by Calculated Risk on 8/09/2011 04:36:00 PM

Yesterday I posted a table of the largest one day declines since 1950 in percentage terms. Below is a table of the largest one day increases. Note that the largest increases happened in 2008 during the bear market.

From MarketWatch: U.S. stocks stage rapid recovery to close up 4%

U.S. stocks rocketed to their best one-day gain since March 2009 ... The Dow Jones Industrial ended up 429.92 points ... The S&P 500 added 53.07 points, or 4.7% ... The Nasdaq added 124.83 points, or 5.3%.

Here is a table of the largest one day increases (in percentage terms) for the S&P 500 since January 1950. There were quite a few large up and down days in 2008 ... today is highlighted in red.

Largest S&P 500 One Day Percentage Increases since 1950
	Date	Percent Increase	Close	Previous Close	Six Months Later
1	10/13/08	11.6%	1003.35	899.22	-16.1%
2	10/28/08	10.8%	940.51	848.92	-7.1%
3	10/21/87	9.1%	258.38	236.83	-0.9%
4	3/23/09	7.1%	822.92	768.54	29.8%
5	11/13/08	6.9%	911.29	852.3	-3.1%
6	11/24/08	6.5%	851.81	800.03	4.8%
7	3/10/09	6.4%	719.6	676.53	41.2%
8	11/21/08	6.3%	800.03	752.44	13.8%
9	7/24/02	5.7%	843.43	797.7	4.1%
10	9/30/08	5.4%	1166.36	1106.42	-31.6%
11	7/29/02	5.4%	898.96	852.84	-5.7%
12	10/20/87	5.3%	236.83	224.84	8.9%
13	12/16/08	5.1%	913.18	868.57	-0.3%
14	10/28/97	5.1%	921.85	876.99	18.7%
15	9/8/98	5.1%	1023.46	973.89	25.1%
16	5/27/70	5.0%	72.77	69.29	15.0%
17	1/3/01	5.0%	1347.56	1283.27	-8.4%
18	10/29/87	4.9%	244.77	233.28	7.3%
19	10/20/08	4.8%	985.4	940.55	-13.7%
20	3/16/00	4.8%	1458.47	1392.14	1.8%
21	8/17/82	4.8%	109.04	104.09	35.4%
22	8/9/11	4.7%	1172.53	1119.46	---
23	10/15/02	4.7%	881.27	841.44	1.1%
24	5/29/62	4.6%	58.08	55.5	6.3%
25	10/9/74	4.6%	67.82	64.84	22.1%
26	10/23/57	4.5%	40.73	38.98	5.1%
27	5/10/10	4.4%	1159.73	1110.88	5.3%
28	4/5/01	4.4%	1151.44	1103.25	-8.2%
29	1/21/09	4.3%	840.24	805.22	13.6%
30	9/18/08	4.3%	1206.51	1156.39	-35.0%
31	10/16/08	4.3%	946.43	907.84	-8.1%
32	3/18/08	4.2%	1330.74	1276.6	-10.4%
33	10/7/74	4.2%	64.95	62.34	23.7%
34	10/15/98	4.2%	1047.49	1005.53	25.9%
35	11/4/08	4.1%	1005.75	966.3	-8.6%
36	7/12/74	4.1%	83.15	79.89	-14.4%
37	3/12/09	4.1%	750.74	721.36	37.6%
38	9/19/08	4.0%	1255.08	1206.51	-38.8%
39	2/24/09	4.0%	773.14	743.33	32.7%
40	8/14/02	4.0%	919.62	884.21	-11.0%
41	10/1/02	4.0%	847.91	815.28	1.2%

by Calculated Risk on 8/09/2011 02:20:00 PM

From the Federal Reserve:

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period

by Calculated Risk on 8/09/2011 12:31:00 PM

The FOMC statement will be released around 2:15 PM ET today. This is a one day meeting of the FOMC and there will be no press briefing.

I posted some thoughts yesterday and here are few other articles:

• From Binyamin Appelbaum at the NY Times: Fed’s Elusive Prescriptions for an Erratic Ailment

Most public attention has focused on the possibility that the Fed will renew its asset purchases ... Instead, the Fed is more likely to begin any renewed aid campaign with smaller gestures.

The most basic measure available to the Fed is to promise that it will keep interest rates near zero for at least six months, or a year, or some other specified period of time.
...
The Fed also could make a similar commitment for the first time regarding its huge investment portfolio ... a promise about the portfolio also would extend the Fed’s commitment to maintain low rates.
...
Another available option would be to maintain the size of the portfolio, but to shift its composition toward bonds with longer terms.

• From Patti Domm at CNBC: Fed Under Pressure to Soothe Markets

Economists have speculated the Fed could also reaffirm in its statement that it will hold rates low for an extended time, and it could also vow to keep its balance sheet extended, at nearly $3 trillion for a long period of time.

The Fed also could cut the interest rate on reserves from 0.25 percent to zero.

