GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN
SOVEREIGN DEBT & CREDIT CRISIS
U.S. Has `Realistic Possibility' of Stagnation, S&P's Wyss Says
“I think there is still a realistic possibility in the
U.S. that it’s slipping into this pattern like Japan has
-- 10, 20 years of stagnation”
GDP REVISIONS - ANTICIPATION
CBO Estimates Stimulus Boosted Q2 GDP By 4.5%, Standalone
Number Is Likely Under Around -3.5%
Depression-Era Manufacturers' Association Slashes U.S. Growth
Forecasts -- And 350,000 Jobs Disappear BInsider
The Manufacturers Alliance (MAPI), whose roots date
back to the U.S. depression period when it was formed
in order to help stabilize the manufacturing economy,
has just slashed their U.S. GDP forecasts in their
latest economic outlook. Previously expecting 3.3% GDP
growth this year, they now see just 2.9%. 2011's
forecast has also been trimmed to 2.6% from 2.9%.
“There is a somewhat bleaker
outlook amid weaker economic data and it clearly
indicates a slow growth mode,” said Daniel J.
Meckstroth, Manufacturers Alliance/MAPI Chief
Economist. “For instance, the numbers for June retail
trade, inventories, and foreign trade have all come in
weaker than the Bureau of Economic Analysis had
estimated in the preliminary estimate of second
quarter GDP growth. The homeowners’ tax credit has
expired. Consumers are not spending as much.
They are saving more and repaying debt, which is good
for the long run but not the near term. The inventory
swing is over and the benefits of the stimulus have
basically run their course.”
There remain, however,
positive economic signs, and the manufacturing sector
should continue to hold its own. “Expenditures are
rapidly growing for business equipment, as are
exports,” Meckstroth added. “Manufacturing will grow
faster than the general economy as it relies less on
consumer spending while disproportionately benefiting
from strong demand for business equipment, exports,
and basic materials.”
Yet manufacturing output will grow faster
than the U.S. economy thanks to high-tech.
Interestingly, they nevertheless expect the U.S.
manufacturing sector to expand at a faster rate than
the greater U.S. economy, forecasting manufacturing
production growth of 5.7% in 2010 and 4.7% in 2011.
Digging a bit deeper, it's a substantially different
economy environment for high tech vs. 'non-high tech'
companies. While non-high tech output is only expect
to grow by 5.1% and 4.3% in 2010 and 2011
respectively, high-tech production is forecast to
surge by 14.5% and 13%. It's a completely different
economy for those in the high-tech space.
Nevertheless, there's one final piece of news,
which isn't too pretty for those in need of a job:
MAPI forecasts overall
unemployment to remain high, averaging 9.6 percent in
2010 and 9.4 percent in 2011. Manufacturing is
expected to see a hiring increase, albeit less than
previously anticipated. The sector is
forecast to add 277,000 jobs in 2010 and 373,000 jobs
in 2011, although the numbers are down from 400,000
and 500,000, respectively, in MAPI’s May report.
While the association expects 650,000 manufacturing
jobs to be created through 2011, this is a sharp drop
of about 350,000 from the 900,000 new jobs previously
expected for the period, back in May. Hiring will
likely be skewed towards the high tech industries
where there's double-digit production growth, so high
tech is the place to be.
Hard-nosed Fed sends global markets reeling
100-year Treasuries could be tough sell
Asian markets continue retreat from risk
Commercial Property Owners Default
|STRATEGIC DEFAULTS & JINGLE MAIL:
walking away from mortgaged houses, some large commercial property
owners are defaulting on debts and surrendering to lenders
buildings worth less than their loans. Companies such as
Macerich Co., Vornado Realty Trust and
Simon Property Group Inc. have recently stopped making
mortgage payments to put pressure on lenders to restructure debts.
In many cases they have walked away, sending keys to properties
whose values had fallen far below the mortgage amounts, a process
known as "jingle mail." These companies all have piles of cash to
make the payments. They are simply opting to default because they
believe it makes good business sense.
Of the $1.4 trillion
of commercial-real-estate debt coming due by the end of 2014,
roughly 52% is attached to properties that are underwater,
according to debt-analysis company Trepp LLC.Owners of commercial
property have an easier time walking away than homeowners because
commercial mortgages are typically nonrecourse.
Whether landlords walk away from properties often depends on the lender. In
recent years, most projects were financed by the use of
commercial-mortgage-backed securities, or CMBS, which are effectively bundles of
mortgages sold as bonds to thousands of investors. Restructuring debt with
scores of bondholders is more difficult than with banks. If borrowers do walk
from bond-financed properties, the real estate is often foreclosed and sold for
less than the loan balance. Investors holding those loans take another hit by
paying fees to loan servicers that handle the liquidations.
