Today's Tidbits

Annual Federal Budget Deficit Shrinks in 2007
From Deutsche Bank: “Over the last year, federal spending is down 0.7%, but some of this reflects a large 7.4% decline in defense spending in Q1 that is unlikely to be repeated going forward. Still, we do not see federal spending growing much more than 2% in
inflation-adjusted terms, because we do not anticipate any major new legislative initiatives that would sharply lift appropriations.”
From JP Morgan: “The forecast looks for the federal budget deficit to narrow by nearly $100 billion this year to $150 billion, or 1.1% of GDP…Through the first nine months of the fiscal year, the federal budget shows an improvement of $85.5 billion. The trend in growth of receipts has slowed over the past few months, partly reflecting the sharp slowdown in corporate income taxes.”
From Bloomberg: “Just as international investors are reducing purchases of Treasuries, the U.S. government will be selling fewer of them thanks to a surge in tax receipts. The projected 7 percent increase in tax revenue will help the U.S. budget deficit shrink by 17 percent to about $205 billion for the fiscal year ending Sept. 30, the Bush administration said last week. As a result, the Treasury Department sold less securities from January through June than matured, the first time that has happened since 2000. A drop in supply is good news for a market that in the second quarter lost 0.4 percent when including reinvested interest, the biggest decline in more than a year, as an accelerating economy drew investors away from fixed-income assets, according to New York-based Merrill Lynch & Co.'s U.S. Treasury Master index. In fact, the fiscal outlook is so good that investors and strategists are beginning to handicap which maturities the government may stop selling or even buy back for the first time in five years.”

Surprising Strength in Construction Employment Has Many Questioning Data
From The New York Post: “The numbers are too amazing to believe. In fact, the figures are so unbelievable - as in, "not to be believed" - that even an economist working at the Labor Department hedged on their veracity by admitting that there may be a "lag time" before job losses start to appear. You decide for yourself if the government is snowing us. According to the Labor Department, there were 185,000 more construction jobs in June than there were in May before the government makes seasonal adjustments to the statistics. Even after adjusting for the season, the number of construction jobs increased by a still inconceivable 12,000. Harder to believe is what the government says happened in the residential construction market. Before the zany seasonal adjustment the government says 126,000 new residential construction jobs were created in June. After being seasonally adjusted, there were still 2,000 extra people putting up houses around the country - at least the way Washington counts them.”
From Lehman: “Macroeconomic Advisers finds that payrolls as of June this year were between 68,000 and 139,000 lower than what the BLS says [based on ADP data of 17% of employers]…if the company's estimates are correct and the BLS is wrong, the likeliest reason is that the BLS's own birth/death model may be overstating jobs created at small firms (a major share of employment in construction). If so, the eventual release of more comprehensive, quarterly data based on state unemployment insurance records could eventually lead to a downward revision to the BLS's monthly estimates…Automatic Data Processing doesn't supply data for the BLS's monthly payroll count, but does for the quarterly comprehensive count, because the firm processes unemployment insurance premium payments for its payroll clients. But that still leaves a mystery. Based on Macroeconomic Advisers's own econometric analysis, construction payrolls ought to be about 500,000 lower than the BLS now reports them to be; the new analysis explains at most a quarter of that gap. A recent report by Deutsche Bank argues that the unemployment stats have failed to capture layoffs of about 500,000 illegal Hispanic workers…On the other hand, Ken Simonson, chief economist of the Associated General Contractors of America, argues that the gap can be explained entirely by small firms moving from residential to commercial work -- an explanation the Deutsche Bank researchers rejected.”

Impact of Weaker Dollar on US Companies and Foreign Countries
From JP Morgan: “The weaker currency has an immediate effect in lifting the dollar value of foreign earnings [for US companies], a plus for stock prices and for corporate financial health. The lower dollar will also support growth in trade-sensitive industries over time. The amount of help that the economy will get from a weaker dollar depends on both the rate of depreciation and the level of the dollar. Significant stimulus is likely on both counts. The real trade-weighted dollar has dropped a hefty 5% since the beginning of March, and the trade-weighted value of the dollar is now down to its lowest level in decades…
…fx reserves in the EM [emerging market countries] group rose $586 billion in 1H07 to $3.7 trillion by the end of June, a gain almost as much as in all of 2006. These inflows have only partially been sterilized, most recently demonstrated by reports of continued double-digit money supply growth in China and Korea—a development that is common throughout the EM group. Although inflation rates remain quite low in most EM countries, the rapid growth of credit is raising concerns about incipient wage and price pressures alongside longer-standing worries about overheated asset markets. In response, some countries have tried easing restrictions on capital outflows from residents to stimulate foreign currency demand. For example, some Latin American countries (e.g.,
Chile, Colombia, and Peru) have introduced regulatory changes allowing pension funds to invest a higher proportion of their portfolios overseas. These market-based measures
have tended to fail, however, because of the expectation of higher returns in local currency investments. This has led a handful of countries (most recently Columbia) to introduce capital controls in an effort to cap net inflows. But the potential cost is that choosing this option sends a negative signal to the private sector and distorts capital mobility.”

