Custom Search

Friday, November 2, 2007

Payrolls Surprise

U.S. Payrolls Rose 166,000 in October; Rate at 4.7% (Update3): “American employers added almost twice as many jobs as forecast in October, helping steer the economy clear of recession even as the housing slump deepens.

Payrolls climbed by 166,000 after a 96,000 increase in September, the Labor Department said today in Washington. The jobless rate held at 4.7 percent.”

Expect a bounce on this news this morning. Whether or not the bounce sticks is another matter entirely. Traders will eventually realize that these numbers strengthen Bernanke’s resolve not to cut rates again in December…

No time for a lengthy post today.

Thursday, November 1, 2007

Just Another Cut...

With oil and gold at record highs, the US dollar at record lows and the US economy still growing at a respectable rate, “Helicopter” Ben Bernanke cut rates again. Only this time he was more reluctant.

Fed May Be Done Cutting as Inflation Risk Increases (Update1): “Federal Reserve officials may be done cutting interest rates after voicing new inflation concerns and signaling they won't be surprised by further housing weakness.

Chairman Ben S. Bernanke and his colleagues cut the benchmark rate yesterday by a quarter point to 4.5 percent and said risks of higher prices and slower growth are “roughly” balanced. They warned that energy and commodity prices may place “renewed upward pressure on inflation.””

Brilliant. Just brilliant insight by the Fed. Each and every single one of their cuts is a direct inflation injection. There isn’t even much of a lag anymore. Cut and the dollar drops, commodities rise and import prices rise.

Proctor and Gamble announced their earnings and missed. Their explanation was simple: Rising input costs. Their solution was just as simple: Raise prices.

Exxon Mobile announced this morning with a similar story.

Exxon Mobil Profit Drops as Refining Margins Narrow (Update3): “Exxon Mobil Corp., the world's largest oil company, posted its biggest drop in quarterly profit in more than three years after equipment and power failures slowed gasoline output and refining margins narrowed.

Third-quarter net income fell to $9.41 billion, or $1.70 a share, from $10.5 billion, or $1.77, a year earlier, Irving, Texas-based Exxon Mobil said today in a statement. Per-share profit was 4 cents below the average of 16 analyst estimates compiled by Bloomberg, sending the company's stock lower.

Retail gasoline prices in the U.S., the world's biggest market for the fuel, fell almost 6 percent. At the same time, oil rose, squeezing the gap between crude costs and refined fuel prices. That margin, called a crack spread, and production disruptions outweighed gains from record oil prices.”

Input prices (crude oil) rose much faster than output prices (the consumer good gasoline). Since crude price strength is a result of both a weakening US dollar and increased geopolitical risk, it is likely that crude won’t fall substantially in the near future. Instead, expect crack spreads to blow out shortly with the predictable result of a sudden dramatic increase in gasoline prices at the pump.

“The profit decline was the largest for Exxon Mobil since the first three months of 2004, when oil averaged about $35 a barrel, less than half its current price.”

Credit Suisse Profit Falls After Debt Market Swings (Update5): “Credit Suisse Group, Switzerland's second-largest bank, said it's “too early to predict” an end to the credit-market swings that caused $1.9 billion of writedowns and the first profit decline in a year.

Net income fell 31 percent to 1.3 billion Swiss francs ($1.1 billion), or 1.18 francs a share, in the third quarter, the Zurich-based bank said today. Credit Suisse stock fell the most in almost three months, pulling European bank shares lower.”

Since the real estate bubble has yet to hit bottom, it is safe to assume that the ‘credit market swings’ are far from over.

“The size of the writedowns is equal to about 5.2 percent of the company's 42 billion francs in shareholders' equity, or assets minus liabilities.”

We are talking about real money here. Writedown’s of this size have the knock on effect of severely curtailing the bank’s activities… with the riskiest activities getting the axe first.

“While revenue fell 15 percent to 6.8 billion francs, the bank cut personnel expenses by 30 percent to 2.4 billion francs.”

Expect more, serious job losses from the financial sector as a whole.

Deutsche Bank Shrinks Bonus Pool After Writedowns (Update1): “Deutsche Bank AG, Germany's biggest bank, shrank its bonus pool after 2.16 billion euros ($3.12 billion) of losses and writedowns linked to the U.S. subprime collapse led to the securities unit's first loss in five years.

