Thursday, November 6, 2008
Number of people on unemployment rises to highest since 1983!
Initial jobless claims rose to 481k last week (consensus 477k), following a revision higher the prior week to 485k from 479k originally reported. Continuing claims rose to 3.843 million, a 25 year high! The number of people claiming unemployment benefits is now at the highest level since 1983.
Wednesday, November 5, 2008
Today's Tidbits
Updating Impact of Mortgage Equity Withdrawals on Consumption
From John Mauldin: “…net MEWs have fallen precipitously in 2008, down 95% from three years ago. On this data alone, GDP should be off by 3% this year. No wonder we are in negative economic territory. In 2005 there was almost $595 billion in mortgage extractions that went into some kind of consumer spending. Remember…that translated into a 3% rise in GDP. In 2007, MEWs were down to $470 billion, for a boost of 2% to GDP. The second quarter of 2008 saw an anemic $9.5 billion. At that run rate, we could see a drop-off of well over 90% from 2005! Now, think what the second quarter would have been without the federal stimulus program of $150 billion. It might have looked and felt like this quarter!”
Time to Pay for Past Excesses?
From Newsweek by Robert Samuelson: “Unfortunately, slower growth seems probable. What the new president, and everyone else, needs to understand is that the present crisis marks the end of an economic era. For roughly a quarter century, the U.S. economy benefited from the expansionary side effects of falling inflation—lower interest rates, greater debt, higher personal wealth—to the point now that we have now overdosed on its pleasures and are suffering the hangover. In our zeal to identify the villains of the present economic debacle, we ought to recognize that the larger causes lie in this prolonged prosperity and the permissive attitudes and practices it inspired. Largely unrecognized, the dominant economic event of the past half century was the rise and fall of double-digit inflation. On the way up, starting at about 1 percent in 1960, inflation destabilized the economy. There were four recessions between 1969 and 1981. Unemployment peaked at 10.8 percent in late 1982. That last devastating recession, imposed by the then Fed chairman Paul Volcker with Reagan's backing, purged the worst inflationary psychology. By 1984, inflation had dropped from double digits to less than 4 percent; by 2001, it was 1 percent. This declining inflation—disinflation—bolstered the economy. Consider what happened. The stock market recovered spectacularly: lower inflation led to lower interest rates, which caused investors to switch from bonds to stocks. The Dow Jones industrial average, which traded under 1,000 for much of 1982, averaged about 2,500 in 1989 and almost 10,500 in 1999. There was a consumption boom. Feeling wealthier, Americans borrowed and spent. The personal savings rate dropped from 11 percent in 1982 to almost zero by 2005. There were only two mild recessions (1990–91 and 2001). But what's clear now is that this prosperity bred bad habits. The present crisis, though usually attributed to dubious "subprime" mortgages, really traces its origins in the widespread optimism unleashed by disinflation. By now, the perverse consequences are clear. As stocks and real estate rose sharply in value, many Americans became convinced that prices could only go up. Once that mind-set took hold, lax investment standards (in the case of high-tech companies) and lending practices (in the case of homes) mushroomed. "Bubbles" followed. People overinvested in tech stocks and overborrowed to buy homes at inflated prices or to raise cash from bloated real-estate values. But the borrowing surge could not last indefinitely, because debts increasingly outpaced the rise of incomes. By 2006, household debt was 134 percent of personal income. Sooner or later, consumers had to retrench. They are now; car sales and retail spending are down. The recession will end, but recovery won't ensure a return to previous rates of economic growth. Just beyond the horizon looms a larger threat: an aging society. Arithmetically, economic growth reflects the increases in workers' hours and their productivity—a.k.a. efficiency. From 1960 to 2005, annual U.S. economic growth averaged 3.4 percent, split almost evenly between labor-force growth (1.5 percent) and productivity gains (1.9 percent). As baby boomers retire, labor-force growth will shrink. By the mid-2020s, the Social Security Administration expects economic growth of about 2.1 percent, with scant labor-force increases (0.4 percent) and higher productivity gains (1.7 percent). Because productivity reflects many influences—technology, management, workers' skills—even that projection could be optimistic. If productivity falters, as in the 1970s, the U.S. economy would virtually stagnate in the face of growing claims on people's incomes…. people will fight over pieces of a fairly fixed economic pie rather than sharing ever-larger pieces of an expanding pie…. Already, Americans face far more claims on their incomes than can be easily met. Start with government. It's overcommitted in the sense that it's made more promises than can be sensibly afforded. The largest of these involve retirement costs. As is well known, three programs for the elderly dominate the federal budget: Social Security, Medicare (health insurance) and Medicaid (nursing-home care for the elderly poor). These programs now represent more than two fifths of the $3 trillion budget, and as baby boomers retire, they could nearly double—measured as a share of the economy, gross domestic product (GDP)—in 2030. The tough questions are obvious. How much will we permit spending on retirees to raise taxes or crowd out the rest of government? Health care compounds the difficulty. About three quarters of the projected increase in federal spending for the elderly involves Medicare and Medicaid. As a society, we haven't learned how to control health spending. Most Americans think that people should get all the medical care they need. Spending controls—for government and private insurance—haven't worked, because Americans don't want them to work. Health spending has gone from 5 percent of GDP in 1960 to 16 percent now and may hit 20 percent by 2015. For workers with employer-paid insurance, that's depressed take-home pay by diverting dollars from wages into premiums. For everyone, health spending puts upward pressure on taxes and downward pressure on other government programs…. the great forces that propelled the economy forward for the past quarter century, fed by disinflation and the accompanying rise in personal wealth and borrowing, have clearly spent themselves. If the economy is to retrieve faster growth in the future, it will need to nurture new sources of advance.
Given the scope and scariness of the financial crisis, it has already stimulated massive government intervention—and there will be more. But there is a parallel danger that too much intervention, or the wrong kind of intervention, will suppress the impulse for expansion, investment and risk-taking.”
Government Entitlement Problems Lurk Like Sub-Prime Issues – Off Balance Sheet
From Fortune (By David Walker, former U.S. Comptroller General): “The U.S. Government Accountability Office (GAO), noting that the federal balance sheet does not reflect the government's huge unfunded promises in our nation's social-insurance programs, estimated last year that the unfunded obligations for Medicare and Social Security alone totaled almost $41 trillion. That sum, equivalent to $352,000 per U.S. household, is the present-value shortfall between the growing cost of entitlements and the dedicated revenues intended to pay for them over the next 75 years. Why call it a super-subprime crisis? Besides its gigantic scale, there are very disturbing similarities between the current mortgage-related crisis and our next potential disaster. First, like the securitized investment vehicles that blew up, federal programs were launched without adequately thinking through who would bear the ultimate cost and related risk. Just as originators of mortgages let themselves off the hook by unloading packages of dubious loans onto others, lawmakers have increased spending, expanded entitlement programs, and cut taxes while expecting future generations to pay the bill. Second, just as a lack of transparency associated with mortgage-backed securities resulted in big surprises and large losses for investors, our nation's huge off-balance-sheet obligations for Social Security and Medicare present a threat wrapped in camouflage. After all, the government's "trust funds" don't really provide much security since they don't hold anything but more government debt. Third, in the same way that private sector "risk management" executives failed to prevent the subprime mortgage crisis, overseers in Congress and the executive branch have turned a blind eye to costs associated with entitlement programs and tax cuts. While lax regulation of banks fed the current subprime crisis, a lack of statutory budget controls has led to a widening gap between the government's revenues and costs. At the heart of these problems is our leaders' collective failure to act in the face of known challenges. Our country has veered from its founding principles, which held to individual responsibility and accountability today in order to create more opportunity tomorrow. When our constitution was written, the concepts of thrift and prudence were no less at the During past financial crises and wars, the government went into debt because our nation's survival was at stake. What has changed is that piling up debt has become business as usual, even during times of prosperity.
Today we are headed toward debt levels that far exceed the all-time record as a percentage of our economy. In fact, by 2040 we are projected to see debt as a percentage of our economy that is double the record set at the end of World War II. Based on GAO data, balancing the budget in 2040 could require us to cut federal spending by 60% or raise overall federal tax burdens to twice today's levels. Medicare, Medicaid, and Social Security already account for more than 40% of the total federal budget. And their portion of the budget is expected to grow so fast that their cost, and the cost of servicing our debt, will soon crowd out vital programs, including research and development, critical infrastructure, education, and even national defense. The crisis we face is one of numbers and demographics but also of attitudes. Promises were made in an earlier time, when they seemed more affordable. Like homeowners borrowing against the value of their homes in the expectation that the values would go up forever, the American government borrowed against the future and assumed that the economy would grow fast enough to make that debt affordable. But our national debt is not limitless, and our foreign lenders are not fools. If we persist on our current "do nothing" path, our future will be jeopardized. Americans need to reconcile the government we want with the taxes we're willing to pay for it.”
