Re-Establishing the Baseline: Econ & Mkts Ain't Look'n That Good ! (UPDATES !!)
After hammering away at the Finance Industry, the implications and the structural reforms there's several directions we ought to go. We could look at the industry specifics for Finance or shift gears to other industries (Autos come to mind for some reason but we could re-iterate and wrap-up our look at Technology as well). Or we could really pop up and look at the core causal breakdowns in business management which lie at the root of almost all of this. But with a three week runup in the markets apparently loosing steam plus the the "ray of sunshine" economic reports it's time to re-set the baseline back to reality yet again. The readings cover the US and World Outlooks (Janet Yellen' speech is a thing of professional beauty if scary and the OECD has just lowered it's worldwide outlook significantly) and the Market situation. Just to review the bidding remember it was the Pandit Put that got this whole thing rolling, followed by historically unprecedented Fed quantitative easing (Prof. Ben Addresses the Lizard-brain: Steady-hands Vs DiscomBOOBulations (Update)) and carried further by Geithner's two major proposals.(Helmet Laws vs Adult Supervision: Re-Regulation & Finance Industry Futures) But the market was already loosing it's upward momentum. The real reason we want to focus here is that the headlines and mis-interpretations remind us of this exact time last year and in the readings you'll find some older posts excerpted to remind us of how distortionate the analysis was then, as well as panglossian in an extreme. Our best judgement is that we're back to that, so be warned. And also remember that in these circumstances policies and politics are as much a key driver as anything else; this week's G-20 meeting (which ain't going well) will be a major driver. (Sounds of Angry Men, Whimpering Politicians & the Global Crisis)
Economic Outlook
Contrary to the headlines NONE of the economic data really offered up much in the way of encouragement, especially when you look at the data using our preferred YoY% change measurements. One ostensibly favorable WSJ headline was pretty optimistic but when you read the story it was anything but ! Fortunately the YoY change meme is now widespread enough that most of the reporting includes it so you can see for yourselves. The top part of this graphic shows the high-frequency indicators that got some excitement but aren't encouraging at all. Turndown points are marked in yellow while tipping points are noted in red. The thing to really notice is the cyclic structure with New Home Sales falling off the cliff, then Autos and now Capex (durable good x-aircraft). Besides Capex the other stimulating headline was about Personal Consumption where the monthly number was "o.k." but in this YoY view you can see where PCE and real sales are still terrible; as bad as they've been in the post-war period.(Previous posts here and here).What got everybody going was the apparent flattening of the rate of decrease. Which leads to a key point that Yellen makes - there's changes in rates and changes in levels. While the rate of decrease may be slowing the level of activity is still bad. That's NOT a recovery or even close you see in those charts.
Markets
Like we said everybody's bottom calling but if you look at this chart thru last Friday you can see where the markets (the whole proxied by the SPX) is really running out of steam indeed. Again, of course, IOHO. Sorry if this is confusing but it's four different "studies" of the SPX compressed on one page so you can see multiple timeframes simultaneously. The UR corner shows a 30Min 15Day chart where you can the uptrend of the last three weeks loosing momentum while the LR chart uses something called a Fibonacci Fan to look at March on a daily basis. Notice that the runup kept tipping farther and farther over; that is hitting a lower and lower fan-line. The middle chart shows YtD for the SPX and how the technical indicators are giving off ambiguous signals; notice especially the yellow-circled Slow Stochastic Indicator which has stayed in over-bought territory thru last Fri. So far this week btw it's tipped over rather abruptly (threatening GM and Chrysler with bankruptcy didn't help but not only was that long over-due but the steam was leaking out anyway). The LH chart runs back to Nov. and what you see is that the longer-run downtrend is not only perfectly intact but that the recent rally ran right up against that downtrend and is failing. So much for bottom-calling and the end of surprises. Sucker's Rally indeed. Now the markets may run sideways here for a while but, again, compare it to last year when the de-coupling meme was still around and there was lots of bottom-calling as well. We especially enjoyed all the folks telling us that the worst of the credit market breakdown was over. In actual point of fact the markets are now starting to function after heroic efforts but credit is still widely unavailable.
Two other little details we'll call attention to. One is China's call for a new international standard currency and the other is something we've pointed out before - the impact of credit constriction and an economic downturn on oilfield investment and development. Even if, as we expect, economies perform poorly for several years and energy demand doesn't pick up very much demand will still exceed supply. Now that'll be an ugly situation for sure. 
UPDATES:
In case you missed it the OECD and the World Bank came out with new economic forecasts that severely reduced the outlook for the rest of the year and anticipated a very poor and extended recovery. The OECD/WB scenarios now is as bad as the worst case for the stress test. In other news Moody's anticipates unprecedented credit card defaults and corporate bond defaults/BKs as well. Below are the URL's for several key announements and in the readings section you'll find several major additions excerpted as well. There are two in particular we think are mandatory self-interest readings. One is the OECD vs Worst Case graphic from CalculatedRisk and the other is Todd Harrison's update on the investment outlook, from which we quote:
"January thought: The entire spectrum of industries, from finance to media to retail to philanthropy to academia, will be forced to reinvent themselves and the leaders coming out of this crisis won't be the same as the leaders that entered it. Update: We use the forest-fire analogy because it's so very apt, scary and dangerous, yet necessary for a fertile rebirthing. A snapshot of once-venerable icons such as General Motors (GM) , General Electric (GE) , Citigroup (C) and AIG (AIG) supports the notion that market leadership, and leadership within individual sectors, will look drastically different once this process of price discovery passes."
