Saturday, August 30, 2008

Real Disposable Income Declines Again

8/30/08 Real Disposable Income Declines Again

Real consumer spending fell 0.4% in July, the Commerce Department reported Thursday. This is the biggest drop since June 2004. Nominal spending rose 0.2%. Personal income fell 0.7% in July, the biggest drop since August 2005. Real disposable incomes fell 1.7% in July. This is the second straight large monthly drop in the wake of the government stimulus payments. Inflation surged in the month. The core personal consumption expenditure price index rose 0.3% in July compared with June and is up 2.4% in the past year. This is the largest gain since September 2006. Wall Street economists had expected a 0.4% decline in incomes, a 0.2% gain in nominal spending and a 0.3% rise in the core PCE.
Here's more from the gov't: "Personal saving -- DPI less personal outlays -- was $133.8 billion in July, compared with $272.9 billion in June. Personal saving as a percentage of disposable personal income was 1.2 percent in July, compared with 2.5 percent in June. Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods."

As part of the economic stimulus packaged authorized by the White House, as of the end of August, Treasury has sent out more than $93.4 billion to 114.8 million households.

Europeans' confidence fell more than forecast this month as the economy teetered on the brink of a recession. An index of executive and consumer sentiment in the economic outlook dropped to 88.8 from 89.5 in July, the European Commission in Brussels said Friday. That is below the 89.3 median estimate of 26 economists surveyed by Bloomberg News. Inflation unexpectedly eased in August and a measure of consumer-price expectations declined.

Rob Hanna: "The market rose strongly on Thursday. NYSE advancers outpaced decliners by over 3 to 1 – the 2nd day in a row advancers accounted for over 70% of the total. I’ve noted a few times recently that rallies in the S&P 500 since the end of May have been quick to reverse. Most have not lasted more than 2 days before suffering a down day. There have been three 3-day rallies and none of four days or longer. The market has now closed up 3 days in a row. We are reaching the upper boundary of “normal”. Although I’m not betting on it, traders should be on alert for a change of character in the market.
The market may or may not pull back in the next day or two, but it appears likely to happen quite soon. Back to back days of 70% advancers are fairly rare. The fact that it happened without the S&P 500 posting a 10-day high is even more unusual. Since 1970 this has happened 20 times. Sixteen (80%) of the time the market closed below the close of the trigger day within the next four days. If you give it 10 days to work off the overbought breadth readings then 19 (95%) of the time you’d find a close lower than the trigger day. In other words, a pullback appears likely in the not-too distant future."

"Out of almost 2,100 diversified retail U.S. stock mutual funds that are open to new investors, just 17 have positive returns for both the past 12 months and year-to-date, according to investment researcher Morningstar Inc."

Russia’s prime minister said he thought the U.S. might have helped “stir up” the conflict to benefit one of the presidential candidates.

International Rectifier Corp.said Friday that its board unanimously rejected a $21.22-a-share unsolicited bid from Vishay Intertechnology Inc. Richard Dahl, chairman of International Rectifier, said in a statement that the deal, valued at about $1.6 billion, "significantly undervalues the company and its future prospects."

Business activity in the Chicago region picked up in August, according to a survey of corporate purchasing managers released Friday. The Chicago purchasing managers index rose slightly to 57.9 in August from 50.8 in July.

Integrity Bank of Alpharetta, Ga., with $1.1 billion in assets and $974 million in deposits, was closed Friday by the Georgia Department of Banking and Finance and the Federal Deposit Insurance Corp. was named receiver. This marks the 10th U.S. bank failure so far this year.

Alitalia has filed for bankruptcy protection as the Italian government scrambled to put together a package to save the troubled airline, according to a statement posted on its corporate Web site Friday.

Friday, August 29, 2008

California Homes

8/29/08 California Homes

American workers' confidence in the job market is as low as it was during the 2001 recession, according to a survey released Thursday.

When asked whether this is a bad time to find a quality job, 65 percent said it was, matching the level of the 2001 recession, according to the survey by Rutgers University's John J. Heldrich Center for Workforce Development.

With unemployment at 5.7 percent, the highest level since 2004, and weekly unemployment claims hitting a six-year high earlier this month, workers are worried about everything from their weekly hours to their total pay.

Almost three years to the day after Katrina devastated New Orleans, disaster-response officials are bracing for Tropical Storm Gustav's projected landfall nearby as forecasters predict it will strengthen into a major hurricane.

The Department of Homeland Security's Federal Emergency Management Agency, criticized in 2005 for its slow response to Katrina, is working with state officials to prepare for the storm. FEMA said it moved 2.4 million liters of water in 137 trucks, 4 million meals in 203 trucks, 478 electric generators and 267 truckloads of blankets and cots into position for distribution in the Gulf Coast states. Gustav is the first storm of the 2008 Atlantic hurricane season to pose a serious threat to the more than 4,000 oil and gas installations in the Gulf.