Credit Markets Showing Signs of Imporving
From Bloomberg: “Credit markets are still creaking even after the biggest decline on record in the rate banks say they charge each other to borrow dollars. The London interbank offered rate, or Libor, for three- month loans fell to 2.51 percent today, from 4.82 percent on Oct. 10. The rate is still 151 basis points more than the Federal Reserve's target interest rate for overnight bank loans, compared with an average of 22 basis points in the five years before the global credit crisis began in August 2007. ``Banks are cutting back, the economy is in a deepening recession and in that environment, I don't think banks are going to become a lot more willing to extend credit soon,'' said Jan Hatzius, chief U.S. economist in New York at Goldman Sachs Group Inc., the world's biggest securities firm. Government bailouts totaling about $3 trillion, interest- rate cuts around the world and unprecedented cash injections by central banks drove Libor, the benchmark for $360 trillion of securities worldwide, lower in the past month without convincing financial institutions to lend. About 85 percent of U.S. banks tightened lending standards on loans to large and mid-size companies in the past three months, the Fed said on Nov. 3, the highest since the survey began in its current format in 1991…The credit-market seizure that began after BNP Paribas SA halted withdrawals on three hedge funds last year worsened when Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15,
driving dollar Libor up 200 basis points, or 2 percentage points, in the next 25 days to the highest level in 2008. The difference between Libor and the overnight indexed swap
rate, a measure former Fed Chairman Alan Greenspan uses to gauge the state of money markets, was at 201 basis points today. That compares with 87 basis points on the last day before Lehman's collapse and an average 11 basis points in the five years before
the crisis started…``Libor fixings are improving but it's too early to say that this
pattern is being replicated in the actual money markets.''…Central banks have driven money-market rates lower by offering financial institutions as much dollar funding as they need and acting in concert to slash interest rates. The Reserve Bank of Australia cut its benchmark rate 75 basis points yesterday, joining policy makers in China, Hong Kong, India, Japan and the U.S. in reducing borrowing costs in the past week. The European Central Bank and Bank of England will cut their key rates by 50 basis points tomorrow, according to Bloomberg surveys of economists. While cutting the U.S. target rate during the past 13 months to 1 percent from 5.25 percent, Fed Chairman Ben S. Bernanke has created six loan programs channeling at least $700 billion in cash and collateral into money markets as of Oct. 22….``It's all about buying time.'' Central bank operations helped the MSCI World Index of stocks rise almost 20 percent since falling to a five-year low on Oct. 27. Company borrowing costs have declined, with yields on the highest-ranked 30-day commercial paper, or CP, falling today to the lowest level since June 2004. The market, used by companies to cover daily expenses, grew last week for the first time since Lehman's collapse. Cash injections have had a limited impact because instead of lending the extra money received in auctions, some financial institutions are holding it on deposit with central banks. Banks lodged a record 296 billion euros ($381 billion) overnight with the ECB yesterday. The daily average in the first eight months of the year was 427 million euros. ``The money-market players remain cautious but we're at least seeing an improvement … ``Transactions remain limited and we still have a dislocated market, but we're seeing a significant pullback'' in rates, he said. In its quarterly Senior Loan Officer Survey, the Fed said about 95 percent of U.S. banks raised the costs on credit lines to large firms, and ``nearly all banks'' increased the spread on
borrowing rates over the cost of funds on loans to firms from July. About 70 percent of U.S. banks indicated they tightened standards on prime mortgage loans. Banks may not pass all of the benefits of lower interest rates on to consumers and businesses. Banks around the world are re-evaluating the price they put on risk, raising the cost of loans when compared with levels of pervious years, said David Hodgkinson, chief operating officer of HSBC Holdings Plc, Europe's biggest bank. ``Credit has to be priced appropriately to reflect the risk,'' Hodgkinson said in a Nov. 3 interview in Abu Dhabi. ``If interest rates are brought down significantly, then rates for borrowers will come down. But I'm not going to say it's absolutely linear because it depends on the particular transaction and the risk.'' In another sign that lending remains restricted, corporate bond sales in Europe dropped in October to the lowest level this year… U.S. investment-grade offerings fell to $21.6 billion, the least since July 2002. ``No one wants to lend because they are still wary of values of bank balance sheets, and no one wants to borrow from the money market because they can borrow directly from the central banks,'' …In effect, the measures taken by central banks are not providing incentives to go into the interbank market.''”
Russian Economy Remains Too Dependant on Commodity Exports
From The FT: “Russia … Its annual economic growth in real terms averaged 7 per cent in the years during which Vladimir Putin was president (2000-08), annual real wages rose by almost 15 per cent, the federal budget was continually in surplus… The Russian stock market has lost 70 per cent of its value this year. The commodity prices that spearheaded its boom are now falling. The easy credit money from the west that fuelled it has now fled. Russia has failed to diversify its economy and its politics have long made investors nervous. A confrontation with reality is long overdue. Metals, energy, and food account for 80 per cent of Russian exports. The growth of the economy in the Putin years was largely driven by the devaluation of the rouble in 1998-99 and the increase in the prices of these products: between 2000 and 2007 real prices of metals went up by 275 per cent, of energy by 210 per cent, and of food by 160 per cent… Since July, the commodity price index has dropped by more than 20 per cent…The downturn in the commodity economy will thus have a multiplied effect on the consumer economy and the Russian standard of living. Second, the government's spending plans are based on a $70 a barrel oil price. Every one-dollar decrease in the barrel price implies $3bn less in export revenues a year… Russia's banking system has been a poor channeller of commodity wealth into non-energy businesses. There are too many banks; most are undercapitalised. Growth in the non-energy sectors has been fuelled by collateralised loans from western banks. Russian banks and companies have about $450bn (€362bn, £292bn) of foreign debt, $50bn of which must be repaid or refinanced by the year end. So Russian businesses are exposed to the troubled European banking system when the value of the shares they put up as collateral may have fallen below the cost of the loans…Russia needs to scale down its geopolitical ambition to its real weight - that of an emerging economy with only 3 per cent of the world's gross domestic product and a quarter of America's living standard. Also, it desperately needs to develop its human capital.”
MISC
From Merrill Lynch: “The vast majority of questions we receive are about inflation, and whether the US is "printing money" to solve the crisis. Investors need to keep in mind that inflation is a lagging variable and that credit is a leading variable. Any devout monetarist will say that it is impossible to get inflation without credit creation. There is no credit creation. Investors should probably start worrying about inflation only after the credit cycle turns.”
From Deutsche Bank: “Massive long-end supply is coming The Treasury announced major changes to its auction schedule, reflecting what is likely to be a record high $1 trillion-plus budget deficit this year. Next week, the Treasury will begin auctioning monthly 3-year notes at $25 billion in size; the Treasury will then auction $20B in 10-year notes and these notes will be reopened in each of the ensuing two months (i.e., a double reopening). The Treasury did not specify the size of the 10-year reopenings but our initial guess is that it will be somewhere in the $10 to $15B range. The Treasury also decided that beginning next February it will begin auctioning quarterly 30-year bonds. Next week, though, the Treasury will…”
From Bloomberg: “Voters in states led by California embraced municipal debt as they approved about $39.7 billion of new borrowing, representing about 83 percent of measures for which results were available. Californians approved at least $27 billion, including money for schools and loans to veterans. Voters in 41 states from Rhode Island to Alaska considered $66.4 billion of bond proposals yesterday, the second-biggest slate after November 2006's $78.6 billion…”
End-of-Day Market Update
From Bloomberg: “The stock market posted its biggest plunge following a presidential election as reports on jobs and service industries stoked concern the economy will worsen even as President-elect Barack Obama tries to stimulate growth. Citigroup Inc. tumbled 14 percent and Bank of America Corp. lost 11 percent as the Standard & Poor's 500 Index and Dow Jones Industrial Average sank more than 5 percent. Nucor Corp., the largest U.S.-based steel producer, slid 10 percent after bigger rival ArcelorMittal doubled production cuts amid slowing demand. Boeing Co., the world's second-largest commercial planemaker, lost 6.9 percent after UBS AG forecast a 3 percent drop in global air traffic next year. `We had an election yesterday; that doesn't mean the problems go away,…``We still have an economic slowdown.'' The S&P 500 tumbled 52.96 points, or 5.3 percent, to 952.79, erasing yesterday's 4.1 percent rally. The Dow retreated 486.01, or 5.1 percent, to 9,139.27 and the Nasdaq Composite Index dropped 98.48, or 5.5 percent, to 1,681.64. Twelve stocks fell for each that rose on the New York Stock Exchange. The retreat halted an 18 percent rebound from the S&P 500's five-year low on Oct. 27. The benchmark for U.S. equities has lost more than 35 percent this year, the steepest annual plunge since 1937, and Obama will have to contend with an economy pummeled by the fastest contraction in manufacturing in 26 years and the lowest consumer confidence. The market's decline came a day after the biggest presidential Election Day gain since the NYSE first opened for trading on a voting day in 1984.”
From UBS: “ Prices as of 4:45PM (Based on Bloomberg)
Three month T-Bill yield fell 9 bp to 0.39%
Two year T-Note fell 4 bp to 1.33%
Ten year T-Note yield fell 4 bp to 3.68%
30-year FNMA current coupon fell 14 bp to 5.47%
Dow fell 486 points to 9139
S&P fell 53 points to 953
Dollar index fell 0.18 points to 84.61
Yen at 98.2
Euro at 1.297
Gold fell $21 to $742
Oil fell $5 to $65.50
From John Mauldin: “…net MEWs have fallen precipitously in 2008, down 95% from three years ago. On this data alone, GDP should be off by 3% this year. No wonder we are in negative economic territory. In 2005 there was almost $595 billion in mortgage extractions that went into some kind of consumer spending. Remember…that translated into a 3% rise in GDP. In 2007, MEWs were down to $470 billion, for a boost of 2% to GDP. The second quarter of 2008 saw an anemic $9.5 billion. At that run rate, we could see a drop-off of well over 90% from 2005! Now, think what the second quarter would have been without the federal stimulus program of $150 billion. It might have looked and felt like this quarter!”