Here are the NEW URLs:
Despite Interventions Global Outlook Deteriorates (World outlook update survey from RGE Monitor)
Roubini: Go Ahead, Keep Dreaming of That "V-Shaped" Recovery(vidclip on Tech Ticker with Dr. Doom laying it out)
Comparison: OECD and "More Adverse" Scenarios(CR graphic comparison of new OECD outlook with stress test worst case)
Stress Test, Quarterly Forecasts for Unemployment and GDP (earlier graphic comparisons)
Asian Data Shows Severity of Slump
Has Housing Industry Hit Bottom Yet?
Credit card charge-offs hit record high -Moody's
10 Investment Themes for 2009, Revisited
This is enough material to call for a whole major new post, or re-threading them thru this one. But there was so much startling new news that confirms our basic arguments we wanted to put them in the context we already developed. The new excerpts are in a concluding section at the bottom of the readings. BUT...if you don't think this is worth really paying attention to we urge you to look at the 2010 OECD outlook and then think thru the implications for what Harrison is saying.
US Economic Outlook
The US and global economic outlook (Roubini Interview) However, in an intense presentation held yesterday in Milan at a meeting organized behind closed doors by Calyon Crédit Agricole, Dr. Doom gave a glimmer of hope: "there is possibly light at the end of the tunnel," he said, although with close teeth. That bottoming out however requires a number of conditions: it requires governments and central banks of the countries most affected by the worst recession since the Great Depression of 1929 – the United States, European Union, China and Japan in the first place - "to adopt anti-crisis measures that very aggressive and front loaded". What has been implemented so far, in terms of fiscal stimulus and monetary policies, including unconventional policies, is not enough. The severity of the crisis is such – “the world economy in danger of falling into the abyss of a near depression" to put it as Roubini says it - that resolving this crisis requires major policy efforts and timely and bold decisions by the governments. Dr. Doom had already foreseen a long and protracted U-shaped recession for the world economy when the prevailing view was of a short and shallow V-shaped recession for the US. Roubini yesterday made it clear that his estimate for the length of the recession in the U.S. is moving from 24 to 36 months, with an unemployment rate in the U.S. that is heading towards 10%. Its "U" in the meantime is worsening day by day. "If the Obama Administration and the rest of the world will not intervene in drastic manner, with anti-crisis fiscal and other policies even stronger than those announced, the" U "is likely to turn into a" L ", i.e into a near-depression." The forecasts by Roubini about the global economy are bleak. "Do you remember the saying that when the U.S. sneezes, the world catches a cold. Well now the United States have a severe chronic case of pneumonia."
The Uncertain Economic Outlook and the Policy Responses (Yellen). We are struggling to assess the effects of conditions we haven’t seen before, including a near-collapse of the financial system, and to predict the impacts of policies that haven’t been tried before, including an array of new Fed initiatives designed to improve conditions in private credit markets. I share the guarded optimism of most professional forecasters that the economy may begin to grow again within the next several quarters. But I must admit that I see considerable downside risk, and my confidence in this outlook is greatly diminished by the nearly unprecedented set of circumstances we face, circumstances that severely challenge our ability to use historical economic relationships to anticipate future developments. We face an extraordinarily uncertain future, and our main hope for economic recovery lies in the sorts of innovative and aggressive economic policy responses that are being carried out by Federal Reserve and federal government policymakers. We must use all available tools to fight off the significant forces for contraction now hitting the economy. You are well aware of how downbeat most of the economic news has been, despite some scattered positive signals. We are in the fifth quarter of recession and economic activity and employment are contracting sharply, with weakness evident in every major sector aside from the federal government. At the same time, financial markets remain highly stressed and the adverse feedback loop between the economy and the financial sector shows little sign of slackening. These negative dynamics create severe cash; and financial institutions are shrinking their assets to bolster capital and improve their chances of weathering the current storm. Such precautions may be smart for individuals and firms, but they intensify economic distress for the economy as a whole. With the caveat that my forecast is subject to exceptional uncertainty in the present environment, my best guess is similar to that of most forecasters, who expect to see moderately positive real GDP growth rates beginning later this year or early in 2010, followed by a gradual recovery. However, I am well aware that my views are strikingly more optimistic than those I hear from the vast majority of my business contacts. They tend to see conditions as dire and getting worse. In fact, many of them can’t believe I would even suggest what they see as such a patently rosy scenario! So why is it that so many of us who prepare forecasts seem to be more optimistic than many others? I think there are several reasons. First, as forecasters, we distinguish between growth rates and levels. It’s true that the Blue Chip consensus shows moderate positive growth rates in output in the second half of this year. But even so, the level of the unemployment rate would still rise throughout 2009 and into 2010. So, in this sense, the worst of the recession is not expected to occur until next year. And, even by the end of 2011, I would expect the unemployment rate to be above its full-employment level. So I wouldn’t call this a particularly rosy scenario.
