Tuesday, October 27, 2009
Home Prices in 20 U.S. Cities Rise for Third Month
Oct. 27 (Bloomberg) -- Home prices in 20 U.S. cities rose in August for a third consecutive month, bolstering the case that an economic recovery is at hand.
The S&P/Case-Shiller home-price index climbed 1 percent from the prior month, seasonally adjusted, after a 1.2 percent increase in July, the group said today in New York. From a year earlier, the gauge fell 11.3 percent, less than forecast.
Rising home sales, due in part to government programs including the first-time buyer credit and efforts to lower borrowing costs, have helped stem the slump in property values that precipitated the worst recession since the 1930s. Sustained gains in household spending, the biggest part of the economy, may be harder to come by as joblessness mounts.
“We’re nearing the bottom in home prices,” said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts. “Right now the government is helping to stabilize housing.”
Stocks in the U.S. rose for the first time in three days after the report. The Standard & Poor’s 500 Index was up 0.3 percent to 1,069.70 at 9:39 a.m. in New York.
The housing index was forecast to fall 11.9 percent from August 2008, after a 13.3 percent drop in the 12 months ended in July, according to the median forecast of 33 economists surveyed by Bloomberg News. Estimates ranged from declines of 11 percent to 13.3 percent. Year-over-year records began in 2001.
The gains over the last three months have been the strongest since the three months ended in December 2005.
Broad-Based Improvement
Nineteen of the 20 cities in the S&P/Case-Shiller index showed a smaller decline year-over-year than in July. Dallas showed the smallest drop since August 2008, at 1.2 percent, while Las Vegas showed a 30 percent decrease, the most of any city.
Compared with the prior month, 15 of the 20 areas covered showed an increase while four showed a decline. The biggest month-over-month gain was in San Francisco, which showed a 2.6 percent gain.
In the latest evidence of rising demand, existing home sales in September jumped to a 5.57 million annual rate, more than economists forecast and the highest in more than two years, according to data from the National Association of Realtors issued last week.
Housing and manufacturing are leading the stabilization in the economy, the Federal Reserve said in the Beige Book survey of conditions in its 12 district banks during September and early October.
Fed Regions
“Most districts reported that housing market conditions improved in recent weeks, primarily from a pickup in sales of low- to middle-priced houses,” the Fed said.
One risk to the emerging stabilization is foreclosures, which worsen the property glut. Foreclosure rates will climb through late 2010, peaking only after the unemployment rate reaches 10.2 percent in the second quarter, Jay Brinkmann, chief economist at the Mortgage Bankers Association, said this month.
Unemployment, which is projected to exceed 10 percent by early 2010, according to the median estimate in a Bloomberg survey earlier this month, will also limit demand. Economists and industry groups are among those projecting home sales will also cool in the absence of the $8,000 credit for first-time buyers, due to expire Nov. 30. Lawmakers are debating extending the credit.
Home Builder Stocks
The Standard & Poor’s Supercomposite Homebuilding Index has climbed 22 percent since the beginning of July on the improving outlook for housing, compared with a 16 percent increase in the S&P 500 index. The builder index fell yesterday on concern that the tax-credit program may not be extended.
“The residential housing market appears to have stabilized, but it has done so at a very low level,” William Foote, chief executive officer of USG Corp., North America’s largest maker of gypsum wallboard, said Oct. 21 on a conference call. The Chicago-based company posted its eighth straight net loss last quarter as sales dropped 32 percent from a year ago.
Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.
U.S. Stocks, Oil Gain on Housing Data, IBM Buyback Approval
Oct. 27 (Bloomberg) -- U.S. stocks rose for the first time in three days after International Business Machines Corp.’s board approved $5 billion in additional funds for buybacks and home prices climbed for a third consecutive month.
IBM jumped 1.4 percent and contributed the most to the advance in the Dow Jones Industrial Average. Exxon Mobil Corp. and Chevron Corp. climbed at least 2 percent as crude gained on increased optimism the economy is emerging from the worst recession since the 1930s. Lennar Corp. and Home Depot Inc. advanced after the S&P/Case-Shiller home-price index climbed 1 percent in August from the previous month.
“Earnings are good, we continue to see stabilization in housing prices,” said Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York. “Ultimately, that should give support to the stock market.”
The Standard & Poor’s 500 Index added 0.4 percent to 1,071.01 at 10:49 a.m. in New York. The Dow Jones Industrial Average increased 65.83 points, or 0.7 percent, to 9,933.79.
Benchmark indexes briefly erased gains after the Conference Board’s gauge of consumer confidence unexpectedly decreased in October. The S&P 500 has rallied 58 percent from a 12-year low on March 9 amid growing confidence a U.S. economic recovery will drive profit growth.
IBM led technology shares in the S&P 500 up 0.3 percent after the group fell 1 percent earlier. IBM, the world’s largest computer-services provider, gained 1.4 percent to $121.84
Verizon added 2 percent to $29.20. The second-largest U.S. phone company was raised to “outperform” at Wells Fargo & Co., which said “wireline margins troughed in Q3 and should be a driver of upside going forward.”
Pullback Predicted
Jeremy Grantham, the chief investment strategist at Boston- based Grantham Mayo Van Otterloo & Co., said stocks will “drop painfully from current levels” in the coming year amid disappointing economic data and profits as margins shrink. The benchmark S&P 500 for U.S. equities fell 1.2 percent to 1,066.95 yesterday, higher than Grantham’s estimate for its so-called fair value at 860.
Grantham said his firm has recently reduced equity holdings from a “neutral” 65 percent weighting in its portfolio to 62 percent, leaving “room to pull back further” should markets continue to climb.
IBM jumped 1.4 percent and contributed the most to the advance in the Dow Jones Industrial Average. Exxon Mobil Corp. and Chevron Corp. climbed at least 2 percent as crude gained on increased optimism the economy is emerging from the worst recession since the 1930s. Lennar Corp. and Home Depot Inc. advanced after the S&P/Case-Shiller home-price index climbed 1 percent in August from the previous month.
“Earnings are good, we continue to see stabilization in housing prices,” said Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York. “Ultimately, that should give support to the stock market.”
The Standard & Poor’s 500 Index added 0.4 percent to 1,071.01 at 10:49 a.m. in New York. The Dow Jones Industrial Average increased 65.83 points, or 0.7 percent, to 9,933.79.
Benchmark indexes briefly erased gains after the Conference Board’s gauge of consumer confidence unexpectedly decreased in October. The S&P 500 has rallied 58 percent from a 12-year low on March 9 amid growing confidence a U.S. economic recovery will drive profit growth.
IBM led technology shares in the S&P 500 up 0.3 percent after the group fell 1 percent earlier. IBM, the world’s largest computer-services provider, gained 1.4 percent to $121.84
Verizon added 2 percent to $29.20. The second-largest U.S. phone company was raised to “outperform” at Wells Fargo & Co., which said “wireline margins troughed in Q3 and should be a driver of upside going forward.”
Pullback Predicted
Jeremy Grantham, the chief investment strategist at Boston- based Grantham Mayo Van Otterloo & Co., said stocks will “drop painfully from current levels” in the coming year amid disappointing economic data and profits as margins shrink. The benchmark S&P 500 for U.S. equities fell 1.2 percent to 1,066.95 yesterday, higher than Grantham’s estimate for its so-called fair value at 860.
Grantham said his firm has recently reduced equity holdings from a “neutral” 65 percent weighting in its portfolio to 62 percent, leaving “room to pull back further” should markets continue to climb.
Consumer Confidence in U.S. Unexpectedly Decreases
Oct. 27 (Bloomberg) -- Confidence among U.S. consumers unexpectedly fell in October for a second month as Americans fretted about a lack of jobs.
The Conference Board’s confidence index dropped to 47.7 from a revised 53.4 in September, a report from the New York- based private research group showed today. A measure of employment availability deteriorated to a 26-year low.
Mounting unemployment threatens to restrain consumer spending entering the Christmas-holiday shopping season. Without a sustained rebound in the biggest part of the economy, the emerging recovery may fall short of expectations.
“There really isn’t any scope for us to see sustained gains in consumer spending for quite some time,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. “The labor market remains very weak.”
Stocks dropped after the report, erasing earlier gains, on concern consumers will cut back. The Standard & Poor’s 500 Index was down 0.2 percent to 1,065.05 at 10:21 a.m. in New York. Treasury securities rallied, pushing the yield on the 10-year note down to 3.52 percent from 3.56 percent late yesterday.
Economists forecast confidence would increase to 53.5 from a previously reported 53.1 for September, according to the median of 74 projections in a Bloomberg News survey. Estimates ranged from 48 to 57.
Home Prices Firm
An earlier report today showed home prices in 20 U.S. cities rose in August for a third straight month. The S&P/Case- Shiller home-price index climbed 1 percent from the prior month on a seasonally adjusted basis, after a 1.2 percent increase in July. Compared with a year earlier, prices were down 11.3 percent, less than the median forecast of economists surveyed.
The Conference Board’s measure of present conditions dropped to 20.7, the lowest level since February 1983. The gauge of expectations for the next six months decreased to 65.7 from 73.7.
The share of consumers who said jobs are plentiful dropped to 3.4 percent from 3.6 percent. The proportion of people who said jobs are hard to get increased to 49.6 percent, the highest level since May 1983, from 47 percent.
The proportion of people who expect their incomes to rise over the next six months decreased to 10.3 percent from 11.2 percent. The share expecting more jobs fell to 16.3 percent from 18 percent.
Less Spending
Consumers “remain quite pessimistic about their future earnings, a sentiment that will likely constrain spending during the holidays,” Lynn Franco, director of the Conference Board Consumer Research Center, said in a statement.
Government reports have shown that while companies are slowing the pace of firing they are reluctant to hire. The U.S. has lost 7.2 million jobs since the recession began in December 2007.
Caterpillar Inc. said Oct. 26 it has started rehiring and expects to return a portion of its laid-off employees to jobs as demand increases in the coming months. Even so, while 550 U.S. employees have returned or will return to work before the end of next year, about 2,500 idled U.S. workers are being told they won’t get their jobs back and will be offered a separation package.
“It’s important to remember that we are not close to the record-breaking demand we experienced from 2004 through 2008,” Chief Executive Officer Jim Owens said in a statement.
Buying Plans
Buying plans for automobiles, homes and major appliances within the next six months all decreased this month, today’s report showed.
Today’s report mimics a decline seen in the Reuters/University of Michigan preliminary index of consumer sentiment issued earlier this month.
Economists say the Conference Board’s index tends to be more influenced by attitudes about the labor market.
Consumer spending probably increased at a 3 percent pace in the third quarter, according to the median projection of economists ahead of the gross domestic product report due in two days. Demand will ease to a 1 percent growth rate the final three months this year and then may accelerate to a 1.5 percent rate in the first quarter, according to median forecasts in a Bloomberg News survey earlier in October.
J.C. Penney Chief Executive Officer Myron Ullman told analysts Oct. 23 while the consumer is “still under enormous pressure,” the company is “starting to see some stabilization and some modest improvement in traffic.”
Fed Regions
Most Federal Reserve district banks saw “stabilization or modest improvements” in areas including housing and manufacturing in September and earlier this month, according to the Beige Book business survey released Oct. 21. The report was issued two weeks before the central bank’s next monetary policy meeting and cited continued “weak or mixed” labor markets.
“Reports of gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered,” the Fed said last week.
The Conference Board’s confidence index dropped to 47.7 from a revised 53.4 in September, a report from the New York- based private research group showed today. A measure of employment availability deteriorated to a 26-year low.
Mounting unemployment threatens to restrain consumer spending entering the Christmas-holiday shopping season. Without a sustained rebound in the biggest part of the economy, the emerging recovery may fall short of expectations.
“There really isn’t any scope for us to see sustained gains in consumer spending for quite some time,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. “The labor market remains very weak.”
Stocks dropped after the report, erasing earlier gains, on concern consumers will cut back. The Standard & Poor’s 500 Index was down 0.2 percent to 1,065.05 at 10:21 a.m. in New York. Treasury securities rallied, pushing the yield on the 10-year note down to 3.52 percent from 3.56 percent late yesterday.
Economists forecast confidence would increase to 53.5 from a previously reported 53.1 for September, according to the median of 74 projections in a Bloomberg News survey. Estimates ranged from 48 to 57.
Home Prices Firm
An earlier report today showed home prices in 20 U.S. cities rose in August for a third straight month. The S&P/Case- Shiller home-price index climbed 1 percent from the prior month on a seasonally adjusted basis, after a 1.2 percent increase in July. Compared with a year earlier, prices were down 11.3 percent, less than the median forecast of economists surveyed.
The Conference Board’s measure of present conditions dropped to 20.7, the lowest level since February 1983. The gauge of expectations for the next six months decreased to 65.7 from 73.7.
The share of consumers who said jobs are plentiful dropped to 3.4 percent from 3.6 percent. The proportion of people who said jobs are hard to get increased to 49.6 percent, the highest level since May 1983, from 47 percent.
The proportion of people who expect their incomes to rise over the next six months decreased to 10.3 percent from 11.2 percent. The share expecting more jobs fell to 16.3 percent from 18 percent.
Less Spending
Consumers “remain quite pessimistic about their future earnings, a sentiment that will likely constrain spending during the holidays,” Lynn Franco, director of the Conference Board Consumer Research Center, said in a statement.
Government reports have shown that while companies are slowing the pace of firing they are reluctant to hire. The U.S. has lost 7.2 million jobs since the recession began in December 2007.
Caterpillar Inc. said Oct. 26 it has started rehiring and expects to return a portion of its laid-off employees to jobs as demand increases in the coming months. Even so, while 550 U.S. employees have returned or will return to work before the end of next year, about 2,500 idled U.S. workers are being told they won’t get their jobs back and will be offered a separation package.
“It’s important to remember that we are not close to the record-breaking demand we experienced from 2004 through 2008,” Chief Executive Officer Jim Owens said in a statement.
Buying Plans
Buying plans for automobiles, homes and major appliances within the next six months all decreased this month, today’s report showed.
Today’s report mimics a decline seen in the Reuters/University of Michigan preliminary index of consumer sentiment issued earlier this month.
Economists say the Conference Board’s index tends to be more influenced by attitudes about the labor market.
Consumer spending probably increased at a 3 percent pace in the third quarter, according to the median projection of economists ahead of the gross domestic product report due in two days. Demand will ease to a 1 percent growth rate the final three months this year and then may accelerate to a 1.5 percent rate in the first quarter, according to median forecasts in a Bloomberg News survey earlier in October.
J.C. Penney Chief Executive Officer Myron Ullman told analysts Oct. 23 while the consumer is “still under enormous pressure,” the company is “starting to see some stabilization and some modest improvement in traffic.”
Fed Regions
Most Federal Reserve district banks saw “stabilization or modest improvements” in areas including housing and manufacturing in September and earlier this month, according to the Beige Book business survey released Oct. 21. The report was issued two weeks before the central bank’s next monetary policy meeting and cited continued “weak or mixed” labor markets.
“Reports of gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered,” the Fed said last week.
Nationwide’s Mortgage Bonds Help Thaw Asset-Backed Debt Market
Oct. 27 (Bloomberg) -- Nationwide Building Society’s sale of bonds backed by U.K. home loans may help reopen Europe’s $3.3 trillion market for asset-backed debt, which all but shut after the credit crisis caused investors to shun hard-to-value assets.
The 3.5 billion-pound ($5.7 billion) issue from Britain’s biggest customer-owned lender follows a 4 billion-pound transaction by Lloyds Banking Group Plc last month. The yield on top-rated U.K. mortgage bonds has narrowed to 130 basis points relative to benchmarks from 425 in January, JPMorgan Chase & Co. data show. A basis point is 0.01 percentage point.
“It’s good for the European asset-backed securities market to get its second public deal done after the credit crisis,” said Attilio Di Mattia, a money manager at Aurelius Capital Management in Vienna, who bought some of the notes. “There is hope that some banks in continental Europe will tap the ABS market shortly.”
Nationwide’s notes will be issued in three portions, one of which will be used as collateral for a loan from JPMorgan, according to a banker involved in the deal. The so-called class A1 portion was reduced to 1.25 billion pounds from 1.5 billion pounds, the people said.
Housing Slump Eases
Nationwide is issuing the securities amid signs that Britain’s housing slump is abating. Mortgage approvals by the six biggest U.K. banks held at the highest this year, the Bank of England said last week. London home sellers raised prices to a record this month amid a shortage of properties, said Rightmove Plc, owner of the nation’s biggest property Web site.
Nationwide spokesman Roy Beale declined to comment.
The lender’s AAA rated notes are being issued through Silverstone 2009-1, a program set up to package U.K. home loans into bonds. Lenders sell pools of mortgages to investors to transfer the risk of borrower defaults and reduce the amount of capital they’re required to hold as a cushion against losses.
The Silverstone transaction includes 1.6 billion pounds of class A2 floating-rate notes, of which JPMorgan has already committed to buy 1 billion pounds. The notes were priced at 145 basis points over the London interbank offered rate, said the banker, who declined to be identified before the deal was completed.
Silverstone also sold 650 million pounds of class A3 fixed- rate securities, up from 300 million euros planned last week, said the banker. The notes were priced to yield 145 points more than the benchmark mid-swap rate, the banker said.
The transaction was arranged by Barclays Capital, Citigroup Inc. and JPMorgan along with the Swindon, England-based lender.
The 3.5 billion-pound ($5.7 billion) issue from Britain’s biggest customer-owned lender follows a 4 billion-pound transaction by Lloyds Banking Group Plc last month. The yield on top-rated U.K. mortgage bonds has narrowed to 130 basis points relative to benchmarks from 425 in January, JPMorgan Chase & Co. data show. A basis point is 0.01 percentage point.
“It’s good for the European asset-backed securities market to get its second public deal done after the credit crisis,” said Attilio Di Mattia, a money manager at Aurelius Capital Management in Vienna, who bought some of the notes. “There is hope that some banks in continental Europe will tap the ABS market shortly.”
Nationwide’s notes will be issued in three portions, one of which will be used as collateral for a loan from JPMorgan, according to a banker involved in the deal. The so-called class A1 portion was reduced to 1.25 billion pounds from 1.5 billion pounds, the people said.
Housing Slump Eases
Nationwide is issuing the securities amid signs that Britain’s housing slump is abating. Mortgage approvals by the six biggest U.K. banks held at the highest this year, the Bank of England said last week. London home sellers raised prices to a record this month amid a shortage of properties, said Rightmove Plc, owner of the nation’s biggest property Web site.
Nationwide spokesman Roy Beale declined to comment.
The lender’s AAA rated notes are being issued through Silverstone 2009-1, a program set up to package U.K. home loans into bonds. Lenders sell pools of mortgages to investors to transfer the risk of borrower defaults and reduce the amount of capital they’re required to hold as a cushion against losses.
The Silverstone transaction includes 1.6 billion pounds of class A2 floating-rate notes, of which JPMorgan has already committed to buy 1 billion pounds. The notes were priced at 145 basis points over the London interbank offered rate, said the banker, who declined to be identified before the deal was completed.
Silverstone also sold 650 million pounds of class A3 fixed- rate securities, up from 300 million euros planned last week, said the banker. The notes were priced to yield 145 points more than the benchmark mid-swap rate, the banker said.
The transaction was arranged by Barclays Capital, Citigroup Inc. and JPMorgan along with the Swindon, England-based lender.
