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| MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - July 2nd - July 7th, 2012 |
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| CHINA BUBBLE |
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CHINA PMI: 48.2. Fourth Stright Month of JOB Contraction
China HSBC PMI Falls To 48.2, Fourth Straight Month Of Job Contraction 07/01/12 Markit
"For the second quarter as a whole, the index averaged its lowest quarterly value since Q1 2009," according to the report.
Key points:
- New orders fall to greatest extent in seven months, as export orders slump
- Factory output declines marginally in comparison; stocks of finished goods rise
- Input costs and output charges down
"It is all about growth and employment," said HSBC economist Hongbin Qu. "As external demand has weakened and domestic demand hasn't shown a meaningful improvement in response to earlier easing measures, growth is likely to be on track for further slowdown, hence weighing on the jobs market. But as inflation eases sharply, Beijing has plenty of room and policy ammunition to avoid a hard landing. We expect more decisive easing efforts to come through in the coming months.”
On jobs: "The size of China’s manufacturing workforce contracted for the fourth month running in June, albeit at only a modest rate that was the weakest in three months. Job shedding in part reflected spare capacity in the sector, which was highlighted by a slight decline in backlogs of work."
NOT GOOD: South Korean PMI Falls To 49.4, Orders Booked Fall For The First Time In 4 Months 07/01/12 Markit
South Korea's HSBC manufacturing PMI number for June fell to 49.4. This is a decline from 51.0 in May.
A reading below 50 signals contraction in the industry.
“Persistent global uncertainties continue to weigh on Korean manufacturing conditions," said HSBC economist Ronald Man. "Should the slowdown in demand for Korean goods be sustained, manufacturing employment may start to contract."
Key Points:
- First sub 50.0 PMI reading for five months
- Falling output prices recorded for eighth successive month
- Order book volumes contract, ending a four-month period of expansion
From Markit:
Weaker domestic and international demand reportedly contributed to a lower output level in the manufacturing sector. Panellists also stated that a fragile economic climate affected South Korean manufacturers. Although the rate of decline was only moderate, the respective index was the lowest since December 2011.
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07/02/12 |
Markit |
4
4 - China Hard Landing |
TAXATION: Obamacare in Perspective
Actually, Obamacare Is Nowhere Close To America's Largest Ever Tax Increase 07/02/12 BI
Rush Limbaugh claimed Friday that the Affordable Care Act constitutes the biggest tax increase in history. We are confident that someone, somewhere is working out where the bill stands as far as world tax increases. In the meantime, we now have this graph, via Dr. Austin Frakt at The Incidental Economist and Boston University, showing the country's largest-ever tax increases as a percentage of GDP, using Treasury data compiled by Mother Jones' Kevin Drum. Obamacare is not even close. (Thanks to Dr. Frakt for giving us permission to run his chart.)
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07/03/12 |
BI |
13
13 - Global Governance Failure |
GLOBAL IMBALANCES: Demographic Headwinds
The Global Demographic Dependency Debacle 07/02/12 Zerom Hedge
The long-term importance of the dependency ratio (which at its most base represents the ratio of economically inactive compared to economically active individuals) is at the heart of many of our fiscal problems (and policy decisions). Not only have they and will they become a larger and larger burden on the tax-paying public but as a voting block will be more and more likely to vote the more socialist wealth-transfer-friendly way in any election (just as we see extreme examples in Europe). The following chart provides some significant food for thought along these lines as by 2016, for the first time ever, developed world economies will have a higher dependency ratio than emerging economies and it rises dramatically. How this will affect budget deficits (food stamps) and/or civil unrest is anyone's guess but for sure, it seems given all the bluster, that we are far from prepared for this shift.
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07/03/12 |
Zero Hedge |
14
14 - Chronic Global Fiscal ImBalances |
GLOBAL SLOWING: A Quickly Worsening Situation
OECD’s Composite Leading Indicator Suggests Economic Weakness Spreading to China and India 06/11/12 Reuters
OECD, the Paris-based economic think-tank, reported that its Composite Leading Indicator (CLI), which provides a measure of future economic activity, shows the following:
1. China: The CLI slipped to 99.1 from 99.4 in April, falling further below its long-term average of 100.
2. India: The CLI dropped to 98.0 from 98.2, again below the 100 average.
3. OECD: The overall CLI for the OECD area, covering 33 countries, inched up to 100.5 from 100.4 over the month, helped by fresh growth in activity in the United States, Japan and Russia.
4. U.S., Japan and Russia: The pace of improvement in the U.S., Japan and Russia has decelerated in recent months, giving a tentative sign their growth may be about to slow.
5. The euro area: remained stable at 99.6.
6. Italy: Their LCI inched down to 99.1 from 99.2.
7. Germany: Their LCI was unchanged at 99.4.
8. Britain: Their LCI inched up to 99.8 from 99.7.
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07/02/12 |
Reuters |
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17 - Shrinking Revenue Growth Rate |
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26
26 - Corruption |
LIBOR MANIPULATION: Barclay's Claims
Why it's important: More than $800 trillion in securities and loans are linked to the Libor, including $350 trillion in swaps and $10 trillion in loans, including auto and home loans, according to the CFTC. Even small movements – or inaccuracies – in the Libor affect investment returns and borrowing costs, for individuals, companies and professional investors
Rate Scandal Set to Spread Former Barclays CEO Lambasted in Parliament as Other Banks Brace for Fallout. 07/05/12 WSJ
"Either you were complicit, grossly negligent or incompetent," John Mann, a Labour lawmaker, told Mr. Diamond. After a pause, Mr. Diamond asked, "Is there a question?"
Barclays last week agreed to pay $453 million to settle U.S. and British authorities' allegations that the British bank tried to manipulate the London interbank offered rate, or Libor, which is the benchmark for interest rates on trillions of dollars of loans to individuals and businesses around the world. Investigations of more than a dozen banks—by authorities on three continents—are starting to unearth evidence that some banks improperly sought to manipulate Libor. Regulators say that some banks, including Barclays, submitted artificially low readings during the early days of the financial crisis as part of an effort to mask the financial problems they were encountering.
