HowWealthWorks.com

CDS traders downgrade Fannie and Freddie 5 levels below AAA to A2

Author: Dave
CDS traders downgrade Fannie and Freddie 5 levels below AAA to A2 Posted: Wed Jul 09, 2008 11:05 am (GMT 0)
Topic Replies: 5

Perhaps we don't need the bond rating services afterall-- CDS traders establish bond ratings far more efficiently and reliably. -Dave

Bloomberg: Fannie, Freddie Downgraded by Derivatives Traders

Fannie Mae and Freddie Mac, ranked Aaa by the world's largest credit-rating companies, are being treated by derivatives traders as if they are rated five levels lower.

Credit-default swaps tied to $1.45 trillion of debt sold by the two biggest U.S. mortgage finance companies are trading at levels that imply the bonds should be rated A2 by Moody's Investors Service, according to data compiled by the firm's credit strategy group. The price of contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac and to protect against a default doubled in the past two months.

Traders are overlooking the government's implied guarantee of the debt as credit losses grow and concern rises that the companies don't have enough capital to weather the biggest housing slump since the Great Depression.

The bailout of Bear Stearns Cos. arranged by the Federal Reserve in March shows the government won't allow the companies to fail, Robert Millikan, who manages $5 billion as director of fixed income at BB&T Asset Management in Raleigh, North Carolina.
_________________
Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

Cantarell oil production plummets 37pct, may force open mexican oil market

Author: Dave
Cantarell oil production plummets 37pct, may force open mexican oil market Posted: Wed Jul 09, 2008 10:33 am (GMT 0)
Topic Replies: 7

Mexico's constitution precludes outside investment in its oil industry. That may change as Mexico's oil production has now declined 10% in the last 12 months alone; and studies have shown that declines usually steepen once begun. -Dave

Financial Times: Output plummets at huge Mexican oilfield

Production at Mexico�s Cantarell oil complex, one of the world�s largest, has plummeted by a third in the past year, an indication the country could lose self-sufficiency in oil in the medium term.

Average daily production dropped to slightly more than 1m barrels a day in May compared with more than 1.6m b/d in the same month last year, according to the energy ministry.

Mexico�s total oil production fell about 10 per cent in the past 12 months to 2.79m b/d in May. That was only marginally above April�s output, which was the lowest in a decade.
_________________
Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

Return persistence: sell your losers and buy your winners

Author: Dave
Return persistence: sell your losers and buy your winners Posted: Wed Jul 09, 2008 10:23 am (GMT 0)
Topic Replies: 0

A London Business School study of momentum investing finds that momentum investing provides excess returns, and is especially effective in sector and small cap investing.

Financial Sense: Return Persistence & Future Stock Performance

The latest comprehensive study of this issue by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School examined 108 years of market data. They looked at markets in 16 different countries to determine if a stock�s historical return has any predictive basis when looking at future stock returns.

Return Persistence. The study found extensive evidence that was statistically significant, across time periods and markets, that returns are persistent � that is a stock that has performed extremely well in the last year has an increased probability of performing well in the future. Conversely, stocks that have performed poorly have an increased probability of underperforming the market going forward.

Strategies which utilized this persistence, called �momentum� investing or �relative strength� or �trend following� by some, generated excess returns that were striking. Over 108 years, taking the largest stocks, those that performed in the top 20% in the previous year, outperformed those in the bottom 20% by 10.3% per year in the U.K. markets. Over time such incremental returns compound � delivering substantial excess returns for long term investors.

Over shorter periods the excess returns of momentum investing remained significant. Over the 1956 to 2007 period the top 20% outperformed the lowest performing 20% by 10.8% per year. The impact of this strategy was present not only in the U.K. markets but every market they studied, including U.S. markets.
_________________
Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

Mohamed El-Erian on who should step over to the sidelines right now

Author: Suresh
Mohamed El-Erian on who should step over to the sidelines right now Posted: Tue Jul 08, 2008 3:58 pm (GMT 0)
Topic Replies: 1

Financial Times: Traversing wild market swings
...
Successful risk management must reflect the fact that markets are now in the grip of three distinct but reinforcing forces that will play out over a number of quarters.