Time to Pay for Past Excesses?
From Newsweek by Robert Samuelson: “Unfortunately, slower growth seems probable. What the new president, and everyone else, needs to understand is that the present crisis marks the end of an economic era. For roughly a quarter century, the U.S. economy benefited from the expansionary side effects of falling inflation—lower interest rates, greater debt, higher personal wealth—to the point now that we have now overdosed on its pleasures and are suffering the hangover. In our zeal to identify the villains of the present economic debacle, we ought to recognize that the larger causes lie in this prolonged prosperity and the permissive attitudes and practices it inspired. Largely unrecognized, the dominant economic event of the past half century was the rise and fall of double-digit inflation. On the way up, starting at about 1 percent in 1960, inflation destabilized the economy. There were four recessions between 1969 and 1981. Unemployment peaked at 10.8 percent in late 1982. That last devastating recession, imposed by the then Fed chairman Paul Volcker with Reagan's backing, purged the worst inflationary psychology. By 1984, inflation had dropped from double digits to less than 4 percent; by 2001, it was 1 percent. This declining inflation—disinflation—bolstered the economy. Consider what happened. The stock market recovered spectacularly: lower inflation led to lower interest rates, which caused investors to switch from bonds to stocks. The Dow Jones industrial average, which traded under 1,000 for much of 1982, averaged about 2,500 in 1989 and almost 10,500 in 1999. There was a consumption boom. Feeling wealthier, Americans borrowed and spent. The personal savings rate dropped from 11 percent in 1982 to almost zero by 2005. There were only two mild recessions (1990–91 and 2001). But what's clear now is that this prosperity bred bad habits. The present crisis, though usually attributed to dubious "subprime" mortgages, really traces its origins in the widespread optimism unleashed by disinflation. By now, the perverse consequences are clear. As stocks and real estate rose sharply in value, many Americans became convinced that prices could only go up. Once that mind-set took hold, lax investment standards (in the case of high-tech companies) and lending practices (in the case of homes) mushroomed. "Bubbles" followed. People overinvested in tech stocks and overborrowed to buy homes at inflated prices or to raise cash from bloated real-estate values. But the borrowing surge could not last indefinitely, because debts increasingly outpaced the rise of incomes. By 2006, household debt was 134 percent of personal income. Sooner or later, consumers had to retrench. They are now; car sales and retail spending are down. The recession will end, but recovery won't ensure a return to previous rates of economic growth. Just beyond the horizon looms a larger threat: an aging society. Arithmetically, economic growth reflects the increases in workers' hours and their productivity—a.k.a. efficiency. From 1960 to 2005, annual U.S. economic growth averaged 3.4 percent, split almost evenly between labor-force growth (1.5 percent) and productivity gains (1.9 percent). As baby boomers retire, labor-force growth will shrink. By the mid-2020s, the Social Security Administration expects economic growth of about 2.1 percent, with scant labor-force increases (0.4 percent) and higher productivity gains (1.7 percent). Because productivity reflects many influences—technology, management, workers' skills—even that projection could be optimistic. If productivity falters, as in the 1970s, the U.S. economy would virtually stagnate in the face of growing claims on people's incomes…. people will fight over pieces of a fairly fixed economic pie rather than sharing ever-larger pieces of an expanding pie…. Already, Americans face far more claims on their incomes than can be easily met. Start with government. It's overcommitted in the sense that it's made more promises than can be sensibly afforded. The largest of these involve retirement costs. As is well known, three programs for the elderly dominate the federal budget: Social Security, Medicare (health insurance) and Medicaid (nursing-home care for the elderly poor). These programs now represent more than two fifths of the $3 trillion budget, and as baby boomers retire, they could nearly double—measured as a share of the economy, gross domestic product (GDP)—in 2030. The tough questions are obvious. How much will we permit spending on retirees to raise taxes or crowd out the rest of government? Health care compounds the difficulty. About three quarters of the projected increase in federal spending for the elderly involves Medicare and Medicaid. As a society, we haven't learned how to control health spending. Most Americans think that people should get all the medical care they need. Spending controls—for government and private insurance—haven't worked, because Americans don't want them to work. Health spending has gone from 5 percent of GDP in 1960 to 16 percent now and may hit 20 percent by 2015. For workers with employer-paid insurance, that's depressed take-home pay by diverting dollars from wages into premiums. For everyone, health spending puts upward pressure on taxes and downward pressure on other government programs…. the great forces that propelled the economy forward for the past quarter century, fed by disinflation and the accompanying rise in personal wealth and borrowing, have clearly spent themselves. If the economy is to retrieve faster growth in the future, it will need to nurture new sources of advance.
Given the scope and scariness of the financial crisis, it has already stimulated massive government intervention—and there will be more. But there is a parallel danger that too much intervention, or the wrong kind of intervention, will suppress the impulse for expansion, investment and risk-taking.”
Government Entitlement Problems Lurk Like Sub-Prime Issues – Off Balance Sheet
From Fortune (By David Walker, former U.S. Comptroller General): “The U.S. Government Accountability Office (GAO), noting that the federal balance sheet does not reflect the government's huge unfunded promises in our nation's social-insurance programs, estimated last year that the unfunded obligations for Medicare and Social Security alone totaled almost $41 trillion. That sum, equivalent to $352,000 per U.S. household, is the present-value shortfall between the growing cost of entitlements and the dedicated revenues intended to pay for them over the next 75 years. Why call it a super-subprime crisis? Besides its gigantic scale, there are very disturbing similarities between the current mortgage-related crisis and our next potential disaster. First, like the securitized investment vehicles that blew up, federal programs were launched without adequately thinking through who would bear the ultimate cost and related risk. Just as originators of mortgages let themselves off the hook by unloading packages of dubious loans onto others, lawmakers have increased spending, expanded entitlement programs, and cut taxes while expecting future generations to pay the bill. Second, just as a lack of transparency associated with mortgage-backed securities resulted in big surprises and large losses for investors, our nation's huge off-balance-sheet obligations for Social Security and Medicare present a threat wrapped in camouflage. After all, the government's "trust funds" don't really provide much security since they don't hold anything but more government debt. Third, in the same way that private sector "risk management" executives failed to prevent the subprime mortgage crisis, overseers in Congress and the executive branch have turned a blind eye to costs associated with entitlement programs and tax cuts. While lax regulation of banks fed the current subprime crisis, a lack of statutory budget controls has led to a widening gap between the government's revenues and costs. At the heart of these problems is our leaders' collective failure to act in the face of known challenges. Our country has veered from its founding principles, which held to individual responsibility and accountability today in order to create more opportunity tomorrow. When our constitution was written, the concepts of thrift and prudence were no less at the During past financial crises and wars, the government went into debt because our nation's survival was at stake. What has changed is that piling up debt has become business as usual, even during times of prosperity.
Today we are headed toward debt levels that far exceed the all-time record as a percentage of our economy. In fact, by 2040 we are projected to see debt as a percentage of our economy that is double the record set at the end of World War II. Based on GAO data, balancing the budget in 2040 could require us to cut federal spending by 60% or raise overall federal tax burdens to twice today's levels. Medicare, Medicaid, and Social Security already account for more than 40% of the total federal budget. And their portion of the budget is expected to grow so fast that their cost, and the cost of servicing our debt, will soon crowd out vital programs, including research and development, critical infrastructure, education, and even national defense. The crisis we face is one of numbers and demographics but also of attitudes. Promises were made in an earlier time, when they seemed more affordable. Like homeowners borrowing against the value of their homes in the expectation that the values would go up forever, the American government borrowed against the future and assumed that the economy would grow fast enough to make that debt affordable. But our national debt is not limitless, and our foreign lenders are not fools. If we persist on our current "do nothing" path, our future will be jeopardized. Americans need to reconcile the government we want with the taxes we're willing to pay for it.”
