SKY News Summary 05-20-10
You would never know it from the market, but today’s economic indicators are positive. The CPI, the Philadelphia Fed report, and the Leading Indicators should be reasons to cheer. The negatives are the drop in mortgage applications, which can be explained by the stimulus expiration, and the uptick in the unemployment claims number which is still significantly less than last month’s 4-week moving average.
According to the firms polled for this month’s Philadelphia Fed Business Outlook Survey, regional manufacturing activity continues to expand. Firms reported some expansion of overall employment again this month. The survey’s broad indicators of future activity continue to suggest that the region’s manufacturing executives expect growth in business over the next six months. More firms reported an increase in employment (21 percent) than reported a decline (17 percent). The workweek index declined slightly but has now remained positive for seven consecutive months. The future general activity index remained positive for the 17th consecutive month, although it fell from 44.2 in April to 37.0 this month. The future employment index increased 8 points and is at its highest reading since May 2004.
http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2010/bos0510.pdf
In the week ending May 15, the advance figure for seasonally adjusted initial claims was 471,000, an increase of 25,000 from the previous week’s revised figure of 446,000. The 4-week moving average was 453,500, an increase of 3,000 from the previous week’s unrevised average of 450,500. This increase sounded alarms in market news today, but it should be remembered that last month’s moving average was 460,000. The advance number of actual initial claims under state programs, unadjusted, totaled 407,940 in the week ending May 15, a decrease of 1,819 from the previous week. There were 540,925 initial claims in the comparable week in 2009.
http://www.dol.gov/opa/media/press/eta/ui/eta20100682.htm
The Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending May 14, 2010 showed, ‘“Purchase applications plummeted 27 percent last week and have declined almost 20 percent over the past month, despite relatively low interest rates. The data continue to suggest that the tax credit pulled sales into April at the expense of the remainder of the spring buying season. In fact, this drop occurred even as rates on 30-year fixed-rate mortgages continued to fall, and at 4.83 percent are at their lowest level since November 2009,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “However, refinance borrowers did react to these lower rates, with refi applications up almost 15 percent, hitting their highest level in nine weeks.”’
http://www.mortgagebankers.org/NewsandMedia/PressCenter/72905.htm
On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in April, the U.S. Bureau of Labor Statistics reported today. The index for all items less food and energy was unchanged.
http://www.bls.gov/news.release/pdf/cpi.pdf
Conference Board Leading Economic Index declined 0.1 percent in April, but the Board’s Coincident Index, a measure of current economic activity, rose 0.3 percent, and the Lagging Economic Index increased 0.1 percent in April.
http://www.conference-board.org/pdf_free/economics/bci/blumrus.pdf
Sources: Conference Board, BLS, MBA, DOL, Phili Fed. websites
SKY News Summary 01-05-010
Pending home sales and new construction spending weighed down good economic news on consumer spending and manufacturing. Congressional waivering on the extension of the popular homebuyer’s tax credit caused prospective homebuyers to postpone purchases pending further clarity on the issue.
According to NASDAQ, December’s ISM manufacturing report showed the headline composite index at 55.9, well over the 53.6 reading in November. (A score of 50 would mean no growth). New orders increased more than 5 points, reaching 65.5. Ongoing production continues to be strong, at 61.8. The employment index rose more than 1 point to 52.0.
http://www.nasdaq.com/asp/econodayframe.asp?page=http://anasdaq.econoday.com/byweek.asp?cust=nasdaq
Construction spending during November was not strong. The Department of Commerce’s estimate showed a 0.6 percent drop in spending which was exacerbated by a significant downward revision in October’s estimate of $905.6 billion. The November figure is 13.2 percent below the November 2008 estimate of $1,037.3 billion. This year’s decline was mainly due to a drop in private residential construction which was 1.6 percent below the revised October estimate of $254.9 billion.
http://www.census.gov/const/C30/release.pdf
ICSC-Goldman reports stronger sales in the week ending January 2, 2010. Weekly sales were up 1.5 percent with year-over-year sales at 2.5 percent.
The NRA’s Pending Home Sales Index fell a substantial 16.0 percent to 96.0 in November as purchasers expected the first-time buyer tax credit to expire. Of course the credit was extended, but not until too late. ‘Lawrence Yun, NAR chief economist, said “It will be at least early spring before we see notable gains in sales activity as home buyers respond to the recently extended and expanded tax credit,” he said. “The fact that pending home sales are comfortably above year-ago levels shows the market has gained sufficient momentum on its own. We expect another surge in the spring as more home buyers take advantage of affordable housing conditions before the tax credit expires.”