Deutsche Bank cut personnel costs at the corporate and investment bank by 87 percent in the third quarter by taking back some funds set aside for bonuses in the first half, Chief Financial Officer Anthony di Iorio told analysts on a conference call today. The stock rose 3.7 percent in Frankfurt trading.”

Jobs cuts and pay cuts. Nothing like satisfying the shareholders at the expense of the employees to improve both moral and productivity…

Citigroup Shares Fall to Four-Year Low After Analyst Downgrades: “Citigroup Inc., the largest U.S. bank, fell to the lowest in four years in New York trading after a CIBC World Markets analyst downgraded the stock and said the bank may cut its dividend or sell assets to shore up capital.”

Surprised? Mish saw this coming in his October 19th post Enron Accounting at Citigroup. Wait, it will get worse… much worse.

“The ratio of Citigroup's tangible equity to tangible assets fell to 2.8 percent, the lowest in decades and half the average for its peer group, Whitney said.

Citigroup's tier 1 capital ratio, a measure used by regulators to make sure banks have enough cash to cushion losses, fell to 7.4 percent at the end of the third quarter from 8.64 percent at the same time last year.”

You definitely don’t want to be the weakest of the pack going into this perfect economic storm… While nature has a way of culling the weak, capitalism accelerates that process and has the nasty habit of generating serious collateral damage for good measure.

Radian Posts First Loss as Home Slump Boosts Claims (Update3): “Radian Group Inc., the third-biggest U.S. mortgage insurer, reported a loss of $703.9 million, the largest yet in an industry roiled by claims from failed home loans. The company fell 15 percent in New York trading.

Radian had a third-quarter loss of $8.78 a share, compared with a year-earlier gain of $112 million, or $1.36 a share, joining larger rivals, MGIC Investment Corp. and PMI Group Inc. in reporting its first quarterly loss as a publicly traded company. Radian, based in Philadelphia, wrote down its $468 million stake in Credit-Based Asset Servicing and Securitization LLC, owned jointly with MGIC, it said today in a statement.”

No worries though, Countywide said last week that they foresee a profitable next quarter… so that should definitely help the mortgage insurance industry. >grin< “The worst U.S. housing slump in 16 years deepened as homeowners with private mortgage insurance defaulted on 22 percent more loans in September than a year earlier, according to an industry trade group. Falling home prices make it harder for struggling homeowners to sell or refinance their property and for banks to cover their loans in a foreclosure sale. The insurers help lenders recoup losses.” Oh. Never mind. Consumer Spending in U.S. Rose Less Than Forecast (Update5): “Consumer spending in the U.S. rose less than forecast in September as house prices fell and fuel expenses climbed.

The 0.3 percent increase followed a revised 0.5 percent gain in August that was smaller than previously reported, the Commerce Department said today in Washington. The Federal Reserve's preferred measure of inflation rose 1.8 percent from a year ago, matching economists' estimates.”

The housing ATM has been shut off for quite a while now and the credit card ATM is reaching saturation (See yesterdays post). Construction related and financial industry job losses should start mounting rapidly now…

U.S. ISM Manufacturing Index Fell More Than Forecast (Update2): “Manufacturing in the U.S. slowed more than forecast in October as factories received fewer orders and production contracted, an industry report showed today.

The Institute for Supply Management's factory index fell to 50.9, the lowest in seven months, from 52 in September. Readings greater than 50 signal expansion.

Manufacturing is on the verge of stalling as the deepening housing slump weakens demand for construction equipment, furniture and appliances, economists said. Overseas growth and a weaker dollar are boosting exports at firms including DuPont Co. and Agco Corp., helping avert a broader factory slump.”

Getting close that magically swing point of 50 where things finally and officially go into ‘contraction’ mode.

Chrysler to Cut Up to 11,000 Jobs, Drop 4 Models (Update1): “Chrysler LLC said it will eliminate as many as 11,000 more hourly and salaried jobs and scrap four models as the automaker deepens cuts under new owner Cerberus Capital Management LP.

The job reductions include 8,500 to 10,000 hourly and 1,000 salaried positions, and will occur through next year, the Auburn Hills, Michigan-based company said in a statement today. They include trimming shifts at two plants in Michigan and one each in Illinois, Ohio and Ontario.”