Treasuries Little Changed Before Record $44 Billion 2-Year Sale
Oct. 27 (Bloomberg) -- Treasuries were little changed before a $44 billion sale of two-year notes, part of a record auction of debt this week by the U.S. government.
The yield on the two-year note touched 1.0328 percent, tied for the highest level this month before the sale, the second of four auctions this week amounting to $123 billion. The Treasury Department plans to sell $41 billion of five-year notes tomorrow and $31 billion of seven-year securities in two days. Home prices in 20 U.S. cities rose in August for a third consecutive month. A separate report is forecast to show consumer confidence improved in October.
“The auctions will be heavily watched,” said Christian Cooper, an interest-rate strategist at RBC Capital Markets in New York, one of 18 primary dealers that trade with the central bank. “A large concession hasn’t occurred but as the frequency of these auctions increases, it seems like more and more the concession has already been priced in.”
The yield on the 10-year note fell one basis point, or 0.01 percentage point, to 3.54 percent at 9:31 a.m. in New York, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 rose 3/32, or 94 cents per $1,000 face amount, to 100 22/32. The yield touched 3.58 percent yesterday, the highest level since Aug. 24. The two-year note yield fell one basis point to 1.01 percent.
Home Values
The S&P/Case-Shiller home-price index climbed 1 percent from the prior month on a seasonally adjusted basis after a 1.2 percent increase in July, the group said today in New York. From a year earlier, the gauge was down 11.3 percent, less than forecast.
An index of consumer sentiment rose to 53.5, from 53.1 in September, a report from the Conference Board will show, according to a separate survey.
A collapse in the U.S. housing industry triggered the global financial crisis. The 2007 property slump froze bond markets last year and led to $1.66 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg.
President Barack Obama has increased U.S. marketable debt to a record $7.01 trillion as he borrows unprecedented amounts to battle the steepest recession since the 1930s.
Total sales of Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, Goldman Sachs Group Inc. said in a report on Oct. 20. Goldman Sachs, based in New York, is one of the 18 primary dealers that are required to bid at the government debt auctions.
Record Sales
The sizes of this week’s sales are raising speculation investors will demand higher yields before bidding.
“There’s too much supply,” said Takashi Yamamoto, chief trader in Singapore at Mitsubishi UFJ Trust & Banking, a unit of Japan’s biggest bank. “There is a little more room for yields to rise.”
The two-year notes scheduled for sale today yielded 1.082 percent in pre-auction trading, versus 1.034 percent the last time the securities were sold on Sept. 22.
Investors bid for 3.23 times the amount of debt on offer last month, the most since September 2007.
Indirect bidders, the category of investors that includes foreign central banks, purchased 45.2 percent of the notes, versus an average of 42.6 percent for the past 10 sales.
Two-year notes have returned 0.9 percent in 2009, versus a 3.4 percent loss for the whole Treasury market, according to indexes compiled by Merrill Lynch.
Pellegrini Shorts
Paolo Pellegrini, who helped make more than $3 billion at New York-based hedge-fund Paulson & Co. with wagers on the U.S. housing crash, said shorting long-term U.S. debt is the “only attractive bet.”
“I always like to think about assets that are likely to experience a breakdown,” he said in a telephone interview from Beijing today. “The only thing I’m pretty comfortable with right now is U.S. Treasury securities and U.S. agency mortgage- backed securities. I think that those are overpriced so they are attractive shorts.”
In a short sale, a manager borrows a security and sells it in the hope it can be bought back later at a cheaper price. Mortgage-backed securities are issued by U.S. agencies including Fannie Mae.
Pellegrini, former manager of Paulson’s credit- opportunities funds, left in December 2008 to start a macro investment fund called PSQR LLC that aims to profit from changes in the global economy.
Inflation Expectations
Yields indicate government borrowing has increased inflation expectations this year.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, widened to 2.01 percentage points from almost zero at the end of 2008. It is still less than the five-year average of 2.18 percentage points.
The U.S. sold $7 billion of five-year TIPS yesterday at a yield of 0.769 percent, dropping from 1.278 percent at the prior auction in April. Investors bid for 3.10 times the amount of debt available, the most since 1997.
The yield on the two-year note touched 1.0328 percent, tied for the highest level this month before the sale, the second of four auctions this week amounting to $123 billion. The Treasury Department plans to sell $41 billion of five-year notes tomorrow and $31 billion of seven-year securities in two days. Home prices in 20 U.S. cities rose in August for a third consecutive month. A separate report is forecast to show consumer confidence improved in October.
“The auctions will be heavily watched,” said Christian Cooper, an interest-rate strategist at RBC Capital Markets in New York, one of 18 primary dealers that trade with the central bank. “A large concession hasn’t occurred but as the frequency of these auctions increases, it seems like more and more the concession has already been priced in.”
The yield on the 10-year note fell one basis point, or 0.01 percentage point, to 3.54 percent at 9:31 a.m. in New York, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 rose 3/32, or 94 cents per $1,000 face amount, to 100 22/32. The yield touched 3.58 percent yesterday, the highest level since Aug. 24. The two-year note yield fell one basis point to 1.01 percent.
Home Values
The S&P/Case-Shiller home-price index climbed 1 percent from the prior month on a seasonally adjusted basis after a 1.2 percent increase in July, the group said today in New York. From a year earlier, the gauge was down 11.3 percent, less than forecast.
An index of consumer sentiment rose to 53.5, from 53.1 in September, a report from the Conference Board will show, according to a separate survey.
A collapse in the U.S. housing industry triggered the global financial crisis. The 2007 property slump froze bond markets last year and led to $1.66 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg.
President Barack Obama has increased U.S. marketable debt to a record $7.01 trillion as he borrows unprecedented amounts to battle the steepest recession since the 1930s.
Total sales of Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, Goldman Sachs Group Inc. said in a report on Oct. 20. Goldman Sachs, based in New York, is one of the 18 primary dealers that are required to bid at the government debt auctions.
Record Sales
The sizes of this week’s sales are raising speculation investors will demand higher yields before bidding.
“There’s too much supply,” said Takashi Yamamoto, chief trader in Singapore at Mitsubishi UFJ Trust & Banking, a unit of Japan’s biggest bank. “There is a little more room for yields to rise.”
The two-year notes scheduled for sale today yielded 1.082 percent in pre-auction trading, versus 1.034 percent the last time the securities were sold on Sept. 22.
Investors bid for 3.23 times the amount of debt on offer last month, the most since September 2007.
Indirect bidders, the category of investors that includes foreign central banks, purchased 45.2 percent of the notes, versus an average of 42.6 percent for the past 10 sales.
Two-year notes have returned 0.9 percent in 2009, versus a 3.4 percent loss for the whole Treasury market, according to indexes compiled by Merrill Lynch.
Pellegrini Shorts
Paolo Pellegrini, who helped make more than $3 billion at New York-based hedge-fund Paulson & Co. with wagers on the U.S. housing crash, said shorting long-term U.S. debt is the “only attractive bet.”
“I always like to think about assets that are likely to experience a breakdown,” he said in a telephone interview from Beijing today. “The only thing I’m pretty comfortable with right now is U.S. Treasury securities and U.S. agency mortgage- backed securities. I think that those are overpriced so they are attractive shorts.”
In a short sale, a manager borrows a security and sells it in the hope it can be bought back later at a cheaper price. Mortgage-backed securities are issued by U.S. agencies including Fannie Mae.
Pellegrini, former manager of Paulson’s credit- opportunities funds, left in December 2008 to start a macro investment fund called PSQR LLC that aims to profit from changes in the global economy.
Inflation Expectations
Yields indicate government borrowing has increased inflation expectations this year.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, widened to 2.01 percentage points from almost zero at the end of 2008. It is still less than the five-year average of 2.18 percentage points.
The U.S. sold $7 billion of five-year TIPS yesterday at a yield of 0.769 percent, dropping from 1.278 percent at the prior auction in April. Investors bid for 3.10 times the amount of debt available, the most since 1997.
U.S. Stocks Gain as Housing Data Overshadows Stimulus Concern
Oct. 27 (Bloomberg) -- U.S. stocks rose for the first time in three days after home prices climbed for a third consecutive month, overshadowing concern that more governments around the world will wind down stimulus efforts as the economy recovers.
Lennar Corp. advanced 1.6 percent to lead gains in homebuilders. Verizon Communications Inc. rallied 1.7 percent after Wells Fargo & Co. recommended the shares. A gauge of emerging-market equities tumbled 1.5 percent after India began withdrawing its record monetary stimulus.
“Earnings are good, we continue to see stabilization in housing prices,” said Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York. “Ultimately, that should give support to the stock market.”
The Standard & Poor’s 500 Index added 0.4 percent to 1,071.11 at 9:53 a.m. in New York. The Dow Jones Industrial Average increased 51.85 points, or 0.5 percent, to 9,919.81.
The S&P 500 index has rallied 58 percent from a 12-year low on March 9 amid growing confidence a U.S. economic recovery will drive profit growth. The S&P/Case-Shiller home-price index climbed 1 percent in August from the prior month on a seasonally adjusted basis, adding to speculation that the nation is emerging from the worst recession in seven decades.
A gauge of 12 homebuilders in the S&P 500 rose as much as 0.8 percent, led by Pulte Homes Inc. and Lennar Corp.
Verizon had the second-steepest gain in the Dow average, rising 1.7 percent to $29.13. The second-largest U.S. phone company was raised to “outperform” at Wells Fargo & Co., which said “wireline margins troughed in Q3 and should be a driver of upside going forward.”
‘Drop Painfully’
Jeremy Grantham, the chief investment strategist at Boston- based Grantham Mayo Van Otterloo & Co., said stocks will “drop painfully from current levels” in the coming year amid disappointing economic data and profits as margins shrink. The benchmark S&P 500 for U.S. equities fell 1.2 percent to 1,066.95 yesterday, higher than Grantham’s estimate for its so-called fair value at 860.
Grantham said his firm has recently reduced equity holdings from a “neutral” 65 percent weighting in its portfolio to 62 percent, leaving “room to pull back further” should markets continue to climb.
Lennar Corp. advanced 1.6 percent to lead gains in homebuilders. Verizon Communications Inc. rallied 1.7 percent after Wells Fargo & Co. recommended the shares. A gauge of emerging-market equities tumbled 1.5 percent after India began withdrawing its record monetary stimulus.
“Earnings are good, we continue to see stabilization in housing prices,” said Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York. “Ultimately, that should give support to the stock market.”
The Standard & Poor’s 500 Index added 0.4 percent to 1,071.11 at 9:53 a.m. in New York. The Dow Jones Industrial Average increased 51.85 points, or 0.5 percent, to 9,919.81.
The S&P 500 index has rallied 58 percent from a 12-year low on March 9 amid growing confidence a U.S. economic recovery will drive profit growth. The S&P/Case-Shiller home-price index climbed 1 percent in August from the prior month on a seasonally adjusted basis, adding to speculation that the nation is emerging from the worst recession in seven decades.
A gauge of 12 homebuilders in the S&P 500 rose as much as 0.8 percent, led by Pulte Homes Inc. and Lennar Corp.
Verizon had the second-steepest gain in the Dow average, rising 1.7 percent to $29.13. The second-largest U.S. phone company was raised to “outperform” at Wells Fargo & Co., which said “wireline margins troughed in Q3 and should be a driver of upside going forward.”
‘Drop Painfully’
Jeremy Grantham, the chief investment strategist at Boston- based Grantham Mayo Van Otterloo & Co., said stocks will “drop painfully from current levels” in the coming year amid disappointing economic data and profits as margins shrink. The benchmark S&P 500 for U.S. equities fell 1.2 percent to 1,066.95 yesterday, higher than Grantham’s estimate for its so-called fair value at 860.
Grantham said his firm has recently reduced equity holdings from a “neutral” 65 percent weighting in its portfolio to 62 percent, leaving “room to pull back further” should markets continue to climb.
Friday, October 9, 2009
U.S. Job Openings Fall to Lowest Level in at Least Nine Years
Oct. 9 (Bloomberg) -- Job openings in the U.S. fell in August to the lowest level in at least nine years, signaling the economy hasn’t improved enough to prompt companies to take on more staff.
The number of unfilled positions fell by 21,000 to 2.39 million, the fewest since records began in 2000, the Labor Department said today in Washington. Openings were down by 2.4 million, or 50 percent, since peaking in July 2007.
The report showed hiring and firing both slowed in August, indicating last month’s acceleration in payroll losses may have been due to a lack of employment rather than a pick up in dismissals. Labor Department figures last week showed employers cut staff by a net 263,000 workers in September and the unemployment rate increased to the highest level since 1983.
“We’re not going to signal the all-clear on the jobs market until we see hiring pick up,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. “Firing has cooled off but firms have not really ramped up hiring activity.”
The rate of job openings in August held at 1.8 percent, matching July’s reading as the lowest in records dating back to 2000. The pace of hiring fell to 3.1 percent after increasing in July for the first time this year. The separations rate dropped to 3.3 percent, also matching the lowest on record.
The September payroll decrease exceeded the median estimate of economists surveyed by Bloomberg News and followed a 201,000 drop the prior month, last week’s Labor Department report showed. The unemployment rate climbed to 9.8 percent from 9.7 percent in August.
Obama on Jobs
President Barack Obama said Oct. 2 he is “working closely” with his economic advisers to “explore any and all additional options and measures that we might take to promote job creation.”
The U.S. economy may grow at an average 2.8 percent pace annual pace in the second half of the year, according to the median estimate of economists surveyed by Bloomberg News this month. Consumer spending, after rebounding last quarter as auto sales jumped because of the government’s “cash-for-clunkers” plan, will probably decelerate in the last three months of the year as the jobless rate reaches 10 percent, the survey showed.
Federal Reserve Chairman Ben S. Bernanke last week said economic growth next year probably won’t be strong enough to “substantially” bring down unemployment. The jobless rate will “still probably be above 9 percent by the end of 2010,” Bernanke said.
Dell Inc. is among companies still trimming staff to cut costs. The world’s second-largest maker of personal computers said this week it will shut a North Carolina factory by January, putting about 600 employees out of work.
Windstream Corp., a Little Rock, Arkansas-based fixed-line phone company, said last week it plans to trim about 350 positions, or 4.9 percent of its workforce, by the end of the year. The cuts are needed as the company changes its business model, Chief Executive Officer Jeff Gardner said in a Sept. 30 statement.
The number of unfilled positions fell by 21,000 to 2.39 million, the fewest since records began in 2000, the Labor Department said today in Washington. Openings were down by 2.4 million, or 50 percent, since peaking in July 2007.
The report showed hiring and firing both slowed in August, indicating last month’s acceleration in payroll losses may have been due to a lack of employment rather than a pick up in dismissals. Labor Department figures last week showed employers cut staff by a net 263,000 workers in September and the unemployment rate increased to the highest level since 1983.
“We’re not going to signal the all-clear on the jobs market until we see hiring pick up,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. “Firing has cooled off but firms have not really ramped up hiring activity.”
The rate of job openings in August held at 1.8 percent, matching July’s reading as the lowest in records dating back to 2000. The pace of hiring fell to 3.1 percent after increasing in July for the first time this year. The separations rate dropped to 3.3 percent, also matching the lowest on record.
The September payroll decrease exceeded the median estimate of economists surveyed by Bloomberg News and followed a 201,000 drop the prior month, last week’s Labor Department report showed. The unemployment rate climbed to 9.8 percent from 9.7 percent in August.
Obama on Jobs
President Barack Obama said Oct. 2 he is “working closely” with his economic advisers to “explore any and all additional options and measures that we might take to promote job creation.”
The U.S. economy may grow at an average 2.8 percent pace annual pace in the second half of the year, according to the median estimate of economists surveyed by Bloomberg News this month. Consumer spending, after rebounding last quarter as auto sales jumped because of the government’s “cash-for-clunkers” plan, will probably decelerate in the last three months of the year as the jobless rate reaches 10 percent, the survey showed.
Federal Reserve Chairman Ben S. Bernanke last week said economic growth next year probably won’t be strong enough to “substantially” bring down unemployment. The jobless rate will “still probably be above 9 percent by the end of 2010,” Bernanke said.
Dell Inc. is among companies still trimming staff to cut costs. The world’s second-largest maker of personal computers said this week it will shut a North Carolina factory by January, putting about 600 employees out of work.
Windstream Corp., a Little Rock, Arkansas-based fixed-line phone company, said last week it plans to trim about 350 positions, or 4.9 percent of its workforce, by the end of the year. The cuts are needed as the company changes its business model, Chief Executive Officer Jeff Gardner said in a Sept. 30 statement.
Dollar Rises, Bonds Fall on Bernanke Comments; Commodities Drop
Oct. 9 (Bloomberg) -- The dollar rose against the yen and the euro and government bonds fell after Federal Reserve Chairman Ben S. Bernanke said the bank will tighten monetary policy once the economy improves. Commodities slipped.
The U.S. currency advanced as much as 1.2 percent versus the yen, the most since Aug. 7, and was up 0.4 percent at 8:08 a.m. in New York. Yields on two-year Treasuries and German notes jumped as much as eight basis points. Copper fell 1.1 percent. Futures on the Standard & Poor’s 500 Index declined 0.3 percent.
The Fed will need to raise rates “at some point” to control inflation, Bernanke said at a Board of Governors conference yesterday in Washington. Australia’s Reserve Bank unexpectedly increased its key rate Oct. 6. The MSCI World Index of 23 developed stocks has advanced 4.5 percent this week as U.S. jobless claims fell more than analysts estimated and Alcoa Inc. reported an unexpected profit.
Bernanke’s remarks “were interpreted to suggest that the Fed stood ready to tighten,” Gareth Berry, a currency strategist at UBS AG in Singapore, wrote in a note today. “The comments come as investors look for evidence that the policy tightening timetables of other central banks will be brought forward” after the Australian move.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against the yen, euro, Swiss franc, pound, Swedish krona and Canadian dollar, rose 0.2 percent to 76.054. It fell to 75.767 yesterday, the lowest level since August 2008.
Yen Drops
The yen fell against 13 of the 16 most-traded currencies tracked by Bloomberg, losing 0.4 percent versus the dollar, after Japan’s Cabinet office said machinery orders rose 0.5 percent in August, compared with the 2.1 percent increase predicted in a Bloomberg survey of 27 economists.
The increase in the German two-year yield narrowed the gap, or spread, with the 10-year bund by three basis points to 184 basis points, the lowest level since May 1, based on closing prices. The U.S. Treasury spread also narrowed two basis points, to 234 basis points.
Copper for delivery in three months fell as much as 1.4 percent on the London Metal Exchange, leading a decline in industrial metals. Crude oil slipped 0.7 percent to $71.18 a barrel in New York trading. Gold for immediate delivery declined 0.5 percent to $1,050.03 an ounce. The metal rose to a record for three consecutive days this week.
European Stocks
Basic-resource producers led the decline in Europe’s Dow Jones Stoxx 600 Index, which slipped 0.6 percent after earlier rising as much as 0.3 percent. BHP Billiton Ltd., the world’s largest mining company, fell for the first time in five days, losing 1.5 percent. U.S. futures dropped after the S&P 500 posted four days of gains, the longest streak in a month.
Developing-nation shares rose for a fifth day. The MSCI Emerging Markets Index added 0.3 percent, extending its weekly increase to 4.6 percent, the most since Sept. 11.
The Shanghai Composite Index of stocks in China posted its biggest gain in five weeks as the nation’s markets opened after an eight-day holiday.