Credit Markets Showing Signs of Imporving
From Bloomberg: “Credit markets are still creaking even after the biggest decline on record in the rate banks say they charge each other to borrow dollars. The London interbank offered rate, or Libor, for three- month loans fell to 2.51 percent today, from 4.82 percent on Oct. 10. The rate is still 151 basis points more than the Federal Reserve's target interest rate for overnight bank loans, compared with an average of 22 basis points in the five years before the global credit crisis began in August 2007. ``Banks are cutting back, the economy is in a deepening recession and in that environment, I don't think banks are going to become a lot more willing to extend credit soon,'' said Jan Hatzius, chief U.S. economist in New York at Goldman Sachs Group Inc., the world's biggest securities firm. Government bailouts totaling about $3 trillion, interest- rate cuts around the world and unprecedented cash injections by central banks drove Libor, the benchmark for $360 trillion of securities worldwide, lower in the past month without convincing financial institutions to lend. About 85 percent of U.S. banks tightened lending standards on loans to large and mid-size companies in the past three months, the Fed said on Nov. 3, the highest since the survey began in its current format in 1991…The credit-market seizure that began after BNP Paribas SA halted withdrawals on three hedge funds last year worsened when Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15,
driving dollar Libor up 200 basis points, or 2 percentage points, in the next 25 days to the highest level in 2008. The difference between Libor and the overnight indexed swap
rate, a measure former Fed Chairman Alan Greenspan uses to gauge the state of money markets, was at 201 basis points today. That compares with 87 basis points on the last day before Lehman's collapse and an average 11 basis points in the five years before
the crisis started…``Libor fixings are improving but it's too early to say that this
pattern is being replicated in the actual money markets.''…Central banks have driven money-market rates lower by offering financial institutions as much dollar funding as they need and acting in concert to slash interest rates. The Reserve Bank of Australia cut its benchmark rate 75 basis points yesterday, joining policy makers in China, Hong Kong, India, Japan and the U.S. in reducing borrowing costs in the past week. The European Central Bank and Bank of England will cut their key rates by 50 basis points tomorrow, according to Bloomberg surveys of economists. While cutting the U.S. target rate during the past 13 months to 1 percent from 5.25 percent, Fed Chairman Ben S. Bernanke has created six loan programs channeling at least $700 billion in cash and collateral into money markets as of Oct. 22….``It's all about buying time.'' Central bank operations helped the MSCI World Index of stocks rise almost 20 percent since falling to a five-year low on Oct. 27. Company borrowing costs have declined, with yields on the highest-ranked 30-day commercial paper, or CP, falling today to the lowest level since June 2004. The market, used by companies to cover daily expenses, grew last week for the first time since Lehman's collapse. Cash injections have had a limited impact because instead of lending the extra money received in auctions, some financial institutions are holding it on deposit with central banks. Banks lodged a record 296 billion euros ($381 billion) overnight with the ECB yesterday. The daily average in the first eight months of the year was 427 million euros. ``The money-market players remain cautious but we're at least seeing an improvement … ``Transactions remain limited and we still have a dislocated market, but we're seeing a significant pullback'' in rates, he said. In its quarterly Senior Loan Officer Survey, the Fed said about 95 percent of U.S. banks raised the costs on credit lines to large firms, and ``nearly all banks'' increased the spread on
borrowing rates over the cost of funds on loans to firms from July. About 70 percent of U.S. banks indicated they tightened standards on prime mortgage loans. Banks may not pass all of the benefits of lower interest rates on to consumers and businesses. Banks around the world are re-evaluating the price they put on risk, raising the cost of loans when compared with levels of pervious years, said David Hodgkinson, chief operating officer of HSBC Holdings Plc, Europe's biggest bank. ``Credit has to be priced appropriately to reflect the risk,'' Hodgkinson said in a Nov. 3 interview in Abu Dhabi. ``If interest rates are brought down significantly, then rates for borrowers will come down. But I'm not going to say it's absolutely linear because it depends on the particular transaction and the risk.'' In another sign that lending remains restricted, corporate bond sales in Europe dropped in October to the lowest level this year… U.S. investment-grade offerings fell to $21.6 billion, the least since July 2002. ``No one wants to lend because they are still wary of values of bank balance sheets, and no one wants to borrow from the money market because they can borrow directly from the central banks,'' …In effect, the measures taken by central banks are not providing incentives to go into the interbank market.''”
Russian Economy Remains Too Dependant on Commodity Exports
From The FT: “Russia … Its annual economic growth in real terms averaged 7 per cent in the years during which Vladimir Putin was president (2000-08), annual real wages rose by almost 15 per cent, the federal budget was continually in surplus… The Russian stock market has lost 70 per cent of its value this year. The commodity prices that spearheaded its boom are now falling. The easy credit money from the west that fuelled it has now fled. Russia has failed to diversify its economy and its politics have long made investors nervous. A confrontation with reality is long overdue. Metals, energy, and food account for 80 per cent of Russian exports. The growth of the economy in the Putin years was largely driven by the devaluation of the rouble in 1998-99 and the increase in the prices of these products: between 2000 and 2007 real prices of metals went up by 275 per cent, of energy by 210 per cent, and of food by 160 per cent… Since July, the commodity price index has dropped by more than 20 per cent…The downturn in the commodity economy will thus have a multiplied effect on the consumer economy and the Russian standard of living. Second, the government's spending plans are based on a $70 a barrel oil price. Every one-dollar decrease in the barrel price implies $3bn less in export revenues a year… Russia's banking system has been a poor channeller of commodity wealth into non-energy businesses. There are too many banks; most are undercapitalised. Growth in the non-energy sectors has been fuelled by collateralised loans from western banks. Russian banks and companies have about $450bn (€362bn, £292bn) of foreign debt, $50bn of which must be repaid or refinanced by the year end. So Russian businesses are exposed to the troubled European banking system when the value of the shares they put up as collateral may have fallen below the cost of the loans…Russia needs to scale down its geopolitical ambition to its real weight - that of an emerging economy with only 3 per cent of the world's gross domestic product and a quarter of America's living standard. Also, it desperately needs to develop its human capital.”
MISC
From Merrill Lynch: “The vast majority of questions we receive are about inflation, and whether the US is "printing money" to solve the crisis. Investors need to keep in mind that inflation is a lagging variable and that credit is a leading variable. Any devout monetarist will say that it is impossible to get inflation without credit creation. There is no credit creation. Investors should probably start worrying about inflation only after the credit cycle turns.”
From Deutsche Bank: “Massive long-end supply is coming The Treasury announced major changes to its auction schedule, reflecting what is likely to be a record high $1 trillion-plus budget deficit this year. Next week, the Treasury will begin auctioning monthly 3-year notes at $25 billion in size; the Treasury will then auction $20B in 10-year notes and these notes will be reopened in each of the ensuing two months (i.e., a double reopening). The Treasury did not specify the size of the 10-year reopenings but our initial guess is that it will be somewhere in the $10 to $15B range. The Treasury also decided that beginning next February it will begin auctioning quarterly 30-year bonds. Next week, though, the Treasury will…”
From Bloomberg: “Voters in states led by California embraced municipal debt as they approved about $39.7 billion of new borrowing, representing about 83 percent of measures for which results were available. Californians approved at least $27 billion, including money for schools and loans to veterans. Voters in 41 states from Rhode Island to Alaska considered $66.4 billion of bond proposals yesterday, the second-biggest slate after November 2006's $78.6 billion…”
End-of-Day Market Update
From Bloomberg: “The stock market posted its biggest plunge following a presidential election as reports on jobs and service industries stoked concern the economy will worsen even as President-elect Barack Obama tries to stimulate growth. Citigroup Inc. tumbled 14 percent and Bank of America Corp. lost 11 percent as the Standard & Poor's 500 Index and Dow Jones Industrial Average sank more than 5 percent. Nucor Corp., the largest U.S.-based steel producer, slid 10 percent after bigger rival ArcelorMittal doubled production cuts amid slowing demand. Boeing Co., the world's second-largest commercial planemaker, lost 6.9 percent after UBS AG forecast a 3 percent drop in global air traffic next year. `We had an election yesterday; that doesn't mean the problems go away,…``We still have an economic slowdown.'' The S&P 500 tumbled 52.96 points, or 5.3 percent, to 952.79, erasing yesterday's 4.1 percent rally. The Dow retreated 486.01, or 5.1 percent, to 9,139.27 and the Nasdaq Composite Index dropped 98.48, or 5.5 percent, to 1,681.64. Twelve stocks fell for each that rose on the New York Stock Exchange. The retreat halted an 18 percent rebound from the S&P 500's five-year low on Oct. 27. The benchmark for U.S. equities has lost more than 35 percent this year, the steepest annual plunge since 1937, and Obama will have to contend with an economy pummeled by the fastest contraction in manufacturing in 26 years and the lowest consumer confidence. The market's decline came a day after the biggest presidential Election Day gain since the NYSE first opened for trading on a voting day in 1984.”
From UBS: “ Prices as of 4:45PM (Based on Bloomberg)
Three month T-Bill yield fell 9 bp to 0.39%
Two year T-Note fell 4 bp to 1.33%
Ten year T-Note yield fell 4 bp to 3.68%
30-year FNMA current coupon fell 14 bp to 5.47%
Dow fell 486 points to 9139
S&P fell 53 points to 953
Dollar index fell 0.18 points to 84.61
Yen at 98.2
Euro at 1.297
Gold fell $21 to $742
Oil fell $5 to $65.50
Massive Service Sector Economy Falls Into Worst Contraction in Over 10 Years
The October non-manufacturing ISM, which covers the majority service sector (88%) of the US economy, fell more than expected to 44.4 (Consensus 47, prior 50.2). This was the lowest reading ever recorded for the index, which goes back to 1997. Any reading below 50 indicates contraction.
Among the sub-sectors, business activity declined even faster than the headline reading, falling from 52.1 to 44.2. New orders fell from 50.8 to 44, and the order backlog eased down to 44 from 46.5. As with the ISM manufacturing index, inventory sentiment rose, indicating that inventories are probably growing larger than desired. One bright spot was that new export orders held steady at 50 vs 50.5 in September. In addition, the decline in commodity prices helped prices paid fall to 53.4 from 70 the prior month. Obviously lower oil prices feed through into reduced transportation costs for everything. The demand for labor remains subdued. Employment eased down to 41.5 from 44.2.