I point out this story because the market loves leveraged buyouts. The real world effects of LBO’s however, is far less desirable in the short run. Each and every single LBO results in massive job losses. In part this is done to legitimately restructure the company, but also to pay the carrying costs of the debt required to finance the deal. On the job front, the last few years of LBO mania have yet to fully manifest themselves. Expect more of these headlines, especially as some of the over hyped and over leveraged LBOs start to get into some trouble as both the US and global economies slow…

Wednesday, October 31, 2007

Don't Do It Bernanke!

U.S. Economy Grew at a 3.9% Annual Rate in Third Quarter: “The U.S. economy unexpectedly accelerated in the third quarter as increases in exports, consumer spending and business investment made up for another plunge in home construction.

Gross domestic product grew at an annual rate of 3.9 percent in the quarter, the most since the first three months of 2006, compared with a 3.8 percent pace in the prior quarter, the Commerce Department said today in Washington. The Federal Reserve's preferred price gauge rose more than forecast.”

Surprisingly robust growth AND inflation. Any cut, especially a 50 basis point cut today would be madness. No amount of rate cuts will alleviate the pain caused by the bursting of the residential real estate bubble. Long rates, which are the benchmarks for most mortgages, will not drop in lockstep with each cut… in fact there is the very real possibility that at some threshold level, they will RISE with each cut. Each cut will also result in an INCREASE in inflation as the dollar spirals ever downward and import prices therefore eventually rise. Important input costs, namely commodities too would accelerate their parabolic rises…

Obscenely low rates, coupled with lax credit standards, were the biggest causes of this credit and asset price bubble. Obscenely low rates are not the cure.

Fed Seeks to Be `Nimble' as Spending, Housing Diverge (Update2): “The Federal Reserve, with consumer spending and housing figures sending conflicting signals, is likely to reduce interest rates today while leaving itself leeway either to take back the move or cut more.”

A 25 basis point cut followed by some strong jawboning on inflation concerns is the most probable strategy that Bernanke will announce at 2:15 today.

“Some investors are counting on lower rates, and a disappointment today may roil stocks, increasing the risk that the six-year expansion will end. Traders see a 94 percent chance of a quarter-point move today, according to futures quoted on the Chicago Board of Trade.”

The junkies are eagerly awaiting any cut… and it is hard to imagine that a mere 25 basis points followed up by some tough talk won’t be greeted with disappointment.

“At the same time, cheaper borrowing costs may stoke consumer prices, already pressured by a weakening dollar and record oil prices. After the Fed's half-point reduction on Sept. 18, commodities prices jumped and yields on Treasury notes linked to inflation increased.”

A rate cut will be ENTIRELY offset by decreases in the dollar and increases in commodity prices… the September cuts proved that.

Treasuries Fall as Reports Show Faster Job Creation and Growth: “Treasuries fell after reports showed companies added more employees to payrolls in October than forecast and the U.S. economy unexpectedly accelerated in the third quarter.

The data led some traders to pare bets that the Federal Reserve will reduce its target interest rate a quarter- percentage point today to prevent the housing slump from causing a recession.”

Once can only hope that Bernanke will find the courage to pause today.

Defaults on Insured Home Mortgages Rise 22 Percent (Update1): “U.S. homeowners defaulted last month on 22 percent more privately insured mortgages than a year earlier, an industry report today showed.

The number of insured borrowers more than 60 days late on their payments climbed to 54,699 in September from 44,791 a year earlier, according to monthly data from the Washington-based Mortgage Insurance Companies of America. The defaults represented a 4.9 percent increase from a revised August number, while 2.9 percent fewer loans returned to good standing.”

The deterioration is accelerating. Which is INCOMPATIBLE with this:

MasterCard Profit Rises 63 Percent as Purchases Rise (Update1): “MasterCard Inc., the second-biggest payment-card network, said profit climbed 63 percent, beating analysts' estimates, as customer spending increased. The shares rose as much as 8 percent in premarket trading.

Third-quarter net income rose to $314 million, or $2.31 a share, from $193 million, or $1.42, a year earlier, the Purchase, New York-based company said today in a statement. MasterCard earned $1.80 a share before gains of $70 million on the partial sale of its stake in Redecard SA in Brazil. The company said it will more than double the size of its share repurchase program.”