Forecasts that Gustav could regain hurricane strength and cut a swath through offshore oil and natural gas production areas in the Gulf of Mexico also portend a threat to onshore energy sites.

Fannie Mae's capital and reserves positions are better than market expectations, according to an analyst at Lehman Brothers, who also said the biggest U.S. mortgage finance company may not need any more externally raised capital.

Fannie Mae should get through this difficult housing cycle with core capital remaining at or above the 15 percent excess capital requirement, analyst Bruce Harting said in a research note to clients.

Rob Hanna: "The market has been especially choppy over the last 15 months. Once aware of this, traders should look to take advantage. Seeing the market move in one direction for even a couple of days should alert traders that they may want to take profits or consider a strategy to benefit from a swing in the opposite direction.
Lastly, this environment will certainly change. While the above system may not be a great “trading” system, it does appear to be a very useful “tracking” system. In other words, moves higher of 2 days or more have quickly reversed and provided the system a nice string of winning trades. Traders should be on alert for system failures, as they could be a sign that selling into up-moves may be falling out of favor and the market environment changing. Therefore they would need to adjust their approach to take advantage of the new, emerging environment."

The median sales price of California homes sold in July was 40.3% below year-ago levels as bargain-hunters snapped up distressed housing in large numbers, skewing the state's housing market toward cheaper houses, the California Association of Realtors reports.

Median sales prices in the state -- which peaked at just under $600,000 late last summer -- fell from $587,560 in July 2007 to $350,760 in July 2008, a staggering decline that translates into prices falling by $4,500 per week.

The credit crunch squeezing Detroit's Big Three auto makers is now spreading to some of their dealers, adding financial pressure to a group already strained by this year's big drop in auto sales.

Economists see signs that the economy is weakening. While growth is expected to rise around 2% in the third quarter, many analysts expect much weaker growth in the last quarter of the year.

Keefe, Bruyette & Woods analysts in a research note Thursday cut their profit estimates for large-cap brokers with quarters ending in August: Goldman Sachs, Lehman Brothers and Morgan Stanley. They cited expected write-downs on residential mortgages and other assets, and weaker revenue in investment banking and trading. "Given the uncertain recovery we have also lowered 2009 estimates and adjusted price targets," KBW said. "Caution is warranted if investing in these names as volatility remains intense."

Microsoft released a web browser on Wednesday that includes a feature that could affect the advertising model of internet rivals such as Google.

The Internet Explorer 8 browser’s InPrivate setting lets users access websites without disclosing their browsing habits, which websites need to be able to do to deliver targeted advertising. This is a business Google has just moved into through its acquisition of DoubleClick.

Sears Holdings Corp. said second-quarter profit fell 62 percent drop as the retailer continues to struggle to attract customers to its stores despite a high-stakes restructuring. The company also said that it expects that its sales and gross profit margins will continue to be pressured as it sees no near-term improvement in the economy.

Caterpillar Inc. expects record sales this year as booming demand for construction and mining equipment in China and other emerging economies offsets weakness in its home U.S. market, its chairman said Thursday.

"Our manufacturing operations in Asia have been running at capacity to satisfy demand in China," James Owens said.

In Asia, Caterpillar has so many orders for heavy mining and power generation equipment that it is sold out of most items through 2010, he said.

Moscow has issued an extraordinary warning to the West that military assistance to Georgia for use against South Ossetia or Abkhazia would be viewed as a "declaration of war" by Russia.

The United States, Europe and Japan had planned to intervene and rescue a weak U.S. dollar in March, business newspaper Nikkei reported on Wednesday.
Officials from the U.S. Treasury Department, Japan's Finance Ministry, and the European Central Bank reportedly drew up a currency contingency plan to be undertaken over the March 15-16 weekend, Nikkei reported, citing sources familiar with the situation.
The monetary officials also agreed on a framework for coordinating dollar-buying intervention, the report said.
The officials did not specify an exchange rate for initiating the dollar rescue plan, but in the event of a free-fall, they all agreed to aggressively buy the greenback and sell yen and euros, according to Nikkei.
Just remember. No one is bigger than the market.

The thrift industry posted a $5.4 billion loss for the second quarter of 2008, as institutions set aside record reserves for loan losses during the continued housing market downturn, the Office of Thrift Supervision (OTS) reported today.

