Mixed economic data sends stocks into the final hour with small gains. A number of reports are out showing further real estate price declines in the bay area along with an increase in distressed sales to nearly 50% of the total. Here in Santa Cruz County as per data from the local association of Realtors, an average of median prices last year shows that single family home prices fell a little over 10% in 2011 while condo prices declined about 11.5%.

The Philly Fed Index increased to 7.3 in January, new orders were positive for a 4th consecutive month despite slipping to 6.9. Initial claims for unemployment fell to 352,000 last week a nearly 4-year low. The 4-week moving average slipped to 379,000 while continued claims dropped to 3,432,000.

Housing starts fell 4.1% in December 657,000 units annualized. Permits slipped .1% to 680,000 units annualized. 2011 housing completions hit a new record low of just 630,000 units, less than a third of the 2.1 million completions seen in 2006. This marked the 3rd straight year of less than a million completions and continues the trend of inventory reduction. An important and very necessary step if real estate is to lead the economy out of recession and generate a true economic recovery.

The World Bank released its 2012 Economic Prospects report today, detailing significant global uncertainties and vulnerabilities. It noted a dramatic slowdown in capital flows to the developing world in the second half of last year as they dropped by nearly half, this cut the GDP growth estimates to just 5.4% the second lowest figure in the last 10-years. Global economic growth is figured to be an anemic 2.5% this year as per the report, high income countries such as Japan the US and Western Europe are expected to achieve growth of just 1.4%, while trade growth is expected to decline to +4.7%. Positive numbers to be sure but definitely on the weak side, with substantial downward risks.

Stocks moved higher in early trade on mixed economic data. The December PPI increased .1%, the annualized rate fell to 4.8% as intermediate and crude goods prices declined.

Factory output increased .4% in December as capacity utilization advanced to 78.1%, as manufacturing now accounts for about 28% of total GDP as per the Commerce Department.

NAHB Confidence Index increased again in January, adding 4 points to 25 to put the index at a nearly 5-year high. The MBA Index gained 23.1% last week as purchase apps jumped 10.3% and refi’s surged 26.4% as the 30-year contract rate increased to 4.4%

The November TIC Report showed foreigners remained willing to finance our deficits with net flows of +48.6 billion. Treasury bonds were popular as were agencies and corporates to a much lesser extent.

While the fraudclosure scandal is slipping into the background amid ongoing rumors of a settlement with the nation’s biggest banks and mortgage servicers, data is starting to surface showing that the practice of fraud, robo-signing and falsification of data apparently extends to other loan types as well. Following a sampling of court records and recent revelations that Chase Bank collection efforts have come to a halt in some states following allegations that the bank overstated balances on delinquent accounts it sold to collection agencies amongst other items. Human behavior is frequently consistent, and so to it seems is corporate behavior as the parade of lawlessness by the big banks continues without hindrance or consequences despite repeated promises to clean up their acts.

Stocks opened higher and enter the final hour with modest gains on little real news. So far the earnings season is off to a rough start particularly for the big banks, the analysts darlings just a week or so ago.

The January NY Fed manufacturing survey beat expectations with a 5 point gain to 13.5, new orders jumped 8 points, prices paid increased fractionally but prices received surged 20 points.

Much was made of the Mastro’s, AKA Alan Greenspan’s tenure as Federal Reserve Chairman prior to the bust and after his retirement in January 2006. Fed meeting minutes are released with a 5-year lag so we now get to see what exactly was on the Fed’s mind just prior to the crash. Like their comments at the time, the record shows that they were utterly clueless, oblivious to the impending meltdown and asleep at the switch, just like the regulators as detailed by their lack of appropriate action and the FCIC report.

The recent bankruptcy of MF Global in a cloud of malfeasance and failure by the regulators yet again, served to illustrate that nothing has really changed despite myriad new regulations, enforcement still isn’t properly pursued. While Canada was recently lauded as more effectively supervised, it seems that one of its metals futures and option trading firms, Barret Capital Management, may have followed in the footsteps of MF Global having used its clients funds for company purposes. I said at the time of MF Global’s failure that all commodities accounts were suspect given that MF Global managed to pledge client funds for company purposes, making incredibly risky bets with an assist from the regulators that ultimately caused its bankruptcy.