In its settlement with U.S. and British authorities, Barclays acknowledged that, starting in 2005, traders submitted erroneous data about its borrowing costs, in what was then an effort by some employees to boost profits on the positions they held. Regulators uncovered emails, instant messages and phone calls in which Barclays traders and other employees openly discussed their tactics. But by 2008, with the financial crisis intensifying, Barclays was routinely submitting some of the highest cost-of-borrowing readings of any bank. Executives at Barclays, which was financially healthier than some banks that were reporting lower borrowing costs, believed this was because rivals were reporting bogus data to conceal their financial problems. Mr. Diamond and other executives repeatedly complained to regulators.
Supplementary information regarding Barclays settlement with the Authorities in respect of their investigations into the submission of various interbank offered rates
Barclays Releases Damning Email, Implicates British Government Taibbi
We have officially disappeared now down the rabbit-hole of the international financial oligarchy.
Diamond's evidence to MPs branded implausible Guardian
There were 14 bad people at Barclays, but I wasn't one of them, says Bob Diamond Inde
Bob Diamond hints he is ready to fight for £22m Barclays payoff Guardian
Libor scandal: Bank of England told us to rig rates, claims Barclays Telegraph
BBC: There have been suggestions the BoE's deputy governor and senior Whitehall officials knew rates were manipulated...
Darling: “What Bob Diamond or Barclays appear to be saying is that the Bank (of England) told them to do this. I would find it absolutely astonishing...”
Inside Bob Diamond's fall CNN
Barclays' Diamond faces grilling in parliament Reuetrs
Diamond Would Be Catch for Private Equity, Investment Fund: Recruiters BL
Analysis: Investors may shun big Libor lawsuit and go it alone Reuters
JPMorgan Manipulation Scandal Raises Specter Of Enron HP
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07/05/12 |
WSJ |
26
26 - Corruption |
LIBOR MANIPULATION: The Losers
The Big Losers in the Libor Rate Manipulation 07/05/12 Washington Blog
Local Governments Which Entered Into Interest Rate Swaps Got Scalped
We know that the big banks conspired to manipulate Libor rates, with the approval of government authorities.
We know that the Libor manipulation effected the world’s largest market – interest rate derivatives.
But who are the biggest victims?
Sometimes the big banks manipulated the Libor rates up, and sometimes down. Different groups of people got hurt depending which way the rates were gamed.
Bloomberg’s Darrell Preston explained last year how cities and other local governments got scalped when rates were manipulated downward:
In the U.S., municipal borrowers used swaps to guard against the risk of higher interest costs on variable-rate debt by exchanging payments with another entity and tying how much they pay to an underlying value such as an index. The agreements can backfire if rates move in unexpected directions, resulting in issuers making larger payments.The derivatives were often designed to offset the risks of increases in the short-term rates tied to auction-rate securities, fixing borrowers’ costs by trading their debt- service payments with another party. Instead, rates dropped.
The yield on two-year Treasury notes fell from about 5.1 percent in June 2007 to a record 0.14 percent on Sept. 20. On Oct. 6, the U.S. Treasury sold $10 billion of five-day cash- management bills at 0 percent.
Ellen Brown adds:
For more than a decade, banks and insurance companies convinced local governments, hospitals, universities and other non-profits that interest rate swaps would lower interest rates on bonds sold for public projects such as roads, bridges and schools. The swaps were entered into to insure against a rise in interest rates; but instead, interest rates fell to historically low levels. This was not a flood, earthquake, or other insurable risk due to environmental unknowns or “acts of God.” It was a deliberate, manipulated move by the Fed, acting to save the banks from their own folly in precipitating the credit crisis of 2008. The banks got in trouble, and the Federal Reserve and federal government rushed in to bail them out, rewarding them for their misdeeds at the expense of the taxpayers. [The same thing happened in England.]
How the swaps were supposed to work was explained by Michael McDonald in a November 2010 Bloomberg article titled “Wall Street Collects $4 Billion From Taxpayers as Swaps Backfire”:
In an interest-rate swap, two parties exchange payments on an agreed-upon amount of principal. Most of the swaps Wall Street sold in the municipal market required borrowers to issue long-term securities with interest rates that changed every week or month. The borrowers would then exchange payments, leaving them paying a fixed-rate to a bank or insurance company and receiving a variable rate in return. Sometimes borrowers got lump sums for entering agreements.
Banks and borrowers were supposed to be paying equal rates: the fat years would balance out the lean. But the Fed artificially manipulated the rates to the save the banks. After the credit crisis broke out, borrowers had to continue selling adjustable-rate securities at auction under the deals. Auction interest rates soared when bond insurers’ ratings were downgraded because of subprime mortgage losses; but the periodic payments that banks made to borrowers as part of the swaps plunged, because they were linked to benchmarks such as Federal Reserve lending rates, which were slashed to almost zero.
In a February 2010 article titled “How Big Banks’ Interest-Rate Schemes Bankrupt States,” Mike Elk compared the swaps to payday loans. They were bad deals, but municipal council members had no other way of getting the money. He quoted economist Susan Ozawa of the New School:
The markets were pricing in serious falls in the prime interest rate. . . . So it would have been clear that this was not going to be a good deal over the life of the contracts. So the states and municipalities were entering into these long maturity swaps out of necessity. They were desperate, if not naive, and couldn’t look to the Federal Government or Congress and had to turn themselves over to the banks.
Elk wrote:
As almost all reasoned economists had predicted in the wake of a deepening recession, the federal government aggressively drove down interest rates to save the big banks. This created opportunity for banks – whose variable payments on the derivative deals were tied to interest rates set largely by the Federal Reserve and Government – to profit excessively at the expense of state and local governments. While banks are still collecting fixed rates of from 4 percent to 6 percent, they are now regularly paying state and local governments as little as a tenth of one percent on the outstanding bonds – with no end to the low rates in sight.
. . . [W]ith the fed lowering interest rates, which was anticipated, now states and local governments are paying about 50 times what the banks are paying. Talk about a windfall profit the banks are making off of the suffering of local economies.
To make matters worse, these state and local governments have no way of getting out of these deals. Banks are demanding that state and local governments pay tens or hundreds of millions of dollars in fees to exit these deals. In some cases, banks are forcing termination of the deals against the will of state and local governments, using obscure contract provisions written in the fine print.