During the second quarter, thrifts set aside $14.0 billion in loan loss provisions, the highest total on record. During the last four quarters, the industry has added more than $30 billion to loan loss reserves, driving down earnings but providing a cushion against the impact of rising loan delinquencies and other problem assets. The net loss during the second quarter was the second largest on record after the $8.8 billion loss in the fourth quarter of 2007. In the first quarter of 2008, the industry lost $627 million...Troubled assets (noncurrent loans and repossessed assets) rose to 2.68 percent of assets, up from 2.06 percent in the previous quarter and 0.95 percent a year ago.

First-time applications for state unemployment benefits fell 10,000 in the latest weekly data to 425,000, the Labor Department reported Thursday. The four-week average of new claims fell 6,000 to 440,250. Continuing claims rose 64,000 to 3.42 million -- the highest level since November 2003. The four-week average of continuing claims rose 36,250 to 3.37 million - also reaching the highest level since November 2003.

Natural-gas inventories rose by 102 billion cubic feet for the week ended August 22, the Energy Department said Thursday. Analysts at Global Insight expected a climb of 86 billion. Total stocks now stand at 2.757 trillion cubic feet, down 200 billion cubic feet from the year-ago level but 71 billion cubic feet above the five-year average, the government data said. October natural gas was down 33.1 cents, or 3.9%, at $8.277 per million British thermal units on Globex.

Dell Inc. reported a fiscal second-quarter profit of $616 million, or 31 cents a share, on $16.43 billion in revenue. Analysts surveyed by FactSet Research had forecast Dell to earn 36 cents a share on sales of $15.97 billion. During the same period a year ago, Dell earned 33 cents a share on revenue of $14.77 billion.

October crude closed at $115.59 per barrel in New York Thursday, down $2.56, or 2.2%. Gold for December delivery closed up $3.20, or 0.4%, at $837.20 an ounce on the New York Mercantile Exchange.

Lehman Brothers plans to lay off as many as 1,500 employees, or about 6% of its work force, before it announces its third-quarter results on Sept. 15, The New York Times reported Thursday on its Web site, citing a person familiar with the plans.

The central bank of the Philippines raised its key interest rate by 25 basis points to 6% on Thursday as expected.

Japan's inflation rate exceeded 2 percent for the first time in a decade as companies passed higher costs onto households, deterring spending and weakening the economy.

Core prices, which exclude fresh food, climbed 2.4 percent in July from a year earlier after rising 1.9 percent in June, the statistics bureau said today in Tokyo. The median estimate of 38 economists surveyed by Bloomberg News was for 2.3 percent.

According to AMG Data Services, Including ETF activity, Equity funds report net cash outflows totaling -$3.690 billion in the week ended 8/27/08 with Domestic funds reporting net outflows of -$2.141 billion and Non-domestic funds reporting net outflows of -$1.549 billion;

Excluding ETF activity, equity funds report net cash outflows totaling -$1.186 billion with Domestic funds reporting net outflows of -$245 million and Non-domestic funds reporting net outflows totaling -$941 million.

Euro-zone consumer inflation fell back to an annual pace of 3.8% in August from 4% in July.

Microsoft Corp. has agreed to acquire Web-based survey company Greenfield Online, Inc. for about $486 million in cash, or $17.50 a share.

Japan's Industrial output upended expectations to rise 0.9% in July, marking its first gain in two months, according to government data released Friday.

Wednesday, August 27, 2008

Home Sales

8/27/08 Home Sales

U.S. June Case-Shiller home prices down 15.9% in past year.

U.S. home sales rose 2.4% in July, but large downward revisions to prior months showed a weaker home sales market than previously estimated. New-home sales rose to a seasonally adjusted annual rate of 503,000 in July, the Commerce Department estimated. This was well below the 521,000 pace expected by economists surveyed by MarketWatch. The department revised down June sales to a 503,000 level compared with the previous estimate of 530,000. This is the lowest level of the economic cycle. The last time sales were lower was in September 1991. New-home sales are down 35.3% compared with a year ago. The months' supply of homes on the market fell to 10.1 months in July from 10.7 months in June. Median sales prices fell 6.3% in the past year to $230,700.

U.S. consumer confidence rose in August - the second consecutive month of gains - but the level remained relatively low and job concerns persisted, the Conference Board reported Tuesday. The August consumer confidence index rose to 56.9 from a July reading of 51.9. The percentage of consumers saying jobs are "hard to get" rose to 32% in August from 30.2% in July. Meanwhile, the percentage of consumers expecting business conditions to worsen over the next six months fell to 25.8% from 32.4%.

General Motors Corp has received interest from two separate investors from the Gulf Arab region to buy its Hummer brand, the company's Middle East chief told Reuters on Tuesday.

North Korea said on Tuesday it will stop disabling its nuclear facilities and consider restoring the Yongbyon reactor that can make material for atomic bombs, accusing the United States of violating a disarmament deal.