First, look for further balance sheet contractions in the financial sector that will continue to suck oxygen out of, and undermine risk appetite in credit and equity markets. This is part of a long-term process of de-risking that is currently driven by markets but will soon have a more important regulatory dimension.

Second, markets are yet to adequately price the morphing of the credit crunch into a full-scale US economic disruption. Prepare for even stronger headwinds fuelled by declining real income and eroding household wealth.

Third, there are no easy policy solutions. Instead, policy makers face an extremely difficult situation in which any action, no matter how well-intentioned, entails unstable feedback loops and impose distortions elsewhere. Collateral damage cannot be avoided, yet its exact characterisation is uncertain given the extent of still-hidden vulnerabilities in both the real economy and the financial sector.
...
[H]ow about the implications for investment strategies? Interestingly, they differ significantly depending on where your investible capital stands with respect to some key structural attributes � an insight that also speaks to why we are likely to see more market volatility.

The answer lies in a phased, multi-quarter approach by investors that benefit from the following structural attributes: a high degree of capital permanency that steers clear of the need to finance sudden withdrawals; a willingness to take long-term views that can be sustained through wild market swings; and a process that accommodates opportunities that, in some cases, do not fit well into traditional classifications of asset classes.

If you possess these structural attributes, today�s markets offer opportunities that are high up in the capital structure and that, in a few years, will be looked at as having constituted incredible bargains. If you don�t, you are well advised to stay on the sidelines, focused on the probability that these same markets will also be treacherous for at least the remainder of this year.
...
[Mohamed El-Erian], co-CEO and co-CIO of Pimco, is author of �When Markets Collide: Investment Strategies for the Age of Global Economic Change.�
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I feel comfortable with those structural attributes. How about you?
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

Net increase in available strip mall space caused rents to fall

Author: Suresh
Net increase in available strip mall space caused rents to fall Posted: Tue Jul 08, 2008 12:28 pm (GMT 0)
Topic Replies: 25

MoneyNews: Retail Property, Vacancies Q2 Worst in 30 Years
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Strip malls, which are usually anchored by grocery or drug stores, saw average vacancies spike 0.5 percentage points to 8.2 percent, a level unseen since 1995, according to the report released on Monday.

Vacancies at regional malls rose 0.4 percentage points to 6.3 percent, the highest level since the first quarter of 2002, according to the preliminary results.
...
For the first time since 1980, more space became available to rent at strip malls than was rented out -- about 3.2 million square feet more. Part of the available space came in the form of 5.7 million square feet of new development that came on the market during the quarter.

The extra space translated into falling rents at strip malls, down 0.1 percent to an average of $17.60 per square foot.
...
Preliminary figures show that regional malls were barely able to raise rents, with just an anemic 0.2 percent rise excluding concessions, its weakest gain since the second quarter.
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

International equity exposure provides little diversification benefit

Author: Suresh
International equity exposure provides little diversification benefit Posted: Tue Jul 08, 2008 11:56 am (GMT 0)
Topic Replies: 2

TheStreet.com: Your Best Shot at Diversification
...
During downturns, diversification provides only limited protection, according to a recent study by Peng Chen, president of Ibbotson Associates.
...
Comparing recent experience with the past, Ibbotson's Chen examined correlations, a measure of how closely two assets track each other. The lower the correlation (1.0 is perfect correlation, 0 means there's none), the greater the diversification. If an asset has a high correlation, then there may be little reason to own it.

Ibbotson looked at how various assets tracked the S&P 500 from 1970 through March 2008.

During months when the S&P was rising, the foreign stocks of the MSCI EAFE index had an average correlation of 0.31. In other words, foreign stocks rarely tracked the S&P exactly.

But the picture changed during downturns. When the S&P was falling, the correlation with foreign stocks climbed to 0.53. Correlations for real estate investment trusts also spiked during downturns.
...
Besides rising during downturns, correlations can change over time. During the 1980s, foreign stocks typically had average correlations of less than 0.4 relative to the S&P. At the time, for instance, Japanese markets were soaring, sometimes climbing during periods when Wall Street languished.

