Mish's Global Economic Trend Analysis

Hotels Feel the Pain of a Glut of Empty Rooms and Lower Room Rates

noreply@blogger.com (Michael Shedlock) — Mon, 06 Jul 2009 00:34:00 +0000

Hotels are slashing rates to attract customers. However, it's not working and Resorts are Suffering From Financial Strains.

From Arizona Central ...

A glut of empty rooms and panic pricing are taking a serious toll on hotel and resort owners in the Phoenix area.

Foreclosure proceedings were initiated against seven financially squeezed properties, two of them brand new, in the first half of the year. That's just one less than in all of 2008 and more than double the number in 2007, according to Ion Data, a Mesa real-estate research firm.

There are other signs of financial stress, too, including major liens filed against resorts that recently expanded or renovated, and big projects being put on hold, some midstream.

The worst part: Many experts say the foreclosure woes are likely in the early stages given the volume of big-ticket deals during the boom years, the severity of the hotel downturn in Greater Phoenix and few signs business will solidly rebound anytime soon.

"This is probably still the tip of the iceberg," said Robert Hayward, principal with the Phoenix hospitality consulting and research firm Warnick & Co.

Metro Phoenix, usually a magnet for vacationers and big meetings, continues to post some of the industry's biggest declines in occupancy, average daily rate and other measures, with many at the lowest levels on record, according to Smith Travel Research.

Preliminary figures show June occupancy was about 45 percent, nearly 10 percentage points, or 17 percent, below June 2008, when occupancy was already hurting. Most are calling it an industry depression, rather than recession.

Richard Warnick of Warnick & Co. said he'd be surprised if nearly all hotels and resorts, here and across the country, weren't in technical default on their loans, falling below required minimums on debt service coverage, for example, given the sad state of travel. That is often a precursor to more serious financial problems that prompt lenders to foreclose.

Nationally, the number of delinquent hotel loans has been climbing sharply since the recession deepened last fall. The delinquency rate jumped from 0.3 percent of so-called hotel commercial mortgage-backed securities loans in September to 2.8 percent in May, according to Realpoint data provided by real-estate services firm Jones Lang Lasalle.

The big questions are who is going to buy the troubled properties, when and for how much. The market for hotel deals is anemic. Nationally, there were just 19 transactions in the first half of the year, vs. 103 in the same period last year, according to Jones Lang Lasalle.

"From our standpoint, transactions have really just stopped," said Jeremy Allen, vice president in the Phoenix office of hotel brokerage firm Molinaro Koger.

He said the only activity is for smaller deals, those for $5 million and under.

For bigger deals, such as the $120 million the Montelucia's German bank is reportedly seeking for the resort, there are a couple obstacles: financing and agreeing on a price in this volatile market.

Tip of the Iceberg

This is indeed the tip of the iceberg. Moreover, places like Phoenix where no one in their right mind would want to go in the Summer, Spring, Winter, or Fall are going to be especially hard hit.

Yes, I am biased against Phoenix. I am not fond of dust storms, blazing hot treeless conditions, flat barren desert, or any other Phoenix attractions except when there are Spring rains every 5th year or so and the desert blooms.

When there are Spring rains, I highly recommend camping in places like Picacho Peak State Park.

Note: the pictures in that link are god awful. Then again, that is how the place looks most of the time. I have some tremendous images of the park in full bloom. Unfortunately they are slides and my slide scanner does not work with a recent Microsoft Vista upgrade so you have to take my word for it.

Others might feel Chicago is god awful, especially in the Winter. The important point is, no matter where you pick, travel is down, and travelers are making do with less. Camping is in, hotel rooms are out. Traveling far is out. Traveling close by is in. Eating out is out. Backyard barbecues are in. By the way, inquiring minds might be interested in the origin of the word barbecue.

Barbecue is from the French barbe à queue when goats were roasted on a spit from the beard (barbe) to to the tail (queue). Some disagree as to the origin, but that works for me.

At any rate my advice for the rest of the summer is skip the hotel and go camping. I am back from a weekend of camping, posting at night from a closed bagel shop on the hood of my car with lights from the Little Caesars Pizza place next door. The bagel shop left its WiFi going all night and I took advantage.

Those who see hyperinflation coming, need to ponder the implication of multiple aspects of this post and think again.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Railfax Rail Carloading Report June 27, 2009

noreply@blogger.com (Michael Shedlock) — Sun, 05 Jul 2009 16:15:00 +0000

Every week I watch the Weekly Railfax Report of North American Rail Freight Traffic for signs of stabilization. Year over year, there is nothing to cheer at as the following charts show.

Total US Rail Traffic

Total Industry Charts (US, Canada and Mexico)
Year over Year Percent Change - 13 Week Rolling Averages

Autos cargoes remain at depression levels and the only bright spots (on a relative basis) are coal and food. More charts in the report.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mish Weekly Mailbag 2009-07-04

noreply@blogger.com (Michael Shedlock) — Sun, 05 Jul 2009 00:19:00 +0000

I often receive many interesting emails from readers. Bear in mind that unless I specifically comment, I may or may not agree with the Emails. Here are a few from this last week.

Aircraft Repair Jobs Revisited

In response to Aircraft repair jobs sold to foreign workers, resumes not important GR writes:

Hi Mish,

Very interesting story.

I used to be a Boeing Pilot for South African Airways 40 years ago. We used to train crews from India. None of us would ever get on an Indian flight.

Very sadly, over the last 30 years, the US has allowed its FAA to degenerate badly. They are now totally minimalist to save expenses.

Aircraft mechanics are making hundreds of small decisions every day. Usually it is a no-brainer. However, one or two decisions a day are pivotal. As you know, very often a mechanic's decision can take 10-20 years to cause a disaster.

I really fear for the US because it is making only expedient short term decisions about everything. This is not like the US of my generation.

Regards GR

Radio Advertising Sign of the Time

RT writes:

As a frequent reader of both your blogs, I thought you might enjoy (if that is the right word) this little tidbit. Last night I heard on Q104.3 (a tri-state area radio station) the radio host making an announcement that in these trying economic times, finding a job can be harder than ever. That's why you can now PAY the radio station to have your RESUME read on the air.

If that doesn't tell you the true state of affairs, I don't know what will.

This is one consequence that I wouldn't have ever guessed. It's not surprising to me, but I just wouldn't have ever thought of it.

RT

Thanks RT

Your story is telling for a couple of reasons. Radio advertising has to be way down for the station to do that. Unemployed individuals cannot be paying much to have their resumes read. So the station is as hard up for cash as those unemployed individuals whose resumes it reads on the air.

True Unemployment Rate

TMK from Utah has this interesting perspective on the unemployment rate:

Mish

I am a Mormon in Utah, and last Sunday evening I was at a Priesthood Meeting (basically, all the men hold the Priesthood) with our Stake President, who presides over a Stake (equivalent to a diocese) of 5,000 members. A good statistical study group, in other words. (FYI, if you weren't already aware, the Latter-Day Saints (Mormons) keep EXCELLENT tabs on their members and are fastidious record keepers.)

I went up to him after the meeting and asked, "Are you keeping track of the number of heads of households out of work in our Stake?" "Oh, yes," he said, and then he threw out a number of the unemployed heads of households. "How does that translate into percent?" I asked. "Sixteen percent", he told me.

We talked about how this is significantly higher than what the national media is reporting.

This is in Utah County, where economic difficulties are rising, but I wouldn't consider depression-like, yet.

Nonetheless, I was amazed to read your informative blog today indicating that the more accurate count is, indeed, 16 percent.

TMK

Spanish Economy

Bran from Spain writes:

It is always hard to be objective as circumstance and sentiment is ever changing, but I will give you my feelings as to the temper in Spain.

Personally I have the sense of present/forthcoming serious economic disintegration, of social confusion and retribution. There seems no outlet to the bullishness more present in Spanish society than others, and that it may end up being almost vindictive, if not destructive in its expression.

As Spain relies so heavily on foreign participation to augment its productivity, it is not going to be a primary target for future global investment, as it is a secondary economy, and the northern economies may take several years to restock. The boom here has leveled prices with the north which due to Eurozone can't be diminished easily to invite investment.

We now have a very terrible cocktail of large immigrant populations, wealth exodus, high unemployment, end of anti-cyclic bank provisions, high public deficit, inter-regional disagreements, corruption, pre-democratic divides in power and politics, a dysfunctional legal system, large differences in expectations between young and old, past and future, poor economic education amongst the population, etc.

Maybe the only things that will maintain the fabric are family, religion, and the underground economy - not exactly inviting in business terms.

When I see such I dread to think what will be made of this country, even at the best of times they didn't quite have their act together. Remains to be seen.

All the best, Bran.

I cannot comment on Bran's take on the Spanish economy other than to say I trust his judgment. I can comment on his command of the English language and it is clearly superb. Thanks Bran.

Independent Contractors and the Unemployment Rate

DAL Writes:

The day after I retired (in 1993) I went back to work as an independent contractor or consultant. I've since retired for good, but here's a question...

During the 1990s and up until 2008 there were a huge number of ICs employed. The IC pays his/her own Social Security and Medicare taxes, files tax returns as self-employed. There hae been literally millions of ICs.

During layoffs a company will simply let ICs go. No fuss, no muss, just tell them to stop showing up for work. No problems with unlawful discharge suits, no severance pay. Nothing. And, by the way, since they are self-employed they do not qualify for unemployment compensation, so they do not show up on the government books.

If from 5 million to 7million people have been let go - "officially" - since the beginning of the downturn, how many people on IC status are simply out of a job and out of luck? Is there any way of finding out? My guess is that unemployed independents may at least equal the number of people counted on the roles.

Something to think about.

DAL

Thank's DAL, you are correct. I have commented on this many times but I do not know how to total it up. It is far worse this go around because of all the mortgage broker and Realtors who are still officially working but who have not had a paycheck for months.

This is another reason the reported Birth/Death job numbers are absolutely bogus. Many small independent business are no longer in existence yet the Birth/Death model showed net job expansion through the entire recession. The BLS model is a total fabrication of reality.

From Jobs Contract 18th Straight Month; Unemployment Rate Hits 9.5% :

Birth Death Model Revisions 2008

click on chart for sharper image

Birth Death Model Revisions 2009

The BLS should be embarrassed to report such nonsense.

Mish

Obama's "Cap and Trade" Energy Plan Will Cost Jobs

noreply@blogger.com (Michael Shedlock) — Sat, 04 Jul 2009 15:36:00 +0000

A quick look at the details of the Energy Plan working its way through Congress shows that Obama's energy plan will cost jobs. Please consider Energy job losers could get windfall.

Workers who lose their jobs if the pending climate change legislation becomes law could get a weekly paycheck for up to three years, subsidies to find new work and other generous benefits -- all courtesy of Uncle Sam -- under a little-noticed provision of the bill.

Touted by its House Democratic authors as a jobs engine, the bill offers extraordinary compensation for those who would lose their paycheck as a consequence of its passage.

Adversely affected employees in oil, coal and other fossil-fuel sector jobs would qualify for a weekly check worth 70 percent of their current salary for up to three years. In addition, they would get $1,500 for job-search assistance and $1,500 for moving expenses from the bill's "climate change worker adjustment assistance" program, which is expected to cost $4.2 billion from 2011 to 2019.

The bill passed the House a week ago in a hotly contested 219-212 vote, with supporters arguing that a principal reason to support the bill is that it would create millions of new jobs. But analyses from the political left and right argue that potentially millions of jobs in industries tied to traditional fossil fuels would be lost and, at least initially, not enough "green" jobs would be created to replace them.

"Can you name another jobs-creation bill that was so concerned about its potential impact that it preemptively included a benefits' program for the millions of workers it expected to displace?" asked Chris Tucker, a spokesman for the Institute for Energy Research, a pro-oil industry independent think tank.

While the analyses assume displaced workers will eventually find jobs, the liberal-leaning Brookings Institution predicts a net job loss of 0.5 percent over the first 10 years that carbon reduction legislation, called "cap-and-trade," is in effect. The conservative Heritage Foundation found that by 2030 net job losses would top 1.1 million, while the Coalition for Affordable American Energy, an industry group, estimates that more than 3 million jobs would be lost by 2030 as a result of the cap-and-trade system.