By the end of 2010, according to Michael McDonald, borrowers had paid over $4 billion just to get out of the swap deals. Among other disasters, he lists these:
California’s water resources department . . . spent $305 million unwinding interest-rate bets that backfired, handing over the money to banks led by New York-based Morgan Stanley. North Carolina paid $59.8 million in August, enough to cover the annual salaries of about 1,400 full-time state employees. Reading, Pennsylvania, which sought protection in the state’s fiscally distressed communities program, got caught on the wrong end of the deals, costing it $21 million, equal to more than a year’s worth of real-estate taxes.
In a March 15th article on Counterpunch titled “An Inside Glimpse Into the Nefarious Operations of Goldman Sachs: A Toxic System,” Darwin Bond-Graham adds these cases from California:
The most obvious example is the city of Oakland where a chronic budget crisis has led to the shuttering of schools and cuts to elder services, housing, and public safety. Oakland signed an interest rate swap with Goldman in 1997. . . .
Across the Bay, Goldman Sachs signed an interest rate swap agreement with the San Francisco International Airport in 2007 to hedge $143 million in debt. Today this agreement has a negative value to the Airport of about $22 million, even though its terms were much better than those Oakland agreed to.
Greg Smith wrote that at Goldman Sachs, the gullible bureaucrats on the other side of these deals were called “muppets.”
***
Who could have anticipated, when the Fed funds rate was at 5%, that the Fed would push it nearly to zero?
***
The banks have made outrageous profits by capitalizing on their own misdeeds. They have already been paid several times over: first with taxpayer bailout money; then with nearly free loans from the Fed; then with fees, penalties and exaggerated losses imposed on municipalities and other counterparties under the interest rate swaps themselves.
Bond-Graham writes:
The windfall of revenue accruing to JP Morgan, Goldman Sachs, and their peers from interest rate swap derivatives is due to nothing other than political decisions that have been made at the federal level to allow these deals to run their course, even while benchmark interest rates, influenced by the Federal Reserve’s rate setting, and determined by many of these same banks (the London Interbank Offered Rate, LIBOR) linger close to zero. These political decisions have determined that virtually all interest rate swaps between local and state governments and the largest banks have turned into perverse contracts whereby cities, counties, school districts, water agencies, airports, transit authorities, and hospitals pay millions yearly to the few elite banks that run the global financial system, for nothing meaningful in return.
Bloomberg’s Darrell Preston writes:
Ask a Nobel Prize-winning economist what’s the difference between the mayor of Baltimore losing taxpayer money with derivatives sold by Wall Street and millions of Americans defaulting on subprime loans and he’ll say there isn’t any: State and local governments are victims of opaque financing they don’t understand, the same way individuals go broke on borrowing at rates too good to be true.
***
“These financially unsophisticated local officials were being exploited by big banks,” said Columbia University Professor Joseph Stiglitz, who won the Nobel Prize in 2001 with George Akerlof of the University of California, Berkeley and Michael Spence, now at New York University, for their analysis of markets with asymmetric information.
“The outrage was not just that there were high transaction costs, but that the risk wasn’t understood by those who used them,” Stiglitz said.
***
Jefferson County, home to Birmingham, the state’s biggest city, became the biggest municipal bankruptcy on record after costs spiraled out of control on its auction-rate debt and related derivatives used to finance a sewer project. The county defaulted on the securities, issued in 2002 and 2003 to refinance fixed-rate sewer bonds, as short-term yields fell.
***
Bill Slaughter, the lawyer who advised Jefferson’s County Commission on bond sales at the time of the refinancing, said later that he couldn’t figure out the math on the swaps.
***
Alabama’s Jefferson County wound up in bankruptcy after it defaulted on about $3.1 billion of debt backed by sewer revenue in 2008. The financial crisis had pushed up the cost of its bonds, including the auction-rate debt, and required early repayments that the county couldn’t afford. The swaps tied to the securities also didn’t shield it from rising expenses.
Some overseas government borrowers have been banned from using swaps in their finances.
***
In January 1991, the U.K. House of Lords ruled that local authorities weren’t permitted to use swaps and derivatives. Parliament’s upper chamber said such agreements had “the stigma of being unlawful.” Municipal authorities, including the London borough of Hammersmith & Fulham, had speculated on the direction of borrowing costs in the late 1980s using interest-rate swaps. Auditors challenged the transactions, resulting in a series of court rulings that said such activities were outside of the council’s jurisdiction and thus unenforceable by banks involved.
In 1997, the U.K. barred local governments from investing in derivatives.
Greece used currency swaps, the biggest of which were with Goldman Sachs Group Inc., to hide 5.3 billion euros ($7.7 billion) of debt from 2001 to 2007, Eurostat, the European Union’s statistics office, said in a May report. When the arrangements were added to the nation’s accounts, it spurred a surge in borrowing costs and triggered Europe’s debt crisis.
***
“The banks make so much money off of the swaps, they don’t care about the underwriting fee or other fees” collected from municipal issuers, Kalotay said. In testimony at a July 29 SEC hearing held in Birmingham, he estimated that municipal taxpayers have paid $20 billion in fees on swaps valued at $1 trillion in the past five years, noting that banks usually get about 2 percent on such transactions.
And Darwin BondGraham notes:
In 2002 a little-known but powerful state agency in California and Wall Street titans Morgan Stanley, Citigroup, and Ambac consummated one of the biggest deals to date involving … an “interest rate swap.” A year later the executive director of the Bay Area’s Metropolitan Transportation Commission, Steve Heminger, proudly described these historic deals to a visiting contingent of Atlanta policymakers as a model to be emulated. Swaps were opening up a brave new world in public finance by extending the MTC’s purchasing power by $200 million, making a previously impossible bridge construction schedule achievable in a shorter timeframes. The deal would also protect the MTC from future volatile swings in variable interest rates. To top it off, the banks would make a neat little profit too. Everybody was winning.
Then in 2008 it all came crashing down. The financial system’s near collapse, the federal government’s unprecedented bailouts, and global economic stagnation mean that the derivative products once touted as prudent hedges against uncertainty have instead become toxic assets, draining billions from the public sector.