But beginning in the 1990s, the correlations of foreign stocks began to rise. As global trade increased, stock markets were becoming more closely linked. With the Internet providing real-time information, traders around the world began reacting simultaneously. When word about the subprime mortgage crisis appeared, stocks fell in many countries. Now, the correlation of foreign stocks is 0.8. So foreign stocks only provide a small diversification benefit.
...
While hedge funds may provide limited value, commodities clearly help to diversify. As has been painfully apparent in recent months, prices of gold and oil can climb while stocks fall.

Still, researchers disagree about whether investors should hold commodities for the long term. The problem is that prices of commodities often bounce up and then eventually return to the initial level. The evidence is murky about whether commodity prices rise much over the long term.
...
Along with stocks, investors should also own bonds, says ... [Scott Donaldson, senior investment analyst for Vanguard Group]. During the past decade, bond correlations have dropped. In many instances, bonds have risen while stocks were falling. This year, Treasuries and other investment-grade securities climbed as stocks dropped.
...
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With the increasing prevalence of yen and Swiss Franc carry trades, for example, and brokerage or investment accounts that permit investing on stock exchanges outside the United States, it's not really a shock that domestic and foreign stocks are becoming more correlated. That's why I keep on thinking about Prof. Siege's reference to a study by Morgan Stanley�s Quantitative Analytics team in June 2004. That study concluded that in constructing global asset allocations, sector allocation is more important than geographic allocation.

As to Mr. Donaldson's assertion that stocks and bonds are not very correlated, I need more information about the duration Mr. Donaldson is considering. If he were to look at the same 1970 through 2008 period at which Peng Chen considered, perhaps he would see that as stocks traded sideways in nominal terms and lost money in real terms from 1970 through about 1981, so did bonds. Similarly, post-1981, stocks and bonds went on a bullish tear.
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

Government bailout of Fannie, Freddie looms large as share prices plunge

Author: Dave
Government bailout of Fannie, Freddie looms large as share prices plunge Posted: Tue Jul 08, 2008 11:51 am (GMT 0)
Topic Replies: 5

GSEs Fannie and Freddie have lost more than 60% of their market value this year alone-- and the year is just half over. The GSEs must raise capital to survive, but with share prices in free fall, raising capital by selling shares has become self-defeating. Falling asset prices, an inability to raise needed capital means that a taxpayer bailout is probably on the way. But not really-- it won't be taxpayer dollars going to bailout the GSEs, but newly created money that can only add to the devaluation and inflation pressures the dollar already faces. -Dave

IHT: Global markets shudder after new worries about U.S. financial institutions

As U.S. home prices decline and Washington struggles to end the economic malaise, Wall Street is starting to send a sobering message: The worst is yet to come.

One of the strongest warning signs came as the week began, when shares of the most important U.S. mortgage companies, Fannie Mae and Freddie Mac, plummeted. After falling almost continuously over the past month, in just one day Freddie Mac tumbled another 18 percent and Fannie Mae lost 16 percent amid concerns that the companies would need to raise billions of dollars in fresh capital.

Worldwide, banks and brokerage have written down the value of the assets they hold, notably those linked to mortgages, by more than $400 billion since the beginning of last year. In April, the International Monetary Fund said total losses for banks, insurance companies and investment funds may reach $945 billion, and some forecasters say they bill could be even higher.

The gloomy news also threatens to further shrink Washington's influence over the economy. Legislators are widely expected to approve a housing rescue bill by the end of the month. That legislation will overhaul the regulatory structure for Freddie Mac and Fannie Mae, which are government chartered enterprises, and will force the two companies to hand over hundreds of millions of dollars each year to refinance troubled home loans.