Buyers who have a contract in place to purchase a primary residence by April 30, 2010, have until June 30, 2010, to finalize the transaction to qualify for the tax credit of up to $8,000 for first-time buyers and $6,500 for repeat buyers.’
http://www.realtor.org/press_room/news_releases/2010/01/pending_surge
In company news, Louis Chênevert succeeded George David as the eighth Chairman of United Technologies.
http://www.utc.com/utc/News/News_Details/2010/2010-01-04.html?page=1&year=0
Sources: NRA, ICSC, Census, UTC, and NASDAQ websites.
SKY News Summary 11-05-09
Economic news was mostly positive this week with consumer spending, mortgage applications and productivity showing signs of improvement. Commercial real estate and employment continue to be weak.
The big news from the Mortgage Bankers Association was that the Refinance Index for the week ending October 30, 2009 increased 14.5 percent from the previous week due mainly to a 7 b.p. drop in the average 30-year mortgage rate to 4.97 percent. The Market Composite Index increased 8.2 percent from one week earlier.
http://www.mbaa.org/NewsandMedia/PressCenter/70843.htm
However, commercial and multifamily mortgage loan originations for the third quarter of 2009 were 12 percent lower than during the second quarter of 2009, and 54 percent lower than during the same period last year, according to the Mortgage Bankers Association’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations.
“Tight credit conditions coupled with scant demand for new loans meant that commercial and multifamily mortgage originations remained low in the third quarter,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research.
http://www.mbaa.org/NewsandMedia/PressCenter/70862.htm
The Bureau of Labor Statistics will release new employment numbers on Friday, which based on the numbers released today by ADP, should show continued improvement. ADP’s payroll count decreased 203,000 from September to October 2009 on a
seasonally adjusted basis, compared to a 227,000 decrease in September. October was the seventh consecutive month during which the decline in employment was less
than in the previous month. Monster’s employment index also showed improvement, rising 1 point in October. Much of the growth shown in the Monster report was in the healthcare and public administration sectors. These numbers add credence to the Department of Labor’s initial jobless claims figures for the week ending October 31 which indicate that initial claims dropped 20,000. According to the same report, continuing claims fell by 68,000.
http://www.adpemploymentreport.com/pdf/FINAL_Report_October_09.pdf
http://www.dol.gov/opa/media/press/eta/ui/current.htm
Productivity increased at a 9.5 percent annual rate during the third quarter of 2009, according to the U.S. Bureau of Labor Statistics. Some of this increase is due to layoffs at auto plants at the same time cash-for-clunkers ramped up production. The manufacturing sector’s productivity grew 13.6 percent in the third quarter of 2009, as output increased 7.7 percent despite a 5.2 percent decrease in hours worked. This was the largest increase in the quarterly productivity series, which begins in 1987.
http://www.bls.gov/news.release/prod2.nr0.htm
The Treasury’s quarterly refunding included news that 20-year TIPS are being replaced with 30-year TIPS, which will be auctioned semiannually in January and August. The first 30-year TIPS auction will be on Monday, February 22, 2010.
http://www.treas.gov/offices/domestic-finance/debt-management/quarterly-refunding/11-04-2009/Nov%202009%20FINAL%20Statement%20747am.pdf
The Federal Open Market Committee determined that economic activity has continued to pick up. Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
http://www.frbatlanta.org/bank_info/circ_router.cfm
Spectra Energy 3Q2009 results:
http://www.spectraenergy.com/news/releases/2009/nov/20091105_01.pdf
Louis Chênevert’s (President and CEO of UTC) presentation at Goldman Sachs Global Industrials Conference
http://www.utc.com/utc/Static%20files/Investor_Relations/2009-11-04_goldman.pdf
Cisco Q1FY10 Earnings Conference Call:
http://files.shareholder.com/downloads/CSCO/711897928×0x329571/49bc32b9-fe79-4679-a4b5-cdb383f8c1bf/Q1FY10%20Earnings%20Slides%20without%20Guidance_FINAL.pdf
Sources: Federal Reserve Atlanta, UTC, Cisco, Treasury, BLS, DOL, ADP, and MBAA websites.