With prices declining and rapidly rising mortgage defaults the American Super Consumer is desperately swiping their plastic to delay the inevitable as in this story:

Stressed borrowers use plastic to delay default: “This may be Johari Reeves' last chance to catch up on her mortgage payments. The credit cards, she'll worry about later.

"We fell behind (with the mortgage) and twice we agreed to new repayment schedules that didn't work out," said the 31-year-old, a compliance officer at a small bank on Chicago's blue-collar South Side. "It's been a lot of stress. But this time, if all goes well, we should be able catch up."

In August 2006, Reeves and her husband bought a $214,000 home with almost no money down, leaving them with a monthly payment of $1,636 -- higher than they planned on, especially with her husband's furniture sales job largely commission-based and business not good due to the U.S. housing slowdown.

An attempt this spring at refinancing with another lender fell through, leaving them behind on payments and struggling.

But as part of her efforts to avoid defaulting on the mortgage, Reeves said she has "maxed out" all her credit cards, spending to the limit on basic needs. "Now all I'm doing is making the minimum monthly payments."

The Reeves were ‘advised’ by their ‘financial counselor’ Nancy Barba to do this. Any financial advisor that advocates using credit card debt to make your mortgage payments should be shot on the spot.

Not all of MasterCard’s results are suspect. The company is well diversified outside the US. But since the credit bubble was a global event, so will the consequences. The only differences will be the timing and the degree.

“MasterCard, which gets about half its revenue from customers outside the U.S., benefited as the dollar fell to a record low during the quarter. The shares have risen more than fivefold since Chief Executive Officer Robert Selander took the company public in May 2006, capitalizing on consumers' growing preference for credit and debit cards over cash and checks.”

All I can say is: Don’t do it Bernanke! Hold the line!

Tuesday, October 30, 2007

Sacrificing the Future for the Present

UBS Reports SF830 Million Loss on Debt Writedowns (Update4): “UBS AG, Europe's largest bank by assets, reported its first quarterly loss in almost five years after declines in the U.S. subprime mortgage market led to $4.4 billion in losses and writedowns on fixed-income securities.

The third-quarter net loss was 830 million Swiss francs ($712 million), or 49 centimes a share, compared with net income of 2.2 billion francs, or 1.07 francs, a year earlier, Zurich- based UBS said in a statement today. UBS shares fell as much as 1.9 percent after the loss exceeded analysts' estimates.”

UBS is trading below both the 200 day and 50 day EMA near important support around the $51 area. Failure to hold this area will set the stage for further price weakness in UBS specifically and the entire financial complex in general. Pay close attention.

“The slumping U.S. housing market, which cost the world's biggest securities firms and banks more than $30 billion in bad loans and trading losses in the quarter, may lead to further writedowns, UBS reiterated today. Chief Executive Officer Marcel Rohner, who replaced Peter Wuffli four months ago, said losses at the investment bank outweighed record earnings at UBS's wealth management operation, the world's biggest.”

The US housing market still has to get significantly worse AND the same real estate bubbles in Europe, such as in Spain and in the UK, have yet to burst. Therefore, expect rapidly deteriorating earnings and balance sheets from the entire financial industry as they were all involved in the easy credit party.

S&P/Case-Shiller Home Prices Fell 4.4% in August (Update1): “Home prices in 20 U.S. metropolitan areas slumped in August by the most in at least six years, a private survey showed today.

Values dropped 4.4 percent in the 12 months that ended August, an eighth consecutive decline, according to the S&P/Case-Shiller home-price index, which has data back to 2001.

The figures reinforce the view among Federal Reserve officials and Treasury Secretary Henry Paulson that the housing slump has further to go. Near-record inventory levels suggest sellers will continue to lower prices, posing a threat to consumer spending because homeowners will have less equity to borrow against.”

The fall in home prices is showing no real signs of a slowdown or turnaround. Recent price cuts are not enough… these prices are NOT market clearing. Inventory continues to accumulate rapidly. Only further price declines can resolve this situation, both by completely discouraging the construction of new supply and by luring side lined buyers back into the market.

