In July, the National Association of Homebuilders' confidence index plummeted to a new low of 24 (consensus 27). The prior low for this cycle was set last month at 28. Sentiment has been declining for the last six months. Prior to that, the index dipped to 30 last September before rebounding to 39 in February. Any reading below 50 indicate poor selling conditions.
Single-family home sales fell to 24 from 29, prospective buyer traffic fell to 19 from 23, and expectations for the next six months dropped to 34 from 39 last month. Over the past year, the decline in the single-family homes sales has been the greatest, falling 19 points.
All regions of the country are showing weakness with the Midwest having the lowest reading at 19 (-1 from prior month), followed by the West and South at 25(-3) and 26(-5). The strongest area is the Northeast at 31 (-5).
Record high levels of inventory and increased cancellations are causing builders to halt new projects, and reduce prices, as losses mount. Higher interest rates and tighter credit conditions are also weighing on the housing market following the problems in subprime mortgages. Residential construction has been in decline for a year and half, cutting GDP growth. Today's survey does not indicate that housing is likely to rebound soon. Most economists expect housing starts to continue to decline through the rest of this year.
Tuesday, July 17, 2007
Industrial Production Rebounds, As Expected
Industrial production in June rose +.5% MoM, and right at consensus. This indicator has been bouncing from gain to loss over the past year as inventories have been pared back. Capacity utilization also rebounded to 81.7% (81.6% consensus), and a new high for the year in June.
Increases in industrial production were broadbased across industries. Manufacturing rose +.6% MoM. Motor vehicle output rose +2.5% MoM while machinery production fell -1.2% MoM. These were both countercyclical to their behavior over the past year when vehicle production fell -1.7% YoY and machinery grew +.9% YoY. As expected, utility demand grew +.3% MoM. Excluding motor vehicle production, factory output rose +.4% MoM.
By product groupings, home electronics(+2.6% MoM) saw the greatest rebound followed by construction supplies(+1% MoM).
Mining has the highest capacity utilization at 90.7% followed by utilities at 85.6%. Semiconductors had the lowest factory usage rate at 72.4% followed by manufacturing at 80.3%. The overall capacity utilization rate at 81.75 is still .6% below the level of a year ago.
Output in the second quarter accelerated to a 2.9% annualized pace from the 1.1% annualized pace in the first quarter.
Increases in industrial production were broadbased across industries. Manufacturing rose +.6% MoM. Motor vehicle output rose +2.5% MoM while machinery production fell -1.2% MoM. These were both countercyclical to their behavior over the past year when vehicle production fell -1.7% YoY and machinery grew +.9% YoY. As expected, utility demand grew +.3% MoM. Excluding motor vehicle production, factory output rose +.4% MoM.
By product groupings, home electronics(+2.6% MoM) saw the greatest rebound followed by construction supplies(+1% MoM).
Mining has the highest capacity utilization at 90.7% followed by utilities at 85.6%. Semiconductors had the lowest factory usage rate at 72.4% followed by manufacturing at 80.3%. The overall capacity utilization rate at 81.75 is still .6% below the level of a year ago.
Output in the second quarter accelerated to a 2.9% annualized pace from the 1.1% annualized pace in the first quarter.
International Demand for US Stocks and Bonds Rises to Record in May
Foreign purchases of long-term U.S. financial assets rose to a record $126.1 billion in May, an increase from the $80.3 billion purchased last month. The largest previous monthly long-term purchases were in August, 2006 at $120.9 billion. When net short-term purchases are included, the total increased to $105.9 billion in May, and April's purchases were revised down to $97.8 billion from the $111.8 billion originally reported. Purchases were focused on corporate bonds and stocks.
Private flows made up the total demand for total net flows into the U.S. in May as net foreign official flows actually were a negative -$2.8B. Private purchases more than doubled from the prior month to a record $152B in May. U.S. investors bought a net $37.3 billion of overseas assets, an increase of $20 billion over the prior month.
New record highs in the U.S. equity market helped fuel foreign demand for our stocks, which rose to $41.9 billion in May from a recent low of $8.7 billion in March. Demand for Treasury notes also rebounded, rising $21.6 billion from flat in April. Corporate bonds saw a more than doubling in demand to $72.6 billion in May from $33.5 billion in April, while agency debt and mortgages saw an almost $9 billion decline to $27.5 billion in May.
Foreign official holdings of Treasuries fell -$10 billion in May, fairly evenly split between T-Bills and T-Notes. The UK was the largest purchaser ($33B) by a large margin, followed by oil exporters at +$9B. China was a net seller of $6.6B, but this was swamped by hedge fund selling out of the Caribbean of -$28.5B. Japan is still the largest foreign holder of U.S. Treasury debt at $615B, followed by China at $407B. The UK trails in third place at $167B.
Foreign investor demand for U.S. assets continues to be sufficient to fund the trade deficit, which rose to $60B in May, even as the dollar weakens. The strong demand for long-term over short-term ( <1y) assets can be viewed as a sign of foreign faith in the U.S. economy.
Private flows made up the total demand for total net flows into the U.S. in May as net foreign official flows actually were a negative -$2.8B. Private purchases more than doubled from the prior month to a record $152B in May. U.S. investors bought a net $37.3 billion of overseas assets, an increase of $20 billion over the prior month.
New record highs in the U.S. equity market helped fuel foreign demand for our stocks, which rose to $41.9 billion in May from a recent low of $8.7 billion in March. Demand for Treasury notes also rebounded, rising $21.6 billion from flat in April. Corporate bonds saw a more than doubling in demand to $72.6 billion in May from $33.5 billion in April, while agency debt and mortgages saw an almost $9 billion decline to $27.5 billion in May.
Foreign official holdings of Treasuries fell -$10 billion in May, fairly evenly split between T-Bills and T-Notes. The UK was the largest purchaser ($33B) by a large margin, followed by oil exporters at +$9B. China was a net seller of $6.6B, but this was swamped by hedge fund selling out of the Caribbean of -$28.5B. Japan is still the largest foreign holder of U.S. Treasury debt at $615B, followed by China at $407B. The UK trails in third place at $167B.
Foreign investor demand for U.S. assets continues to be sufficient to fund the trade deficit, which rose to $60B in May, even as the dollar weakens. The strong demand for long-term over short-term ( <1y) assets can be viewed as a sign of foreign faith in the U.S. economy.
Core PPI Inflation Rises in June
June producer prices showed a substantial decline in headline inflation as energy price rises retreated, but core inflation rose more than expected. Pipeline pressures abated at the crude and intermediate levels.
Headline PPI fell -.2% MoM (consensus +.2%) versus an increase of +.9% MoM in May. This is the first negative monthly change since January. On an annual basis, headline inflation fell to +3.3% YoY in June versus +4.1% YoY in May. Over the past three months, headline PPI has risen at a 5.7% annualized basis.