Existing Home Sales: Turnover Rate (CalculatedRisk [CR]) It is correct that sales peaked in 2005, and have fallen steadily since then. And it is also correct that the rate of decline has slowed. However this doesn't suggest to me that "a bottom may be near" for existing home sales. The opposite it true. I think existing home sales will fall further. (note: much of this post is an update from earlier posts) This was an important disclosure in the National Association of Realtors (NAR) Existing Home Sales report: Lawrence Yun, NAR chief economist, said ... "[D]istressed sales accounted for 40 to 45 percent of transactions in February.” This is another reminder that the only reason existing home sales appear to have "stabilized" is because of the high number of REO sales. Sales excluding REOs have plummeted. I've argued before that REO resales are real sales and should be included in the NAR statistics, but I suspect these REO buyers might hold these properties longer than recent turnover would suggest. If these are owner occupied buyers, they have probably been waiting to buy, and they have saved a down payment and qualified under the tighter lending standards. They probably won't sell until they can make a reasonable profit to buy a move up home - and it will probably be a number of years before prices recover. Although slowing, the turnover rate is still above the median for the last 40 years and substantially above previous troughs. Both types of speculative buying are over for now. And the Baby Boomers have probably bought move up homes, and the next major move for the Boomers will be downsizing in retirement (still a number of years away). And finally - and probably a very important point - homeowners with negative equity, who manage to avoid foreclosure, will be stuck in their homes for years. All of the above suggests the turnover rate - and existing home sales - will fall further, perhaps much further.
- New Home Sales: Is this the bottom? [CR]
- New Home Sales Fell 41% in February 2009 (Big Picture)
- Commercial Property Faces Crisis
Banks Starting to Walk Away on Foreclosures City officials and housing advocates here and in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal — from legal fees to maintenance — exceeds the diminishing value of the real estate. The so-called bank walkaways rarely mean relief for the property owners, caught unaware months after the fact, and often mean additional financial burdens and bureaucratic headaches. Technically, they still owe on the mortgage, but as a practicality, rarely would a mortgage holder receive any more payments on the loan. The way mortgages are bundled and resold, it can be enormously time-consuming just trying to determine what company holds the loan on a property thought to be in foreclosure. In Ms. James’s case, the company that was most recently servicing her loan is now defunct. Its parent company filed for bankruptcy and dissolved. And the original bank that sold her the loan said it could not find a record of it. Experts suggest the bank walkaways are most visible in states where foreclosures are processed through the courts and therefore tend to be more transparent. Other states, like Indiana and New York, have court-mandated foreclosures, but roughly half of the states allow foreclosures to proceed without court intervention, making it difficult to accurately count the number of bank walkaways in recent months. The soft housing market and the vandalism that often occurs when a house sits empty are the two main factors influencing the mortgage holders’ decisions to walk away, said Larry Rothenberg, a lawyer for Weltman, Weinberg & Reis, one of the larger creditors’ rights firms in the country. “Oftentimes when the foreclosure starts out, it’s a viable property,” Mr. Rothenberg said, “but by the time it gets to a sheriff’s sale, it might not have enough value to justify further expense. We’ve always had cases where property was vandalized or lost value, but they were rare compared to these times.”
A Downturn Wraps a City in Hesitance Throughout the American economy, retrenchment is begetting retrenchment. Falling home prices, weak consumer spending, diminishing investment and a fresh reappraisal of risk are combining to bring more of each. Grim expectations about the future are becoming self-fulfilling prophesies, as nervous companies cancel investments and households defer purchases. This vengeful dynamic was the main problem that policy makers failed to tame nearly 80 years ago, when a banking crisis swelled into the Great Depression. As the Obama administration confronts what some economists describe as perhaps the worst downturn since then, the same constellation of forces appears at play. Even as stock markets have rallied in recent days on hopes that the latest government plan to rescue the banks can finally restore order to the financial system, this fundamental problem continues to constrict the economy. Credit remains tight for troubled households and businesses, while even those able to borrow often demur because they are afraid to invest and spend in the face of so much uncertainty. The needed ingredients to change this psychology are unclear, and history underscores the difficulties. Economists suggest the same forces now pushing the economy into a downward spiral must be reversed; housing prices must level off, stock markets stabilize and consumers — now deferring purchases of items like cars and appliances — must start to replace older models. Banks now confront accusations of clinging to their money, depriving the economy of growth, while the picture, as Mr. Powell attests, is more complicated. Even banks that are eager to lend find some of their best customers reluctant to extend themselves.
U.S. Economy Raises Tentative Hopes Just as the U.S. recession is set to become the longest since the Great Depression, some economic signs are encouraging, if tentative.April will mark the 17th month of the recession that began in December 2007, making it the lengthiest downturn of the post-Depression era. For the most part, forecasters don't see U.S. economic growth turning positive until early autumn, and even then, expect the unemployment rate to hit double digits this year or next. This week, though, has brought a spate of good economic news. Consumer spending rose marginally in February, the Commerce Department said Friday, as did consumer sentiment in a household survey by Reuters and the University of Michigan. The housing market also appears to have stabilized from its free fall, and an uptick in orders for big-ticket items is helping raise hopes of a future pickup in manufacturing. During a meeting with President Barack Obama and other bank executives Friday at the White House, Bank of America Corp. Chief Executive Ken Lewis and Northern Trust Corp. CEO Rick Waddell expressed cautious optimism that the economic downturn was either at or near the bottom of the cycle, according to people at the meeting. "There's growing evidence supporting the optimists' view, and I am surprised at that," said Robert J. Gordon, an economist at Northwestern University and a member of the National Bureau of Economic Research committee that is the official arbiter of when recessions begin and end. "I was sort of in the pessimists' camp until I started looking at things." He points to one indicator in particular with a remarkable track record: the number of Americans filing new claims for unemployment benefits. In past recessions, it has hit its peak about four weeks before the economy hit a trough and began to grow again. As of right now, the four-week average of new claims hit its peak of 650,000 in the week ended March 14. Based on the model, "if there's no further rise, we're looking at a trough coming in April or May," he said, which is far earlier than most forecasts currently anticipate. But a turn toward positive growth is not the same as a recovery, particularly now with the current 8.1% unemployment rate at a quarter-century high and marching higher by the month. Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Mass., says unemployment could hit 10.5% by late next year, even if the economy is growing at a 3% rate by that point. "What comes next, I'm afraid, will be the mother of all jobless recoveries," said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, N.J. "While we may emerge from recession from a statistical standpoint later this year, most Americans will be hard-pressed to tell the difference between a recession and recovery the next 12 months."