2011 served to illustrate once again the chicanery of the financial services sector as the termination of the hedge funds so called expert networks, a euphemism for insider trading, showed that they struggle to make their clients’ money with many building on the losses experienced in 2008 to the extent that their 5 and 10-year performance numbers went negative. With the big banks and others in the sector demonstrating time and again that their business model is based on lie, cheat and steal, ala MF Global. It begs the question what positive purpose do they serve in society as the economic and social damage they have wrought plus the costs of the bailouts is starting to overshadow their positive benefits. 2011 also went down as a particularly bad year for mutual funds as 48% of them lost 2.5% or more than their benchmark average. The highest total since I started my company in 1998, when the figure was 55%, as per Morningstar.

Stocks enter the final hour with modest losses despite little significant data, though JP Morgan-Chase missed on earnings. Since Monday the DOW is up about 20 points or a fraction of a percent, while the NASDAQ is some 20 points higher as well for a gain of a little less than 1%.

Import prices fell .1% in December putting the 2011 total increase at 8.5%. The Commerce Department reports that the Trade Deficit spiked to 47.8 billion in November, exports fell 1.5 billion while imports increased 2.9 billion, once again oil was about half the total.

Some data from the Blog Calculated Risk shows that distressed sales, including foreclosure and short sales, decreased year over year in some markets as their report showed that Vegas dropped from 75.1% in December of 2010 to 72.6% at the end of last year. Reno was unchanged at 69%. Phoenix dropped from 69.6% to 59.8%. Sacramento fell from 67% to 64.1%. Still way to high and at levels that will put considerable downward pressure on prices but at least they are moving in the right direction, let’s hope it stays that way.

The Euro Zone continues to benefit from calmer financial markets following the ECB’s recent near half a trillion bailout. That said Standard and Poors cut the credit rating of Italy 2 notches to BBB and France from AAA to AA. Other European countries are likely to be downgraded as well. Treasuries rallied sharply following the US downgrade last year and despite a ratings cut for Japan some time ago it still has some of the lowest bond yields around. Another essentially meaningless action from a company with no credibility anymore or a significant event, time will tell.

Stocks remain about even in late trade on little real news. Retail sales increased .1% in December as per Census, missing expectations.

With the usual real estate will recover this year mantra out again. I thought another look at shadow inventory is in order. A recent report from Michael Olnick over at Legalprise figured shadow inventory is some 9.8 million units, a shocking number that also figures to deliver losses in the 1 trillion range. Previous estimates of shadow inventory ranged from a low of 1.6 million as per CoreLogic to a high between 8.2 and 10.6 million as per Laurie Goodman over at Amherst Securities. The general consensus here is that Goodman’s model is the most well thought out and probably the most accurate so the 9.8 million figured by Michael Olnick is in the ballpark. Shadow inventory being defaulted properties not yet foreclosed and properties in the foreclosure pipeline but not yet sold. These are distressed properties whose eventual sale will put considerable downward pressure on sales prices, now not all of these properties will ultimately be foreclosed on due to the cure rate or the mortgage holder making the loan current. Historically the cure rate was about 60% but during the current crisis compliments of steadily falling prices it has fallen to about 10% at last count.

A quick look and the big banks CDs spreads compliments of the Blog Bespoke shows that Morgan Stanly is the highest at 379, meaning it costs $379 to insure $10,000 worth of their debt against default for 5-years, followed by B of A at 350, Goldman Sachs at 312, CitiGroup 266, Wells Fargo 130 and JP Morgan Chase 128. I bring this up as the analysts are busy telling everyone how wonderful bank earnings are going to be this year, particularly B of A and yet they face huge ongoing litigation costs from the current crisis and massive potential liabilities due to the shadow inventory issues. How does it go, you don’t need stock analysts in a bull market and you can’t trust them in a bear market.