All Pain, No Gain

Government interference like this always costs jobs. The plan is a complete boondoggle. The provision to give displaced workers 70% of their salaries is downright disgusting. Who else gets guarantees like that?

Moreover, the plan is ripe for graft. Anyone who loses a job for any reason will be blaming the "cap-and-trade" legislation. At 70% pay, many will be hoping they lose their jobs.

Inquiring minds will want to investigate an excellent writeup on the subject called Cap and Trade and the Illusion of the New Green Economy on Prison Planet.

Contact Your Senators

"Cap-And-Trade" legislation has already passed the House. The only hope at this point is the Senate. There is a Senate Contact List in Speak Out - Audit the Fed, Then End It! You can also get Phone, Fax, and Email numbers from the Online Directory for the 111th Congress.

Please contact your senators today and stop this boondoggle. Tell them you do not support this bill outright, and you especially do not support 70% pay for those who lose their jobs. If the bill is supposed to gain jobs such provisions are not needed and will be ripe for graft.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

We The People

noreply@blogger.com (Michael Shedlock) — Sat, 04 Jul 2009 02:38:00 +0000

Here is a thought provoking video about the stimulus package, Congress, the Constitution and many other topics.

I disagree with some of it, especially mandatory service. If the founders wanted mandatory service or English as the national language, they would have put it in the Constitution. Require a bunch of 18 year olds to join the military and you are begging for another war or more police actions. The US simply cannot afford to be the world's policeman.

The video also left out a discussion of money and gold that would have been interesting. However, most of what was said about Congress and spending rings a big bell.

Millions of people have played this video, and it is a good topic for discussion this 4th of July weekend.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

More Idiocy From the SEC: Reinstatement of Short-Selling Restrictions

noreply@blogger.com (Michael Shedlock) — Fri, 03 Jul 2009 15:08:00 +0000

Inquiring minds are reading S.E.C. May Reinstate Rules for Short-Selling Stocks.

They have been reviled as the bad hats of Wall Street, nefarious traders who cashed in on the market collapse and, some insist, helped precipitate it.

Now short-sellers, the market skeptics who correctly called last year’s downturn, are coming under even more unwanted scrutiny, this time from federal regulators. The Securities and Exchange Commission appears poised to reverse itself and reinstate rules that would make shorting stocks — that is, betting their prices will decline — somewhat more difficult.

Many banks, whose stocks came under attack last autumn, maintain that unfettered short-selling is dangerous. The shorts, their argument goes, helped bring down Bear Stearns and Lehman Brothers last year.

Mary L. Schapiro, chairwoman of the S.E.C., has said that considering new rules restricting short-selling is a priority.

For the moment, the most likely outcome may be for the S.E.C. to reinstate a rule that the commission itself abolished with a unanimous vote in 2007, under its previous chairman, Christopher S. Cox. Known as the uptick rule, it would bar investors from shorting a stock until its price ticks at least a penny above its previous trading price.

To some, the issue is clear-cut. The American Bankers Association, a trade group representing the vast majority of American banks — whose equity values have been especially battered in the last 18 months — recently submitted an opinion in favor of reinstating the short-sale restrictions.

Sally Miller, a spokesman for the A.B.A., said the member banks thought there was a clear link between the market turmoil and the rule change.

The American Bankers Association Group of Idiots

What brought down the banks was excessive leverage (40-1 or greater at Bear Stearns and Lehman), excessive dependence on real estate investments (both residential mortgages and commercial real estate), lax lending standards, off balance sheet investments ($1 Trillion at Citigroup alone), and a host of other piss poor discretions.

If the American Bankers Association wants to place the blame on who is responsible for this mess they ought to look straight in the mirror and blame themselves.

Moreover, Sally Miller is obviously a complete dunce as to how stock markets work. sally says there is a "clear link between the market turmoil and the rule change". Hello Sally, correlation does not imply causation.

The rooster crows at the crack of dawn every day and the sun comes up. The sun does not comes up because the rooster crows, no matter what the ABA says.

Citigroup's Ridiculous Short Selling Claim

Flashback November 20, 2008: Citigroup Blames Short Sellers For Collapse.

Inquiring minds are looking at Citigroup Statistics as of October 28, 2008.

Citigroup is blaming shorts when the short interest is under 3%. That's ridiculous. If Citigroup does not understand this, it is a sign of incompetence. If Citigroup does understand how ridiculous their claim looks (and is), that is additional support for the desperation thesis.

Note the dividend. Citigroup is paying a dividend when it is clearly in need of capital . Is that a sign of arrogance or incompetence? That Citigroup is in this mess in the first place is clearly sign of incompetence somewhere, at some point in time. Current management will attempt to place that blame on Chuck Price, but the culture of greed, arrogance, and excessive risk taking, permeated the entire financial industry.

Looking ahead, foreclosures, credit card defaults, and bankruptcies are going to soar along with a soaring unemployment rate. Banks in general, and citigroup specifically, are woefully undercapitalized and unprepared for what is about to happen. One look at a chart of Citigroup should be proof enough.

The market seems to believe Citigroup is insolvent and so do I.

Citigroup The Bank That Gets Nothing Right

While on the subject of Citigroup, and Citigroup whiners, I offer Listen to Citigroup Analysts at Your Own Peril.

Who Are The Short Sellers?

Inquiring minds are asking, who is doing the bulk of short selling?

It's a good question, too. And I have an answer: The market makers like Goldman Sachs, Citigroup, and Merrill Lynch.

Yes, the whiners complaining about short selling are doing the bulk of it! For every buyer there is a seller, and when markets are screaming higher, the market makers are frequently shorting as a pure function of what they do. Moreover, when people buy PUTs, the market makers selling those options short stock as a hedge.

Not only are the market makers shorting, but these actions are where the bulk of naked shorting comes from.

By the way, the SEC initiated a huge short squeeze once before by restricting shorts on financials. Guess what happened when the short squeeze ended and Goldman Sachs, Citigroup, and the other market makers were the ones left holding the shorts? The market plunged is what.

Finally, there is no uptick rule for market makers. There never was. This is how ridiculous this nonsense about shorting is.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Sweden Cuts Deposit Rate to NEGATIVE .25%

noreply@blogger.com (Michael Shedlock) — Thu, 02 Jul 2009 21:42:00 +0000

There has been a lot of ludicrous recommendations recently to combat deflation by making deposit rates negative. I did not think any central bank would be dumb enough to try it. I thought wrong.

Today, Riksbank, Sweeden's central bank cut the deposit rate to -0.25% effectively charging savers interest on deposited money.

DATE 2/07/2009
The weak development of the economy requires a somewhat more expansionary monetary policy. The Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.25 of a percentage point to 0.25 per cent.

Deep economic downturn

Economic activity abroad is very weak and this hits Sweden hard. Exports have fallen substantially and the situation on the labour market is continuing to deteriorate rapidly. The information received in recent months points to the economic downturn in 2009 being somewhat deeper than the Riksbank forecast in April.

Deposit Rate

The decision on the repo rate will apply with effect from Wednesday, 8 July. The deposit rate is at the same time cut to -0.25 per cent and the lending rate to 0.75 per cent.

Sweden Attempts To Boost Lending

Please consider Sweden cuts rates to new low, offers banks loans.

Sweden's Riksbank cut interest rates to a fresh record low on Thursday and offered banks 100 billion crowns ($13.2 billion) to boost lending as it strives to reverse the country's worst recession since the 1940s.

The central bank lowered its key interest rate by 25 basis points to 0.25 percent in a surprise move, putting official rates at their lowest since records began in 1907, and said it expected rates to remain at that level until late 2010.

"It's a double whammy, or even a triple whammy," said Roger Josefsson at Danske Markets.

"The deposit rates are actually negative now. In some sense they are creating a money machine for banks. You can lend all you want, but don't put that back into the central bank."

Sweden was plunged into recession late last year as the global financial crisis pulled the plug on market demand, leaving firms such as world number two truck firm Volvo scrambling to cut costs and shed jobs.

The central bank forecast the economy will contract 5.4 percent this year and return to tepid growth of 1.4 percent next year.

Broadening its arsenal of policy measures, the Riksbank said it would offer banks loans at a fixed rate as was done recently by the European Central Bank, although it offered unlimited amounts.

The Riksbank will offer 100 billion crowns of fixed interest loans with a maturity of 12 months. It said supplementary measures would ensure monetary policy had the intended effect.

"This should contribute to lower funding costs for the banks and lower interest rates for companies and households," it said.

Deputy Central Bank Governor Barbro Wickman-Parak told a news conference that offering loans at fixed rates to the banks was judged more suitable than purchasing government or mortgage-backed bonds, at least for now.

"Sweden has a very bank-based system," she said.

"Company borrowing, in contrast to the United States, is carried out through the banks and in light of that it is reasonable for us to look first to moving through the banking system when we want to ease credits."

The ECB ended up pouring 442 billion euros ($622 billion) of funds into money markets in its first such operation with a term as long as one year, pushing some bank-to-bank borrowing costs to new record lows.

Punishing Savers

The global economy is in a mess because of the lack of savings not because of an excess of it. People spent money they did not have, pushing asset prices to ridiculous levels. Banks, in belief that asset prices would keep rising exponentially, increased leverage. Now consumers everywhere are retrenching in the wake of the collapse, a much needed phenomenon.

In light of the above, punishing savers with negative deposit rates is the height of stupidity.

It would be fitting if there was an immediate run on deposits. And if that happens what will Sweden do? Halt deposits? Sweden risks (and deserves) a currency collapse and bank runs for this insane effort. Look for capital flight in Sweden.

We should all be rooting for the demise of Sweden lest Bernanke or some other Central Bank clowns try the same thing. The risk is that Sweden does not immediately suffer for this stupidity and that Bernanke tries to do the same thing.

One thing is certain. This is eventually going to blow sky high. Let's hope it does before Bernanke gets the same brilliant idea.

By the way, in case you missed it, here is Bernanke's Deflation Preventing Scorecard.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Listen to Citigroup Analysts at Your Own Peril

noreply@blogger.com (Michael Shedlock) — Thu, 02 Jul 2009 19:19:00 +0000

Citigroup analysts appear to be a hopeless lot. Please consider this July 1, analyst recommendation: Citi tells clients to buy Bank of America.

The analysts added Bank of America (BAC) to their "Ten+ Aggressive Growth List," telling clients that the Charlotte, N.C.-based company is a good long-term investment and that it should return to normalized annual earnings of $3 a share in a few years.

"We believe the firm stands to benefit long term from market-share gains across a variety of businesses, including traditional banking, mortgage origination, retail brokerage, and investment banking," Citi analysts said in a research note.

They also highlighted Bank of America's record of making acquisitions and argued that two controversial recent takeovers -- namely, Countrywide Financial and Merrill Lynch -- offer good growth opportunities for Bank of America when the mortgage and capital markets stabilize and resume their expansion.

Citi rates Bank of America's shares as a buy with an $18 price target, implying 36% potential upside from their closing price Tuesday.

Flashback March 31, 2009

Inquiring minds are taking another look at a post of mine from April 2, 2009 called Citibank to Investors: We Suggest You Bet Against Us.

In a statement that ought to scare the hell out of the bears Citigroup Says Buy Bank Puts Because Rally Will Fade.

March 31 (Bloomberg)

Investors should buy put options on financial companies because derivatives-market trading suggests the industry will retreat after a 43 percent surge since March 6, Citigroup Inc. said.

“Despite the rally, credit and option markets are pricing in increased downside risk,” New York-based Citigroup strategist Alvin Wang wrote in a note sent to clients today.

He recommended puts giving the right to sell the Financial Select Sector SPDR Fund, an exchange-traded fund that tracks a basket of bank stocks, for $8 before May 15. The XLF, as the ETF is known, added 5.5 percent to $8.81 in New York, bringing its gain since March 6 to 43 percent. The May $8 puts fell 25 percent to 70 cents today.

Citigroup is essentially telling investors to bet against JPMorgan, Citigroup, Bank of America, and a whole slew of financial stocks that have been smashed to smithereens.