Q1 GDP will be Ugly (Calculated Risk) Earlier today the BEA released the February Personal Income and Outlays report. This report suggests Personal Consumption Expenditures (PCE) will probably be slightly positive in Q1 (caveat: this is before the March releases and revisions). Since PCE is almost 70% of GDP, does this mean GDP will be OK in Q1? Nope. I expect Q1 2009 GDP to be very negative, and possibly worse than in Q4 2008. Right now I'm looking at something like a 6% to 8% decline (annualized) in real GDP (there is significant uncertainty, especially with inventory and trade). The problem is the 30% of non-PCE GDP, especially private fixed investment. There will probably be a significant inventory correction too, and some decline in local and state government spending. But it is private fixed investment that will cliff dive. This includes residential investment, non-residential investment in structures, and investment in equipment and software. A little story ... Imagine ACME widget company with a steadily growing sales volume (say 5% per year). In the first half of 2008 their sales were running at 100 widgets per year, but in the 2nd half sales fell to a 95 widget per year rate. Not too bad. ACME's customers are telling the company that they expect to only buy 95 widgets this year, and 95 in 2010. Not good news, but still not too bad for ACME. But this is a disaster for companies that manufacturer widget making equipment. ACME was steadily buying new widget making equipment over the years, but now they have all the equipment they need for the next two years or longer. ACME sales fell 5%. But the widget equipment manufacturer's sales could fall to zero, except for replacements and repairs. And this is what we will see in Q1 2009. Real investment in equipment and software has declined for four straight quarters, including a 28.1% decline (annualized) in Q4. And I expect another huge decline in Q1. For non-residential investment in structures, the long awaited slump is here. I expect declining investment over a number of quarters (many of these projects are large and take a number of quarters to complete, so the decline in investment could be spread out over a couple of years). And once again, residential investment has declined sharply in Q1 too. When you add it up, this looks like a significant investment slump in Q1.
Profits Drop at Steepest Rate in 55 Years U.S. corporate profits fell by $250 billion in the closing months of 2008, a staggering decline that many businesses are still struggling to offset. Profits at corporations in the fourth quarter fell 16.5% from the previous quarter, the Commerce Department said Thursday. In the financial sector, profits fell by $178 billion -- and that figure doesn't reflect the industry's massive write-downs as the value of assets soured. The drop in pretax corporate profits was the steepest in 55 years. Compared with the same quarter in the previous year, the decline was more than 20%. "It's horrendous," said Joshua Shapiro, chief U.S. economist at forecasting firm MFR Inc. in New York. "It destroys the ability of corporations to pay salaries, invest in equipment and do everything else that helps the economy grow."
Underwriting Gains on Stimulus The government's programs to address the financial crisis didn't stop the first-quarter decline in the stock market, but they did help spur a rebound in Wall Street underwriting. The dollar volume of new stocks and bonds issued during the first quarter rose 27% from last year's first quarter and 94% from the fourth quarter of 2008, when markets were largely frozen. In all, about $1.7 trillion in new securities were sold in the latest three months, according to data provider Dealogic.Fees earned by Wall Street firms stayed subdued, in part because companies around the world were reluctant to sell stock at prices far below what they could have received a year or two ago. Global fees earned from stock and bond deals was an estimated $6.1 billion, down 12% from the first quarter of 2008 but up 30% from the fourth quarter. "With the political and financial uncertainty," large parts of the market "are in hibernation," said Jody Drulard, managing director at Dealogic. "The investment-grade bond market is picking up a lot of the slack. The problem is it's the only capital market running at a normal pace." Dealogic expects heavy corporate bond issuance in 2009, in part because $3 trillion in debt is coming due and companies are reluctant to use short-term funding that can dry up nearly overnight. New securitized bonds are still few and far between, often requiring government support, which puts pressure on some companies with investment-grade bond ratings to sell straight debt. Debt markets have been "wide open for well-recognized, well-capitalized," issuers, said Paul Spivack, who runs the investment-grade debt syndicate at Morgan Stanley. Those issuers benefited from the attention of both traditional bond investors as well as participants that previously focused on other assets such as commodities and stocks. The government's recent moves to keep interest rates low while buying up distressed bonds helped support the credit markets and bond issuance, said Tyler Dickson, head of global capital-markets origination at Citigroup. "There's been a meaningful thawing in the capital-markets freeze," he said.