But the reform legislation will also likely bolster the odds that taxpayers will foot the bill if either company falters. "If Fannie or Freddie ever became critically undercapitalized, their regulator would have no choice but to put in place a taxpayer rescue," said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company.
_________________
Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

AngloGold to spend $1.6B to cover gold hedge positions

Author: Dave
AngloGold to spend $1.6B to cover gold hedge positions Posted: Tue Jul 08, 2008 11:18 am (GMT 0)
Topic Replies: 4

"Hedging" is just another way of saying "shorting." The world's major gold producers had been shorting all the way down in the 18 year bear market in gold, too good effect. But as the price has risen over the last 8 years, gold producer profitability has been hit by the low hedge price received on ounces that have been increasingly expensive to mine. AngloGold would never cover its hedges if it were conceivable the price of gold might fall. That the world's major gold producers must now enter the market to cover their shorts is very bullish for the price of gold. -Dave

FT: AngloGold raises $1.6bn to trim hedges

AngloGold Ashanti of South Africa yesterday made progress towards its aim of becoming an unhedged gold producer after raising $1.6bn through a rights issue to pay for the settlement of unattractive forward sales contracts.

Mark Cutifani, AngloGold chief executive, made it a priority when he joined the mining company last September to unwind its large hedge book.

The price of gold has been climbing since 2003 and this year peaked at more than $1,000 an ounce.

While this has been good for unhedged gold producers, companies that hedged large amounts of their future output at lower prices have seen their profit margins fall because the cost of production has also risen.

The rights issue was almost seven times subscribed, said bankers, with the majority of existing shareholders taking up their rights.
_________________
Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

China Oilfield buys Awilco for $2.5B to take oil production off market

Author: Dave
China Oilfield buys Awilco for $2.5B to take oil production off market Posted: Tue Jul 08, 2008 11:09 am (GMT 0)
Topic Replies: 28

Since "Bretton Woods II," the US dollar has been backed by oil. The more oil traded in the international marketplace for dollars, the better. But oil producing and consuming nations are in the process of taking oil production, and sales, out of the international market and tying it up in long term supply contracts not denominated in dollars. The shrinking oil market is a major headwind to the dollar. This deal for Awilco can only mean that China's ability to take global oil supply off market has just grown.

Reuters: China Oilfield to buy Awilco for US$2.5bil

China's largest offshore oil services group has agreed to buy Norwegian peer Awilco Offshore for around US$2.5bil to increase its drilling capacity and tap overseas markets.

China Oilfield Services Ltd, an arm of China's top offshore oil and gas producer CNOOC, will pay 85 crowns per share for the Oslo-based company in what will be the fourth largest crossborder acquisition by a Chinese company in the oil and gas sector, according to Thomson Reuters.

�China Oilfield has US$1bil cash in hand. Its biggest problem has been there is no acquisition targets,� said BOCI analyst Lawrence Lau. �Awilco has new rigs coming on stream over the next two years, which will benefit China Oilfield.�

Cross-border acquisitions by China have more than quadrupled year to date to US$41.1bil worth of announced deals, according to Thomson Reuters, fuelled by China's hunger for natural resources needed to fuel the country's economic boom. � Reuters
_________________
Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

Proctor Gamble raise prices 16pct. on rising energy, plastics costs

Author: Dave
Proctor Gamble raise prices 16pct. on rising energy, plastics costs Posted: Tue Jul 08, 2008 10:57 am (GMT 0)
Topic Replies: 3

This won't do anything good for consumers' "inflation expectations." We've noted before that the Federal Reserve is losing the battle to keep consumers inflations expectations in check. Most consumers will be amazed to see how much prices will rise just over the next few years. And as Suresh has pointed out, the compounding of price increases will quickly lead to doubling and tripling of prices.

Bloomberg: P&G to hike prices 16%

Procter & Gamble Co., the maker of Tide laundry detergent and Head & Shoulders shampoo, announced yesterday it will raise prices as much as 16 percent because of higher costs for plastic, energy and paper.

The increases are the Cincinnati-based company's steepest in at least 18 months.