Pardon me for asking, but where was this advice a year ago, or six months ago, or even three months ago?

I am not particularly bullish on financials right now, but perhaps I ought to be on the grounds that Citigroup has not gotten anything right during this economic decline and is now recommending a bet against itself.

Indeed, Citigroup's recommendation could be a nice contrary indicator especially as More Ugly Details Emerge On "Geithner's Heist America Plan".

XLF 15 Minute Chart

Those $8.00 strike May PUTs are likely to expire worthless. If so, I have to ask the question: Can anyone at Citigroup get anything right?

Can Citigroup Strike Out Again?

Those strike $8 May XLF PUTs did expire worthless. Indeed someone could have had a 300% profit by betting on $8 May XLF CALLs.

At the time of Citigroup's inspirational XLF PUT recommendation this is what the weighting of the XLF sector looked like. Note that Bank of America had the second largest weighting. Click on link for current weightings.

XLF Daily Chart

click on chart for sharper image

Bank of America Daily Chart

click on chart for sharper image

Excuse me for asking but exactly where was the Citigroup recommendation to buy Bank of America at $3? $4? $5? $6?

The answers are nowhere, nowhere, nowhere, and at $6 a recommendation to bet against financials via PUTs, a recommendation that went to $0.

Now, after a 300%+ rally from the lows, Citigroup analysts advise buying Bank of America stock.

This is not a recommendation, but it just may be time to buy some XLF PUTs. My big caution on the PUT trade is whether or not Geithner's Heist America Plan gets off the ground.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Jobs Contract 18th Straight Month; Unemployment Rate Hits 9.5%

noreply@blogger.com (Michael Shedlock) — Thu, 02 Jul 2009 17:03:00 +0000

This morning, the Bureau of Labor Statistics (BLS) released the June Employment Report.

Nonfarm payroll employment continued to decline in June (-467,000), and the unemployment rate was little changed at 9.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job losses were widespread across the major industry sectors, with large declines occurring in manufacturing, professional and business services, and construction..

Establishment Data

click on chart for sharper image

Highlights

467,000 jobs were lost in total vs. 345,000 jobs last month.
79,000 construction jobs were lost vs. 59,000 last month.
136,000 manufacturing jobs were lost vs. 156,000 last month.
244,000 service providing jobs were lost vs. 120,000 last month.
21,000 retail trade jobs were lost vs. 18,000 last month.
118,000 professional and business services jobs were lost vs. 51,000 last month.
34,000 education and health services jobs were added vs. 44,000 added last month.
18,000 leisure and hospitality jobs were gained vs. 3,000 added last month.
52,000 government jobs were lost vs. 7,000 last month.

A total of 223,000 goods producing jobs were lost (higher paying jobs), and in contrast to last month, the service sector was hit hard again. Indeed most of the improvement in May was a 149,000 relative improvement in the service sector as compared to April.

It was nearly a clean sweep again this month with education and health services jobs the only real winner for the month.

Note: some of the above categories overlap as shown in the preceding chart, so do not attempt to total them up.

Index of Aggregate Weekly Hours

Work hours are now down to 33.0 in aggregate. This is contributing to household problems. The expectation was for work hours to rise.

Birth Death Model Revisions 2008

click on chart for sharper image

Birth Death Model Revisions 2009

click on chart for sharper image

Birth/Death Model Revisions

After the typical in January in which the Birth/Death Model revisions bore some semblance of reality, the Birth/Death numbers remain in deep outer space.

At this point in the cycle birth death numbers should have been massively contracting for months. The BLS is going to keep adding jobs through the entire recession.

The Birth/Death numbers are a complete joke and has been for at least two years now.

BLS Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals). Those assumptions are made according to estimates of where the BLS thinks we are in the economic cycle.

The BLS has admitted however, that their model will be wrong at economic turning points. And there is no doubt we are long past an economic turning point.

Here is the pertinent snip from the BLS on Birth/Death Methodology.

The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.
Note that the net birth/death figures are not seasonally adjusted, and are applied to not seasonally adjusted monthly employment links to determine the final estimate.
The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.

Household Data

The number of unemployed persons (14.7 million) and the unemployment rate (9.5 percent) were little changed in June. Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.2 million, and the unemployment rate has risen by 4.6 percentage points.

The number of long-term unemployed (those jobless for 27 weeks or more) increased by 433,000 over the month to 4.4 million. In June, 3 in 10 unemployed persons were jobless for 27 weeks or more.

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in June at 9.0 million. Since the start of the recession, the number of such workers has increased by 4.4 million.

Persons Not in the Labor Force

About 2.2 million persons (not seasonally adjusted) were marginally attached to the labor force in June, 618,000 more than a year earlier. These individuals wanted and were available for work and had looked for a job sometime in the past 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Among the marginally attached, there were 793,000 discouraged workers in June, up by 373,000 from a year earlier.

Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The other 1.4 million persons marginally attached to the labor force in June had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

Table A-5 Part Time Status

click on chart for sharper image

The chart shows there are 9 million people are working part time but want a full time job. A year ago the number was 5.5 million.

Table A-12

Table A-12 is where one can find a better approximation of what the unemployment rate really is. Let's take a look

click on chart for sharper image

Grim Statistics

The official unemployment rate is 9.5% and rising. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

It reflects how unemployment feels to the average Joe on the street. U-6 is 16.5%. Both U-6 and U-3 (the so called "official" unemployment number) are poised to rise further although most likely at a slower pace than earlier this year.

Looking ahead, I expect the service sector to continue to weaken. Mall vacancy rates are rising and a huge contraction in commercial real estate is finally started. There is no driver for jobs and states in forced cutback mode are making matters far worse.

Unemployment is likely to continue rising until sometime in 2010.

Depression Level Statistics

I consider these job losses to be depression level totals. Admittedly conditions are not as bad as the great depression, but this is certainly no ordinary recession by any economic measure including lending, housing, bank failures, jobs, the stock market, commodity prices, treasury yields etc. For more on this idea please see Humpty Dumpty On Inflation.

Regardless of whether you think these are depression level statistics, unemployment is high and rising. Moreover, the "adverse scenario" in the Fed's stress test was unemployment at 10.3% at the end of 2010.

If you want something to think about after reading that jobs report, please consider Aircraft repair jobs sold to foreign workers, resumes not important.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Aircraft repair jobs sold to foreign workers, resumes not important

noreply@blogger.com (Michael Shedlock) — Thu, 02 Jul 2009 07:38:00 +0000

Here's something to think about when the unemployment numbers come out Thursday Morning: Aircraft repair jobs sold to foreign workers, resumes not important.

A News 8 investigation found that hundreds of aircraft mechanics have been brought into the United States to work at aircraft repair facilities.

Insiders say the companies that are importing the mechanics are so eager to save money, they’re overstating their qualifications. The result may be a threat to safety, abetted by lax enforcement of immigration law.

At daybreak any morning at San Antonio Aerospace, hundreds of workers amble through the gates for the day shift. They repair big jets like Airbuses, Boeing 757s and MD-11s.

Jada Williams used to work for one of the contracting companies, Aircraft Workers Worldwide (AWW), based in Daphne, Alabama. AWW supplied workers for two facilities, Mobile Aerospace Engineering (MAE) in Mobile, Alabama and San Antonio Aerospace, which are both controlled by ST Aerospace. San Antonio Aerospace is a division of ST Aerospace, the largest aircraft repair company in world.

"They’ve employed over 200 since I left,” said Williams, who said she was unfairly fired by the contractor last fall. "And I know we had over a hundred when I was in there, just in Mobile.”

San Antonio Aerospace uses several contracting companies to supply it with workers. It can be a high-profit business for the contractors. They can make $3 to $12 an hour for every worker hired by SAA, contractors say.

The drive for profits is so big, Williams and other insiders said, that the contractors often falsify the qualifications of the imports.

"We had two,” she said. “One of them was a female. She was about 16. It was a brother and a sister. One guy was a grocery bagger, one was a security guard in Puerto Rico. Their ages were between 18 and 22.”

Their ages are important because it takes years of experience or schooling to learn how to repair a big jet, experience they couldn’t have had.

One former SAA mechanic, who spent years learning his trade before being laid off, said foreign workers got their training on the job from the Americans they worked with.

"The more experienced mechanics, we would get paired up with either one or two of these guys,” he says. “And they would watch us for a month or so. And that’s how they would get their training.”

Williams is suing her former boss, Daniel Harding, for unlawful termination and racial discrimination. She has a computer full of company documents that were acquired accidentally when AWW got new computers for its office and gave her an old one. Spreadsheets, resumes and payrolls revealed many company practices, from interviews, to trips to the U.S. Embassy in Mexico City for visas, charts marked the progress of Mexican workers to the United States. Documents also showed workers were charged $3,500 each by AWW to get into the United States.

Williams also has an e-mail trail from AWW president Harding to Moh Loong Loh, the President of San Antonio Aerospace. He described one candidate as having “ 25 percent English skills.”

Williams said in Mobile the numbers were even bigger. She said she picked up a group of 60 people from Puerto Rico at Mobile Regional Airport last February. Since Puerto Rico is a U.S. territory, its residents are U.S citizens. For the contractors, this is a bonus because they can pay the Puerto Ricans low wages without having to deal with foreign immigration requirements.

There is an interesting video in the above link that inquiring minds may wish to consider.

Putting profit over the safety of aircraft and passengers is unconscionable. If anyone at AWW or San Antonio Aerospace is in violation of immigration laws or falsifying documents, I hope they join Madoff for a nice stay in prison.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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El Monte California Avoids Bankruptcy After Unions Agrees To Cuts

noreply@blogger.com (Michael Shedlock) — Thu, 02 Jul 2009 06:12:00 +0000

Amidst a big round of applause, El Monte California avoids bankruptcy after police union agrees to cuts.

The city averted bankruptcy Tuesday night after all four of its employee unions, including the Police Officers Association, agreed to cuts in benefits to help eliminate the city's budget deficit.

Though a round of applause spread through the City Council chambers after the last-minute announcement was made, many residents and staff members walked away from the meeting still frustrated by El Monte's dire financial situation.

"City departments are working with skeleton crews, and we are being forced to concentrate on essential services," acknowledged City Manager Jim Mussenden.

The council Tuesday approved a budget for the 2009-10 fiscal year, which began Wednesday, that includes massive cuts to city services and recreational programs. It also will result in the layoff of 100 employees and the closure of one of the city's four fire stations.

The cuts totaled $12 million - more than one-fifth the city's total $49.3 million budget.

The deficit is the result of falling sales tax revenues combined with retirement costs and deferred compensation benefits in employee contracts.

Sales tax revenue has been dropping since 2007 and fell an estimated $5.5 million last fiscal year alone. It is expected to continue falling in the coming year, despite a half-cent sales tax increase voters approved in November. Sales tax in the city stands at 10.25 percent, one of the highest rates in the state and country.

Employees agreed to forgo pay increases they were due starting Wednesday, accept a $200 lower contribution from the city for medical benefits, and, in some cases contribute 5 percent toward their PARS retirement accounts.

The non-police employees also agreed to continue through June 2010 the 10 percent cut in pay through furloughs they agreed to late last year.

In addition, upper management, including the city manager, assistant city managers, finance director, police chief and assistant police chief all agreed to continue the 10 percent cuts they accepted last year, and accept a $200 lower contribution from the city for medical benefits. Civilian management also agreed to contribute 5 percent of their salary towards their PARS retirement accounts and police management agreed to forgo their 4 percent pay increase due July 1.

No Reason To Cheer

El Monte solved nothing. The cuts were temporary and the city will soon be back in trouble.

The root cause of this mess is retirement costs and deferred compensation benefits in employee contracts. The union cuts did not solve the basic problem.

Note that the city sales tax is an excessive 10.25 percent, one of the highest rates in the country. What are El Monte taxpayers getting for their money? The answer is skeleton crews, longer emergency response times, a layoff of 100 employees, and the closure of one of the city's four fire stations.