China’s banking regulator said today it would be premature for the government to start winding down stimulus efforts in the world’s third-largest economy.
“It’s far too early to talk about an exit strategy,” Liu Mingkang, chairman of the China Banking Regulatory Commission, told a conference in Hong Kong. The economy “may face a bumpy road ahead.”
The International Monetary Fund on Oct. 1 raised its forecast for global growth next year as more than $2 trillion in stimulus packages and demand in Asia pull the world economy out of its worst recession since World War II. The Washington-based IMF said the economy will expand 3.1 percent in 2010, after a July forecast of 2.5 percent.
The U.S. currency advanced as much as 1.2 percent versus the yen, the most since Aug. 7, and was up 0.4 percent at 8:08 a.m. in New York. Yields on two-year Treasuries and German notes jumped as much as eight basis points. Copper fell 1.1 percent. Futures on the Standard & Poor’s 500 Index declined 0.3 percent.
The Fed will need to raise rates “at some point” to control inflation, Bernanke said at a Board of Governors conference yesterday in Washington. Australia’s Reserve Bank unexpectedly increased its key rate Oct. 6. The MSCI World Index of 23 developed stocks has advanced 4.5 percent this week as U.S. jobless claims fell more than analysts estimated and Alcoa Inc. reported an unexpected profit.
Bernanke’s remarks “were interpreted to suggest that the Fed stood ready to tighten,” Gareth Berry, a currency strategist at UBS AG in Singapore, wrote in a note today. “The comments come as investors look for evidence that the policy tightening timetables of other central banks will be brought forward” after the Australian move.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against the yen, euro, Swiss franc, pound, Swedish krona and Canadian dollar, rose 0.2 percent to 76.054. It fell to 75.767 yesterday, the lowest level since August 2008.
Yen Drops
The yen fell against 13 of the 16 most-traded currencies tracked by Bloomberg, losing 0.4 percent versus the dollar, after Japan’s Cabinet office said machinery orders rose 0.5 percent in August, compared with the 2.1 percent increase predicted in a Bloomberg survey of 27 economists.
The increase in the German two-year yield narrowed the gap, or spread, with the 10-year bund by three basis points to 184 basis points, the lowest level since May 1, based on closing prices. The U.S. Treasury spread also narrowed two basis points, to 234 basis points.
Copper for delivery in three months fell as much as 1.4 percent on the London Metal Exchange, leading a decline in industrial metals. Crude oil slipped 0.7 percent to $71.18 a barrel in New York trading. Gold for immediate delivery declined 0.5 percent to $1,050.03 an ounce. The metal rose to a record for three consecutive days this week.
European Stocks
Basic-resource producers led the decline in Europe’s Dow Jones Stoxx 600 Index, which slipped 0.6 percent after earlier rising as much as 0.3 percent. BHP Billiton Ltd., the world’s largest mining company, fell for the first time in five days, losing 1.5 percent. U.S. futures dropped after the S&P 500 posted four days of gains, the longest streak in a month.
Developing-nation shares rose for a fifth day. The MSCI Emerging Markets Index added 0.3 percent, extending its weekly increase to 4.6 percent, the most since Sept. 11.
The Shanghai Composite Index of stocks in China posted its biggest gain in five weeks as the nation’s markets opened after an eight-day holiday.
China’s banking regulator said today it would be premature for the government to start winding down stimulus efforts in the world’s third-largest economy.
“It’s far too early to talk about an exit strategy,” Liu Mingkang, chairman of the China Banking Regulatory Commission, told a conference in Hong Kong. The economy “may face a bumpy road ahead.”
The International Monetary Fund on Oct. 1 raised its forecast for global growth next year as more than $2 trillion in stimulus packages and demand in Asia pull the world economy out of its worst recession since World War II. The Washington-based IMF said the economy will expand 3.1 percent in 2010, after a July forecast of 2.5 percent.
Goldman Sachs Seeks to Restart Commercial-Backed Bond Sales
Oct. 9 (Bloomberg) -- Goldman Sachs Group Inc., seeking to take advantage of an untapped Federal Reserve program, may sell the first commercial-mortgage bond since June 2008, backed by a $400 million loan to an Ohio property owner.
The five-year loan to Developers Diversified Realty Corp. made by a unit of the New York-based bank is secured by 28 shopping centers. It will be used to repay debt on those properties and others, and to reduce the outstanding amounts of credit facilities, Developers Diversified said yesterday in a statement.
Developers Diversified and Goldman Sachs are working with the Fed to qualify the loan for the government’s program to unfreeze the $700 billion market for securities backed by commercial mortgages. The Fed expanded its Term Asset-Backed Securities Loan Facility to newly issued commercial real estate debt in June. No sales have been completed since then.
“The DDR deal has been expected for months,” said Aaron Bryson, an analyst at Barclays Capital in New York. “An actual close at reasonable terms would be a significant positive for new-issue TALF which has been slow to get off the ground.”
Sales of U.S. commercial mortgage-backed debt slumped to $12.2 billon last year from a record $237 billion in 2007 as the credit crisis sapped demand, choking off financing to borrowers with maturing debt, according to JPMorgan Chase & Co. data.
“We are pleased to announce continued progress raising long-term capital to retire short-term debt,” David Oakes, chief investment officer of the Beachwood, Ohio-based company, said in the statement. “We look forward to announcing additional progress in the coming months.” Michael DuVally, a Goldman Sachs spokesman, declined to comment.
Reviving a Market
The U.S. government pushed to revive the market for commercial real estate amid a pullback in lending and a 36 percent drop in property prices from their October 2007 peak.
About $524 billion of commercial mortgages held by U.S. banks and thrifts are scheduled to come due before 2012, half of which probably won’t qualify for refinancing because they exceed 90 percent of the property’s value, according to distressed investor Lone Star Funds.
At least $410 billion, or two-thirds, of commercial mortgages bundled and sold as bonds coming due by 2018 will have difficulty refinancing, according to data from Deutsche Bank AG.
The initial TALF deals may provide price points for new loan originations, said Darrell Wheeler, an analyst at Citigroup Inc. in New York.
“If price levels remain stable enough, several issuers will start originating smaller loans for multi-loan CMBS pools that will not require TALF financing support,” Wheeler said in an e-mail.
Goldman Sachs, the world’s largest securities firm before converting to a bank last year to win the protection of the Federal Reserve, garnered record revenue from fixed-income trading in the second quarter. It set aside $11.4 billion to pay compensation in the first half of the year, an all-time high.
The five-year loan to Developers Diversified Realty Corp. made by a unit of the New York-based bank is secured by 28 shopping centers. It will be used to repay debt on those properties and others, and to reduce the outstanding amounts of credit facilities, Developers Diversified said yesterday in a statement.
Developers Diversified and Goldman Sachs are working with the Fed to qualify the loan for the government’s program to unfreeze the $700 billion market for securities backed by commercial mortgages. The Fed expanded its Term Asset-Backed Securities Loan Facility to newly issued commercial real estate debt in June. No sales have been completed since then.
“The DDR deal has been expected for months,” said Aaron Bryson, an analyst at Barclays Capital in New York. “An actual close at reasonable terms would be a significant positive for new-issue TALF which has been slow to get off the ground.”
Sales of U.S. commercial mortgage-backed debt slumped to $12.2 billon last year from a record $237 billion in 2007 as the credit crisis sapped demand, choking off financing to borrowers with maturing debt, according to JPMorgan Chase & Co. data.
“We are pleased to announce continued progress raising long-term capital to retire short-term debt,” David Oakes, chief investment officer of the Beachwood, Ohio-based company, said in the statement. “We look forward to announcing additional progress in the coming months.” Michael DuVally, a Goldman Sachs spokesman, declined to comment.
Reviving a Market
The U.S. government pushed to revive the market for commercial real estate amid a pullback in lending and a 36 percent drop in property prices from their October 2007 peak.
About $524 billion of commercial mortgages held by U.S. banks and thrifts are scheduled to come due before 2012, half of which probably won’t qualify for refinancing because they exceed 90 percent of the property’s value, according to distressed investor Lone Star Funds.
At least $410 billion, or two-thirds, of commercial mortgages bundled and sold as bonds coming due by 2018 will have difficulty refinancing, according to data from Deutsche Bank AG.
The initial TALF deals may provide price points for new loan originations, said Darrell Wheeler, an analyst at Citigroup Inc. in New York.
“If price levels remain stable enough, several issuers will start originating smaller loans for multi-loan CMBS pools that will not require TALF financing support,” Wheeler said in an e-mail.
Goldman Sachs, the world’s largest securities firm before converting to a bank last year to win the protection of the Federal Reserve, garnered record revenue from fixed-income trading in the second quarter. It set aside $11.4 billion to pay compensation in the first half of the year, an all-time high.
Unemployment Will Suppress U.S. Consumer Spending, Survey Shows
Oct. 9 (Bloomberg) -- The rebound in U.S. consumer spending, driven by government stimulus, will wane as the unemployment rate surpasses 10 percent, a survey of economists showed.
Household purchases will grow at a 1 percent annual rate this quarter after rising at a 2.4 percent pace in the previous three months, according to the median forecast of 57 economists surveyed by Bloomberg News from Oct. 1 to Oct. 8. Analysts also marked down spending estimates for the first quarter of 2010.
“You just can’t see a lot of strength on the consumer side given how battered income is from job losses and weak hourly wage growth,” said David Greenlaw, chief fixed-income economist at Morgan Stanley & Co. in New York. “We’ve got a gradual recovery in the overall economy, but it’s not vigorous enough to knock down the unemployment rate by much.”
Auto sales plunged 35 percent last month after the “cash- for-clunkers” program expired, indicating gains in business and government spending will be needed to sustain the recovery into 2010. Mounting joblessness is intensifying pressure on the Obama administration to consider additional measures to boost hiring heading into next year’s Congressional elections.
Rising unemployment “could be enough to push the economy back into recession,” said Gus Faucher, director of macroeconomic research at Moody’s Economy.com in West Chester, Pennsylvania. “There is going to be more stimulus. The economy needs some support until consumer spending kicks in.”
Obama’s Options
Obama is considering a mix of options, including a boost in transportation spending and extensions of expiring bills that will prolong unemployment benefits and a tax credit for first-time homebuyers, administration officials have told allies in Congress.
The White House is balancing rising concern about unemployment with a budget deficit the Congressional Budget Office estimates will total $1.6 trillion for 2009, and $1.4 trillion in 2010.
The economy will probably grow at a 2.4 percent annual rate this quarter after expanding at a 3.2 percent pace from July through September, according to the survey median. Gross domestic product will increase 2.4 percent next year and 2.8 percent in 2011, the survey showed, less than the 3.4 percent average over the past six decades.
Analysts put the odds of the U.S. dipping back into a recession in the next 12 months at 20 percent, down from 25 percent last month. Easing concern that the economy will falter has helped push the Standard & Poor’s 500 Index up more than 57 percent from a 12-year low reached on March 9.
Spending Gains
Household spending will grow at a 1.5 percent pace in the first three months of 2010, and 1.8 percent in the second quarter, the survey showed.
The government’s $3 billion “clunkers” program caused consumer spending to rise 1.3 percent in August, the most in almost eight years, the Commerce Department reported last week. Following the program’s expiration, car sales plunged to the lowest level since February.
“Cash for clunkers merely pulled consumption forward from the fourth quarter, rather than as a result of any improvement in the consumer’s situation,” said David Semmens, an economist at Standard Chartered Bank in New York. “With consumers holding back on spending while they rebuild their balance sheets, we are in uncharted territory.”
U.S. holiday sales for the last two months of the year will probably fall 1 percent from the same period in 2008, the National Retail Federation forecast on Oct. 6. Last year’s 3.4 percent decline was the first drop since the Washington-based NRF started tracking the data in 1995.
Less Debt
“We are not counting on the economy,” John Mahoney, chief financial officer of Staples Inc., said in a Bloomberg Television interview this week. Shoppers are focusing on reducing debt instead of spending, Mahoney said, and consumers remain reluctant to make non-essential purchases. Staples is the world’s largest retailer of office supplies.
Consumer credit has dropped by a record $118.8 billion since peaking in July 2008, according to figures from the Federal Reserve, as Americans boosted savings and banks and credit-card companies restricted lending. The figures don’t include mortgage borrowing, which is also down.
The economic expansion won’t be enough to keep the jobless rate from exceeding 10 percent in the first quarter of 2010, the survey showed. Unemployment will average 9.9 percent next year and 9.1 percent in 2011, higher than projected last month, according to the median estimate.
Fed Chairman Ben S. Bernanke last week said the jobless rate may be above 9 percent at the end of 2010.
Economists this month anticipated policy makers will wait until the third quarter of 2010 to start raising the benchmark interest rate, the same as projected in September, as unemployment rises and inflation slows. The Fed’s rate has been near zero since December, the lowest on record.
The world’s largest economy contracted 3.8 percent in the year ended in June, the worst economic slump since the 1930s.
Household purchases will grow at a 1 percent annual rate this quarter after rising at a 2.4 percent pace in the previous three months, according to the median forecast of 57 economists surveyed by Bloomberg News from Oct. 1 to Oct. 8. Analysts also marked down spending estimates for the first quarter of 2010.
“You just can’t see a lot of strength on the consumer side given how battered income is from job losses and weak hourly wage growth,” said David Greenlaw, chief fixed-income economist at Morgan Stanley & Co. in New York. “We’ve got a gradual recovery in the overall economy, but it’s not vigorous enough to knock down the unemployment rate by much.”
Auto sales plunged 35 percent last month after the “cash- for-clunkers” program expired, indicating gains in business and government spending will be needed to sustain the recovery into 2010. Mounting joblessness is intensifying pressure on the Obama administration to consider additional measures to boost hiring heading into next year’s Congressional elections.
Rising unemployment “could be enough to push the economy back into recession,” said Gus Faucher, director of macroeconomic research at Moody’s Economy.com in West Chester, Pennsylvania. “There is going to be more stimulus. The economy needs some support until consumer spending kicks in.”
Obama’s Options
Obama is considering a mix of options, including a boost in transportation spending and extensions of expiring bills that will prolong unemployment benefits and a tax credit for first-time homebuyers, administration officials have told allies in Congress.
The White House is balancing rising concern about unemployment with a budget deficit the Congressional Budget Office estimates will total $1.6 trillion for 2009, and $1.4 trillion in 2010.
The economy will probably grow at a 2.4 percent annual rate this quarter after expanding at a 3.2 percent pace from July through September, according to the survey median. Gross domestic product will increase 2.4 percent next year and 2.8 percent in 2011, the survey showed, less than the 3.4 percent average over the past six decades.
Analysts put the odds of the U.S. dipping back into a recession in the next 12 months at 20 percent, down from 25 percent last month. Easing concern that the economy will falter has helped push the Standard & Poor’s 500 Index up more than 57 percent from a 12-year low reached on March 9.
Spending Gains
Household spending will grow at a 1.5 percent pace in the first three months of 2010, and 1.8 percent in the second quarter, the survey showed.
The government’s $3 billion “clunkers” program caused consumer spending to rise 1.3 percent in August, the most in almost eight years, the Commerce Department reported last week. Following the program’s expiration, car sales plunged to the lowest level since February.
“Cash for clunkers merely pulled consumption forward from the fourth quarter, rather than as a result of any improvement in the consumer’s situation,” said David Semmens, an economist at Standard Chartered Bank in New York. “With consumers holding back on spending while they rebuild their balance sheets, we are in uncharted territory.”
U.S. holiday sales for the last two months of the year will probably fall 1 percent from the same period in 2008, the National Retail Federation forecast on Oct. 6. Last year’s 3.4 percent decline was the first drop since the Washington-based NRF started tracking the data in 1995.
Less Debt
“We are not counting on the economy,” John Mahoney, chief financial officer of Staples Inc., said in a Bloomberg Television interview this week. Shoppers are focusing on reducing debt instead of spending, Mahoney said, and consumers remain reluctant to make non-essential purchases. Staples is the world’s largest retailer of office supplies.
Consumer credit has dropped by a record $118.8 billion since peaking in July 2008, according to figures from the Federal Reserve, as Americans boosted savings and banks and credit-card companies restricted lending. The figures don’t include mortgage borrowing, which is also down.
The economic expansion won’t be enough to keep the jobless rate from exceeding 10 percent in the first quarter of 2010, the survey showed. Unemployment will average 9.9 percent next year and 9.1 percent in 2011, higher than projected last month, according to the median estimate.
Fed Chairman Ben S. Bernanke last week said the jobless rate may be above 9 percent at the end of 2010.
Economists this month anticipated policy makers will wait until the third quarter of 2010 to start raising the benchmark interest rate, the same as projected in September, as unemployment rises and inflation slows. The Fed’s rate has been near zero since December, the lowest on record.
The world’s largest economy contracted 3.8 percent in the year ended in June, the worst economic slump since the 1930s.
Bernanke Ready to Tighten When Recovery Sufficient
Oct. 9 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the central bank will be prepared to tighten monetary policy when the outlook for the economy “has improved sufficiently.”
“My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period,” Bernanke said at a Board of Governors conference yesterday in Washington, echoing language from last month’s meeting of the Federal Open Market Committee. “At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.”
The Fed chairman didn’t enter into the debate among his colleagues on the FOMC over the pace or timing of a change in monetary policy. Fed Governor Kevin Warsh said Sept. 25 interest rates may need to rise “with greater force” than usual, while New York Fed President William Dudley said Oct. 5 the recovery’s pace “is not likely to be robust” and inflation risks are “on the downside.”
The FOMC reiterated its pledge last month to keep the benchmark lending rate at around zero “for an extended period” to boost a weak recovery that has yet to create jobs. The unemployment rate rose to 9.8 percent last month, the highest level since 1983. Bernanke didn’t discuss the outlook for the economy in his prepared remarks, which outlined the Fed’s response to the financial crisis.
‘More Pointed’
“He could not have been more pointed when reminding his worldwide audience that the low-rates promise is conditional,” said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Money is free and easy right now, and the minute the job losses halt, you can bet the Fed will stop talking about exit strategies, including lifting the Fed funds rate, and start implementing them.”
Any move to tighten policy over the next year may run into opposition from the White House, which has said it doesn’t want to end fiscal or monetary stimulus quickly, the New York Times reported today, without citing anyone.
The Fed chairman, responding to an audience question about the effect of the $787 billion fiscal stimulus package on monetary policy, said he is assessing the impact of the spending on growth.
Capacity
“Looking at the amount of excess capacity in the economy, looking at the low rate of inflation, we believe that conditions will warrant policy accommodation for an extended period,” he said.
Bernanke’s comments come as a global recovery prompts officials around the world to debate the timing of exit strategies. Australia raised rates this week, the first Group of 20 nation to do so since the crisis intensified a year ago. Bank of Japan Governor Masaaki Shirakawa said Oct. 3 the need for the bank’s corporate bond purchase programs has eased.
In Europe, the Bank of England and the European Central Bank both kept rates unchanged yesterday and have signaled little willingness to immediately rein back emergency measures. China’s banking regulator, Liu Mingkang, said in Hong Kong today it’s “ far too early to talk about an exit.”
The U.S. currency strengthened to 89.29 yen as of 9:13 a.m. in Tokyo from 88.39 yen in New York yesterday, while it has dropped 0.6 percent this week. The dollar climbed to $1.4725 per euro from $1.4794, paring its decline on the week to 1 percent.