Core inflation rose +.3% MoM (consensus +.2%), and the highest monthly gain since March. Over the past year, core inflation rose 1.8% versus June 2006 (consensus +1.7% YoY), a notable increase from the +1.6% YoY rate in May. Ex-food and energy, core PPI has risen at a 2% annualized basis over the past three months.
Gasoline prices fell -3.9% MoM and food prices fell -.8% MoM. Though the prices for gasoline and food fell this month, they have been trending higher over the past year, with gasoline rising +3.8% YoY and food rising +6.5% YoY. Energy prices overall fell -1.1% MoM but are up +4.7% YoY. This month's decline in food and energy prices is not likely to persist into next month's data.
Consumer goods prices fell -.4% MoM while capital equipment rose +.3% MoM, the biggest gain since February. Computers continue to fall in price, declining -3.4% MoM, and -22.5% YoY. Surprising strength was observed in auto prices which rose +1.4% MoM, and accounts for 17% of the core weighting. This is unlikely to continue based on the weak auto sales data, and should allow core PPI to subside in coming months.
Intermediate goods prices slowed to +.5% MoM from +1.1% MoM in May, and crude goods prices decelerated even more to +.3% MoM from +2% MoM in May. Food prices took over from energy prices as the major inflationary factor in intermediate prices, while they were about equally weighted in their impact at the crude level in June.
Over the first six months of 2007, finished goods prices have risen at a 6.4% seasonally adjusted annual rate. This compares with an unchanged reading during the last six months of 2006. The main reason for the change is energy prices which rose 18.4% this year, after declining 8.2% in the second half of 2006. Food prices accelerated in 2007, rising at a 7.8% for the year-to-date, after increasing 4.9% annualized in the second half of 2006. Excluding food and energy, the core PPI accelerated to 2.3% so far this year versus +1.3% annualized in the prior six months.
The Treasury market focused on the rise in core inflation, and has sold off slightly this morning, causing ten year yields to rise around 2bp.
Headline PPI fell -.2% MoM (consensus +.2%) versus an increase of +.9% MoM in May. This is the first negative monthly change since January. On an annual basis, headline inflation fell to +3.3% YoY in June versus +4.1% YoY in May. Over the past three months, headline PPI has risen at a 5.7% annualized basis.
Core inflation rose +.3% MoM (consensus +.2%), and the highest monthly gain since March. Over the past year, core inflation rose 1.8% versus June 2006 (consensus +1.7% YoY), a notable increase from the +1.6% YoY rate in May. Ex-food and energy, core PPI has risen at a 2% annualized basis over the past three months.
Gasoline prices fell -3.9% MoM and food prices fell -.8% MoM. Though the prices for gasoline and food fell this month, they have been trending higher over the past year, with gasoline rising +3.8% YoY and food rising +6.5% YoY. Energy prices overall fell -1.1% MoM but are up +4.7% YoY. This month's decline in food and energy prices is not likely to persist into next month's data.
Consumer goods prices fell -.4% MoM while capital equipment rose +.3% MoM, the biggest gain since February. Computers continue to fall in price, declining -3.4% MoM, and -22.5% YoY. Surprising strength was observed in auto prices which rose +1.4% MoM, and accounts for 17% of the core weighting. This is unlikely to continue based on the weak auto sales data, and should allow core PPI to subside in coming months.
Intermediate goods prices slowed to +.5% MoM from +1.1% MoM in May, and crude goods prices decelerated even more to +.3% MoM from +2% MoM in May. Food prices took over from energy prices as the major inflationary factor in intermediate prices, while they were about equally weighted in their impact at the crude level in June.
Over the first six months of 2007, finished goods prices have risen at a 6.4% seasonally adjusted annual rate. This compares with an unchanged reading during the last six months of 2006. The main reason for the change is energy prices which rose 18.4% this year, after declining 8.2% in the second half of 2006. Food prices accelerated in 2007, rising at a 7.8% for the year-to-date, after increasing 4.9% annualized in the second half of 2006. Excluding food and energy, the core PPI accelerated to 2.3% so far this year versus +1.3% annualized in the prior six months.
The Treasury market focused on the rise in core inflation, and has sold off slightly this morning, causing ten year yields to rise around 2bp.
Today's Tidbits
Subprime Contagion Fears
From Dow Jones: “The riskiest tranche of the subprime mortgage-based derivative index, the ABX, hit another low Tuesday. The BBB- tranche was quoted at 44 cents on the dollar early afternoon… Further downgrades of securities tied to the subprime mortgage meltdown will put pressure on public pension funds and insurance companies to sell off their holdings, but the rules under which they operate generally give them the flexibility to avoid a fire sale. That could provide some reassurance to Wall Street, which is concerned hasty sales could sharply lower market prices on mortgage bonds and the complex securities that banks have constructed based on them, so-called collateralized debt obligations. A sharp drop in prices could force other buyers to record big losses, spooking investors and causing a sharp spike in risk aversion - which could threaten the stability of the financial system.”
Private Equity Firms May Have to Utilize Bridge Loans to Fund Pipeline Purchases
From TheStreet.com: “…bankers financing big leveraged buyouts are fretting over …handing over billions of dollars in so-called bridge loan commitments to buyout-happy private-equity shops. Bridge loans are hardly lucrative for investment banks -- they are not usually even drawn down. Instead they serve to "bridge" the gap between the announcement of a buyout …and the receipt of permanent financing. But with the debt market having soured recently for leveraged buyouts, banks are starting to worry that private-equity shops might opt to actually draw upon these hefty loans -- possibly leaving the banks with billions of unwanted loans on their books, unless they can syndicate them out to buyers including hedge fund investors…Complicating the picture is growing resistance from hedge funds and managers of collateralized loan obligations, which pool and manage portfolios of commercial debt… one firm pushing back against banks and eschewing loans that lack the covenants that would protect investors if they tank. "Until recently there has been no organized consortium among managers to push back on poor covenant quality and credit agreement terms," …Although markedly different from CLOs, subprime has put a spotlight on loans made to borrowers with questionable credit. Excesses emerging there have caused buyers of loans to demand better underwriting standards. Highland has doubled the number of loans it rejects in structuring CLO assets from 25% to 35% to around 65%, …Such resistance has put a strain on banks and pushed bankers into the negotiating room with private-equity firms, which are trying to ensure that the buyout-friendly terms they received earlier don't change. But if they do, they are willing to consider asking the banks to fund these billion dollar bridges.”
