Consensus Prior
Monday, 5/7
March Consumer Credit $4B $3B
Consumer credit growth has been moderate this year
Average growth over the past five years has been $8.7B per month
Most new growth in credit cards, as auto sales remain weak
Tuesday, 5/8
March Wholesale Inventories +0.4% +0.5%
Most industries still have excess inventories, but the inventory-to-sales ratios have stopped expanding
YoY inventory growth was 8.3% last month
Wednesday, 5/9
FOMC Meeting
Likely to maintain the “vigilant” tone and leave rates unchanged at 5.25%
Growth below trend, but inflation remains above target
Thursday, 5/10
March Trade Balance -$60B -58.4B
Rising oil prices will cause the trade deficit to begin widening again
Import and export volumes are both expected to rise
Nominal consumer imports have risen +15% YoY
April Import Price Index MoM +1.1% +1.7%
Last month’s increase has only been exceeded four times in last 5 years
The dollar index has fallen twice as much as import prices have risen over the past year (-5.8% vs +2.8%)
Core consumer prices over the last year have gone from -0.3% YoY in March 2006 to +1.8% YoY last month, and is expected to rise to +2.1% YoY in April
April Monthly Budget Statement $134.5B $118.8B
Higher non-withheld tax receipts more than offset higher outlays to create a large monthly surplus
Year-to-date, the U.S. government still in deficit
Chicago Fed President Moskow and Fed Governor Kroszner speak at Chicago Fed Conference entitled “Competitive Forces Shaping the Payments Environment: What’s Next?”
Friday, 5/11
April Producer Price Index MoM +0.6% +1%
YoY +3.1% +3.2%
Core PPI (ex-food and energy) MoM +.2% unch
YoY +1.8% +1.7%
PPI measures only domestically produced goods prices, not services prices
Higher food and gasoline prices keep inflation pressures elevated
YoY Core inflation accelerating as headline figure eases
Rising domestic car and truck production may indicate higher prices
Core intermediate PPI growth has remained moderate over last 6 months
April Advanced Retail Sales +0.4% +0.7%
Less Autos +0.4% +0.8%
Retail sales expected to soften as higher energy prices depress consumers’ purchasing power
Thirty cent rise in gasoline prices accounts for majority of monthly sales gain
Auto sales were flat in April and will not impact retail sales
General merchandise and clothing expected to hold steady, while furniture and home improvement sales continue to weaken
Sales excluding autos and gas have recently been running below headline
March Business Inventories +0.2% +0.3%
Business inventories have risen in each of the past 12 months
Manufacturing inventories rose +.2% MoM in March
Friday, May 4, 2007
New Jobs and Wages Rise Less Than Expected in April
A weaker than expected employment report this morning, with only 88k new jobs created (consensus 100k), and the unemployment rate rising to 4.5% (as expected). This was the slowest pace of job growth in over two years. Weekly hours worked fell a tenth to 33.8 (as expected), but earnings grew slower than anticipated, gaining +.2% MoM and 3.7% YoY.
Of the 88k new jobs created, 63k were in the private sector, and the government added a trend like 25k. The service area (banking, insurance, restaurants, and retailers) continues to be the area producing the new jobs, adding 116k last month, but it was the smallest monthly increase since last June. Education showed a healthy increase of 53k, as did business services(+24k MoM) and hospitality (+22k MoM). Retailers shed 26k jobs.
Manufacturing jobs remain under pressure. Manufacturing lost 19k positions (similar to last month's -18k change), goods-producing shed 28k, and construction jobs fell 11k, after rising an unexpected 50k the previous month. The financial sector also saw job losses for the first time in a long time, losing 11k employees.
Due to the shorter work week, weekly earnings fell -.1% MoM to $583. The +3.4% YoY gain in weekly earnings is the lowest gain in the past six months. Manufacturing hours worked also declined a tenth, to 41.1 hours a week in April, as overtime fell to 4.2 from 4.3 hours.
Revisions to prior months reduced jobs created by 26k. Over the past year, revisions have tended to add jobs, not subtract them. The percentage of industries hiring last month fell to the lowest level since October 2005, at 53.4%.
The cooling economy, with GDP growing at less than 2%, has economists estimating that the unemployment rate will gradually rise toward 5% later this year. The increase in the unemployment rate would have been larger this month, except that the size of the labor force fell. Moderating wage pressures likely to ease the Fed's concerns about wage inflation. The Fed is likely to remain on hold.
Of the 88k new jobs created, 63k were in the private sector, and the government added a trend like 25k. The service area (banking, insurance, restaurants, and retailers) continues to be the area producing the new jobs, adding 116k last month, but it was the smallest monthly increase since last June. Education showed a healthy increase of 53k, as did business services(+24k MoM) and hospitality (+22k MoM). Retailers shed 26k jobs.
Manufacturing jobs remain under pressure. Manufacturing lost 19k positions (similar to last month's -18k change), goods-producing shed 28k, and construction jobs fell 11k, after rising an unexpected 50k the previous month. The financial sector also saw job losses for the first time in a long time, losing 11k employees.
Due to the shorter work week, weekly earnings fell -.1% MoM to $583. The +3.4% YoY gain in weekly earnings is the lowest gain in the past six months. Manufacturing hours worked also declined a tenth, to 41.1 hours a week in April, as overtime fell to 4.2 from 4.3 hours.
Revisions to prior months reduced jobs created by 26k. Over the past year, revisions have tended to add jobs, not subtract them. The percentage of industries hiring last month fell to the lowest level since October 2005, at 53.4%.