SKY News Summary 11-03-09
The ICSC-Goldman Sachs chain store sales index for the week ending October 31 rose by 0.1% from the prior week and increased by 1.9% year-over-year. This was the sixth-consecutive sequential week-over-week gain.
http://www.icsc.org/homepage/research_article.php?id=60
Berkshire Hathaway will buy the remaining 77.4% of Burlington Northern Santa Fe Railroad for $100 per share in cash and stock. On Nov. 2, 2009, the transaction is valued at approximately $44 billion, including $10 billion of outstanding BNSF debt, making it the largest acquisition in Berkshire Hathaway history.
http://www.berkshirehathaway.com/news/NOV0309.pdf
http://www.bnsf.com/investors/presentations/Bravo-Blue-IR-Presentation.ppt#386,3,Transaction Overview
Merck and Schering-Plough Corporation announced that they will complete their merger today. The companies will begin combined operations tomorrow, November 4, 2009. As previously announced, Schering-Plough will change its name to Merck and its common stock will trade under the ticker symbol “MRK” on the New York Stock Exchange.
Under the terms of the agreement, Schering-Plough shareholders will receive 0.5767 shares of the newly combined company and $10.50 in cash for each share of Schering-Plough. Each Merck common share will automatically become a common share of the newly combined company.
http://www.merck.com/newsroom/press_releases/corporate/2009_1103.html
According to the Wall Street Journal, Infratil Ltd., in consortium with the government-run New Zealand Superannuation Fund, is hoping to acquire Shell New Zealand’s refining and downstream distribution and retailing businesses. “Shell plans to sell about 15% of its global refining capacity, or about 600,000 barrels a day of capacity, in the next three years as part of a restructuring program aimed at increasing profitability and efficiency. The company agreed in September to sell its fuel and lubricant businesses in Greece for about 260 million euros ($176.1 million).”
http://online.wsj.com/article/SB10001424052748703740004574512524174621300.html?mod=rss_asia_whats_news
Texas Eastern Transmission, LP, a subsidiary of Spectra Energy, has completed expansion of its Texas Eastern system that will transport 150 million cubic feet per day of new Rocky Mountain natural gas supplies to Northeast markets. During the last seven years, Texas Eastern Transmission has expanded its system in the Northeast corridor by more than 15 percent and the system is now able to move approximately 4.5 billion cubic feet per day from Ohio to the Northeast
http://www.spectraenergy.com/news/releases/2009/nov/20091102_01.asp
An article in the Wall Street Journal entitled “America’s Natural Gas Revolution” by Daniel Yergin and Robert Ineson discusses the importance of unconventional U.S. gas that is transforming the energy market.
http://online.wsj.com/article/SB10001424052748703399204574507440795971268.html
I also discuss the importance of natural gas in my blog 7/18/08
There is an interesting interview with Mr. Yergin on CSPAN available at:
http://www.c-span.org/Watch/Media/2009/10/29/HP/A/24846/Daniel+Yergin+Author+The+Prize.aspx
The interview refers to an article in the Financial Times entitled “A crisis in search of a narrative” also by Daniel Yergin, published October 20 2009 available at:
http://www.ft.com/cms/s/0/8a82d274-bda9-11de-9f6a-00144feab49a.html
Johnson & Johnson announced a restructuring plan which is expected to increase its generate pre-tax cost savings of $1.4-$1.7 billion by 2011, with $800-$900 million expected to be achieved in 2010. Cost savings will be achieved primarily through position eliminations in a range of 6-7 percent of its global workforce.
http://www.jnj.com/connect/news/all/20091103_073000
Here is a good website for those of us wondering about long term care options for our parents or ourselves.
http://www.longtermcare.gov/LTC/Main_Site/index.aspx
UBS’ 3 Q 2009 Presentation:
http://www.ubs.com/1/e/investors.html
Sources: UBS, J&J, Financial Times, Wall Street Journal, Spectra, Merck, Berkshire Hathaway, Burlington Northern Santa Fe, and ICSC websites.
Today’s Banking Structure – What happened? How can it be fixed?
Today’s Banking Structure – What happened? How can it be fixed?
Background: In 1988, The Basel Committee, consisting of representatives from central banks and regulatory authorities of the G10 countries, Luxembourg and Spain, produced guidelines for bank capital. In essence, the committee, meeting in Basel, Switzerland, introduced a global standard that based capital needs on the weighted risk of assets. Assets, like cash, were given a zero risk weight, while mortgages generally were given a risk weight of 35-50%, and commercial loans, a risk weight of 100%.
