any event, the 5% is looking more like a 10% rule (or at best a 7.5% rule).  The point is still valid though – in a range trading market there is value to be had from trading at the extremes and one way to gauge this to ask how far is the market trading from its 50 day moving average.

One last point worth noting though – the key assumption here is that the market is likely to trade sideways.  If it doesn’t (China decides to put up the shutters for example), then buying simply cause we are 10% below the 50 day MA isn’t a great strategy. For a quick visual check – have a look at the following chart in the light of the one above – if the market trends down, so does the 50 day MA…

The mechanics of internal devaluation – as it happens

Posted on 5 March 2010 | No responses

A long time back we looked at ‘internal devaluation’ and particularly how it was being imposed on Latvia. (Click on – Internal devaluation defined – to view the original post). I thought the craze might catch on – but the struggling developed world would prefer to take a less obviously painful path.  Having said that it did make our list of the Top 5 Financial Cliches for 2009 (you can find that here).

So wanted to file for posterity how Latvia’s internal devaluation is working out – A Fistful of Euro’s once again with their deerstalker and magnifying glass summarise the current state of affairs superbly (click here to read there analysis).

I suspect this playbook will be used again.

One final note – ‘internal devaluation’ is still to make its mark in the Google Trends Hall of Fame.

The relationship between equity prices and the real economy

Posted on 4 March 2010 | 2 responses

A May 2007 paper by some fellows at the St Louis Fed looked at “Monetary Policy and Stock Market Booms and Busts in the 20th Century“. It’s worth a read if you have the time. The following charts are taken from it:

Expanding money supply may be expressed in the host’s equity market – and/or any other sector(s) of its asset markets.  It could also escape into consumer price inflation. Or it could actually be used for productive investment. The point is that if money supply is expanding faster than the fundamental economy, the excess supply will find a home.

This is a theme we shall explore in more detail at another time. For now wanted to explore a variant of this concept with respect to the equities market – the idea that the equities market can get ahead of the real economy when risk appetite and expanding money supply conspire to juice things up:

This chart isn’t so simple to read given that the absolute range of outcomes – on the face of it we are sitting in the middle of the long term range.  It also doesn’t take into account the substitution of equity for debt (and vice versa) that is one of the objectives of our analysis.  A better interpretation perhaps is that provided by relative market capitalisation.  I’m still on the hunt for raw data but in the meantime consider this chart from The Chart Store (via The Big Picture):

It makes for an interesting comparison…

China PMI – bearish for base metal prices

Posted on 3 March 2010 | No responses

Following up on our note yesterday on the RBA Commodity Price index and the turning down of our pre-pubescent materials sector leading indicator comes a report on the China Purchasing Managers Index for February that was released late last week.

But first to the PMI index (from Standard Chartered Daily Metals bulletin):

China’s manufacturing index reading was well below expectations at 52 — down from 55.8 in Jan and below the consensus 55.2. While this still signals expansion in China’s manufacturing sector, it is the lowest reading since March 2009. This is of some concern (especially on the back of monetary tightening in China). However, we attribute the weakness in the Index to China’s week-long New Year holiday in February.

So to the article by Prieur du Plessis at Investment Postcards from Capetown (click here to go to original) where he published the following charts:

Now putting together historical data for China is notoriously difficult, so we should give a vote of thanks to Prieur (and Plexus Asset Management).

In the context of the recent moves to tighten lending and liquidity in China, the turndown in the PMI could well confirm a change in trend for GDP growth.  That’s not to say China’s GDP growth is about to fall into a black hole – but along with the rolling over of the OECD’s lead indicator (that we discussed here – with the next instalment from the OECD to be published tomorrow) the signs are that economic growth in China has turned the corner.

Secondly, note that the “New Export Orders” index is leading the way.  If GDP growth is to remain around 10%, the impetus is going to have to come internally – which is somewhat contradicted by the recent tightening.

Conclusion

If the relationships hold, base metal prices should continue to come under pressure in the near term (notwithstanding the one day rally in copper after the Chilean earthquake).  Perhaps we should put some more work into our fledging index.

Australian retail sales – also flagging

Posted on 2 March 2010 | No responses

Also, released today were Retail Sales for January. Following is the summary from the ABS:

CURRENT PRICES

• The trend estimate increased 0.4% in January 2010. This follows a 0.4% increase in December 2009 and a 0.4% increase in November 2009.
• The seasonally adjusted estimate increased 1.2% in January 2010. This follows a 0.9% decrease in December 2009 and a 1.5% increase in November 2009.
• In original terms, Australian turnover decreased 23.8% in January 2010. Australian turnover increased 2.0% in January 2010 compared with January 2009.
• In trend terms, all industry groups increased in January 2010. The largest increase was in Cafes, restaurants and takeaway food services (0.7%) followed by Department stores (0.4%), Clothing, footwear and personal accessory retailing (0.4%), Household good retailing (0.3%), Food retailing (0.3%) and Other Retailing (0.3%).

That’s a pretty important heading that “Current Prices” because if you strip out the effect of inflation, retail sales are showing signs of exhaustion:

Take the 12 month rolling average to smooth out seasonality, and then adjust for inflation, and it looks like retail sales have stalled. All-in-all must have been a pretty difficult decision for the RBA today.  My guess is that it was the resilience of house prices that pushed them – cause as Ric Battelino said in December (click here to read the full speech):

As you know, the cash rate is currently 3.75 per cent. This is still 50 basis points below the previous cyclical low of 4.25 per cent in 2001. On the surface this might suggest that the cash rate is still unusually low. However, with other interest rates in the economy having risen by at least 100 basis points relative to the cash rate over the past couple of years, they are now above their previous cyclical lows.

Another way to think about this is that the current level of deposit rates, housing loan rates and business loan rates would have been consistent, before the crisis, with a cash rate of at least 4.75 per cent.

Taking these considerations into account, it would be reasonable to conclude that the overall stance of monetary policy is now back in the normal range, though in the expansionary segment of that range.

Enough data for one day.  As Radio Birdman opined, “I’m going down…into a data maelstrom” or something like that:

Gotta give Rob Younger credit for inventing the double microphone – it’s louder that way.

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