The composite index of the manufacturing and non-manufacturing indexes fell to 43.8 in October, from 49.4 in September. The ISM manufacturing data released earlier this week showed the manufacturing sector shrinking the most in 26 years in September, as the economy faltered, and credit evaporated for producers and consumers.
Among the sub-sectors, business activity declined even faster than the headline reading, falling from 52.1 to 44.2. New orders fell from 50.8 to 44, and the order backlog eased down to 44 from 46.5. As with the ISM manufacturing index, inventory sentiment rose, indicating that inventories are probably growing larger than desired. One bright spot was that new export orders held steady at 50 vs 50.5 in September. In addition, the decline in commodity prices helped prices paid fall to 53.4 from 70 the prior month. Obviously lower oil prices feed through into reduced transportation costs for everything. The demand for labor remains subdued. Employment eased down to 41.5 from 44.2.
The composite index of the manufacturing and non-manufacturing indexes fell to 43.8 in October, from 49.4 in September. The ISM manufacturing data released earlier this week showed the manufacturing sector shrinking the most in 26 years in September, as the economy faltered, and credit evaporated for producers and consumers.
Job and housing data
Challenger job cuts rose to a 5 year high, up 79% YoY, with losses in financial and auto jobs leading the way. 75% of job categories are now seeing lay-offs, as the labor market weakness spreads. Year-to-date, layoffs have totaled 875k.
****************
The ADP private sector employment job report showed a higher than expected loss of 157k jobs in October. Consensus looked for a 100k drop. This index has been under-estimating job losses by 71k on average each month this year. Consensus for Friday's payroll loss is currently 200k, which includes government jobs as well as private sector employment. Government jobs have continued to grow modestly as the private sector has been shedding positions this year. The economy has lost net jobs each month this year.
*************
MBA Mortgage applications fell 20% WoW, bringing them back to an 8-year low (12/2000), as thirty year mortgage rates rose 21bp to 6.47%. Purchase applications fell -14% WoW and refinance applications fell -28% WoW, as the housing slump continues.
****************
The ADP private sector employment job report showed a higher than expected loss of 157k jobs in October. Consensus looked for a 100k drop. This index has been under-estimating job losses by 71k on average each month this year. Consensus for Friday's payroll loss is currently 200k, which includes government jobs as well as private sector employment. Government jobs have continued to grow modestly as the private sector has been shedding positions this year. The economy has lost net jobs each month this year.
*************
MBA Mortgage applications fell 20% WoW, bringing them back to an 8-year low (12/2000), as thirty year mortgage rates rose 21bp to 6.47%. Purchase applications fell -14% WoW and refinance applications fell -28% WoW, as the housing slump continues.
Tuesday, November 4, 2008
Today's Tidbits
Cost of Not Taking The “Punchbowl” Away Quickly Enough
From MNI: Dallas Fed President “Fisher… the Fed has been acting aggressively to alleviate the credit crisis and the economic downturn, but said there are limits to what the Fed can do. He called for unspecified fiscal action to complement the Fed's efforts. Pointing to the aggressive lending which the Fed has done to resolve the credit crisis and rescue large financial firms, Fisher observed, "You can see the size and breadth of the Fed's efforts to counter the collapse of the credit mechanism in our balance sheet." Noting that the Fed's assets have more than doubled from $890 billion at the start of the year to more than $1.9 trillion, Fisher said he "would not be surprised to see them aggregate to $3 trillion -- roughly 20% of GDP -- by the time we ring in the New Year." Fisher also observed that "the composition of our holdings has shifted considerably. Previously, almost 100 percent of our holdings were in the form of core holdings of U.S. Treasuries; today, less than a third are. The remainder consists of claims deriving from our new facilities."… Because of the Fed's "limited role," Fisher said "Complementary action must now be undertaken by the fiscal authorities." He did not say what kind of fiscal stimulus he would like to see. The U.S. is "experiencing the conesquences of the failure to take away the punch bowl and of allowing the exuberant 'animal spirits' of
our economy to get out of hand," Fisher said, adding, "We must never allow this to happen again."”
Why Has The Dollar Been Rallying?
From Dr. Ronald Solberg: “What has caused this abrupt appreciation of the US dollar during the past quarter…First, the seven-year decline in the US dollar’s value through July 2008 improved US competitiveness and… has led to an acceleration of export revenue. Slower GDP growth is also allowing imports to decline. These two effects have begun to stabilize the US trade deficit in nominal terms and allowed net exports in real terms to contribute 1.1% to Q3 2008 GDP growth. The shrinking trade deficit has also contributed to the narrowing of the current account deficit. By pumping fewer US dollars to our foreign suppliers, this narrowing is shrinking global liquidity and creating further support for the dollar. A second fundamental reason for US dollar strength has been an improvement in US terms-of-trade: the ratio of export prices over import prices. Since the United States is a net energy importer and this cost represents a significant portion of total import expenditures, the recent decline in crude oil prices has been a boon to our terms-of-trade. The improvement in US terms-of-trade has also supported the US dollar. Thirdly, it is suggested from viewing the highly unusual negative break-even yields for inflation-linked bonds (TIPs) that investors believe the US will suffer deflation, not inflation, for the foreseeable future. This expectation for a declining price level, as a corollary, also creates the expectation for US dollar appreciation…Perhaps the most important driver of the US dollar’s recent appreciation is not a fundamental but a technical factor. The meltdown of prices in the commodity complex, particularly energy, has generated a very strong impulse for US dollar strength. Whilst many commodity end-users were outright cash buyers, other buyers that were investing or speculating in commodities as a newfound asset class over the past five years would typically fund their position with US dollar-denominated credit, in effect, creating a US dollar short position. Now that these commodity carry trades are being unwound, it exacerbates commodity weakness and contributes to US dollar strength. In addition, US investments in foreign markets, particularly equities, were primarily un-hedged and large amounts of those monies are now being repatriated which holds similar bullish US dollar effects.
Huge Drop In New Mortgage Insurance Contracts
From LEHC: “The Mortgage Insurance Companies of America reported that primary new mortgage insurance written by members totaled a measly $8.1 billion in September, down almost 72% from last September’s pace. “Bulk” insurance written was “virtually zero” for the third straight month, compared to $5.8 billion last September…Private mortgage insurance companies, battered by rising mortgage defaults and soaring claims, have tightened underwriting and raised pricing considerably over the past year. As a result, an increasing number of borrowers have turned to the FHA SF program, which saw total SF mortgage endorsements surge from about $6 billion last September to about $25 billion this September. Current FHA pricing is massively below any private alternative for loans where the borrower makes the minimum down payment, and that is especially true for borrowers with less than perfect credit, and for borrowers in areas where home prices have been falling and foreclosures rising. The huge increase in the FHA loan limit in many parts of the country earlier this year has made government-subsidized low-down-payment mortgage financing available to the vast bulk of the US population – both for owner-occupied home purchase loans and for refinance loans – including folks who are pretty well off! Private mortgage lenders, stung not simply by much higher than expected home price declines but also by much higher default rates than “models” had predicted given observed home price declines, have reassessed both the pricing of and the logic of making low- or no-down payment mortgage loans.”
Concerns Rising China’s Growth Could Fall Below Stability Enhancing 8%
From the FT: “Wen Jiabao, China's prime minister, warned that high growth was needed to maintain social stability as fresh evidence emerged yesterday that China's economy was slowing quickly. In an article in a Communist party magazine, Mr Wen said 2008 was "the most difficult year in recent years" and maintaining high growth was the priority. "We must be crystal-clear that without a certain pace of economic growth, there will be difficulties with employment, fiscal revenues and social development . . . and factors damaging social stability will grow," he wrote in the magazine…The decision to relax lending quotas is the latest in a series of steps to prevent a hard landing in the economy, including three cuts in interest rates and a fiscal stimulus plan that includes a Rmb2,000bn ($292bn, €231bn) investment in railway infrastructure. Stephen Roach, chairman of Morgan Stanley Asia, said the flurry of recent announcements could indicate that Chinese authorities knew growth had already dipped below 8 per cent, sometimes considered an important benchmark. "The way the Chinese are reacting now is either visionary and proactive or they are panicking," he said. Many economists believe the economy can still expand by around 8 per cent next year. "There is no reason to panic," said Andy Rothman, economist at CLSA. But several have reduced their forecasts over the last few weeks. Dong Tao, at Credit Suisse, said yesterday that growth in the fourth quarter of this year could fall as low as 5.8 per cent.”
MISC
From Bloomberg: “U.S. auto sales plummeted 32 percent in October to the lowest monthly total since January 1991, led by General Motors Corp's 45 percent slide, as reduced access to loans and a weaker economy kept consumers off dealer lots. Ford Motor Co. reported a 30 percent drop in car and light- truck sales from a year earlier and Toyota Motor Corp.'s declined 23 percent. Honda Motor Co.'s slid 25 percent, Nissan Motor Co.'s were down 33 percent and Chrysler LLC's fell 35 percent. ``If you adjust for population growth, it's the worst sales month in the post-World War II era'' for the industry, said Mike DiGiovanni, GM's chief sales analyst, on a conference call. ``Clearly we're in a dire situation.'' Industrywide U.S. auto sales fell for the 12th straight month, extending the longest slide in 17 years.”
