Consensus Prior
Monday, 5/7
March Consumer Credit $4B $3B
Consumer credit growth has been moderate this year
Average growth over the past five years has been $8.7B per month
Most new growth in credit cards, as auto sales remain weak
Tuesday, 5/8
March Wholesale Inventories +0.4% +0.5%
Most industries still have excess inventories, but the inventory-to-sales ratios have stopped expanding
YoY inventory growth was 8.3% last month
Wednesday, 5/9
FOMC Meeting
Likely to maintain the “vigilant” tone and leave rates unchanged at 5.25%
Growth below trend, but inflation remains above target
Thursday, 5/10
March Trade Balance -$60B -58.4B
Rising oil prices will cause the trade deficit to begin widening again
Import and export volumes are both expected to rise
Nominal consumer imports have risen +15% YoY
April Import Price Index MoM +1.1% +1.7%
Last month’s increase has only been exceeded four times in last 5 years
The dollar index has fallen twice as much as import prices have risen over the past year (-5.8% vs +2.8%)
Core consumer prices over the last year have gone from -0.3% YoY in March 2006 to +1.8% YoY last month, and is expected to rise to +2.1% YoY in April
April Monthly Budget Statement $134.5B $118.8B
Higher non-withheld tax receipts more than offset higher outlays to create a large monthly surplus
Year-to-date, the U.S. government still in deficit
Chicago Fed President Moskow and Fed Governor Kroszner speak at Chicago Fed Conference entitled “Competitive Forces Shaping the Payments Environment: What’s Next?”
Friday, 5/11
April Producer Price Index MoM +0.6% +1%
YoY +3.1% +3.2%
Core PPI (ex-food and energy) MoM +.2% unch
YoY +1.8% +1.7%
PPI measures only domestically produced goods prices, not services prices
Higher food and gasoline prices keep inflation pressures elevated
YoY Core inflation accelerating as headline figure eases
Rising domestic car and truck production may indicate higher prices
Core intermediate PPI growth has remained moderate over last 6 months
April Advanced Retail Sales +0.4% +0.7%
Less Autos +0.4% +0.8%
Retail sales expected to soften as higher energy prices depress consumers’ purchasing power
Thirty cent rise in gasoline prices accounts for majority of monthly sales gain
Auto sales were flat in April and will not impact retail sales
General merchandise and clothing expected to hold steady, while furniture and home improvement sales continue to weaken
Sales excluding autos and gas have recently been running below headline
March Business Inventories +0.2% +0.3%
Business inventories have risen in each of the past 12 months
Manufacturing inventories rose +.2% MoM in March
Friday, May 4, 2007
New Jobs and Wages Rise Less Than Expected in April
A weaker than expected employment report this morning, with only 88k new jobs created (consensus 100k), and the unemployment rate rising to 4.5% (as expected). This was the slowest pace of job growth in over two years. Weekly hours worked fell a tenth to 33.8 (as expected), but earnings grew slower than anticipated, gaining +.2% MoM and 3.7% YoY.
Of the 88k new jobs created, 63k were in the private sector, and the government added a trend like 25k. The service area (banking, insurance, restaurants, and retailers) continues to be the area producing the new jobs, adding 116k last month, but it was the smallest monthly increase since last June. Education showed a healthy increase of 53k, as did business services(+24k MoM) and hospitality (+22k MoM). Retailers shed 26k jobs.
Manufacturing jobs remain under pressure. Manufacturing lost 19k positions (similar to last month's -18k change), goods-producing shed 28k, and construction jobs fell 11k, after rising an unexpected 50k the previous month. The financial sector also saw job losses for the first time in a long time, losing 11k employees.
Due to the shorter work week, weekly earnings fell -.1% MoM to $583. The +3.4% YoY gain in weekly earnings is the lowest gain in the past six months. Manufacturing hours worked also declined a tenth, to 41.1 hours a week in April, as overtime fell to 4.2 from 4.3 hours.
Revisions to prior months reduced jobs created by 26k. Over the past year, revisions have tended to add jobs, not subtract them. The percentage of industries hiring last month fell to the lowest level since October 2005, at 53.4%.
The cooling economy, with GDP growing at less than 2%, has economists estimating that the unemployment rate will gradually rise toward 5% later this year. The increase in the unemployment rate would have been larger this month, except that the size of the labor force fell. Moderating wage pressures likely to ease the Fed's concerns about wage inflation. The Fed is likely to remain on hold.
Of the 88k new jobs created, 63k were in the private sector, and the government added a trend like 25k. The service area (banking, insurance, restaurants, and retailers) continues to be the area producing the new jobs, adding 116k last month, but it was the smallest monthly increase since last June. Education showed a healthy increase of 53k, as did business services(+24k MoM) and hospitality (+22k MoM). Retailers shed 26k jobs.
Manufacturing jobs remain under pressure. Manufacturing lost 19k positions (similar to last month's -18k change), goods-producing shed 28k, and construction jobs fell 11k, after rising an unexpected 50k the previous month. The financial sector also saw job losses for the first time in a long time, losing 11k employees.
Due to the shorter work week, weekly earnings fell -.1% MoM to $583. The +3.4% YoY gain in weekly earnings is the lowest gain in the past six months. Manufacturing hours worked also declined a tenth, to 41.1 hours a week in April, as overtime fell to 4.2 from 4.3 hours.
Revisions to prior months reduced jobs created by 26k. Over the past year, revisions have tended to add jobs, not subtract them. The percentage of industries hiring last month fell to the lowest level since October 2005, at 53.4%.
The cooling economy, with GDP growing at less than 2%, has economists estimating that the unemployment rate will gradually rise toward 5% later this year. The increase in the unemployment rate would have been larger this month, except that the size of the labor force fell. Moderating wage pressures likely to ease the Fed's concerns about wage inflation. The Fed is likely to remain on hold.
Thursday, May 3, 2007
Non-Manufacturing ISM Shows Recovery
Non-manufacturing ISM (construction, retailing, banking, etc) rebounded in April, rising to 56 (consensus 53) following a two month decline to 52.4 in March. A reading above 50 indicates growth. Over the ten years the survey has been in existence, it has averaged 57.7. Services remain the growth area of the economy, and a rebound here is positive for economic expansion.
Thirteen of the fifteen industries reported growth in April. New orders rose, with export orders rising sharply to 55.5. Prices paid held steady, though there were numerous comments of concern about rising energy costs. A decline in inventories supports hope that the inventory correction is nearing an end.
Net, the headline figure was stronger than the components. Unlike many surveys, this survey does not aggregate the components to create the headline, but asks the questions separately.
Thirteen of the fifteen industries reported growth in April. New orders rose, with export orders rising sharply to 55.5. Prices paid held steady, though there were numerous comments of concern about rising energy costs. A decline in inventories supports hope that the inventory correction is nearing an end.
Net, the headline figure was stronger than the components. Unlike many surveys, this survey does not aggregate the components to create the headline, but asks the questions separately.
Improving productivity and ULC data should help reduce inflation fears
Today's productivity and labor cost results for the first quarter of 2007 were much better than expected, according to the preliminary data, and will help reduce inflation concerns.
First quarter productivity was +1.7% (consensus +.7%), and the fourth quarter results were also revised higher to +2.1% from +1.6% previously reported. The surprise improvement is based on drop in hours worked, which is at odds with other reports, and calls into question the productivity gains reported today. Fourth quarter productivity was enhanced by an increase in output produced.
Manufacturing productivity, which tends to more variable than the larger non-farm business sector, was +2.7% in the first quarter of 2007. The growth reflected a 1.5% increase in output and a 1.1% decrease in hours worked in manufacturing.
Unit labor costs unexpectedly rose only +.6% (consensus +3.8%). This is a substantial deceleration from the revised 6.2% of the prior quarter, which was boosted by one time bonus and stock option exercises. Compensation per hour fell from an +8.5% gain in the fourth quarter to +2.3% in the first quarter. It is probably more fair to average the two numbers due to how the government accounts for the timing of bonus accruals versus payments, and would equate to around 3.5% annualized, which is above the core inflation rate. Unit non-labor costs rebounded in the first quarter to increase +7.6% after falling -7.9% in the prior period. Unit labor costs adjust wages and benefits per hour worked for output produced. So, higher productivity helps reduce unit labor costs.
The implicit price deflator, which reflects changes in costs, grew at a 3.2% pace in the first quarter, versus a slim +.5% gain in the fourth quarter. On a year-over-year basis, the price deflator is running at 2%.
On a year-over-year basis, productivity has fallen to +1.1% in the first quarter of 2007, versus +2% in the first quarter of 2006. Current productivity levels remain below the trend of the last decade. Efficiency tends to drop when the economy contracts because workers are retained while production slows. Unit labor costs have also declined over the same period from +3.6% YoY in the first quarter of 2006 to +1.3% YoY presently.
Net - rising productivity and falling unit labor costs are good for business.
**********
Initial jobless claims unexpectedly fell to 305k from 326k last week. This survey week was after the payroll data survey for April employment.
First quarter productivity was +1.7% (consensus +.7%), and the fourth quarter results were also revised higher to +2.1% from +1.6% previously reported. The surprise improvement is based on drop in hours worked, which is at odds with other reports, and calls into question the productivity gains reported today. Fourth quarter productivity was enhanced by an increase in output produced.
Manufacturing productivity, which tends to more variable than the larger non-farm business sector, was +2.7% in the first quarter of 2007. The growth reflected a 1.5% increase in output and a 1.1% decrease in hours worked in manufacturing.
Unit labor costs unexpectedly rose only +.6% (consensus +3.8%). This is a substantial deceleration from the revised 6.2% of the prior quarter, which was boosted by one time bonus and stock option exercises. Compensation per hour fell from an +8.5% gain in the fourth quarter to +2.3% in the first quarter. It is probably more fair to average the two numbers due to how the government accounts for the timing of bonus accruals versus payments, and would equate to around 3.5% annualized, which is above the core inflation rate. Unit non-labor costs rebounded in the first quarter to increase +7.6% after falling -7.9% in the prior period. Unit labor costs adjust wages and benefits per hour worked for output produced. So, higher productivity helps reduce unit labor costs.
The implicit price deflator, which reflects changes in costs, grew at a 3.2% pace in the first quarter, versus a slim +.5% gain in the fourth quarter. On a year-over-year basis, the price deflator is running at 2%.
On a year-over-year basis, productivity has fallen to +1.1% in the first quarter of 2007, versus +2% in the first quarter of 2006. Current productivity levels remain below the trend of the last decade. Efficiency tends to drop when the economy contracts because workers are retained while production slows. Unit labor costs have also declined over the same period from +3.6% YoY in the first quarter of 2006 to +1.3% YoY presently.
Net - rising productivity and falling unit labor costs are good for business.
**********
Initial jobless claims unexpectedly fell to 305k from 326k last week. This survey week was after the payroll data survey for April employment.
Today's Tidbits
Demand for Shipping Boxes Slipping – Not a Good Sign For Economy
From Merrill Lynch: “…shipments of paperboard containers…fell 1.7% in March, following a 1% slide in February and a 3.1% decline in January. Three strikes in a row in this particular component of the economy is pretty rare - having occurred just three other times in the past 10 years…We focus on "boxes" because there are few segments of the economy more "cyclical" than this - and activity here is down in 4 of the past 5 months. The year-on-year pace of shipments has moved into negative terrain (-1.5%), but the near-term trend is even deeper in the "red" - the three-month trend is now running at a -21% annual rate, which last happened when the economy was limping out of recession in Dec/01. But note that in the last cycle, shipments of paperboard containers sank at a 20%+ rate for the first time in June/00 and it led the economic downturn by little more than eight months (when jobless claims were also barely above the 300,000 mark). As an aside, this one metric leads industrial production by three months with a 63% correlation.”
Dow Stocks Gain From International Strength
From Merrill Lynch: “The Dow 30 companies are receiving a huge boost from their overseas operations: We managed to split out pre-tax income into foreign and domestic
sources for the Dow 30 companies and it tells quite a tale. Foreign income as a share of the total earnings pie has been steadily rising, and in three years has gone up 10 percentage points. Not only that, but we estimate that these megacaps now derive over half their earnings from abroad.”