The MTC was forced to pay $104 million to cancel its interest rate swap with Ambac when the company went bankrupt in 2010. Whereas once the Commission’s swaps portfolio was saving it money, now it must pay millions yearly to a wolf pack of banks including Wells Fargo, JPMorgan Chase, Morgan Stanley, Citibank, Goldman Sachs, and the Bank of New York. The MTC’s own analysts now estimate that the Commission’s swaps have a net negative value of $235 million. This money all ultimately comes from tolls paid by drivers crossing the San Francisco Bay Area’s bridges, toll money that not too long ago was supposed to purchase bridge upgrades. Now it’s just a free lunch for the banks.
The MTC is only one example. Local governments and agencies across the United States have been caught in a perfect storm that has turned their “brilliant” hedging instruments into golden handcuffs. The result is something of a second bailout for the Wall Street banks on the other sides of these deals.
Perhaps worst of all has been the double standard set by the federal government. In 2008 when the world’s biggest banks stumbled toward insolvency, the U.S. Treasury stepped in to inject capital through the Troubled Asset Relief Program (TARP). TARP allowed the banks to offload or restructure their most toxic holdings, including many derivatives like interest rate swaps.
Four years later no such relief has been mobilized for cities, counties, and public agencies suffering from the toxic interest rate swaps they have been forced to hold. In its size and severity, the rate swap crisis rivals other discrete financial injustices related to the global economic meltdown of 2008. Unlike these other crises that have received enormous attention from the media and reform-minded officials, the foreclosure crisis for example, the rate swap crisis has remained hidden from public scrutiny, left to fester.
***
So why did local governments in the United States jump on the swap-wagon? The big-picture transformation of global capitalism engendered by derivatives was the last thing on the minds of local leaders as they signed rate swap agreements over the last two decades. They were feeling globalization’s local effects, however.
The post-Gold Standard era for local and state governments has … been characterized by volatile interest rates. Many local governments have been stung by wild swings in variable interest rates on bond debt. Conversely, many public entities found themselves locked into high long-term rates, unable to refinance during periodic dips. In other words, they incorrectly guessed what the price of borrowing money would be over a given time frame, and they were forced to pay the difference. In an age of chronic municipal budget shortfalls produced by tax rebellions and capital flight, a few million burned on rising interest rates, or the inability to refund debt at lower levels, is a big political deal.
Seeking to hedge against this risk, and still deliver the goods voters want, local governments eagerly signed contracts for a particular variety of swap, the floating-to-fixed contract in which cities would issue long-term debt pegged to variable rates, and then swap payments with a bank counterparty that offered the surety of a low “synthetic” fixed rate.
There was another reason for the rise in popularity of municipal swaps though. As illustrated in the case of California’s Metropolitan Transportation Commission, the promise of extending a government’s purchasing power by reducing its overall debt payments enticed many CFOs to ink swap deals. The means by which swaps could lower the cost of borrowing money for public entities hinges on the way that derivatives, as they have for global corporations, promised to create larger integrated debt markets where before there were barriers.
What swaps allowed many governments to do was to replace a floating rate with a synthetic fixed rate that was often significantly lower than would otherwise be possible if the local government itself directly issued a fixed-rate debt. Local governments tend to be able to issue slightly lower initial variable-rate debt than other sorts of borrowers (mostly large business corporations) can in other debt markets. Conversely, many banks and corporations can issue fixed rate debt at significantly lower rates than local governments have been able to. Big banks figured out how to profit from these differences with rate swaps. By issuing debt in the most favorable terms and then swapping interest-rate payments, a local government could transform its relatively low but risky variable-rate debt payment into a higher fixed-rate obligation that is lower than it would have otherwise been had the government gone straight to the market to sell fixed-rate bonds.
***
In March, 2010, the Service Employees International Union released one of the most comprehensive studies to date calculating how much toxic interest rate swaps have cost communities during the Great Recession. Combing through the financial reports of major cities, states, and public agencies from New York to California, SEIU researchers estimated that $28 billion had already been paid by governments to the banks, and that for 2010 alone, public entities would have to pay at least another $1.25 billion.
More recently, researchers in New York and Pennsylvania have dissected specific swap deals that have drained millions from local school systems, transit agencies, and the budgets of cities and counties. New York state and its local governments were forced to pay $236 million last year to fulfill the terms of swap agreements signed with Wall Street, according to a December, 2011 report prepared by United NY, a union-supported advocacy group. These swap payments are ultimately drawn from taxes, fees, and other sources of public revenues, diverted away from crucial services that have been cut back during the Great Recession.
***
Because of the economic collapse, and the decline of interest rates in 2008 to virtually zero, the MTA has been forced to pay the amazing sum of $658 million in net swap payments so far.
***
Philadelphia and its schools have lost $331 million in swap payments made to Wells Fargo, Morgan Stanley, Goldman Sachs, and other banks.
***
Other enormous transfers of public revenues to the banks include a loss of $10 million by the Bethlehem Area School District after the system was forced to cancel one particularly toxic swap. Then there’s a case that is similar to California’s MTC boondoggle. The Delaware River Port Authority, the public entity that operates and maintains toll bridges linking Philadelphia with New Jersey, lost $65 million on swap deals. As of 2010 these swaps have a negative value of $199 million for the Port Authority.
Back in California, virtually every other government and public agency has been hit by costly rate swap payments or termination fees.
***
In Pennsylvania the problem was identified early on by officials like the state’s auditor general Jack Wagner. Since 2009 Wagner has been imploring local and state leaders to ban their agencies from entering into interest rate swaps. Wagner’s office conducted one of the earliest (and maybe the only) official audits of swaps in the United States after the financial crisis, finding that Pennsylvania governments had entered into 626 individual interest rate swap agreements with a mere thirteen banks, linked to $14.9 billion in public debt.
Wagner concluded:
the use of swaps amounts to gambling with public money. The fundamental guiding principle in handling public funds is that they should never be exposed to the risk of financial loss. Swaps have no place in public financing and should be banned immediately.
His office has so far succeeded in convincing the Delaware River Port Authority to ban itself from using rate swaps in the future, while also introducing a bill in the state legislature to ban future swap agreements by Pennsylvania governments.
Wagner’s efforts have been bolstered by the Pennsylvania Budget and Policy Center’s statewide study of swaps, referenced above. Most recently the Philadelphia City Council has convened hearings to investigate how interest rate swaps affecting the city’s agencies and school system were created. The resolution calls for the city to assess “whether corrective actions, including legal remedies, should be pursued.” Philadelphia is considering litigation to determine if banks, government employees, or advisers misrepresented or otherwise fraudulently put taxpayers on the hook for millions by obscuring the risks involved, or purposefully structuring them to implode to the banks’ benefit.