Has Servicing Private Equity Debt Reduced Capex Expenditures and Productivity?
From BMO: “The sky became the limit for the amount of money investors were willing
to give PE [private equity] investors in subordinated paper and collateralized bank loans, so there was no apparent limit on the market capitalization of mid-cap companies waiting to be removed from the nuisances of Sarbanes-Oxley, and the constraints on management vision from quarterly earnings reporting. The most obvious effect of the torrent of privatizations was on the S&P 400…. Collectively, the mid-caps who remain public (apart from the commodity producers) probably have lesser investment merit than those acquired by the PE companies, who can be presumed to be great stock selectors. Meanwhile, another trend was emerging. US business capital spending was not sharing in the otherwise strong economic recovery. As each new year dawned, forecasters assured us that “the long overdue recovery in capex is coming this year.”… The acquired companies once had modest debt loads which were incurred primarily for capital spending. Now they have debt loads many times their cash flow financing payouts to the owners—with nothing to show for those payouts but the debts. Instead of managing for growth, the companies have to be managed for servicing the debts. The capex budgets are the most obvious candidate for cuts… Remember that the best of the small and mid-size non-financial American companies have been responsible for a disproportionate share of American economic growth. That means they have probably been responsible for a disproportionate share of American productivity gains. Result: It is hard to imagine that American productivity growth in the future will be as strong as in the relatively recent past.”

Higher Food Prices Cutting Into Aid for the Poor
From The Financial Times: “Rising prices for food have led the United Nations…to warn that it can no longer afford to feed the 90m people it has helped for each of the past five years…The World Food Programme…said its purchasing costs had risen ‘almost 50 per cent in the last five years’. It said the price it paid for maize had risen up to 120 per cent in the past six months…Global what stocks have fallen to the lowest level in 25 years, according to the US Department of Agriculture…’We are no longer in a surplus world.’”
From BMO: “Consumers across most of the economic world will be spending significantly more on food this year and next…The world’s carryover of grains and oilseeds at the end of the crop year in September will probably be the lowest (in relation to consumption) on record…The US…average corn production per acre has risen by two bushels a year over the past 26 years…the major contributor has been genetically modified seeds…Many climatologists also attribute the sustained gains to rises in CO2, which, of course contributes to faster growth in plants and thereby to the lowering of food costs across the globe…Last week’s FAO and OECD report on the food outlook predicted a decade of higher food prices. The CEO of Nestle predicts ‘significant and long-lasting food-price inflation.”

MISC
From Dow Jones: “Even with the absence of negative subprime-related headlines that have roiled the markets in the past few weeks, the index based on subprime mortgages is hitting new lows. The riskiest tranche of the current index, the BBB- of the ABX.HE 07-1, touched 45 cents on the dollar in morning trade, according to … a trader at UBS. “The stuff is a lot softer,” … “Sellers want to offset risk and sell the stuff.””

From JP Morgan: “Real consumer spending downshifted from two consecutive quarters of 4.2% growth to an estimated 1.4% growth pace in 2Q07…The most important influence on spending is real labor income. The payroll proxy of labor income (hours worked times hourly earnings) has been getting stronger, accelerating to a 6.1% growth pace in 2Q.”

From Mauldin: “The Chinese yuan is up against the dollar from 8.28 to 7.57 to the dollar over the last two years. That is an increase of almost 9%. The movement in the last month has been particularly fast.”

From The Financial Times: “In the last few quarters, wage rises have started to outstrip rises in productivity for the first time in years [in China]”
From AFP: “China's economy grew so rapidly in the first half of 2007 that it is likely to overtake Germany as the world's third-largest by the end of this year, analysts say.”
From RBSGC: “MBS holdings were down $9 bn since the end of June. Deposits…were up $48 bn since June.Commercial and industrial loans… increased $9 bn since June. Whole loan holdings decreased by $11 bn over the week, and were up by $9 bn since June.”
From The New York Times: “…last year it [solar power] provided less than 0.01 percent of the country’s electricity supply…Even a quarter century from now, says the Energy Department official in charge of renewable energy, solar power might account for, at best, 2 or 3 percent of the grid electricity in the United States…there are few major programs looking for ways to drastically reduce the cost of converting sunlight to energy and — of equal if not more importance — of efficiently storing it for when the sun is not shining…Scientists are hoping to expand the range of sunlight’s wavelengths that can be absorbed, and to cut the amount of energy the cells lose to heat.”
From Deutsche Bank: “The economy has been growing below trend for the last four quarters, and while growth is expected to pick up in the second half of the year, the trajectory is likely to be modest because of a projected slowdown in consumer spending. This should limit the economy's ability to get back to trend growth on a sustained basis. However, the economy is unlikely to be weak enough to engender a meaningful rise in the unemployment rate which would be necessary to bring the Fed into play.”

From Mauldin: “Wal-Mart sales were up a higher than expected 2.4%. They noted that home goods and apparel sales were weak but that grocery sales surged. No kidding. With food inflation at almost 7%, grocery sales are clearly going to increase if we just eat the same food…”

End-of-Day Market Update
Treasuries rallied causing yields to fall 5bp across the curve on flight-to-quality buying as ABX fell further. 10y Treasury yield is closing at 5.04%. The 2/10 curve is at 17.
Equities are mixed with the Down closing up 44 to another new record nominal high, and the S&P 500 closing down 3. NASDAQ is also closing down 10 points. The dollar continues to slowly weaken, with the dollar index falling .05 to 80.52, but slid sharply versus the Canadian Dollar to approach a 30 year high. Oil futures rose 23 cents, but slid in after hours trading. Oil futures are still $4 below the $78 high reached last summer.