The company tries to counter as much as a third of rising expenses for pulp, used in paper, tallow, an animal fat used in soap, and oil-based products such as plastics through the reduction of distribution costs, Fox said.
_________________
Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

UK mortgage lender Bradford Bingley's shares may be worth nothing

Author: Suresh
UK mortgage lender Bradford Bingley's shares may be worth nothing Posted: Tue Jul 08, 2008 10:43 am (GMT 0)
Topic Replies: 45

Telegraph Media Group: Wipe-out fear for Bradford & Bingley's investors

When the Financial Services Authority hammered out a new rescue for Bradford & Bingley last week with a handful of City institutions, the urgent aim was to make sure the stricken buy-to-let lender did not go to the wall.

But with B&B's shares falling again yesterday - down 8 to 42p - there was a growing view that the plan, backed by four of B&B's biggest shareholders and underwritten by a mixture of investment and high street banks, was merely a sticking plaster.

"What the stock market is telling you is that B&B's shares could end up being worth nothing and that the equity holders could be wiped out," said one banking analyst.

Leigh Goodwin at Fox-Pitt Kelton said of B&B: "It is not a viable business model in today's world. It can't fund at a viable rate. They can't lend because they can't fund and bad debts are coming their way big time."...

"It has got to be taken out of the system. It has got to be ushered towards a safe harbour," said one banker.

There are indications that the Government has been searching for such a harbour, after private equity firm Texas Pacific Group walked away from a deal to buy 23pc of B&B for �179m late on Thursday.

Under the terms of the new �400m capital raising thrashed out to fill the hole left by TPG, a partial lifeboat has been created. As well as the underwriting already agreed with Citigroup and UBS, six big banks - HBOS, HSBC, Abbey, Lloyds TSB, Barclays and Royal Bank of Scotland - have agreed to sub-underwrite �230m of the issue. Given B&B's tumbling share price, there is a good chance the six will end up owning one third of B&B after the rights issue.
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Even if the bank were given away, an acquirer would have to assume B&B's liabilities. These may grow more steeply than at other banks because of B&B's exposure to the riskier parts of the housing market, including buy-to-let and self-certification, where the borrower does not have to give proof of income when taking out a mortgage.
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In a research note which also said B&B's shares were worth nothing, Pali International said it expected B&B to "shrink the mortgage book by 5pc per annum until 2012".

That will present a difficulty. B&B has �21bn of savings on its books. It might find it hard to keep these customers if there is a perception that the business is in run-off. The only way to do so would be to offer very high interest rates, which would further increase costs.

At the same time, B&B is tied into several obligations with its securitisation vehicle, Aire Valley Master Trust. Moody's, whose downgrade last week prompted TPG to walk, yesterday said that due to its impaired rating, B&B could no longer act as a counterparty which provides a buffer against interest movements to the trust. The bank will have to find a new bank to do this, which will be more expensive for B&B.

The existence of Aire Valley, which has �13bn of mortgage assets, would also be an obstacle to the FSA orchestrating a plan to carve up B&B and share it out between different banks.

Winding down Aire Valley would lead to an immediate need to repay the holders of senior debt, which may be too stretching. Holders of junior debt would be shunted to the back of the queue, which would probably cause widespread resentment among the City institutions which hold this paper.

B&B also has an obligation to buy �350m of mortgages every three months from specialist lender GMAC until 2009.

When B&B issued a profits warning on June 2 it revealed arrears in its acquired mortgages were 5pc of the book, compared to the 1.9pc of loans it originated itself. Some hedge funds believe B&B could lose �400m - the value of its current rights issue - on the GMAC book alone.
...
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

Suburban office space leasing falls 23%, commercial real estate softens

Author: Dave
Suburban office space leasing falls 23%, commercial real estate softens Posted: Tue Jul 08, 2008 10:39 am (GMT 0)
Topic Replies: 25

We don't see commercial real estate coming back anytime soon; given the height of the bubble prices, I expect a long period of working out the excesses. The temptation for owners in a down market is to "ride it down." If an owner will need to sell in the next few years, it is my opinion that now is the best time.

Chicago Trib.: Suburban office space losing occupancy and value

Demand for leased suburban office space has fallen to levels not seen since the last recession, industry observers say, and some building owners are holding on to their property because buyers are rare.Cushman & Wakefield said second-quarter suburban leasing of office space fell 23 percent to 1.3 million square feet compared with the first quarter.