From Citi: “The Fed's Senior Loan Officer survey was also very tight. In October, a net 47% of all banks pulled back from lending to consumers, according to a series with the longest history in the report. Other than the net 79% pulling back from consumer lending in 1Q 1980, this was the most severe tightening event measured in the survey's history… The net percentage of banks tightening standards for commercial real estate loans rose to a record high 87% from 80.7% in 3Q. This points to outright declines in non-residential construction activity looking forward.”
From Bloomberg: “The cost of borrowing dollars for one month in London fell to the lowest level in almost four years as central-bank cash injections and interest-rate cuts worldwide showed signs of thawing the freeze in lending. The London interbank offered rate, or Libor, that banks charge each other for such loans slid 18 basis points to 2.18 percent today, the lowest level since November 2004, and the 17th straight decline, according to British Bankers' Association data. The three-month rate dropped 15 basis points to 2.71 percent, the lowest level since June 9, according to BBA figures. Interbank rates have tumbled worldwide as central banks slashed interest rates and governments pledged as much as $3 trillion of emergency funds to kickstart lending.”
From the Treasury: “Over the October – December 2008 quarter, the Treasury expects to borrow $550 billion of marketable debt, assuming an end-of-December cash balance of $300 billion, which includes $260 billion for the Supplementary Financing Program (SFP). Without the SFP, the end-of-December cash balance is expected to be $40 billion. This borrowing estimate is $408 billion higher than announced in July 2008. The increase in borrowing is primarily due to higher outlays related to economic assistance programs, lower receipts, and lower net issuances of State and Local Government Series securities.”
From Bloomberg: “The broadest set of data yet on the credit-default swaps market will be released today as traders in the market say concerns about potential losses from the more than $47 trillion in outstanding contracts are overblown. The Depository Trust & Clearing Corp., which operates a central registry of credit swaps trades, will publish details including the top 1,000 contracts on its Web site after 5 p.m. New York time. The data is being released after pressure from regulators for more transparency about risks in the market after trading exploded the past decade. The data will for the first time offer a clearer picture of the amount wagered on the creditworthiness of the world's companies and governments.”
From Bloomberg: “New York City commercial real estate transactions plunged 61 percent in 2008 through October as the global credit crisis roiled lending and sidelined buyers.”
From Merrill Lynch: “The Baltic Dry Index, a measure of commodity shipping costs, has plunged 21 days in a row. The index is now at its lowest level since February 1999. In fact, the index is off a staggering 90% from its peak seen back in May of this year.”
From MNI: “Taiwan and China began historic talks here aimed at bringing the two sides closer economically…the discussions that are expected to ink deals potentially worth billions of dollars to each side…China and Taiwan have agreed to open direct sea, air and postal links at the morning session of talks in Taipei…”
End-of-Day Market Update
From Bloomberg: “U.S. stocks advanced in the biggest presidential Election Day rally in 24 years, led by energy and banking shares, on rebounding commodity prices and speculation the Treasury will bail out more financial companies. General Electric Co. added 7.6 percent while CIT Group Inc. and Principal Financial Group Inc. climbed more than 22 percent after people briefed on the matter said the government may broaden the focus of its rescue program. Exxon Mobil Corp. and Chevron Corp. led all 40 energy shares in the Standard & Poor's 500 Index higher as oil gained. Archer Daniels Midland Co. rose 15 percent after profit more than doubled at the world's largest grain processor. ``The market has come to the conclusion that Armageddon is off the table,'' said Philip Orlando, who helps manage $330 billion as chief equity strategist at Federated Investors Inc. in New York. ``The elimination of the uncertainty of the campaign typically results in an end-of-year rally and you're starting to see that today.'' The S&P 500 added 39.42 points, or 4.1 percent, to 1,005.72, its first close above 1,000 since Oct. 13. The Dow Jones Industrial Average rose 305.45 points, or 3.3 percent, to 9,625.28. The Nasdaq Composite Index advanced 53.79, or 3.1 percent, to 1,780.12. Gains in Europe and Asia sent the MSCI World Index to a sixth straight advance. Today's advance in the S&P 500 and Dow average are the biggest for a presidential Election Day since the NYSE first opened for trading during a vote in 1984. The S&P 500 rose on four and fell on two of the previous presidential election days since then, averaging a 0.3 percent gain. The winner between Democrat Barack Obama, who leads in national polls, and Republican John McCain will contend with an economy crippled by declining profits and the highest unemployment in five years… Concern economic growth is slowing sent the S&P 500 down 17 percent in October, the steepest monthly loss since 1987. The month's sell-off erased more than $9.5 trillion from the value of stocks worldwide, almost one-third of the total value wiped out this year, as credit-related losses and writedowns by financial firms approached $700 billion. The S&P 500 has rebounded 18 percent since reaching a five-year low on Oct. 27 as global interest-rate cuts and government attempts to shore up banks spurred a 23 percent gain in the index's financial shares.”
From Bloomberg: “The dollar fell the most against the euro since the 15-nation currency's 1999 debut as the thaw in money markets reduced demand for the safety of U.S. assets. Brazil's real and South Africa's rand advanced versus the dollar on revived investor interest in emerging markets. The yen dropped against the dollar, the euro, the Australian dollar and New Zealand's currency as a global rally in stocks encouraged investors to buy higher-yielding assets financed by low-cost loans in Japan's currency. ``It's a broad setback for the dollar,'' … The dollar depreciated 2.7 percent to $1.2999 per euro … The euro climbed 3.5 percent to 129.71 yen from 125.33. The yen fell 0.6 percent to 99.76 per dollar from 99.12.”
From UBS: “Another quiet data day with a seeming decline in risk aversion. UST rallied smartly in the early afternoon, led by the intermediate sector. UST were responsive to movements in other sectors, as the Swap and MBS desks reported good real money buying, while the Treasury desk noted the out-performance of futures relative to cash. UST 2- year and UST 10- year approached our short term resistance levels of 1.375% and 3.75% respectively. The UST2Y10Y flattened -8 bps to 238 bps. In addition to the lower Libor sets of recent days, our anecdotal sense is that UST fails in the repo market continue to decline. It is hard to characterize the price moves in the various markets in a manner that makes sense. UST, equities, and commodities rallied in an asset grabathon. The dollar weakened presumably because there was a flight from quality (?) which conflicts with the UST rally theme.... Let's chalk this all up to thin markets and position squaring in anticipation of election results. Hopefully when we start the day tomorrow everything will make more sense. The Dow was up 305 points to 9,625. The CRB was 278.11, +14.11. Oil closed at $70.30/bbl, +6.22. UST volume was -34.5% below the 30 day trading average…. Spreads Narrow as Vol Seems Perched to Fall:
Let's lead with Vol. As noted yesterday, implied Vol is at very high levels which need to be justified by high realized price action. The market has seen subdued volumes and somewhat less intraday price volatility. Volatilities have been moving lower since mid-month and have now reached a support point. Further declines start to probe levels last seen in early September, before the world "changed." If the "repair" trade is on, then volatility is probably too high. MBS were very well bid today. Purchasing MBS can be a play on declining volatility. Our desk saw better real money buying and we heard the same away. The supply pipeline is thin and price movements can therefore be exaggerated. We see the current coupon MBS at 170 bps over a 50/50 weight of 5- year and 10- year swaps, -16 bps today. The swap desk reported better receiving across the curve as well as rate curve flatteners. The 2Y10Y swap box trade improved by about 8 bps, with 2- year spreads narrowing by -11.25 bps. Agency spreads joined the party as benchmark 2- years fell by -15 bps to 131, 5- years fell by -10 to 125 bps, and 10- years fell by -3 bps to 124 bps (Bloomberg).”
Prices as of 5PM (Based on Bloomberg)
Three month T-Bill yield fell 1 bp to 0.48%
Two year T-Note fell 6 bp to 1.37%
Ten year T-Note yield fell 19 bp to 3.72%
30-year FNMA current coupon fell 38 bp to 5.60%
Dow rose 305 points to9625
S&P rose 39 points to 106
Dollar index fell 1.57 points to 84.78
Yen at 99.7
Euro at 1.298
Gold rose $40 to $763
Oil rose $6 to $70
From MNI: Dallas Fed President “Fisher… the Fed has been acting aggressively to alleviate the credit crisis and the economic downturn, but said there are limits to what the Fed can do. He called for unspecified fiscal action to complement the Fed's efforts. Pointing to the aggressive lending which the Fed has done to resolve the credit crisis and rescue large financial firms, Fisher observed, "You can see the size and breadth of the Fed's efforts to counter the collapse of the credit mechanism in our balance sheet." Noting that the Fed's assets have more than doubled from $890 billion at the start of the year to more than $1.9 trillion, Fisher said he "would not be surprised to see them aggregate to $3 trillion -- roughly 20% of GDP -- by the time we ring in the New Year." Fisher also observed that "the composition of our holdings has shifted considerably. Previously, almost 100 percent of our holdings were in the form of core holdings of U.S. Treasuries; today, less than a third are. The remainder consists of claims deriving from our new facilities."… Because of the Fed's "limited role," Fisher said "Complementary action must now be undertaken by the fiscal authorities." He did not say what kind of fiscal stimulus he would like to see. The U.S. is "experiencing the conesquences of the failure to take away the punch bowl and of allowing the exuberant 'animal spirits' of
our economy to get out of hand," Fisher said, adding, "We must never allow this to happen again."”