RealtyTrac reports that a total of 2.7 million foreclosure filling were recorded in 2011. 33% less than 2009 as procedure issues, meaning the fraudclosure scandal slowed things down considerably. I would expect foreclosure activity to increase dramatically this year.

Stocks enter the final hour mixed on little real news. LPS reports that its home price index fell .8% in October, as prices dropped to levels last seen in late 2002.

Recent data on commercial property has been fair with small increase in both rents and occupancy. That said 5+ years in to the bust and a lot of office leases coming up for renewal combined with still high vacancy rates, pressure to lower renewal rates should be quite high, so will see how rents hold up going forward.

The MBA Index increased 4.5% last week with refis up 3.3% and purchase apps up 8.1%, the 30-year contract rate increased to 4.11%, still very low by historical standards.

The NFIB is out with their latest member survey, once again the largest reported problem faced by small business owners is a lack of customers. Not an inability to access credit, uncertainty, burdensome regulations or taxes, though taxes and regulations came in 2nd and 3rd respectively behind poor sales.

A recent speech by Fed governor Sarah Raskin cited profound and pervasive misconduct by mortgage servicers combined with a failure of regulators to enforce the rules and reign in the unsafe and unsound practices of the financial sector. This in turn created an environment where these practices became the norm along with broad disrespect for the law. Adding that enforcement of rules and regulations against the big banks was crucial for society, at least somebody gets it.

Now for some good news, while jobs remain hard to come by, and wages continue to slip, the BLS is out with a report showing that of the top 10 large counties in the US showing wage increases during the 2nd quarter of last year compared to 2010. Three of the top ten are here in California, they are; Santa Clara +8.5% or number 4, San Mateo at +6.1% which is number 7 and San Francisco with a gain of 5.8% coming in at #8.

Stocks rose in early trade despite little significant data. Wholesale inventories gained .1% in November, considerably less than expectations of +.5%.

Yesterday’s Consumer Credit data that came out after the close is interesting to say the least. During November consumer credit jumped 10% annualized to 20.4 billion destroying expectations for an advance to 7.3 billion. Non-revolving debt increased 10.75% annualized while revolving or credit card debt increased 8.5%. The top line number represents the largest increase since 2001 and more than twice the gain of the most optimistic economists. In fact, credit use rate of change has increased steadily since the 3rd quarter of 2010. Here is the kicker; the current bust was not caused by real estate even though real estate is the poster child for said bust. The wheels came off due to the excessive use of debt, at the peak we were spending 1.32 for every dollar we had compliments of credit. The bust occurred because we as a nation could not effectively borrow anymore because we could not handle the payments on our existing debt that had reached 14+ trillion at the private level during 2008 as per the Federal Reserve. Further current debt levels, while they came down a little, are still sky high. Yet despite falling earned income and an official unemployment rate of 8.5%, did I mention record food stamp use. It seems that another credit cycle is about to begin. I can read the data and I can look at the pretty graphs but this flies in the face of economic history, theory and historical experience. Because you cannot borrow your way to prosperity, god knows we tried, it did not work and it never will.

I don’t pay much attention to the Wall Street Journal as I find its content lacking for the most part. Seems they have a piece out roundly criticizing the Fed for blatant electioneering compliments of increased lobbying for yet more housing market intervention. Following the uninvited sending to Congress of a 26 page document offering suggestions for helping the housing market. As the Fed is essentially a who’s who of the nation’s banksters and that said banksters were instrumental in precipitating the current crisis, with a generous assist from the regulators who failed to enforce the rules. Who have already received trillions in assorted bailouts in direct violation of the principals of capitalism. Never mind the suspension of FASB Rule 157, which allowed them to play it fast and loose with asset valuations and thus maintain the fiction of solvency. They now solicit yet more taxpayer funds in an attempt to paper over their greed, lack of ethics and or morals never mind their rank ineptitude as they ran their businesses into the ground in the first place. At least the Journal had the guts to call them on their chicanery. For the life of me how does anyone expect a real economic recovery when we continue to perpetuate the status quo, when said status quo precipitated the worst global economic meltdown in history.