The cooling economy, with GDP growing at less than 2%, has economists estimating that the unemployment rate will gradually rise toward 5% later this year. The increase in the unemployment rate would have been larger this month, except that the size of the labor force fell. Moderating wage pressures likely to ease the Fed's concerns about wage inflation. The Fed is likely to remain on hold.
Thursday, May 3, 2007
Non-Manufacturing ISM Shows Recovery
Non-manufacturing ISM (construction, retailing, banking, etc) rebounded in April, rising to 56 (consensus 53) following a two month decline to 52.4 in March. A reading above 50 indicates growth. Over the ten years the survey has been in existence, it has averaged 57.7. Services remain the growth area of the economy, and a rebound here is positive for economic expansion.
Thirteen of the fifteen industries reported growth in April. New orders rose, with export orders rising sharply to 55.5. Prices paid held steady, though there were numerous comments of concern about rising energy costs. A decline in inventories supports hope that the inventory correction is nearing an end.
Net, the headline figure was stronger than the components. Unlike many surveys, this survey does not aggregate the components to create the headline, but asks the questions separately.
Thirteen of the fifteen industries reported growth in April. New orders rose, with export orders rising sharply to 55.5. Prices paid held steady, though there were numerous comments of concern about rising energy costs. A decline in inventories supports hope that the inventory correction is nearing an end.
Net, the headline figure was stronger than the components. Unlike many surveys, this survey does not aggregate the components to create the headline, but asks the questions separately.
Improving productivity and ULC data should help reduce inflation fears
Today's productivity and labor cost results for the first quarter of 2007 were much better than expected, according to the preliminary data, and will help reduce inflation concerns.
First quarter productivity was +1.7% (consensus +.7%), and the fourth quarter results were also revised higher to +2.1% from +1.6% previously reported. The surprise improvement is based on drop in hours worked, which is at odds with other reports, and calls into question the productivity gains reported today. Fourth quarter productivity was enhanced by an increase in output produced.
Manufacturing productivity, which tends to more variable than the larger non-farm business sector, was +2.7% in the first quarter of 2007. The growth reflected a 1.5% increase in output and a 1.1% decrease in hours worked in manufacturing.
Unit labor costs unexpectedly rose only +.6% (consensus +3.8%). This is a substantial deceleration from the revised 6.2% of the prior quarter, which was boosted by one time bonus and stock option exercises. Compensation per hour fell from an +8.5% gain in the fourth quarter to +2.3% in the first quarter. It is probably more fair to average the two numbers due to how the government accounts for the timing of bonus accruals versus payments, and would equate to around 3.5% annualized, which is above the core inflation rate. Unit non-labor costs rebounded in the first quarter to increase +7.6% after falling -7.9% in the prior period. Unit labor costs adjust wages and benefits per hour worked for output produced. So, higher productivity helps reduce unit labor costs.
The implicit price deflator, which reflects changes in costs, grew at a 3.2% pace in the first quarter, versus a slim +.5% gain in the fourth quarter. On a year-over-year basis, the price deflator is running at 2%.
On a year-over-year basis, productivity has fallen to +1.1% in the first quarter of 2007, versus +2% in the first quarter of 2006. Current productivity levels remain below the trend of the last decade. Efficiency tends to drop when the economy contracts because workers are retained while production slows. Unit labor costs have also declined over the same period from +3.6% YoY in the first quarter of 2006 to +1.3% YoY presently.
Net - rising productivity and falling unit labor costs are good for business.
**********
Initial jobless claims unexpectedly fell to 305k from 326k last week. This survey week was after the payroll data survey for April employment.
First quarter productivity was +1.7% (consensus +.7%), and the fourth quarter results were also revised higher to +2.1% from +1.6% previously reported. The surprise improvement is based on drop in hours worked, which is at odds with other reports, and calls into question the productivity gains reported today. Fourth quarter productivity was enhanced by an increase in output produced.
Manufacturing productivity, which tends to more variable than the larger non-farm business sector, was +2.7% in the first quarter of 2007. The growth reflected a 1.5% increase in output and a 1.1% decrease in hours worked in manufacturing.
Unit labor costs unexpectedly rose only +.6% (consensus +3.8%). This is a substantial deceleration from the revised 6.2% of the prior quarter, which was boosted by one time bonus and stock option exercises. Compensation per hour fell from an +8.5% gain in the fourth quarter to +2.3% in the first quarter. It is probably more fair to average the two numbers due to how the government accounts for the timing of bonus accruals versus payments, and would equate to around 3.5% annualized, which is above the core inflation rate. Unit non-labor costs rebounded in the first quarter to increase +7.6% after falling -7.9% in the prior period. Unit labor costs adjust wages and benefits per hour worked for output produced. So, higher productivity helps reduce unit labor costs.
The implicit price deflator, which reflects changes in costs, grew at a 3.2% pace in the first quarter, versus a slim +.5% gain in the fourth quarter. On a year-over-year basis, the price deflator is running at 2%.
On a year-over-year basis, productivity has fallen to +1.1% in the first quarter of 2007, versus +2% in the first quarter of 2006. Current productivity levels remain below the trend of the last decade. Efficiency tends to drop when the economy contracts because workers are retained while production slows. Unit labor costs have also declined over the same period from +3.6% YoY in the first quarter of 2006 to +1.3% YoY presently.
Net - rising productivity and falling unit labor costs are good for business.