In the 1990s bank regulators came to New England to review loan and balance sheet strengths after reviewing banks in Texas. Regulators were uncomfortable with New England banks’ heavy exposure to real estate. After banks wrote down their exposures, they implemented new risk-based capital standards of the Basil Accord. These new standards created incentives for banks to be active in the mortgage banking business and to focus on asset-based lending.
By pooling and securitizing different asset classes (car loans, mortgages, commercial loans, etc.) bankers could sell these loans to insurance companies, mutual fund companies, or even municipalities as bonds. Mortgages were broken into different categories – prime and sub prime – with prime loans meeting Fannie Mae and Freddie Mac guidelines levels. Sub prime, as a term, is often used to describe people with shaky credit scores that had to stretch to get a mortgage. But sub prime can also be used to describe borrowers who chose not to provide documents and full disclosure. These sub prime borrowers have lower FICO scores and higher interest rates than other borrowers. An article in the Wall Street Journal last December points out that about 61% of people who ended up with sub prime loans had “top-notch” credit scores. (See http://online.wsj.com/public/article_print/SB119662974358911035.html).
When the bank sold the packaged loans, as securities, it no longer carried the risk of the credit and was able to avoid allocating capital. Instead, the bank obtained a fee from selling the bond, as well as originating the mortgage. The bank might or might not service the loan, collecting the interest payments from the borrower and paying interest to the bond holder. The bond holder received a secure asset (people normally pay their mortgage or car loan) at a higher yield over U.S. Treasury bonds. And homeowners got their mortgages. The lender got the money from the bond holder and was able to lend this money again and again and again, now that no risk or capital was involved. Thus, the process accelerated and was driven by the consumer – either by the would-be homeowner that needed a way to finance that big house, or by the bond buyer that wanted a higher yield. In this process multiple regulators were involved at various levels. The states regulated mortgage originators, the SEC regulated the issuance of the bonds, the Federal Reserve and the FDIC regulated the banks so that no one regulator was overseeing the whole process. Everyone everywhere bought these bonds, from four towns in Norway (see http://www.iht.com/articles/2007/11/28/business/bank.php) to Merrill Lynch and Washington Mutual, to the Bank of Japan.
The problem: The homeowner was happy because he got his mortgage, the bond holder was happy because he got his high yield, and the banker was happy because he got his fee, without allocating capital. He could make as many mortgage loans as he wanted. Until…the bond market questioned the strength of the home mortgage market. With the bond market not interested in buying more bonds, bankers were left holding mortgages that weren’t saleable and, in turn needed more capital to hold these credits. The whole system collapsed on nothing more than a lack of trust and the expectation of future write-downs.
The fix: The solution lies in regaining trust by supporting capital markets with liquidity and greater trading activity. Federal Reserve Chairman Bernake has been taking steps to actively combat trust issues: His first steps tried to address the problems in the credit market. If bond investors are not interested in buying mortgages then bankers cannot make mortgages. So the Fed took steps to increase liquidity and expand types of collateral they would accept at the discount window. These steps reopened the bond market, increased the level of trust, allowing investors to trade securities. With a healthier credit market, bankers should be able to underwrite mortgages again.
The good news is that everyone everywhere bought these securitized loans, spreading the risk of default globally. But certainly, the problem of the U.S. banking industry will be most felt within the U.S. And most of the fixes in progress will take time to legislate and implement. In the interim, banks are getting capital injections so that lending does not cease altogether. So far, banks have raised nearly $100 billion in equity by various methods to continue making loans and build trust.
The trust and willingness to trade are probably more important than the legislation and regulatory changes that naturally follow a crisis. However changes in the works include:
o Treasury Secretary Paulson’s recommendation of the creation of a federal Mortgage Origination Commission to oversee the licensing of mortgage lenders.” (See http://www.forbes.com/2008/03/29/paulson-finance-reform-biz-wallst-cx_lm_0329paulson.html
o Congress and the administration, hoping to spur mortgage lending, have temporarily loosened restrictions on Fannie Mae and Freddie Mac as well as the Federal Reserve. The size of mortgages that Fannie and Freddie can guarantee was increased from $417,000 to as high as $729,750 in some areas. (See http://online.wsj.com/article/SB120805134086510643.html).
o At the same time, the Basel committee is looking at recommending stricter capital requirements for structured credit requirements like the mortgage packages that created the banking problem. (See http://online.wsj.com/article/SB120846965830924359.html ).
Whatever the legislation proves to be, two things remain certain: In the short term, banks will shy away from riskier loans, and we will be seeing and feeling the effects of the banking problem for many years to come.