Note: For those keeping track, the scalping of local governments discussed above is totally separate from the mafia-style big-rigging fraud perpetuated by the big banks against local governments. For details on that scandal, see this, this and this.
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07/06/12 |
Washington Blog |
26
26 - Corruption |
| TO TOP |
| MACRO News Items of Importance - This Week |
GLOBAL MACRO REPORTS & ANALYSIS |
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GLOBAL GROWTH: Confirmation of Rate of Slowing
Global Growth Outlook Weakens 07/02/12 Zero Hedge
Three weeks ago we noted that Goldman Sach's Global Leading Indicator (GLI) and its Swirlogram had entered a rather worrying contraction phase. Today's update to the June GLI data suggests things got worse and not better as momentum is now also dropping as well as the absolute level.
This continued deterioration in momentum suggests further softening in the global cyclical picture. Of particular concern is the broad-based deterioration in the GLI’s constituent components in June.
Nine of ten components weakened last month, only the second time this has occurred since the depths of the recession in 2008Q4. The June Final GLI confirms the pronounced weakening in global activity in recent months. Goldman has found elsewhere (as we noted here) that this stage of the cycle, when momentum is negative and decelerating, is typically accompanied by deteriorating data and market weakness.
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07/05/12 |
Zero Hedge |
MACRO ECONOMICS |
GLOBAL GROWTH: Confirmation of Rate of Slowing
Factory Slump Reaches U.S. Slowdown in Europe, Asia Slams American Firms; Weak Euro Hurts Exporters. 07/02/12 WSJ
Click to Enlarge |
07/05/12 |
WSJ |
MACRO ECONOMICS |
RISK: Global Market Risks
Citi's Outlook For The Entire Global Financial Markets In One Chart 06/28/12 Citigroup
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07/03/12 |
Citigroup |
GLOBAL MACRO |
US ECONOMIC REPORTS & ANALYSIS |
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| CURTAILED SPENDING: Shrinking Incomes, Uncertainty& Housing have reduced confidence
‘Fab Five’ Indicators Soften as Household Incomes Shrink 07/02/12 Bloomberg
- Shrinking incomes, amid uncertainties surrounding employment, the financial markets, and the housing sector, have reduced consumer confidence, resulting in curtailed spending.
- The softer economic data from the late spring was underscored by a weak performance in the personal income and outlays report.
- Real disposable personal incomes increased 0.3 percent in May, a lowly 1.1 percent gain from year ago levels. This soft pace in incomes is insufficient to foster confidence and promote greater spending.
- Real consumer spending increased 0.1 percent in May and was a mere 1.9 percent higher than year ago levels. Traditionally, sub-2.0 percent postings in the annual growth rate of real consumption expenditures portend recession – something to keep an eye on in coming months.
- Late last week, in a conference call, Family Dollar Stores CEO Howard Levine noted consumers continue to face difficult economic headwinds. “While consumer expectations for inflation have moderated recently, unemployment rates have given up gains and consumer confidence is deteriorating,” he said.
- The deterioration in attitudes may not be limited to Family Dollar store shoppers at the lower end of the income spectrum.
SENTIMENT & CONFIDENCE
- The University of Michigan’s Consumer Sentiment Index took a turn for the worse falling 7.7 percent over the last month to 73.2 in June.
- Similarly, the Index of Consumer Expectations plunged 8.7 percent to 67.8 in June.
- According to Richard Curtin, the Surveys of Consumers chief economist, “Perhaps of greater importance was that the entire June decline was among households with incomes above $75,000. Higher income households were not only less optimistic about economic prospects but viewed their own financial prospects much less favorably.”
- Confidence may get hit yet again now that the U.S. Supreme Court upheld the American Health Care Act, particularly within the small business sector. The Small Business Association reports that 99.7 percent of all employer firms in the U.S. are small businesses. Added healthcare costs could force employers to reduce staff.
- The National Federation of Business Economists (NFIB) will be asking a special healthcare question in its next survey of small business conditions, which should be quite informative with respect to hiring prospects and subsequently future incomes and spending.
DISCRETIONARY SPENDING
- The Fab Five indictors of discretionary spending softened in May,
- the weakest being women’s and girls’ clothing, which contracted by 1.0 percent, far below the 9.0 percent gain registered in late 2010.
- Casino gambling was up 0.4 percent yearover- year.
- Jewelry and watches advanced 2.2 percent over the last year – likely due to trading down from “bling” to costume jewelry.
- Meanwhile cosmetics are up 1.9 percent year-over-year.
- The pace of dining out was the strongest of the Fab Five, advancing 3.5 percent over the last year. Darden Group’s CEO Clarence Otis last week noted the problems facing the restaurant sector. Fourth quarter same-store sales at Red Lobster declined 3.9 percent. Olive Garden fell 1.8 percent.
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07/03/12 |
Bloomberg |
US ECONOMY |
ISM: Major Miss into Contraction.