**********
Initial jobless claims unexpectedly fell to 305k from 326k last week. This survey week was after the payroll data survey for April employment.
Today's Tidbits
Demand for Shipping Boxes Slipping – Not a Good Sign For Economy
From Merrill Lynch: “…shipments of paperboard containers…fell 1.7% in March, following a 1% slide in February and a 3.1% decline in January. Three strikes in a row in this particular component of the economy is pretty rare - having occurred just three other times in the past 10 years…We focus on "boxes" because there are few segments of the economy more "cyclical" than this - and activity here is down in 4 of the past 5 months. The year-on-year pace of shipments has moved into negative terrain (-1.5%), but the near-term trend is even deeper in the "red" - the three-month trend is now running at a -21% annual rate, which last happened when the economy was limping out of recession in Dec/01. But note that in the last cycle, shipments of paperboard containers sank at a 20%+ rate for the first time in June/00 and it led the economic downturn by little more than eight months (when jobless claims were also barely above the 300,000 mark). As an aside, this one metric leads industrial production by three months with a 63% correlation.”
Dow Stocks Gain From International Strength
From Merrill Lynch: “The Dow 30 companies are receiving a huge boost from their overseas operations: We managed to split out pre-tax income into foreign and domestic
sources for the Dow 30 companies and it tells quite a tale. Foreign income as a share of the total earnings pie has been steadily rising, and in three years has gone up 10 percentage points. Not only that, but we estimate that these megacaps now derive over half their earnings from abroad.”
Construction Employment Lags Housing Completions
From Merrill Lynch: “There is a 95% correlation between the two series [construction employment and housing completions], but actually, the highest correlation (97%) is with completions leading construction employment ahead by six months. Everyone is asking how it is that construction activity, as per the GDP accounts, could be down 17% over the past year with such a muted effect on employment in that sector. Well, it is because the job slide tends to occur after completions have hit their highs…residential construction jobs have to play some catch up. The last time completions were at today's level, which was in October/2002, construction employment was 810,000 which is a good 190,000 below current levels of one million+, so either way you slice it or dice it, we are talking about something in the order of a 200,000 employment decline by the end of the year. Now that is just the impact on direct residential construction payrolls - there are another 2.038 million of trades people and specialty contractors that will also feel the pain. And the last time completions were at current levels back in Oct/02, these payrolls were 1.906 million versus 2.317 million currently - that's another 411,000 potential job slice ahead, bringing the full force to over 600,000 payrolls.” [Note this combined loss of residential construction jobs is similar to the 500k Morgan Stanley’s economist said he was looking for this year, during his presentation today.]
MISC
From Dow Jones: “U.S. Treasury prices continued to lose ground [with the 2 year yield rising 5bp and thirty year yields rising 2bp as the curve continues to flatten]… The dollar was up… Stocks gained [modestly], with the S&P 500 breaching the 1500 level [for the first time since September 2000. The all-time high is 1527.5 set in March 2000.]… Crude oil futures were lower after the Department of Energy sad it was halting its purchases of oil for the Strategic Petroleum Reserve.”
From Morgan Stanley: “What strikes us most is the conflicting data surrounding jobs, incomes and taxes. On the one hand, we would expect weaker jobs data, given the slow 1Q growth, and more recently from the weak release of ADP. On the other hand, higher tax receipts and falling jobless claims make us think that traders will look past a weak jobs report on Friday in anticipation of job market strength based on expectations for Q2 growth to rebound. From a price action perspective, UST yields are trapped in a range with seemingly little impetus to break out.”
From JP Morgan: “The Euro area unemployment rate fell another notch to 7.2% in March, and is down a full percentage point over the past 12 months. With unemployment rates at cyclical lows in the United States, the Euro area and Japan, it is little surprise that our global unemployment rate proxy is making new lows, falling to 5.4% last month. This is the lowest unemployment rate in the history of our global series dating back to 1990.”
From Merrill Lynch: “Prices at the pump are now up almost 80 cents over the past three months and the rule of thumb is that every penny in the tank siphons $1.3 billion from household cash flow, which then makes this over a $100 billion drag at an annual rate or over a 2% pay cut for the average American worker.”
From Dow Jones: “Three Democrats on the Senate Banking Committee introduced
two bills that would provide $300 million to help stave off foreclosures on subprime loans and tighten the underwriting standards for brokers and lenders…The proposal is the first broad legislative attempt by Democrats to address the growing turbulence in the subprime market. It also breaks with the non-legislative approach that Senate Banking Committee Chairman Christopher Dodd, D-Conn., has urged. He has tried to prompt changes in industry practices through coalitions and agreements, not through law.”
From Citi: “Over the medium term…oil consumption is likely to bear some relationship
to economic growth. As such, non-OECD area countries, where economic growth
rates are stronger, increasingly dominate global oil demand changes…Oil demand growth rates outside the OECD have outpaced those inside the region in every year since 1994 and the share of incremental global oil demand from the non-OECD region has been in excess of 40% every year since 1995 and in excess of 70% since 2004. According to the IEA, oil consumption globally is set to grow by 1.5 m bls/day in 2007 or by around 1.8%. Of this, 1.2 m bls/day will come from non-OECD users.”