Construction Employment Lags Housing Completions
From Merrill Lynch: “There is a 95% correlation between the two series [construction employment and housing completions], but actually, the highest correlation (97%) is with completions leading construction employment ahead by six months. Everyone is asking how it is that construction activity, as per the GDP accounts, could be down 17% over the past year with such a muted effect on employment in that sector. Well, it is because the job slide tends to occur after completions have hit their highs…residential construction jobs have to play some catch up. The last time completions were at today's level, which was in October/2002, construction employment was 810,000 which is a good 190,000 below current levels of one million+, so either way you slice it or dice it, we are talking about something in the order of a 200,000 employment decline by the end of the year. Now that is just the impact on direct residential construction payrolls - there are another 2.038 million of trades people and specialty contractors that will also feel the pain. And the last time completions were at current levels back in Oct/02, these payrolls were 1.906 million versus 2.317 million currently - that's another 411,000 potential job slice ahead, bringing the full force to over 600,000 payrolls.” [Note this combined loss of residential construction jobs is similar to the 500k Morgan Stanley’s economist said he was looking for this year, during his presentation today.]
MISC
From Dow Jones: “U.S. Treasury prices continued to lose ground [with the 2 year yield rising 5bp and thirty year yields rising 2bp as the curve continues to flatten]… The dollar was up… Stocks gained [modestly], with the S&P 500 breaching the 1500 level [for the first time since September 2000. The all-time high is 1527.5 set in March 2000.]… Crude oil futures were lower after the Department of Energy sad it was halting its purchases of oil for the Strategic Petroleum Reserve.”
From Morgan Stanley: “What strikes us most is the conflicting data surrounding jobs, incomes and taxes. On the one hand, we would expect weaker jobs data, given the slow 1Q growth, and more recently from the weak release of ADP. On the other hand, higher tax receipts and falling jobless claims make us think that traders will look past a weak jobs report on Friday in anticipation of job market strength based on expectations for Q2 growth to rebound. From a price action perspective, UST yields are trapped in a range with seemingly little impetus to break out.”
From JP Morgan: “The Euro area unemployment rate fell another notch to 7.2% in March, and is down a full percentage point over the past 12 months. With unemployment rates at cyclical lows in the United States, the Euro area and Japan, it is little surprise that our global unemployment rate proxy is making new lows, falling to 5.4% last month. This is the lowest unemployment rate in the history of our global series dating back to 1990.”
From Merrill Lynch: “Prices at the pump are now up almost 80 cents over the past three months and the rule of thumb is that every penny in the tank siphons $1.3 billion from household cash flow, which then makes this over a $100 billion drag at an annual rate or over a 2% pay cut for the average American worker.”
From Dow Jones: “Three Democrats on the Senate Banking Committee introduced
two bills that would provide $300 million to help stave off foreclosures on subprime loans and tighten the underwriting standards for brokers and lenders…The proposal is the first broad legislative attempt by Democrats to address the growing turbulence in the subprime market. It also breaks with the non-legislative approach that Senate Banking Committee Chairman Christopher Dodd, D-Conn., has urged. He has tried to prompt changes in industry practices through coalitions and agreements, not through law.”
From Citi: “Over the medium term…oil consumption is likely to bear some relationship
to economic growth. As such, non-OECD area countries, where economic growth
rates are stronger, increasingly dominate global oil demand changes…Oil demand growth rates outside the OECD have outpaced those inside the region in every year since 1994 and the share of incremental global oil demand from the non-OECD region has been in excess of 40% every year since 1995 and in excess of 70% since 2004. According to the IEA, oil consumption globally is set to grow by 1.5 m bls/day in 2007 or by around 1.8%. Of this, 1.2 m bls/day will come from non-OECD users.”
From Merrill Lynch: “…shipments of paperboard containers…fell 1.7% in March, following a 1% slide in February and a 3.1% decline in January. Three strikes in a row in this particular component of the economy is pretty rare - having occurred just three other times in the past 10 years…We focus on "boxes" because there are few segments of the economy more "cyclical" than this - and activity here is down in 4 of the past 5 months. The year-on-year pace of shipments has moved into negative terrain (-1.5%), but the near-term trend is even deeper in the "red" - the three-month trend is now running at a -21% annual rate, which last happened when the economy was limping out of recession in Dec/01. But note that in the last cycle, shipments of paperboard containers sank at a 20%+ rate for the first time in June/00 and it led the economic downturn by little more than eight months (when jobless claims were also barely above the 300,000 mark). As an aside, this one metric leads industrial production by three months with a 63% correlation.”
Dow Stocks Gain From International Strength
From Merrill Lynch: “The Dow 30 companies are receiving a huge boost from their overseas operations: We managed to split out pre-tax income into foreign and domestic
sources for the Dow 30 companies and it tells quite a tale. Foreign income as a share of the total earnings pie has been steadily rising, and in three years has gone up 10 percentage points. Not only that, but we estimate that these megacaps now derive over half their earnings from abroad.”
Construction Employment Lags Housing Completions
From Merrill Lynch: “There is a 95% correlation between the two series [construction employment and housing completions], but actually, the highest correlation (97%) is with completions leading construction employment ahead by six months. Everyone is asking how it is that construction activity, as per the GDP accounts, could be down 17% over the past year with such a muted effect on employment in that sector. Well, it is because the job slide tends to occur after completions have hit their highs…residential construction jobs have to play some catch up. The last time completions were at today's level, which was in October/2002, construction employment was 810,000 which is a good 190,000 below current levels of one million+, so either way you slice it or dice it, we are talking about something in the order of a 200,000 employment decline by the end of the year. Now that is just the impact on direct residential construction payrolls - there are another 2.038 million of trades people and specialty contractors that will also feel the pain. And the last time completions were at current levels back in Oct/02, these payrolls were 1.906 million versus 2.317 million currently - that's another 411,000 potential job slice ahead, bringing the full force to over 600,000 payrolls.” [Note this combined loss of residential construction jobs is similar to the 500k Morgan Stanley’s economist said he was looking for this year, during his presentation today.]
MISC
From Dow Jones: “U.S. Treasury prices continued to lose ground [with the 2 year yield rising 5bp and thirty year yields rising 2bp as the curve continues to flatten]… The dollar was up… Stocks gained [modestly], with the S&P 500 breaching the 1500 level [for the first time since September 2000. The all-time high is 1527.5 set in March 2000.]… Crude oil futures were lower after the Department of Energy sad it was halting its purchases of oil for the Strategic Petroleum Reserve.”
From Morgan Stanley: “What strikes us most is the conflicting data surrounding jobs, incomes and taxes. On the one hand, we would expect weaker jobs data, given the slow 1Q growth, and more recently from the weak release of ADP. On the other hand, higher tax receipts and falling jobless claims make us think that traders will look past a weak jobs report on Friday in anticipation of job market strength based on expectations for Q2 growth to rebound. From a price action perspective, UST yields are trapped in a range with seemingly little impetus to break out.”
From JP Morgan: “The Euro area unemployment rate fell another notch to 7.2% in March, and is down a full percentage point over the past 12 months. With unemployment rates at cyclical lows in the United States, the Euro area and Japan, it is little surprise that our global unemployment rate proxy is making new lows, falling to 5.4% last month. This is the lowest unemployment rate in the history of our global series dating back to 1990.”
From Merrill Lynch: “Prices at the pump are now up almost 80 cents over the past three months and the rule of thumb is that every penny in the tank siphons $1.3 billion from household cash flow, which then makes this over a $100 billion drag at an annual rate or over a 2% pay cut for the average American worker.”
From Dow Jones: “Three Democrats on the Senate Banking Committee introduced
two bills that would provide $300 million to help stave off foreclosures on subprime loans and tighten the underwriting standards for brokers and lenders…The proposal is the first broad legislative attempt by Democrats to address the growing turbulence in the subprime market. It also breaks with the non-legislative approach that Senate Banking Committee Chairman Christopher Dodd, D-Conn., has urged. He has tried to prompt changes in industry practices through coalitions and agreements, not through law.”
From Citi: “Over the medium term…oil consumption is likely to bear some relationship
to economic growth. As such, non-OECD area countries, where economic growth
rates are stronger, increasingly dominate global oil demand changes…Oil demand growth rates outside the OECD have outpaced those inside the region in every year since 1994 and the share of incremental global oil demand from the non-OECD region has been in excess of 40% every year since 1995 and in excess of 70% since 2004. According to the IEA, oil consumption globally is set to grow by 1.5 m bls/day in 2007 or by around 1.8%. Of this, 1.2 m bls/day will come from non-OECD users.”
Wednesday, May 2, 2007
Today's Tidbits
May 2, 2007 TIDBITS
Increased Use of MBS Changes Foreclosure Landscape (Average Cost $80,000)
From Business Week: “Many of the homeowners in trouble are fist-timers who bought recently or investors who got in over their heads….For the first time in years, houses are hitting the market with asking prices below the value of their mortgages. Stretched owners are hoping for a so-called short sale, in which the lenders forgive the difference. National statistics are scarce… In Sacramento, real estate agent…counts 1,079, more than 10% of the total homes on the market. ‘If home values are falling, short sales are better because they can be done cheaper and quicker [than foreclosures],”…Quick is good, given the unprecedented pressures lenders are facing. In previous downturns, most loans were owned by federally insured lenders. Now roughly 56% of all loans outstanding, $5.7 trillion worth, have been pooled into mortgage-backed securities, vs. just 12% in 1980. “Wall Street has been very tough, and it’s encouraging lenders to act rapidly,” says Douglas G. Duncan, chief economist for the Mortgage Bankers Assn. “The faster you act, the lower the losses.” With so much at stake, lenders are scrambling to cut delinquencies and avoid foreclosures…a unit of Bear, Stearns & Co., recently set up a “Mod Squad” team - short for loan modification – of 50 workout specialists who travel the country helping homeowners renegotiate…face-to-face meetings with borrowers before there is a problem…”We want to protect the loan for going all the way south.” That is good for everybody. Each foreclosure costs lenders, the government and homeowners an estimated $80,000. Even neighbors take a hit, since foreclosure can have a ripple effect on property values. One foreclosure can cut the price on nearby homes by 1.4%. Still, with so many loans packaged and sold as pools, the industry has tied its hands to some extent. To take advantage of the accounting and tax benefits, many lenders wrote restrictions on the mortgage-backed securities; generally just 5% of loans in such investments can be renegotiated. Some pools containing subprime loans already have delinquency rates of 8% or more. It’s possible to change the deal, but it’s time consuming and costly. “What was once a simple, often personal relationship between a borrower and lenders is now a complex structure involving many parties, including services, investors, trustees, and rating agencies,”…By keeping borrowers in houses they never should have bought, lenders could simply be setting everyone up for a steeper fall down the road.”
Housing Glut Raises Rental Vacancy Rates
From Bloomberg: “The glut of U.S. properties for sale is about to hit the rental market. A record number of homeowners who can't sell condominiums and houses are competing for tenants with the country's biggest apartment owners… ``Competition already is forcing the big apartment owners to offer concessions like two months free rent,'' McCabe said. Vacant rental apartments rose to 6.1 percent in the U.S. during the first quarter, the most in almost two years… Nationwide, 2.8 percent of houses for sale were unoccupied in the first quarter, the highest since the Census Department started collecting the data in 1956. Unsold properties on the market totaled a record 3.45 million in 2006, according to the Chicago-based National Association of Realtors. ``Unsold properties being turned into rental units are creating a shadow market that's driving up the vacancy rate and slowing the growth of rents,'' …``Areas that saw the most speculative investing, particularly in condos, will see the biggest pressure on rents.''…
Equity Rally Led By “Defensive” Stocks
From Merrill Lynch: “One heck of a "defensive rally" in stocks: since the February 27th low, outside of energy, three of the best performing sectors have been utilities (+9.4%), health care (+8.1%) and telecom services (+6.6%). What type of "cyclical" developments are equities pricing in exactly when utilities are the second best performing sector, followed by health care? These tend to do well in economic slowdowns – so maybe, despite the headline indices, the action beneath the surface is actually quite consistent with our view of lingering economic malaise in the USA. The bottom performers during the rally have been consumer cyclicals, which have underperformed the broad market by 350 basis points – that represents the stock market's feeling on that 70% share of the US economy otherwise known as the resilient consumer. And the other two bottom performers have been materials, another economic-sensitive, and financials – the latter underperforming since late February by nearly 250 bps in an environment of broadly stable bond yields. Could that be telling us something about the stock market's view towards credit quality? Rallies that are not led by financials or consumer discretionary but instead by utilities and health care are rallies that don’t generally point in the way of economic reacceleration… That the market would hit its cycle highs – all-time highs for the Dow – in the aftermath of the weakest GDP quarter since 2003Q1 and the softest earnings trend since 2002Q1 speaks volumes.”