Stocks Gained
U.S. stocks gained as Alcoa Inc. started the earnings season with an unexpected profit and jobless claims decreased more than forecast. The Standard and Poor’s 500 Index rose 0.8 percent to 1,065.48. Yields on U.S. 10-year notes increased 8 basis points to 3.26 percent. A basis point is 0.01 percent.
The Fed staff is fine-tuning mechanisms designed to drain or neutralize excess cash in the banking system following a doubling of the central bank’s balance sheet. Those tools range from paying interest on bank reserves deposited at the Fed to reverse repurchase agreements, where the Fed pulls cash out of the financial system through a temporary sale of securities.
Bernanke said in the question-and-answer period the Fed could also conduct reverse repurchase agreements with Fannie Mae and Freddie Mac to soak up their excess cash balances.
Money Growth
U.S. central bankers boosted their balance sheet by $1.2 trillion after the collapse of Lehman Brothers Holdings Inc. in September 2008. The Fed has provided emergency credit to markets for commercial paper and asset-backed securities, expanded loans to banks and financed a $30 billion pool of high-risk securities to facilitate the merger of Bear Stearns Cos. with JPMorgan Chase & Co.
The Fed chairman said the bank reserves created through these operations haven’t created growth in broader measures of money. Still, he said Fed actions have improved liquidity and reduced lending spreads, two measures of success for a policy he calls “credit easing.”
“The unstinting provision of liquidity by the central bank is crucial for arresting a financial panic,” Bernanke said. “By backstopping these markets, the Federal Reserve has helped normalize credit flows for the benefit of the economy.”
To keep longer-term interest rates low, the Federal Open Market Committee is also conducting a $1.75 trillion purchase program of Treasury, housing agency and mortgage-backed securities.
Lower the Cost
“The principal goals of our recent security purchases are to lower the cost and improve the availability of credit for households and businesses,” Bernanke said. “The programs appear to be having their intended effect.”
The average rate on a 30-year fixed-rate mortgage fell to 4.87 percent, the lowest since May, Freddie Mac said yesterday. The Fed’s auctions of term loans to banks are also reducing pressures in the market for interbank loans.
The Fed won’t begin raising interest rates until the third quarter of 2010 as the recovery is likely to be too weak to lift employment and incomes, according to a September survey of 57 economists by Bloomberg News.
Richmond Fed President Jeffrey Lacker told reporters at a separate event in Washington yesterday that the risk the economy will slide back into recession “has diminished substantially” yet is “not entirely zero.”
Lacker also said Oct. 1 in a Bloomberg Radio interview that the growth and consumer spending outlook are “more fundamental” to the decision on when to tighten than “labor- market conditions.”
‘Extended Period’
Fed Governor Daniel Tarullo said yesterday in a speech in Phoenix that the strength of the U.S. recovery shouldn’t be exaggerated, while reiterating that rates are likely to remain low for “an extended period.”
“This turnaround is certainly welcome, but it should not be overstated,” Tarullo said. “Although we can expect positive growth to continue beyond the third quarter, economic activity remains relatively weak.”
The economy will expand at a 2.2 percent annual pace this quarter, the economists estimated. Housing markets have stabilized and manufacturing is picking up as companies re- stock lean inventories. Employers cut 263,000 jobs in September, pushing the unemployment rate up to 9.8 percent.
“The unemployment rate is much too high and it seems likely that the recovery will be less robust than desired,” New York Fed President William Dudley said Oct. 5. “This means that the economy has significant excess slack and implies that we face meaningful downside risks to inflation over the next year or two.”
Six Straight Months
Consumer prices have fallen for six straight months from year-earlier levels, the longest stretch of declines since a 12- month drop from September 1954 to August 1955, according to the Labor Department.
The core consumer-price index, which excludes food and energy, rose 1.4 percent in August from a year earlier, down from a 2.5 percent increase in September 2008.
“There is still downward pressure on core inflation and with the unemployment as weak as it is, there is a lot of room, as the Fed sees it, to maintain exceptionally low interest rates,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. LLC.
“My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period,” Bernanke said at a Board of Governors conference yesterday in Washington, echoing language from last month’s meeting of the Federal Open Market Committee. “At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.”
The Fed chairman didn’t enter into the debate among his colleagues on the FOMC over the pace or timing of a change in monetary policy. Fed Governor Kevin Warsh said Sept. 25 interest rates may need to rise “with greater force” than usual, while New York Fed President William Dudley said Oct. 5 the recovery’s pace “is not likely to be robust” and inflation risks are “on the downside.”
The FOMC reiterated its pledge last month to keep the benchmark lending rate at around zero “for an extended period” to boost a weak recovery that has yet to create jobs. The unemployment rate rose to 9.8 percent last month, the highest level since 1983. Bernanke didn’t discuss the outlook for the economy in his prepared remarks, which outlined the Fed’s response to the financial crisis.
‘More Pointed’
“He could not have been more pointed when reminding his worldwide audience that the low-rates promise is conditional,” said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Money is free and easy right now, and the minute the job losses halt, you can bet the Fed will stop talking about exit strategies, including lifting the Fed funds rate, and start implementing them.”
Any move to tighten policy over the next year may run into opposition from the White House, which has said it doesn’t want to end fiscal or monetary stimulus quickly, the New York Times reported today, without citing anyone.
The Fed chairman, responding to an audience question about the effect of the $787 billion fiscal stimulus package on monetary policy, said he is assessing the impact of the spending on growth.
Capacity
“Looking at the amount of excess capacity in the economy, looking at the low rate of inflation, we believe that conditions will warrant policy accommodation for an extended period,” he said.
Bernanke’s comments come as a global recovery prompts officials around the world to debate the timing of exit strategies. Australia raised rates this week, the first Group of 20 nation to do so since the crisis intensified a year ago. Bank of Japan Governor Masaaki Shirakawa said Oct. 3 the need for the bank’s corporate bond purchase programs has eased.
In Europe, the Bank of England and the European Central Bank both kept rates unchanged yesterday and have signaled little willingness to immediately rein back emergency measures. China’s banking regulator, Liu Mingkang, said in Hong Kong today it’s “ far too early to talk about an exit.”
The U.S. currency strengthened to 89.29 yen as of 9:13 a.m. in Tokyo from 88.39 yen in New York yesterday, while it has dropped 0.6 percent this week. The dollar climbed to $1.4725 per euro from $1.4794, paring its decline on the week to 1 percent.
Stocks Gained
U.S. stocks gained as Alcoa Inc. started the earnings season with an unexpected profit and jobless claims decreased more than forecast. The Standard and Poor’s 500 Index rose 0.8 percent to 1,065.48. Yields on U.S. 10-year notes increased 8 basis points to 3.26 percent. A basis point is 0.01 percent.
The Fed staff is fine-tuning mechanisms designed to drain or neutralize excess cash in the banking system following a doubling of the central bank’s balance sheet. Those tools range from paying interest on bank reserves deposited at the Fed to reverse repurchase agreements, where the Fed pulls cash out of the financial system through a temporary sale of securities.
Bernanke said in the question-and-answer period the Fed could also conduct reverse repurchase agreements with Fannie Mae and Freddie Mac to soak up their excess cash balances.
Money Growth
U.S. central bankers boosted their balance sheet by $1.2 trillion after the collapse of Lehman Brothers Holdings Inc. in September 2008. The Fed has provided emergency credit to markets for commercial paper and asset-backed securities, expanded loans to banks and financed a $30 billion pool of high-risk securities to facilitate the merger of Bear Stearns Cos. with JPMorgan Chase & Co.
The Fed chairman said the bank reserves created through these operations haven’t created growth in broader measures of money. Still, he said Fed actions have improved liquidity and reduced lending spreads, two measures of success for a policy he calls “credit easing.”
“The unstinting provision of liquidity by the central bank is crucial for arresting a financial panic,” Bernanke said. “By backstopping these markets, the Federal Reserve has helped normalize credit flows for the benefit of the economy.”
To keep longer-term interest rates low, the Federal Open Market Committee is also conducting a $1.75 trillion purchase program of Treasury, housing agency and mortgage-backed securities.
Lower the Cost
“The principal goals of our recent security purchases are to lower the cost and improve the availability of credit for households and businesses,” Bernanke said. “The programs appear to be having their intended effect.”
The average rate on a 30-year fixed-rate mortgage fell to 4.87 percent, the lowest since May, Freddie Mac said yesterday. The Fed’s auctions of term loans to banks are also reducing pressures in the market for interbank loans.
The Fed won’t begin raising interest rates until the third quarter of 2010 as the recovery is likely to be too weak to lift employment and incomes, according to a September survey of 57 economists by Bloomberg News.
Richmond Fed President Jeffrey Lacker told reporters at a separate event in Washington yesterday that the risk the economy will slide back into recession “has diminished substantially” yet is “not entirely zero.”
Lacker also said Oct. 1 in a Bloomberg Radio interview that the growth and consumer spending outlook are “more fundamental” to the decision on when to tighten than “labor- market conditions.”
‘Extended Period’
Fed Governor Daniel Tarullo said yesterday in a speech in Phoenix that the strength of the U.S. recovery shouldn’t be exaggerated, while reiterating that rates are likely to remain low for “an extended period.”
“This turnaround is certainly welcome, but it should not be overstated,” Tarullo said. “Although we can expect positive growth to continue beyond the third quarter, economic activity remains relatively weak.”
The economy will expand at a 2.2 percent annual pace this quarter, the economists estimated. Housing markets have stabilized and manufacturing is picking up as companies re- stock lean inventories. Employers cut 263,000 jobs in September, pushing the unemployment rate up to 9.8 percent.
“The unemployment rate is much too high and it seems likely that the recovery will be less robust than desired,” New York Fed President William Dudley said Oct. 5. “This means that the economy has significant excess slack and implies that we face meaningful downside risks to inflation over the next year or two.”
Six Straight Months
Consumer prices have fallen for six straight months from year-earlier levels, the longest stretch of declines since a 12- month drop from September 1954 to August 1955, according to the Labor Department.
The core consumer-price index, which excludes food and energy, rose 1.4 percent in August from a year earlier, down from a 2.5 percent increase in September 2008.
“There is still downward pressure on core inflation and with the unemployment as weak as it is, there is a lot of room, as the Fed sees it, to maintain exceptionally low interest rates,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. LLC.
Tuesday, October 6, 2009
U.S. Economy on Mend, Housing Poised for Rebound, LaVorgna Says
Oct. 6 (Bloomberg) -- The U.S. economy is on the mend and housing is poised for a rebound, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.
“The momentum in the economy is moving forward,” LaVorgna said today in an interview on Bloomberg Radio.
Housing is close to a turnaround because “we have had a tremendous improvement on inventories,” he said. “We are much closer to a housing bottom than many believe.”
Combined sales of new and existing homes were up 15 percent in August from January, when they reached the lowest level since comparable records began in 1999, according to figures from the Commerce Department and the National Association of Realtors.
The increase in purchases trimmed the number of houses on the market to 3.88 million, the fewest since March 2006.
At the current sales pace it would take 8.5 months to sell all the previously owned homes on the market, compared with 11.3 months in April 2008, the highest level since at least 1999. For new houses, supply dropped to 7.3 months in August, the shortest period since January 2007.
Rising demand is giving homebuilding a boost. Private residential construction climbed 4.7 percent in August from the prior month, the biggest gain since November 1993, according to data from the Commerce Department. Declines in residential construction have trimmed gross domestic product by one percentage point on average since 2006.
Growth Outlook
Economic growth will reach 3 percent next year, “maybe a little more,” LaVorgna said. Economists surveyed by Bloomberg News last month projected the world’s largest economy will expand 2.4 percent in 2010, according to the median estimate.
Core inflation, which excludes food and energy costs, will fall below 1 percent in 2010, and that will open the way for the Federal Reserve to refrain from raising its benchmark interest rate next year, LaVorgna said.
Gold Jumps to Record as Inflation Outlook Fuels Investor Demand
Oct. 6 (Bloomberg) -- Gold rose to a record on speculation that inflation will accelerate and erode the value of the dollar, boosting the appeal of the precious metal for investors seeking to preserve their wealth.
Gold futures climbed as high as $1,038 an ounce in New York, topping the previous record of $1,033.90 in March 2008. The spot price headed for a ninth straight annual gain, the longest rally since at least 1948. The dollar fell as much as 0.6 percent against a basket of six major currencies.
“Gold is acting like the ultimate currency,” said Chip Hanlon, president of Delta Global Advisors Inc. in Huntington Beach, California. “Central banks are following the same monetary course and trying to stimulate and inflate their way back to growth. Everyone’s concerned about the dollar, but it’s not like you can hate the dollar and fall in love with the euro or the yen.”
Gold futures for December delivery climbed $17, or 1.7 percent, to $1,034.80 an ounce at 9:36 a.m. on the Comex division of the New York Mercantile Exchange. Prices may reach $1,400 within six months, Hanlon said. Gold for immediate delivery in London gained as much as 1.9 percent to a record $1,036.60. The metal gained 17 percent this year.
Federal Reserve Chairman Ben S. Bernanke said Sept. 15 that the worst U.S. recession since 1930s had probably ended, and billionaire investor Warren Buffett said his company was buying equities. Central banks lowered borrowing costs and the Group of 20 nations has pledged about $12 trillion to revive economic growth, leading to record inflows in some of the gold industry’s largest exchange-traded funds.
‘Just Begun’
“Gold has just begun its ascent,” said John Brynjolfsson, the chief investment officer of Armored Wolf LLC, a hedge fund in Aliso Viejo, California. “As central banks print more and more money, the private demand for gold as an investment and inflation hedge is destined to grow. It’s pretty clear that gold will be at $2,000 by 2012, and it could happen a lot faster.”
Expectations of higher consumer prices are building. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for inflation, widened to 1.84 percentage points from almost zero at the end of 2008. It averaged 2.2 percentage points in the past five years.
“Even though the current inflation rate is low, the risk of a blowup in inflation in the future is becoming higher all the time,” said Adam Farthing, Deutsche Bank AG’s head of metals trading in Asia. “Gold is pricing that in.”
Metal Projection
Farthing projected the metal will reach $1,150 by the end of the year.
U.S. President Barack Obama increased the nation’s marketable debt to an unprecedented $6.78 trillion as he borrows to spur the world’s largest economy. Goldman Sachs Group Inc. predicts the country will sell about $2.9 trillion of debt in the two years ending next September.
“Many are expecting gold to trade at $1,050 an ounce within the next few weeks,” said Miguel Perez-Santalla, a Heraeus Precious Metals Management sales vice president in New York. “They are talking about this on the back of hyperinflation. Investment money is the driver.”
Gold held in the SPDR Gold Trust, the biggest ETF backed by the metal, reached an all-time high of 1,134 metric tons on June 1 and was at 1,098.07 tons yesterday. The fund has passed Switzerland as the world’s sixth-largest gold holding.
Consumer Prices
U.S. consumer prices will expand 1 percent this quarter and 1.8 percent in each of the following two quarters, according to the median estimate of 49 economists surveyed by Bloomberg.
Central banks’ net gold sales may drop to 16 tons this year, 93 percent below last year and the lowest since 1988, researcher GFMS Ltd. said Sept. 15. That, combined with futures trading regulation, will support demand for gold, Deutsche Bank’s Farthing said.
The U.S. Commodity Futures Trading Commission has tightened trading rules and pushed enforcement of position limits amid concern that speculation drove commodity prices to records last year. So far, new and anticipated limits have affected the largest agricultural, natural-gas and broad-based commodity funds in the U.S.
“There’s definitely switching going on out of energy and agricultural commodities into gold,” Farthing said.
Other precious metals have outperformed gold this year.
Silver Futures
Silver futures for December delivery advanced 3.8 percent to $17.155 an ounce on the Comex. The metal climbed to a 13- month high of $17.69 on Sept. 17 and is up 52 percent this year.
An ounce of gold now buys about 60.3 ounces of silver in London, according to Bloomberg data. That’s down from a high of 84.4 ounces on Oct. 10, which was the most since March 1995.
Palladium futures for December delivery rose 70 cents, or 0.2 percent, to $304 an ounce. The best-performing precious metal this year has gained 61 percent in 2009 on expectations for a revival in auto demand.
Platinum futures for January delivery jumped $10.70, or 0.8 percent, to $1,312.50 an ounce in New York, increasing their gain for the year to 39 percent. Automakers account for about 60 percent of platinum and palladium use.
Crude-oil futures, used by some investors to forecast inflation, have soared 60 percent this year in New York.
Gold futures climbed as high as $1,038 an ounce in New York, topping the previous record of $1,033.90 in March 2008. The spot price headed for a ninth straight annual gain, the longest rally since at least 1948. The dollar fell as much as 0.6 percent against a basket of six major currencies.
“Gold is acting like the ultimate currency,” said Chip Hanlon, president of Delta Global Advisors Inc. in Huntington Beach, California. “Central banks are following the same monetary course and trying to stimulate and inflate their way back to growth. Everyone’s concerned about the dollar, but it’s not like you can hate the dollar and fall in love with the euro or the yen.”
Gold futures for December delivery climbed $17, or 1.7 percent, to $1,034.80 an ounce at 9:36 a.m. on the Comex division of the New York Mercantile Exchange. Prices may reach $1,400 within six months, Hanlon said. Gold for immediate delivery in London gained as much as 1.9 percent to a record $1,036.60. The metal gained 17 percent this year.
Federal Reserve Chairman Ben S. Bernanke said Sept. 15 that the worst U.S. recession since 1930s had probably ended, and billionaire investor Warren Buffett said his company was buying equities. Central banks lowered borrowing costs and the Group of 20 nations has pledged about $12 trillion to revive economic growth, leading to record inflows in some of the gold industry’s largest exchange-traded funds.
‘Just Begun’
“Gold has just begun its ascent,” said John Brynjolfsson, the chief investment officer of Armored Wolf LLC, a hedge fund in Aliso Viejo, California. “As central banks print more and more money, the private demand for gold as an investment and inflation hedge is destined to grow. It’s pretty clear that gold will be at $2,000 by 2012, and it could happen a lot faster.”
Expectations of higher consumer prices are building. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for inflation, widened to 1.84 percentage points from almost zero at the end of 2008. It averaged 2.2 percentage points in the past five years.
“Even though the current inflation rate is low, the risk of a blowup in inflation in the future is becoming higher all the time,” said Adam Farthing, Deutsche Bank AG’s head of metals trading in Asia. “Gold is pricing that in.”
Metal Projection
Farthing projected the metal will reach $1,150 by the end of the year.
U.S. President Barack Obama increased the nation’s marketable debt to an unprecedented $6.78 trillion as he borrows to spur the world’s largest economy. Goldman Sachs Group Inc. predicts the country will sell about $2.9 trillion of debt in the two years ending next September.
“Many are expecting gold to trade at $1,050 an ounce within the next few weeks,” said Miguel Perez-Santalla, a Heraeus Precious Metals Management sales vice president in New York. “They are talking about this on the back of hyperinflation. Investment money is the driver.”
Gold held in the SPDR Gold Trust, the biggest ETF backed by the metal, reached an all-time high of 1,134 metric tons on June 1 and was at 1,098.07 tons yesterday. The fund has passed Switzerland as the world’s sixth-largest gold holding.
Consumer Prices
U.S. consumer prices will expand 1 percent this quarter and 1.8 percent in each of the following two quarters, according to the median estimate of 49 economists surveyed by Bloomberg.