RRESIDENTIAL REAL ESTATE - PHASE II
EXISTING HOME SALES
In Case It Wasn't Obvious That The Homebuyer Tax Credit Created A
Huge Distortion BInsider
Check out this chart from
Advisors which shades in the period of the tax
credit. Home sales started rising immediately,
and have fallen off immediately with the tax credit's
expiry. Quick Congress, time for another!
CDS On Home Builders Spike After Terrible Housing Data
Existing Homes: Months of Supply and House Prices July 2010
CDS prices on home builders spiked as a result of
poor existing homes sales data. Sales plunged
27.2% in July, far worse than estimates. Now key
homebuilders are seeing the cost of insuring their
debt rise dramatically as the housing market comes
under renewed pressure. Tomorrow, new home sales data
is released. The industry ETF, however,
|The first graph shows the year-over-year (YoY) change
in reported existing home inventory and months-of-supply.
Inventory is not seasonally adjusted, so it really helps
to look at the YoY change.
Click on graph for larger image in new window.
Although inventory increased from June 2010 to July
2010, inventory decreased 1.9% YoY in July. The slight
year-over-year decline is probably because some sellers
put their homes on the market in the Spring hoping to take
advantage of the home buyer tax credit. Note:
Usually July is the peak month for inventory.
level of inventory is especially bad news because the
reported inventory is already historically very high, and
the 12.5 months of supply in July is far above normal.
The months-of-supply will probably decline in August as
sales rebound slightly and some sellers take their homes
off the market, but I expect double digit months-of-supply
for some time - and that will be a really bad sign for
house prices ... A normal housing market usually has under
6 months of supply. The following graph shows the
relationship between supply and house prices (using
This graph show months of supply (through July 2010)
and the annualized change in the Case-Shiller Composite 20
house price index (through May 2010). Below 6 months of
supply (blue line) house prices are typically rising
(black line). Above 6 or 7 months of supply, house
prices are usually falling. This isn't perfect - it is
just a guideline. Over the last year, there have been many
programs aimed at supporting house prices, and house
prices increased slightly even with higher than normal
supply. However those programs have mostly ended.
This is a key reason why I expect house prices to fall
further later this year as measured by the Case-Shiller
and CoreLogic repeat sales house price indexes, although I
don't expect huge declines like in 2008. My expectation is
further price declines of 5% to 10% on the repeat sales
Notes: The Case-Shiller house price
index for June will be reported next week (really a 3
month average of April, May and June). We really want to
see prices for July - and those will not be reported until
the end of September. And once again the July numbers will
be a 3 month average. So it might take until the end of
October to see the price declines that are already
happening in the housing market.
EXPIRATION FINANCIAL CRISIS PROGRAM
PENSION & ENTITLEMENTS CRISIS
Retiree Ponzi Scheme Is $16 Trillion Short
This fiscal child abuse, which will turn the American dream into a
nightmare, is best summarized by the $202 trillion fiscal gap...
Unfortunately, the Trustees’ cash-flow accounting, like all such
accounting, is arbitrary and misleading. In fact, Social Security
is broke. Its
fiscal gap, which the Trustees measure correctly, is $16
trillion. This gap is small compared with the U.S.’s overall $202
trillion shortfall, not because the Trustees treat Social
Security’s $2.5 trillion trust fund as an asset (a questionable
choice), but because they credit one-third of federal revenue to
the program. But dollars are dollars. If we re-label Social
Security “payroll” taxes as “general revenue wage taxes,” Social
Security’s fiscal gap increases by $60 trillion, and the fiscal
gap of all other government activities falls by $60 trillion,
leaving the overall $202 trillion gap unchanged. Even by the
Trustees’ measure, there’s a massive problem. Coming up with $16
trillion requires permanently raising revenue or cutting benefits
by 26 percent, starting now. In other words, the program is 26
PPF to unveil long-term pension funding plans
|UK’s body plans to have enough cash to pay all future benefits
Activist pension funds to target boards
New proxy access rules set to shake up underperforming US companies
Are Pensions the Next AIG ZH
|If forced liquidation becomes a pattern among US (and global)
pension funds, watch out, the pension tsunami will have far
reaching effects which will make the whole AIG fiasco look like a
walk in the park...