"We have decided to immediately suspend disabling our nuclear facilities," the North's KCNA news agency quoted a foreign ministry official as saying.

"This measure has been effective on August 14 and related parties have been notified of it," the official said.

ONGC Videsh Ltd., a unit of India's biggest exploration company, agreed to buy Imperial Energy Plc for 1.4 billion pounds ($2.58 billion) to tap Siberian deposits and make up for dwindling output at home.

ONGC Videsh's cash offer of 1,250 pence a share is worth 61.9 percent more than Imperial Energy's share price on July 11, the company said in a statement distributed by Regulatory News Service.

Rob Hanna: "Extremely negative breadth and extremely low volume is an unusual combination. On Monday we saw this combination...t appears to suggest we should see a respite and a bounce sometime soon."

Reuters: "The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 125.9 in the week to Aug. 15 from 126.4 in the previous period. Its annualized growth fell to negative 11.4 percent from minus 10.7 percent, revised up from minus 10.8 percent. It hit its lowest mark since the week to June 13, 1980, when it was negative 11.8 percent.The index declined to its lowest since July 2003 due to lower stock prices and housing activity, and the fall was partly offset by lower interest rates and jobless claims, said in an instant message interview Lakshman Achuthan, managing director at ECRI."Last year WLI growth fell to its worst reading since the 2001 recession, and today it has plunged to a 28-year low, its worst reading since the 1980 recession," he wrote. "This makes it crystal clear that there is no business cycle upturn in sight."

Hyundai Heavy Industries Co., the world's largest shipbuilder, plans to bid for a 3.35 trillion won ($3.1 billion) controlling stake in Daewoo Shipbuilding & Marine Engineering Co. in what may be the industry's biggest acquisition.

A preliminary offer will be submitted Wednesday, Ulsan, South Korea-based Hyundai Heavy said today in an e-mailed statement, without providing more details. The value of the stake is based on today's closing price of 34,700 won a share in Seoul.

Hyundai Heavy will compete with Posco, GS Group and Hanwha Group for the 50.4 percent holding being sold by state-run Korea Development Bank and Korea Asset Management Corp. The successful bidder may end up paying more than double the value of the stake following Hyundai Heavy's offer, analyst Song Sang Hoon said.

Rigzone reported Iran's oil minister said on Monday he expects OPEC to work on preventing the falling trend in crude prices and also to study oversupply in the market when it meets in September, oil ministry news website SHANA said.

According to Bloomberg, the dollar's rally over the past month is ``close to unprecedented'' in the 35 years since the currency was decoupled from gold and will have room to rise on bets the European Central Bank will begin cutting borrowing costs, according to Lehman Brothers Holdings Inc.

The CHART OF THE DAY shows the four-week rate of change in the Federal Reserve's trade-weighted U.S. dollar index since 1973 and the 6.3 percent gain through Aug. 15, the second-largest increase.

``The ECB is going to start cutting early next year -- in January,'' said Steven Englander, a currency strategist at Lehman in New York. ``Right now, the first ECB cut isn't priced in to the market until July. We are significantly more aggressive in terms of thinking how the ECB is going to respond to weaker growth and lower inflation.''
The dollar will rise to $1.43 per euro by year-end and strengthen to $1.40 by the end of the first quarter, Englander said.

The New York Times Co.said Tuesday that its advertising revenue for July fell 16.2%. Total revenue from continuing operations decreased 10.1% compared to the year-earlier period, while circulation revenue slipped 0.5%. The newspaper publisher said ad revenue from About Group grew 14.6% during the month.

Rob Kirby: "Last week, widely regarded silver analyst Ted Butler, reported on recent developments during the July 1 – August 5, 2008 time period in the precious metals complex [specifically, open-interest data in COMEX futures].

Butler’s work shows, as of July 1, 2008, two U.S. banks were short 6,199 contracts of COMEX silver (30,995,000 ounces). As of August 5, 2008, two U.S. banks were short 33,805 contracts of COMEX silver (169,025,000 ounces), an increase of more than five-fold. This is the largest such position by U.S. banks I can find in the data, ever. Between July 14 and August 15th, the price of COMEX silver declined from a peak high of $19.55 (basis September) to a low of $12.22 for a decline of 38%.
For gold, 3 U.S. banks held a short position of 7,787 contracts (778,700 ounces) in July, and 3 U.S. banks held a short position of 86,398 contracts (8,639,800 ounces) in August, an eleven-fold increase and coinciding with a gold price decline of more than $150 per ounce. As was the case with silver, this is the largest short position ever by US banks in the data listed on the CFTC’s site. This position was put on and resulted in massive market price collapse...The current track is NOT SUSTAINABLE. This is evidenced by the recent “decoupling” or widening of spreads between the futures [COMEX] price of precious metals and the prices being paid to acquire physical metal. We see the same type of divergence in the interest rate complex where LIBOR is set [effectively by 3 month Eurodollar Interest Rate Contracts] at contrived rates where banks are UNWILLING to lend money.