Central banks’ net gold sales may drop to 16 tons this year, 93 percent below last year and the lowest since 1988, researcher GFMS Ltd. said Sept. 15. That, combined with futures trading regulation, will support demand for gold, Deutsche Bank’s Farthing said.
The U.S. Commodity Futures Trading Commission has tightened trading rules and pushed enforcement of position limits amid concern that speculation drove commodity prices to records last year. So far, new and anticipated limits have affected the largest agricultural, natural-gas and broad-based commodity funds in the U.S.
“There’s definitely switching going on out of energy and agricultural commodities into gold,” Farthing said.
Other precious metals have outperformed gold this year.
Silver Futures
Silver futures for December delivery advanced 3.8 percent to $17.155 an ounce on the Comex. The metal climbed to a 13- month high of $17.69 on Sept. 17 and is up 52 percent this year.
An ounce of gold now buys about 60.3 ounces of silver in London, according to Bloomberg data. That’s down from a high of 84.4 ounces on Oct. 10, which was the most since March 1995.
Palladium futures for December delivery rose 70 cents, or 0.2 percent, to $304 an ounce. The best-performing precious metal this year has gained 61 percent in 2009 on expectations for a revival in auto demand.
Platinum futures for January delivery jumped $10.70, or 0.8 percent, to $1,312.50 an ounce in New York, increasing their gain for the year to 39 percent. Automakers account for about 60 percent of platinum and palladium use.
Crude-oil futures, used by some investors to forecast inflation, have soared 60 percent this year in New York.
Fidelity’s Bolton Predicts ‘Multi-Year’ Bull Market
Oct. 6 (Bloomberg) -- Sustainable economic growth and low interest rates worldwide will spur a “multi-year” bull market in equities, led by developing nations, said Fidelity International’s Anthony Bolton.
“Low growth means low interest rates, and actually that’s one of the best environments for stock-market investing,” Bolton, president of investments at Fidelity International, which oversees about $141 billion, said in an interview on Bloomberg Television in Hong Kong. “Anything that can show growth in this low-growth environment is going to be bid up by investors. It’s very pro the emerging-market world versus the developed world.”
Policy makers in the U.S. and Europe will keep interest rates low for another year even as Australia’s central bank unexpectedly raised rates today, Bolton said. He’s “particularly optimistic” on Chinese stocks because the government will foster sustained economic growth without fueling inflation.
Bolton’s view contrasts with New York University Professor Nouriel Roubini and Elliott Wave International Inc.’s Robert Prechter, who have said shares are poised to retreat. Pacific Investment Management Co.’s Bill Gross predicted low economic growth will restrict annual stock returns to 5 percent, while Nobel Prize-winning economist Joseph Stiglitz said investors have been “irrationally exuberant” about an economic recovery.
Stock Rally
The MSCI Emerging Markets Index has climbed 62 percent this year on expectations that developing nations will lead a rebound in the global economy from its worst recession since World War II. Emerging-market economies may grow 6 percent next year, compared with 1.8 percent growth in advanced nations, according to HSBC Holdings Plc.
The MSCI emerging markets gauge climbed 1.5 percent as of 12:23 p.m. in London as higher commodity prices boosted earnings prospects for producers and HSBC said its purchasing managers’ index for developing economies posted its biggest gain in more than a year. The MSCI World Index of developed nations, up 21 percent this year, gained 0.9 percent today.
Bolton, Fidelity’s first fund manager in Europe, said on March 11 that the U.K. equity market was at or near its lowest point. The nation’s benchmark FTSE 100 Index, which tumbled 31 percent in 2008, bottomed on March 3 and has since rallied 45 percent. Bolton dumped his holdings of telecommunications stocks in the first quarter of 2000 at the height of the industry’s bull market.
Bolton’s Special Situations Fund beat the FTSE All-Share Index on an annual basis by 6 percentage points from 1979 through 2007, according to Fidelity. Fidelity International is the London-based affiliate of Fidelity Investments, the world’s largest mutual-fund company.
“Low growth means low interest rates, and actually that’s one of the best environments for stock-market investing,” Bolton, president of investments at Fidelity International, which oversees about $141 billion, said in an interview on Bloomberg Television in Hong Kong. “Anything that can show growth in this low-growth environment is going to be bid up by investors. It’s very pro the emerging-market world versus the developed world.”
Policy makers in the U.S. and Europe will keep interest rates low for another year even as Australia’s central bank unexpectedly raised rates today, Bolton said. He’s “particularly optimistic” on Chinese stocks because the government will foster sustained economic growth without fueling inflation.
Bolton’s view contrasts with New York University Professor Nouriel Roubini and Elliott Wave International Inc.’s Robert Prechter, who have said shares are poised to retreat. Pacific Investment Management Co.’s Bill Gross predicted low economic growth will restrict annual stock returns to 5 percent, while Nobel Prize-winning economist Joseph Stiglitz said investors have been “irrationally exuberant” about an economic recovery.
Stock Rally
The MSCI Emerging Markets Index has climbed 62 percent this year on expectations that developing nations will lead a rebound in the global economy from its worst recession since World War II. Emerging-market economies may grow 6 percent next year, compared with 1.8 percent growth in advanced nations, according to HSBC Holdings Plc.
The MSCI emerging markets gauge climbed 1.5 percent as of 12:23 p.m. in London as higher commodity prices boosted earnings prospects for producers and HSBC said its purchasing managers’ index for developing economies posted its biggest gain in more than a year. The MSCI World Index of developed nations, up 21 percent this year, gained 0.9 percent today.
Bolton, Fidelity’s first fund manager in Europe, said on March 11 that the U.K. equity market was at or near its lowest point. The nation’s benchmark FTSE 100 Index, which tumbled 31 percent in 2008, bottomed on March 3 and has since rallied 45 percent. Bolton dumped his holdings of telecommunications stocks in the first quarter of 2000 at the height of the industry’s bull market.
Bolton’s Special Situations Fund beat the FTSE All-Share Index on an annual basis by 6 percentage points from 1979 through 2007, according to Fidelity. Fidelity International is the London-based affiliate of Fidelity Investments, the world’s largest mutual-fund company.
Monday, October 5, 2009
Cap Rate Spreads: Indicator of Opportunity?
Oct 5, 2009 12:52 PM, By David Lynn, Ph.D.
The cap rate spread over the 10-year Treasury yield is normally positive, reflecting the additional risks inherent in real estate assets (Exhibit 1). The risk premium is generally considered necessary to compensate for liquidity, leasing and tenant credit risk.
This risk premium component fluctuates depending on the outlook for the commercial real estate market. We believe this spread can serve as a rough gauge of the relative value of the real estate market.
Exhibit 1: Components of Real Estate Cap Rate
When projected future income growth is strong, asset values will likely appreciate and the risk premium will decrease. As a result, the cap rate spread over the Treasury yield may fall below the long-term average.
For example, in 2005 and 2006 cap rates for several large office sales in Manhattan were reported to be less than 4%, well below the 10-year Treasury yield of about 5% at that time. Such low cap rates were justified at the time by expectations of significant income growth — often double-digit growth — in future years. Unfortunately, those aggressive assumptions did not materialize as the economy went into a severe recession in 2008 and 2009.
Conversely, when projected future income growth is weak, the risk premium will likely increase and the cap rate spread over Treasuries rises above the long-term average. Today, rents in most markets across the country are falling and asset values are depreciating. The risk premium is high.
As illustrated in Exhibit 2, the long-term average spread between the cap rate and the 10-Year Treasury yield since 2001 has been 320 basis points (the dotted line). We believe that persistently high cap rate spreads above the mean may indicate that markets are oversold, while persistently low cap rates — especially negative spreads to Treasuries — may indicate that markets are overbought.
As of the second quarter of 2009, the cap rate spread (the light blue line) has widened to more than 400 basis points. We believe this trend reflects increased risk-aversion among investors, who are pricing in a negative outlook for real estate.
During the recession of the early 2000s, cap rate spreads also rose to more than 400 basis points, making real estate appear undervalued relative to Treasuries. We believe that entering the real estate market during such periods of above-average spreads may be advantageous to long-term investors.
These periods of high cap rates and spreads often do not last long. From 2003 to 2007, spreads narrowed significantly as the economy recovered and property values appreciated (Exhibit 2).
Exhibit 2: Cap Rate Spreads over 10-Year Treasury
Cap rates and spreads began to widen again in late 2007. According to Real Capital Analytics, as of the second quarter of 2009 cap rates for market transactions ranged from 7% to 8.5% depending on the property type (Exhibit 3). From the peak of the market until June 30, 2009, cap rates increased by 120 to 300 basis points, with the CBD office market expanding the most.
Exhibit 3: Rise in Cap Rates by Property Sector
We caution that in today’s environment low transaction volume and incomplete data make tracking cap rates extremely challenging. Nonetheless, the current spread between cap rates and the 10-year Treasury yield suggests that commercial real estate may be undervalued, or oversold, relative to historical standards. We expect these spreads to remain elevated for some time given the uncertainty in the economy and the risk of additional distress — they may even widen further.
As the economy begins to rebound and real estate fundamentals improve, investors will likely become less risk-averse. We believe it is likely that more capital will flow into the sector in 2010. Consequently, we expect cap rate spreads to eventually narrow gradually, reverting toward the mean, and repeating the cycle.
The cap rate spread over the 10-year Treasury yield is normally positive, reflecting the additional risks inherent in real estate assets (Exhibit 1). The risk premium is generally considered necessary to compensate for liquidity, leasing and tenant credit risk.
This risk premium component fluctuates depending on the outlook for the commercial real estate market. We believe this spread can serve as a rough gauge of the relative value of the real estate market.
Exhibit 1: Components of Real Estate Cap Rate
When projected future income growth is strong, asset values will likely appreciate and the risk premium will decrease. As a result, the cap rate spread over the Treasury yield may fall below the long-term average.
For example, in 2005 and 2006 cap rates for several large office sales in Manhattan were reported to be less than 4%, well below the 10-year Treasury yield of about 5% at that time. Such low cap rates were justified at the time by expectations of significant income growth — often double-digit growth — in future years. Unfortunately, those aggressive assumptions did not materialize as the economy went into a severe recession in 2008 and 2009.
Conversely, when projected future income growth is weak, the risk premium will likely increase and the cap rate spread over Treasuries rises above the long-term average. Today, rents in most markets across the country are falling and asset values are depreciating. The risk premium is high.
As illustrated in Exhibit 2, the long-term average spread between the cap rate and the 10-Year Treasury yield since 2001 has been 320 basis points (the dotted line). We believe that persistently high cap rate spreads above the mean may indicate that markets are oversold, while persistently low cap rates — especially negative spreads to Treasuries — may indicate that markets are overbought.
As of the second quarter of 2009, the cap rate spread (the light blue line) has widened to more than 400 basis points. We believe this trend reflects increased risk-aversion among investors, who are pricing in a negative outlook for real estate.
During the recession of the early 2000s, cap rate spreads also rose to more than 400 basis points, making real estate appear undervalued relative to Treasuries. We believe that entering the real estate market during such periods of above-average spreads may be advantageous to long-term investors.
These periods of high cap rates and spreads often do not last long. From 2003 to 2007, spreads narrowed significantly as the economy recovered and property values appreciated (Exhibit 2).
Exhibit 2: Cap Rate Spreads over 10-Year Treasury
Cap rates and spreads began to widen again in late 2007. According to Real Capital Analytics, as of the second quarter of 2009 cap rates for market transactions ranged from 7% to 8.5% depending on the property type (Exhibit 3). From the peak of the market until June 30, 2009, cap rates increased by 120 to 300 basis points, with the CBD office market expanding the most.
Exhibit 3: Rise in Cap Rates by Property Sector
We caution that in today’s environment low transaction volume and incomplete data make tracking cap rates extremely challenging. Nonetheless, the current spread between cap rates and the 10-year Treasury yield suggests that commercial real estate may be undervalued, or oversold, relative to historical standards. We expect these spreads to remain elevated for some time given the uncertainty in the economy and the risk of additional distress — they may even widen further.
As the economy begins to rebound and real estate fundamentals improve, investors will likely become less risk-averse. We believe it is likely that more capital will flow into the sector in 2010. Consequently, we expect cap rate spreads to eventually narrow gradually, reverting toward the mean, and repeating the cycle.
Mortgage-Bond Prices Double From March Lows in Rally
Oct. 5 (Bloomberg) -- U.S. home-loan bonds without government backing ended a third-quarter rally with a week of gains, leaving some securities at prices almost double their March lows.
Typical prices for the most-senior prime-jumbo securities rose 2 cents on the dollar last week to 84 cents, according to Barclays Capital data. Similar bonds backed by Alt-A loans with a few years of fixed rates increased 2 cents to 60 cents. The jumbo bonds are up from about 75 cents three months earlier, while the Alt-A bonds have climbed from 47 cents.
The debt has jumped from 63 cents for the jumbos and 35 cents for Alt-As in mid-March, as investors accept lower potential yields amid a rally across debt markets and traders anticipate demand from the U.S. Public-Private Investment Program. Investment funds, banks, insurers and Wall Street brokers have been among buyers, according to Scott Buchta, head of investment strategy at Guggenheim Capital Markets LLC in Chicago.
“There’s a ton of dollars sloshing around, and the people who are compensated to put those dollars to work have to do something,” David Castillo, a senior managing director at San Francisco-based broker Further Lane Securities, said in a telephone interview. “The great cushion which the market provided for errors in assumptions is almost entirely gone.”
Feeding the Rally
Home-loan securities in the almost $1.7 trillion non-agency market lack guarantees from government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae, and they have been among the largest sources of the $1.6 trillion of writedowns and credit losses reported by the world’s largest financial companies since the start of 2007.
The recent rally has reflected a combination of yield premiums over Treasury debt coming down across credit markets, anticipation of buying by PPIP funds and data suggesting housing is starting to stabilize, according to Tom Hamilton, the head of Barclays Capital’s securitized products trading in New York.
“All those things culminated at once and made for an unbelievable third quarter,” he said in a telephone interview last week.
Sectors benefiting from increased demand for debt also include high-yield, high-risk company loans. Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index has climbed to 85.5 cents on the dollar, from a low of 59.2 cents in December. Investors are seeking higher yields than available in the money markets, accounting for about $300 billion of inflows this year into funds targeting debt such as corporate and municipal notes.
Lull in Foreclosures
Albert Sohn, Credit Suisse Group’s co-head of global structured products, said many investors behind the rally in mortgage bonds are skeptical of signs of a recovery in housing and attribute them to a temporary lull in foreclosures as the government pushes servicers to assess which loans should be reworked.
“It hasn’t necessarily been because suddenly people are expecting performance to become materially better anytime soon,” he said. “In fact, a lot of people who are buying expect performance to continue to deteriorate.”
An S&P/Case-Shiller index for 20 U.S. metropolitan areas showed home values rising in May, June and July, the first increases since 2006. The recovery reduced the average drop from the peak to 30 percent from 33 percent in April. About 28.2 percent of mortgages backing non-agency securities were at least 30 days late in August, up from 19.3 percent a year earlier and 9.6 percent two years earlier, according to Bloomberg data.
Atypical Terms
Jumbo mortgages are larger than Fannie Mae or Freddie Mac can finance, currently $417,000 in most areas and as much as $729,750 in expensive regions. Alt-A mortgages have atypical terms such as proof-of-income waivers or delayed principal repayment, and are ranked between prime and subprime in terms of projected defaults.
The U.S. said in July that the PPIP would begin with nine managers raising as much as $10 billion and receiving as much as $30 billion in taxpayer capital and loans to buy mortgage bonds that were issued with top ratings. The Treasury last week began confirming managers including Invesco Ltd. and TCW Group Inc. have raised at least $500 million, the minimum to get started.
Advantus Capital Management Inc., which oversees about $14 billion, is telling investors as it seeks more cash to buy devalued mortgage bonds they’d be better off with managers like it that aren’t part of the PPIP and thus have more freedom in selecting assets. The marketing underscores PPIP managers’ difficulty immediately raising the maximum amounts allowed and the possibility they may hold back on buying until prices drop.
Performance Goals
PPIP managers Invesco, AllianceBernstein Holding LP and Marathon Asset Management LP have told potential investors they are targeting annual returns of at least 18 percent, according to a Sept. 2 memo by M. Timothy Corbett, chief investment officer of the Connecticut Retirement Plans and Trust Funds.
Amid the higher prices among eligible securities, “the likelihood of generating those types of returns are becoming remote, unless one were to take ever-riskier bets,” Dean Di Bias, high-yield mortgage portfolio manager at St. Paul, Minnesota-based Advantus, said in an interview last month.
While some traders and investors wonder whether PPIP managers will deploy money at current prices, “it would be a pretty bold move to not put any money to work and wait for prices to back up,” Barclays’ Hamilton said. “If they’re pitching investors on something like 20 percent returns, they’re not going to put the money into cash until prices go down.”
Even if they don’t buy much immediately, their need to make purchases will probably limit any declines, he said.
‘Potential Problem’
“Prices have gotten pretty full,” Hamilton said. “We think that market prices have increased to the point of being much closer to the intrinsic value of securities. Against a whole range of other fixed-income assets, though, they still look cheap.”
At the same time, Credit Suisse’s Sohn said, “a unique potential problem for structured products” is that financial companies worldwide are holding “hundreds of billions” of dollars worth of the securities, which still carry a taint from the market’s collapse in 2007 and 2008, and may eventually decide to sell the debt in the market.
Any reverse in the rally may be large, said Adam Schwartz, mortgage portfolio manager in Miami at hedge-fund firm Fir Tree Partners LP. One mistake investors may be making is over- estimating the number of borrowers who will be able to refinance out of loans or sell their houses, he said. Prepayments this year removed many homeowners with equity in their properties from the pool of existing mortgages.
“When people are groping for yield, whenever there’s a negative surprise they react as violently on the way down as they did on the way up,” Schwartz said in an interview last week.
Typical prices for the most-senior prime-jumbo securities rose 2 cents on the dollar last week to 84 cents, according to Barclays Capital data. Similar bonds backed by Alt-A loans with a few years of fixed rates increased 2 cents to 60 cents. The jumbo bonds are up from about 75 cents three months earlier, while the Alt-A bonds have climbed from 47 cents.
The debt has jumped from 63 cents for the jumbos and 35 cents for Alt-As in mid-March, as investors accept lower potential yields amid a rally across debt markets and traders anticipate demand from the U.S. Public-Private Investment Program. Investment funds, banks, insurers and Wall Street brokers have been among buyers, according to Scott Buchta, head of investment strategy at Guggenheim Capital Markets LLC in Chicago.
“There’s a ton of dollars sloshing around, and the people who are compensated to put those dollars to work have to do something,” David Castillo, a senior managing director at San Francisco-based broker Further Lane Securities, said in a telephone interview. “The great cushion which the market provided for errors in assumptions is almost entirely gone.”
Feeding the Rally
Home-loan securities in the almost $1.7 trillion non-agency market lack guarantees from government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae, and they have been among the largest sources of the $1.6 trillion of writedowns and credit losses reported by the world’s largest financial companies since the start of 2007.
The recent rally has reflected a combination of yield premiums over Treasury debt coming down across credit markets, anticipation of buying by PPIP funds and data suggesting housing is starting to stabilize, according to Tom Hamilton, the head of Barclays Capital’s securitized products trading in New York.
“All those things culminated at once and made for an unbelievable third quarter,” he said in a telephone interview last week.