From The International Herald Tribune: “Money is flowing into alternative energy companies so fast that "the warning signs of a bubble are appearing,".. the amount of venture capital put into clean energy investments last year was $1.5 billion, up 141 percent from the $623 million of 2005, and that in the same period, initial public offerings by companies in this sector rose to $4.1 billion, from $1.6 billion in 2005. The initial public offerings were primarily in companies involved in solar power or biofuels…”
Grantham (Manages VP Cheney’s Investments) Sees Bubbles Everywhere
From Bloomberg: “…Grantham make one of the gutsiest market calls in recent memory: That pretty much every asset class, everywhere, is in the midst of a bubble. It would be comforting if we could dismiss such negativity. After all, isn't the Dow Jones Industrial Average climbing to all time highs at a time when Japan and Europe are growing, China, India and much of the rest of Asia boom and all's well in the global financial system? Sure, and that's just what worries Grantham. He points to the U.S. in the late 1990s and Japan in the late 1980s -- periods when investors thought asset rallies would continue indefinitely. ``Most bubbles, like Internet stocks and Japanese land, go through an exponential phase before breaking, usually short in time, but dramatic in extent,'' Grantham argues, and he has a point. Bubbles generally require two dynamics: the perception of near-perfect economic conditions and an abundance of cheap credit… The trouble, Grantham says, is that the bursting of this bubble ``will be across all countries and all assets, with the probable exception of high-grade bonds. Risk premiums in particular will widen. Since no similar global event has occurred before, the stresses to the system are likely to be unexpected.''”
Hedge Fund Risk Concentrations Rising as Volatility Falls
From Market News International: “Research at the New York Federal Reserve Bank has found that concentrations of risk in the hedge fund industry, as measured by high correlations of hedge fund returns, is approaching the levels that prevailed before the 1998 collapse of Long-Term Capital Management (LTCM). However, the New York Fed research paper found a key difference between now and 1998: current high correlations of returns in the $1.5 trillion hedge fund industry mainly reflect a decline in the volatility of returns. The implication is that risk concentrations are not necessarily leading up to an LTCM-type collapse. That hedge fund's implosion, which accompanied a debt default and devaluation by Russia, aggravated a global liquidity crisis which prompted the Fed to make emergency interest rate cuts… "The correlation of hedge fund returns rose both in the period prior to the LTCM crisis and in recent times -- but for different reasons," he says. "An increase in the comovement of dollar returns was the leading cause of rising correlation in the 1990s, but a decline in overall volatility explains
the recent rise." Adrian finds that "high correlations of returns generally do not precede increases in volatility in the hedge fund sector, but high covariances among hedge funds do."… "This result suggests that comovement measured in dollars -- covariance -- is a more relevant indicator of risk than comovement measured in correlation, that is, covariance normalized by volatility," he writes. Adrian observes that "recently, hedge fund covariance has increased, but it is not at particularly high levels by historical
standards." Rather, he adds, "the unusually high correlation among hedge funds in the current environment is therefore attributable primarily to low hedge fund volatility -- a reflection of the generally low volatility of financial assets.”
Rating Agencies Voice Concerns about CMBS
From The New York Times: “Spurred by the collapse of the subprime mortgage market, the leading bond rating agencies are beginning to crack down on what they see as risky lending practices in commercial real estate. Low interest rates and an abundance of investment capital have led to heady times for buyers and sellers of office buildings, hotels and other income-producing property. Buildings have traded at record prices and loan terms have become increasingly generous, with many buyers putting little or no equity into the deals. Like residential loans, commercial mortgages are pooled and packaged into bonds that are sliced up into portions carrying different degrees of risk.
Global Manufacturing at a Seven Month High as Input Prices Rise Rapidly
From JP Morgan: “The JPMorgan global manufacturing PMI rebounded to 54.1 in April, the highest level since September 2006. The move was broadly based, with the indexes of output, employment, and new orders all moving up smartly. At the same time, the index of raw materials and work in progress inventory was little changed and remained below the 50 mark. The index of input prices moved sharply higher, reflecting recent strength in global commodity prices. The combination of rising new orders and lower inventories produced a big move up in the PMI ratio of new orders to inventory. We consider this ratio to be the best barometer of near-term momentum in the global manufacturing sector, and the move up to 1.12 in April—if it is sustained—would be a strong signal that the pace of manufacturing activity is poised to accelerate into midyear.”
MISC
From Dow Jones: “Treasury prices were modestly lower… The dollar was modestly higher… U.S. stocks rallied early on Wednesday, lifting the Dow Jones Industrial Average by over 100 points to a record high… Crude oil futures extended their losses…”
From Lehman: “Challenger announced layoffs jumped to 70,672 in April on the back of a surge in layoffs related to the subprime fallout. Financial sector layoffs were 33,789, accounting for almost 48% of total layoffs announced during the month. No other industry reported layoffs of more than 6,000. Hiring intentions picked up modestly, led by government hiring, which expected to hire 15,000 and accounted for two-thirds of the announced hiring intentions.”
From Merrill Lynch: “If you're looking for "global liquidity", don't look at Japan: the monetary base contracted 12.2% y/y in April, the 14th consecutive month of decline.”
From The Wall Street Journal: “If U.S. consumer spending now slows, the flow of dollars overseas should slow as well, potentially staunching foreign demand for Treasuries. What’s more, many countries may have concluded that they have enough Treasuries to tap into in times of trouble…Maybe that’s a reason why yields on 10-year Treasuries, at 4.64%, haven’t fallen much even though economic growth has slowed in the past year.” [Note WSJ spelled Treasuries and Treasurys]
From Merrill Lynch: “…the consumers' resilience is going to be severely tested in coming months from 4 sources: further declines in housing wealth as home prices adjust lower; receding employment growth as the pace of job creation follows the slowing in capex growth over the past year; more stringent credit standards going forward; and rising gasoline prices.”
From Merrill Lynch: “The export sector has to expand 10% for every 1% the consumer slows down just to prevent overall GDP growth from decelerating.”
Increased Use of MBS Changes Foreclosure Landscape (Average Cost $80,000)
From Business Week: “Many of the homeowners in trouble are fist-timers who bought recently or investors who got in over their heads….For the first time in years, houses are hitting the market with asking prices below the value of their mortgages. Stretched owners are hoping for a so-called short sale, in which the lenders forgive the difference. National statistics are scarce… In Sacramento, real estate agent…counts 1,079, more than 10% of the total homes on the market. ‘If home values are falling, short sales are better because they can be done cheaper and quicker [than foreclosures],”…Quick is good, given the unprecedented pressures lenders are facing. In previous downturns, most loans were owned by federally insured lenders. Now roughly 56% of all loans outstanding, $5.7 trillion worth, have been pooled into mortgage-backed securities, vs. just 12% in 1980. “Wall Street has been very tough, and it’s encouraging lenders to act rapidly,” says Douglas G. Duncan, chief economist for the Mortgage Bankers Assn. “The faster you act, the lower the losses.” With so much at stake, lenders are scrambling to cut delinquencies and avoid foreclosures…a unit of Bear, Stearns & Co., recently set up a “Mod Squad” team - short for loan modification – of 50 workout specialists who travel the country helping homeowners renegotiate…face-to-face meetings with borrowers before there is a problem…”We want to protect the loan for going all the way south.” That is good for everybody. Each foreclosure costs lenders, the government and homeowners an estimated $80,000. Even neighbors take a hit, since foreclosure can have a ripple effect on property values. One foreclosure can cut the price on nearby homes by 1.4%. Still, with so many loans packaged and sold as pools, the industry has tied its hands to some extent. To take advantage of the accounting and tax benefits, many lenders wrote restrictions on the mortgage-backed securities; generally just 5% of loans in such investments can be renegotiated. Some pools containing subprime loans already have delinquency rates of 8% or more. It’s possible to change the deal, but it’s time consuming and costly. “What was once a simple, often personal relationship between a borrower and lenders is now a complex structure involving many parties, including services, investors, trustees, and rating agencies,”…By keeping borrowers in houses they never should have bought, lenders could simply be setting everyone up for a steeper fall down the road.”
Housing Glut Raises Rental Vacancy Rates
From Bloomberg: “The glut of U.S. properties for sale is about to hit the rental market. A record number of homeowners who can't sell condominiums and houses are competing for tenants with the country's biggest apartment owners… ``Competition already is forcing the big apartment owners to offer concessions like two months free rent,'' McCabe said. Vacant rental apartments rose to 6.1 percent in the U.S. during the first quarter, the most in almost two years… Nationwide, 2.8 percent of houses for sale were unoccupied in the first quarter, the highest since the Census Department started collecting the data in 1956. Unsold properties on the market totaled a record 3.45 million in 2006, according to the Chicago-based National Association of Realtors. ``Unsold properties being turned into rental units are creating a shadow market that's driving up the vacancy rate and slowing the growth of rents,'' …``Areas that saw the most speculative investing, particularly in condos, will see the biggest pressure on rents.''…
Equity Rally Led By “Defensive” Stocks
From Merrill Lynch: “One heck of a "defensive rally" in stocks: since the February 27th low, outside of energy, three of the best performing sectors have been utilities (+9.4%), health care (+8.1%) and telecom services (+6.6%). What type of "cyclical" developments are equities pricing in exactly when utilities are the second best performing sector, followed by health care? These tend to do well in economic slowdowns – so maybe, despite the headline indices, the action beneath the surface is actually quite consistent with our view of lingering economic malaise in the USA. The bottom performers during the rally have been consumer cyclicals, which have underperformed the broad market by 350 basis points – that represents the stock market's feeling on that 70% share of the US economy otherwise known as the resilient consumer. And the other two bottom performers have been materials, another economic-sensitive, and financials – the latter underperforming since late February by nearly 250 bps in an environment of broadly stable bond yields. Could that be telling us something about the stock market's view towards credit quality? Rallies that are not led by financials or consumer discretionary but instead by utilities and health care are rallies that don’t generally point in the way of economic reacceleration… That the market would hit its cycle highs – all-time highs for the Dow – in the aftermath of the weakest GDP quarter since 2003Q1 and the softest earnings trend since 2002Q1 speaks volumes.”
From The International Herald Tribune: “Money is flowing into alternative energy companies so fast that "the warning signs of a bubble are appearing,".. the amount of venture capital put into clean energy investments last year was $1.5 billion, up 141 percent from the $623 million of 2005, and that in the same period, initial public offerings by companies in this sector rose to $4.1 billion, from $1.6 billion in 2005. The initial public offerings were primarily in companies involved in solar power or biofuels…”
Grantham (Manages VP Cheney’s Investments) Sees Bubbles Everywhere
From Bloomberg: “…Grantham make one of the gutsiest market calls in recent memory: That pretty much every asset class, everywhere, is in the midst of a bubble. It would be comforting if we could dismiss such negativity. After all, isn't the Dow Jones Industrial Average climbing to all time highs at a time when Japan and Europe are growing, China, India and much of the rest of Asia boom and all's well in the global financial system? Sure, and that's just what worries Grantham. He points to the U.S. in the late 1990s and Japan in the late 1980s -- periods when investors thought asset rallies would continue indefinitely. ``Most bubbles, like Internet stocks and Japanese land, go through an exponential phase before breaking, usually short in time, but dramatic in extent,'' Grantham argues, and he has a point. Bubbles generally require two dynamics: the perception of near-perfect economic conditions and an abundance of cheap credit… The trouble, Grantham says, is that the bursting of this bubble ``will be across all countries and all assets, with the probable exception of high-grade bonds. Risk premiums in particular will widen. Since no similar global event has occurred before, the stresses to the system are likely to be unexpected.''”