BIG MISS: JUNE ISM TANKS TO 49.7, PRICES PAID COLLAPSES 07/02/12 BI
MANUFACTURING AT A GLANCE
JUNE 2012 |
Index |
Series
Index
Jun |
Series
Index
May |
Percentage
Point
Change |
Direction |
Rate
of
Change |
Trend*
(Months) |
| PMI |
49.7 |
53.5 |
-3.8 |
Contracting |
From Growing |
1 |
| New Orders |
47.8 |
60.1 |
-12.3 |
Contracting |
From Growing |
1 |
| Production |
51.0 |
55.6 |
-4.6 |
Growing |
Slower |
37 |
| Employment |
56.6 |
56.9 |
-0.3 |
Growing |
Slower |
33 |
| Supplier Deliveries |
48.9 |
48.7 |
+0.2 |
Faster |
Slower |
5 |
| Inventories |
44.0 |
46.0 |
-2.0 |
Contracting |
Faster |
3 |
| Customers' Inventories |
48.5 |
43.5 |
+5.0 |
Too Low |
Slower |
7 |
| Prices |
37.0 |
47.5 |
-10.5 |
Decreasing |
Faster |
2 |
| Backlog of Orders |
44.5 |
47.0 |
-2.5 |
Contracting |
Faster |
3 |
| Exports |
47.5 |
53.5 |
-6.0 |
Contracting |
From Growing |
1 |
| Imports |
53.5 |
53.5 |
0.0 |
Growing |
Same |
7 |
| |
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| OVERALL ECONOMY |
Growing |
Slower |
37 |
| Manufacturing Sector |
Contracting |
From Growing |
1 |
*Number of months moving in current direction
'Big miss at 49.7. The reading, which represents contraction, is well below the 52.0 that was expected. The Prices Paid Index (which measures the cost of goods for companies) went into total freefall, falling from 47.5 to 37.0. |
07/03/12 |
ISM |
US ECONOMY |
| CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES |
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CENTRAL BANK LIQUIDITY: UK Injects Yet Another £50
Bank Of England Hikes QE By £50 Billion As Expected, As China Cuts Benchmark Rate In Surprising Move 07/05/12
While everyone was expecting the BOE to return back to QEasing with a £50 Billion increase in its asset purchase program(me), to a total of £375 billion, which is what just happened, the bigger news came 1 second before the BOE announcement, with China declaring it has cut benchmark interest rates as once again the fate of the whole world is in the hands of small groups of academics, promising each other bottles of Bollinger if they can only get the S&P500 over 1,400. In other words, once again small groups of people around the world sat down and conspired (perfectly legally) to manipulate global interest rates. No hearings are scheduled.
From the BOE:
The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £50 billion to a total of £375 billion.
UK output has barely grown for a year and a half and is estimated to have fallen in both of the past two quarters. The pace of expansion in most of the United Kingdom’s main export markets also appears to have slowed. Business indicators point to a continuation of that weakness in the near term, both at home and abroad. In spite of the progress made at the latest European Council, concerns remain about the indebtedness and competitiveness of several euro-area economies, and that is weighing on confidence here. The correspondingly weaker outlook for UK output growth means that the margin of economic slack is likely to be greater and more persistent.
CPI inflation fell to 2.8% in May and is likely to edge down further in the near term. Commodity prices have fallen, which should help to moderate external price pressures. And pay growth remains subdued. Given the continuing drag from economic slack, that should ensure inflation continues to ease into the medium term.
At its meeting today, the Committee agreed that the Funding for Lending Scheme, which would be launched shortly, was a welcome initiative. It also noted recent and prospective actions to ease liquidity constraints within the banking system. Taken together with reduced pressure on household real incomes, on the back of lower commodity prices, and the continued stimulus from past monetary policy actions, that should sustain a gradual strengthening of output growth.
But against the background of continuing tight credit conditions and fiscal consolidation, the increased drag from the heightened tensions within the euro area meant that, without additional monetary stimulus, it was more likely than not that inflation would undershoot the target in the medium term. The Committee therefore voted to increase the size of its programme of asset purchases, financed by the issuance of central bank reserves, by £50 billion to a total of £375 billion. The Committee also voted to maintain Bank Rate at 0.5%. The Committee expects the announced programme of asset purchases to take four months to complete. The scale of the programme will be kept under review.
The minutes of the meeting will be published at 9.30am on Wednesday 18 July.
And from the PBOC:
The People's Bank of China decided to cut financial institutions RMB benchmark deposit and lending interest rates since July 6, 2012. One-year benchmark deposit rate cut of 0.25 percentage points, year benchmark lending interest rate cut by 0.31 percentage points; other deposit and lending interest rates and individual housing provident fund deposit and lending rates be adjusted accordingly.
Since the same day, the lower limit of the floating range of lending rates of financial institutions was adjusted to 0.7 times the benchmark interest rate. Individual housing loans interest rate floating range should not be adjusted, financial institutions should continue to strictly enforce the differentiation of the housing credit policy, to continue to curb speculative investment buyers. (End)
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07/06/12 |
Zero Hedge |
CENTRAL BANKS |
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| Market Analytics |
| TECHNICALS & MARKET ANALYTICS |
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DIVIDEND YIELD PREMIUM: History Suggests Stocks Are Not YET Cheap.
The broad theme of buying stocks because they are cheap - as evidenced by the dividend yield's premium to US Treasury yields - seems to fall apart a little once one look at a long-run history of the behavior of these two apples-to-unicorns yield indications. Forget the risky vs risk-free comparisons, forget the huge mismatch in mark-to-market volatility, and forget the huge differences in max draw-downs that we have discussed in the past; prior to WWII, the average S&P 500 dividend yield was 136bps over the 10Y Treasury yield and while today's 'equity valuation' is its 'cheapest' since the 1950s relative to Bernanke's ZIRP-driven bond market; the 'old' normal suggests that this time is no different at all and merely a reversion to more conservative times - leaving stocks far from cheap.
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07/03/12 |
Zero Hedge |
ANALYTICS |
CORPORATE EARNINGS: Shrinking Foreign Profits
Rest of World Pulls Down U.S. Profits. 06/30/12 WSJ
$48.1 billion: The quarterly drop in U.S. corporate profits from abroad in the first three months of 2012.
It’s becoming increasingly clear that what happens overseas isn’t likely to stay overseas.
The final data for gross domestic product was released on Thursday, showing that the economy grew at an unrevised rate of 1.9% in the first quarter. Markets basically yawned as they went back to focusing on the euro zone summit and the release shortly after of the Supreme Court’s health-law decision.
But beneath the unchanged headline number were some worrying new details. For one, corporate profits were revised lower. The new data showed the first quarterly drop in the measure since the darkest days of the recession in the fourth quarter of 2008.
At first glance, the drop in profits was a bit hard to square with job numbers for the first quarter. Sure, employment has been weak for the past few months, but it was strong in the early part of the year. The answer came in where the profit drop originated. Profits from the U.S. were actually strong in first quarter, jumping 10% from a year earlier. But earnings coming from the rest of the world tumbled 12% from the first quarter of 2011.
Meanwhile, export growth was revised down to just a 4.2% gain from a previously reported 7.2% increase. Weaker corporate profits from abroad and slower export growth are telling a clearer story of a global slowdown. But the worrying part is that the story is already three months old.