Under our current monetary regime the distortions outlined above will continue to intensify.

This is why I believe it is so important that people consider having an appropriate amount of physical precious metal, which is getting harder to purchase despite recent price bashings."

Jim Jubak: "In the long term, though, almost nothing has changed. Growth in the demand for oil still threatens to outstrip growth in supply. In June, oil consumption in China topped 8 million barrels a day for the first time, and the International Energy Agency projects demand from China will grow 5.6% in 2008 and 5.7% in 2009. Demand will more than double, to 16.5 million barrels a day, by 2030, the agency says.

India is seeing an even bigger jump in its demand, which is projected to grow 8% to 10% in 2008. And because India imports 76% of its crude, at these rates of demand growth, India is projected to become the biggest oil importer in the world by 2025, according to the energy agency."

Fewer Americans went without health insurance in 2007 than in the prior year, while there was a gain in median household income adjusted for inflation, the Census Bureau reported Tuesday. The number of people without health insurance fell to 45.7 million in 2007 from 47 million in 2006, the government said in its annual snapshot. Median household income adjusted for inflation rose 1.3% to $50,233. The poverty rate hit 12.5% in 2007, compared with 12.3% in the prior year - not statistically different, according to Census.

The Federal Deposit Insurance Corp. is considering a plan to borrow funds from the U.S. Treasury Department, as its seeks to shore up its finances amid an expected wave of bank failures, according to a published report Tuesday.

Standard & Poor's Ratings Services on Tuesday lowered Freddie Mac's subordinated debt rating to BBB+, its risk-to-the-government stand-alone issuer credit rating to A- from A, and its preferred stock rating to BBB- from A-.

Banks had the second worst earnings in the since 1991, the Federal Deposit Insurance Corporation said Tuesday. Earnings for the quarter totaled just $5.0 billion compared to $36.8 billion a year ago, a decline of 86.5%, the FDIC said in its second-quarter banking profile. Higher loss provisions were the main reason for the drop.

October crude closed at $116.27 a barrel in New York Tuesday, up $1.16, or 1%, for the session. Gold for December delivery rose $2.4, or 0.3%, to $828.10 an ounce on the New York Mercantile Exchange.

Tuesday, August 26, 2008


8/26/08 Housing

According to the FT, South Korea’s top financial regulator on Monday warned that Korea Development Bank should take a “cautious” approach to buying an overseas bank, following the state-run group’s expression of interest in Lehman Brothers .

Jun Kwang-woo, chairman of the Financial Services Commission, said he was “aware” that KDB was considering the possibility of buying a global investment bank, but he stressed that such a deal should be led by private lenders.

June Euro-zone factory orders fell at the fastest rate since December 2001, hammered by weakened domestic demand. New industrial orders were down 7.4% vs. an expected 6.7% drop.

James Conrad: "According to the Mint website, in the first two weeks of August, before the suspension of sales, the Mint sold 65,000 ounces worth of gold eagle bullion coins. These were sold at per ounce rates far exceeding the COMEX fantasy price...According to the U.S. Mint, in 2007, 198,500 ounces of gold were sold in the form of gold eagles. That amounts to about 6.2 tons of gold for the entire year. In contrast, in the first two weeks of August, the Mint had already sold 65,000 ounces worth of gold eagles. That is an annual rate of 1,690,000 ounces of gold. It works out to about 52.6 metric tons. In other words, demand for gold, in the form of eagle coins, increased by a factor of about 8.5. During all of 2007, total demand in the US based physical gold investment market was only about 16.6 tons, according to the World Gold Council. This year, if the pace set in the first two weeks of August continues, and the ratio of American Eagle sales to total sales stays about the same, real market investment gold sales, in America , will total 141.1 tons. But, that assumes the increases will stop. There is no likelihood that this will happen."

If government predictions come true, homeowners will spend $22 billion more to heat their homes this winter than they did last year, estimates Mark Zandi, chief economist at Moody's

That could cut gross domestic product by 0.3 percentage points at the end of 2008 and into 2009 at a time when "the economy will be struggling to remain in positive territory," Zandi says.