From Dow Jones: “Private equity firms hoping to skimp on investor protection when they raise funds for their buyouts in the debt markets in the coming months could be in for a rude awakening. A particularly risky type of leveraged loan - debt that is sliced up and sold to investors - has borne the brunt of selling in the last three weeks as investors have grown less enamored with speculative debt. Covenant-lite loans - ones that carry
minimal protection for debt holders should a company run into trouble - have under-performed more traditional, safer loans as investors rethink risk. This doesn’t bode well for large deals looming, like First Data Corp.’s (FDC) expected $14 billion covenant-lite loan to finance its leveraged buyout. If sold as covenant-lite, it would be the largest ever deal of its kind in the market…. According to S&P’s data, about 17% of the loan universe is covenant-lite. First Data’s deal alone would grow that number to 20% if investors agree to a deal without such protections. But recent aversion to covenant-lite loans could have lasting repercussions in the market, which is expecting $200 billion of new supply in the next six to nine months to fund the massive amount of leveraged buyouts that have already been announced.”
Central Banks Becoming More Aggressive With Investment of Excess Reserves
From Bloomberg: “In a confidential poll, UBS surveyed its guests about several key issues, including predictions about where U.S. interest rates, bond yields and the dollar will be at year's end, and anticipated changes in asset allocation over the next decade. The reserve managers' responses made it clear that the world's biggest pool of cash will be invested more aggressively than in the past. That means they will buy fewer U.S. government securities, which is bad news for U.S. interest rates. What's more, the responses illustrate that regardless of their financial muscle, central banks are no better than the private sector when it comes to predicting market moves… Central banks traditionally have invested their reserves in highly liquid, low-yielding securities, such as U.S. Treasuries and equivalent German government bonds. The goal is to have quick
access to the funds to defend a currency under attack, cover short-term debt obligations, finance imports and counter any runs on domestic banks. Yet, having amassed reserves well in excess of prudential needs, central banks are under increasing pressure from
politicians and public-interest groups to earn higher returns on their hoards by investing in riskier assets. To that end, several countries, including China, Singapore, the United Arab Emirates, Kuwait, Norway and Russia, have established or announced their intention to set up sovereign wealth funds… The UBS survey asked the reserve managers what the biggest change would be in the way they allocated assets over the next 10 years. Thirty-six percent said they would invest more in so-called spread products, which include swaps, agency bonds andcorporate debt -- fixed-income securities that trade at a spread to government bonds… Eighteen percent of reserve managers responded with more equities, another 18 percent with fewer U.S. dollars and 12 percent said alternative investments. Bottom line: The more money that the countries with big reserves invest in corporate bonds, stocks and other risky investments, the less they will put into Treasuries. Asian central banks and oil exporters, which are large buyers of U.S. government securities, have helped restrain U.S. interest rates in recent years. ``The dominant story is more risk: People are looking for higher rates of return, and that will only come with more risk,''… One percent of the respondents voted for more gold, while 3 percent said less gold.”
From Morgan Stanley: “The composition of buying in May was geared towards riskier assets more so than safer assets. Increased risk appetite was definitely the name of the game as the data indicates that foreign accounts took major stakes in US corporations
during May. The majority of these flows were private based, but foreigners purchased both a record $41.9 billion in US stocks and $72.6 billion in US corporate bonds. This trend bears watching, given the prospects of excess official reserves flowing into sovereign wealth funds (which would be difficult to tag as official flows by the TIC system and would instead be viewed as private account transactions), which are mandated to seek higher returning assets …Granted, there was a rebound in foreign buying of safe assets as purchases of Treasuries rebounded in May up $21.6 billion. However, the majority of the flows into Treasuries were from private accounts (bulk UK and OPEC) as central banks actually sold $4.6 billion (the second time that FCBs have sold this year). In 2007, foreign official purchases of Treasuries have been diminutive at best (only $3 billion in 2007), as FCB purchases of US fixed income assets are now concentrated more in Agencies and MBS (up $63 billion in 2007).”
Concentration of Credit Derivatives Risk May Amplify Volatility Says Fitch Study
From Bloomberg: “Hedge fund borrowing to invest in credit derivatives may magnify volatility in a market slump, according to a Fitch Ratings survey of 65 banks and insurers. A ``dramatic'' increase in hedge funds' use of credit derivatives has pushed their share of trading to 60 percent of credit-default swaps, and about 33 percent of collateralized
debt obligations, Fitch said in the report today, citing data from Greenwich Associates. U.S. corporate bond risk premiums reached the highest in almost two years last week as hedge funds bought credit-default swaps to offset potential losses from the subprime mortgage rout… In a market slump, large deals financed with borrowed money, or leverage, may ``result in a number of hedge funds and banks attempting to close out positions with no potential takers of credit risk on the other side,''… Banks and money managers bought and sold about $50 trillion of credit derivatives in 2006, more than twice the total in the previous year, Fitch said. The market has grown 15-fold since
Fitch started the survey in 2003, the ratings company said. The contracts, based on bonds and loans, are used to speculate on the ability of companies to repay debt. ``Until all of this recent volatility, investors had been forced down the credit quality ladder, and up in leverage to meet investment targets,'' …``Now it appears hedge funds are deleveraging'' to meet demands from their lenders. Hedge funds typically leverage their assets by five to six times, Fitch said in a report in June. The funds' holdings of corporate debt reached more than $300 billion in 2005, Fitch said, citing International Monetary Fund data. In-depth, up-to-date data on hedge fund investment in corporate bonds, loans and their derivatives ``remains elusive,'' Fitch said in today's report. In credit-default swaps, the buyer pays an annual premium to guard against a borrower failing to pay its debts. In a default, the buyer gets paid the full amount insured, and hands over defaulted loans or bonds to the swap seller. Morgan Stanley was cited as the most frequent trader of the contracts, followed by Deutsche Bank AG, Goldman Sachs Group Inc. and JPMorgan Chase & Co., Fitch said. The top 10 firms accounted for 89 percent of credit derivatives bought and sold in 2006, up from 86 percent in the previous year, Fitch said. ``For better or worse, counterparty concentration appears to remain a feature of this market,'' Fitch analysts wrote. Credit-default swaps based on the debt of General Motors Corp., the largest U.S. automaker, were the most frequently traded single-name contracts last year, … Prices of the derivatives typically decline when creditworthiness improves, and rise when it worsens.”
MISC
From Merrill Lynch: “…real consumer spending was depressed by the surge in food and energy prices in 2Q-07 (growing just +1.31% SAAR)…We expect substantial price discounting from general merchandisers in the ‘back-to-school’ sales period in August and September.”
From Barclays: “On a regional basis, Asia preferred US agency debt to Treasuries, with net purchases of $22.5bn of the former versus net sales of $0.8bn of the latter. [Based on May TIC data]”
From Dow Jones: “…recent figures from the Chicago Mercantile Exchange show that short speculative positions in the U.S. currency have risen back to their highest level in nearly three years…”
From Merrill Lynch: “The NAHB index is now just 5 points shy of making a new all-time low. The last time it was this low in January 1991, housing starts were 798,000 units (vs. 1.5 million now) and new home sales were 401,000 (vs. 915,000 now).”