All El Monte did was postpone the real problem for another day while city services degrade and the city sales tax remains excessive. This is no reason to cheer.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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GM Blames Bankruptcy, Trade-In Programs, Man in the Moon for Latest Miss

noreply@blogger.com (Michael Shedlock) — Wed, 01 Jul 2009 23:48:00 +0000

GM and Toyota Missed again. As usual GM has an array of excuses although admittedly not the man in the moon, at least not yet. Please consider U.S. Auto Sales Slide as GM, Toyota Miss Estimates.

U.S. auto sales in June again failed to reach a 10 million annual pace as General Motors Corp. and Toyota Motor Corp. fell short of analyst estimates, suggesting that the industry hasn’t started to rebound yet.

The annual rate fell to 9.69 million cars and light trucks last month, from 9.9 million in May and 13.7 million in June 2008, Autodata Corp. said. Total sales fell 28 percent, to 859,847 vehicles, the 20th straight monthly decline, the Woodcliff Lake, New Jersey-based company said.

Analysts surveyed by Bloomberg had projected that the annual pace for June would climb above 10 million for the first time this year. GM blamed its worse-than-expected results on a new U.S. program to spur trade-ins of older vehicles, saying that kept some buyers on the sidelines. The company said its June 1 bankruptcy filing also scared off some customers.

Sales dropped 42 percent from a year earlier at Chrysler, 34 percent at GM and 32 percent at Toyota. Chrysler, which exited bankruptcy during June, cited an end to most sales to fleet customers such as rental companies for its drop.

Traffic ‘Fell Off’

“Traffic definitely fell off during the last 10 days of the month,” said David Fischer, owner of 30 auto franchises, mostly in Michigan and Florida. “In my opinion, it was because of consumers waiting to understand the cash-for-clunkers law.”

Ford’s deliveries fell 11 percent last month, according to a statement today from the Dearborn, Michigan-based company. The declines were 23 percent for Nissan and 30 percent for Honda.

The sales decline for this year’s first six months was the worst since at least 1976, according to Bloomberg data.

Tight credit is still holding down sales and may reduce the annual total by as many as 2 million vehicles, GM’s DiGiovanni said. “There’s no question credit is hurting our market.”

Ford, passed by Toyota in annual U.S. sales in 2007, outsold the Toyota City-based company for the third month in a row and leads the Japanese automaker for this year’s first half.

Ford’s total sales fell to 155,195 vehicles from 174,091 a year earlier. Sales of its cars declined 17 percent in June, while the Fusion mid-size sedan had a 26 percent gain. Mustang sales were down 30 percent and F-Series pickup trucks, Ford’s biggest seller, fell 7.4 percent.

Consumer confidence is still the biggest hurdle to auto sales, Toyota U.S. Vice President Bob Carter said on a conference call.

Consumer Confidence Survey

Inquiring minds are digging into the Consumer Confidence Survey™ Press Release to see if Toyota's Claim can be justified.

The chart shows that Consumer Confidence has actually been on a tear since March although there was a slight dip in June. However most of the improvement is in expectations rather than "present conditions" which fell to 24.8. Those saying jobs are "plentiful" decreased to 4.5 percent from 5.8 percent according to the survey.

Present conditions are unlikely to improve until jobs do, and jobs are unlikely to improve for quite some time.

Inventory Clearing

Any substantial increase in auto sales (if and when it comes) will probably be in clearing 2009 models at huge losses, and at the expense of 2010 sales and pricing power. Consumers want bargains, and bargains they will get.

At some point GM sales will rebound and when it happens expect to see hoopla, fireworks, and a lot of misguided credit taking for turning the corner to profitability. However, the fact remains, US taxpayers are never going to be repaid for their "investment" in GM.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Voluntary and Involuntary Credit Card "Attitude Adjustments"

noreply@blogger.com (Michael Shedlock) — Wed, 01 Jul 2009 15:45:00 +0000

In the course of this recession, consumer attitudes towards spending have changed. So have banks' attitudes towards lending.

In regards to consumer spending and credit cards, some consumers have had a voluntary attitude adjustment. Others have had an attitude adjustment thrust upon them. Several articles will show what I mean.

JPMorgan Chase Raises Minimum Payments

Please consider JPMorgan Raises Credit Card Monthly Minimum Payments.

JPMorgan Chase & Co., the biggest U.S. credit-card issuer, plans to raise the minimum payment on balances to 5 percent for some customers, less than a month before new federal curbs begin to take hold.

The increase from 2 percent takes effect in August, the company said in a notice customers received this month. Customers who pay less than the minimum may be charged extra fees, the bank’s Web site says. New York-based JPMorgan has about 159 million cards in circulation, a regulatory filing shows, and spokeswoman Stephanie Jacobson said the new minimum applies to fewer than 1 percent of customers.

By making some customers pay a 5 percent monthly minimum, Chase is minimizing its risk, said Bill Hardekopf, CEO of LowCards.com, a Birmingham, Alabama research firm. “Too many people got credit cards that should not have been approved for credit cards,” Hardekopf said today in an interview. “Chase is deeming those customers as high risk.”

Citigroup Raises Rates on 13-15 Millions Cards

Also note that Citi raises rates on millions of credit cards.

Citigroup Inc has increased interest rates on up to 15 million U.S. credit card accounts just months before curbs on such rises come into effect, the Financial Times reported citing people close to the situation.

"These changes also reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availability of credit," Citigroup told the paper.

Clearly banks have had a voluntary attitude adjustment. They are tired of taking losses on credit cards and are acting to stem losses and raise rates while they still can. My guess is that default rates immediately go up in response to these measures by Citigroup and Chase. However, that is better for Citigroup and Chase than letting consumers run up debts only to default later.

Banks Cut Credit Lines, Consumers Gripe

Here is a more interesting article to consider: FICO Scores Show Flaws as U.S. Banks Cut Credit Lines.

When Sharii Rey, a paralegal in Portland, Oregon, had her credit limit reduced by JPMorgan Chase & Co. earlier this month, she said it would hurt her 760 credit score. That’s not the bank’s problem, she was told. It’s FICO’s.

After Rey’s $42,500 credit line was cut to $12,000, her debt relative to available funds almost quadrupled. This so-called utilization rate is a large component of the FICO formula and a higher ratio can lower a score. Rey, 62, is concerned a new FICO score will squash her ability to borrow.

Rey said she was counting on a credit “cushion” in case she was affected by the decline in the economy. She said she fears she won’t be able to buy a new home and car because her reduced FICO score will mean higher interest rates on the loans.

“I have been gritting my teeth so hard, I fear for the enamel,” Rey said.

Involuntary Attitude Adjustment

Rey has exactly the kind of attitude that banks should be fearing. Rey was ready and willing to use a $42,500 credit line should she be affected by the decline in the economy. The operative word in the last sentence is "was". However, JPMorgan cut her off.

$12,000 should be plenty of cushion should one lose a job. If perchance it is not, then JPMorgan probably saved themselves a lot of money.

Someone 62 years old should be thinking about something other than buying cars or new houses on credit, namely saving for retirement. Anyone who claims “I have been gritting my teeth so hard, I fear for the enamel” is truly in need of an attitude adjustment.

Since she would not do it herself, JPMorgan is attempting to thrust an attitude adjustment upon Rey. And I might add, rightfully so, at least from the limited details as presented.

FICO Scoring Flaws

Let's return to the article for a look at reported FICO flaws.

Congressman Luis Gutierrez, an Illinois Democrat, says the FICO formula, the most widely used by U.S. lenders, has flaws as banks decrease loans to consumers, regardless of individual risk profiles. At least 30 million Americans had their credit limits reduced arbitrarily during the second half of 2008, FICO estimates. In the first quarter, New York-based JPMorgan and Citigroup Inc. and Bank of America Corp. in Charlotte, North Carolina, slashed $320 billion from credit lines, according to a report by former Oppenheimer & Co. analyst Meredith Whitney.

“Reductions to a consumer’s line of credit based upon the lending institutions’ overall appetite for risk has little or no bearing on a consumer’s own risk of default,” said Gutierrez, chairman of the House Subcommittee on Financial Institutions and Consumer Credit.

Banks have scaled back lending during the deepest U.S. recession in five decades. The Federal Reserve’s quarterly survey of senior loan officers released May 4 showed about 65 percent of banks lowered credit limits on new or existing credit-card customers, compared with 45 percent in the January survey. Consumer credit, which includes credit card and auto loans, was $2.52 trillion in April, according to a Fed report released this month.

“The emphasis on utilization rates when you’re not running up debt and instead limits are running down makes FICO scores much less reliable,” said Josh Frank, a senior researcher at the Center for Responsible Lending in Durham, North Carolina.

“Is FICO an accurate predictor of risk?” said Evan Hendricks, publisher of “Privacy Times,” a Washington-based newsletter and author of “Credit Scores & Credit Reports.” “It’s the worst system around, except for all the rest,” said Hendricks, taking a line from former U.K. Prime Minister Winston Churchill.

FICO clearly is not perfect. One flaw I see in the system is people had too much credit and FICO did not penalize them enough for it. That FICO scores can rise as credit cards limits rise is certainly a mistake although it seems that FICO corrected some of that in the FICO 08 version.

Flaws or not, Gutierrez is making an assumption that these reductions in credit are arbitrary. It is clear that too much credit has been extended to too many people. Cutting back credit seems like a pretty smart thing to me given the state of the economy and jobs.

An easy case in point is a paralegal with a $42,500 credit line. We do not know what other assets she has, so perhaps that line is reasonable. However, her attitude as well as here dependence on credit suggests otherwise.

By the way, this curtailing of credit, voluntarily or in voluntarily is clearly a deflationary force.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Investment Grade Bonds Return 9.2%, Junk Returns 29%; Has the "Hard Money" Been Made?

noreply@blogger.com (Michael Shedlock) — Wed, 01 Jul 2009 05:34:00 +0000

As long as the corporate bond market is healthy there is going to be a bid on equities. And in the first half of 2009, junk bonds have been running.

Please consider Corporate Bonds Show Lehman Doesn’t Matter With 9.2% Return.

Nowhere is the recovery in financial markets more evident than in corporate bonds, where Lehman Brothers Holdings Inc.’s bankruptcy is becoming a distant memory.

U.S. investment-grade company debt returned 9.2 percent in the first half of the year, outperforming Treasuries by 13.7 percentage points, the most on record, according to Merrill Lynch & Co. index data. Corporate bonds also did better than the Standard & Poor’s 500 Index of stocks, marking the first time since 2002 that the fixed-income securities outshined both Treasuries and equities.

Yields on investment-grade company securities fell to within 3.31 percentage points of Treasuries yesterday, the least since Sept. 10, according to Merrill’s U.S. Corporate Master Index. Spreads widened to a record 6.56 percentage points on Dec. 5, and the securities lost 6.8 percent in 2008, the worst year on record, as the shock to financial markets from Lehman’s collapse Sept. 15 froze credit markets and sparked a run on Treasuries that caused bill rates to fall below zero.

“Spreads on corporate debt were so out of whack coming into the year, implying default rates that indicated more than 20 percent of all speculative-grade companies would go bankrupt,” said Kevin Sherlock, co-head of loan and high-yield capital markets at Deutsche Bank in New York. “The risk appetite is far more aggressive now than it was three months ago. It’s about where we were last summer at pre-Lehman levels.”

The biggest returns came in the riskiest securities. High- yield, high-risk bonds gained 29 percent, or 34 percentage points more than Treasuries, Merrill Lynch indexes show.

While credit spreads are narrowing, defaults continue to rise. The U.S. speculative-grade default rate jumped to 8.1 percent in May, the highest since October 2002, and may reach 14.3 percent by the first quarter of 2010, according to S&P.

“The easy money has been made,” said Richard Lee, a managing director in the fixed-income trading department of closely held broker-dealer Wall Street Access in New York. “You could have bought any corporate credit in January and February and made out like a bandit.”

Other measures of credit also show improvement. The difference between what banks and the U.S. government pay to borrow for three months, the TED spread, has shrunk to 41 basis points, the lowest since July 2007 and down from 464 basis points in October. A basis point is 0.01 percentage point.

The Libor-OIS spread, an indicator for banks’ willingness to lend, ended yesterday at 0.38 percentage point. That’s approaching the 0.25 percentage point that former Fed Chairman Alan Greenspan has said would indicate that markets were back to “normal.”