Sectors benefiting from increased demand for debt also include high-yield, high-risk company loans. Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index has climbed to 85.5 cents on the dollar, from a low of 59.2 cents in December. Investors are seeking higher yields than available in the money markets, accounting for about $300 billion of inflows this year into funds targeting debt such as corporate and municipal notes.
Lull in Foreclosures
Albert Sohn, Credit Suisse Group’s co-head of global structured products, said many investors behind the rally in mortgage bonds are skeptical of signs of a recovery in housing and attribute them to a temporary lull in foreclosures as the government pushes servicers to assess which loans should be reworked.
“It hasn’t necessarily been because suddenly people are expecting performance to become materially better anytime soon,” he said. “In fact, a lot of people who are buying expect performance to continue to deteriorate.”
An S&P/Case-Shiller index for 20 U.S. metropolitan areas showed home values rising in May, June and July, the first increases since 2006. The recovery reduced the average drop from the peak to 30 percent from 33 percent in April. About 28.2 percent of mortgages backing non-agency securities were at least 30 days late in August, up from 19.3 percent a year earlier and 9.6 percent two years earlier, according to Bloomberg data.
Atypical Terms
Jumbo mortgages are larger than Fannie Mae or Freddie Mac can finance, currently $417,000 in most areas and as much as $729,750 in expensive regions. Alt-A mortgages have atypical terms such as proof-of-income waivers or delayed principal repayment, and are ranked between prime and subprime in terms of projected defaults.
The U.S. said in July that the PPIP would begin with nine managers raising as much as $10 billion and receiving as much as $30 billion in taxpayer capital and loans to buy mortgage bonds that were issued with top ratings. The Treasury last week began confirming managers including Invesco Ltd. and TCW Group Inc. have raised at least $500 million, the minimum to get started.
Advantus Capital Management Inc., which oversees about $14 billion, is telling investors as it seeks more cash to buy devalued mortgage bonds they’d be better off with managers like it that aren’t part of the PPIP and thus have more freedom in selecting assets. The marketing underscores PPIP managers’ difficulty immediately raising the maximum amounts allowed and the possibility they may hold back on buying until prices drop.
Performance Goals
PPIP managers Invesco, AllianceBernstein Holding LP and Marathon Asset Management LP have told potential investors they are targeting annual returns of at least 18 percent, according to a Sept. 2 memo by M. Timothy Corbett, chief investment officer of the Connecticut Retirement Plans and Trust Funds.
Amid the higher prices among eligible securities, “the likelihood of generating those types of returns are becoming remote, unless one were to take ever-riskier bets,” Dean Di Bias, high-yield mortgage portfolio manager at St. Paul, Minnesota-based Advantus, said in an interview last month.
While some traders and investors wonder whether PPIP managers will deploy money at current prices, “it would be a pretty bold move to not put any money to work and wait for prices to back up,” Barclays’ Hamilton said. “If they’re pitching investors on something like 20 percent returns, they’re not going to put the money into cash until prices go down.”
Even if they don’t buy much immediately, their need to make purchases will probably limit any declines, he said.
‘Potential Problem’
“Prices have gotten pretty full,” Hamilton said. “We think that market prices have increased to the point of being much closer to the intrinsic value of securities. Against a whole range of other fixed-income assets, though, they still look cheap.”
At the same time, Credit Suisse’s Sohn said, “a unique potential problem for structured products” is that financial companies worldwide are holding “hundreds of billions” of dollars worth of the securities, which still carry a taint from the market’s collapse in 2007 and 2008, and may eventually decide to sell the debt in the market.
Any reverse in the rally may be large, said Adam Schwartz, mortgage portfolio manager in Miami at hedge-fund firm Fir Tree Partners LP. One mistake investors may be making is over- estimating the number of borrowers who will be able to refinance out of loans or sell their houses, he said. Prepayments this year removed many homeowners with equity in their properties from the pool of existing mortgages.
“When people are groping for yield, whenever there’s a negative surprise they react as violently on the way down as they did on the way up,” Schwartz said in an interview last week.
U.S. Stocks Rise on Goldman Bank Upgrade, ISM; Dollar Weakens
Oct. 5 (Bloomberg) -- U.S. stocks rose, rebounding from the first two-week decline since July, as Goldman Sachs Group Inc. recommended large banks and a report showed service industries returned to growth after 11 months of contraction. Gold and oil advanced as the dollar weakened.
Wells Fargo & Co. rallied 7.2 percent and JPMorgan Chase & Co. added 4.7 percent as Goldman Sachs said big banks will outperform regional lenders. Nordstrom Inc. and Limited Brands Inc. climbed at least 7.6 percent after the Institute for Supply Management’s gauge of non-manufacturing businesses topped estimates. Brocade Communications Systems Inc. jumped 18 percent on takeover speculation.
The Standard & Poor’s 500 Index added 1.6 percent to 1,041.53 at 3:08 p.m. in New York. The Dow Jones Industrial Average gained 127.95 points, or 1.4 percent, to 9,615.62. Europe’s benchmark index advanced 0.9 percent, while Asia’s slipped 0.7 percent. Almost seven stocks rose for each that fell on the New York Stock Exchange.
“Third-quarter earnings season is going to be pretty strong,” said Noman Ali, part of a group that manages $20 billion in Toronto for MFC Global Investment Management. “Analysts are way too conservative coming out of recessions. Estimates will have to move higher because actual earnings will come in better than expected.”
The S&P 500 surged 32 percent in the last two quarters amid expectations the worst of a global recession is over. Lower- than-forecast data on manufacturing and jobs last week spurred concern the seven-month rally may have outpaced the prospects for earnings growth. New York University Professor Nouriel Roubini said Oct. 3 that “markets have gone up too much, too soon, too fast.”
‘No Time to Sell’
“Tactical indicators at current levels would normally lead us to downgrade equities, but their signals are less meaningful at this stage in the cycle,” wrote a team of Credit Suisse Group AG strategists led by Andrew Garthwaite in a report today titled “Equities: No Time to Sell.” “A further near-term correction is possible, but we believe that the S&P 500 will be 1,100 by year-end.”
Alcoa is scheduled to release third-quarter results on Oct. 7, the first company in the Dow average to report earnings. Analysts’ estimates compiled by Bloomberg predict companies will report a ninth straight quarter of declining profits before returning to growth in the final three months of the year.
‘Positive Event’
“Growth is still going to surprise people on the upside in the near-to-intermediate term,” said Walter Todd, who manages $750 million as co-chief investment officer at Greenwood Capital Associates LLC in Greenwood, South Carolina. “The fourth quarter last year was so bad from an economic and earnings perspective that simply lapping that is going to be a fairly positive event.”
Money managers are betting that the longest stretch of falling profits since the Great Depression will end in 2010 when the net income of companies in the S&P 500 rises 26 percent, followed by a 22 percent increase in 2011, according to data compiled by Bloomberg.
“If the third quarter was the quarter when risk tolerance improved, the fourth quarter is likely to be the quarter when markets look for the recent earnings promise to be delivered,” David Shairp and Rekha Sharma, strategists at JPMorgan Asset Management, wrote in a report.
Losing Streak Snapped
Today’s advance snapped a four-day losing streak for the S&P 500 and came after the Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90 percent of the economy, rose to 50.9, higher than forecast, from 48.4 in August. Fifty is the dividing line between expansion and contraction.
Stocks fell last week after ISM’s factory index on Oct. 1 showed that the manufacturing industry expanded less than economists anticipated in September. Employers unexpectedly cut more jobs last month than in August and unemployment climbed to the highest level since 1983, Labor Department data showed on Oct. 2.
JPMorgan, the second-biggest U.S. bank by assets, climbed 4.7 percent to $43.85. Wells Fargo, the San Francisco, California-based lender, gained 7.2 percent to $28.18. Goldman Sachs raised its rating on large U.S. banks to “attractive,” citing the outlook for earnings. The firm also upgraded Wells Fargo to “buy” from “neutral.”
Capital One, Brocade
Capital One Financial Corp. was added to Goldman Sachs’s “conviction buy” list. The analysts said third-quarter revenue at the credit-card company will be better than expected. Capital One climbed 8.4 percent to $35.97.
Nordstrom, the department-store chain with more than 100 namesake locations, climbed 9.1 percent to $31.57 for the second- biggest advance in the S&P 500. Buckingham Research Group upgraded Nordstrom to “accumulate” from “neutral.”
Limited Brands, the owner of the Victoria’s Secret lingerie chain, added 7.6 percent to $17.36. Susquehanna Financial Group Inc. raised its 2009 and 2010 earnings estimates and its price target to $22.
Brocade jumped 18 percent to $9.04. The California-based data-storage and networking company is considering a sale, a person familiar with the matter told Bloomberg News. A spokesman for San Jose, California-based Brocade said the company doesn’t comment on speculation.
Convergys Rallies
Convergys Corp. advanced the most in the S&P 500, gaining 9.5 percent to $10.42. The provider of customer call-center services was boosted to “buy” from “hold” at Citigroup Inc., which said the stock’s valuation is “attractive” given that the company is likely to achieve earnings-per-share growth of as much as 11 percent through 2011.
ConocoPhillips rose 2.5 percent to $47.97. Shares in the third-largest U.S. oil company were raised to “buy” from “hold” at Deutsche Bank AG, which said ConocoPhillips “has a very large legacy oil position, which will be highly profitable over the coming years.”
Bank of America Corp. rose 2.9 percent to $16.81. The bank plans to make a decision on the appointment of an “emergency” chief executive officer this week in case Kenneth D. Lewis steps down before the end of the year, the Wall Street Journal reported, citing unidentified people familiar with the situation.
Amicus Therapeutics Inc. had the steepest drop in Russell 2000 Index, falling 33 percent to $5.72. The biopharmaceutical company said it won’t pursue final-stage testing of a drug for Gaucher disease after a study showed the treatment failed to provide “clinically meaningful improvements.” JPMorgan Chase & Co. downgraded the stock to “neutral” from “overweight.”
Wells Fargo & Co. rallied 7.2 percent and JPMorgan Chase & Co. added 4.7 percent as Goldman Sachs said big banks will outperform regional lenders. Nordstrom Inc. and Limited Brands Inc. climbed at least 7.6 percent after the Institute for Supply Management’s gauge of non-manufacturing businesses topped estimates. Brocade Communications Systems Inc. jumped 18 percent on takeover speculation.
The Standard & Poor’s 500 Index added 1.6 percent to 1,041.53 at 3:08 p.m. in New York. The Dow Jones Industrial Average gained 127.95 points, or 1.4 percent, to 9,615.62. Europe’s benchmark index advanced 0.9 percent, while Asia’s slipped 0.7 percent. Almost seven stocks rose for each that fell on the New York Stock Exchange.
“Third-quarter earnings season is going to be pretty strong,” said Noman Ali, part of a group that manages $20 billion in Toronto for MFC Global Investment Management. “Analysts are way too conservative coming out of recessions. Estimates will have to move higher because actual earnings will come in better than expected.”
The S&P 500 surged 32 percent in the last two quarters amid expectations the worst of a global recession is over. Lower- than-forecast data on manufacturing and jobs last week spurred concern the seven-month rally may have outpaced the prospects for earnings growth. New York University Professor Nouriel Roubini said Oct. 3 that “markets have gone up too much, too soon, too fast.”
‘No Time to Sell’
“Tactical indicators at current levels would normally lead us to downgrade equities, but their signals are less meaningful at this stage in the cycle,” wrote a team of Credit Suisse Group AG strategists led by Andrew Garthwaite in a report today titled “Equities: No Time to Sell.” “A further near-term correction is possible, but we believe that the S&P 500 will be 1,100 by year-end.”
Alcoa is scheduled to release third-quarter results on Oct. 7, the first company in the Dow average to report earnings. Analysts’ estimates compiled by Bloomberg predict companies will report a ninth straight quarter of declining profits before returning to growth in the final three months of the year.
‘Positive Event’
“Growth is still going to surprise people on the upside in the near-to-intermediate term,” said Walter Todd, who manages $750 million as co-chief investment officer at Greenwood Capital Associates LLC in Greenwood, South Carolina. “The fourth quarter last year was so bad from an economic and earnings perspective that simply lapping that is going to be a fairly positive event.”
Money managers are betting that the longest stretch of falling profits since the Great Depression will end in 2010 when the net income of companies in the S&P 500 rises 26 percent, followed by a 22 percent increase in 2011, according to data compiled by Bloomberg.
“If the third quarter was the quarter when risk tolerance improved, the fourth quarter is likely to be the quarter when markets look for the recent earnings promise to be delivered,” David Shairp and Rekha Sharma, strategists at JPMorgan Asset Management, wrote in a report.
Losing Streak Snapped
Today’s advance snapped a four-day losing streak for the S&P 500 and came after the Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90 percent of the economy, rose to 50.9, higher than forecast, from 48.4 in August. Fifty is the dividing line between expansion and contraction.
Stocks fell last week after ISM’s factory index on Oct. 1 showed that the manufacturing industry expanded less than economists anticipated in September. Employers unexpectedly cut more jobs last month than in August and unemployment climbed to the highest level since 1983, Labor Department data showed on Oct. 2.
JPMorgan, the second-biggest U.S. bank by assets, climbed 4.7 percent to $43.85. Wells Fargo, the San Francisco, California-based lender, gained 7.2 percent to $28.18. Goldman Sachs raised its rating on large U.S. banks to “attractive,” citing the outlook for earnings. The firm also upgraded Wells Fargo to “buy” from “neutral.”
Capital One, Brocade
Capital One Financial Corp. was added to Goldman Sachs’s “conviction buy” list. The analysts said third-quarter revenue at the credit-card company will be better than expected. Capital One climbed 8.4 percent to $35.97.
Nordstrom, the department-store chain with more than 100 namesake locations, climbed 9.1 percent to $31.57 for the second- biggest advance in the S&P 500. Buckingham Research Group upgraded Nordstrom to “accumulate” from “neutral.”
Limited Brands, the owner of the Victoria’s Secret lingerie chain, added 7.6 percent to $17.36. Susquehanna Financial Group Inc. raised its 2009 and 2010 earnings estimates and its price target to $22.
Brocade jumped 18 percent to $9.04. The California-based data-storage and networking company is considering a sale, a person familiar with the matter told Bloomberg News. A spokesman for San Jose, California-based Brocade said the company doesn’t comment on speculation.
Convergys Rallies
Convergys Corp. advanced the most in the S&P 500, gaining 9.5 percent to $10.42. The provider of customer call-center services was boosted to “buy” from “hold” at Citigroup Inc., which said the stock’s valuation is “attractive” given that the company is likely to achieve earnings-per-share growth of as much as 11 percent through 2011.
ConocoPhillips rose 2.5 percent to $47.97. Shares in the third-largest U.S. oil company were raised to “buy” from “hold” at Deutsche Bank AG, which said ConocoPhillips “has a very large legacy oil position, which will be highly profitable over the coming years.”
Bank of America Corp. rose 2.9 percent to $16.81. The bank plans to make a decision on the appointment of an “emergency” chief executive officer this week in case Kenneth D. Lewis steps down before the end of the year, the Wall Street Journal reported, citing unidentified people familiar with the situation.
Amicus Therapeutics Inc. had the steepest drop in Russell 2000 Index, falling 33 percent to $5.72. The biopharmaceutical company said it won’t pursue final-stage testing of a drug for Gaucher disease after a study showed the treatment failed to provide “clinically meaningful improvements.” JPMorgan Chase & Co. downgraded the stock to “neutral” from “overweight.”
U.S. Economy: Service Industries Grow for First Time in a Year
Oct. 5 (Bloomberg) -- U.S. service industries expanded in September for the first time in a year as the emerging recovery spread from housing and factories to the broader economy.
The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 50.9, higher than forecast, from 48.4 in August, according to the Tempe, Arizona-based group. Fifty is the dividing line between expansion and contraction.
Federal Reserve efforts to unlock credit and government measures such as “cash-for-clunkers” and a tax credit for first-time homebuyers are reviving demand and likely helped the economy grow last quarter. Nonetheless, last week’s report showing job cuts accelerated in September is a reminder that gains in purchases may not be sustained as incentives expire.
“We should continue to see broad improvement in the economy,” said Ellen Zentner, a senior economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. Even so, she said, “hurdles remain within the side of the economy that creates jobs. It’s going to be growth, but weak growth.”
The index was projected to increase to 50, according to the median forecast in a Bloomberg News survey of 70 economists. Estimates ranged from 45 to 52.1. Before today’s report, the gauge had shown contraction in every month since October 2008, just after Lehman Brothers Holdings Inc. filed for bankruptcy.
Stocks Higher
Stocks rose after the report, rebounding from the first two-week decline since July and led by financial shares as Goldman Sachs Group Inc. said big banks will outperform regional lenders. The Standard & Poor’s 500 Index was up 0.9 percent to 1,034.43 as of 11:29 a.m. in New York. Treasury securities also rose.
The ISM non-manufacturing gauge of new orders rose to the highest since October 2007, and the index of employment gained to 44.3, the highest since August 2008 and signaling job cuts were decelerating.
Employers unexpectedly cut more jobs last month than in August and unemployment climbed to the highest level since 1983, Labor Department data showed on Oct. 2. Payrolls fell by 263,000 following a 201,000 drop the prior month, while the jobless rate rose to 9.8 percent from 9.7 percent. The U.S. has lost 7.2 million jobs since the recession began in December 2007.
Job losses are a “concern,” Anthony Nieves, chairman of the ISM’s non-manufacturing survey, said on a conference call. “Until we see employment come back, we are not going to see dramatic growth in the economy.”
Employment Trends
A measure of U.S. job prospects improved in September for the first time in more than a year, a sign job losses may not keep accelerating, a private survey showed. The Conference Board’s Employment Trends Index rose 0.3 to 88.5, the first increase since January 2008 and the highest level since April, the New York-based private research group said today.
Economic growth next year probably won’t be strong enough to “substantially” bring down unemployment, which may remain above 9 percent at the end of 2010, Fed Chairman Ben S. Bernanke told lawmakers on Oct. 1.
Five of 18 industries in the ISM services survey including utilities, health care, housing, retailing and construction, expanded last month, today’s report showed.
ISM’s factory index on Oct. 1 showed manufacturing, which accounts for about 12 percent of the economy, expanded less than economists anticipated in September. The measure slipped to 52.6, the first drop this year, from 52.9 in August.
Economy Growing
Recent data signal growth resumed in the third quarter after the economy shrank in the first half of 2009. Consumer spending, about 70 percent of the economy, jumped in August by the most since October 2001, led by the government’s $3 billion incentive program to trade in older, less fuel-efficient cars.
Homebuilding, which is included in ISM’s services index, may no longer be a drag on growth as steadier demand trims the property glut. The number of contracts to buy previously owned homes rose in August for a seventh month, lifted by the first- time buyer credits, data from the National Association of Realtors showed last week.
Macy’s Inc., the second-largest U.S. department store chain, is among retailers that are seeing more stable sales and planning to hire staff for the holiday season.
“We are seeing some stabilization ourselves,” Chairman and Chief Executive Officer Terry Lundgren said in a Sept. 8 interview on Bloomberg Television. “We have a much better handle now on where we are headed.”
Frits van Paasschen, chief executive officer of Starwood Hotels & Resorts Worldwide Inc., the third-largest U.S. lodging company, said last week that higher demand for hotel rooms in New York City may signal the U.S. is beginning to emerge from the recession.