From Time: “The average U.S. home size was 2,434 square feet in 2005, up from 983 square feet in 1950, according to the National Association of Home Builders.”
End-of-Day Market Update
Treasuries fell for the first time in three days, pushing up interest rates 2bp across the curve. The ten year Treasury is finishing the day at 5.06% after rising to 5.10% earlier in the day.
Stocks rose, pushing the Dow to another new high of 14,021 intraday, before closing up 21 at 13,971. The S&P remained confined within yesterday’s range, and closed essentially unchanged. The NASDAQ closed up 15 at 2712.
The dollar is closing unchanged after trading in a tight range all day.
Oil shot up above $75 a barrel during the morning, to an 11-month high in an outside trading day, but closed 13 cents lower at $74.02. Most other energy prices fell as well, with gasoline falling to a 34 day low.
Commodity prices were lower, with soybeans settling near limit down for the second day in a row.
From Dow Jones: “The riskiest tranche of the subprime mortgage-based derivative index, the ABX, hit another low Tuesday. The BBB- tranche was quoted at 44 cents on the dollar early afternoon… Further downgrades of securities tied to the subprime mortgage meltdown will put pressure on public pension funds and insurance companies to sell off their holdings, but the rules under which they operate generally give them the flexibility to avoid a fire sale. That could provide some reassurance to Wall Street, which is concerned hasty sales could sharply lower market prices on mortgage bonds and the complex securities that banks have constructed based on them, so-called collateralized debt obligations. A sharp drop in prices could force other buyers to record big losses, spooking investors and causing a sharp spike in risk aversion - which could threaten the stability of the financial system.”
Private Equity Firms May Have to Utilize Bridge Loans to Fund Pipeline Purchases
From TheStreet.com: “…bankers financing big leveraged buyouts are fretting over …handing over billions of dollars in so-called bridge loan commitments to buyout-happy private-equity shops. Bridge loans are hardly lucrative for investment banks -- they are not usually even drawn down. Instead they serve to "bridge" the gap between the announcement of a buyout …and the receipt of permanent financing. But with the debt market having soured recently for leveraged buyouts, banks are starting to worry that private-equity shops might opt to actually draw upon these hefty loans -- possibly leaving the banks with billions of unwanted loans on their books, unless they can syndicate them out to buyers including hedge fund investors…Complicating the picture is growing resistance from hedge funds and managers of collateralized loan obligations, which pool and manage portfolios of commercial debt… one firm pushing back against banks and eschewing loans that lack the covenants that would protect investors if they tank. "Until recently there has been no organized consortium among managers to push back on poor covenant quality and credit agreement terms," …Although markedly different from CLOs, subprime has put a spotlight on loans made to borrowers with questionable credit. Excesses emerging there have caused buyers of loans to demand better underwriting standards. Highland has doubled the number of loans it rejects in structuring CLO assets from 25% to 35% to around 65%, …Such resistance has put a strain on banks and pushed bankers into the negotiating room with private-equity firms, which are trying to ensure that the buyout-friendly terms they received earlier don't change. But if they do, they are willing to consider asking the banks to fund these billion dollar bridges.”
From Dow Jones: “Private equity firms hoping to skimp on investor protection when they raise funds for their buyouts in the debt markets in the coming months could be in for a rude awakening. A particularly risky type of leveraged loan - debt that is sliced up and sold to investors - has borne the brunt of selling in the last three weeks as investors have grown less enamored with speculative debt. Covenant-lite loans - ones that carry
minimal protection for debt holders should a company run into trouble - have under-performed more traditional, safer loans as investors rethink risk. This doesn’t bode well for large deals looming, like First Data Corp.’s (FDC) expected $14 billion covenant-lite loan to finance its leveraged buyout. If sold as covenant-lite, it would be the largest ever deal of its kind in the market…. According to S&P’s data, about 17% of the loan universe is covenant-lite. First Data’s deal alone would grow that number to 20% if investors agree to a deal without such protections. But recent aversion to covenant-lite loans could have lasting repercussions in the market, which is expecting $200 billion of new supply in the next six to nine months to fund the massive amount of leveraged buyouts that have already been announced.”
Central Banks Becoming More Aggressive With Investment of Excess Reserves
From Bloomberg: “In a confidential poll, UBS surveyed its guests about several key issues, including predictions about where U.S. interest rates, bond yields and the dollar will be at year's end, and anticipated changes in asset allocation over the next decade. The reserve managers' responses made it clear that the world's biggest pool of cash will be invested more aggressively than in the past. That means they will buy fewer U.S. government securities, which is bad news for U.S. interest rates. What's more, the responses illustrate that regardless of their financial muscle, central banks are no better than the private sector when it comes to predicting market moves… Central banks traditionally have invested their reserves in highly liquid, low-yielding securities, such as U.S. Treasuries and equivalent German government bonds. The goal is to have quick
access to the funds to defend a currency under attack, cover short-term debt obligations, finance imports and counter any runs on domestic banks. Yet, having amassed reserves well in excess of prudential needs, central banks are under increasing pressure from
politicians and public-interest groups to earn higher returns on their hoards by investing in riskier assets. To that end, several countries, including China, Singapore, the United Arab Emirates, Kuwait, Norway and Russia, have established or announced their intention to set up sovereign wealth funds… The UBS survey asked the reserve managers what the biggest change would be in the way they allocated assets over the next 10 years. Thirty-six percent said they would invest more in so-called spread products, which include swaps, agency bonds andcorporate debt -- fixed-income securities that trade at a spread to government bonds… Eighteen percent of reserve managers responded with more equities, another 18 percent with fewer U.S. dollars and 12 percent said alternative investments. Bottom line: The more money that the countries with big reserves invest in corporate bonds, stocks and other risky investments, the less they will put into Treasuries. Asian central banks and oil exporters, which are large buyers of U.S. government securities, have helped restrain U.S. interest rates in recent years. ``The dominant story is more risk: People are looking for higher rates of return, and that will only come with more risk,''… One percent of the respondents voted for more gold, while 3 percent said less gold.”