Has The Hard Money Been Made?

It is perfectly clear the easy money has been made. Junk bonds are up 29% for the year while the S&P 500 is up 3.2%.

The question now is "Has the Hard Money Been Made?"

While no one knows the answer to that question, we do know risk appetite is back at pre-Lehman levels even though speculative grade defaults are at 8.1 percent and climbing, the highest since October 2002.

Please note the differences. In October of 2002 the economy and jobs were about to improve dramatically along with consumer spending. Housing was robust and about to get white-hot.

This go around, there is not going to be a quick revival in jobs and the housing bottom is still not in. Even when housing bottoms, where is it going? I suggest nowhere in real terms for a decade. Moreover, consumer attitudes towards debt and saving are dramatically different now than in 2003.

Household Deleveraging

In Effect of Household Deleveraging on Housing, Consumption and the Stock Market I posted the following chart and commentary.

Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.

....

Think the US stock market is going to come roaring back if consumer deleveraging plays out as it must? Think again.

Expect another "Lost Decade" when it comes to housing and the stock market. It's the deflationary payback for the greatest credit binge in world history.

On June 26, the US Savings Rate Hits 6.9%, Highest In 15 Years. It was 4% when I posted the above chart on May 19, 2009.

Consumer attitudes towards spending have changed. So have banks' attitudes towards lending.

Moreover, the so-called stimulus plans and Bernanke's wizardry have bailed out banks (at taxpayer expense) but have done nothing for consumer debt levels or housing. Indeed Home Loan Delinquencies Double on Prime Loans; Foreclosure Filings Top 300,000 3rd Straight Month.

Expect a double dip recession because one is coming. A triple dip is certainly not out of the question. With that in mind, and with rising junk bond defaults, the stock market and corporate bonds are both priced for perfection.

Nonetheless, if junk bonds continue to run more "hard money" can be had. Feelin' Lucky?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Home Loan Delinquencies Double on Prime Loans; Foreclosure Filings Top 300,000 3rd Straight Month

noreply@blogger.com (Michael Shedlock) — Tue, 30 Jun 2009 22:06:00 +0000

The Office of the Comptroller of the Currency says Delinquencies Double on Least-Risky Loans.

Delinquency rates on the least-risky mortgages more than doubled in the first quarter from a year earlier as U.S. efforts to help homeowners failed to keep pace with job losses that pushed more borrowers toward foreclosure.

Prime mortgages 60 days or more past due climbed to 2.9 percent of such loans through March 31 from 1.1 percent at the same point in 2008, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said today in a report. First-time foreclosure filings on the loans rose 22 percent from the fourth quarter, the report said.

“I’m very concerned about the rise in delinquent mortgages and foreclosure actions,” Comptroller of the Currency John Dugan said in a statement with the report. President Barack Obama’s plan to create “sustainable, payment-reducing modifications is a positive step that should show significant benefits in the coming months,” Dugan said.

Obama’s program, unveiled Feb. 18, aims to help as many as 4 million homeowners by modifying loans and calls for Fannie Mae and Freddie Mac to refinance mortgages for as many as 5 million borrowers who owe more than their houses are worth. Foreclosure filings surpassed 300,000 for a third straight month in May, according to RealtyTrac Inc., and the U.S. economy has shed about 6 million jobs since the recession began in 2007.

Serious delinquencies on prime loans, which account for two-thirds of all U.S. mortgages, rose to 661,914 in the first quarter from 250,986 a year earlier, according to the report. Overall, mortgages 60 days or more past due rose 88 percent from last year, the report said.

“Serious delinquencies are a leading indicator of increased foreclosure actions in the future,” the report said.

The data shows 5.9 percent of the 21.8 million Fannie Mae and Freddie Mac loans serviced by national banks or thrifts were at least days 30 days late, in foreclosure or subject to bankruptcy, compared with 3.2 percent a year earlier.

The report covers the performance of 34 million loans totaling $6 trillion, the agencies said.

Mortgage Metrics Report for First Quarter 2009

Inquiring minds are digging into the OCC and OTS Release Mortgage Metrics Summary for First Quarter 2009.

The report, based on data from loan servicing companies that manage 64 percent of all first-lien U.S. mortgages, shows:
The number of loan modifications significantly increased. During the quarter, servicers implemented 185,156 new loan modifications, up 55 percent from the previous quarter and 172 percent from the first quarter of 2008.

The proportion of payment-reducing modifications also increased. More than half of the modifications in the first quarter of 2009 resulted in lower monthly principal and interest payments, as servicers focused on achieving more sustainable mortgage payments. Modifications that reduced monthly payments by 20 percent or more jumped 19 percent from the previous quarter, to 29 percent of all modifications. By contrast, actions that resulted in increased payments constituted only 19 percent of modifications, a drop of 25 percent from the previous quarter.

Modifications that reduce payments have lower delinquency rates over time. Although delinquencies on modified loans increased each month following modification, delinquency rates were considerably lower for mortgages in which monthly payments were reduced. Six months after modification, only 24 percent of the mortgages that had monthly payments reduced by 20 percent or more were 60 or more days past due, compared with 54 percent of mortgages with monthly payments left unchanged, and 50 percent with higher monthly payments.

Seriously delinquent mortgages increased. Seriously delinquent mortgages (60 or more days past due or involving delinquent bankrupt borrowers) increased as economic pressures continued to weigh on homeowners. Prime mortgages, which represented two-thirds of all mortgages in the portfolio, had the highest percentage increase in serious delinquencies, climbing by more than 20 percent from the prior quarter to 2.9 percent of all prime mortgages.

Foreclosures in process increased. Foreclosures in process also increased during the quarter to 844,389, or about 2.5 percent of all serviced loans, as moratoriums on foreclosures expired during the first quarter. This increase represented a 22 percent jump from the previous quarter and a 73 percent rise from the first quarter of 2008.
Data also showed a continuing emphasis on preventing avoidable foreclosures to keep families in homes and mitigate losses, as servicers continued to implement more home retention actions (loan modifications and payment plans) than home forfeiture actions (foreclosures, short sales, and deed-in-lieu-of-foreclosure actions). Prime borrowers received about twice as many home retention actions as home forfeiture actions, while subprime borrowers received more than seven times as many.

The report covers the performance of 34 million loans totaling more than $6 trillion in principal balances from the beginning of 2008 through the end of the first quarter of 2009. The impact of the increase in modifications, particularly those with reduced monthly payments, will be seen only in future data.

OCC and OTS Mortgage Metrics Report

Inquiring minds are also digging into the 42 page OCC and OTS Mortgage Metrics Report

Click On Any Chart For Sharper Image

Home Retention Actions: Loan Modifications and Payment Plans

Increased emphasis on loan modifications drove an overall increase in home retention actions, as shown in the table below. Newly initiated loan modifications reached 185,156 during the quarter— rising by 55.3 percent from the previous quarter and 172.3 percent from the first quarter of 2008. The impact of this increase in modifications on reducing foreclosures and enabling borrowers to remain current on their loans will only be seen in future data. Likewise, modification data through the first quarter do not reflect the impact of the Administration’s “Making Home Affordable” program, which was announced in March and began to be implemented after this reporting period.

Modifications during the first quarter of 2009 resulted in lower monthly principal and interest payments on 54.1 percent of all modified loans, as servicers focused on achieving more sustainable mortgage payments. The percentage of modifications that reduced payments by 20 percent or more increased to 29.3 percent of all modifications made in the first quarter of 2009, up 19.2 percent from the previous quarter. Modifications that increased monthly payments declined to 18.5 percent of all modifications during the quarter, down from 25 percent in the fourth quarter and 33.5 percent in the third quarter. Actions that left payments unchanged increased slightly to 27.3 percent.

New to this report are data on the types of actions taken to modify loans. Nearly two-thirds of modifications were “combination modifications” that involved two or more changes to the terms of the loan. Capitalization of delinquent interest, fees, and advances, combined with interest rate reductions and extended maturities were the predominant combination of modifications made during the first quarter. Interest rate and payment freezes, principal reductions, and principal deferrals were less prevalent. Of the 185,156 mortgages that were modified in the first quarter of 2009, 70.2 percent included a capitalization of missed payments and fees, 63.2 percent reduced the interest rate, and 25.1 included an extended term. By comparison, 12.6 percent of the mortgages received modifications that froze the interest rate, 1.8 percent included a reduction of principal, and 1.1 percent included a deferral of principal.

Status of Loans Modifications as of March 31, 2009

Re-Default Rate for 2008 Modifications

Re-Default Rates for Portfolio Loans and Loans Serviced for Others

Overall Mortgage Portfolio

Portfolio Composition
(Percent of All Mortgage Loans in the Portfolio) First Quarter 2009

Damning Report

This is a damning report on the success (or lack thereof) of the mortgage foreclosure workout programs to date. Redefault rates are near 50% after Fannie/Freddie loan modifications. Of course Fannie and Freddie can grant bigger loan mods (and probably will), but taxpayers will have to eat the cost.

Private loan mods are redefaulting at a stunning 58.1% rate 12 months after modification. Can those people redeafulting can afford ANY payment? Even if they can, the incentives to walk away are enormous.

Certainly those out of a job are unlikely to be able to afford any payment, and the unemployment rate is soaring.

Prime Loan Math in Dollars

Moreover note that 67% of loans are "Prime Loans". Prime mortgages 60 days or more past due climbed to 2.9 percent of such loans through March 31 from 1.1 percent at the same point in 2008 according to the report.

Total Servicing is $6 Trillion. $4 Trillion of that is "prime". 2.9% of that is 60 days late or worse. 2.9% of $4 Trillion is $116 billion. And that ignores the problem in Alt-A and Pay Option ARMs.

Prime Loan Math in Units

There are 22.8 million prime loans. 2.9% of that is 661,200. That's a lot of potential housing supply.

Jobs Are The Key

Unless the job market quickly improves, expect those numbers to soar. Here's a hint: the job market is unlikely to significantly recover for years.

This was a very damning report on the state of housing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Corn Futures Down Lock Limit, Soybeans and Wheat Drop On Crop Reports

noreply@blogger.com (Michael Shedlock) — Tue, 30 Jun 2009 18:48:00 +0000

As U.S. Farmers Boost Acreage, Corn, Soybeans, Wheat Plummet.

Corn plunged by the Chicago Board of Trade’s limit after a government report showed U.S. farmers planted more acreage with the grain than estimated in March. Wheat and soybeans also tumbled on signs of increasing supplies.

Corn futures for December delivery dropped by the maximum of 30 cents, or 7.6 percent, to $3.6725 a bushel at 11:02 a.m. on the CBOT. The price headed for the fourth straight quarterly slide.

The U.S. corn report showed “an awfully big acreage number and suggests inventories will be more comfortable,” said Tim Emslie, a research manager at Country Hedging Inc. in Inner Grove Heights, Minnesota.

The U.S. is the world’s largest exporter of corn, soybeans and wheat. Corn is the nation’s biggest crop, valued at $47.4 billion in 2008, followed by soybeans, hay and wheat, government figures show.

Soybean futures for November delivery fell 22 cents, or 2.2 percent, to $9.615 a bushel. Earlier, the price touched $9.435, the lowest since April 1.

U.S. farmers will sow a record 77.483 million acres with the oilseed, up 2.3 percent from 75.718 million last year, the USDA said. In March, the agency said farmers intended to plant 76.024 million acres.

Wheat futures for July delivery tumbled 18.25 cents, or 3.5 percent, to $5.0975 a bushel. The price earlier touched $4.9575, the lowest since Dec. 12.

About 13.77 million acres were seeded with spring wheat, the USDA said. That topped the 13 million projected by analysts surveyed by Bloomberg News last week. Total inventories on June 1 were 667 million bushels, doubling from a year earlier.

Cattle and hog futures rallied today as the crop reports signaled lower costs for livestock feed.

“This is a great day for the cattle and hog producer and the dairyman,” Basse said. “Corn, soybeans and wheat all made their seasonal highs earlier this month. Given favorable weather for the remainder of the growing season, we should have a breathable cushion of inventories.”