But it is not likely the Fed will embark any time soon on another quantitative easing program.

• From Jon Hilsenrath at the WSJ: Fed Has Some Tricks Left, but None Are Magic

An announcement of QE3 seems extremely unlikely for the reasons I mentioned yesterday. Obviously the wording of the statement will change, and maybe the FOMC will commit to a longer "extended period", or commit to hold their investment portfolio for an extended period - or some of the other changes mentioned above.

by Calculated Risk on 8/09/2011 10:59:00 AM

Yesterday I posted a graph for REO inventory through Q2. (REO: Real Estate Owned by lenders)

And on Sunday, I noted that REO is only a part of the problem. A bigger part of the problem is the large number of seriously delinquent and in-foreclosure loans. See: Mortgage Delinquencies and REOs

Although delinquencies and foreclosure activity is higher than normal in all states, a few states stand out. The following data is from the Q2 Freddie Mac SEC filing:

Freddie Mac Single Family Portfolio, Serious Delinquencies and REO
	California	Florida	Illinois	Arizona	Nevada	All States
Portfolio UPB (billions)1	$285	$109	$91	$45	$20	$1,805
Seriously Delinquent (billions)	$13.388	$15.099	$5.071	$2.673	$2.770	$77.840
Serious Delinquency Rate	3.8%	10.6%	4.5%	4.6%	10.6%	3.5%
REO Inventory (billions)2	$2.163	$0.751	$0.772	$0.610	$0.338	$10.830
REO compared to Portfolio	0.8%	0.7%	0.8%	1.4%	1.7%	0.6%
Negative Equity3	30.9%	46.1%	21.7%	49.6%	62.6%	22.7%
Foreclosure	Non-Judicial	Judicial	Judicial	Non-Judicial	Non-Judicial

¹ UPB: Unpaid Principal Balance.
² Based on UPB at time of REO acquisition.
³ Negative Equity source: CoreLogic.

I marked a few numbers in red. Although Freddie Mac has the most REO in California, the percent of REO in California is only slightly above the national average compared to the portfolio size. Nevada and Arizona have the most Freddie Mac REOs compared to the portfolio (Nevada is almost triple the national rate).

Look at the serious delinquency rate. Now Florida and Nevada stand out. In general judicial foreclosure states have more loans in process, but Nevada is a non-judicial state!

I've also added negative equity data from CoreLogic (percent of properties with a mortgage that owe more than their home is worth). Nevada, Arizona and Florida really stand out.

Although Florida doesn't have an especially high number of Freddie Mac REO, there are many more coming. Nevada has both a high number of REO and a high delinquency rate. The timing of the eventual recovery in housing depends on clearing out this backlog of REO and seriously delinquent loans - so I think California will recover long before areas like Florida and Nevada.

Also: I noted this yesterday, but this is important. Freddie Mac had been expecting REO acquisitions to increase in the 2nd half of 2011, now they are expecting the delays to continue all year. From their SEC filing: "The pace of REO acquisitions slowed in Q2 2011 due to delays in the foreclosure process. We expect these delays will likely continue through the remainder of 2011."

by Calculated Risk on 8/09/2011 07:30:00 AM

From the National Federation of Independent Business (NFIB): Small Business Optimism Index Continues Downward Trajectory

For the fifth consecutive month, NFIB’s monthly Small-Business Optimism Index fell, dropping 0.9 points in July—a larger decline than in each of the previous three months—and bringing the Index down to a disappointing 89.9. This is below the average Index reading of 90.2 for the last two-year recovery period.
...
The percent of owners citing poor sales as their top problem—the long-time primary complaint of firms—has faded a few points, and reports of sales trends are much better than a few months ago. However, the July survey anticipates slow growth for the remainder of the year, high unemployment rates, inflation rates that are too high and little progress on job creation.

Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy.

Click on graph for larger image in graph gallery.

The first graph shows the small business optimism index since 1986. The index decreased to 89.9 in July from 90.8 in June.

Optimism has declined for five consecutive months now.

The second graph shows the net hiring plans for the next three months.

Hiring plans were slightly positive in July.

According to NFIB: “While the national unemployment rate dipped marginally, for the nation’s small businesses, the employment story is not a positive one. Twelve percent (seasonally adjusted) reported unfilled job openings, down 3 points. Over the next three months, 10 percent plan to increase employment (down 1 point), and 11 percent plan to reduce their workforce (up 4 points), yielding a seasonally adjusted 2 percent of owners planning to create new jobs, 1 point lower than June, leaving the prospect for job creation bleak."

Weak sales is still the top business problem with 23 percent of the owners reporting that weak sales continued to be their top business problem in July.

In good times, owners usually report taxes and regulation as their biggest problems.

From NFIB: "The percent of owners citing poor sales as their top problem—the long-time primary complaint of firms—has faded a few points, and reports of sales trends are much better than a few months ago."

The index continues to struggle, probably a combination of the recent economic weakness, and also the high concentration of real estate related companies in the index.