From Merrill Lynch: “…shipments of paperboard containers…fell 1.7% in March, following a 1% slide in February and a 3.1% decline in January. Three strikes in a row in this particular component of the economy is pretty rare - having occurred just three other times in the past 10 years…We focus on "boxes" because there are few segments of the economy more "cyclical" than this - and activity here is down in 4 of the past 5 months. The year-on-year pace of shipments has moved into negative terrain (-1.5%), but the near-term trend is even deeper in the "red" - the three-month trend is now running at a -21% annual rate, which last happened when the economy was limping out of recession in Dec/01. But note that in the last cycle, shipments of paperboard containers sank at a 20%+ rate for the first time in June/00 and it led the economic downturn by little more than eight months (when jobless claims were also barely above the 300,000 mark). As an aside, this one metric leads industrial production by three months with a 63% correlation.”
Dow Stocks Gain From International Strength
From Merrill Lynch: “The Dow 30 companies are receiving a huge boost from their overseas operations: We managed to split out pre-tax income into foreign and domestic
sources for the Dow 30 companies and it tells quite a tale. Foreign income as a share of the total earnings pie has been steadily rising, and in three years has gone up 10 percentage points. Not only that, but we estimate that these megacaps now derive over half their earnings from abroad.”
Construction Employment Lags Housing Completions
From Merrill Lynch: “There is a 95% correlation between the two series [construction employment and housing completions], but actually, the highest correlation (97%) is with completions leading construction employment ahead by six months. Everyone is asking how it is that construction activity, as per the GDP accounts, could be down 17% over the past year with such a muted effect on employment in that sector. Well, it is because the job slide tends to occur after completions have hit their highs…residential construction jobs have to play some catch up. The last time completions were at today's level, which was in October/2002, construction employment was 810,000 which is a good 190,000 below current levels of one million+, so either way you slice it or dice it, we are talking about something in the order of a 200,000 employment decline by the end of the year. Now that is just the impact on direct residential construction payrolls - there are another 2.038 million of trades people and specialty contractors that will also feel the pain. And the last time completions were at current levels back in Oct/02, these payrolls were 1.906 million versus 2.317 million currently - that's another 411,000 potential job slice ahead, bringing the full force to over 600,000 payrolls.” [Note this combined loss of residential construction jobs is similar to the 500k Morgan Stanley’s economist said he was looking for this year, during his presentation today.]
MISC
From Dow Jones: “U.S. Treasury prices continued to lose ground [with the 2 year yield rising 5bp and thirty year yields rising 2bp as the curve continues to flatten]… The dollar was up… Stocks gained [modestly], with the S&P 500 breaching the 1500 level [for the first time since September 2000. The all-time high is 1527.5 set in March 2000.]… Crude oil futures were lower after the Department of Energy sad it was halting its purchases of oil for the Strategic Petroleum Reserve.”
From Morgan Stanley: “What strikes us most is the conflicting data surrounding jobs, incomes and taxes. On the one hand, we would expect weaker jobs data, given the slow 1Q growth, and more recently from the weak release of ADP. On the other hand, higher tax receipts and falling jobless claims make us think that traders will look past a weak jobs report on Friday in anticipation of job market strength based on expectations for Q2 growth to rebound. From a price action perspective, UST yields are trapped in a range with seemingly little impetus to break out.”
From JP Morgan: “The Euro area unemployment rate fell another notch to 7.2% in March, and is down a full percentage point over the past 12 months. With unemployment rates at cyclical lows in the United States, the Euro area and Japan, it is little surprise that our global unemployment rate proxy is making new lows, falling to 5.4% last month. This is the lowest unemployment rate in the history of our global series dating back to 1990.”
From Merrill Lynch: “Prices at the pump are now up almost 80 cents over the past three months and the rule of thumb is that every penny in the tank siphons $1.3 billion from household cash flow, which then makes this over a $100 billion drag at an annual rate or over a 2% pay cut for the average American worker.”
From Dow Jones: “Three Democrats on the Senate Banking Committee introduced
two bills that would provide $300 million to help stave off foreclosures on subprime loans and tighten the underwriting standards for brokers and lenders…The proposal is the first broad legislative attempt by Democrats to address the growing turbulence in the subprime market. It also breaks with the non-legislative approach that Senate Banking Committee Chairman Christopher Dodd, D-Conn., has urged. He has tried to prompt changes in industry practices through coalitions and agreements, not through law.”
From Citi: “Over the medium term…oil consumption is likely to bear some relationship
to economic growth. As such, non-OECD area countries, where economic growth
rates are stronger, increasingly dominate global oil demand changes…Oil demand growth rates outside the OECD have outpaced those inside the region in every year since 1994 and the share of incremental global oil demand from the non-OECD region has been in excess of 40% every year since 1995 and in excess of 70% since 2004. According to the IEA, oil consumption globally is set to grow by 1.5 m bls/day in 2007 or by around 1.8%. Of this, 1.2 m bls/day will come from non-OECD users.”