Hedge Fund Risk Concentrations Rising as Volatility Falls
From Market News International: “Research at the New York Federal Reserve Bank has found that concentrations of risk in the hedge fund industry, as measured by high correlations of hedge fund returns, is approaching the levels that prevailed before the 1998 collapse of Long-Term Capital Management (LTCM). However, the New York Fed research paper found a key difference between now and 1998: current high correlations of returns in the $1.5 trillion hedge fund industry mainly reflect a decline in the volatility of returns. The implication is that risk concentrations are not necessarily leading up to an LTCM-type collapse. That hedge fund's implosion, which accompanied a debt default and devaluation by Russia, aggravated a global liquidity crisis which prompted the Fed to make emergency interest rate cuts… "The correlation of hedge fund returns rose both in the period prior to the LTCM crisis and in recent times -- but for different reasons," he says. "An increase in the comovement of dollar returns was the leading cause of rising correlation in the 1990s, but a decline in overall volatility explains
the recent rise." Adrian finds that "high correlations of returns generally do not precede increases in volatility in the hedge fund sector, but high covariances among hedge funds do."… "This result suggests that comovement measured in dollars -- covariance -- is a more relevant indicator of risk than comovement measured in correlation, that is, covariance normalized by volatility," he writes. Adrian observes that "recently, hedge fund covariance has increased, but it is not at particularly high levels by historical
standards." Rather, he adds, "the unusually high correlation among hedge funds in the current environment is therefore attributable primarily to low hedge fund volatility -- a reflection of the generally low volatility of financial assets.”
Rating Agencies Voice Concerns about CMBS
From The New York Times: “Spurred by the collapse of the subprime mortgage market, the leading bond rating agencies are beginning to crack down on what they see as risky lending practices in commercial real estate. Low interest rates and an abundance of investment capital have led to heady times for buyers and sellers of office buildings, hotels and other income-producing property. Buildings have traded at record prices and loan terms have become increasingly generous, with many buyers putting little or no equity into the deals. Like residential loans, commercial mortgages are pooled and packaged into bonds that are sliced up into portions carrying different degrees of risk.
Global Manufacturing at a Seven Month High as Input Prices Rise Rapidly
From JP Morgan: “The JPMorgan global manufacturing PMI rebounded to 54.1 in April, the highest level since September 2006. The move was broadly based, with the indexes of output, employment, and new orders all moving up smartly. At the same time, the index of raw materials and work in progress inventory was little changed and remained below the 50 mark. The index of input prices moved sharply higher, reflecting recent strength in global commodity prices. The combination of rising new orders and lower inventories produced a big move up in the PMI ratio of new orders to inventory. We consider this ratio to be the best barometer of near-term momentum in the global manufacturing sector, and the move up to 1.12 in April—if it is sustained—would be a strong signal that the pace of manufacturing activity is poised to accelerate into midyear.”
MISC
From Dow Jones: “Treasury prices were modestly lower… The dollar was modestly higher… U.S. stocks rallied early on Wednesday, lifting the Dow Jones Industrial Average by over 100 points to a record high… Crude oil futures extended their losses…”
From Lehman: “Challenger announced layoffs jumped to 70,672 in April on the back of a surge in layoffs related to the subprime fallout. Financial sector layoffs were 33,789, accounting for almost 48% of total layoffs announced during the month. No other industry reported layoffs of more than 6,000. Hiring intentions picked up modestly, led by government hiring, which expected to hire 15,000 and accounted for two-thirds of the announced hiring intentions.”
From Merrill Lynch: “If you're looking for "global liquidity", don't look at Japan: the monetary base contracted 12.2% y/y in April, the 14th consecutive month of decline.”
From The Wall Street Journal: “If U.S. consumer spending now slows, the flow of dollars overseas should slow as well, potentially staunching foreign demand for Treasuries. What’s more, many countries may have concluded that they have enough Treasuries to tap into in times of trouble…Maybe that’s a reason why yields on 10-year Treasuries, at 4.64%, haven’t fallen much even though economic growth has slowed in the past year.” [Note WSJ spelled Treasuries and Treasurys]
From Merrill Lynch: “…the consumers' resilience is going to be severely tested in coming months from 4 sources: further declines in housing wealth as home prices adjust lower; receding employment growth as the pace of job creation follows the slowing in capex growth over the past year; more stringent credit standards going forward; and rising gasoline prices.”
From Merrill Lynch: “The export sector has to expand 10% for every 1% the consumer slows down just to prevent overall GDP growth from decelerating.”
Factory Orders Rising
Factory orders rose +3.1% MoM in March (consensus +2.2% MoM), and February was revised higher to +1.4% MoM from +1%. Factory orders have now risen for four of the last five months, indicating that business investment may be improving, especially as orders for machinery and power generation equipment rise.
Excluding transportation, orders rose +1.9% MoM in March, indicating good aircraft demand, as seen in the durable goods orders. Durable goods orders make up about 55% of total factory demand. New orders for durable goods rose +3.7% MoM with transportation orders rising +9.5% MoM. Demand for non-durable goods rose +2.3% MoM. Ex-defense new orders rose 3.5% MoM. Defense capital goods orders have declined a huge -32% YoY.
Shipments rose for the first time in three months, increasing +1.5% MoM. Unfilled orders are at record levels, and have risen steadily for the last two years. Unfilled orders have risen 20% YoY. The unfilled-orders-to-shipments ratio also rose. The inventories-to-shipments ratio fell slightly to 1.23, from 1.25, as inventory growth slowed to only +.2% MoM.
Excluding transportation, orders rose +1.9% MoM in March, indicating good aircraft demand, as seen in the durable goods orders. Durable goods orders make up about 55% of total factory demand. New orders for durable goods rose +3.7% MoM with transportation orders rising +9.5% MoM. Demand for non-durable goods rose +2.3% MoM. Ex-defense new orders rose 3.5% MoM. Defense capital goods orders have declined a huge -32% YoY.
Shipments rose for the first time in three months, increasing +1.5% MoM. Unfilled orders are at record levels, and have risen steadily for the last two years. Unfilled orders have risen 20% YoY. The unfilled-orders-to-shipments ratio also rose. The inventories-to-shipments ratio fell slightly to 1.23, from 1.25, as inventory growth slowed to only +.2% MoM.
ADP +64k for April
The ADP report estimates that the US added 64k new non-government jobs in April. Government payroll growth has averaged 27k over the past three months. So, it looks like the ADP survey, when adjusted for government jobs, shows a 91k employment gain for April, and is close to the consensus 100k for Friday's non-farm payroll number.
April's increase was the smallest since July 2003. In addition, ADP's estimate for last month was revised down to 98k from 106k. These levels are consistent with below trend growth for the economy.
The survey is based on payroll information for 364k businesses and around 22 million employees. ADP saw a drop in manufacturing jobs of 42k in April, and a gain of 106k in service jobs. It appears that large companies shed jobs last month, while smaller companies added.
April's increase was the smallest since July 2003. In addition, ADP's estimate for last month was revised down to 98k from 106k. These levels are consistent with below trend growth for the economy.
The survey is based on payroll information for 364k businesses and around 22 million employees. ADP saw a drop in manufacturing jobs of 42k in April, and a gain of 106k in service jobs. It appears that large companies shed jobs last month, while smaller companies added.
Tuesday, May 1, 2007
Pending Homes Sales Fall to a 4 Year Low
Pending home sales unexpectedly dropped -4.9% in March, to the lowest level since March 2003. Versus a year ago, pending home sales have fallen 11.7% YoY. Pending home sales represent signed purchase agreements for existing homes, and usually lead closings by 1-2 months.
Tighter lending standards are probably partially to blame, as troubles in the subprime market have rippled through the system, and encouraged consumers to postpone purchases while they wait to see the impact on housing prices. Most economists are expecting house prices to decline this year.
Sales volume fell in three of the four national regions. The South and Midwest saw declines of around 7% MoM, and the Northeast experienced a 5% MoM drop. The West was the only region to show growth, at +1.6% MoM. Over the past year, the Northeast has seen the greatest decline in pending home sales, falling 15.4% YoY, while the South and Midwest have seen the smallest declines at around 10.4% YoY.
Tighter lending standards are probably partially to blame, as troubles in the subprime market have rippled through the system, and encouraged consumers to postpone purchases while they wait to see the impact on housing prices. Most economists are expecting house prices to decline this year.
Sales volume fell in three of the four national regions. The South and Midwest saw declines of around 7% MoM, and the Northeast experienced a 5% MoM drop. The West was the only region to show growth, at +1.6% MoM. Over the past year, the Northeast has seen the greatest decline in pending home sales, falling 15.4% YoY, while the South and Midwest have seen the smallest declines at around 10.4% YoY.
ISM Suggests Manufacturing Weakness May be Bottoming
The April summary of U.S. manufacturing conditions, from the Institute for Supply Management, unexpectedly rose to 54.7 (consensus 51), from 50.9 last month. Any number above 50 indicates expansion.
Strength was broad-based, with most categories rising. Notably, production rose over 4 points to 57.3, new orders rose 7 points to 58.5, and order backlogs increased 7.5 points to 54.5. All three are at their highs for the past year, and in addition, inventories shrank a point.
Prices paid also rose to their highest level since last August at 73. This will worry the Fed on the inflation front as it indicates higher energy prices are working through the system. Employment also rose back into positive territory, gaining almost 4.5 points to 53.1, also the highest level since last August. Some dealers are starting to discuss raising their employment estimate for this Friday. Consensus is for 100k in new jobs for April.
Export orders rose to a six month high, indicating the dollar weakness is helping manufacturers become more competitive globally.
Today's report will give hope that the manufacturing contraction is bottoming, and that inventories have been worked back down to reasonable levels. The gap between orders and inventories is the widest it has been in over two years, which is a leading indicator for growth.
Strength was broad-based, with most categories rising. Notably, production rose over 4 points to 57.3, new orders rose 7 points to 58.5, and order backlogs increased 7.5 points to 54.5. All three are at their highs for the past year, and in addition, inventories shrank a point.
Prices paid also rose to their highest level since last August at 73. This will worry the Fed on the inflation front as it indicates higher energy prices are working through the system. Employment also rose back into positive territory, gaining almost 4.5 points to 53.1, also the highest level since last August. Some dealers are starting to discuss raising their employment estimate for this Friday. Consensus is for 100k in new jobs for April.
Export orders rose to a six month high, indicating the dollar weakness is helping manufacturers become more competitive globally.
Today's report will give hope that the manufacturing contraction is bottoming, and that inventories have been worked back down to reasonable levels. The gap between orders and inventories is the widest it has been in over two years, which is a leading indicator for growth.
Today's Tidbits
Impact of a Weaker Dollar and Inflation
From The Wall Street Journal: “Robust growth outside of the U.S. means robust demand for goods globally. That helps the overseas sales of multinationals but could also push up prices at home for globally traded goods. While the U.S. economy lumbered in the first quarter, China’s GDP was 11.1% above its year-ago level, which means that China’s appetite for raw materials has only grown. Now throw the dollar in the mix. With the rest of the world growing faster relative to the U.S., the rest of the world has become a more attractive place to invest – on reason the dollar is weak. On a trade-weighted basis, the dollar has hit its lowest level against the currencies of major U.S. trading partners in the 36 year the Federal Reserve has been keeping records. That means that the dollar’s buying power has been reduced compared with other currencies. Profits earned abroad translate into more dollars at home, but it also means it costs more to import products. Consider gold, often seen as an inflation gauge. At $678.70 an ounce, it has risen 13% over the past six months and is just 6% shy of the…high it hit last May. But in euro terms, it has risen just 6% over the past six months, and the May peak is 13% away…In March, prices for imported consumer goods, excluding automobiles, were 1.8% higher than they were a year earlier – the biggest gain in 11 years…The risk is that this could make it harder for the Fed to cut rates in the presence of economic weakness.”
Growth of Islamic Banking
From Bloomberg: “Shariah requires that investors profit only from transactions based on the exchange of assets, not money alone, so interest is banned. Bankers sell Islamic bonds, or sukuk, by using property and other assets to generate income equivalent to interest they would pay on conventional debt. The money can't be used to finance gambling, guns or alcohol. The world's top five banks by assets -- Zurich-based UBS AG, HSBC and Barclays Plc in London, Paris-based BNP Paribas SA and Citigroup in New York -- have Islamic units. CIMB Group Bhd. in Kuala Lumpur is the biggest underwriter of sukuk this year followed by Standard Chartered in London, Barclays and Citigroup, Bloomberg data show. Sales of sukuk grew nine times faster than international corporate bonds last year and twice as fast as the U.S. market for debt with ratings below investment grade, according to Bloomberg data…The Shariah finance industry, born in the 1970s after a 12- fold jump in oil prices, is expanding with crude prices near record highs enriching Islamic nations.”