Corn Futures Daily Chart

Corn Futures Monthly Chart

Wheat Futures Daily Chart

Wheat Futures Monthly Chart

Soybean Futures Daily Chart

Soybean Futures Monthly Chart

Charts are from Barchart Futures.

As compared to a year ago, prices are down across the board, even on soybeans. Corn prices are down by 50%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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UK First Quarter GDP Drops 2.4%, Most Since 1958; US GDP Fell 5.5%

noreply@blogger.com (Michael Shedlock) — Tue, 30 Jun 2009 16:52:00 +0000

Expect to see more headlines like this, worldwide: U.K. First-Quarter GDP Drops 2.4%, Most Since 1958.

The U.K. economy shrank more than previously estimated in the first quarter in the biggest contraction since 1958 as the recession choked industries from construction to services.

Gross domestic product fell 2.4 percent from the final three months of 2008, compared with the prior measurement of a 1.9 percent drop, the Office for National Statistics said today in London. The median prediction in a Bloomberg survey of 28 economists was for a 2.1 percent decline. Construction activity plunged almost three times as much as originally estimated.

Bank of England Governor Mervyn King said last week that Britain’s recovery from recession may turn out to be “a long, hard slog.”

The U.K.’s GDP will probably fall 4.3 percent this year, the Organization for Economic Cooperation and Development said in a June 24 report. That compares with a 4.8 percent drop in the euro area and a 2.8 percent decline in the U.S.

The Bank of England is pumping newly created money into the financial system and keeping its benchmark interest rate at a record low of 0.5 percent to fight the recession.

Still, King said June 24 that problems in the banking system mean the recovery is “uncertain” and policy maker Kate Barker said the same day that Britain’s housing market was “still some way away from normal.

US First Quarter GDP Dropped At 5.5%

Last week the BEA announced the US Gross Domestic Product, for the 1st Quarter 2009.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 5.5 percent in the first quarter of 2009,(that is, from the fourth quarter to the first quarter), according to final estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP decreased 6.3 percent.

The decrease in real GDP in the first quarter primarily reflected negative contributions from exports, equipment and software, private inventory investment, nonresidential structures, and residential fixed investment that were partly offset by a positive contribution from personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, decreased.

The smaller decrease in real GDP in the first quarter than in the fourth primarily reflected an upturn in PCE and a larger decrease in imports that were partly offset by larger decreases in private inventory investment and in nonresidential structures.

The 2.8% GDP contraction estimate for the US looks a little optimistic but there are so many give-away programs and government spending that perhaps they the NBER will be declaring the end of this recession later this year. If so it will be nothing to get excited over.

A double dip will be coming in 2010 or 2011 once the stimulus wears off. Consumers are not about to go on a sustained spending spree anytime soon and consumer spending is 70% of the economy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Chicken Farmers Have Hearts Plucked Out

noreply@blogger.com (Michael Shedlock) — Tue, 30 Jun 2009 05:57:00 +0000

Last December, Pilgrim's Pride Went Bankrupt. The repercussions on chicken farmers are still being felt.

Please consider At Chicken Plant, a Recession Battle.

DOUGLAS, Ga. -- This small town was devastated in February when its largest employer, Pilgrim's Pride Corp., said it would close a chicken-processing plant as part of the company's bankruptcy filing.

Since then, city and county officials have been working to find a buyer who could save the plant's nearly 1,000 jobs and $300,000 in annual county tax revenues. But there's a problem: Pilgrim's Pride isn't eager to sell.

Pilgrim's has so far rejected a $32 million bid for the plant from Amick Farms LLC of Batesburg, S.C., company and city officials say. Another chicken company took a look and decided Pilgrim's asking price was too high, say people familiar with the matter. City officials say the company kept a prospective bidder from touring the plant, making it a challenge to market.

Pilgrim's says it hasn't been offered a fair price for the plant and is cautious about letting rivals see its manufacturing processes. In an email to the city of Douglas, Pilgrim's President and Chief Executive Don Jackson said, "With declining demand for chicken in this terrible economy we need to remove chicken from the market. This would not be accomplished with a sale." While he said he recognized the "devastating impact" a closing would have on Douglas, "the actions do strengthen the company and help protect the jobs" of the company's 40,000 U.S. employees and farmers.

Many businesses in the U.S. are struggling with excess capacity. From autos to airlines to houses, "there's a landscape of industries and sectors that are recognizing that they're going to need to scale down," says Nancy L. Rose, an economist at the Massachusetts Institute of Technology Department of Economics in Cambridge.

With no plant to process the birds they raise, local chicken farmers have no income to pay off debts. Months ago, the hundreds of cavernous, metal-and-wood chicken houses in the county were worth at least $200,000 each when filled with chickens, farmers say. Now, except for flies and old feathers, the structures sit empty and are virtually worthless.

Mr. Jackson, Pilgrim's CEO, appears to have struggled over the decision to shut the plant. In a March 11 email to Ms. Lewis, the Economic Development Authority official, he said: "I do not mean to 'pluck the heart' out of Douglas or any other community. All of my 58 years have been spent in agriculture. Thirty of it in the chicken business. I grew up on a farm and my father spent his entire life farming. Not some 'rich' farmer but one just like your neighbors in Coffee County. He would be sick over this situation." Mr. Jackson declined to be interviewed.

Pilgrim's began dismantling chicken operations in the area, slaughtering hens and selling off eggs. The steps were necessary because "you can't close a plant and have tens of thousands of live chickens there with no place to go," Pilgrim's bankruptcy attorney, Stephen A. Youngman, said in court transcripts.

Douglas residents still hope the plant will reopen. One recent afternoon, after a corporate jet landed at the local airport, rumors flew that a buyer might have arrived. It turned out the plane was carrying executives from Little Debbie, a maker of cookies and cakes, doing business in the region.

Oh' The Humanity!

I am not sure quite why but the above story reminds me of a scene from the Cincinnati WKRP Turkey Drop Episode.

"As God is my witness, I thought turkeys could fly!!!" -- Arthur Carlson, WKRP in Cincinnati.

The above quote is from the famous WKRP in Cincinnati episode where Station Manager, Arthur Carlson (played by Gordon Jump), arranged to have live turkeys dropped from a helicopter as an advertising stunt.

Unfortunately, this turned out to be a serious miscalculation. The poor birds plunged to earth, never even having a chance. Their tragic "last flight" was relayed to WKRP listeners by reporter Les Nessman, played by Richard Sanders:

"It's a helicopter, and it's coming this way. It's flying something behind it, I can't quite make it out, it's a large banner and it says, uh - Happy... Thaaaaanksss... giving! ... From ... W ... K ... R... P!! No parachutes yet. Can't be skydivers... I can't tell just yet what they are, but - Oh my God, Johnny, they're turkeys!! Johnny, can you get this? Oh, they're plunging to the earth right in front of our eyes! One just went through the windshield of a parked car!

Oh, the humanity! The turkeys are hitting the ground like sacks of wet cement! Not since the Hindenburg tragedy has there been anything like this!"

Tomorrow a report on lobsters.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Long Term Budget Projections at Unprecedented and Intolerable Levels

noreply@blogger.com (Michael Shedlock) — Mon, 29 Jun 2009 21:46:00 +0000

The Committee for a Responsible Federal Budget has an interesting report on the Long Term Budget Outlook as reported by the Congressional Budget Office. Let's take a look.

Last week, the Congressional Budget Office (CBO) released its Long-Term Budget Outlook. The reports suggests a brief window in which deficits subside a bit, after which the effects of health care cost growth and population aging will drive them rapidly upward and bring the national debt to unprecedented and intolerable levels.

Under current law, CBO projects debt held by the public will rise from less than 40 percent of GDP before the economic crisis to nearly 100 percent by 2040 and 300 percent by 2083. If current policies are continued, CBO projects the debt will rise to 100 percent by the early 2020s, to 200 percent before 2040, and eventually to 750 percent.

Ultimately, revenue increases and/or spending cuts will be necessary to prevent “a vicious cycle in which the government had to issue ever-larger amounts of debt in order to pay ever-higher interest charges.”

Ever-Growing Deficits

If we continue on our current path, according to the CBO, deficits will persist and grow, driving public debt to untenable levels. The CBO makes two sets of long-term projections: the “extended baseline scenario,” which essentially assumes current law, and the “alternative fiscal scenario,” which assumes policy makers continue a number of current practices such as maintaining physicians payments in Medicare, continuing to patch the Alternative Minimum Tax, renewing the 2001/2003 tax cuts, and allowing discretionary spending to grow with GDP rather than inflation over the next decade.

Rising deficits are caused by spending growing considerably faster than revenue. Projected spending increases come mainly from the growth of Medicare and Medicaid, and to a lesser extent Social Security.

Although a relatively small portion of our budget today at 1 percent of GDP, interest on the debt would grow to consume 12 percent of GDP by 2080 under CBO’s baseline scenario or 30 percent under its alternative scenario. Of course, even the baseline scenario displayed below would be unlikely to occur, since investors and lenders would not allow the United States to accumulate such high levels of debt. But this projection represents the magnitude of the gap that must be closed.

Ultimately, the long-term budget outlook will necessitate serious tax and spending changes. Absent such changes, we face the real threat of a fiscal and economic crisis more severe than what we've already endured.

There are more interesting charts in the article including one on Factors Impacting Growth of Medicare, Medicaid, and Social Security.

To say that the present course is unsustainable is putting it mildly. Spending cuts are mandatory. However, neither the Obama administration nor Congress has gotten the message. Nor has the Free Lunch Society of which Paul Krugman is the high priest.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Complacency as Measured by VIX Returns to Wall Street

noreply@blogger.com (Michael Shedlock) — Mon, 29 Jun 2009 18:05:00 +0000

Bloomberg is reporting VIX Drops to Lowest Level Since Lehman’s Collapse as Fear Ebbs.

The benchmark index for U.S. stock options fell below its closing level from the day before Lehman Brothers Holdings Inc.’s September collapse as stocks rallied and investors paid less to hedge against equity losses.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, lost 1.1 percent to 25.65 at 11:54 a.m. in New York. The index measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index, which added 0.9 percent.

“Fear of the doomsday scenario has definitely subsided,” Jeremy Wien, a VIX options trader at Societe Generale SA in New York, said before the index slipped below its Sept. 12 close of 25.66.

Before today, the VIX averaged 20.18 in its history stretching back to the start of 1990. The index peaked at 80.86 in November and dipped below 30 in May for the first time in eight months. It reached an intraday record of 89.53 on Oct. 24.

The volatility benchmark, known as Wall Street’s “fear gauge” because it almost always increases as stocks fall, reflects expectations for price swings for the next 30 days and is calculated from S&P 500 options that are one or two months from expiration.

Federal Reserve Chairman Ben S. Bernanke has made unprecedented use of the central bank’s powers as the lender of last resort. He kept banks liquid by accepting bonds they can’t trade as collateral for Treasuries and bailed out the nation’s biggest insurer, American International Group Inc.

The S&P 500’s swings were the biggest in the benchmark’s 80-year history last year as it plunged 38 percent, the most since 1937. There were 18 moves of more than 5 percent after Sept. 29. That was more than half of the 35 swings of that size that have occurred from 1955 through 2008, according Howard Silverblatt, the senior index analyst at S&P in New York.

Giving Bernanke or the Fed any credit for this is preposterous. The Fed helped create this mess. For a complete trashing of Bernanke please see Bernanke is a Total Failure Unsuited for Role as Fed Chairman.

Moreover, we have still not felt the repercussions of the Fed's actions nor does the Fed have an exit strategy for what it has done. Premature celebration for the Fed's policies is certainly unwarranted. The payback period may last a decade or more.

$VIX Daily

click on chart for sharper image

Looking forward, consumer spending attitudes have changed for good (and consumer spending is 70% of the economy), there is virtually no chance for a V shaped recovery, housing is going to remain in the doldrums (at best) , lending standards have tightened dramatically, the jobs picture is going to be bleak for a long time, bank leverage will not come back to the same extent for decades, if ever, and Peak Earnings are in.

In light of the above, the stock market is priced for perfection.