World Economic Outlook
WTO Predicts Global Trade Will Slide 9% This Year The World Trade Organization issued the most pessimistic report on global trade in its 62-year history, forecasting a drop of 9% or more in 2009. Monday's prediction is worse than previous estimates by the WTO, the World Bank and independent economists, and adds to evidence that the financial crisis is badly hurting trade. "Many thousands of trade-related jobs are being lost," said Pascal Lamy, director of the Geneva-based organization. Mr. Lamy urged the leaders of the Group of 20 leading economies, who will meet in London on April 2, "to unite in moving from pledges to action and refrain from any further protectionist measure which will render global recovery efforts less effective." When that recovery happens will be determined by the effectiveness of stimulus plans, which will amount to 3% of total global production in 2009, and of reforms to the banking system, the WTO said. "Further adverse developments in financial markets could prolong the current crisis, as could a surge in protection," the group warned. The report is based on recently available trade figures showing steep drops in the first two months of 2009, as well as on broader economic projections. Mr. Lamy's economists listed four reasons for gloom. First, all regions of the globe are hurting, and consumer demand is shrinking, especially for imported goods -- from cars to stereos. There aren't any "decoupled" areas that aren't affected, the WTO said. Second, the trade crisis will mostly affect the richest countries, whose citizens borrowed and bought beyond their means, the WTO said. Trade in developed countries will decline 10% this year, compared with a drop of 2% to 3% for developing nations. Third, companies big and small have globalized their supply chains, so goods that cross the world on their way from factory to shelf add to trade statistics in several countries. As a result, global trade now grows or declines more than global economic growth. The global economy is expected to shrink 1% or 2% in 2009. "This kind of globalization entails volatility," says Fredrik Erixon, director of the European Centre for International Political Economy, a Brussels-based think tank. Finally, there's been a flurry of protectionist measures, as countries from Mexico to Russia imposed new tariffs on imports. The World Bank estimates that 17 of the 20 countries coming to London on April 2 have already broken free-trade promises. With the prospects slim for another international trade treaty following the Uruguay Round of 1994, the WTO is hoping to shame its 153 members into keeping trade open by cataloguing protectionist excesses and publishing a bimonthly list. It will release its latest such report this week.
Global Slump Seen Deepening The outlook for the global economy worsened on the eve of a summit of the world's 20 biggest economic powers, as two international agencies warned that global output will fall in 2009 for the first time since World War II.Fresh evidence of the deepening slowdown came from around the world. Euro-zone data released Tuesday showed inflation at 0.6% in Europe's single-currency area for the year through March, the lowest level since official records began in 1996. In the U.S., home prices fell 19% in January compared with a year earlier. In Japan, the jobless rate climbed to its highest level in more than three years.All together, the world economy will shrink by 2.75% this year, the Organization for Economic Cooperation and Development said. The 30 industrialized countries it tracks now face a far bigger slump than it forecast just four months ago, the OECD said, at 4.3%. The World Bank issued a slightly smaller downgrade of the global economic outlook Tuesday, projecting a contraction of 1.7%. Both institutions forecast a steep and damaging plunge in 2009 world trade, the World Bank at 6.1% and the OECD more than double that. "The world economy is in the midst of its deepest and most synchronized recession in our lifetimes," the OECD's chief economist Klaus Schmidt-Hebbel wrote in the group's report. The OECD added its voice to U.S. calls for reluctant governments to increase their stimulus efforts -- especially Germany -- and for the European Central Bank to lower rates more quickly to stave off a potential spiral of deflation there. Some resistance to calls for increased government spending has been spurred by fears it will stoke inflation. But the new data Tuesday showed that the opposite problem -- potential for deflation, a downward spiral in prices and wages -- may be at least an equal threat. The ECB meets Thursday and is expected to lower rates perhaps by a half-point from its current 1.5%. But Europe's fast-falling inflation has put the bank under increasing criticism that it has been too slow to join its peers in bringing rates close to zero, and thus exacerbated the euro zone's slowdown. The OECD's report said the ECB should cut interest rates quickly in view of "growing disinflationary pressures" in the next couple of years. Many economists and the ECB believe euro-zone inflation could turn negative in coming months -- partly because energy and food prices have plunged from their peaks last summer -- before turning positive again this year. "Even if the outlook is not for deflation as such, it is for very low inflation and it's a strong indicator that [the ECB] needs to do much more," says Nick Kounis, economist at Fortis in Amsterdam. The ECB has also been reluctant so far to mimic other central banks by buying government or corporate debt with newly created money to support borrowing and lending. But ECB officials have hinted they might soon take more aggressive steps to ease companies' financing woes, such as buying corporate bonds. The OECD report also said stimulus measures are still "critical to cushion the fall in aggregate demand." It said Germany, Europe's biggest economy, faces a particularly sharp contraction of 5.3% this year, and that "further temporary stimulus measures are needed and should be implemented quickly." German unemployment rose to 8.1% in March from 8.0% in February, official data showed Tuesday.
Oil Production Cutbacks Threaten Major Price Spike, Study Says The slowdown in investment in oil and gas production could lop off nearly eight million barrels a day of future oil supply growth, setting the stage for another big crude price surge in years to come, according to a new study. The global credit crisis and falling oil prices have squeezed oil companies' finances and forced many to cut capital spending and postpone projects. That could have big implications for supply when the global recession ends and demand for energy recovers, the report by Cambridge Energy Research Associates says. CERA projected last summer, before the economic crisis set in, that world oil production capacity would rise to 109 million barrels a day by 2014 from the current 94.5 million barrels a day.It now says 7.6 million barrels a day -- or slightly more than half -- of that increase is "at risk" due to project deferrals or cancellations.The report says that reduction in capacity is a "potentially powerful and long-lasting aftershock" following the oil-price slide of 2008, when within a few months crude fell from a record high of $147 a barrel. Crude-oil futures rose $1.57, or 3%, to settle at $54.34 a barrel Thursday. "A price collapse of this magnitude really registers on the Richter scale, and its impact on levels of future investment will be felt for years," CERA Chairman Daniel Yergin said in an interview. The report comes amid ample evidence companies are scaling back on investment in costly projects that require a high oil price to be profitable, such as the oil sands of Canada or the ultra-deep waters off west Africa. Middle East oil producers, hit by falling export revenue, have reined in spending plans. The Organization of Petroleum Exporting Countries says as many as 35 new projects in OPEC countries could now be delayed past 2013. Most Western oil companies say they are sticking to their investment plans but are slowing down some developments. The slowdown is troubling the International Energy Agency, the Paris-based adviser to oil-consuming countries, which has also trimmed its forecast for supply growth due to the fall in oil prices and the lack of available credit.