Resales of U.S. single-family homes and condos rose 3.1% in July to a seasonally adjusted annual rate of 5.0 million, the National Association of Realtors reported Monday. Resales have sunk 13.2% in the past year. The gain was stronger than expected. Economists surveyed by MarketWatch expected sales to rise to 4.91 million. Despite the increase in sales, the inventory of unsold homes on the market rose 3.9% to 4.67 million, an 11.2 month supply at the current sales pace. The median sales prices fell 7.1% in the past year to $212,400.

American International Group Inc., the largest U.S. insurer, fell 5.1 percent in New York trading after Credit Suisse Group said the company may post a third- quarter loss of $2.41 billion on mortgage-related writedowns.

AIG's estimate was trimmed to an 86 cents-a-share loss from a gain of 13 cents after ``recent deterioration'' in debt holdings that may cause credit-default swap losses, analyst Thomas Gallagher wrote today in a research note. The average estimate of 15 analysts surveyed by Bloomberg is for profit of 65 cents a share.

Standard & Poor's said Monday early results show that second-quarter earnings for companies in the S&P 500 index fell 29% from a year ago, the fourth consecutive declining quarter for the index. The figures are based on 96% of the data in, S&P said. "The shift in earnings continues with Energy contributing 25.1% of the S&P 500's operating earnings during the second quarter, up from 16.4% a year ago," said Howard Silverblatt, S&P senior index analyst, in a statement. "Conversely, Financials have now posted their third consecutive quarter of negative earnings after accounting for 28.4% of operating earnings this time last year."

The Chicago Fed said Monday that its National Activity Index fell slightly in July to 0.67 from 0.59 in June. This is the eighth straight month the index has been near the 0.7 threshold that indicates "an increasing likelihood that a recession has begun," the bank said in a statement. The index is a weighted average of 85 indicators of national economic activity and is designed to highlight turning points. The decline in July was driven primarily by labor market indicators, the Chicago Fed said. The three month average for the index was -0.80. "The index signals that the economy is in recession and has been since the end of last year," wrote the economist team at Dresdner Kleinwort in a note to clients.

Israel's central bank decided to raise its interest rate by 25 basis points to 4.25% on Monday to curb inflationary pressures. "Inflation in the last twelve months stands at 4.8%, and since the beginning of 2008 has been above the upper limit of the price stability target range of 1% to 3%," the Bank of Israel said in its monetary policy statement.

October crude closed at $115.11 a barrel, up 52 cents, in New York. Sept. natural gas cut its losses to close at $7.825 per million British thermal units, down 1.8 cents. Gold futures for December delivery fell $7.80, or 0.9%, to close at $825.70 an ounce on the New York Mercantile Exchange.

As Democrats put the final touches on opening night, Obama's campaign released the ad featuring images of Sen. McCain hugging Mr. Bush and the two smiling in spite of national economic woes. It features a parody of the Sam Cooke classic "Wonderful World," which starts off with the line "Don't know much about history." For the ad it's "I'm not up on the economy," playing on Sen. McCain's earlier admission that economics wasn't his best subject.

Ending with a photo of Mr. Bush patting Sen. McCain's back, the spot asks, "Do we really want four more years of the same old tune?"

the Dow Jones Industrial Average fell 241.81 points, or 2.1%, to end at 11,386.25. The S&P 500 declined 25.36 points, or 2%, to rest at 1,266.84, while the Nasdaq Composite dropped 49.12 points, or 2%, to finish at 2,365.59.

Kohlberg Kravis Roberts is showing a high level of interest in buying the Neuberger Berman asset management unit of Lehman Brothers, while Blackstone Group is showing almost no interest, CNBC reported, citing people close to the negotations.

The Ifo Institute's closely-watched gauge of German business sentiment tumbled more than expected to 94.8 in August from a reading of 97.5 in July, news reports said. Consensus expectations were for a fall to 97.1, according to a Dow Jones Newswires survey of analysts.

Monday, August 25, 2008

Credit Spreads

8/25/08 Credit Spreads

According to the NY Times, in the three years since housing peaked in Merced, California, the median sales price has fallen by 50 percent. There are thousands of foreclosures on the market. The asking prices on those properties are so low that competitive bidding, a hallmark of the boom, is back.

But almost no homeowner can afford to sell. If you cannot go as low as “the foreclosure price” — the cost of a comparable bank-owned house — real estate agents say you might as well not even bother listing your home.

And so most people do not: three out of four existing-home sales in Merced County are now foreclosures, the highest percentage in the state, according to DataQuick Information Systems. The only group for whom selling makes sense, real estate agents here say, are the elderly entering assisted-living facilities, who often have decades of appreciation built into their home’s value.

As Merced goes, so might go much of the nation. With as many as 2.5 million homes in the United States entering foreclosure this year and, at best, sales of only five million existing houses, the foreclosure price is becoming the rule in many areas. In Los Angeles County, whose 10 million people make it the most populous county in the United States, a third of the sales are foreclosures.