“Occupancy is starting to come back, yes, at low rates, but if this recovery looks like a normal recovery we would see in a couple of quarters rates come back as well,” Van Paasschen said in an Oct. 1 interview. “I am just not sure if this is a normal recovery.”
The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 50.9, higher than forecast, from 48.4 in August, according to the Tempe, Arizona-based group. Fifty is the dividing line between expansion and contraction.
Federal Reserve efforts to unlock credit and government measures such as “cash-for-clunkers” and a tax credit for first-time homebuyers are reviving demand and likely helped the economy grow last quarter. Nonetheless, last week’s report showing job cuts accelerated in September is a reminder that gains in purchases may not be sustained as incentives expire.
“We should continue to see broad improvement in the economy,” said Ellen Zentner, a senior economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. Even so, she said, “hurdles remain within the side of the economy that creates jobs. It’s going to be growth, but weak growth.”
The index was projected to increase to 50, according to the median forecast in a Bloomberg News survey of 70 economists. Estimates ranged from 45 to 52.1. Before today’s report, the gauge had shown contraction in every month since October 2008, just after Lehman Brothers Holdings Inc. filed for bankruptcy.
Stocks Higher
Stocks rose after the report, rebounding from the first two-week decline since July and led by financial shares as Goldman Sachs Group Inc. said big banks will outperform regional lenders. The Standard & Poor’s 500 Index was up 0.9 percent to 1,034.43 as of 11:29 a.m. in New York. Treasury securities also rose.
The ISM non-manufacturing gauge of new orders rose to the highest since October 2007, and the index of employment gained to 44.3, the highest since August 2008 and signaling job cuts were decelerating.
Employers unexpectedly cut more jobs last month than in August and unemployment climbed to the highest level since 1983, Labor Department data showed on Oct. 2. Payrolls fell by 263,000 following a 201,000 drop the prior month, while the jobless rate rose to 9.8 percent from 9.7 percent. The U.S. has lost 7.2 million jobs since the recession began in December 2007.
Job losses are a “concern,” Anthony Nieves, chairman of the ISM’s non-manufacturing survey, said on a conference call. “Until we see employment come back, we are not going to see dramatic growth in the economy.”
Employment Trends
A measure of U.S. job prospects improved in September for the first time in more than a year, a sign job losses may not keep accelerating, a private survey showed. The Conference Board’s Employment Trends Index rose 0.3 to 88.5, the first increase since January 2008 and the highest level since April, the New York-based private research group said today.
Economic growth next year probably won’t be strong enough to “substantially” bring down unemployment, which may remain above 9 percent at the end of 2010, Fed Chairman Ben S. Bernanke told lawmakers on Oct. 1.
Five of 18 industries in the ISM services survey including utilities, health care, housing, retailing and construction, expanded last month, today’s report showed.
ISM’s factory index on Oct. 1 showed manufacturing, which accounts for about 12 percent of the economy, expanded less than economists anticipated in September. The measure slipped to 52.6, the first drop this year, from 52.9 in August.
Economy Growing
Recent data signal growth resumed in the third quarter after the economy shrank in the first half of 2009. Consumer spending, about 70 percent of the economy, jumped in August by the most since October 2001, led by the government’s $3 billion incentive program to trade in older, less fuel-efficient cars.
Homebuilding, which is included in ISM’s services index, may no longer be a drag on growth as steadier demand trims the property glut. The number of contracts to buy previously owned homes rose in August for a seventh month, lifted by the first- time buyer credits, data from the National Association of Realtors showed last week.
Macy’s Inc., the second-largest U.S. department store chain, is among retailers that are seeing more stable sales and planning to hire staff for the holiday season.
“We are seeing some stabilization ourselves,” Chairman and Chief Executive Officer Terry Lundgren said in a Sept. 8 interview on Bloomberg Television. “We have a much better handle now on where we are headed.”
Frits van Paasschen, chief executive officer of Starwood Hotels & Resorts Worldwide Inc., the third-largest U.S. lodging company, said last week that higher demand for hotel rooms in New York City may signal the U.S. is beginning to emerge from the recession.
“Occupancy is starting to come back, yes, at low rates, but if this recovery looks like a normal recovery we would see in a couple of quarters rates come back as well,” Van Paasschen said in an Oct. 1 interview. “I am just not sure if this is a normal recovery.”
Friday, October 2, 2009
U.S. Economy: Job Losses Exceed Forecast, Imperiling Recovery
Oct. 2 (Bloomberg) -- U.S. job losses accelerated last month and the unemployment rate climbed to the highest level since 1983, stark reminders of how the worst financial crisis in a generation may undermine consumer spending and economic growth in the months ahead.
The figures from today’s Labor Department report sent stocks tumbling for a fourth day and yields on benchmark 10-year notes to the lowest level since May. The report underscores forecasts for the Federal Reserve to keep its benchmark interest rate near zero through next year, and may spark calls for stronger government efforts to shore up jobs.
“You will see the economy pulling back,” Richard Yamarone, head of economic research at Argus Research Corp. in New York and most accurate forecaster surveyed for the payrolls loss, said in a Bloomberg Television interview. Payrolls may not return to their previous peak for years to come, he added.
Payrolls dropped by 263,000 in September, exceeding the median forecast in Bloomberg’s survey, with losses extending from cash-strapped state and local governments to retailers to builders, today’s report showed. The jobless rate rose to 9.8 percent from 9.7 percent in August, while working hours matched a record low.
The Standard & Poor’s 500 Index dropped 0.8 percent to 1,021.83 as of 9:46 a.m. in New York. Ten-year Treasury yields dipped to 3.15 percent from 3.18 percent late yesterday. The dollar sank 0.9 percent to 88.80 yen.
Bernanke’s Analysis
Fed Chairman Ben S. Bernanke yesterday said the expansion may not be strong enough to “substantially” bring down unemployment, indicating the central bank will be slow to drain the trillions of dollars it’s pumped into the economy. UAL Corp. is among companies still cutting jobs on concern spending will fade as government stimulus wanes.
“I certainly don’t think we can afford to withdraw the stimulus, without it we’d probably be looking at uglier numbers,” Chris Low, chief economist at FTN Financial in New York, said in a Bloomberg Television interview. “What we are looking at is the lack of small-business job creation that typically marks the beginning of an economic recovery.”
Payrolls were forecast to drop 175,000 in September, according to the median of 84 economists surveyed by Bloomberg News. Estimates ranged from decreases of 260,000 to 100,000. Job losses peaked at 741,000 in January, the most since 1949. The September unemployment rate matched the median projection.
Revisions subtracted 13,000 from payroll figures previously reported for August and July.
Deeper Losses
The Labor Department today also published its preliminary estimate for the annual benchmark revisions to payrolls that will be issued in February. They showed the economy may have lost an additional 824,000 jobs in the 12 months ended March 2009. The data currently show a 4.8 million drop in employment during that time.
The projected decrease was three times larger than the historical average, the Labor Department said. Most of the drop occurred in the first quarter of this year, probably due to an increase in business closings, the government said.
September’s losses bring total jobs lost since the recession began in December 2007 to 7.2 million, the biggest decline since the Great Depression.
Today’s report showed factory payrolls fell 51,000 after decreasing 66,000 in the prior month. Economists forecast a drop of 52,000. The decline included a drop of 3,500 jobs in auto manufacturing and parts industries.
GM Woes
General Motors Co. this week said it would close the Saturn brand after Penske Automotive Group Inc. broke off discussions to buy the unit. Saturn dealers will have until October 2010 to wind down operations. The Detroit-based automaker said in June a Saturn sale would have saved 13,000 jobs and 350 dealerships.
GM had called back some workers after the government’s “cash-for-clunkers” plan cut further into inventories already diminished during the bankruptcy shutdown.
Sales of cars and light trucks plunged last month after the $3 billion incentive plan expired in late August. Vehicles sold at a 9.2 million annual pace in September, down from a 14.1 million annual pace in August.
Payrolls at builders dropped 64,000 after decreasing 60,000. Financial firms decreased payrolls by 10,000, after a 25,000 decline the prior month.
Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 147,000 workers after falling 69,000. Retail payrolls decreased by 38,500 after a 8,800 drop.
Government Jobs
Government payrolls decreased by 53,000 after falling 19,000 the prior month.
Economists surveyed by Bloomberg last month projected the jobless rate will reach 10 percent by late 2009 and average 9.7 percent for all of next year even as the economy expands at an average 2.6 percent pace in the second half of this year and 2.4 percent in 2010.
Fed chief Bernanke told lawmakers in Washington yesterday that he anticipated the jobless rate will hold above 9 percent though 2010.
While acknowledging that “economic activity has picked up,” Fed policy makers on Sept. 23 said household spending “remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.”
Today’s report also showed the average work week shrank to 33 hours in September, matching a record low, from 33.1 hours in the prior month. Average weekly hours worked by production workers dipped to 39.8 hours from 39.9 hours, while overtime decreased to 2.8 hours from 2.9 hours. That brought the average weekly earnings to $616.11 from $617.65.
Workers’ average hourly wages rose 1 cent, or 0.1 percent, to $18.67 from the prior month. Hourly earnings were 2.5 percent higher than September 2008, the smallest gain since 2005. Economists surveyed by Bloomberg had forecast a 0.2 percent increase from the prior month and a 2.6 percent gain for the 12- month period.
Airlines are also cutting staff. UAL’s United Airlines, the third-biggest U.S. carrier, last month furloughed 290 more pilots under a plan to trim jobs and limit labor costs, while American Airlines said it would furlough 228 flight attendants.
The figures from today’s Labor Department report sent stocks tumbling for a fourth day and yields on benchmark 10-year notes to the lowest level since May. The report underscores forecasts for the Federal Reserve to keep its benchmark interest rate near zero through next year, and may spark calls for stronger government efforts to shore up jobs.
“You will see the economy pulling back,” Richard Yamarone, head of economic research at Argus Research Corp. in New York and most accurate forecaster surveyed for the payrolls loss, said in a Bloomberg Television interview. Payrolls may not return to their previous peak for years to come, he added.
Payrolls dropped by 263,000 in September, exceeding the median forecast in Bloomberg’s survey, with losses extending from cash-strapped state and local governments to retailers to builders, today’s report showed. The jobless rate rose to 9.8 percent from 9.7 percent in August, while working hours matched a record low.
The Standard & Poor’s 500 Index dropped 0.8 percent to 1,021.83 as of 9:46 a.m. in New York. Ten-year Treasury yields dipped to 3.15 percent from 3.18 percent late yesterday. The dollar sank 0.9 percent to 88.80 yen.
Bernanke’s Analysis
Fed Chairman Ben S. Bernanke yesterday said the expansion may not be strong enough to “substantially” bring down unemployment, indicating the central bank will be slow to drain the trillions of dollars it’s pumped into the economy. UAL Corp. is among companies still cutting jobs on concern spending will fade as government stimulus wanes.
“I certainly don’t think we can afford to withdraw the stimulus, without it we’d probably be looking at uglier numbers,” Chris Low, chief economist at FTN Financial in New York, said in a Bloomberg Television interview. “What we are looking at is the lack of small-business job creation that typically marks the beginning of an economic recovery.”
Payrolls were forecast to drop 175,000 in September, according to the median of 84 economists surveyed by Bloomberg News. Estimates ranged from decreases of 260,000 to 100,000. Job losses peaked at 741,000 in January, the most since 1949. The September unemployment rate matched the median projection.
Revisions subtracted 13,000 from payroll figures previously reported for August and July.
Deeper Losses
The Labor Department today also published its preliminary estimate for the annual benchmark revisions to payrolls that will be issued in February. They showed the economy may have lost an additional 824,000 jobs in the 12 months ended March 2009. The data currently show a 4.8 million drop in employment during that time.
The projected decrease was three times larger than the historical average, the Labor Department said. Most of the drop occurred in the first quarter of this year, probably due to an increase in business closings, the government said.
September’s losses bring total jobs lost since the recession began in December 2007 to 7.2 million, the biggest decline since the Great Depression.
Today’s report showed factory payrolls fell 51,000 after decreasing 66,000 in the prior month. Economists forecast a drop of 52,000. The decline included a drop of 3,500 jobs in auto manufacturing and parts industries.
GM Woes
General Motors Co. this week said it would close the Saturn brand after Penske Automotive Group Inc. broke off discussions to buy the unit. Saturn dealers will have until October 2010 to wind down operations. The Detroit-based automaker said in June a Saturn sale would have saved 13,000 jobs and 350 dealerships.
GM had called back some workers after the government’s “cash-for-clunkers” plan cut further into inventories already diminished during the bankruptcy shutdown.
Sales of cars and light trucks plunged last month after the $3 billion incentive plan expired in late August. Vehicles sold at a 9.2 million annual pace in September, down from a 14.1 million annual pace in August.
Payrolls at builders dropped 64,000 after decreasing 60,000. Financial firms decreased payrolls by 10,000, after a 25,000 decline the prior month.
Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 147,000 workers after falling 69,000. Retail payrolls decreased by 38,500 after a 8,800 drop.
Government Jobs
Government payrolls decreased by 53,000 after falling 19,000 the prior month.
Economists surveyed by Bloomberg last month projected the jobless rate will reach 10 percent by late 2009 and average 9.7 percent for all of next year even as the economy expands at an average 2.6 percent pace in the second half of this year and 2.4 percent in 2010.
Fed chief Bernanke told lawmakers in Washington yesterday that he anticipated the jobless rate will hold above 9 percent though 2010.
While acknowledging that “economic activity has picked up,” Fed policy makers on Sept. 23 said household spending “remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.”
Today’s report also showed the average work week shrank to 33 hours in September, matching a record low, from 33.1 hours in the prior month. Average weekly hours worked by production workers dipped to 39.8 hours from 39.9 hours, while overtime decreased to 2.8 hours from 2.9 hours. That brought the average weekly earnings to $616.11 from $617.65.
Workers’ average hourly wages rose 1 cent, or 0.1 percent, to $18.67 from the prior month. Hourly earnings were 2.5 percent higher than September 2008, the smallest gain since 2005. Economists surveyed by Bloomberg had forecast a 0.2 percent increase from the prior month and a 2.6 percent gain for the 12- month period.
Airlines are also cutting staff. UAL’s United Airlines, the third-biggest U.S. carrier, last month furloughed 290 more pilots under a plan to trim jobs and limit labor costs, while American Airlines said it would furlough 228 flight attendants.
Banks With 20% Unpaid Loans at 18-Year High Amid Recovery Doub
Oct. 2 (Bloomberg) -- The number of U.S. lenders that can’t collect on at least 20 percent of their loans hit an 18-year high, signaling that more bank failures and losses could slow an economic recovery.
Units of Frontier Financial Corp., Towne Bancorp Inc. and Steel Partners Holdings LP are among 26 firms with more than one-fifth of their loans 90 days overdue or not accruing interest as of June 30 -- a level of distress almost five times the national average -- according to Federal Deposit Insurance Corp. data compiled for Bloomberg News by SNL Financial, a bank research firm. Three reported almost half of their loans weren’t being paid.
While regulators may not force firms on the list to close, requiring them to raise capital and curb loans may impede recovery in Florida, Illinois and seven other states. The banks are among the most vulnerable of a larger group of lenders whose failures the FDIC said could cost $100 billion by 2013.
“There are some zombie banks out there,” said Bert Ely, chief executive officer at Ely & Co., a bank consulting firm in Alexandria, Virginia. “Neither the banking industry nor the economy benefits from keeping weak banks in business.”
Ninety-five banks have failed this year at the fastest pace in almost two decades, depleting the FDIC’s insurance fund. The agency proposed on Sept. 29 that financial firms prepay three years of premiums, which would add $45 billion of reserves. The fund sank to $10.4 billion as of June 30, the lowest since 1993. It will run at a deficit starting this quarter, the agency said.
Non-Current Loans
The cost of this year’s failures to the FDIC equals 25 percent of the banks’ assets, according to agency data. Applying the same ratio to the $14.1 billion of assets held by the 26 lenders on SNL’s list means the FDIC could face additional losses of $3.5 billion.
Non-current loans averaged 4.35 percent of the total at U.S. banks as of June 30, the most in 26 years of FDIC data. Regulators typically take notice at 5 percent, according to Walter Mix, a former commissioner of the California Department of Financial Institutions. Corus Bankshares Inc.’s bank unit in Chicago was shut Sept. 11 after 71 percent of its loans soured.
The last time so many banks had 20 percent of their loans more than 90 days overdue was in 1991, near the end of the savings-and-loan crisis, when there were 60, according to an SNL analysis of FDIC data. That year the number of bank failures was less than half those at the peak of the crisis in 1988; this year closings are almost four times what they were in 2008.
For banks with 20 percent of loans overdue, “either they’ve got a massive amount of capital, or the FDIC just hasn’t gotten around to them,” said Jeff Davis, an analyst with FTN Equity Capital Markets in Nashville. Lack of staff and money are slowing shutdowns, he said.
Enforcement Orders
At least 17 of the 26 banks have been hit with civil penalties or enforcement orders that demand improved management and more capital, according to data compiled by Bloomberg. Failure to comply can lead to seizure.
The number of distressed banks is larger, with the FDIC counting 416 companies on its confidential list of “problem” lenders at mid-year.
The data were compiled by Charlottesville, Virginia-based SNL from FDIC records. Institutions that had loans less than 50 percent of assets were excluded, as were those closed since the end of June. The calculation didn’t include restructured loans modified after borrowers couldn’t keep up with the original terms, which have default rates of 40 percent to 60 percent within two months, according to SNL senior analyst Sebastian Hindman. Had such loans been included, the list would have swelled to 49 lenders holding $48.4 billion in assets.
Local Impact
Firms range in size from Frontier Bank in Everett, Washington, with $3.98 billion in assets, to Gordon Bank in Gordon, Georgia, with $35 million in assets. Six of the banks are in Florida and five in Illinois.
“While these aren’t your giant banks, they are the guys your local strip mall and commercial real estate investors get their funds from,” said Joseph Mason, a Louisiana State University banking professor and visiting scholar at the FDIC.
The bank with the highest level of non-current loans, 49 percent, is Community Bank of Lemont in Lemont, Illinois, a town of about 13,000 people 30 miles southwest of Chicago. Bad loans at the bank, about a third of them in construction and development, increased fivefold from a year earlier, according to FDIC data.
In February, the FDIC ordered Lemont, a unit of Oak Park, Illinois-based FBOP Corp., to stop “operating with management whose policies and practices are detrimental to the bank and jeopardize the safety of its deposits.” Calls to the bank seeking comment weren’t returned.
’A Surprise’
Another Illinois lender, Benchmark Bank, also had an increase in non-current loans, to 25 percent as of June 30 from about 1 percent a year earlier.
“Everything was so positive for so long in this area, it came as a surprise when it stopped,” said John Medernach, Benchmark’s CEO, who added that a building boom and bust in his region may have wrecked more than just his balance sheet.
“I stop and think of all the rich farmland that has been developed into subdivisions during the boom years,” Medernach said. “It makes you wonder what we’ve been doing.”
Frontier Bank, owned by Frontier Financial, reported a sixfold rise in overdue loans to $764.6 million in the quarter ended June 30 from a year earlier, or 22 percent, according to FDIC data. More than 43 percent of the bank’s delinquent loans were in construction and development, FDIC data show. The bank has 51 branches in northwestern Oregon and western Washington.