Bank of England Report Says Liquidity Higher Now than in Dotcom Bubble of ‘99
From The Economist: “The Bank uses three measures. The first is the bid-offer spread—the difference between the prices at which market makers are willing to buy and sell securities. The smaller this spread, the more liquid markets have become. The second measure captures the effect of trades on asset prices—in illiquid markets, those who want to deal in size can find that prices move against them. This factor can be quantified as the ratio of price movements to trading volumes; a lower ratio means markets are more liquid.
The final measure is based on the corporate-bond market. Historically, such bonds have offered a higher spread over government securities than would be justified by investors' losses during defaults. This is probably because investors have demanded a premium for owning an illiquid asset. Any shrinking of this premium may suggest markets have become more liquid. The Bank has combined these measures into a composite ratio. From about 2004 onwards, this ratio moved to a much higher level, suggesting it is now very easy to buy financial assets. Another way of looking at it is to say that the cost of trading is very low. Why might this be? One obvious possibility is the activity of hedge funds, which turn their portfolios over rapidly, making it easier for other market participants to deal. Hedge-fund assets have grown fast over the past decade and now are at least $1.5 trillion. Another factor may have been that investment banks have devoted more energy and capital to trading in financial markets. Financial innovation has also helped; the creation of the credit-derivatives markets has encouraged investors to buy corporate bonds, since they can now unbundle the various risks and trade them separately. That has driven down the liquidity premium in the bond market (and pushed yields lower). This may not be permanent. Liquidity is a self-reinforcing process; investors are more willing to buy an asset they know they can sell easily. But if liquidity suddenly dries up, some investors might end up owning assets they neither want nor can get rid of. That might make a virtuous circle turn vicious.”
Investor’s Indiscriminate Demand For High Returns Increased Subprime Issuance
From Bloomberg: “Demand for bonds, and investors' complacency toward risk, can be blamed for the record early delinquencies and defaults on subprime home loans, speakers at an industry conference in Miami said. The poor performance of subprime home loans made last year stems from an average drop of at least 0.50 percentage point in the yield premiums for credit risk on all types of fixed-income assets since 2000, Mortgage Bankers Association Chief Economist Doug Duncan said, citing research by other economists. ``That allowed another cohort of borrowers to get into homes that wouldn't have if credit spreads were wider,'' Duncan said yesterday, citing cheaper loans and looser underwriting. Investors, seeing ``clear signs'' that subprime home loans had gotten too risky, didn't pull back from the securities because of the ``increased global liquidity and increased quest for yield,''…The U.S. bond market has been flooded with money first transferred overseas to China, oil-producing countries and other nations through trade deficits, said David Wyss, chief economist at New York-based Standard & Poor's. Their higher savings rates, he said, means the cash returns to the world bond markets. U.S. bonds have been attractive because of higher yields on government debt, and because the nation has the ``only large and liquid private bond market,'' which offers even greater yields, Wyss said in an interview. Of the $1.1 trillion in foreign investments in the U.S. last year, 89 percent went into bonds, Wyss said, citing Treasury Department data…Any talk of blame misses the ``shared responsibility'' said Christensen [of Fair Isaac]. ``You don't have lenders lending unless you have someone willing to purchase it and someone willing to rate it.''…[others] disagreed. ``I think it's the investors that have been screwing up'' by relying too much on the credit ratings of firms like S&P and Moody's.”
Is Private Equity The Next Bubble to Burst?
From The Boston Globe: “Debt markets that finance private equity transactions have changed in three important ways. They are charging lower interest rates, reducing the premium normally charged for greater risk. They are lending more money for the purchase of an operating company, exceeding normal caps based on the cash generated by the acquired business. Finally, debt markets are reducing or virtually eliminating covenants and other rules that now make it almost impossible for private equity investors to default on loans used to buy companies. Got that? Low rates, more leverage, practically no conditions. How do you think that story is going to end? "The reality is the markets are willing to provide extraordinary amounts of debt, almost indiscriminately," says …the big Boston private equity firm. "It's hard to put these companies into default. I can't think of the last time we had a real covenant in one of our deals."”
New Century Financial Misused Gain-on-Sale Accounting Rules for Mortgages
The New York Times: “In the spring of 1998, the chief financial officer of New Century Financial, a lender to home buyers with blemished credit, wrote an unusual paper describing a then little-known accounting technique…Now that technique, called gain on sale, may be coming back to haunt the company, which filed for bankruptcy protection on April 2 after disclosing a month earlier that federal prosecutors and securities regulators were investigating accounting mistakes and stock sales at the company….The technique …allowed the company to report profits before they actually existed. The paper profits were pegged to future earnings from loan sales to institutional investors. The results, which were nearly always prettier than those produced through traditional, conservative accounting in which profits were recorded only when cash comes through door, were then used to make more loans to risky home buyers. Used properly, gain on sale is legal. Big investment banks routinely employ the technique when packaging securities for sale to institutional investors. Unlike specialty finance lenders like New Century, though, Wall Street banks have deep pockets to support themselves if expected earnings from gain on sale accounting fail to materialize.
But some financial analysts say that New Century appears to have also used gain on sale to hide losses as the subprime market began to falter late last year…The use of gain on sale was a factor in the collapse of Enron in 2001 and of major specialty lenders in the late 1990s through this decade…The deterioration in recent months of the estimated $1.3 trillion subprime housing market has been tied to rising loan delinquencies and the decision by Wall Street to cut off billion-dollar credit lines to companies like New Century, which last year was the largest independent player in the industry…the stock prices of subprime home lenders like New Century Financial had “collapsed so fast because the income and balance sheet had been built on gain on sale, which turns out to be imaginary.”… New Century, of Irvine, Calif., made money in two ways, and it used gain on sale for both. In the first way, called “whole loan sales,” it sold pools of loans to big Wall Street investment banks. New Century made money by keeping the difference between the higher interest rates paid by subprime borrowers and the lower rates offered to the banks. In the second way, New Century chopped up its other loans to home buyers, repackaged them into securities for sale to investors, a process called securitization. New Century then kept the pieces expected to earn money in the future, called residuals, for itself. For both types of business, gain on sale allowed New Century to accelerate its profits. In 2005, the last year for which it has reported annual figures, New Century recorded income from gain on sale accounting of nearly $623 million out of a gross profit that year of $1.4 billion, according to its securities filings. For the whole loan sales, New Century recorded up front the cash gains. At the same time, New Century guaranteed to Wall Street investors that if the whole loans did not make as much money as it predicted — if home buyers were late with or defaulted on payments — New Century would buy back the impaired loans from the banks. But through overly rosy forecasts, New Century underestimated how many impaired loans it would have to repurchase and how much it would need to have on hand to do that. In its second use of gain on sale, New Century booked future earnings based on its estimates of what it expected to earn from the pieces left over from the securitizations. New Century’s problem, according to Zach Gast, an analyst with the Center for Financial Research and Analysis, was how it used gain on sale for its whole loan business. In the late 1990s, in the last downturn for subprime lenders, most abuses of gain on sale involved the securitization side. At New Century Financial, “it was aggressive accounting, that is certain,” Mr. Gast said. “But there are hints that New Century knew exactly how aggressive it was.” As the subprime market started to melt down last fall, New Century was forced to honor its guarantees to investment banks and other institutional investors and repurchase the impaired loans. It resold the loans at a loss. But, Mr. Gast said, when New Century repurchased the loans, it recorded them at values that exceeded the fire-sale prices. In other words, New Century did not recognize upfront the losses in the impaired loans. Mr. Gast said that New Century has “a huge number of repurchased loans that they haven’t taken losses on.” Under gain on sale accounting rules, “you should be recognizing the loss at the initial sale of the loan,” Mr. Gast said, adding that if you underestimate potential losses, you have to recognize those losses when you are forced to repurchase the loans — something New Century did not do.”
Emerging Market Debt Increasingly In Local Currencies as Economies Improve
From Merrill Lynch: “In the last 10 years supply and demand for local debt markets (LDM) increased exponentially. Supply increased because emerging market officials have been reducing foreign liabilities and replacing them with domestic bonds. Demand increased because inflation has been converging and investors continue to seek alternative investment opportunities…According to the BIS, the total stock of emerging market debt reached USD5.5tn in 2006, of which 17% is external debt and 83% is domestic debt. The change in the debt profile, to favor LDM, reflects the effort of both sovereigns and corporates to reduce their foreign currency liabilities. LDM were also boosted by the improvement in economic fundamentals in the individual countries.”
MISC
From Dow Jones: “U.S. Treasuries lost ground [as interest rates rose 1-3bp and the curve flattened]… The dollar stayed firm after the Fed’s Bernanke said that real interest rate remain “very, very low” and brushed off concerns that outsourcing is a major threat to the US economy…[Equities closed higher with the Dow up 73]… Crude oil futures were slightly lower in choppy trading…”
From Morgan Stanley: “S&P 500 outperformed all asset classes on a weekly, MTD, and 52-week basis with 0.9%, 4.9% and 5.3% returns, respectively. However, on a YTD basis, commodities have outperformed all asset classes.”
From The Dallas Morning News: “Centex profit is down 50 percent for quarter…CEO says it's 'one of the most difficult markets in 25 years'”
From Goldman Sachs: “The BOJ’s growth and inflation outlook in the BOJ’s FY2007-08 Outlook report appeared to be cautious. The seemingly cautious growth and inflation outlook, however, can be viewed as the BOJ’s tactics to enable earlier rate hike by lowering the market’s sights on them. We believe the BOJ is more wary about asset price appreciation than it has indicated in public statements. There is a growing likelihood that the BOJ may move forward the timing of its next rate hike to July…”
From Merrill Lynch: “The ISM defied expectations and surged 3.8 points in April to 54.7, the highest level in eleven months…When you get 75% of the regions report a decline in activity and then get a 3.8 point pop in the national index then you know you have a story because this is the first time that has ever happened. Just to see a 3.8 point surge is a big deal on its own because in the past decade, it has only done this 4% of the time - a 1 in 25 event; and usually it occurs after an event that took the prior month down sharply (i.e. Katrina, 9-11, Sarbanes-Oxley). But the data clearly suggest, as a stand alone event, and assuming that the ISM was "right" while the majority of the regional indices were "wrong", that capex is starting off the current quarter on a much better footing than it started Q1…”
From Morgan Stanley: “The amount of Fed easing priced into futures markets contracted modestly to around 40bp of cuts by year-end, compared to two full cuts previously.”
From Lehman: “[In today’s ISM report] 20 commodities were reported “up in price” with no commodities reported as “down in price.” Of these 20, half have not been trending higher (they appeared on the list in April but not in March).”
From Bloomberg: “Manufacturing activity in China expanded at the fastest pace in more than two years in April, according to a survey of purchasing managers released today.”
From Citi: “…consumer spending numbers are beginning to show mild stress as
Rebook Retail Sales printed sharply down with its first negative reading since
March of 2003.”
From Morgan Stanley: “Based on a nearly complete count, we estimate that motor vehicle sales held steady at 16.3 million units annualized in April. This was as expected overall, though the mix was more positive, with sales of domestically produced vehicles rising to an estimated 12.6 million from 12.3 million and imports dipping to 3.8 from 3.9.”
From Reuters: “President Hugo Chavez's government took over Venezuela's last remaining privately run oil fields Tuesday, intensifying a decisive struggle with Big Oil over one of the world's most lucrative deposits…three-quarters of the world's proven reserves are already controlled by state monopolies…”
From The Bureau of Economic Analysis: “For the first time, the Department of the Treasury will release quarterly transactions data and yearend investment position data on financial derivatives… The data on financial derivatives will be included on new line items in BEA’s standard tables. In future releases of the balance of payments, BEA will incorporate quarterly derivatives transactions data on the newly established line item with a one quarter lag…. The quarterly balance of payments table presents U.S. transactions in financial derivatives on a net basis on a new line. The annual international investment position table will separately present gross positive and gross negative positions in derivatives, as this level of detail is available from the new source data.”