John Maynard Keyes: “There is nothing so disastrous as a rational investment policy in an irrational world."

The Oil Drum: "The poll of 1,089 likely voters found that just under 13 percent thought gasoline prices would rise a lot between now and the end of the year. About one quarter thought prices would rise a little, while one in three thought they would drop a little and 18 percent said they would stay about the same.

...Pollster John Zogby said the swift rise in fuel prices earlier this year had fundamentally changed U.S. consumer behavior, and a pullback below $115 per barrel was not sufficient to alter that.

"The lines are not forming to buy Hummers," he said, referring to the big luxury trucks that are notorious for their poor fuel mileage."

Christian Menegatti has an excellent article on Nouriel Roubini's RGE Monitor and it is entitled Life Without Home Equity (Withdrawal)--Down to $24B in QTR 1. Here are a few excerpts: "We found that a 10% fall in home prices could have an impact that goes from 0.99 to 1.97% of GDP. Cleary, the outcome would get much worse in the case of a sharp 20% drop in home prices. In this case, the heavy toll on GDP coming from the negative wealth effect would range from 1.6 to 3.3%.

Now, prices have fallen about 20% since July 2006 when they peaked and looking at indicators like price/income ratio or price/rent ratio a further 15% fall in home prices should not come as a surprise; especially since inventories are still at a record high and foreclosures are mounting adding to the glut of supply that puts downward pressure on prices.

But the wealth effect, though present and significant might be only part of the story that links the housing boom to personal consumption (which went from an average of 67% of GDP in the 1990s to 71% of GDP now – and about one fourth of world GDP).

In the 1990s HEW averaged about 14bn. It started to increase sharply at the end of the 1990s and peaked in Q3 2005 when it reached an annualized $714.5bn per year. It has been declining ever since, falling all the way to $157bn in Q4 2006 which was the last data point we had available. Again, to analyze the possible effect of a fall in HEW we depicted different scenarios.

Estimates of marginal propensity to consume out of an additional dollar in HEW vary between 10 and 50%

HEW drops to $140b


HEW drops to $60b


HEW drops to $0b


Now, according to our estimates HEW is down to $24bn (annualized) in Q1 2008, the lowest reading since the 1990s. And most likely it will not rebound very soon as home prices keep falling pressured by mounting inventories.

And whether HEW is the driver or not, the slump in demand is evident not only from the slowdown of the growth rate of personal consumption (from 3.9% in Q1 2007 to 0.9% in Q1 2007 and then 1.5% in Q2 2008) but also from the fact that the (negative) growth rate of imports was the largest contributor to GDP in Q2 2008 (import fell 6.6% and their contribution to GDP was 1.3% - over two-thirds of the GDP growth in the Q2 was due to the decline in imports)."

Bloomberg reported the Federal Deposit Insurance Corp.'s plan to have IndyMac Federal Bank FSB rework mortgages for troubled homeowners is ``dangerous'' for bondholders, according to Barclays Capital.

Investors in mortgage-backed securities may be worse off if enough loans default after they're modified because recoveries may be lower as home prices decline, analyst Sharon Greenberg wrote yesterday in a report. Loan changes also cost bondholders by reducing borrower payments, their collateral or both.

John Maynard Keyes: “Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”

Canada's Precision Drilling Trust said Monday it plans to buy Amex-listed Grey Wolf Inc. for an estimated $1.12 billion cash and 42 million shares of Precision. Investors in the purchased firm will be allowed to choose either $5 cash or 0.1883 Precision shares for each share of Grey Wolf they own, according to a joint statement on the deal. The stock side of the price marks a 4.5% increase over Precision's previous offer for the oil services firm. Precision said the deal will be "highly accretive" to its cash flow, and that Grey Wolf shareholders will receive their proxy statements by the end of the third quarter.

Iran has chosen the site for and started designing a new, 360-megawatt nuclear power plant in the country, a senior atomic-energy official said Sunday, according to reports. "We are involved in the design phase of this power station," said Mohammad Saeedi, deputy head of Iran's Atomic Energy Organization, according to a Reuters report. "Gradually, the complementary design phase and its building will begin," Saeedi said. Iran's first nuclear power plant, with a capacity of 1,000 MW, is currently being built by Russia in the port city of Bushehr. The country has said it wants to build nuclear power plants with a total capacity of 20,000 MW by 2020, the report added.

According to Bloomberg, banks are charging each other a premium of 77 basis points over what traders predict the Federal Reserve's daily effective federal funds rate will average over the next three months to lend cash. The spread is up from about 24 basis points in January, and may widen to 85 basis points, or 0.85 percentage point, by mid-December, prices in the forwards market show.