New lows might be coming whether there is another outright panic or not as measured by the VIX. Indeed that is what happened in March, with the S&P 500 making a new low although the VIX was nowhere near the October and November 2008 spikes.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bernanke is a Total Failure Unsuited for Role as Fed Chairman

noreply@blogger.com (Michael Shedlock) — Mon, 29 Jun 2009 08:14:00 +0000

Inquiring minds are reading Bernanke Flubs Tryout, Still Up for Leading Role by Caroline Baum.

Most often I agree with Caroline, but not this time.

After trashing (and rightfully so) Bernanke's last appearance before Congress, Caroline somehow arrives at the following conclusion.

It would be hard to find someone more suited for the job of Fed chairman than Bernanke. His performance yesterday has nothing to do with his unique qualifications for the position. ... Unless President Barack Obama wants a solo pilot, he would do well to tap Bernanke for a second term.

Let's take a look at the qualifications of which Baum speaks.

Ten Qualifications

1) Bernanke is either a liar or has a memory problem. I believe the former. Either way, there is a problem when a Fed chairman cannot recall a conversation with another Fed governor over something as critical as the Bank of America/Merrill Lynch merger. See Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America "Turd in the Punchbowl" for my take.

2) Bernanke claims to be a student of the great depression yet amazingly concludes the cause was misguided Fed policy after the stock market crash. This is nonsense. The cause of the great depression and the cause of the current depression (yes we are in a depression), is the massive expansion of credit and debt fostered by the Fed itself. Bernanke is no student of history, he is a dunce.

3) Bernanke has on many occasions promised transparency. This is an outright lie. There is no transparency and Bloomberg has filed freedom of information lawsuits requesting information that should have been disclosed. Moreover, Congress had to subpoena the Fed in regards to the Bank of America / Merrill Lynch shotgun wedding which is how we know about Bernanke's selective memory loss. What else is Bernanke hiding?

4) Bernanke is creative. Some might think creativity is a positive attribute. It is, for a design engineer. Unfortunately creativity is not a good attribute for a Fed chairman. This whole mess was sponsored by the Fed when Greenspan got creative with interest rate policy. Bernanke is light-years more creative than Greenspan as witnessed by an amazing array of Fed lending facilities and the ballooning of the Fed's balance sheet swapped for garbage collateral. The unintended consequences of Bernanke's extraordinary actions are coming down the road. We do not even know what those consequences are. However, we do know that the Fed has no exit policy, and will come up with one by the seat of Bernanke's pants on the fly. Given there is no need for the Fed at all, the last thing we need is for a creative Fed.

5) Bernanke supports policies of theft. Proof of this is easy to establish. Bernanke favors a policy of 2% inflation, and inflation is theft. How so? Inflation benefits those with first access to money: governments, banks, and the wealthy. Government benefits when property taxes rise more than wages, banks benefit by borrowing money into existence, and the already wealthy benefit by being next in line for access to cheap money. By the time those low on the totem pole have access to cheap money, asset prices are already through the moon. Moreover, those with enough common sense to avoid the bubbles, get nothing for their money sitting in the bank. The middle class has been ravished by inflation, and Bernanke supports that inflation.

Please note that Bernanke cannot even follow his own mandate. Where was Bernanke when property and commodity prices were soaring? The answer is he was ignoring them. Thus we see the one sided nature of Bernanke's policies. He let home prices soar, and now that they are crashing looks to support them. By the way, this is not just Bernanke, this is a symptom of central bankers in general.

6) Bernanke cannot dissent. As a member of the Greenspan Fed, Bernanke went along with everything Greenspan did. It is clear Greenspan failed. Thus it is clear that Bernanke failed by supporting Greenspan's policies.

7) Bernanke supports policies of outright fraud. Fractional reserve lending is a fraud. Please consider Murray N. Rothbard and the Case for a 100 Percent Gold Dollar in which Rothbard condemned fractional reserve banking as a violation of contract. "In my view, issuing promises to pay on demand in excess of the amount of the goods on hand is simply fraud, and should be so considered by the legal system. For this means that a bank issues "fake" warehouse receipts — warehouse receipts, for example, for ounces of gold that do not actually exist in the vaults. This is legalized counterfeiting; this is the creation of money without the necessity of production, to compete for resources against those who have produced. In short, I believe that fractional-reserve banking is disastrous both for the morality and for the fundamental bases and institutions of the market economy...."

8) Bernanke could not spot the housing bubble. Amazingly Bernanke thought the housing bubble was "well contained" right before it exploded in his face. Of course there is another possibility: Bernanke is a liar and knew it was not contained but did not want to say so.

9) Bernanke has no idea where interest rates should be. Of course no one else does either. But Bernanke thinks he does. The result is overshooting interest rate policy in both directions, just as Greenspan did. This is the Fed Uncertainty Principle Corollary Number One in action: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.

10) Bernanke is a power grabbing hack. This is the Fed Uncertainty Principle Corollary Number Two in action: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Summary:

Bernanke is a disingenuous liar with a memory problem. He is also an economic dunce who does not understand the cause of great depression nor could he spot a housing/credit bubble visible to nearly every blogger in the country. However, like his mentor Greenspan, Bernanke believes that every problem can be cured by throwing money at it. Finally, he is a creative, political power grabbing hack who gives memorable speeches about throwing money out of helicopters.

I have to hand it to Caroline. That is indeed a unique set of qualifications.

Bernanke’s four-year term ends in February, let us hope he is gone. Better yet, it's time to Audit the Fed Then End It!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bloated State Police Pension Plans – Something Has To Give

noreply@blogger.com (Michael Shedlock) — Sun, 28 Jun 2009 19:36:00 +0000

The police union in Michigan is doing what public service unions in general usually do, 1) whine for more taxes 2) Complain they need more workers to maintain safety 3) Elect layoffs over reduced pay 4) Ignore the long term issues that need addressing.

Please consider Michigan State Police layoffs take effect Sunday.

LANSING, Mich. (AP) - About 100 Michigan State Police troopers will be laid off Sunday after a last-ditch effort to avoid the job loss failed.

Members of the Michigan State Police Troopers Association voted against a furlough plan that would have temporarily cut their pay to avoid layoffs of low seniority workers.

The furlough plan would have required troopers to take 37 hours of unpaid leave over a six-week period. That would have saved jobs now, but there was no guarantee low-seniority officers would have kept their jobs in the next budget year.

Mike Moorman, the troopers' union president, said the vote reflects dissatisfaction with how the state has handled public safety funding in recent years. Michigan has lost more than 2,000 law enforcement officers statewide this decade, including more than 400 from the state police. Positions have been eliminated as government tax revenues decline during a lengthy recession.

"The membership's rejection of furlough time is not a reflection on our unwillingness to stop the loss of 100 troopers," Moorman said in a statement. "Our members are fed up with the lack of public safety priorities in Michigan, which have been discussed for years, yet never acted upon."

Col. Peter Munoz, director of the Michigan State Police, said in a statement he is "deeply disappointed" a solution could not be found to avoid the layoffs.

The state spent more than $8 million in the past few years training the troopers it now plans to lay off to save less than $2 million in the current budget year.

Some state lawmakers continue to question why Gov. Jennifer Granholm's administration plans to move the police department into a new $40 million headquarters building in downtown Lansing early next year. The move could have long-term financial implications for the state police -- including significantly higher annual lease payments of $3.7 million per year -- but it does not affect the department's budget for the current fiscal year.

Peter Munoz, director of the Michigan State Police, whines he is "deeply disappointed a solution could not be found to avoid the layoffs". Munoz is wrong. There was a perfectly good solution to avoid the layoffs. If the union wanted to protect the most workers, the vote would have been for pay cuts. Instead, the union elected to do what unions typically do, protect the few instead of sharing the pain.

Of course there is plenty of blame to be spread around. Why is the legislature and/or Governor authorizing a new $40 million police headquarters in Lansing with lease payments $3.7 million per year higher?

After the layoffs, the Michigan State Police will have 958 troopers at posts across the state. Reduce the pension plans and benefits to reasonable levels and perhaps Michigan can afford 1200 officers. Then again, why isn't 900 or even 850 officers enough? Michigan has lost 400 state police in a decade. Is anyone suffering for it? How?

Voters are fed up with paying ever increasing taxes to keep unneeded public servants in high paying jobs with ridiculous pension benefits.

State Police Pension Double-Dipping

Inquiring minds are digging further into the Michigan State Police layoff situation. Please consider Why another budget "crisis?" State Police Pension Double-Dipping (among other reasons).

Troopers start getting a portion of their pension while still working and simultaneously collecting their regular salary. The amount of pension they can collect is 30 percent the first year, 50 percent the second, and then increases 10 percent each year until eventually they are getting full pension and full pay before they have retired. The money is not paid out to them immediately but is deposited into an interest-bearing retirement account they get when they really retire.

That's nuts, of course. No sane private sector employer would give away such a benefit.

We offer one because legislators abandoned their fiduciary duty to be responsible stewards and gave away a huge pile of loot to a powerful public employee union.

The rationale under which that caper was foisted on taxpayers was that Michigan State Police are eligible to retire and collect their pensions after just 25 years of service with no minimum age. As a result it's not uncommon to have age 40-something men and women in the prime of life eligible to call it a career and head for the beaches, spending the last 35-40 years of their lives lounging at taxpayer expense.

Needless to say this causes potential staffing problems at the MSP. Rather than fix the problem in a rational and fiscally prudent way - establish a minimum age of say 55 or 65 before an individual can start collecting a pension - the political class gave away some boodle in the form of a goofy DROP program as an incentive to keep troopers working.

Pretty sweet deal, huh? Sweet for the troopers, but not for the taxpayers. And just one more example of why you should never believe a politician who says, "Our budget has been cut to the bone."

Mike Moorman, the troopers' union president, whines "Our members are fed up with the lack of public safety priorities in Michigan".

Moorman is not bright enough to figure out what everyone else in the world knows: The US is in recession and Michigan is at the top of the list. There simply is no more tax money to pay for boated unions or their pension plans.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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175 California Hotels In Default; Sheraton Keahou Bay Resort in Hawaii Defaults; More Defaults Coming

noreply@blogger.com (Michael Shedlock) — Sun, 28 Jun 2009 07:32:00 +0000

Hotel owners are facing the same problems as homeowners, being upside down on their properties with no good escape. Please consider Hotel foreclosures jump in California.

In California, 175 hotels are in default -- the first stage in the foreclosure process -- according to a report from Atlas Hospitality Group, an Irvine-based brokerage firm. Another 31 have been foreclosed, nearly one third of them in the Inland region.

Of those in default or foreclosure, about 75 percent obtained new loans between 2005 and 2007 for construction financing, re-financing or to buy the hotel, according to the firm. Atlas Hospitality estimates that 2,500 hotels -- about 25 percent of the state's entire hotel population -- refinanced or obtained new loans in that time meaning more defaults and foreclosures could be on the horizon.

The industry has been rattled by foreclosures before, especially in the mid-1990s, but the impact today is more widespread, hitting both low-end and high-end properties in every region, Reay said.

Those who bought hotels between 2006 and 2006 are likely sitting on properties worth at least 50 percent less than what they paid, he said. [Mish: obviously there is a typo in the date range]

Reay's firm is marketing The Block at Big Bear, a 50-room hotel that catered to snowboarders. The hotel's owner walked away earlier this year and closed the hotel, which is in default. The hotel was appraised for more than $4 million in 2006. Today, Reay's firm, working with a court-ordered receiver, is asking $2.04 million for the property.

Hoteliers will likely have to survive at least two more years of low revenues, diminishing profit margins and fewer rooms booked by travelers unwilling to spend.

Atlanta-based PKF Hospitality Research has forecast that the revenue hoteliers earn per room will reach its lowest point of the recession in the third quarter of this year.

Sheraton Keauhou Bay In Foreclosure

In Hawaii, the Sheraton Keauhou Bay Resort and Spa is in foreclosure after owner defaults.

The Sheraton [Keauhou] Bay Resort and Spa on the Big Island is going into foreclosure after the resort's owner defaulted on its mortgage, another sign Hawaii's beleaguered tourism industry is suffering during the global recession.