Why Has The Dollar Been Rallying?
From Dr. Ronald Solberg: “What has caused this abrupt appreciation of the US dollar during the past quarter…First, the seven-year decline in the US dollar’s value through July 2008 improved US competitiveness and… has led to an acceleration of export revenue. Slower GDP growth is also allowing imports to decline. These two effects have begun to stabilize the US trade deficit in nominal terms and allowed net exports in real terms to contribute 1.1% to Q3 2008 GDP growth. The shrinking trade deficit has also contributed to the narrowing of the current account deficit. By pumping fewer US dollars to our foreign suppliers, this narrowing is shrinking global liquidity and creating further support for the dollar. A second fundamental reason for US dollar strength has been an improvement in US terms-of-trade: the ratio of export prices over import prices. Since the United States is a net energy importer and this cost represents a significant portion of total import expenditures, the recent decline in crude oil prices has been a boon to our terms-of-trade. The improvement in US terms-of-trade has also supported the US dollar. Thirdly, it is suggested from viewing the highly unusual negative break-even yields for inflation-linked bonds (TIPs) that investors believe the US will suffer deflation, not inflation, for the foreseeable future. This expectation for a declining price level, as a corollary, also creates the expectation for US dollar appreciation…Perhaps the most important driver of the US dollar’s recent appreciation is not a fundamental but a technical factor. The meltdown of prices in the commodity complex, particularly energy, has generated a very strong impulse for US dollar strength. Whilst many commodity end-users were outright cash buyers, other buyers that were investing or speculating in commodities as a newfound asset class over the past five years would typically fund their position with US dollar-denominated credit, in effect, creating a US dollar short position. Now that these commodity carry trades are being unwound, it exacerbates commodity weakness and contributes to US dollar strength. In addition, US investments in foreign markets, particularly equities, were primarily un-hedged and large amounts of those monies are now being repatriated which holds similar bullish US dollar effects.
Huge Drop In New Mortgage Insurance Contracts
From LEHC: “The Mortgage Insurance Companies of America reported that primary new mortgage insurance written by members totaled a measly $8.1 billion in September, down almost 72% from last September’s pace. “Bulk” insurance written was “virtually zero” for the third straight month, compared to $5.8 billion last September…Private mortgage insurance companies, battered by rising mortgage defaults and soaring claims, have tightened underwriting and raised pricing considerably over the past year. As a result, an increasing number of borrowers have turned to the FHA SF program, which saw total SF mortgage endorsements surge from about $6 billion last September to about $25 billion this September. Current FHA pricing is massively below any private alternative for loans where the borrower makes the minimum down payment, and that is especially true for borrowers with less than perfect credit, and for borrowers in areas where home prices have been falling and foreclosures rising. The huge increase in the FHA loan limit in many parts of the country earlier this year has made government-subsidized low-down-payment mortgage financing available to the vast bulk of the US population – both for owner-occupied home purchase loans and for refinance loans – including folks who are pretty well off! Private mortgage lenders, stung not simply by much higher than expected home price declines but also by much higher default rates than “models” had predicted given observed home price declines, have reassessed both the pricing of and the logic of making low- or no-down payment mortgage loans.”
Concerns Rising China’s Growth Could Fall Below Stability Enhancing 8%
From the FT: “Wen Jiabao, China's prime minister, warned that high growth was needed to maintain social stability as fresh evidence emerged yesterday that China's economy was slowing quickly. In an article in a Communist party magazine, Mr Wen said 2008 was "the most difficult year in recent years" and maintaining high growth was the priority. "We must be crystal-clear that without a certain pace of economic growth, there will be difficulties with employment, fiscal revenues and social development . . . and factors damaging social stability will grow," he wrote in the magazine…The decision to relax lending quotas is the latest in a series of steps to prevent a hard landing in the economy, including three cuts in interest rates and a fiscal stimulus plan that includes a Rmb2,000bn ($292bn, €231bn) investment in railway infrastructure. Stephen Roach, chairman of Morgan Stanley Asia, said the flurry of recent announcements could indicate that Chinese authorities knew growth had already dipped below 8 per cent, sometimes considered an important benchmark. "The way the Chinese are reacting now is either visionary and proactive or they are panicking," he said. Many economists believe the economy can still expand by around 8 per cent next year. "There is no reason to panic," said Andy Rothman, economist at CLSA. But several have reduced their forecasts over the last few weeks. Dong Tao, at Credit Suisse, said yesterday that growth in the fourth quarter of this year could fall as low as 5.8 per cent.”
MISC
From Bloomberg: “U.S. auto sales plummeted 32 percent in October to the lowest monthly total since January 1991, led by General Motors Corp's 45 percent slide, as reduced access to loans and a weaker economy kept consumers off dealer lots. Ford Motor Co. reported a 30 percent drop in car and light- truck sales from a year earlier and Toyota Motor Corp.'s declined 23 percent. Honda Motor Co.'s slid 25 percent, Nissan Motor Co.'s were down 33 percent and Chrysler LLC's fell 35 percent. ``If you adjust for population growth, it's the worst sales month in the post-World War II era'' for the industry, said Mike DiGiovanni, GM's chief sales analyst, on a conference call. ``Clearly we're in a dire situation.'' Industrywide U.S. auto sales fell for the 12th straight month, extending the longest slide in 17 years.”
From Citi: “The Fed's Senior Loan Officer survey was also very tight. In October, a net 47% of all banks pulled back from lending to consumers, according to a series with the longest history in the report. Other than the net 79% pulling back from consumer lending in 1Q 1980, this was the most severe tightening event measured in the survey's history… The net percentage of banks tightening standards for commercial real estate loans rose to a record high 87% from 80.7% in 3Q. This points to outright declines in non-residential construction activity looking forward.”
From Bloomberg: “The cost of borrowing dollars for one month in London fell to the lowest level in almost four years as central-bank cash injections and interest-rate cuts worldwide showed signs of thawing the freeze in lending. The London interbank offered rate, or Libor, that banks charge each other for such loans slid 18 basis points to 2.18 percent today, the lowest level since November 2004, and the 17th straight decline, according to British Bankers' Association data. The three-month rate dropped 15 basis points to 2.71 percent, the lowest level since June 9, according to BBA figures. Interbank rates have tumbled worldwide as central banks slashed interest rates and governments pledged as much as $3 trillion of emergency funds to kickstart lending.”
From the Treasury: “Over the October – December 2008 quarter, the Treasury expects to borrow $550 billion of marketable debt, assuming an end-of-December cash balance of $300 billion, which includes $260 billion for the Supplementary Financing Program (SFP). Without the SFP, the end-of-December cash balance is expected to be $40 billion. This borrowing estimate is $408 billion higher than announced in July 2008. The increase in borrowing is primarily due to higher outlays related to economic assistance programs, lower receipts, and lower net issuances of State and Local Government Series securities.”
From Bloomberg: “The broadest set of data yet on the credit-default swaps market will be released today as traders in the market say concerns about potential losses from the more than $47 trillion in outstanding contracts are overblown. The Depository Trust & Clearing Corp., which operates a central registry of credit swaps trades, will publish details including the top 1,000 contracts on its Web site after 5 p.m. New York time. The data is being released after pressure from regulators for more transparency about risks in the market after trading exploded the past decade. The data will for the first time offer a clearer picture of the amount wagered on the creditworthiness of the world's companies and governments.”
From Bloomberg: “New York City commercial real estate transactions plunged 61 percent in 2008 through October as the global credit crisis roiled lending and sidelined buyers.”
From Merrill Lynch: “The Baltic Dry Index, a measure of commodity shipping costs, has plunged 21 days in a row. The index is now at its lowest level since February 1999. In fact, the index is off a staggering 90% from its peak seen back in May of this year.”
From MNI: “Taiwan and China began historic talks here aimed at bringing the two sides closer economically…the discussions that are expected to ink deals potentially worth billions of dollars to each side…China and Taiwan have agreed to open direct sea, air and postal links at the morning session of talks in Taipei…”
End-of-Day Market Update
From Bloomberg: “U.S. stocks advanced in the biggest presidential Election Day rally in 24 years, led by energy and banking shares, on rebounding commodity prices and speculation the Treasury will bail out more financial companies. General Electric Co. added 7.6 percent while CIT Group Inc. and Principal Financial Group Inc. climbed more than 22 percent after people briefed on the matter said the government may broaden the focus of its rescue program. Exxon Mobil Corp. and Chevron Corp. led all 40 energy shares in the Standard & Poor's 500 Index higher as oil gained. Archer Daniels Midland Co. rose 15 percent after profit more than doubled at the world's largest grain processor. ``The market has come to the conclusion that Armageddon is off the table,'' said Philip Orlando, who helps manage $330 billion as chief equity strategist at Federated Investors Inc. in New York. ``The elimination of the uncertainty of the campaign typically results in an end-of-year rally and you're starting to see that today.'' The S&P 500 added 39.42 points, or 4.1 percent, to 1,005.72, its first close above 1,000 since Oct. 13. The Dow Jones Industrial Average rose 305.45 points, or 3.3 percent, to 9,625.28. The Nasdaq Composite Index advanced 53.79, or 3.1 percent, to 1,780.12. Gains in Europe and Asia sent the MSCI World Index to a sixth straight advance. Today's advance in the S&P 500 and Dow average are the biggest for a presidential Election Day since the NYSE first opened for trading during a vote in 1984. The S&P 500 rose on four and fell on two of the previous presidential election days since then, averaging a 0.3 percent gain. The winner between Democrat Barack Obama, who leads in national polls, and Republican John McCain will contend with an economy crippled by declining profits and the highest unemployment in five years… Concern economic growth is slowing sent the S&P 500 down 17 percent in October, the steepest monthly loss since 1987. The month's sell-off erased more than $9.5 trillion from the value of stocks worldwide, almost one-third of the total value wiped out this year, as credit-related losses and writedowns by financial firms approached $700 billion. The S&P 500 has rebounded 18 percent since reaching a five-year low on Oct. 27 as global interest-rate cuts and government attempts to shore up banks spurred a 23 percent gain in the index's financial shares.”