Americans who lack health insurance will spend about $30 billion out of pocket on medical care this year, but others -- mainly the government -- will end up covering another $56 billion in costs, according to a new study.

The tab to cover all the uninsured would be $208.6 billion -- $122.6 billion more than this year's projected total -- mainly because people with insurance tend to use more health-care services, the study found.

The report from researchers at George Mason University in Fairfax, Va., and the Urban Institute think tank in Washington, D.C., is to be published Monday in the journal Health Affairs online.

John Hussman: "I'll emphasize again that at the point we do observe sufficient evidence for investors to concede recession, the potential downside could be abrupt, leaving little opportunity to make defensive changes after the fact. As I've often said, the best time to panic is before everybody else does.

Among the factors that concern me here is the continued widening of credit spreads, which increasingly suggests that default risk may be starting to spread beyond the financial sector into the broader economy. Meanwhile, there is a relative complacency in the stock market because investors are still convinced that the extreme “tail risk” in the markets has been removed by the Federal Reserve and the U.S. Treasury."

Sunday, August 24, 2008

Money Flows

8/24/08 Money Flows

Accroding to Bloomberg, General Motors Corp., Ford Motor Co., Chrysler LLC and U.S. auto-parts makers are seeking $50 billion in government-backed loans, double their initial request, to develop and build more fuel-efficient vehicles.

The U.S. automakers and the suppliers want Congress to appropriate $3.75 billion needed to back $25 billion in U.S. loans approved in last year's energy bill and add $25 billion in new loans over subsequent years, according to people familiar with the strategy. The industry is also seeking fewer restrictions on how the funding is used, the people said today.

Boeing, aiming to avoid a possible strike when machinists vote on the outcome of negotiations Sept. 3, offered yesterday to raise wages 2.5 percent the first year and 2 percent the following two years. The union had said it was seeking a gain of 9 percent to 13 percent, spread out over the contract, for the machinists, who make an average of about $56,000 a year.

The offer is ``well below expectations and very inadequate in all areas,'' said Connie Kelliher, a spokeswoman in Seattle for the International Association of Machinists and Aerospace Workers. ``The wage package is below industry standards, and it's doubling or tripling health-care costs in some cases.''

The union says workers haven't had raises, except for cost- of-living increases, since 2004 and deserve to share in Boeing's $10.7 billion in profit since then. Boeing has said it needs to make sure the contract is sustainable. The Chicago-based planemaker faces the possibility of deferred or canceled orders as airlines cope with record oil prices.

Jim Rogers, who in April 2006 correctly forecast the oil price would reach $100 a barrel and gold $1,000 an ounce, said he expects oil to continue to increase over the next decade.

``Over the course of time, it's a bull market,'' the chairman of Rogers Holdings said today after an investor conference in Kuala Lumpur. While the oil price could fall to $75 or rise to $175, the market will continue to increase over the next 10 years, he said.

Peter Schiff: "The fact is that the outlook for the dollar has never been bleaker and the prospects for gold and other commodities have never been brighter. The rationale for a new dollar bull market, or bear markets in commodities, is just as flawed as those used to justify investments in internet stocks and subprime mortgages. Interestingly enough, it's mostly the same suspects advancing the arguments."

Brett Steenbarger: "Note how money flows have been quite weak since the market's pullback from its highs earlier this month. Observe also how flows have remained mostly negative throughout 2008; forays into positive territory have been brief. There is little indication from money flow that investors are aggressively putting fresh funds to work in the stock market. Much of what we're seeing in the market's choppiness appears to be sector rotation and a covering of existing positions."

A recent survey conducted by PEW Internet & American Life Project (PIP) reveals that "almost half of all Internet users now use search engines on a typical day," an increase of 69% from 2002 when Pew Internet & American Life Project first tracked search activity. The PIP survey also finds that those who use broadband connections at home are "significantly more likely" to use search than those with a dialup connection.

Mike Wendland: "This is huge: A new speech-to-text technology from Google in which you type in a word or a phrase and it searches through YouTube videos to find all the instances where someone said it."

Australia has approved Chinese aluminum giant Chinalco's recent purchase of a minority stake in Anglo-Australian miner Rio Tinto , but warned the Chinese firm against buying more shares without prior approval. State-owned Aluminum Corp of China (Chinalco), backed by U.S. peer Alcoa Inc , began amassing shares this year with the aim of taking up to 14.9 percent of Rio, the target of a $127 billion takeover bid from rival BHP Billiton.

Mike Burk: "The sell off early last week relieved the overbought condition. Even if we are headed for a cycle top, it should be a few weeks off.
I expect the major indices to be higher on Friday August 29 than they were on Friday August 22."