Owners Koa Hotel LLC have defaulted on nearly $60 million remaining on their mortgage, interest and fines. Koa Hotel is owned by the New York private equity firm Brickman Associates. The property's major creditor is Lehman Brothers Holdings Inc., which filed for bankruptcy last year.

The resort's business declined amid a broader drop in visitors to Hawaii since last spring. So far this year, 15 percent fewer tourists have visited the Big Island compared to the first part of 2008.

Anyone who bought hotels in anywhere in the US between 2003 and 2007 more than likely overpaid, and by as much as 50% or more. Tourism is down everywhere and that tourism is not going to recover for years, perhaps decades as cash strapped consumers attempt to repair balance sheets.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Embrace Deflation - It's The Cure, Not The Problem

noreply@blogger.com (Michael Shedlock) — Sat, 27 Jun 2009 07:00:00 +0000

Concern over Japanese deflation is increasing. Please consider Japan Succumbs to Deflation as Consumer Prices Fall Record 1.1%.

Japan’s consumer prices fell at a record pace in May, adding to the risk that deflation will become entrenched and hamper a rebound from the nation’s worst postwar recession.

Prices excluding fresh food slid 1.1 percent from a year earlier after dropping 0.1 percent in the preceding two months, the statistics bureau said today in Tokyo. It was the sharpest decrease since comparable figures were first compiled in 1971.

Bank of Japan Governor Masaaki Shirakawa said last week that price declines will accelerate through the middle of the fiscal year as demand slackens and crude oil continues to trade lower than last year’s record. Retailers including Aeon Co. are cutting prices to attract customers as falling wages and the worsening job outlook damp spending.

“Profits fall, then wages come down, then consumers stop shopping,” said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. “And because people aren’t shopping, companies lower prices. That’s the process that we’re starting to see. It isn’t easy to break out of.”

“With demand deteriorating, companies are finding it more difficult to sell goods and services and are turning to discounting,” said Azusa Kato, an economist at BNP Paribas in Tokyo.

Some 47 percent of 775 Japanese retailers surveyed by the Nikkei newspaper plan to lower prices in the year ending March 2010 to spur sales, up from 9 percent a year earlier. Aeon, Japan’s second-largest retailer, this week started a discount campaign for confectionary, drinks and mayonnaise.

Consumers, whose spending accounts for more than half of the economy, may delay purchases if they expect goods to get cheaper. That would erode profits and force companies to cut wages, which have already slid for 11 months. Japan only escaped from a decade of deflation in 2005.

Japanese Deflation Deepens

As Japanese deflation deepens, Japanese Bonds Complete 2nd Weekly Gain.

Japan’s bonds gained for a second week as a government report showed consumer prices fell at a record pace, adding to signs deflation will hamper the economic recovery and boost the value of the fixed payments of debt.

Ten-year yields touched the lowest in almost three months after the statistics bureau said yesterday prices excluding fresh food fell 1.1 percent in May from a year ago.

“The drop in consumer prices may accelerate to about 2 percent in the summer,” said Yuichi Kodama, chief economist in Tokyo at Meiji Yasuda Life Insurance Co., Japan’s third-largest life insurer. “The 10-year yield may decline to 1.3 percent or below as the market needs to prepare for deeper deflation.”

An “extreme” slump in demand and production are causing the drop in prices, Finance Minister Kaoru Yosano said yesterday. “We continue to monitor developments in prices and need to carefully manage the economy to avoid a deflationary spiral.”

The Organization for Economic Cooperation and Development this week urged the Bank of Japan to keep pumping cash into the economy “until underlying inflation is firmly positive.” Since it cut the key interest rate to 0.1 percent in December, the central bank has been buying corporate debt and increased government bond purchases from lenders to revive growth.

Japan Fighting Deflation For Decades

Notice the misguided advice by the OECD about pumping cash into the economy. Japan has been doing this for 15 years and all they have to show for it is massive national debt and bridges to nowhere.

Will Deflation Derail A Japanese Recovery?

Jun Saito, a top Japanese economist says Deflation May Derail Japan Recovery.

Deflation “will exert a significant amount of downward pressure on the recovery,” Jun Saito, an adviser to Economic and Fiscal Policy Minister Kaoru Yosano, said in an interview yesterday in Tokyo. “An increase in deflationary expectations will raise real interest rates and that will restrain business investment.”

“Declining prices will mean lower profits, less investment and wage cuts that will weaken consumer spending further,” said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co.

According to Saito, who quantifies the risk of deflation by using government data and figures from the International Monetary Fund, the risk of persistent price declines climbed to the highest level since 2003 and almost doubled since last year.

“I think there’s a risk we may slip back into deflation,” Saito said, adding that he defines it as a sustained decline in prices.

Japanese companies cut spending at the fastest pace in 54 years in the three months ended March 31. Wages have dropped for 11 months and households reduced spending for a record 14th month in April.

Falling prices are a blow to households who borrow money because it makes it harder to repay debt, Saito said. Consumers will cut back spending if entrenched price declines push up their borrowing costs, he added.

Deflation Misinformation

There is so much misinformation in the above articles it's hard to know where to begin. For starters, inflation and deflation are monetary measures not price measures. However, let's talk about prices for a change.

The idea that "Falling prices are a blow to households who borrow money because it makes it harder to repay debt" is preposterous. When prices fall, consumers have more money and they can pay off debts faster, provided of course they have a job. Falling prices reward the fiscally prudent, which is the way it should be.

Falling home prices do encourage more mortgage walk-aways which is another matter. However, home prices must drop to the point of affordability before a recovery in housing can begin, so even falling home prices are desirable. The sooner home prices fall to the point of affordability, the better of everyone will be.

In general, falling prices are good for consumer balance sheets. Imagine the problems we would have if prices were soaring with the unemployment rate approaching 10%.

Profits are falling along with prices because demand is returning to some sense of normalcy that businesses did not plan for. In the meantime, cash strapped consumers spent recklessly for decades and need to save. They are. Proof is easy to find: US Savings Rate Hits 6.9%, Highest In 15 Years.

This saving is not bad for business as Keynesian clowns believe. Savings provides capital for businesses to expand. For more on this as well as a rebuttal to the ridiculous concept callled "Paradox of Thrift", please see Families Start Saving; Does This Aggravate The Nation's Woes?.

The only reason it appears that savings is bad is after decades of loose credit and monetary expansion by the Fed the world is awash in overcapacity. Now is payback time for misguided Fed polices and reckless consumer spending.

This recession and a rising savings rate are both necessary ingredients to restore fiscal sanity. Deflation should not be feared; deflation should be embraced. What should be feared is the reckless expansion of consumer and corporate credit made possible by Fed policies under both Greenspan and Bernanke. Deflation is not the problem, it is the cure for those reckless policies.

Ironically both Greenspan and Bernanke encouraged Japan to write off bad debts as the means to return to normalcy. However Bernanke Suffers From Selective Memory Loss and cannot follow his own advice.

Addendum:
The Fed likes to portray itself as being an "inflation fighter" when the ONLY source of inflation is the Fed itself. Because of rising productivity over time, the natural state of affairs is actually deflation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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US Savings Rate Hits 6.9%, Highest In 15 Years

noreply@blogger.com (Michael Shedlock) — Fri, 26 Jun 2009 15:23:00 +0000

Personal incomes are rising reflecting tax cuts and consumer spending is up as well, notably car sales. However, consumers are still struggling to fix their personal balance sheets, currently overloaded in debt.

Please consider Surging U.S. Savings Rate Reduces Dependence on China.

In the recession following a borrowing binge that sent consumer debt to the highest level ever, Americans are shutting their wallets and building their nest eggs at the fastest pace in 14 years.

While the trend will put the country’s finances in better balance and reduce its dependence on Chinese investment, it may also restrain economic growth in 2010 and beyond, said Lyle Gramley, a senior economic adviser with New York-based Soleil Securities Corp. and a former Federal Reserve governor.

“There’s been a fundamental change in people’s behavior,” he said. “It will affect the economy for years.”

Government data today showed that the household savings rate rose to 6.9 percent in May, a 15-year high, as personal spending increased less than incomes. The rate in April 2008 was zero.

Americans’ newfound frugality is pinching airlines such as Chicago-based UAL Corp., which is cutting staff amid dwindling demand for leisure travel. Donations to charities dropped last year for the first time since 1987, and they’re in danger of declining further in 2009.

Banks are benefiting. Deposits grew 1.7 percent in May, the ninth-biggest monthly rise since 1973.

The bigger cash reserves will lessen U.S. dependence on investment by China and other foreign countries to finance economic growth, Gramley said. The current-account deficit, which includes trade in goods, services and income transfers, narrowed in the first quarter to its lowest since 2001 as Americans saved more and brought fewer imports.

Banks are already gaining from American’s thriftiness. Fed data show that deposits at commercial banks stood at $7.5 trillion in the week ended June 10 after recording the biggest monthly increase of this year in May. “They’re getting cheap deposits,” said Allen Sinai, chief economist at Decision Economics in New York. “It’s part of the healing process.”

Rebuilding Balance Sheets

From 1960 until 1990, households socked away an average of about 9 percent of their after-tax income, government figures show. Americans got out of the habit in the 1990s as they saw their wealth build up in other ways, first through surging stock prices and then soaring home values, Gramley said.

Retailers are adjusting their strategies to reflect that new reality of a permanently higher savings rate. Saks Inc., Neiman Marcus Group Inc. of Dallas and other luxury businesses are reducing orders this year to limit supply and boost profitability.

“Across the board you are going to find less of the sizes, less of the availability in almost all of the categories,” Saks Chief Executive Officer Stephen Sadove said in an interview on June 23.

Roubini is concerned the savings rate will rise too quickly.

Nouriel Roubini, an economics professor at New York University and chairman of RGE Monitor, forecasts that the savings rate will ultimately reach 10 percent to 11 percent. What’s critical, he said in a Bloomberg Television interview on June 24, is how quickly it increases.

A rapid rise in the next year because of a collapse in consumption would push the economy, already in its deepest contraction in 50 years, further into recession, he said. If it occurs over a few years, the economy may grow.

Edmund Phelps, winner of the Nobel Prize in economics in 2006 and a professor at Columbia University in New York, said it may take as long as 15 years for households to rebuild what they lost in the recession.

“The only way we’re going to get a healthy, full recovery is over a long period of time, involving households rebuilding their balance sheets,” Phelps said in an interview on June 22 with Bloomberg TV. “There’s no silver bullet that’s going to get us into good shape quickly.”

On this issue I side with Phelps.

The increasing savings rate is a good thing not a bad one. The faster the savings rate rises the better off we will be in the long run.

Fortunately consumer attitudes towards debt have changed and changed for good, something that many have told me would never happen. Retailers are now adjusting for this new reality.

Consumer Spending Stabilizes, Incomes Rise, Wages and Salaries Drop

Bloomberg is reporting U.S. Consumer Spending Rose, Incomes Gained in May.

Consumer spending rose for the first time in three months in May as incomes jumped by the most in a year, a sign that government efforts to revive the economy may be starting to pay off.

The 0.3 percent gain in purchases followed no change in April, the Commerce Department said today in Washington. Incomes surged 1.4 percent, reflecting tax cuts and Social Security payments from the Obama administration’s stimulus and driving up the savings rate to a 15-year high.

Wages and salaries dropped 0.1 percent in May, showing the effects of mounting job losses.

Today’s report also showed inflation moderated. The price gauge tied to spending patterns rose 0.1 percent from May 2008, the smallest gain since records began in 1959. The Federal Reserve’s preferred gauge of prices, which excludes food and fuel, rose 0.1 percent from a month earlier and was up 1.8 percent from a year earlier.

Adjusted for inflation, spending climbed 0.2 percent, following a 0.1 percent drop the prior month.

U.S. auto sales rose to a 9.9 million-unit rate in May from 9.3 million the prior month. Industry estimates for June show the rate may exceed 10 million for the first time this year.

Car sales will rebound, but it's important to remember how depressed the current level is. Moreover, a significant portion of sales this year will be profit-losing sales as dealers cut prices to clear inventories. These sales will cut into demand for 2010 as will the silly as well as wasteful, cash for clunkers plan.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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