Illinois Teachers' Retirement System Enters The Death Spiral- AIG
Wannabe's Go-For-Broke Strategy Fails As Pension Fund Begins Liquidations
|Two few months ago we disclosed how the Illinois Teachers'
Retirement System (TRS) was doing all it can to become the next
AIG. In addition to, or maybe precisely due to, its deplorable
fundamental condition, which can be summarized as being 61%
underfunded on its $33.7 billion in assets, with a performance
record of down $4.4 billion in 2009 and 5% in 2008, the fund,
courtesy of a detailed analysis by Alexandra Harris of the Medill
Journalism school at Northwestern, was found to be on its way to
trying to become a veritable self-made TBTF: as was described
then, "TRS is largely on the risky side of the contracts, selling
and writing OTC derivatives, including credit default swaps,
insurance-like contracts that guarantee payment in the event of a
default." In other words, TRS was selling substantial amounts of
derivatives, which held the fund's other assets as hostage in case
the collateral calls started coming in, as should the market
broadly decline, the value of the downside derivatives would
"increase" and the seller (in this case TRS) would need to pledge
ever more collateral against these wrong way bets. Not only that,
but the Fund is currently getting annihilated on its curve
exposure: "TRS appears to be betting that long-term Treasury
yields will greatly increase" we wrote back then. So as a result
of i) its massive underfunded fundamentals and ii) a bet that the
market would turn bullish, i.e., spreads would drop (they are
rising), and treasuries would plunge (we all know where they are
today), which was supposed to happen by now but isn't as the
economy is now officially double dipping, the fund has basically
thrown in the towel and is proceeding with liquidations. The
problem there is that due to its derivative exposure, liquidations
now become self-reinforcing, as more cash needs to be pledged as
collateral in a declining market, and the AIG death spiral we all
know and love, follows. The only thing missing is for Goldman to
raise its overnight variation margin requirements and it's game
over, as we get a brand new AIG on our hands. And since Goldman is
among the 60 or so asset managers that actually decide how the
fund invests its meager assets, it is fully aware of its
precarious position, and it is a sure bet that Goldman is
currently deciding when to pull the plug on the TRS life support.
David Rosenberg- Prepare For Another 4-5 Million Job Cuts
In his morning
note, David Rosenberg warns of more economic
The article in yesterday’s WSJ titled Specter of Layoffs
Stalks Wall Street really resonated with us. As we said in
yesterday’s note, the size of the securitized loan market has
shrunk 60% in the past two years. Balance sheets, production,
order books and staffing requirements are all rightsizing to
this new semi- permanent landscape of reduced credit
In fact, we could see a situation where
another 4 to 5 million jobs could be shed in the United States
— and in the three sectors that were, and remain, the most
affected by the housing crisis and financial collapse.
For example, historically, the construction industry employed
three workers for every housing start. Today, that ratio is
closer to 10. This could easily mean that we see 3 to 4
million construction jobs being lost going forward, barring a
major revival in the housing market, which isn’t happening.
The ratio of employees in the financial sector to outstanding
private sector credit is at a new and lower level that would
warrant around a workforce 500,000 lower than is the case
today — just to get to productivity ratios that prevailed in
the pre-bubble era. And the third sector, which is the
fiscally-challenged state and local government segment, for
payrolls there to mean revert to the level commensurate with
the ever-declining level of public spending would also mean
roughly 500,000 employment cutbacks. No doubt there are other
sectors that will provide some offset in health and education
and even manufacturing, but it took 25 years for these areas
combined to rise five million and something tells us that the
downsizing that is left in the housing, financial and
state/local government sectors will occur in a much shorter
period (and the latter too, if what happened recently in New
Jersey is any indication, the social contract with public
sector unions will soon go the way of the dodo bird)."
Note that the year-on-year trend in layoff announcements,
after a brief period of declines, is now re-accelerating in
the three above-mentioned affected sectors. For the first time
since late 2007, the financial sector posted no hiring
announcements in each of the last two months and this has also
been the case in three of the past four months in the real
estate sector. Government sector hiring announcements, as an
aside, have plunged 75% from year-ago levels. The signs are
already there — get ready for another downleg in employment as
the jobless claims are now suggesting — especially as it
pertains to this 33 million or 25% chunk of the total
Another Atlas Shrugs - Small Business Owners Chime In Mish
|The CEO of a healthcare consulting company writes ....
You ran a series of articles on small businesses, hiring and
expansions. I thought I would add to it.
I run a small
firm, with about 45 employees and 40 contractors. We have been
growing pretty well, close to 80% topline numbers for the past 3
years. Our average salary is over $100,000. We have some
innovative software we sell to the industry. We also offer
operational improvement strategies and IT consulting.
provide great healthcare insurance coverage to our employees. It
is necessary in order to attract talent and I am in the talent
business. Our healthcare costs went up 90% this year – and that is
on a 6-figure number to begin with. We found only one insurer
willing to provide us coverage, United Healthcare.
other provider pulled out of our segment of the small business
market. Cigna, our prior carrier, refused to renew at the last
minute on a technicality despite being our carrier for the past 3
Our management team’s focus for two weeks was
seriously diverted as we dealt with the consequences of this. Had
we lost coverage altogether, we would have been out of business as
our employees would go elsewhere.
Our staff is young and
healthy, by and large. Average age is early 30s, in the healthcare
consulting, software and technology industry. Only in a severely
government distorted marketplace can a firm with a young and
healthy staff that has had coverage for years face insurers
pulling out or demanding a 90% hike.