From Bloomberg: “Business students are more likely to cut corners than those in any other academic discipline, several studies show. A Rutgers University survey last year found that cheating at business schools is common, even after ethics courses were added following scandals that bankrupted Enron Corp. and WorldCom Inc…56 percent of those in business schools acknowledge violating the rules.”
From The Wall Street Journal: “Robust growth outside of the U.S. means robust demand for goods globally. That helps the overseas sales of multinationals but could also push up prices at home for globally traded goods. While the U.S. economy lumbered in the first quarter, China’s GDP was 11.1% above its year-ago level, which means that China’s appetite for raw materials has only grown. Now throw the dollar in the mix. With the rest of the world growing faster relative to the U.S., the rest of the world has become a more attractive place to invest – on reason the dollar is weak. On a trade-weighted basis, the dollar has hit its lowest level against the currencies of major U.S. trading partners in the 36 year the Federal Reserve has been keeping records. That means that the dollar’s buying power has been reduced compared with other currencies. Profits earned abroad translate into more dollars at home, but it also means it costs more to import products. Consider gold, often seen as an inflation gauge. At $678.70 an ounce, it has risen 13% over the past six months and is just 6% shy of the…high it hit last May. But in euro terms, it has risen just 6% over the past six months, and the May peak is 13% away…In March, prices for imported consumer goods, excluding automobiles, were 1.8% higher than they were a year earlier – the biggest gain in 11 years…The risk is that this could make it harder for the Fed to cut rates in the presence of economic weakness.”
Growth of Islamic Banking
From Bloomberg: “Shariah requires that investors profit only from transactions based on the exchange of assets, not money alone, so interest is banned. Bankers sell Islamic bonds, or sukuk, by using property and other assets to generate income equivalent to interest they would pay on conventional debt. The money can't be used to finance gambling, guns or alcohol. The world's top five banks by assets -- Zurich-based UBS AG, HSBC and Barclays Plc in London, Paris-based BNP Paribas SA and Citigroup in New York -- have Islamic units. CIMB Group Bhd. in Kuala Lumpur is the biggest underwriter of sukuk this year followed by Standard Chartered in London, Barclays and Citigroup, Bloomberg data show. Sales of sukuk grew nine times faster than international corporate bonds last year and twice as fast as the U.S. market for debt with ratings below investment grade, according to Bloomberg data…The Shariah finance industry, born in the 1970s after a 12- fold jump in oil prices, is expanding with crude prices near record highs enriching Islamic nations.”
Bank of England Report Says Liquidity Higher Now than in Dotcom Bubble of ‘99
From The Economist: “The Bank uses three measures. The first is the bid-offer spread—the difference between the prices at which market makers are willing to buy and sell securities. The smaller this spread, the more liquid markets have become. The second measure captures the effect of trades on asset prices—in illiquid markets, those who want to deal in size can find that prices move against them. This factor can be quantified as the ratio of price movements to trading volumes; a lower ratio means markets are more liquid.
The final measure is based on the corporate-bond market. Historically, such bonds have offered a higher spread over government securities than would be justified by investors' losses during defaults. This is probably because investors have demanded a premium for owning an illiquid asset. Any shrinking of this premium may suggest markets have become more liquid. The Bank has combined these measures into a composite ratio. From about 2004 onwards, this ratio moved to a much higher level, suggesting it is now very easy to buy financial assets. Another way of looking at it is to say that the cost of trading is very low. Why might this be? One obvious possibility is the activity of hedge funds, which turn their portfolios over rapidly, making it easier for other market participants to deal. Hedge-fund assets have grown fast over the past decade and now are at least $1.5 trillion. Another factor may have been that investment banks have devoted more energy and capital to trading in financial markets. Financial innovation has also helped; the creation of the credit-derivatives markets has encouraged investors to buy corporate bonds, since they can now unbundle the various risks and trade them separately. That has driven down the liquidity premium in the bond market (and pushed yields lower). This may not be permanent. Liquidity is a self-reinforcing process; investors are more willing to buy an asset they know they can sell easily. But if liquidity suddenly dries up, some investors might end up owning assets they neither want nor can get rid of. That might make a virtuous circle turn vicious.”
Investor’s Indiscriminate Demand For High Returns Increased Subprime Issuance
From Bloomberg: “Demand for bonds, and investors' complacency toward risk, can be blamed for the record early delinquencies and defaults on subprime home loans, speakers at an industry conference in Miami said. The poor performance of subprime home loans made last year stems from an average drop of at least 0.50 percentage point in the yield premiums for credit risk on all types of fixed-income assets since 2000, Mortgage Bankers Association Chief Economist Doug Duncan said, citing research by other economists. ``That allowed another cohort of borrowers to get into homes that wouldn't have if credit spreads were wider,'' Duncan said yesterday, citing cheaper loans and looser underwriting. Investors, seeing ``clear signs'' that subprime home loans had gotten too risky, didn't pull back from the securities because of the ``increased global liquidity and increased quest for yield,''…The U.S. bond market has been flooded with money first transferred overseas to China, oil-producing countries and other nations through trade deficits, said David Wyss, chief economist at New York-based Standard & Poor's. Their higher savings rates, he said, means the cash returns to the world bond markets. U.S. bonds have been attractive because of higher yields on government debt, and because the nation has the ``only large and liquid private bond market,'' which offers even greater yields, Wyss said in an interview. Of the $1.1 trillion in foreign investments in the U.S. last year, 89 percent went into bonds, Wyss said, citing Treasury Department data…Any talk of blame misses the ``shared responsibility'' said Christensen [of Fair Isaac]. ``You don't have lenders lending unless you have someone willing to purchase it and someone willing to rate it.''…[others] disagreed. ``I think it's the investors that have been screwing up'' by relying too much on the credit ratings of firms like S&P and Moody's.”
Is Private Equity The Next Bubble to Burst?
From The Boston Globe: “Debt markets that finance private equity transactions have changed in three important ways. They are charging lower interest rates, reducing the premium normally charged for greater risk. They are lending more money for the purchase of an operating company, exceeding normal caps based on the cash generated by the acquired business. Finally, debt markets are reducing or virtually eliminating covenants and other rules that now make it almost impossible for private equity investors to default on loans used to buy companies. Got that? Low rates, more leverage, practically no conditions. How do you think that story is going to end? "The reality is the markets are willing to provide extraordinary amounts of debt, almost indiscriminately," says …the big Boston private equity firm. "It's hard to put these companies into default. I can't think of the last time we had a real covenant in one of our deals."”
New Century Financial Misused Gain-on-Sale Accounting Rules for Mortgages
The New York Times: “In the spring of 1998, the chief financial officer of New Century Financial, a lender to home buyers with blemished credit, wrote an unusual paper describing a then little-known accounting technique…Now that technique, called gain on sale, may be coming back to haunt the company, which filed for bankruptcy protection on April 2 after disclosing a month earlier that federal prosecutors and securities regulators were investigating accounting mistakes and stock sales at the company….The technique …allowed the company to report profits before they actually existed. The paper profits were pegged to future earnings from loan sales to institutional investors. The results, which were nearly always prettier than those produced through traditional, conservative accounting in which profits were recorded only when cash comes through door, were then used to make more loans to risky home buyers. Used properly, gain on sale is legal. Big investment banks routinely employ the technique when packaging securities for sale to institutional investors. Unlike specialty finance lenders like New Century, though, Wall Street banks have deep pockets to support themselves if expected earnings from gain on sale accounting fail to materialize.
But some financial analysts say that New Century appears to have also used gain on sale to hide losses as the subprime market began to falter late last year…The use of gain on sale was a factor in the collapse of Enron in 2001 and of major specialty lenders in the late 1990s through this decade…The deterioration in recent months of the estimated $1.3 trillion subprime housing market has been tied to rising loan delinquencies and the decision by Wall Street to cut off billion-dollar credit lines to companies like New Century, which last year was the largest independent player in the industry…the stock prices of subprime home lenders like New Century Financial had “collapsed so fast because the income and balance sheet had been built on gain on sale, which turns out to be imaginary.”… New Century, of Irvine, Calif., made money in two ways, and it used gain on sale for both. In the first way, called “whole loan sales,” it sold pools of loans to big Wall Street investment banks. New Century made money by keeping the difference between the higher interest rates paid by subprime borrowers and the lower rates offered to the banks. In the second way, New Century chopped up its other loans to home buyers, repackaged them into securities for sale to investors, a process called securitization. New Century then kept the pieces expected to earn money in the future, called residuals, for itself. For both types of business, gain on sale allowed New Century to accelerate its profits. In 2005, the last year for which it has reported annual figures, New Century recorded income from gain on sale accounting of nearly $623 million out of a gross profit that year of $1.4 billion, according to its securities filings. For the whole loan sales, New Century recorded up front the cash gains. At the same time, New Century guaranteed to Wall Street investors that if the whole loans did not make as much money as it predicted — if home buyers were late with or defaulted on payments — New Century would buy back the impaired loans from the banks. But through overly rosy forecasts, New Century underestimated how many impaired loans it would have to repurchase and how much it would need to have on hand to do that. In its second use of gain on sale, New Century booked future earnings based on its estimates of what it expected to earn from the pieces left over from the securitizations. New Century’s problem, according to Zach Gast, an analyst with the Center for Financial Research and Analysis, was how it used gain on sale for its whole loan business. In the late 1990s, in the last downturn for subprime lenders, most abuses of gain on sale involved the securitization side. At New Century Financial, “it was aggressive accounting, that is certain,” Mr. Gast said. “But there are hints that New Century knew exactly how aggressive it was.” As the subprime market started to melt down last fall, New Century was forced to honor its guarantees to investment banks and other institutional investors and repurchase the impaired loans. It resold the loans at a loss. But, Mr. Gast said, when New Century repurchased the loans, it recorded them at values that exceeded the fire-sale prices. In other words, New Century did not recognize upfront the losses in the impaired loans. Mr. Gast said that New Century has “a huge number of repurchased loans that they haven’t taken losses on.” Under gain on sale accounting rules, “you should be recognizing the loss at the initial sale of the loan,” Mr. Gast said, adding that if you underestimate potential losses, you have to recognize those losses when you are forced to repurchase the loans — something New Century did not do.”
Emerging Market Debt Increasingly In Local Currencies as Economies Improve
From Merrill Lynch: “In the last 10 years supply and demand for local debt markets (LDM) increased exponentially. Supply increased because emerging market officials have been reducing foreign liabilities and replacing them with domestic bonds. Demand increased because inflation has been converging and investors continue to seek alternative investment opportunities…According to the BIS, the total stock of emerging market debt reached USD5.5tn in 2006, of which 17% is external debt and 83% is domestic debt. The change in the debt profile, to favor LDM, reflects the effort of both sovereigns and corporates to reduce their foreign currency liabilities. LDM were also boosted by the improvement in economic fundamentals in the individual countries.”
MISC
From Dow Jones: “U.S. Treasuries lost ground [as interest rates rose 1-3bp and the curve flattened]… The dollar stayed firm after the Fed’s Bernanke said that real interest rate remain “very, very low” and brushed off concerns that outsourcing is a major threat to the US economy…[Equities closed higher with the Dow up 73]… Crude oil futures were slightly lower in choppy trading…”
From Morgan Stanley: “S&P 500 outperformed all asset classes on a weekly, MTD, and 52-week basis with 0.9%, 4.9% and 5.3% returns, respectively. However, on a YTD basis, commodities have outperformed all asset classes.”
From The Dallas Morning News: “Centex profit is down 50 percent for quarter…CEO says it's 'one of the most difficult markets in 25 years'”
From Goldman Sachs: “The BOJ’s growth and inflation outlook in the BOJ’s FY2007-08 Outlook report appeared to be cautious. The seemingly cautious growth and inflation outlook, however, can be viewed as the BOJ’s tactics to enable earlier rate hike by lowering the market’s sights on them. We believe the BOJ is more wary about asset price appreciation than it has indicated in public statements. There is a growing likelihood that the BOJ may move forward the timing of its next rate hike to July…”
From Merrill Lynch: “The ISM defied expectations and surged 3.8 points in April to 54.7, the highest level in eleven months…When you get 75% of the regions report a decline in activity and then get a 3.8 point pop in the national index then you know you have a story because this is the first time that has ever happened. Just to see a 3.8 point surge is a big deal on its own because in the past decade, it has only done this 4% of the time - a 1 in 25 event; and usually it occurs after an event that took the prior month down sharply (i.e. Katrina, 9-11, Sarbanes-Oxley). But the data clearly suggest, as a stand alone event, and assuming that the ISM was "right" while the majority of the regional indices were "wrong", that capex is starting off the current quarter on a much better footing than it started Q1…”
From Morgan Stanley: “The amount of Fed easing priced into futures markets contracted modestly to around 40bp of cuts by year-end, compared to two full cuts previously.”