From Morgan Stanley: “The composition of buying in May was geared towards riskier assets more so than safer assets. Increased risk appetite was definitely the name of the game as the data indicates that foreign accounts took major stakes in US corporations
during May. The majority of these flows were private based, but foreigners purchased both a record $41.9 billion in US stocks and $72.6 billion in US corporate bonds. This trend bears watching, given the prospects of excess official reserves flowing into sovereign wealth funds (which would be difficult to tag as official flows by the TIC system and would instead be viewed as private account transactions), which are mandated to seek higher returning assets …Granted, there was a rebound in foreign buying of safe assets as purchases of Treasuries rebounded in May up $21.6 billion. However, the majority of the flows into Treasuries were from private accounts (bulk UK and OPEC) as central banks actually sold $4.6 billion (the second time that FCBs have sold this year). In 2007, foreign official purchases of Treasuries have been diminutive at best (only $3 billion in 2007), as FCB purchases of US fixed income assets are now concentrated more in Agencies and MBS (up $63 billion in 2007).”
Concentration of Credit Derivatives Risk May Amplify Volatility Says Fitch Study
From Bloomberg: “Hedge fund borrowing to invest in credit derivatives may magnify volatility in a market slump, according to a Fitch Ratings survey of 65 banks and insurers. A ``dramatic'' increase in hedge funds' use of credit derivatives has pushed their share of trading to 60 percent of credit-default swaps, and about 33 percent of collateralized
debt obligations, Fitch said in the report today, citing data from Greenwich Associates. U.S. corporate bond risk premiums reached the highest in almost two years last week as hedge funds bought credit-default swaps to offset potential losses from the subprime mortgage rout… In a market slump, large deals financed with borrowed money, or leverage, may ``result in a number of hedge funds and banks attempting to close out positions with no potential takers of credit risk on the other side,''… Banks and money managers bought and sold about $50 trillion of credit derivatives in 2006, more than twice the total in the previous year, Fitch said. The market has grown 15-fold since
Fitch started the survey in 2003, the ratings company said. The contracts, based on bonds and loans, are used to speculate on the ability of companies to repay debt. ``Until all of this recent volatility, investors had been forced down the credit quality ladder, and up in leverage to meet investment targets,'' …``Now it appears hedge funds are deleveraging'' to meet demands from their lenders. Hedge funds typically leverage their assets by five to six times, Fitch said in a report in June. The funds' holdings of corporate debt reached more than $300 billion in 2005, Fitch said, citing International Monetary Fund data. In-depth, up-to-date data on hedge fund investment in corporate bonds, loans and their derivatives ``remains elusive,'' Fitch said in today's report. In credit-default swaps, the buyer pays an annual premium to guard against a borrower failing to pay its debts. In a default, the buyer gets paid the full amount insured, and hands over defaulted loans or bonds to the swap seller. Morgan Stanley was cited as the most frequent trader of the contracts, followed by Deutsche Bank AG, Goldman Sachs Group Inc. and JPMorgan Chase & Co., Fitch said. The top 10 firms accounted for 89 percent of credit derivatives bought and sold in 2006, up from 86 percent in the previous year, Fitch said. ``For better or worse, counterparty concentration appears to remain a feature of this market,'' Fitch analysts wrote. Credit-default swaps based on the debt of General Motors Corp., the largest U.S. automaker, were the most frequently traded single-name contracts last year, … Prices of the derivatives typically decline when creditworthiness improves, and rise when it worsens.”
MISC
From Merrill Lynch: “…real consumer spending was depressed by the surge in food and energy prices in 2Q-07 (growing just +1.31% SAAR)…We expect substantial price discounting from general merchandisers in the ‘back-to-school’ sales period in August and September.”
From Barclays: “On a regional basis, Asia preferred US agency debt to Treasuries, with net purchases of $22.5bn of the former versus net sales of $0.8bn of the latter. [Based on May TIC data]”
From Dow Jones: “…recent figures from the Chicago Mercantile Exchange show that short speculative positions in the U.S. currency have risen back to their highest level in nearly three years…”
From Merrill Lynch: “The NAHB index is now just 5 points shy of making a new all-time low. The last time it was this low in January 1991, housing starts were 798,000 units (vs. 1.5 million now) and new home sales were 401,000 (vs. 915,000 now).”
From Time: “The average U.S. home size was 2,434 square feet in 2005, up from 983 square feet in 1950, according to the National Association of Home Builders.”
End-of-Day Market Update
Treasuries fell for the first time in three days, pushing up interest rates 2bp across the curve. The ten year Treasury is finishing the day at 5.06% after rising to 5.10% earlier in the day.
Stocks rose, pushing the Dow to another new high of 14,021 intraday, before closing up 21 at 13,971. The S&P remained confined within yesterday’s range, and closed essentially unchanged. The NASDAQ closed up 15 at 2712.
The dollar is closing unchanged after trading in a tight range all day.
Oil shot up above $75 a barrel during the morning, to an 11-month high in an outside trading day, but closed 13 cents lower at $74.02. Most other energy prices fell as well, with gasoline falling to a 34 day low.
Commodity prices were lower, with soybeans settling near limit down for the second day in a row.
Monday, July 16, 2007
Today's Tidbits
Annual Federal Budget Deficit Shrinks in 2007
From Deutsche Bank: “Over the last year, federal spending is down 0.7%, but some of this reflects a large 7.4% decline in defense spending in Q1 that is unlikely to be repeated going forward. Still, we do not see federal spending growing much more than 2% in
inflation-adjusted terms, because we do not anticipate any major new legislative initiatives that would sharply lift appropriations.”
From JP Morgan: “The forecast looks for the federal budget deficit to narrow by nearly $100 billion this year to $150 billion, or 1.1% of GDP…Through the first nine months of the fiscal year, the federal budget shows an improvement of $85.5 billion. The trend in growth of receipts has slowed over the past few months, partly reflecting the sharp slowdown in corporate income taxes.”
From Bloomberg: “Just as international investors are reducing purchases of Treasuries, the U.S. government will be selling fewer of them thanks to a surge in tax receipts. The projected 7 percent increase in tax revenue will help the U.S. budget deficit shrink by 17 percent to about $205 billion for the fiscal year ending Sept. 30, the Bush administration said last week. As a result, the Treasury Department sold less securities from January through June than matured, the first time that has happened since 2000. A drop in supply is good news for a market that in the second quarter lost 0.4 percent when including reinvested interest, the biggest decline in more than a year, as an accelerating economy drew investors away from fixed-income assets, according to New York-based Merrill Lynch & Co.'s U.S. Treasury Master index. In fact, the fiscal outlook is so good that investors and strategists are beginning to handicap which maturities the government may stop selling or even buy back for the first time in five years.”
Surprising Strength in Construction Employment Has Many Questioning Data
From The New York Post: “The numbers are too amazing to believe. In fact, the figures are so unbelievable - as in, "not to be believed" - that even an economist working at the Labor Department hedged on their veracity by admitting that there may be a "lag time" before job losses start to appear. You decide for yourself if the government is snowing us. According to the Labor Department, there were 185,000 more construction jobs in June than there were in May before the government makes seasonal adjustments to the statistics. Even after adjusting for the season, the number of construction jobs increased by a still inconceivable 12,000. Harder to believe is what the government says happened in the residential construction market. Before the zany seasonal adjustment the government says 126,000 new residential construction jobs were created in June. After being seasonally adjusted, there were still 2,000 extra people putting up houses around the country - at least the way Washington counts them.”