We had plans to add
one person to our R&D staff, a low 6-figure salary. That was
shelved because of healthcare costs. Our software development
cycle is slowed as a result.
How has the healthcare bill
helped the economy? In this case, not one bit. And everyone of my
employees has been hurt, because we switched mid-year, those who
were part way into their deductible have to start all over again.
That is a few 1000s for a number of employees. Because of a bill
that passed that cost us money, and most of our employees money.
No one is happy with this.
I have additional areas I would
like to invest in. Areas that involve productivity gains, not just
taking share from someone else, and not just for us. Many of the
things I would like to do would reduce costs for my customers and
build efficiencies in the healthcare industry as well.
of our software products reduces the cost of clinical trials, and
has saved millions of dollars in better planning. Another model we
have developed reduces the cost of carrying inventory for
bio/agritech firms. I believe it is the best in the world,
developed by a Ph.D. out of Carnegie Mellon. It saves millions a
year for large companies (Monsanto, Bayer Crop Science, etc. type
Productivity is the wealth of a nation.
However, thanks to Obama administration policies, we are
pissing our edge away on dumb stuff which makes us hesitate to
invest more. Thanks a lot, Congress.
The state government,
California, (surprise, surprise, surprise) has intimated our
customers. Several large companies are withholding taxes from our
payments in case we need to pay sales tax on our services. We
don’t. It is our responsibility to pay sales taxes under our
What can I do? Sue my customer?
in the heck in this environment can a business owner feel good,
create jobs, and expand?
It's no wonder small businesses
are in a sour mood. I have so many other stories from other small
business owners that I know. The theme is the same. We are all up
against overseas competition, against taxes, against the
government, against societal acrimony.
Many of my business
executive associates are looking to cash out if they could find a
buyer at a decent price. As my friend, a former mid-size credit
union COO and small business owner, says whenever one of the “good
guys” – people who understand how to start businesses that are
productive - throws in the towel and cashes in … “Another Atlas
The business climate is freaking insane. I don’t
blame the insurers too much. It takes a government to make a
market this screwed up.
Thanks to you and others, I pay
more attention to Washington, D.C. and state legislatures. I also
call to protest and give money to fiscal conservative candidates.
Unfortunately this takes time away from my business. But do I
have a choice?
Unions get to pay people full-time to lobby
on their behalf. Me? I work long weeks. I feel bad for my family
if I don’t spend more time with them, but I cheat my son if I
don’t fight for a better world for him.
As always, your
coverage of all topics, including public sector unions, is
wonderful, a great service, and greatly appreciated. You have an
impact on us who don’t have time to do this on our own, but care
about our society and want to contribute. I have given to so many
individual campaigns and efforts around the country this year,
more than the rest of my years combined. You are making a
of Jobs, Foreclosures May Keep Housing in U.S. Depressed
GOVERNMENT BACKSTOP INSURANCE
OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE
FOOD PRICE PRESSURES
What's the Beef- Food-Inflation Fears
|Cattle prices are soaring toward records, pushing up beef
prices in stores, with gains fueled by rising appetites globally
and a dwindling U.S. herd.
Diageo Profit Growth to Trail Pernod as U.S. Consumers Shun Premium Liquor
The Fed Can Create Money, Not Confidence
Bonds Aren't The Only Asset Class Sucking In Investor Money These Days...BInsider
As U.S. treasury yields sink further, the 10-year even
broke below 2.5% today, U.S. stocks are taking it on the chin.
Fund flows continue to massively favor bonds over U.S. stocks.
Yet as U.S. stocks struggle to hang on, it's peculiar how some
stock markets are on fire these days.
For example, Indonesia's stock market hit a new high just a
few days back. Other Southeast Asian stock markets are
approaching multi-year highs as well. In South America,
Brazil's Bovespa Index is close to re-taking its pre-crisis
high, and Argentina's Burcap Index has already broken above
Here's a clue as to what's going on -- According to EPFR,
emerging markets funds attracted $2.2 billion of investor
inflows during last week alone, which means that $34.5 billion
has flowed into emerging market funds year-to-date, shown in
light blue below. Note these emerging market stock inflows
have come as U.S. stock funds have seen outflows. The
current global malaise is sending investors into bonds and
nations like Indonesia or Brazil, which makes for a
peculiar combination of safe-havens since these far flung
nations were considered higher-risk economies not too long
Argentina Moves to Seize Newsprint Firm
|Argentina's government pushed forward in a campaign to wrest
control of the country's largest newsprint-paper provider in a
move top local newspapers called a brazen attack on press freedom.
FLASH CRASH - HFT - DARK POOLS
Market insiders blame 'fat finger failure' for unusual stock swings
VIDEO TO WATCH
QUOTE OF THE WEEK
|To paraphrase Oscar Wilde
know the price of everything but the value of nothing.