From Lehman: “[In today’s ISM report] 20 commodities were reported “up in price” with no commodities reported as “down in price.” Of these 20, half have not been trending higher (they appeared on the list in April but not in March).”
From Bloomberg: “Manufacturing activity in China expanded at the fastest pace in more than two years in April, according to a survey of purchasing managers released today.”
From Citi: “…consumer spending numbers are beginning to show mild stress as
Rebook Retail Sales printed sharply down with its first negative reading since
March of 2003.”
From Morgan Stanley: “Based on a nearly complete count, we estimate that motor vehicle sales held steady at 16.3 million units annualized in April. This was as expected overall, though the mix was more positive, with sales of domestically produced vehicles rising to an estimated 12.6 million from 12.3 million and imports dipping to 3.8 from 3.9.”
From Reuters: “President Hugo Chavez's government took over Venezuela's last remaining privately run oil fields Tuesday, intensifying a decisive struggle with Big Oil over one of the world's most lucrative deposits…three-quarters of the world's proven reserves are already controlled by state monopolies…”
From The Bureau of Economic Analysis: “For the first time, the Department of the Treasury will release quarterly transactions data and yearend investment position data on financial derivatives… The data on financial derivatives will be included on new line items in BEA’s standard tables. In future releases of the balance of payments, BEA will incorporate quarterly derivatives transactions data on the newly established line item with a one quarter lag…. The quarterly balance of payments table presents U.S. transactions in financial derivatives on a net basis on a new line. The annual international investment position table will separately present gross positive and gross negative positions in derivatives, as this level of detail is available from the new source data.”
From Bloomberg: “Business students are more likely to cut corners than those in any other academic discipline, several studies show. A Rutgers University survey last year found that cheating at business schools is common, even after ethics courses were added following scandals that bankrupted Enron Corp. and WorldCom Inc…56 percent of those in business schools acknowledge violating the rules.”
Monday, April 30, 2007
Non-Residential Construction Supports Low Growth as Housing Remains Weak
Construction spending rose +.2% MoM in March, as expected. But, February saw a huge revision higher from +.3% MoM to +1.5% MoM. Since March of 2006 though, construction spending has fallen 2% YoY. Public spending on schools and highways helped support construction spending last month.
As expected, residential construction continues to contract, falling -1% MoM and -14.2% YoY. It has fallen for 11 of the past 12 months. But the weakness in housing is offset by non-residential construction which expanded +1.4% MoM and +13.2% YoY.
Private construction rose a modest +.2% MoM, but is down -5.1% YoY. Public construction rebounded in March to grow +.4% MoM and 9% YoY. Federal spending has declined this year by -10.6% YoY, but state and local has offset that weakness by increasing 10.6% YoY.
Construction spending was a very small net positive to GDP growth in the first quarter, due to non-residential expenditures on factories, offices, hotels, and public buildings such as schools.
As expected, residential construction continues to contract, falling -1% MoM and -14.2% YoY. It has fallen for 11 of the past 12 months. But the weakness in housing is offset by non-residential construction which expanded +1.4% MoM and +13.2% YoY.
Private construction rose a modest +.2% MoM, but is down -5.1% YoY. Public construction rebounded in March to grow +.4% MoM and 9% YoY. Federal spending has declined this year by -10.6% YoY, but state and local has offset that weakness by increasing 10.6% YoY.
Construction spending was a very small net positive to GDP growth in the first quarter, due to non-residential expenditures on factories, offices, hotels, and public buildings such as schools.
Chicago Purchasing Manager Gives Back Last Month's Strength
Chicago purchasing manager's index settled back down toward earth in April after zooming up in March to a two year high. The headline figure slumped to 52.9 (consensus 54) from 61.7 the prior month. Any reading above 50 shows expansion, but the fall back to 52.9 indicates more subdued growth, in line with other surveys.
The Chicago purchasing managers index includes any member group. They don't have to be located in the Midwest, or even the US, which makes it a better proxy for overall U.S. manufacturing strength in many economists' opinion. The only two subcomponents to show strength were employment(which just rose above 50) and prices paid (which rose almost 6 points to 64.9) as energy prices work through the supply chain. All other subgroups fell from the prior month. New orders which surged in March to 72.2 fell back to 56.5 in April, but are still above the 48.7 reading of February. Production though remains firm at 62.2. Inventories weakened to 43.2 from 48.8.
The Chicago purchasing managers index includes any member group. They don't have to be located in the Midwest, or even the US, which makes it a better proxy for overall U.S. manufacturing strength in many economists' opinion. The only two subcomponents to show strength were employment(which just rose above 50) and prices paid (which rose almost 6 points to 64.9) as energy prices work through the supply chain. All other subgroups fell from the prior month. New orders which surged in March to 72.2 fell back to 56.5 in April, but are still above the 48.7 reading of February. Production though remains firm at 62.2. Inventories weakened to 43.2 from 48.8.
Today's Tidbits
MISC
From Dow Jones: “U.S. Treasuries prices saw robust gains Monday morning, fueled by a tame March inflation reading and some weak regional manufacturing data. The data came after Friday’s weaker-than-expected first quarter growth data, which showed the economy expanding at its slowest pace in four years. The combined weaker growth and weaker inflation data convinced investors to increase their bets on Federal Reserve rate cuts. [Treasury yields drop 6-7bp]… The dollar was down in afternoon trading after the Euro made another attempt at a new all-time high, climbing to an intrasession high of $1.3679 but unable to hit a new record of $1.3682. Sterling, meanwhile, was back up above the [$]2.0 mark, while the dollar slipped modestly against the yen as additional disappointing U.S. data helped refuel dollar-bearishness…[U.S. stocks closed lower with the Dow down 58 and the S&P 500 down 12 points]… Crude oil futures turned lower Monday, shedding some of the gains made Friday following Saudi Arabia’s foiling of a major terror plot targeting the kingdom’s oil industry. Saudi Arabia’s arrest of 172 militants stoked fears about the security of Saudi oil supplies and sent oil prices sharply higher.”
From Merrill Lynch: “…as of 2006Q4, outstanding home mortgages stood at $9.7 trillion. At the end of 2000, it was $4.8 trillion. So consider that we tacked on more to our mortgage debt in the past six years than we did in the prior 50 years combined. Half of today's mortgage market – for a country more than two centuries old – was "built" in just the past six years….In ten years, mortgage debt per worker has doubled”
From Bloomberg: “Residential investment, as it's known in the GDP accounts, subtracted from growth for the sixth consecutive quarter, something that hasn't happened since 1980.”
From Goldman Sachs: “Rental vacancy and homeowner vacancy rates for the first quarter both rose from already high levels. The homeowner vacancy rate set a new record of 2.8% (the series goes back more than 50 years), topping the already record 2.7% of last quarter. The rental vacancy rate now ties the second highest level over the last 10 years at 10.1%. Elevated rental and homeowner vacancy rates are associated with lower shelter inflation (rent and OER components of CPI). The continued elevation of both rates indicates oversupply in the housing sector from elevated investment in housing over the last several years. This oversupply should translate into downward pressure on prices - both for rentals and for sales - over the remainder of this year.”
From Dow Jones: “Second-home sales were a mixed bag in 2006, with vacation- home sales hitting a record high, while investment property purchases dropped off sharply, according to the National Association of Realtors. Overall, second-home purchases accounted for 36% of all existing and new residential transactions, down from 40% of
sales in 2005, NAR said. An annual survey from NAR showed vacation-home sales
rose 4.7% to a record 1.07 million in 2006 from 1.02 million in 2005. But investment-home sales plummeted, down 28.9% to 1.65 million in 2006 from a record 2.32 million in 2005.”
From Bloomberg: “One year ago, capital spending was growing at a 9 percent year- over-year rate…``A year ago, people said capital spending was going to rescue us as housing slowed,''…``Capital spending is down to zero (year-on-year). There's been an unambiguous slowdown.'' In only one quarter of this entire expansion did capital spending add 1 percentage point or more to growth compared with an average contribution of 1 percentage point from the end of 1992 through the middle of 2000. The first-quarter contribution was 0.1 percentage point. ``Are businesses going to step up their pace of capital spending with the utilization rate falling and consumer demand slowing?''”
From Bloomberg: “Prices at the gasoline pump for regular-grade gasoline rose in April to $2.88 a gallon, the highest in eight months, according to the Energy Department.”
From Barclays: “…look at the May bi-weekly seasonal tendencies (beginning in 1986) of the US Ten Year Treasury Yield…The first half of the month shows a bias for yields to rise, averaging an increase of 4.6 bp and a median increase of 9.8 bp. Since 1986, yields have risen 62% of the time in the first half of the month. In contrast, the second half of the month averages a yield decline of 6.9 bp, and median fall of 8.3 bp. The second half of the month has seen yields fall 76% of the time since 1986. Yields have fallen for the past 10 years in a row (and in 12 of the past 13 years) in the latter half of May.”
From Wachovia: “Implied volatility has declined substantially in recent weeks following the spike in late February and early March. At the moment, implied volatility associated with 5-year and 10-year tenors across the expiry curve have largely returned to its pre-spike levels. Implied vol in 10-year tenors is also approaching its lows in 2007. While low realized vol has supported the drop in implied vol in recent weeks, the amount of cushion left in implied vol to weather a spike in actual volatility similar to what the market has experienced 2 months ago seems to be getting somewhat thin.”
From Merrill Lynch: “On a trade-weighted basis, the Euro has only risen 2.7% since early February (so the 5% gain against the dollar is a bit misleading) – and Germany's exports are increasingly oriented to parts of the world that are posting solid gains in domestic demand. Russia and other eastern European countries now account for about one-fifth of German's exports – up from 13% in 1999 – and outbound shipments to these regions are currently rising at a 20% annual rate.”
From Bloomberg: “Japan, China and South Korea will produce so many vessels
that shipping costs, now at an all-time high, will fall 40 percent by 2010, according to futures contracts…Commodity-shipping rates have soared 41 percent this year…”
From Merrill Lynch: “The PBOC's primary concern is excess liquidity; a secondary concern is inflation. Raising the required reserve ratio (the percentage of deposits that commercial banks need to place with the PBOC) reduces the system's liquidity, lowers the amount of funds banks have available to make new loans, and tends to boost money market interest rates.”
From Dow Jones: “Texas-area manufacturing activity grew at a modestly slower pace in April. The Federal Reserve Bank of Dallas said Monday that its April production index moved to 24.3 from 27.2 the prior month. The bank’s general activity index stood at 15.9 from 12.7 in March. Readings above zero indicate positive activity, and the higher the number, the more broad-based the gains.”
From The Houston Chronicle: “In retirement, income falls steadily. The government study figures show that income falls dramatically as people age. The median income for married couples declines from $68,612 at ages 55 to 61 to $28,490 for couples 80 and older. The decline is less severe for singles, going from $24,000 to $13,321…Social Security is very important for all but the rich. Even for those in the second-highest income quintile, Social Security was usually the largest single source of income. In 48 percent of those households, it accounted for 50 percent or more of all income.[Based on a study by the Social Security Administration, "Income of the Population 55 or Older, 2004".]
From Reuters: “Morgan Stanley former star economist Andy Xie warned of an imminent stock market crash in China…also warned that the global boom in equities would be over by 2008 and that this would coincide with a worldwide recession. The recession would start from the United States and spiral down into Asia where exporters would be hit…a combination of excess liquidity, rising inflation and rich valuations would result in a global crash soon. "People will be surprised. When the end comes, it's going to be pretty bad," Xie added.”