Politics and Policy
China Takes Aim at Dollar China called for the creation of a new currency to eventually replace the dollar as the world's standard, proposing a sweeping overhaul of global finance that reflects developing nations' growing unhappiness with the U.S. role in the world economy. The unusual proposal, made by central bank governor Zhou Xiaochuan in an essay released Monday in Beijing, is part of China's increasingly assertive approach to shaping the global response to the financial crisis. Mr. Zhou's proposal comes amid preparations for a summit of the world's industrial and developing nations, the Group of 20, in London next week. At past meetings, developed nations have criticized China's economic and currency policies. This time, China is on the offensive, backed by other emerging economies such as Russia in making clear they want a global economic order less dominated by the U.S. and other wealthy nations. However, the technical and political hurdles to implementing China's recommendation are enormous, so even if backed by other nations, the proposal is unlikely to change the dollar's role in the short term. Central banks around the world hold more U.S. dollars and dollar securities than they do assets denominated in any other individual foreign currency. Such reserves can be used to stabilize the value of the central banks' domestic currencies. Monday's proposal follows a similar one Russia made this month during preparations for the G20 meeting. Like China, Russia recommended that the International Monetary Fund might issue the currency, and emphasized the need to update "the obsolescent unipolar world economic order." Chinese officials are frustrated at their financial dependence on the U.S., with Premier Wen Jiabao this month publicly expressing "worries" over China's significant holdings of U.S. government bonds. The size of those holdings means the value of the national rainy-day fund is mainly driven by factors China has little control over, such as fluctuations in the value of the dollar and changes in U.S. economic policies. In his paper, published in Chinese and English on the central bank's Web site, Mr. Zhou argued for reducing the dominance of a few individual currencies, such as the dollar, euro and yen, in international trade and finance.
ECB Chief Says Boost In Stimulus Not Needed The president of the European Central Bank said Europe doesn't need to boost spending more to combat the global financial crisis, throwing the bank's weight behind Europe's governments in their battle with the U.S. over how to overcome the worst recession in a generation. In an interview with The Wall Street Journal, Jean-Claude Trichet said that instead of pushing new measures, governments around the world should move faster on what they've already announced -- referring in part to delays and difficulties in the U.S. government's rescue of its troubled banks. Europe and the U.S. should "now, as efficiently and rapidly as possible, do what has been decided," said Mr. Trichet, chief of monetary policy for an economy second in size only to the U.S. "Nothing will really work until the financial sector is back on track and ready to lend on a sustainable basis. I would say exactly the same with the budget. Decisions have been taken; they are very important. Let's do it! Quick implementation, quick disbursement is what is needed." The U.S. has hoped to press global governments to pass stimulus packages similar in scale to its $787 billion plan at a meeting of the Group of 20 leading economies in London on April 2. European leaders, who have pledged less than half the U.S. amount, have rebuffed that notion, most recently and directly 10 days ago as finance ministers including U.S. Treasury Secretary Timothy Geithner met to prepare for the summit. Mr. Trichet's comments siding with European governments are particularly significant because he has, at times, been a stern critic of their fiscal and other policies. He also is a fierce guardian of the bank's political independence, and has periodically rebuffed governments' calls for the bank to do more itself to spur growth.With forecasts saying the global economy will contract this year for the first time in six decades, governments from China to Britain have unveiled huge spending plans.
Markets
Kass: I was right about the bottom Seabreeze partner Doug Kass thinks you may have just missed a generational market low (or, in any event, a cyclical bear-market one): A classical wall of worry is being reinforced by an overwhelming consensus that the recent advance was a bear market rally. Moreover, the negative "chatter," as Jim "El Capitan" Cramer describes it, appears loosely constructed and fails to credibly argue against the salutary effect that $4 trillion of stimulus will have on the domestic economy. Based on the 12 considerations comprising my watch list [see below], I respectfully disagree with the prevailing negative consensus, most of whose members failed to properly analyze the cracks in the foundation of credit, in the economy and in equities two years ago. Indeed, it remains my view that the fear of further investment losses and possible investor redemptions are clouding many managers' objectivity in assessing the markets. Kass's watch list:
WRFest 18Apr08(Markets): Whee....What a Rush ! Sucker's Rally ?! Well what a day in the markets, and not a bad week either, if you were long. Since a bunch of folks have been calling the bottom for a while with the credit pipes unclogging a tad, everybody having priced into the Big R all we needed was for positive earnings surprises. That Citi announced another huge writeoff after the kitchen sink quarter and 9,000 layoffs to go with ATT's 4,000 or so should make no never mind. Like we said in the immediate prior posts there was NO good economic news. And we're early days in the downturn. Also bear in mind that earnings are a laggin variable and backward looking as well. For example one of the recent drivers was INTC's excellent earnings - we won't mention that last month they managed to reset expectations significantly lower thereby leadping over the lumbago...oops I mean limbo...bar instead of at least a low hurdle.