From Lehman: “Macroeconomic Advisers finds that payrolls as of June this year were between 68,000 and 139,000 lower than what the BLS says [based on ADP data of 17% of employers]…if the company's estimates are correct and the BLS is wrong, the likeliest reason is that the BLS's own birth/death model may be overstating jobs created at small firms (a major share of employment in construction). If so, the eventual release of more comprehensive, quarterly data based on state unemployment insurance records could eventually lead to a downward revision to the BLS's monthly estimates…Automatic Data Processing doesn't supply data for the BLS's monthly payroll count, but does for the quarterly comprehensive count, because the firm processes unemployment insurance premium payments for its payroll clients. But that still leaves a mystery. Based on Macroeconomic Advisers's own econometric analysis, construction payrolls ought to be about 500,000 lower than the BLS now reports them to be; the new analysis explains at most a quarter of that gap. A recent report by Deutsche Bank argues that the unemployment stats have failed to capture layoffs of about 500,000 illegal Hispanic workers…On the other hand, Ken Simonson, chief economist of the Associated General Contractors of America, argues that the gap can be explained entirely by small firms moving from residential to commercial work -- an explanation the Deutsche Bank researchers rejected.”
Impact of Weaker Dollar on US Companies and Foreign Countries
From JP Morgan: “The weaker currency has an immediate effect in lifting the dollar value of foreign earnings [for US companies], a plus for stock prices and for corporate financial health. The lower dollar will also support growth in trade-sensitive industries over time. The amount of help that the economy will get from a weaker dollar depends on both the rate of depreciation and the level of the dollar. Significant stimulus is likely on both counts. The real trade-weighted dollar has dropped a hefty 5% since the beginning of March, and the trade-weighted value of the dollar is now down to its lowest level in decades…
…fx reserves in the EM [emerging market countries] group rose $586 billion in 1H07 to $3.7 trillion by the end of June, a gain almost as much as in all of 2006. These inflows have only partially been sterilized, most recently demonstrated by reports of continued double-digit money supply growth in China and Korea—a development that is common throughout the EM group. Although inflation rates remain quite low in most EM countries, the rapid growth of credit is raising concerns about incipient wage and price pressures alongside longer-standing worries about overheated asset markets. In response, some countries have tried easing restrictions on capital outflows from residents to stimulate foreign currency demand. For example, some Latin American countries (e.g.,
Chile, Colombia, and Peru) have introduced regulatory changes allowing pension funds to invest a higher proportion of their portfolios overseas. These market-based measures
have tended to fail, however, because of the expectation of higher returns in local currency investments. This has led a handful of countries (most recently Columbia) to introduce capital controls in an effort to cap net inflows. But the potential cost is that choosing this option sends a negative signal to the private sector and distorts capital mobility.”
Has Servicing Private Equity Debt Reduced Capex Expenditures and Productivity?
From BMO: “The sky became the limit for the amount of money investors were willing
to give PE [private equity] investors in subordinated paper and collateralized bank loans, so there was no apparent limit on the market capitalization of mid-cap companies waiting to be removed from the nuisances of Sarbanes-Oxley, and the constraints on management vision from quarterly earnings reporting. The most obvious effect of the torrent of privatizations was on the S&P 400…. Collectively, the mid-caps who remain public (apart from the commodity producers) probably have lesser investment merit than those acquired by the PE companies, who can be presumed to be great stock selectors. Meanwhile, another trend was emerging. US business capital spending was not sharing in the otherwise strong economic recovery. As each new year dawned, forecasters assured us that “the long overdue recovery in capex is coming this year.”… The acquired companies once had modest debt loads which were incurred primarily for capital spending. Now they have debt loads many times their cash flow financing payouts to the owners—with nothing to show for those payouts but the debts. Instead of managing for growth, the companies have to be managed for servicing the debts. The capex budgets are the most obvious candidate for cuts… Remember that the best of the small and mid-size non-financial American companies have been responsible for a disproportionate share of American economic growth. That means they have probably been responsible for a disproportionate share of American productivity gains. Result: It is hard to imagine that American productivity growth in the future will be as strong as in the relatively recent past.”
Higher Food Prices Cutting Into Aid for the Poor
From The Financial Times: “Rising prices for food have led the United Nations…to warn that it can no longer afford to feed the 90m people it has helped for each of the past five years…The World Food Programme…said its purchasing costs had risen ‘almost 50 per cent in the last five years’. It said the price it paid for maize had risen up to 120 per cent in the past six months…Global what stocks have fallen to the lowest level in 25 years, according to the US Department of Agriculture…’We are no longer in a surplus world.’”
From BMO: “Consumers across most of the economic world will be spending significantly more on food this year and next…The world’s carryover of grains and oilseeds at the end of the crop year in September will probably be the lowest (in relation to consumption) on record…The US…average corn production per acre has risen by two bushels a year over the past 26 years…the major contributor has been genetically modified seeds…Many climatologists also attribute the sustained gains to rises in CO2, which, of course contributes to faster growth in plants and thereby to the lowering of food costs across the globe…Last week’s FAO and OECD report on the food outlook predicted a decade of higher food prices. The CEO of Nestle predicts ‘significant and long-lasting food-price inflation.”
MISC
From Dow Jones: “Even with the absence of negative subprime-related headlines that have roiled the markets in the past few weeks, the index based on subprime mortgages is hitting new lows. The riskiest tranche of the current index, the BBB- of the ABX.HE 07-1, touched 45 cents on the dollar in morning trade, according to … a trader at UBS. “The stuff is a lot softer,” … “Sellers want to offset risk and sell the stuff.””
From JP Morgan: “Real consumer spending downshifted from two consecutive quarters of 4.2% growth to an estimated 1.4% growth pace in 2Q07…The most important influence on spending is real labor income. The payroll proxy of labor income (hours worked times hourly earnings) has been getting stronger, accelerating to a 6.1% growth pace in 2Q.”
From Mauldin: “The Chinese yuan is up against the dollar from 8.28 to 7.57 to the dollar over the last two years. That is an increase of almost 9%. The movement in the last month has been particularly fast.”
From The Financial Times: “In the last few quarters, wage rises have started to outstrip rises in productivity for the first time in years [in China]”
From AFP: “China's economy grew so rapidly in the first half of 2007 that it is likely to overtake Germany as the world's third-largest by the end of this year, analysts say.”
From RBSGC: “MBS holdings were down $9 bn since the end of June. Deposits…were up $48 bn since June.Commercial and industrial loans… increased $9 bn since June. Whole loan holdings decreased by $11 bn over the week, and were up by $9 bn since June.”