Wednesday, May 2, 2007
Today's Tidbits
May 2, 2007 TIDBITS
Increased Use of MBS Changes Foreclosure Landscape (Average Cost $80,000)
From Business Week: “Many of the homeowners in trouble are fist-timers who bought recently or investors who got in over their heads….For the first time in years, houses are hitting the market with asking prices below the value of their mortgages. Stretched owners are hoping for a so-called short sale, in which the lenders forgive the difference. National statistics are scarce… In Sacramento, real estate agent…counts 1,079, more than 10% of the total homes on the market. ‘If home values are falling, short sales are better because they can be done cheaper and quicker [than foreclosures],”…Quick is good, given the unprecedented pressures lenders are facing. In previous downturns, most loans were owned by federally insured lenders. Now roughly 56% of all loans outstanding, $5.7 trillion worth, have been pooled into mortgage-backed securities, vs. just 12% in 1980. “Wall Street has been very tough, and it’s encouraging lenders to act rapidly,” says Douglas G. Duncan, chief economist for the Mortgage Bankers Assn. “The faster you act, the lower the losses.” With so much at stake, lenders are scrambling to cut delinquencies and avoid foreclosures…a unit of Bear, Stearns & Co., recently set up a “Mod Squad” team - short for loan modification – of 50 workout specialists who travel the country helping homeowners renegotiate…face-to-face meetings with borrowers before there is a problem…”We want to protect the loan for going all the way south.” That is good for everybody. Each foreclosure costs lenders, the government and homeowners an estimated $80,000. Even neighbors take a hit, since foreclosure can have a ripple effect on property values. One foreclosure can cut the price on nearby homes by 1.4%. Still, with so many loans packaged and sold as pools, the industry has tied its hands to some extent. To take advantage of the accounting and tax benefits, many lenders wrote restrictions on the mortgage-backed securities; generally just 5% of loans in such investments can be renegotiated. Some pools containing subprime loans already have delinquency rates of 8% or more. It’s possible to change the deal, but it’s time consuming and costly. “What was once a simple, often personal relationship between a borrower and lenders is now a complex structure involving many parties, including services, investors, trustees, and rating agencies,”…By keeping borrowers in houses they never should have bought, lenders could simply be setting everyone up for a steeper fall down the road.”
Housing Glut Raises Rental Vacancy Rates
From Bloomberg: “The glut of U.S. properties for sale is about to hit the rental market. A record number of homeowners who can't sell condominiums and houses are competing for tenants with the country's biggest apartment owners… ``Competition already is forcing the big apartment owners to offer concessions like two months free rent,'' McCabe said. Vacant rental apartments rose to 6.1 percent in the U.S. during the first quarter, the most in almost two years… Nationwide, 2.8 percent of houses for sale were unoccupied in the first quarter, the highest since the Census Department started collecting the data in 1956. Unsold properties on the market totaled a record 3.45 million in 2006, according to the Chicago-based National Association of Realtors. ``Unsold properties being turned into rental units are creating a shadow market that's driving up the vacancy rate and slowing the growth of rents,'' …``Areas that saw the most speculative investing, particularly in condos, will see the biggest pressure on rents.''…
Equity Rally Led By “Defensive” Stocks
From Merrill Lynch: “One heck of a "defensive rally" in stocks: since the February 27th low, outside of energy, three of the best performing sectors have been utilities (+9.4%), health care (+8.1%) and telecom services (+6.6%). What type of "cyclical" developments are equities pricing in exactly when utilities are the second best performing sector, followed by health care? These tend to do well in economic slowdowns – so maybe, despite the headline indices, the action beneath the surface is actually quite consistent with our view of lingering economic malaise in the USA. The bottom performers during the rally have been consumer cyclicals, which have underperformed the broad market by 350 basis points – that represents the stock market's feeling on that 70% share of the US economy otherwise known as the resilient consumer. And the other two bottom performers have been materials, another economic-sensitive, and financials – the latter underperforming since late February by nearly 250 bps in an environment of broadly stable bond yields. Could that be telling us something about the stock market's view towards credit quality? Rallies that are not led by financials or consumer discretionary but instead by utilities and health care are rallies that don’t generally point in the way of economic reacceleration… That the market would hit its cycle highs – all-time highs for the Dow – in the aftermath of the weakest GDP quarter since 2003Q1 and the softest earnings trend since 2002Q1 speaks volumes.”
From The International Herald Tribune: “Money is flowing into alternative energy companies so fast that "the warning signs of a bubble are appearing,".. the amount of venture capital put into clean energy investments last year was $1.5 billion, up 141 percent from the $623 million of 2005, and that in the same period, initial public offerings by companies in this sector rose to $4.1 billion, from $1.6 billion in 2005. The initial public offerings were primarily in companies involved in solar power or biofuels…”
Grantham (Manages VP Cheney’s Investments) Sees Bubbles Everywhere
From Bloomberg: “…Grantham make one of the gutsiest market calls in recent memory: That pretty much every asset class, everywhere, is in the midst of a bubble. It would be comforting if we could dismiss such negativity. After all, isn't the Dow Jones Industrial Average climbing to all time highs at a time when Japan and Europe are growing, China, India and much of the rest of Asia boom and all's well in the global financial system? Sure, and that's just what worries Grantham. He points to the U.S. in the late 1990s and Japan in the late 1980s -- periods when investors thought asset rallies would continue indefinitely. ``Most bubbles, like Internet stocks and Japanese land, go through an exponential phase before breaking, usually short in time, but dramatic in extent,'' Grantham argues, and he has a point. Bubbles generally require two dynamics: the perception of near-perfect economic conditions and an abundance of cheap credit… The trouble, Grantham says, is that the bursting of this bubble ``will be across all countries and all assets, with the probable exception of high-grade bonds. Risk premiums in particular will widen. Since no similar global event has occurred before, the stresses to the system are likely to be unexpected.''”