The second quarter was even worse for the global economy than the first. That helps explain some of the weaker data in the U.S. in the past few months. For a while, it appeared that the problems overseas weren’t spreading too badly into the U.S., but the revised data make it clear that the spillover was already starting early in the year. The drag was likely exacerbated in the quarter that ends today.
Hopes are high that Europe has gotten its act together following a summit on Friday. But it’s worth noting that we’ve seen plans before that are long on statements of unity and promises for future action but short on specifics.
In the first quarter, the U.S. stayed mostly healthy while the rest of the world came down with the flu. In the second quarter, it looks like America caught the bug. As the third quarter begins, it still isn’t clear whether we spend the summer recuperating on the beach or in bed with pneumonia.
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07/02/12 |
WSJ |
ANALYTICS |
DECISION POINT: BUY Signal Triggered
New BUY Signal for S&P 500 Index 06/29/12 Decision Point
Today our mechanical Thrust/Trend Model (T/TM) for the S&P 500 switched from NEUTRAL to BUY. For our purposes, the S&P 500 represents "the market."
The signal was generated by the Thrust Component of the T/TM, which consists of the PMO (Price Momentum Oscillator) and the PBI (Percent Buy Index). Once both of these indicators have moved above their EMAs, a BUY signal is generated. You can see that the PMO crossover occurred earlier this month. The PBI crossover occurred today, which was more delayed than we normally see.
While the T/TM is intended for intermediate-term timing, the Thrust Component of the model is really more short-term oriented and its intended effect is an earlier entry than we would normally get from the Trend Component alone. This makes it vulnerable to whipsaw.
At this point we will wait for the Trend Component to confirm the signal, which will happen when the 20-EMA crosses up through the 50-EMA. This will take a while because there is still a lot of separation between the two. (See arrows on the thumbnail chart above.)
The timing model is far from perfect, but it has proven to be a fairly reliable tool for identifying changes in trend. At this point we have to assume that a new up leg is in progress. Our intermediate-term market posture is now bullish. |
07/02/12 |
Decision Point |
ANALYTICS |
INITIAL CLAIMS: Magical Indicator
One Indicator Continues To Predict The Market PERFECTLY 06/30/12 BI
The latest look at one of our favorite charts: The S&P (red line) vs. initial jobless claims (inversed, blue line).
Talk all you want about Europe, the Fed, etc. US economic fundamentals matter. |
07/02/12 |
BI |
ANALYTICS |
EARNINGS: Currency Hedging Distorting Falling Revenues
A Stronger Dollar Sparks Second Quarter Earnings Worries for Corporate America 06/27/12 AlphaNOW
As the dollar rises against the euro, companies in the S&P 500 are cutting their forecasts for second-quarter earnings:
- The greenback has gained about 15% against the euro over the course of the last year, perhaps because global investors, in light of the problems afflicting the eurozone, view owning dollar-denominated assets as preferable to exposing themselves to the uncertainty and risk that hovers overhead in Europe.
EXAMPLES
- PHILIP MORRIS: Tobacco powerhouse Philip Morris International Inc. (PM.N) powerhouse is just one of a growing number of companies in the Standard & Poor’s 500 index to cut its earnings guidance to reflect the impact of the stronger U.S. dollar; it also warned that it is seeing sales of tobacco and cigarette products to drop in the European Union.“Growth in developed markets has dropped off significantly,” said Bob McDonald, the company’s chairman and CEO, at last week’s Deutsche Bank Global Consumer Conference. “These markets still account for 60% of sales and an even greater percentage of our profit.” (It doesn’t help, the company noted, that its commodity costs also have risen sharply.)
- MERCK: Pharmaceutical heavyweight Merck & Co (MRK.N) sees the same trends buffeting its own earnings. “At today’s exchange rates, for example, sales in the second quarter would be adversely affected by about 3%,“ cautioned Peter Kellogg, chief financial officer of Merck, during the company’s first-quarter conference call with investors and analysts back in April.
- PROCTOR & GAMBLE - PEPSI: In the final days of the second quarter, other big multinational companies like Procter and Gamble Co. (PG.N), and PepsiCo Inc. (PEP.N) also are giving negative guidance for their second-quarter results.
The strong dollar simply exacerbates the impact of economic weakness worldwide, particularly in Europe; the combination isn’t a good sign for the upcoming earnings season. The chart below provides a selection of companies in the S&P 500 (those that break out their sales by geography) that have the greatest exposure to Europe, as calculated as a percentage of their total revenue, with that revenue translated into British pounds.
From among these companies, Coca Cola Enterprises Inc. (CCE.N) generates the highest percentage of its sales (66%) from Europe, meaning that its second-quarter earnings are very likely to take a hit. Not surprisingly, all 11 analysts covering the stock who have changed their estimates have lowered their earnings per share estimates for the quarter. The dollar effect? Well, Bill Douglas, the company’s chief financial officer, told the Deutsche Bank Global Consumer Conference that he expects currency translation “to have a negative high single-digit impact on (earnings)” for 2012 as a whole.
EARLY INDICATIONS:
- AlphaNow data on earnings preannouncements paints a less-than-rosy picture of what lies ahead. Companies In the S&P 500 have issued 26 positive EPS preannouncements, but that has been dwarfed by the 93 preannouncements cautioning that these companies might not live up to analysts’ expectations for second-quarter earnings.
- To compute a ratio between these negative and positive preannouncements (an N/P ratio), you need only divide 93 by 26; the answer, 3.6, is the weakest showing in more than a decade, since the third quarter of 2001.
- The Information Technology, Consumer Discretionary, and Health Care sectors have seen the largest number of negative earnings preannouncements.
- In addition to the unfavorable exchange rates, companies are citing slower economic growth in emerging markets and Europe as one of many problems that corporate America must grapple with.
- Analysts’ downward revisions, coupled with negative guidance from the companies themselves, makes corporate earnings look bearish in the second quarter.
- As a result, the estimated growth rate for earnings by companies in the S&P 500 has fallen from 9.2% to 6.1%, since the second quarter began in April.
- If the expected earnings growth rate comes in at 6.1%, it will be the third quarter in a row in which earnings growth has remained stuck in the single digits, after eight consecutive quarters of double-digit growth.