From The Financial Times: “Fidelity International has become the first foreign fund management group to launch a back-office operation in China, reflecting the country’s rise in pulling power as a financial outsourcing centre….could rival the group’s outsourcing operations in India, where it employs about 9,000 staff… is hoping to use the Dalian facility to service its mutual funds and pension business in Japan, where it ranks among the biggest foreign money managers. “I don’t know that this venture will be able to provide all of Fidelity’s back-office support for this region, but I do feel that it may be able to provide a high level of support due to the strong systems, operational and linguistic skills that are not all available in India or elsewhere,” …”
From MarketWatch: “Turkey's stocks and currency fell sharply Monday, as the country's political crisis deepened after the military threatened to intervene in the presidential elections to protect secular values, and the Islamist government came under pressure to call early general elections.
From CNN: “…according to the old Wall Street adage "Sell in May and go away," one who invests in stocks during the colder months and sits it out during the beach months can do quite nicely, more or less. That's because stocks gains in November through April have typically been stronger than May through October for a wide variety of reasons… With just one trading day left in April, the Dow is up 8.6 percent in the most recent "best" period, just above the historic average of 7.9 percent…Why does "sell in May" tend to work so well? May itself is not really that bad… and sometimes the traditional end of year rally can start in mid-October. It's the Memorial Day to Labor Day period that's the worst, and that tends to give the whole six months a bad name. By late May, tax refunds are over, so the flow of fresh funds into stocks ebbs…By the time fall kicks in, the psychology has switched to a back-to-school, back-to-work mentality and from a stock standpoint, to house cleaning. In addition, big mutual funds tend to dump losers in anticipation of the end of their fiscal year in October. September is the worst month of the year for the Dow, Nasdaq and S&P 500.”
From Morgan Stanley: “A much stronger-than-expected Canadian February GDP print gave CAD legs of strength…”
From Dow Jones: “U.S. Treasuries prices saw robust gains Monday morning, fueled by a tame March inflation reading and some weak regional manufacturing data. The data came after Friday’s weaker-than-expected first quarter growth data, which showed the economy expanding at its slowest pace in four years. The combined weaker growth and weaker inflation data convinced investors to increase their bets on Federal Reserve rate cuts. [Treasury yields drop 6-7bp]… The dollar was down in afternoon trading after the Euro made another attempt at a new all-time high, climbing to an intrasession high of $1.3679 but unable to hit a new record of $1.3682. Sterling, meanwhile, was back up above the [$]2.0 mark, while the dollar slipped modestly against the yen as additional disappointing U.S. data helped refuel dollar-bearishness…[U.S. stocks closed lower with the Dow down 58 and the S&P 500 down 12 points]… Crude oil futures turned lower Monday, shedding some of the gains made Friday following Saudi Arabia’s foiling of a major terror plot targeting the kingdom’s oil industry. Saudi Arabia’s arrest of 172 militants stoked fears about the security of Saudi oil supplies and sent oil prices sharply higher.”
From Merrill Lynch: “…as of 2006Q4, outstanding home mortgages stood at $9.7 trillion. At the end of 2000, it was $4.8 trillion. So consider that we tacked on more to our mortgage debt in the past six years than we did in the prior 50 years combined. Half of today's mortgage market – for a country more than two centuries old – was "built" in just the past six years….In ten years, mortgage debt per worker has doubled”
From Bloomberg: “Residential investment, as it's known in the GDP accounts, subtracted from growth for the sixth consecutive quarter, something that hasn't happened since 1980.”
From Goldman Sachs: “Rental vacancy and homeowner vacancy rates for the first quarter both rose from already high levels. The homeowner vacancy rate set a new record of 2.8% (the series goes back more than 50 years), topping the already record 2.7% of last quarter. The rental vacancy rate now ties the second highest level over the last 10 years at 10.1%. Elevated rental and homeowner vacancy rates are associated with lower shelter inflation (rent and OER components of CPI). The continued elevation of both rates indicates oversupply in the housing sector from elevated investment in housing over the last several years. This oversupply should translate into downward pressure on prices - both for rentals and for sales - over the remainder of this year.”
From Dow Jones: “Second-home sales were a mixed bag in 2006, with vacation- home sales hitting a record high, while investment property purchases dropped off sharply, according to the National Association of Realtors. Overall, second-home purchases accounted for 36% of all existing and new residential transactions, down from 40% of
sales in 2005, NAR said. An annual survey from NAR showed vacation-home sales
rose 4.7% to a record 1.07 million in 2006 from 1.02 million in 2005. But investment-home sales plummeted, down 28.9% to 1.65 million in 2006 from a record 2.32 million in 2005.”
From Bloomberg: “One year ago, capital spending was growing at a 9 percent year- over-year rate…``A year ago, people said capital spending was going to rescue us as housing slowed,''…``Capital spending is down to zero (year-on-year). There's been an unambiguous slowdown.'' In only one quarter of this entire expansion did capital spending add 1 percentage point or more to growth compared with an average contribution of 1 percentage point from the end of 1992 through the middle of 2000. The first-quarter contribution was 0.1 percentage point. ``Are businesses going to step up their pace of capital spending with the utilization rate falling and consumer demand slowing?''”
From Bloomberg: “Prices at the gasoline pump for regular-grade gasoline rose in April to $2.88 a gallon, the highest in eight months, according to the Energy Department.”
From Barclays: “…look at the May bi-weekly seasonal tendencies (beginning in 1986) of the US Ten Year Treasury Yield…The first half of the month shows a bias for yields to rise, averaging an increase of 4.6 bp and a median increase of 9.8 bp. Since 1986, yields have risen 62% of the time in the first half of the month. In contrast, the second half of the month averages a yield decline of 6.9 bp, and median fall of 8.3 bp. The second half of the month has seen yields fall 76% of the time since 1986. Yields have fallen for the past 10 years in a row (and in 12 of the past 13 years) in the latter half of May.”
From Wachovia: “Implied volatility has declined substantially in recent weeks following the spike in late February and early March. At the moment, implied volatility associated with 5-year and 10-year tenors across the expiry curve have largely returned to its pre-spike levels. Implied vol in 10-year tenors is also approaching its lows in 2007. While low realized vol has supported the drop in implied vol in recent weeks, the amount of cushion left in implied vol to weather a spike in actual volatility similar to what the market has experienced 2 months ago seems to be getting somewhat thin.”
From Merrill Lynch: “On a trade-weighted basis, the Euro has only risen 2.7% since early February (so the 5% gain against the dollar is a bit misleading) – and Germany's exports are increasingly oriented to parts of the world that are posting solid gains in domestic demand. Russia and other eastern European countries now account for about one-fifth of German's exports – up from 13% in 1999 – and outbound shipments to these regions are currently rising at a 20% annual rate.”
From Bloomberg: “Japan, China and South Korea will produce so many vessels
that shipping costs, now at an all-time high, will fall 40 percent by 2010, according to futures contracts…Commodity-shipping rates have soared 41 percent this year…”
From Merrill Lynch: “The PBOC's primary concern is excess liquidity; a secondary concern is inflation. Raising the required reserve ratio (the percentage of deposits that commercial banks need to place with the PBOC) reduces the system's liquidity, lowers the amount of funds banks have available to make new loans, and tends to boost money market interest rates.”
From Dow Jones: “Texas-area manufacturing activity grew at a modestly slower pace in April. The Federal Reserve Bank of Dallas said Monday that its April production index moved to 24.3 from 27.2 the prior month. The bank’s general activity index stood at 15.9 from 12.7 in March. Readings above zero indicate positive activity, and the higher the number, the more broad-based the gains.”
From The Houston Chronicle: “In retirement, income falls steadily. The government study figures show that income falls dramatically as people age. The median income for married couples declines from $68,612 at ages 55 to 61 to $28,490 for couples 80 and older. The decline is less severe for singles, going from $24,000 to $13,321…Social Security is very important for all but the rich. Even for those in the second-highest income quintile, Social Security was usually the largest single source of income. In 48 percent of those households, it accounted for 50 percent or more of all income.[Based on a study by the Social Security Administration, "Income of the Population 55 or Older, 2004".]
From Reuters: “Morgan Stanley former star economist Andy Xie warned of an imminent stock market crash in China…also warned that the global boom in equities would be over by 2008 and that this would coincide with a worldwide recession. The recession would start from the United States and spiral down into Asia where exporters would be hit…a combination of excess liquidity, rising inflation and rich valuations would result in a global crash soon. "People will be surprised. When the end comes, it's going to be pretty bad," Xie added.”
From The Financial Times: “Fidelity International has become the first foreign fund management group to launch a back-office operation in China, reflecting the country’s rise in pulling power as a financial outsourcing centre….could rival the group’s outsourcing operations in India, where it employs about 9,000 staff… is hoping to use the Dalian facility to service its mutual funds and pension business in Japan, where it ranks among the biggest foreign money managers. “I don’t know that this venture will be able to provide all of Fidelity’s back-office support for this region, but I do feel that it may be able to provide a high level of support due to the strong systems, operational and linguistic skills that are not all available in India or elsewhere,” …”
From MarketWatch: “Turkey's stocks and currency fell sharply Monday, as the country's political crisis deepened after the military threatened to intervene in the presidential elections to protect secular values, and the Islamist government came under pressure to call early general elections.
From CNN: “…according to the old Wall Street adage "Sell in May and go away," one who invests in stocks during the colder months and sits it out during the beach months can do quite nicely, more or less. That's because stocks gains in November through April have typically been stronger than May through October for a wide variety of reasons… With just one trading day left in April, the Dow is up 8.6 percent in the most recent "best" period, just above the historic average of 7.9 percent…Why does "sell in May" tend to work so well? May itself is not really that bad… and sometimes the traditional end of year rally can start in mid-October. It's the Memorial Day to Labor Day period that's the worst, and that tends to give the whole six months a bad name. By late May, tax refunds are over, so the flow of fresh funds into stocks ebbs…By the time fall kicks in, the psychology has switched to a back-to-school, back-to-work mentality and from a stock standpoint, to house cleaning. In addition, big mutual funds tend to dump losers in anticipation of the end of their fiscal year in October. September is the worst month of the year for the Dow, Nasdaq and S&P 500.”
From Morgan Stanley: “A much stronger-than-expected Canadian February GDP print gave CAD legs of strength…”
Income continues to grow, but spending slows in March; Higher food and gasoline prices push up inflation rate
Personal Spending slowed below Personal Income in March. Consumer spending has been the support of the economy as housing and business capital expenditures have slowed, but it looks like higher gas prices and the weak housing market may be encouraging more savings. Adjusted for inflation, spending fell the most since September 2005, at -.2% MoM.
Personal income grew .7% MoM in March(consensus +.6% MoM), the same as the revised higher level for February of +.7% MoM. Personal spending slowed to +.3% MoM (consensus +.5% MoM), and only half the rate of the revised higher +.7% MoM increase in February. Slowing spending will keep GDP growth weak in the second quarter.
The savings rate improved to -.8% in March from -1.2% in February.
Over the past year, personal income has risen 5.7% YoY, with disposable income (after taxes) rising +5.3% YoY. Personal spending has increased 5.5% YoY. The savings rate has fallen -.4% since March of 2006. Inflation adjusted, personal spending rose +3.1% YoY, while disposable income rose +2.9% YoY.
Headline inflation continues to rise, with the PCE deflator rising to +2.4% YoY from +1.9% YoY only two months ago. Excluding food and energy, inflation has fallen to +2.1% YoY in March from +2.4% YoY in February. On a monthly basis, core inflation was unchanged in March from February, but total inflation rose +.4% MoM, due to higher gasoline and food expenses.
Personal income grew .7% MoM in March(consensus +.6% MoM), the same as the revised higher level for February of +.7% MoM. Personal spending slowed to +.3% MoM (consensus +.5% MoM), and only half the rate of the revised higher +.7% MoM increase in February. Slowing spending will keep GDP growth weak in the second quarter.
The savings rate improved to -.8% in March from -1.2% in February.
Over the past year, personal income has risen 5.7% YoY, with disposable income (after taxes) rising +5.3% YoY. Personal spending has increased 5.5% YoY. The savings rate has fallen -.4% since March of 2006. Inflation adjusted, personal spending rose +3.1% YoY, while disposable income rose +2.9% YoY.
Headline inflation continues to rise, with the PCE deflator rising to +2.4% YoY from +1.9% YoY only two months ago. Excluding food and energy, inflation has fallen to +2.1% YoY in March from +2.4% YoY in February. On a monthly basis, core inflation was unchanged in March from February, but total inflation rose +.4% MoM, due to higher gasoline and food expenses.
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