U.S. Tosses Lifeline to Lenders Using Home Loan Banks (Update1): “Banks shut out of the market for short-term loans are finding salvation in a government lending program set up to revive housing during the Great Depression.

Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.”

Governments always make bad situations worse:

“To meet the sudden demand, the institutions sold $143 billion of short-term debt in August and September, according to the FHLBs' Office of Finance. The sales pushed outstanding debt up 21 percent to a record $1.15 trillion, an amount that may become a burden to U.S. taxpayers because almost half comes due before 2009.

The home loan banks, known as FHLBs, are increasing risks to taxpayers by assuming the role as a lender of last resort, said Wallison. That's the job of the Federal Reserve, he said.”

The Federal Reserve is much worse… they just ‘tax’ you a little bit differently. Its just called INFLATION.

“A loss of confidence in the companies could prompt investors to dump FHLB debt, potentially causing the collapse of one or more banks, according to Wallison and lawmakers including Representative Richard Baker of Louisiana. If others were unable to meet the liabilities, taxpayers would be on the hook, they said.”

Then the Fed would cut rates, inject liquidity and RE-INFLATE everything… the only thing you’d lose is your home, your purchasing power as the US dollar vaporizes and your life’s savings…

O'Neal Writedown Erased 20% of Shareholder Equity (Update1): “At Merrill Lynch & Co., a lot more was lost than the $2.24 billion, or $2.82 a share, former Chief Executive Officer Stan O'Neal said would be subtracted from the third quarter.

The real damage to shareholders came with Merrill's $8.4 billion writedown. It is the biggest in the history of Wall Street and wiped out four quarters of growth in shareholders' equity, according to Merrill's published figures. The charge, mostly for collateralized debt obligations and subprime mortgages, left the New York-based company with $38.8 billion of assets minus liabilities.

Losing “20 percent of shareholders' equity in one fell swoop is a serious blow,” said Robert Willens, the accounting analyst at Lehman Brothers Holdings Inc. in New York. “It might take them two to three years to earn that capital back.””

The most immediate impact is the rather sudden reduction in activity, especially risky activity, which a 20% reduction of shareholder equity will force on Merril Lynch. Since this equity is leveraged many many times over, this reduction in equity will result in a curtailing of activity many many times larger. Multiply this out through the entire financial industry as one player after another is forced to do the very same thing and you have yourself a sudden reduction in BOTH liquidity and activity. Let the global de-leveraging begin!

In a vain attempt to avoid this necessary rebalancing and retrenchment, the Federal Reserve will blindly continue to sacrifice your economic future to prolong the present ‘high’.
(I'm still looking into the mysterious spike in the Fed Funds rate on 10/25/07.)

Monday, October 29, 2007

WTF Happened to the Federal Funds Rate?

Hat tip to Ticker Sense for noticing the ominous spike in the Fed Funds rate on 10/25/07 to 15%. The data is here.

“Last week some $75 million of "fed funds" (that is, interbank overnight credit) was transacted at a rate of 15%, and "a bunch" went through in the low to mid 7s.

No, I didn't mistype that. You can find the actual data at this link.

Originally I, and everyone else, assumed that the "high" was an error. A bad print. That there was no chance this was "real".

It was. Yes, "EFF" (effective fedfunds) was right where "it should be" according to The Fed - across all transactions.

Now let's think about this one for a minute here folks.

"Someone" transacted a $75 million overnight loan that they needed to meet reserve requirements at an absolutely outrageous interest rate - about what you pay for credit card money. A bunch of "someone else's" transacted a bunch at 7-7.5%.

They had the discount window available to them at 50 bips of penalty to EFF, which is a direct overnight loan from The Fed, but didn't use it.

Are you going to try to tell me that some banks actually paid nearly 10% more as an interest rate than they had to?

On what planet are we having this discussion?

There is only one possible explanation for this particular behavior - The Fed would not take the alleged "collateral" these institutions tried to put up, and the market didn't think it was worth much either, even on an overnight basis, and as such "the market" priced the interest rate similar to how Guido would for your "short-term" loan!

This raises the spectre of something truly terrifying in the credit markets –

The Fed may be inches away from losing control over the FF Rate entirely!”

As of yet, I have no idea how serious these developments are and will be doing research on the matter. I hope to follow up with a more detailed post after market close.