From Bloomberg: “The dollar fell the most against the euro since the 15-nation currency's 1999 debut as the thaw in money markets reduced demand for the safety of U.S. assets. Brazil's real and South Africa's rand advanced versus the dollar on revived investor interest in emerging markets. The yen dropped against the dollar, the euro, the Australian dollar and New Zealand's currency as a global rally in stocks encouraged investors to buy higher-yielding assets financed by low-cost loans in Japan's currency. ``It's a broad setback for the dollar,'' … The dollar depreciated 2.7 percent to $1.2999 per euro … The euro climbed 3.5 percent to 129.71 yen from 125.33. The yen fell 0.6 percent to 99.76 per dollar from 99.12.”
From UBS: “Another quiet data day with a seeming decline in risk aversion. UST rallied smartly in the early afternoon, led by the intermediate sector. UST were responsive to movements in other sectors, as the Swap and MBS desks reported good real money buying, while the Treasury desk noted the out-performance of futures relative to cash. UST 2- year and UST 10- year approached our short term resistance levels of 1.375% and 3.75% respectively. The UST2Y10Y flattened -8 bps to 238 bps. In addition to the lower Libor sets of recent days, our anecdotal sense is that UST fails in the repo market continue to decline. It is hard to characterize the price moves in the various markets in a manner that makes sense. UST, equities, and commodities rallied in an asset grabathon. The dollar weakened presumably because there was a flight from quality (?) which conflicts with the UST rally theme.... Let's chalk this all up to thin markets and position squaring in anticipation of election results. Hopefully when we start the day tomorrow everything will make more sense. The Dow was up 305 points to 9,625. The CRB was 278.11, +14.11. Oil closed at $70.30/bbl, +6.22. UST volume was -34.5% below the 30 day trading average…. Spreads Narrow as Vol Seems Perched to Fall:
Let's lead with Vol. As noted yesterday, implied Vol is at very high levels which need to be justified by high realized price action. The market has seen subdued volumes and somewhat less intraday price volatility. Volatilities have been moving lower since mid-month and have now reached a support point. Further declines start to probe levels last seen in early September, before the world "changed." If the "repair" trade is on, then volatility is probably too high. MBS were very well bid today. Purchasing MBS can be a play on declining volatility. Our desk saw better real money buying and we heard the same away. The supply pipeline is thin and price movements can therefore be exaggerated. We see the current coupon MBS at 170 bps over a 50/50 weight of 5- year and 10- year swaps, -16 bps today. The swap desk reported better receiving across the curve as well as rate curve flatteners. The 2Y10Y swap box trade improved by about 8 bps, with 2- year spreads narrowing by -11.25 bps. Agency spreads joined the party as benchmark 2- years fell by -15 bps to 131, 5- years fell by -10 to 125 bps, and 10- years fell by -3 bps to 124 bps (Bloomberg).”
Prices as of 5PM (Based on Bloomberg)
Three month T-Bill yield fell 1 bp to 0.48%
Two year T-Note fell 6 bp to 1.37%
Ten year T-Note yield fell 19 bp to 3.72%
30-year FNMA current coupon fell 38 bp to 5.60%
Dow rose 305 points to9625
S&P rose 39 points to 106
Dollar index fell 1.57 points to 84.78
Yen at 99.7
Euro at 1.298
Gold rose $40 to $763
Oil rose $6 to $70
September Factory Orders Plunge, with Ex-Transportation Orders Falling Most Ever
New factory orders slid -2.5% MoM in September, much more than the -0.8% MoM drop that had been expected. In addition, August's figure was revised lower to -4.3% MoM from -4% originally, for the largest monthly decline in over 15 years. Excluding the weak transportation sector, new orders fell an even larger -3.7% MoM, just slightly larger than the -3.6% MoM decline in August, and a new record monthly loss. Surprisingly, unfilled orders continued to rise by +0.4% MoM (+12% YoY), while the inventory-to-shipments ratio popped up to 1.29, from 1.26 in August and a recent low of 1.21 in July.
Consumer goods demand remains weak, with new orders falling -5% MoM and shipments declining by -5.2% MoM. Over the past year, both categories have seen growth of 10% YoY.
Capital goods orders rose +3.1% MoM after falling -6% MoM the prior month, and are down -1.1% YoY. Most of this increase was in defense orders, which rose +19.5% MoM (+64% YoY), while non-defense factory orders rose only +0.8% MoM (-7.3% YoY).
Durable goods orders rose +0.9% MoM after falling -5.5% MoM in August, and they are down -3.6% YoY. Transportation equipment rose +6.5% MoM, but is still down -11% YoY. Non-durable goods orders fell -5.5% MoM, the most in two years, due to falling commodity prices.
Factory shipments fell -2.8% MoM after declining by -3.7% MoM in August, but they are up +2.5% YoY.
Inventories fell -0.7% MoM, the first decline in over seven months, but have risen +7% YoY. Durable goods inventories continued to rise, while non-durable manufactured inventories fell due to the decline in oil and other commodity prices
The worldwide economic slowdown, and tighter credit, combined with rapidly falling commodity prices, are quickly sapping notional growth in new factory orders for goods. All signs point to further slowing ahead.
Consumer goods demand remains weak, with new orders falling -5% MoM and shipments declining by -5.2% MoM. Over the past year, both categories have seen growth of 10% YoY.
Capital goods orders rose +3.1% MoM after falling -6% MoM the prior month, and are down -1.1% YoY. Most of this increase was in defense orders, which rose +19.5% MoM (+64% YoY), while non-defense factory orders rose only +0.8% MoM (-7.3% YoY).
Durable goods orders rose +0.9% MoM after falling -5.5% MoM in August, and they are down -3.6% YoY. Transportation equipment rose +6.5% MoM, but is still down -11% YoY. Non-durable goods orders fell -5.5% MoM, the most in two years, due to falling commodity prices.
Factory shipments fell -2.8% MoM after declining by -3.7% MoM in August, but they are up +2.5% YoY.
Inventories fell -0.7% MoM, the first decline in over seven months, but have risen +7% YoY. Durable goods inventories continued to rise, while non-durable manufactured inventories fell due to the decline in oil and other commodity prices
The worldwide economic slowdown, and tighter credit, combined with rapidly falling commodity prices, are quickly sapping notional growth in new factory orders for goods. All signs point to further slowing ahead.
Monday, November 3, 2008
ISM Manufacturing Data Looking Worst Since 1982 Recession
According to the October ISM Manufacturing survey, manufacturing in the US contracted at the fastest pace since 1982 last month, when the index slid to 38.9 from 43.5 in September. September also saw a large decline from 49.9 in August. This rapid retrenchment indicates that the recent turmoil's in the financial markets have had an immediate impact on the real economy. The deceleration apparent in inflation, due to the record drop in commodity prices since peaking in July, is apparent in the prices paid index which has tumbled to 37 from 77 only two months ago. Any reading below 50 indicates contraction, while a number above 50 indicates growth.
The only sub-indexes to show growth last month were inventories, which are not a good sign for future demand. Production fell to 34.1 from 40.8, new orders slid to 32.2 from 38.8, and backlogs tumbled all the way down to 29.5 from 35. Supplier deliveries, eased into contraction at 49.2 versus 52.5 in September. New export orders, which had been supporting GDP growth, fell to 41 from 52 in September. Employment fell again to 34.6 from 41.8, suggesting larger employment losses for the October non-farm payroll report.
Manufacturing is on the front line of the slowdown in consumer spending in the US, as well as the tightening credit conditions globally, which are making it harder to secure funding for international trade.
The only sub-indexes to show growth last month were inventories, which are not a good sign for future demand. Production fell to 34.1 from 40.8, new orders slid to 32.2 from 38.8, and backlogs tumbled all the way down to 29.5 from 35. Supplier deliveries, eased into contraction at 49.2 versus 52.5 in September. New export orders, which had been supporting GDP growth, fell to 41 from 52 in September. Employment fell again to 34.6 from 41.8, suggesting larger employment losses for the October non-farm payroll report.
Manufacturing is on the front line of the slowdown in consumer spending in the US, as well as the tightening credit conditions globally, which are making it harder to secure funding for international trade.
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