WRFest 27Apr08(Market): Three Steps to Two Views Here's our update for the market outlook and situation with the readings (after the break) divided into three sections. One on the nature of the recent rally, then on whether or not the "crisis is over and the third on analysts outlooks. Each of these touch on topics we've explore in depth before so each section has prior posts also included for your review and refresh. The bottomline, IOHO, is that the "Market" appears to think the worst is over and the upcoming/current mild recession is already fully priced into valuations and outlooks. On whether that's true or not rests the largest gap we can remember between the Street and the rest of the world of informed observers we've ever seen. On the state of the Finance Industry and whether it's over please see the prior post listed below. On whether or not we've seen the worst of the economy please...please recall the prior post WRFest 26Apr(Economy): Between the Gust Front and the Storm. For how that's playing out, the debate between the two diametrically opposed views, consider the chart which shows the SP500 on two views. One is the 2 Steps and Jump view we've been exploring for some time where each time the market looked like it was "bottoming" some other unanticipated surprise popped up to take it down. Until this last time when the April Fool's surprise of a massive UBS write-down and re-capitalization led insiders to conclude that things were hunky dory. Our minds our boggled (in the prior post you might want to look at the excerpts on UBS's internal report - gross incompetence is the best summary of their own words. One has to think they aren't alone). The second sub-chart shows how the debate is playing out with what we've argued is the lull before the real storm with the emergence of a sideways trading range. With this week's momentus economic data upcoming this'll get really interesting indeed. To complement that we've update our Key Factors Table which looks at the Structural, Fundamental, Technical and Sentiment Outlook situation. Since it's been a while from the last update the prior observations are included for comparison as well as the current ones. The delay was from more than laziness since until recently most of our assessments were holding up well. Now the only real change is further deterioration in the real world drivers combined with an improvment in Sentiment. Go figure ! :) But feel free to violently disagree with all of these observations - but we suggest doing it systematically (and disagreeing with, for example, Jim Jubak, et.al.).
Stock markets – keep an eye on confidence measures It is important that confidence be restored for the recent stock market gains to be more enduring. A few comments regarding this issue are highlighted in this post. As shown in Sunday’s “Words from the Wise” review, there is a strong historical relationship between the US Consumer Confidence Index and the 12-month change in the S&P 500 Index. One needs to take a view on the direction of consumer confidence, but should it for argument’s sake pick up from 30 to 40 by the end of June, the relationship indicates a S&P 500 decline of 30-35% in year-ago terms. Using end-of-quarter prices, this means an Index at between 832 and 896 by mid-year. Interestingly, a report from Franklin Templeton Investments has just arrived, also showing that when confidence was low in the past, it had been time to buy. For example, on average, stocks returned 12.5% a year following consumer confidence of 66 or lower. The consumer confidence reading at the end of February was 25. Another confidence indicator worth monitoring, is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been an improvement in the ratio since its all-time low in December, showing that bond investors are growing somewhat more confident and have started opting for more speculative bonds over high-grade bonds. Not surprisingly, a strong historical relationship also exists between the Barron’s Confidence Index and the S&P 500’s 12-month rate of change. But unlike consumer confidence that has not yet bottomed, the Barron’s indicator has already been working its way higher over the three months. As mentioned before, taking one step at a time, the next hurdle is the release of potentially ugly earnings and guidance announcements in April. By then a clearer picture should also start emerging on the results of the Fed’s medicine and whether credit markets are thawing and confidence is beginning to improve.
Wall Street Extends Losses After Dimon Comments U.S. stocks slid on Friday as investors booked profits in the wake of a recent surge, and bank shares dropped after several bank executives indicated March had been a tougher month than the previous two.After the meeting with President Barack Obama, JPMorgan Chase & Co's Chief Executive Jamie Dimon said that March was "a little tough" in comments to CNBC. Bank of America Corp's top executive added to the sour mood surrounding banks when he said the No. 1 U.S. bank's trading book lagged the two prior months in March. "Given that's kind of where this rally started in the second week of the month with Citigroup and Bank of America indicating they had a good first two months (of 2009), it would make sense that his comments would have a negative impact," said Peter Jankovskis, director of research at OakBrook Investments LLC in Lisle, Illinois.
UPDATE EXCERPTS
Despite Interventions Global Outlook Deteriorates March 31 OECD: Economic activity is expected to plummet by an average 4.3 percent in the OECD area in 2009 while by the end of 2010 unemployment rates in many countries will reach double figures for the first time since the early 1990s. international trade is forecast to fall by more than 13 percent in 2009 and world economic activity to shrink by 2.7 percent. The big emerging economies will also suffer abrupt slowdowns in growth. The global recession will worsen this year before a policy-induced recovery gradually builds momentum through 2010. Forecast for U.S.: -4% in 2009, 0% in 2010; Japan: -6.6% (-0.5%); Eurozone: -4.1% (-0.3%). Brazil’s GDP is expected to decline by 0.3 percent in 2009 while Russia’s is projected to fall 5.6 percent. Growth in India will ease back to 4.3 percent this year and in China to 6.3 percent. IMF: Global economic activity is projected to contract by ½ to 1% in 2009 on an annual average basis—the first such fall in 60 years before growing 1.5-2.5% in 2010.