- Excluding Bank of America (BOA), the estimated growth rate for the S&P 500 drops to a 1.1%. (See Exhibit 3, below.)
- It doesn’t help that those companies that are generating growth in sales are still having difficulty converting that into growth on the bottom line.
- According to Thomson Reuters I/B/E/S data, nine of the ten sectors in the S&P 500 will record higher revenues for the second quarter, but only five sectors will see earnings grow by more than 1%.
- Analysts expect that three of the ten sectors in the S&P 500 will see earnings decline: Utilities (-16.2%), Energy (-13.5%) and Materials (-11.1%).
- This trend highlights the clear discrepancy between earnings and revenue growth that we discussed previously, and most companies are still facing higher commodity costs, which are eating up profits.
- Troy Alstead, chief financial officer of Starbucks (SBUX.O) reminded his listeners at a recent conference that his company, like many of its peers, has suffered from “extreme commodity cost pressures.”
- Today, with the end of the second quarter only days away, the company, along with those same peers, now must also battle the “macro challenges that we face in Europe”.
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07/02/12 |
AlphaNOW |
ANALYTICS |
EARNINGS: Currency Hedging Distorting Falling Revenues
A Stronger Dollar Sparks Second Quarter Earnings Worries for Corporate America 06/27/12 AlphaNOW
DISTORTIONS: HEDGING OPERATIONS
- Hedging their exposure to foreign currencies is a tried and tested way for multinational companies to reduce the likelihood that their earnings will be dealt a blow by a sudden unfavorable move in the dollar exchange rate.
- While most companies don’t disclose these hedging activities on their balance sheets, it is logical to assume that many are embarking on some kind of hedging strategy.
- PRICELINE.COM Inc. (PCLN.OQ) the online travel company is more reliant on international gross bookings than it is on its U.S. revenues, and, like many of its peers, reduced earnings guidance during its most recent conference call with investors and analysts in light of the challenging economic conditions in Europe.
- Dan Finnegan, the chief financial officer of Priceline.com, warned that expected volatility in the euro/dollar exchange rate “can materially impact our results expressed in U.S. dollars.”
- In order to protect its sales, the company explained that is has contracts in place to shield a substantial portion of its second quarter EBITDA and net earnings from any fluctuation in the euro or pound against the dollar during the second quarter, Finnegan explained.
- ADOBE: Recently, Adobe Systems Inc. (ADBE.OQ) posted results that were slightly better than analysts had predicted (it announced earnings of 60 cents a share, compared to the Thomson Reuters consensus forecast of 59 cents a share) for its fiscal second quarter, which ended May 31.
- However, the company saw a $14.5 million decrease in revenue due to unfavorable currency rates over year-earlier levels.
- Mark Garrett, the chief financial officer at Adobe Systems told conference call attendees that the company had a $10.7 million gain from hedging activities in the second quarter, compared to a $200,000 gain form hedging during the second quarter of 2011.
- “Thus the net year-over-year currency decrease to revenue, considering hedging gains, was $4 million,” Garrett said.
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07/02/12 |
AlphaNOW |
ANALYTICS |
BANK PROFITS: As go Bank Stocks, So Goes the Equity Markets
Risk-Taking by Banks Still Not Paying Off in Higher Returns on Equity 06/29/12 AlphaNOW
Bank investors prize ROE as a measure of how well a financial institution uses its capital to generate profits – but industry-wide, ROE now is at levels once thought unimaginable. Is the right approach taking on more risk, or going back to basics?
- Large global financial institutions could routinely earn returns on equity (ROE) for their shareholders north of 10%, and often even above 20%.
- The financial crisis of 2008 brought about a host of new regulations and restrictions on their activities (such as the provisions of the Dodd-Frank Act barring much proprietary trading and many investments in hedge funds and private equity vehicles).
- The more capital they need to keep on their balance sheets and the more higher-risk but potentially profitable businesses they can no longer pursue as actively, the greater the potential for their ROE to dip.
- The common worry became that if their ROE fell below 10%, investors would be less willing to purchase their stock, since at that level the returns were less attractive relative to the risk and the degree of volatility in the share prices.
- An ROE of around 20% enabled a bank’s stock to trade at around three times book value, a smaller ROE would weigh on that book value ratio and thus the share price.
- As ROE levels have declined since the financial crisis, so, too has the book value of banking stocks in both the United States and Europe.
- European banks, in particular, appear to have a lot to worry about, with a price/book ratio, on average, of around 0.5.
- Whenever a company trade at a level below its book value, it signals that it is generating on return on shareholders’ equity that is below its costs of capital – thus, instead of creating value for shareholders, it is destroying it.
- In theory – although it’s rarely practical in the real world – it would be better for the directors of such a company to liquidate it if they aren’t able to turn that ROE around and boost book value above 1.
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07/02/12 |
AlphaNOW |
ANALYTICS |
| COMMODITY CORNER |
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| THESIS Themes |
| CORPORATOCRACY - CRONY CAPITALSIM |
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CRONY CAPITALISM: Complexity
Charting The Exponential Function Of Financial Complexity 07/02/12 Dylan Grice, SocGen
There is a perverse macro-level outcome from over-zealous central-planning. We have talked in the past about the greater risk of huge tail events in a controlled/normalized/planned/smoothed world, but as SocGen's Dylan Grice in an analogy to driving: "traffic lights and road signs are well intentioned, but by subtly encouraging us to lower our guard they subtly alter the fundamental algorithm dictating micro-level driving behavior." In other words, we drop our guard. With the plethora of financial market traffic light and road signs (Basel III, Solvency II, Bernanke Put) the fear is that this illusion of capital or safety has made markets more lethal (think AAA-rated bonds for a simple example). "We should be able to understand that the world isn’t risk free, can never be made risk free and that regulations which trick people into thinking it is risk free serve only to make it more dangerous." But instead, following the rule-of-Iksil (baffling with bullshit), regulators have gone the traditional route - but this time to an exponential place of craziness with Dodd-Frank - layering complexity upon complexity to give an out to those who abuse it most. Perhaps, as Grice notes, instead of focusing on 'fixing' the "crisis of capitalism", it would be more pragmatic to focus on the "crisis of dumb counterproductive intervention"?
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07/03/12 |
Dylan Grice
SocGen |
CRONY CAPITALISM |
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