Hedge Fund Risk Concentrations Rising as Volatility Falls
From Market News International: “Research at the New York Federal Reserve Bank has found that concentrations of risk in the hedge fund industry, as measured by high correlations of hedge fund returns, is approaching the levels that prevailed before the 1998 collapse of Long-Term Capital Management (LTCM). However, the New York Fed research paper found a key difference between now and 1998: current high correlations of returns in the $1.5 trillion hedge fund industry mainly reflect a decline in the volatility of returns. The implication is that risk concentrations are not necessarily leading up to an LTCM-type collapse. That hedge fund's implosion, which accompanied a debt default and devaluation by Russia, aggravated a global liquidity crisis which prompted the Fed to make emergency interest rate cuts… "The correlation of hedge fund returns rose both in the period prior to the LTCM crisis and in recent times -- but for different reasons," he says. "An increase in the comovement of dollar returns was the leading cause of rising correlation in the 1990s, but a decline in overall volatility explains
the recent rise." Adrian finds that "high correlations of returns generally do not precede increases in volatility in the hedge fund sector, but high covariances among hedge funds do."… "This result suggests that comovement measured in dollars -- covariance -- is a more relevant indicator of risk than comovement measured in correlation, that is, covariance normalized by volatility," he writes. Adrian observes that "recently, hedge fund covariance has increased, but it is not at particularly high levels by historical
standards." Rather, he adds, "the unusually high correlation among hedge funds in the current environment is therefore attributable primarily to low hedge fund volatility -- a reflection of the generally low volatility of financial assets.”
Rating Agencies Voice Concerns about CMBS
From The New York Times: “Spurred by the collapse of the subprime mortgage market, the leading bond rating agencies are beginning to crack down on what they see as risky lending practices in commercial real estate. Low interest rates and an abundance of investment capital have led to heady times for buyers and sellers of office buildings, hotels and other income-producing property. Buildings have traded at record prices and loan terms have become increasingly generous, with many buyers putting little or no equity into the deals. Like residential loans, commercial mortgages are pooled and packaged into bonds that are sliced up into portions carrying different degrees of risk.
Global Manufacturing at a Seven Month High as Input Prices Rise Rapidly
From JP Morgan: “The JPMorgan global manufacturing PMI rebounded to 54.1 in April, the highest level since September 2006. The move was broadly based, with the indexes of output, employment, and new orders all moving up smartly. At the same time, the index of raw materials and work in progress inventory was little changed and remained below the 50 mark. The index of input prices moved sharply higher, reflecting recent strength in global commodity prices. The combination of rising new orders and lower inventories produced a big move up in the PMI ratio of new orders to inventory. We consider this ratio to be the best barometer of near-term momentum in the global manufacturing sector, and the move up to 1.12 in April—if it is sustained—would be a strong signal that the pace of manufacturing activity is poised to accelerate into midyear.”
MISC
From Dow Jones: “Treasury prices were modestly lower… The dollar was modestly higher… U.S. stocks rallied early on Wednesday, lifting the Dow Jones Industrial Average by over 100 points to a record high… Crude oil futures extended their losses…”
From Lehman: “Challenger announced layoffs jumped to 70,672 in April on the back of a surge in layoffs related to the subprime fallout. Financial sector layoffs were 33,789, accounting for almost 48% of total layoffs announced during the month. No other industry reported layoffs of more than 6,000. Hiring intentions picked up modestly, led by government hiring, which expected to hire 15,000 and accounted for two-thirds of the announced hiring intentions.”
From Merrill Lynch: “If you're looking for "global liquidity", don't look at Japan: the monetary base contracted 12.2% y/y in April, the 14th consecutive month of decline.”
From The Wall Street Journal: “If U.S. consumer spending now slows, the flow of dollars overseas should slow as well, potentially staunching foreign demand for Treasuries. What’s more, many countries may have concluded that they have enough Treasuries to tap into in times of trouble…Maybe that’s a reason why yields on 10-year Treasuries, at 4.64%, haven’t fallen much even though economic growth has slowed in the past year.” [Note WSJ spelled Treasuries and Treasurys]
From Merrill Lynch: “…the consumers' resilience is going to be severely tested in coming months from 4 sources: further declines in housing wealth as home prices adjust lower; receding employment growth as the pace of job creation follows the slowing in capex growth over the past year; more stringent credit standards going forward; and rising gasoline prices.”
From Merrill Lynch: “The export sector has to expand 10% for every 1% the consumer slows down just to prevent overall GDP growth from decelerating.”
Increased Use of MBS Changes Foreclosure Landscape (Average Cost $80,000)
From Business Week: “Many of the homeowners in trouble are fist-timers who bought recently or investors who got in over their heads….For the first time in years, houses are hitting the market with asking prices below the value of their mortgages. Stretched owners are hoping for a so-called short sale, in which the lenders forgive the difference. National statistics are scarce… In Sacramento, real estate agent…counts 1,079, more than 10% of the total homes on the market. ‘If home values are falling, short sales are better because they can be done cheaper and quicker [than foreclosures],”…Quick is good, given the unprecedented pressures lenders are facing. In previous downturns, most loans were owned by federally insured lenders. Now roughly 56% of all loans outstanding, $5.7 trillion worth, have been pooled into mortgage-backed securities, vs. just 12% in 1980. “Wall Street has been very tough, and it’s encouraging lenders to act rapidly,” says Douglas G. Duncan, chief economist for the Mortgage Bankers Assn. “The faster you act, the lower the losses.” With so much at stake, lenders are scrambling to cut delinquencies and avoid foreclosures…a unit of Bear, Stearns & Co., recently set up a “Mod Squad” team - short for loan modification – of 50 workout specialists who travel the country helping homeowners renegotiate…face-to-face meetings with borrowers before there is a problem…”We want to protect the loan for going all the way south.” That is good for everybody. Each foreclosure costs lenders, the government and homeowners an estimated $80,000. Even neighbors take a hit, since foreclosure can have a ripple effect on property values. One foreclosure can cut the price on nearby homes by 1.4%. Still, with so many loans packaged and sold as pools, the industry has tied its hands to some extent. To take advantage of the accounting and tax benefits, many lenders wrote restrictions on the mortgage-backed securities; generally just 5% of loans in such investments can be renegotiated. Some pools containing subprime loans already have delinquency rates of 8% or more. It’s possible to change the deal, but it’s time consuming and costly. “What was once a simple, often personal relationship between a borrower and lenders is now a complex structure involving many parties, including services, investors, trustees, and rating agencies,”…By keeping borrowers in houses they never should have bought, lenders could simply be setting everyone up for a steeper fall down the road.”