Steel Partners
In July, Frontier Financial agreed to be acquired by SP Acquisition Holdings Inc., controlled by CEO Warren Lichtenstein, who heads the New York-based investment firm Steel Partners LLC, according to a presentation on the bank’s Web site. The deal would give Frontier access to about $456 million and create ’’an over-capitalized bank’’ that may consider acquisitions, the presentation said. The stock-swap transaction is scheduled to be completed in the fourth quarter.
Frontier “was a well-run organization for the majority of its history,” said Jeffrey Rulis, a banking analyst at D.A. Davidson & Co. in Lake Oswego, Oregon. The offer by SP Acquisition is “probably not what current shareholders envisioned a couple of years ago.” The company’s stock has dropped 92 percent in the last 12 months, and the bank posted an $84 million loss in the first half.
Patrick Fahey, Frontier’s CEO, said the transaction will resolve the bank’s credit issues. He declined to elaborate while a shareholder vote is pending.
Regulatory Art
Lichtenstein’s Steel Partners Holdings LP controls WebBank, a Salt Lake City lender with $35.5 million in assets and 31 percent of its loans overdue, according to SNL. More than 90 percent of construction and development loans weren’t current as of June 30, according to the FDIC. John McNamara, WebBank’s chairman and a managing director at Steel, declined to comment.
Determining which banks to close is “more of an art than a science,” said William Ruberry, spokesman at the Office of Thrift Supervision, which regulates four of the 26 lenders. “Examiners and the supervisory people have a lot of information that’s not public, and they know the circumstances of an institution and everything that goes into it.”
FDIC spokesman Greg Hernandez said in an e-mail that the agency doesn’t comment on individual institutions. Capital levels, profitability and financial strength of the owners are considered in addition to soured loans when deciding a bank’s fate, Hernandez said.
Sources of Capital
“There may be personal guarantees, there may be other collateral that will more than make up for the impairment on the 20 percent,” said Tom Giallanza, assistant superintendent for the State of Arizona Department of Financial Institutions, in a Sept. 15 interview. One bank on the list, Mesa, Arizona-based Towne Bank of Arizona, is in Giallanza’s state, with 28 percent of its loans non-current. Towne Bancorp CEO Patrick Patrick declined to comment.
H&R Block Bank, with 29 percent of its loans overdue, is dwarfed by the Kansas City, Missouri-based tax preparer that owns it. The bank’s deposits totaled $720.1 million as of June 30; assets at the parent company, H&R Block Inc., included more than $1 billion in cash and cash equivalents on July 31. The lender’s balance sheet is strong enough to be considered “well- capitalized” by regulators, according to FDIC reports.
The bank is a legacy of H&R Block’s subprime home lending that ended with more than $1 billion of losses for the parent company. The unit was kept open because it’s an inexpensive way to fund the company’s financial products, President Russell Smyth said a year ago. Spokeswoman Elizabeth McKinley didn’t respond to requests for comment.
Pace of Closures
Regulators may be pacing themselves on closings because the FDIC fund “is only so big,” there isn’t enough staff to close all the struggling banks at once and customers aren’t staging mass withdrawals that would force action, said Kevin Fitzsimmons, a managing director at Sandler O’Neill & Partners LP, a New York brokerage firm specializing in banks.
While a high level of non-performing assets doesn’t mean a bank can’t survive, “in some cases it creates a hole that’s too deep to climb out of,” Fitzsimmons said.
Units of Frontier Financial Corp., Towne Bancorp Inc. and Steel Partners Holdings LP are among 26 firms with more than one-fifth of their loans 90 days overdue or not accruing interest as of June 30 -- a level of distress almost five times the national average -- according to Federal Deposit Insurance Corp. data compiled for Bloomberg News by SNL Financial, a bank research firm. Three reported almost half of their loans weren’t being paid.
While regulators may not force firms on the list to close, requiring them to raise capital and curb loans may impede recovery in Florida, Illinois and seven other states. The banks are among the most vulnerable of a larger group of lenders whose failures the FDIC said could cost $100 billion by 2013.
“There are some zombie banks out there,” said Bert Ely, chief executive officer at Ely & Co., a bank consulting firm in Alexandria, Virginia. “Neither the banking industry nor the economy benefits from keeping weak banks in business.”
Ninety-five banks have failed this year at the fastest pace in almost two decades, depleting the FDIC’s insurance fund. The agency proposed on Sept. 29 that financial firms prepay three years of premiums, which would add $45 billion of reserves. The fund sank to $10.4 billion as of June 30, the lowest since 1993. It will run at a deficit starting this quarter, the agency said.
Non-Current Loans
The cost of this year’s failures to the FDIC equals 25 percent of the banks’ assets, according to agency data. Applying the same ratio to the $14.1 billion of assets held by the 26 lenders on SNL’s list means the FDIC could face additional losses of $3.5 billion.
Non-current loans averaged 4.35 percent of the total at U.S. banks as of June 30, the most in 26 years of FDIC data. Regulators typically take notice at 5 percent, according to Walter Mix, a former commissioner of the California Department of Financial Institutions. Corus Bankshares Inc.’s bank unit in Chicago was shut Sept. 11 after 71 percent of its loans soured.
The last time so many banks had 20 percent of their loans more than 90 days overdue was in 1991, near the end of the savings-and-loan crisis, when there were 60, according to an SNL analysis of FDIC data. That year the number of bank failures was less than half those at the peak of the crisis in 1988; this year closings are almost four times what they were in 2008.
For banks with 20 percent of loans overdue, “either they’ve got a massive amount of capital, or the FDIC just hasn’t gotten around to them,” said Jeff Davis, an analyst with FTN Equity Capital Markets in Nashville. Lack of staff and money are slowing shutdowns, he said.
Enforcement Orders
At least 17 of the 26 banks have been hit with civil penalties or enforcement orders that demand improved management and more capital, according to data compiled by Bloomberg. Failure to comply can lead to seizure.
The number of distressed banks is larger, with the FDIC counting 416 companies on its confidential list of “problem” lenders at mid-year.
The data were compiled by Charlottesville, Virginia-based SNL from FDIC records. Institutions that had loans less than 50 percent of assets were excluded, as were those closed since the end of June. The calculation didn’t include restructured loans modified after borrowers couldn’t keep up with the original terms, which have default rates of 40 percent to 60 percent within two months, according to SNL senior analyst Sebastian Hindman. Had such loans been included, the list would have swelled to 49 lenders holding $48.4 billion in assets.
Local Impact
Firms range in size from Frontier Bank in Everett, Washington, with $3.98 billion in assets, to Gordon Bank in Gordon, Georgia, with $35 million in assets. Six of the banks are in Florida and five in Illinois.
“While these aren’t your giant banks, they are the guys your local strip mall and commercial real estate investors get their funds from,” said Joseph Mason, a Louisiana State University banking professor and visiting scholar at the FDIC.
The bank with the highest level of non-current loans, 49 percent, is Community Bank of Lemont in Lemont, Illinois, a town of about 13,000 people 30 miles southwest of Chicago. Bad loans at the bank, about a third of them in construction and development, increased fivefold from a year earlier, according to FDIC data.
In February, the FDIC ordered Lemont, a unit of Oak Park, Illinois-based FBOP Corp., to stop “operating with management whose policies and practices are detrimental to the bank and jeopardize the safety of its deposits.” Calls to the bank seeking comment weren’t returned.
’A Surprise’
Another Illinois lender, Benchmark Bank, also had an increase in non-current loans, to 25 percent as of June 30 from about 1 percent a year earlier.
“Everything was so positive for so long in this area, it came as a surprise when it stopped,” said John Medernach, Benchmark’s CEO, who added that a building boom and bust in his region may have wrecked more than just his balance sheet.
“I stop and think of all the rich farmland that has been developed into subdivisions during the boom years,” Medernach said. “It makes you wonder what we’ve been doing.”
Frontier Bank, owned by Frontier Financial, reported a sixfold rise in overdue loans to $764.6 million in the quarter ended June 30 from a year earlier, or 22 percent, according to FDIC data. More than 43 percent of the bank’s delinquent loans were in construction and development, FDIC data show. The bank has 51 branches in northwestern Oregon and western Washington.
Steel Partners
In July, Frontier Financial agreed to be acquired by SP Acquisition Holdings Inc., controlled by CEO Warren Lichtenstein, who heads the New York-based investment firm Steel Partners LLC, according to a presentation on the bank’s Web site. The deal would give Frontier access to about $456 million and create ’’an over-capitalized bank’’ that may consider acquisitions, the presentation said. The stock-swap transaction is scheduled to be completed in the fourth quarter.
Frontier “was a well-run organization for the majority of its history,” said Jeffrey Rulis, a banking analyst at D.A. Davidson & Co. in Lake Oswego, Oregon. The offer by SP Acquisition is “probably not what current shareholders envisioned a couple of years ago.” The company’s stock has dropped 92 percent in the last 12 months, and the bank posted an $84 million loss in the first half.
Patrick Fahey, Frontier’s CEO, said the transaction will resolve the bank’s credit issues. He declined to elaborate while a shareholder vote is pending.
Regulatory Art
Lichtenstein’s Steel Partners Holdings LP controls WebBank, a Salt Lake City lender with $35.5 million in assets and 31 percent of its loans overdue, according to SNL. More than 90 percent of construction and development loans weren’t current as of June 30, according to the FDIC. John McNamara, WebBank’s chairman and a managing director at Steel, declined to comment.
Determining which banks to close is “more of an art than a science,” said William Ruberry, spokesman at the Office of Thrift Supervision, which regulates four of the 26 lenders. “Examiners and the supervisory people have a lot of information that’s not public, and they know the circumstances of an institution and everything that goes into it.”
FDIC spokesman Greg Hernandez said in an e-mail that the agency doesn’t comment on individual institutions. Capital levels, profitability and financial strength of the owners are considered in addition to soured loans when deciding a bank’s fate, Hernandez said.
Sources of Capital
“There may be personal guarantees, there may be other collateral that will more than make up for the impairment on the 20 percent,” said Tom Giallanza, assistant superintendent for the State of Arizona Department of Financial Institutions, in a Sept. 15 interview. One bank on the list, Mesa, Arizona-based Towne Bank of Arizona, is in Giallanza’s state, with 28 percent of its loans non-current. Towne Bancorp CEO Patrick Patrick declined to comment.
H&R Block Bank, with 29 percent of its loans overdue, is dwarfed by the Kansas City, Missouri-based tax preparer that owns it. The bank’s deposits totaled $720.1 million as of June 30; assets at the parent company, H&R Block Inc., included more than $1 billion in cash and cash equivalents on July 31. The lender’s balance sheet is strong enough to be considered “well- capitalized” by regulators, according to FDIC reports.
The bank is a legacy of H&R Block’s subprime home lending that ended with more than $1 billion of losses for the parent company. The unit was kept open because it’s an inexpensive way to fund the company’s financial products, President Russell Smyth said a year ago. Spokeswoman Elizabeth McKinley didn’t respond to requests for comment.
Pace of Closures
Regulators may be pacing themselves on closings because the FDIC fund “is only so big,” there isn’t enough staff to close all the struggling banks at once and customers aren’t staging mass withdrawals that would force action, said Kevin Fitzsimmons, a managing director at Sandler O’Neill & Partners LP, a New York brokerage firm specializing in banks.
While a high level of non-performing assets doesn’t mean a bank can’t survive, “in some cases it creates a hole that’s too deep to climb out of,” Fitzsimmons said.
Factory Orders in U.S. Drop 0.8%; Ex-Transport Rises 0.4%
Oct. 2 (Bloomberg) -- Orders placed with U.S. factories fell unexpectedly in August, restrained by long-lasting items such as commercial aircraft, construction machinery and electrical equipment.
Bookings fell 0.8 percent after a revised 1.4 percent increase in July that was larger than previously estimated, the Commerce Department said today in Washington. Excluding transportation equipment, orders rose 0.4 percent.
Today’s report follows others this week that showed manufacturing contracted or slowed in September. With excess capacity close to a record, companies have less reason to ramp up production until they see stronger gains in demand. While the “cash for clunkers” program boosted automakers’ output in August, it’s now expired, pointing to an uneven rebound.
“We could have a choppy recovery,” Benjamin Reitzes, an economist at BMO Capital Markets in Toronto, said before the report. “Employment is still falling, and until that turns around the economy is going to have trouble gaining any momentum.”
Factory orders were forecast to be unchanged, after an originally estimated 1.3 percent gain in June, according to the median of 65 estimates in a Bloomberg News survey. Projections ranged from a decrease of 1.7 percent to an increase of 2.1 percent.
Employers cut more jobs than forecast last month and the unemployment rate rose to a 26-year high, Labor Department data showed today, calling into question the sustainability of the economic recovery.
Durable Goods
The unemployment rate rose to 9.8 percent, the highest since 1983, from 9.7 percent in August. Payrolls fell by 263,000, following a revised 201,000 decline the prior month that was less than previously reported.
Orders for durable goods, which make up 47 percent of total factory demand, fell 2.6 percent, the biggest drop since January. The government last week estimated they had dropped 2.4 percent.
Demand for transportation equipment, which tends to be volatile, fell 9.1 percent, led by a 43 percent decline in commercial aircraft and parts. Autos increased 2 percent.
Ford Motor Co, General Motors Co. and Honda Motor Co. are among automakers that cited the popularity of the cash-for- clunkers plan as they announced production increases for the coming months.
Clunkers Program
The program, which ended Aug. 24, offered auto buyers discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles. The plan produced almost 700,000 auto sales before it ended, the Transportation Department said Aug. 26.
Auto sales fell 35 percent in September from the previous month to a 9.2 million annual rate, after the clunkers plan expired, according to Bloomberg data. Sales had reached the highest level in more than year a month earlier.
Bookings for capital goods excluding aircraft and military equipment, a measure of future business investment, fell 0.9 percent after dropping 1.3 percent in July. Shipments of those goods, used in calculating gross domestic product, decreased 2 percent.
Economists earlier this week said the end of the clunkers incentive may have helped fuel a weaker-than-forecast September reading for the Institute for Supply Management- Chicago’s business survey, which found activity dropped. The Chicago group is not affiliated with the national Institute for Supply Management.
Factory Stockpiles
The Institute for Supply Management yesterday said its factory gauge edged down to 52.6, from 52.9 in August. Readings above 50 signal expansion.
Another Commerce Department report this week showed the record drop in stockpiles in the second quarter was even larger than previously estimated, paving the way for gains in manufacturing in the second half of the year.
Today’s report showed factory stockpiles fell 0.8 percent in August, the smallest drop since May, after falling a revised 0.9 percent a month earlier. Manufacturers had enough goods on hand to last 1.38 months -- the lowest since October -- at the current sales pace, down from 1.39 months in July.
Micron Technology Inc., the biggest U.S. producer of computer-memory chips, this week reported a narrower loss after an industry glut eased and product prices rebounded.
Bankruptcies and factory shutdowns have helped the memory industry pare an oversupply of chips, pushing up prices closer to the cost of production. Micron makes dynamic random access memory, or DRAM, for personal computers, as well as Nand flash chips, which store data in devices such as Apple Inc.’s iPhone.
Job Cuts
Timothy Main, chief executive officer of Jabil Circuit Inc., the Florida electronics manufacturer, said this week that the worst of the recession had likely passed. Even so, the company stepped up a job-cutting program. Jabil now expects to eliminate 4,500 positions, up from the 3,000 already planned.
Today’s factory report showed orders of non-durable goods gained 0.8 percent. The increase may have been influenced by an 8 percent gain in wholesale energy costs in August, according to Labor Department figures released Sept. 15.
Bookings fell 0.8 percent after a revised 1.4 percent increase in July that was larger than previously estimated, the Commerce Department said today in Washington. Excluding transportation equipment, orders rose 0.4 percent.
Today’s report follows others this week that showed manufacturing contracted or slowed in September. With excess capacity close to a record, companies have less reason to ramp up production until they see stronger gains in demand. While the “cash for clunkers” program boosted automakers’ output in August, it’s now expired, pointing to an uneven rebound.
“We could have a choppy recovery,” Benjamin Reitzes, an economist at BMO Capital Markets in Toronto, said before the report. “Employment is still falling, and until that turns around the economy is going to have trouble gaining any momentum.”
Factory orders were forecast to be unchanged, after an originally estimated 1.3 percent gain in June, according to the median of 65 estimates in a Bloomberg News survey. Projections ranged from a decrease of 1.7 percent to an increase of 2.1 percent.
Employers cut more jobs than forecast last month and the unemployment rate rose to a 26-year high, Labor Department data showed today, calling into question the sustainability of the economic recovery.
Durable Goods
The unemployment rate rose to 9.8 percent, the highest since 1983, from 9.7 percent in August. Payrolls fell by 263,000, following a revised 201,000 decline the prior month that was less than previously reported.
Orders for durable goods, which make up 47 percent of total factory demand, fell 2.6 percent, the biggest drop since January. The government last week estimated they had dropped 2.4 percent.
Demand for transportation equipment, which tends to be volatile, fell 9.1 percent, led by a 43 percent decline in commercial aircraft and parts. Autos increased 2 percent.
Ford Motor Co, General Motors Co. and Honda Motor Co. are among automakers that cited the popularity of the cash-for- clunkers plan as they announced production increases for the coming months.
Clunkers Program
The program, which ended Aug. 24, offered auto buyers discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles. The plan produced almost 700,000 auto sales before it ended, the Transportation Department said Aug. 26.
Auto sales fell 35 percent in September from the previous month to a 9.2 million annual rate, after the clunkers plan expired, according to Bloomberg data. Sales had reached the highest level in more than year a month earlier.
Bookings for capital goods excluding aircraft and military equipment, a measure of future business investment, fell 0.9 percent after dropping 1.3 percent in July. Shipments of those goods, used in calculating gross domestic product, decreased 2 percent.
Economists earlier this week said the end of the clunkers incentive may have helped fuel a weaker-than-forecast September reading for the Institute for Supply Management- Chicago’s business survey, which found activity dropped. The Chicago group is not affiliated with the national Institute for Supply Management.
Factory Stockpiles
The Institute for Supply Management yesterday said its factory gauge edged down to 52.6, from 52.9 in August. Readings above 50 signal expansion.
Another Commerce Department report this week showed the record drop in stockpiles in the second quarter was even larger than previously estimated, paving the way for gains in manufacturing in the second half of the year.
Today’s report showed factory stockpiles fell 0.8 percent in August, the smallest drop since May, after falling a revised 0.9 percent a month earlier. Manufacturers had enough goods on hand to last 1.38 months -- the lowest since October -- at the current sales pace, down from 1.39 months in July.
Micron Technology Inc., the biggest U.S. producer of computer-memory chips, this week reported a narrower loss after an industry glut eased and product prices rebounded.
Bankruptcies and factory shutdowns have helped the memory industry pare an oversupply of chips, pushing up prices closer to the cost of production. Micron makes dynamic random access memory, or DRAM, for personal computers, as well as Nand flash chips, which store data in devices such as Apple Inc.’s iPhone.
Job Cuts
Timothy Main, chief executive officer of Jabil Circuit Inc., the Florida electronics manufacturer, said this week that the worst of the recession had likely passed. Even so, the company stepped up a job-cutting program. Jabil now expects to eliminate 4,500 positions, up from the 3,000 already planned.
Today’s factory report showed orders of non-durable goods gained 0.8 percent. The increase may have been influenced by an 8 percent gain in wholesale energy costs in August, according to Labor Department figures released Sept. 15.
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