Credit card charge-offs hit record high -Moody's Credit card write-downs soared to record levels in February, representing an all-time high in the 20-year history of the Moody's Credit Card Index, as job losses mounted, the rating agency said on Wednesday. Credit card charge-offs, the write-down of uncollectable debt, advanced decisively to 8.82 percent in February, marking the sixth consecutive month of increases. The level, is more than 300 basis points higher than a year ago.Sharp increases were experienced across several large issuers and have closely followed the surges in unemployment occurring over recent months, the rating agency said."We expect that the charge-off index will threaten double digits by the end of the year, in light of our expectation that the economy will worsen throughout the remainder of the year," Moody's said.It predicts the charge-off rate index will peak at about 10.5 percent in the first half of 2010, assuming a coincident unemployment rate peak at 10 percent.As deal performance continues to erode, the potential for additional rating actions increases, especially for the lower-rated subordinate tranches.
Moody's downgraded $1.76 trln U.S. corp debt in Q1 Corporate America's credit quality collapsed in the first quarter, with Moody's Investors Service downgrading an estimated $1.76 trillion of debt, a record high, the rating agency said on Wednesday. The downgrades included a record number to the lowest rating categories, signaling the approach of the worst defaults since at least World War Two, Moody's chief economist John Lonski said in an interview."These are numbers that just underscore how risky both the financial and economic environment remain," Lonski said.The downgrades reflect how badly corporate balance sheets have been hurt by the slump in consumer spending amid the deepest economic contraction since 1982."Business sales and profits fell off the table in general during the final quarter of last year and have continued to deteriorate in the first quarter in 2009," Lonski said.U.S. corporate profits plunged a record $120.1 billion in the fourth quarter, depressed by tumbling consumer spending and exports.
Summitry, the global financial architecture and change About three months ago, the editors of Finance and Development (an IMF publication) asked me to reflect on the lessons the effort to reform the international financial architecture in the 1990s holds for today’s effort to reform the global financial system. Then, as now, there was a real desire to create a system that was less prone to major crises — though the financial crises of the late 1990s were concentrated in the emerging economies, not the US and Europe.One of my conclusions was that summits rarely are the venue for the key decisions that end up defining the character of the world’s financial system. Many of the decisions that ended up mattering the most were fundamentally national decisions. Other key decisions were made in the heat of an acute crisis — not in a conference room hashing out communique language.Martin Wolf is right to argue that this summit has to be evaluated against the demands created by a very sharp global downturn. The OECD is now forecasting a global contraction of close to 3%. I certainly had hoped that the world’s large surplus countries would do more to support a recovery in global demand — and in Germany’s case, to facilitate a needed adjustment among the countries of the European Union. But as a veteran of almost ten years of debate over the scale and scope of IMF lending, I am amazed by the set of changes that seem poised to happen. Here is one benchmark: the reworking of the IMF’s lending facilities goes well beyond anything that Nouriel Roubini and I proposed back in 2004.** Maybe that is more evidence that Dr. Roubini and I were too timid in our recommendations then than that the world’s leaders are acting boldly now. But it is evidence that the realm of the possible has changed.
10 Investment Themes for 2009, Revisited As last year drew to a close, we revisited our 2008 themes and weighed them in kind.Some of them came to fruition, others were early, but most hit the mark.When we entered 2009, we offered a fresh set of forward-looking expectations. With a conscious nod that we must stay humble, or the market will do it for us, it's time for reflection as the first quarter comes to a close. The socioeconomic mindset remains the single greatest risk as this crisis evolves from financial to economic to social. If peaceful globalization is to arrive, the persistent trend of protectionism must give way to an orderly destruction of debt. As it stands, current policies are pointing in the wrong direction. Entering September, we offered that the disconnect between equity and credit would manifest as a car crash or a cancer. Four months later, despite lower prices and massive government intervention, the equilibrium between equity, credit, commodities and currencies remains elusive.January thought: The entire spectrum of industries, from finance to media to retail to philanthropy to academia, will be forced to reinvent themselves and the leaders coming out of this crisis won't be the same as the leaders that entered it. Update: We use the forest-fire analogy because it's so very apt, scary and dangerous, yet necessary for a fertile rebirthing. A snapshot of once-venerable icons such as General Motors (GM) , General Electric (GE) , Citigroup (C) and AIG (AIG) supports the notion that market leadership, and leadership within individual sectors, will look drastically different once this process of price discovery passes.
the biggest bailout since the GD and ending with the largest regulatory re-thinking since the cumulative total of GD and intervening decades legislation and regulation. REALLY stop and think about that for a moment - almost EIGHT DECADES of incremental change has been compressed into sixty days. Or being slightly more fair 120 going back to Sept and the TARP kickoff. Five weeks ago everybody wanted to hang Geithner for malfeasance and lack of detail, now he's a genius and a hero. Be careful what you ask for too ! Pundits and interests on the left, right, up and down are all choking, albeit more quietly, on these details. Yet nothing should be a surprise since there's a clear pathway from Bush Administration decisions and recommendations, including Paulson's tentative plan from last spring (btw on of the key readings is a FT oped by Henry supporting a regulatory overhaul that looks like this one on a worldwide basis). Of this set of initiative what's most important - the economics, the financial technicalities, the politics or the popular reaction ? Actually all of them !! What's still missing is a context to help organize, categorize and organize our thinking about these myriad complexities so we're going to take our best shot at explaining what's going on. And make no mistake - these are enormous changes, mostly for the better IOHO, long over-due and the Finance Industry and it's role will never be the same again. The last three decades of business models, strategies and profit/performance relationships are gone forever ! We ended the last post with the accompanying cartoon to capture the popular reactions to date and so we start there. Now lets dig into the strategic context.