Housing Glut Raises Rental Vacancy Rates
From Bloomberg: “The glut of U.S. properties for sale is about to hit the rental market. A record number of homeowners who can't sell condominiums and houses are competing for tenants with the country's biggest apartment owners… ``Competition already is forcing the big apartment owners to offer concessions like two months free rent,'' McCabe said. Vacant rental apartments rose to 6.1 percent in the U.S. during the first quarter, the most in almost two years… Nationwide, 2.8 percent of houses for sale were unoccupied in the first quarter, the highest since the Census Department started collecting the data in 1956. Unsold properties on the market totaled a record 3.45 million in 2006, according to the Chicago-based National Association of Realtors. ``Unsold properties being turned into rental units are creating a shadow market that's driving up the vacancy rate and slowing the growth of rents,'' …``Areas that saw the most speculative investing, particularly in condos, will see the biggest pressure on rents.''…
Equity Rally Led By “Defensive” Stocks
From Merrill Lynch: “One heck of a "defensive rally" in stocks: since the February 27th low, outside of energy, three of the best performing sectors have been utilities (+9.4%), health care (+8.1%) and telecom services (+6.6%). What type of "cyclical" developments are equities pricing in exactly when utilities are the second best performing sector, followed by health care? These tend to do well in economic slowdowns – so maybe, despite the headline indices, the action beneath the surface is actually quite consistent with our view of lingering economic malaise in the USA. The bottom performers during the rally have been consumer cyclicals, which have underperformed the broad market by 350 basis points – that represents the stock market's feeling on that 70% share of the US economy otherwise known as the resilient consumer. And the other two bottom performers have been materials, another economic-sensitive, and financials – the latter underperforming since late February by nearly 250 bps in an environment of broadly stable bond yields. Could that be telling us something about the stock market's view towards credit quality? Rallies that are not led by financials or consumer discretionary but instead by utilities and health care are rallies that don’t generally point in the way of economic reacceleration… That the market would hit its cycle highs – all-time highs for the Dow – in the aftermath of the weakest GDP quarter since 2003Q1 and the softest earnings trend since 2002Q1 speaks volumes.”
From The International Herald Tribune: “Money is flowing into alternative energy companies so fast that "the warning signs of a bubble are appearing,".. the amount of venture capital put into clean energy investments last year was $1.5 billion, up 141 percent from the $623 million of 2005, and that in the same period, initial public offerings by companies in this sector rose to $4.1 billion, from $1.6 billion in 2005. The initial public offerings were primarily in companies involved in solar power or biofuels…”
Grantham (Manages VP Cheney’s Investments) Sees Bubbles Everywhere
From Bloomberg: “…Grantham make one of the gutsiest market calls in recent memory: That pretty much every asset class, everywhere, is in the midst of a bubble. It would be comforting if we could dismiss such negativity. After all, isn't the Dow Jones Industrial Average climbing to all time highs at a time when Japan and Europe are growing, China, India and much of the rest of Asia boom and all's well in the global financial system? Sure, and that's just what worries Grantham. He points to the U.S. in the late 1990s and Japan in the late 1980s -- periods when investors thought asset rallies would continue indefinitely. ``Most bubbles, like Internet stocks and Japanese land, go through an exponential phase before breaking, usually short in time, but dramatic in extent,'' Grantham argues, and he has a point. Bubbles generally require two dynamics: the perception of near-perfect economic conditions and an abundance of cheap credit… The trouble, Grantham says, is that the bursting of this bubble ``will be across all countries and all assets, with the probable exception of high-grade bonds. Risk premiums in particular will widen. Since no similar global event has occurred before, the stresses to the system are likely to be unexpected.''”
Hedge Fund Risk Concentrations Rising as Volatility Falls
From Market News International: “Research at the New York Federal Reserve Bank has found that concentrations of risk in the hedge fund industry, as measured by high correlations of hedge fund returns, is approaching the levels that prevailed before the 1998 collapse of Long-Term Capital Management (LTCM). However, the New York Fed research paper found a key difference between now and 1998: current high correlations of returns in the $1.5 trillion hedge fund industry mainly reflect a decline in the volatility of returns. The implication is that risk concentrations are not necessarily leading up to an LTCM-type collapse. That hedge fund's implosion, which accompanied a debt default and devaluation by Russia, aggravated a global liquidity crisis which prompted the Fed to make emergency interest rate cuts… "The correlation of hedge fund returns rose both in the period prior to the LTCM crisis and in recent times -- but for different reasons," he says. "An increase in the comovement of dollar returns was the leading cause of rising correlation in the 1990s, but a decline in overall volatility explains
the recent rise." Adrian finds that "high correlations of returns generally do not precede increases in volatility in the hedge fund sector, but high covariances among hedge funds do."… "This result suggests that comovement measured in dollars -- covariance -- is a more relevant indicator of risk than comovement measured in correlation, that is, covariance normalized by volatility," he writes. Adrian observes that "recently, hedge fund covariance has increased, but it is not at particularly high levels by historical
standards." Rather, he adds, "the unusually high correlation among hedge funds in the current environment is therefore attributable primarily to low hedge fund volatility -- a reflection of the generally low volatility of financial assets.”