Stocks enter the final hour with small gains on little real news. Its show me the money time again as Alcoa kicks off the 4th quarter earnings season after the close, will see if much lower estimates help more companies beat the number this quarter.

CoreLogic reports that home prices fell 1.4% in November, a 4th consecutive decline. On a year ago basis and prices are 4.3% lower. Considerable emphasis was placed on the so called healthy, non-distressed section of the market. As one influences the other separating the two is disingenuous at best.

Reis reports that the mall vacancy rate declined slightly in the 4th quarter to 9.2% as 2010 saw just 4.5 million square feet of new shopping center space completed a 31-year low.

Despite a better than expected employment report stocks struggle into the final hour mixed. The December Non-Farm payrolls came in at +200,000 as the official unemployment rate fell to 8.5% both better than expectations and this report was generally quite good though the headline is not as great as it sounds.

Unemployment is trending lower and the wages and income data both improved during December all of which are positives as economic recoveries are about jobs and this time doubly so as I seriously doubt real estate is going to lead an economic recovery anytime soon as is its historical pattern.

The average duration of unemployment at 40.8 weeks is its second highest, labor force participation remains at a 27 year low. The trend of revising down previous months data remains as November went from +120,000 jobs to +100,000 jobs. Population increased by 1,695,000 last year yet the labor force increased by just 274,000. Its easy to see why the labor force participation rate is so low. Population growth remains above employment growth. This is what I mean when I say demographic trend, or to put it another way we need 150,000 new jobs each and every month just to keep up with population. Unfortunately, this remains the weakest economic recovery on record. 2.5 years in and the last year saw an average of just 137,000 new jobs created. Effectively this figure matches population growth so the reduction in the unemployment rate is the result of the labor force being reduced as folks give up trying to find a job or are no longer counted for a number of reasons.

Yes it’s a good report and the trend is moving in the right direction, though slowly. That said we have a long way to go as 13.1 million Americans remain unemployed.

Reis reports that the office vacancy rate slipped to 17.3% in the 4th quarter as effective rents rose .5% during the same period. That said office vacancy seems to have peaked and is now trending lower.

Stocks struggled higher in early trade despite generally positive economic data and enter the final hour mixed. The December ISM Non-Manufacturing Index increased to 52.6. Employment advanced to 49.4 but below 50 signals contraction. New orders increased to 53.2 while prices paid slipped to 61.2. More weak economic growth and reduced price pressures due to lower commodities costs last month.

The official employment report is due tomorrow, expectations are for 150,000 new jobs during December. ADP payrolls came in today at +325,000 for December, a huge number that implies some 300,000 new jobs with tomorrow’s BLS employment report. That said ADP is frequently at odds with the BLS data and frankly ADP’s number besides being a statistical outlier has left many, myself included, scratching their head, time will tell.

Reis reports that the apartment vacancy rate hit just 5.4% in the 4th quarter its lowest reading since 2001 a real indicator that the ownership society is shifting back towards renting. As the foreclosures mount and folks reconsider the wisdom of homeownership in light of falling prices, never mind difficulties obtaining mortgages and the general excess levels of debt, classic credit bust.

Get ready to see more of our tax dollars squandered propping up the banks and real estate. Seems the FHA’s reserve has been bouncing along the bottom now for the last 3-years and is well below the required 2%. With a huge spike in serious delinquencies to 9.3% in November up from 8.4% in August, talk of a 50 odd billion bailout just for starters is making the rounds. If memory serves as the real estate boom started to falter, I think around 2003 when Fannie and Freddie struggled to find suitable borrowers. The FHA was shoved into the breach and their loan volumes exploded very late in the boom on ridiculously easy terms that featured just 3.5% down and tax credits that effectively paid people to buy homes as they were one of the last instruments available to keep the party going, our tax dollars at work.