From The New York Times: “…last year it [solar power] provided less than 0.01 percent of the country’s electricity supply…Even a quarter century from now, says the Energy Department official in charge of renewable energy, solar power might account for, at best, 2 or 3 percent of the grid electricity in the United States…there are few major programs looking for ways to drastically reduce the cost of converting sunlight to energy and — of equal if not more importance — of efficiently storing it for when the sun is not shining…Scientists are hoping to expand the range of sunlight’s wavelengths that can be absorbed, and to cut the amount of energy the cells lose to heat.”
From Deutsche Bank: “The economy has been growing below trend for the last four quarters, and while growth is expected to pick up in the second half of the year, the trajectory is likely to be modest because of a projected slowdown in consumer spending. This should limit the economy's ability to get back to trend growth on a sustained basis. However, the economy is unlikely to be weak enough to engender a meaningful rise in the unemployment rate which would be necessary to bring the Fed into play.”
From Mauldin: “Wal-Mart sales were up a higher than expected 2.4%. They noted that home goods and apparel sales were weak but that grocery sales surged. No kidding. With food inflation at almost 7%, grocery sales are clearly going to increase if we just eat the same food…”
End-of-Day Market Update
Treasuries rallied causing yields to fall 5bp across the curve on flight-to-quality buying as ABX fell further. 10y Treasury yield is closing at 5.04%. The 2/10 curve is at 17.
Equities are mixed with the Down closing up 44 to another new record nominal high, and the S&P 500 closing down 3. NASDAQ is also closing down 10 points. The dollar continues to slowly weaken, with the dollar index falling .05 to 80.52, but slid sharply versus the Canadian Dollar to approach a 30 year high. Oil futures rose 23 cents, but slid in after hours trading. Oil futures are still $4 below the $78 high reached last summer.
From Deutsche Bank: “Over the last year, federal spending is down 0.7%, but some of this reflects a large 7.4% decline in defense spending in Q1 that is unlikely to be repeated going forward. Still, we do not see federal spending growing much more than 2% in
inflation-adjusted terms, because we do not anticipate any major new legislative initiatives that would sharply lift appropriations.”
From JP Morgan: “The forecast looks for the federal budget deficit to narrow by nearly $100 billion this year to $150 billion, or 1.1% of GDP…Through the first nine months of the fiscal year, the federal budget shows an improvement of $85.5 billion. The trend in growth of receipts has slowed over the past few months, partly reflecting the sharp slowdown in corporate income taxes.”
From Bloomberg: “Just as international investors are reducing purchases of Treasuries, the U.S. government will be selling fewer of them thanks to a surge in tax receipts. The projected 7 percent increase in tax revenue will help the U.S. budget deficit shrink by 17 percent to about $205 billion for the fiscal year ending Sept. 30, the Bush administration said last week. As a result, the Treasury Department sold less securities from January through June than matured, the first time that has happened since 2000. A drop in supply is good news for a market that in the second quarter lost 0.4 percent when including reinvested interest, the biggest decline in more than a year, as an accelerating economy drew investors away from fixed-income assets, according to New York-based Merrill Lynch & Co.'s U.S. Treasury Master index. In fact, the fiscal outlook is so good that investors and strategists are beginning to handicap which maturities the government may stop selling or even buy back for the first time in five years.”
Surprising Strength in Construction Employment Has Many Questioning Data
From The New York Post: “The numbers are too amazing to believe. In fact, the figures are so unbelievable - as in, "not to be believed" - that even an economist working at the Labor Department hedged on their veracity by admitting that there may be a "lag time" before job losses start to appear. You decide for yourself if the government is snowing us. According to the Labor Department, there were 185,000 more construction jobs in June than there were in May before the government makes seasonal adjustments to the statistics. Even after adjusting for the season, the number of construction jobs increased by a still inconceivable 12,000. Harder to believe is what the government says happened in the residential construction market. Before the zany seasonal adjustment the government says 126,000 new residential construction jobs were created in June. After being seasonally adjusted, there were still 2,000 extra people putting up houses around the country - at least the way Washington counts them.”
From Lehman: “Macroeconomic Advisers finds that payrolls as of June this year were between 68,000 and 139,000 lower than what the BLS says [based on ADP data of 17% of employers]…if the company's estimates are correct and the BLS is wrong, the likeliest reason is that the BLS's own birth/death model may be overstating jobs created at small firms (a major share of employment in construction). If so, the eventual release of more comprehensive, quarterly data based on state unemployment insurance records could eventually lead to a downward revision to the BLS's monthly estimates…Automatic Data Processing doesn't supply data for the BLS's monthly payroll count, but does for the quarterly comprehensive count, because the firm processes unemployment insurance premium payments for its payroll clients. But that still leaves a mystery. Based on Macroeconomic Advisers's own econometric analysis, construction payrolls ought to be about 500,000 lower than the BLS now reports them to be; the new analysis explains at most a quarter of that gap. A recent report by Deutsche Bank argues that the unemployment stats have failed to capture layoffs of about 500,000 illegal Hispanic workers…On the other hand, Ken Simonson, chief economist of the Associated General Contractors of America, argues that the gap can be explained entirely by small firms moving from residential to commercial work -- an explanation the Deutsche Bank researchers rejected.”
Impact of Weaker Dollar on US Companies and Foreign Countries
From JP Morgan: “The weaker currency has an immediate effect in lifting the dollar value of foreign earnings [for US companies], a plus for stock prices and for corporate financial health. The lower dollar will also support growth in trade-sensitive industries over time. The amount of help that the economy will get from a weaker dollar depends on both the rate of depreciation and the level of the dollar. Significant stimulus is likely on both counts. The real trade-weighted dollar has dropped a hefty 5% since the beginning of March, and the trade-weighted value of the dollar is now down to its lowest level in decades…
…fx reserves in the EM [emerging market countries] group rose $586 billion in 1H07 to $3.7 trillion by the end of June, a gain almost as much as in all of 2006. These inflows have only partially been sterilized, most recently demonstrated by reports of continued double-digit money supply growth in China and Korea—a development that is common throughout the EM group. Although inflation rates remain quite low in most EM countries, the rapid growth of credit is raising concerns about incipient wage and price pressures alongside longer-standing worries about overheated asset markets. In response, some countries have tried easing restrictions on capital outflows from residents to stimulate foreign currency demand. For example, some Latin American countries (e.g.,
Chile, Colombia, and Peru) have introduced regulatory changes allowing pension funds to invest a higher proportion of their portfolios overseas. These market-based measures
have tended to fail, however, because of the expectation of higher returns in local currency investments. This has led a handful of countries (most recently Columbia) to introduce capital controls in an effort to cap net inflows. But the potential cost is that choosing this option sends a negative signal to the private sector and distorts capital mobility.”