Rating Agencies Voice Concerns about CMBS
From The New York Times: “Spurred by the collapse of the subprime mortgage market, the leading bond rating agencies are beginning to crack down on what they see as risky lending practices in commercial real estate. Low interest rates and an abundance of investment capital have led to heady times for buyers and sellers of office buildings, hotels and other income-producing property. Buildings have traded at record prices and loan terms have become increasingly generous, with many buyers putting little or no equity into the deals. Like residential loans, commercial mortgages are pooled and packaged into bonds that are sliced up into portions carrying different degrees of risk.
Global Manufacturing at a Seven Month High as Input Prices Rise Rapidly
From JP Morgan: “The JPMorgan global manufacturing PMI rebounded to 54.1 in April, the highest level since September 2006. The move was broadly based, with the indexes of output, employment, and new orders all moving up smartly. At the same time, the index of raw materials and work in progress inventory was little changed and remained below the 50 mark. The index of input prices moved sharply higher, reflecting recent strength in global commodity prices. The combination of rising new orders and lower inventories produced a big move up in the PMI ratio of new orders to inventory. We consider this ratio to be the best barometer of near-term momentum in the global manufacturing sector, and the move up to 1.12 in April—if it is sustained—would be a strong signal that the pace of manufacturing activity is poised to accelerate into midyear.”
MISC
From Dow Jones: “Treasury prices were modestly lower… The dollar was modestly higher… U.S. stocks rallied early on Wednesday, lifting the Dow Jones Industrial Average by over 100 points to a record high… Crude oil futures extended their losses…”
From Lehman: “Challenger announced layoffs jumped to 70,672 in April on the back of a surge in layoffs related to the subprime fallout. Financial sector layoffs were 33,789, accounting for almost 48% of total layoffs announced during the month. No other industry reported layoffs of more than 6,000. Hiring intentions picked up modestly, led by government hiring, which expected to hire 15,000 and accounted for two-thirds of the announced hiring intentions.”
From Merrill Lynch: “If you're looking for "global liquidity", don't look at Japan: the monetary base contracted 12.2% y/y in April, the 14th consecutive month of decline.”
From The Wall Street Journal: “If U.S. consumer spending now slows, the flow of dollars overseas should slow as well, potentially staunching foreign demand for Treasuries. What’s more, many countries may have concluded that they have enough Treasuries to tap into in times of trouble…Maybe that’s a reason why yields on 10-year Treasuries, at 4.64%, haven’t fallen much even though economic growth has slowed in the past year.” [Note WSJ spelled Treasuries and Treasurys]
From Merrill Lynch: “…the consumers' resilience is going to be severely tested in coming months from 4 sources: further declines in housing wealth as home prices adjust lower; receding employment growth as the pace of job creation follows the slowing in capex growth over the past year; more stringent credit standards going forward; and rising gasoline prices.”
From Merrill Lynch: “The export sector has to expand 10% for every 1% the consumer slows down just to prevent overall GDP growth from decelerating.”
Factory Orders Rising
Factory orders rose +3.1% MoM in March (consensus +2.2% MoM), and February was revised higher to +1.4% MoM from +1%. Factory orders have now risen for four of the last five months, indicating that business investment may be improving, especially as orders for machinery and power generation equipment rise.
Excluding transportation, orders rose +1.9% MoM in March, indicating good aircraft demand, as seen in the durable goods orders. Durable goods orders make up about 55% of total factory demand. New orders for durable goods rose +3.7% MoM with transportation orders rising +9.5% MoM. Demand for non-durable goods rose +2.3% MoM. Ex-defense new orders rose 3.5% MoM. Defense capital goods orders have declined a huge -32% YoY.
Shipments rose for the first time in three months, increasing +1.5% MoM. Unfilled orders are at record levels, and have risen steadily for the last two years. Unfilled orders have risen 20% YoY. The unfilled-orders-to-shipments ratio also rose. The inventories-to-shipments ratio fell slightly to 1.23, from 1.25, as inventory growth slowed to only +.2% MoM.
Excluding transportation, orders rose +1.9% MoM in March, indicating good aircraft demand, as seen in the durable goods orders. Durable goods orders make up about 55% of total factory demand. New orders for durable goods rose +3.7% MoM with transportation orders rising +9.5% MoM. Demand for non-durable goods rose +2.3% MoM. Ex-defense new orders rose 3.5% MoM. Defense capital goods orders have declined a huge -32% YoY.
Shipments rose for the first time in three months, increasing +1.5% MoM. Unfilled orders are at record levels, and have risen steadily for the last two years. Unfilled orders have risen 20% YoY. The unfilled-orders-to-shipments ratio also rose. The inventories-to-shipments ratio fell slightly to 1.23, from 1.25, as inventory growth slowed to only +.2% MoM.
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