Has Servicing Private Equity Debt Reduced Capex Expenditures and Productivity?
From BMO: “The sky became the limit for the amount of money investors were willing
to give PE [private equity] investors in subordinated paper and collateralized bank loans, so there was no apparent limit on the market capitalization of mid-cap companies waiting to be removed from the nuisances of Sarbanes-Oxley, and the constraints on management vision from quarterly earnings reporting. The most obvious effect of the torrent of privatizations was on the S&P 400…. Collectively, the mid-caps who remain public (apart from the commodity producers) probably have lesser investment merit than those acquired by the PE companies, who can be presumed to be great stock selectors. Meanwhile, another trend was emerging. US business capital spending was not sharing in the otherwise strong economic recovery. As each new year dawned, forecasters assured us that “the long overdue recovery in capex is coming this year.”… The acquired companies once had modest debt loads which were incurred primarily for capital spending. Now they have debt loads many times their cash flow financing payouts to the owners—with nothing to show for those payouts but the debts. Instead of managing for growth, the companies have to be managed for servicing the debts. The capex budgets are the most obvious candidate for cuts… Remember that the best of the small and mid-size non-financial American companies have been responsible for a disproportionate share of American economic growth. That means they have probably been responsible for a disproportionate share of American productivity gains. Result: It is hard to imagine that American productivity growth in the future will be as strong as in the relatively recent past.”
Higher Food Prices Cutting Into Aid for the Poor
From The Financial Times: “Rising prices for food have led the United Nations…to warn that it can no longer afford to feed the 90m people it has helped for each of the past five years…The World Food Programme…said its purchasing costs had risen ‘almost 50 per cent in the last five years’. It said the price it paid for maize had risen up to 120 per cent in the past six months…Global what stocks have fallen to the lowest level in 25 years, according to the US Department of Agriculture…’We are no longer in a surplus world.’”
From BMO: “Consumers across most of the economic world will be spending significantly more on food this year and next…The world’s carryover of grains and oilseeds at the end of the crop year in September will probably be the lowest (in relation to consumption) on record…The US…average corn production per acre has risen by two bushels a year over the past 26 years…the major contributor has been genetically modified seeds…Many climatologists also attribute the sustained gains to rises in CO2, which, of course contributes to faster growth in plants and thereby to the lowering of food costs across the globe…Last week’s FAO and OECD report on the food outlook predicted a decade of higher food prices. The CEO of Nestle predicts ‘significant and long-lasting food-price inflation.”
MISC
From Dow Jones: “Even with the absence of negative subprime-related headlines that have roiled the markets in the past few weeks, the index based on subprime mortgages is hitting new lows. The riskiest tranche of the current index, the BBB- of the ABX.HE 07-1, touched 45 cents on the dollar in morning trade, according to … a trader at UBS. “The stuff is a lot softer,” … “Sellers want to offset risk and sell the stuff.””
From JP Morgan: “Real consumer spending downshifted from two consecutive quarters of 4.2% growth to an estimated 1.4% growth pace in 2Q07…The most important influence on spending is real labor income. The payroll proxy of labor income (hours worked times hourly earnings) has been getting stronger, accelerating to a 6.1% growth pace in 2Q.”
From Mauldin: “The Chinese yuan is up against the dollar from 8.28 to 7.57 to the dollar over the last two years. That is an increase of almost 9%. The movement in the last month has been particularly fast.”
From The Financial Times: “In the last few quarters, wage rises have started to outstrip rises in productivity for the first time in years [in China]”
From AFP: “China's economy grew so rapidly in the first half of 2007 that it is likely to overtake Germany as the world's third-largest by the end of this year, analysts say.”
From RBSGC: “MBS holdings were down $9 bn since the end of June. Deposits…were up $48 bn since June.Commercial and industrial loans… increased $9 bn since June. Whole loan holdings decreased by $11 bn over the week, and were up by $9 bn since June.”
From The New York Times: “…last year it [solar power] provided less than 0.01 percent of the country’s electricity supply…Even a quarter century from now, says the Energy Department official in charge of renewable energy, solar power might account for, at best, 2 or 3 percent of the grid electricity in the United States…there are few major programs looking for ways to drastically reduce the cost of converting sunlight to energy and — of equal if not more importance — of efficiently storing it for when the sun is not shining…Scientists are hoping to expand the range of sunlight’s wavelengths that can be absorbed, and to cut the amount of energy the cells lose to heat.”
From Deutsche Bank: “The economy has been growing below trend for the last four quarters, and while growth is expected to pick up in the second half of the year, the trajectory is likely to be modest because of a projected slowdown in consumer spending. This should limit the economy's ability to get back to trend growth on a sustained basis. However, the economy is unlikely to be weak enough to engender a meaningful rise in the unemployment rate which would be necessary to bring the Fed into play.”
From Mauldin: “Wal-Mart sales were up a higher than expected 2.4%. They noted that home goods and apparel sales were weak but that grocery sales surged. No kidding. With food inflation at almost 7%, grocery sales are clearly going to increase if we just eat the same food…”
End-of-Day Market Update
Treasuries rallied causing yields to fall 5bp across the curve on flight-to-quality buying as ABX fell further. 10y Treasury yield is closing at 5.04%. The 2/10 curve is at 17.
Equities are mixed with the Down closing up 44 to another new record nominal high, and the S&P 500 closing down 3. NASDAQ is also closing down 10 points. The dollar continues to slowly weaken, with the dollar index falling .05 to 80.52, but slid sharply versus the Canadian Dollar to approach a 30 year high. Oil futures rose 23 cents, but slid in after hours trading. Oil futures are still $4 below the $78 high reached last summer.
New York Manufacturing Unexpectedly Improves Further to One Year High
Empire manufacturing unexpectedly continued to improve in July, rising to 26.5 (consensus 18) from 25.8 in June, to a new one year high. The expansion in factory activity in the New York region showed up as an almost ten point jump in new orders to 26.5. New orders have been improving for the last four months, and set a new one year high. There was also a significant decline in inventories of over 20 points to -20. Employment shot 8 points higher. Prices paid fell notably, but remain elevated at 34.6, while shipments fell modestly to 29.2. The six month outlook also improved, rising to 48.2 from 44.1. 40% of respondents indicated that they are increasing production plans for the rest of this year. The New York region is more tied to high-tech industries compared to the Midwest's continued emphasis on autos.
The past two months have shown the best two month levels since 2004, as most of the subcomponents show strength. The figures indicate strength in the ISM, and support for the employment, figures for July.
The past two months have shown the best two month levels since 2004, as most of the subcomponents show strength. The figures indicate strength in the ISM, and support for the employment, figures for July.
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