A combination of factors is hurting commercial real estate here and around the country. The collapse in home sales, for example, means mortgage brokers and lenders need less office space. And as the economy slows, employers are reluctant to add new workers, which translates into the need for less office space.

Paul Lundstedt, executive director of Cushman & Wakefield, said the economy and cautious lenders began hurting office sales in the suburban market in 2007 and have yet to relent."Some owners have decided to pull [property] off the market," he said. In some cases, they have suspended marketing for a year.

"It is harder to get loans and, as a result, prices have softened," Lunt said. "Owners that have buildings that are leased up, there is no big incentive to sell it."
_________________
Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

Crushing bear market: SP 500 companies forced to cut dividends

Author: Dave
Crushing bear market: SP 500 companies forced to cut dividends Posted: Mon Jul 07, 2008 12:52 pm (GMT 0)
Topic Replies: 2

In case you haven't noticed, the 10 year return on the S&P 500 is negative when adjusted for inflation and dividends. We are in a crushing bear market that has caught many investors asleep at the wheel. In the last 12 months alone, the Dow has fallen 45% against the CRB commodities index. If that's not a crushing bear, I don't know what is.

With stock prices falling, companies must cut dividends.

Long a Reliable Profit Source, Dividends Start to Crumble

Financial institutions, reeling from the rise in foreclosures and ensuing credit crunch, are making the most drastic reductions. Citigroup, which has recorded billions of dollars in losses on mortgage securities, earlier this year lopped its dividend by 41 percent. So did Wachovia. National City, a major regional bank, reduced its payout by nearly half, and Washington Mutual slashed its quarterly dividend to a mere penny.

So tough that 17 of 20 financial companies in the Standard & Poor's 500-stock index have cut their dividends so far this year, more than in the past five years combined, said Howard Silverblatt, senior index analyst at S&P.

"Dividends are usually the last thing you want to cut," Silverblatt said. "You're not just taking your holders out, but you're telling the marketplace: 'I have a cash flow problem.' "

"When you look at dividend cuts in the face of high gas prices, in the face of high commodity prices, in the face of high food prices, this really stings, and unfortunately there's not much you can do about it," said Frank Boucher, a financial planner in Reston with the Garrett Planning Network.
_________________
Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

Commodity costs, 20% wage inflation, sagging import demand hitting China

Author: Suresh
Commodity costs, 20% wage inflation, sagging import demand hitting China Posted: Mon Jul 07, 2008 12:34 pm (GMT 0)
Topic Replies: 14

Telegraph Media Group: Oil price shock means China is at risk of blowing up
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The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete.
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Asia's intra-trade model is a Ricardian network where goods are shipped in a criss-cross pattern to exploit comparative advantage. Profit margins are wafer-thin.

Products are sent to China for final assembly, then shipped again to Western markets. The snag is obvious. The cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded.
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Energy subsidies have disguised the damage. China has held down electricity prices, though global coal costs have tripled since early 2007. Loss-making industries are being propped up. This merely delays trouble.

"The true impact of the shock will only be revealed over time, as subsidies are gradually rolled back," he said. Last week, China raised internal rail freight rates by 17pc.

BP 's Statistical Review says China's use of energy per unit of gross domestic product is three times that of the US, five times Japan's, and eight times Britain's.
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Any low-tech product shipped in bulk - furniture, say, or shoes - is facing the ever-rising tariff of high freight costs. The Asian outsourcing game is over, says CIBC World Markets. "It's not just about labour costs any more: distance costs money," says chief economist Jeff Rubin.

Xinhua says that 2,331 shoe factories in Guangdong have shut down this year, half the total.
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China is being crunched by the triple effects of commodity costs, 20pc wage inflation, and sagging import demand in the US, Canada, Britain, Spain, Italy, and France.

Critics warn that Beijing has repeated the errors of Tokyo in the 1980s by over-investing in marginal plant.
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Vietnam has already blown up at 30pc. India is on the cusp at 11pc, so is Indonesia (11pc), the Philippines (11pc), Thailand (9pc) - leaving aside the double-digit Gulf.
...
____________________________________________________________

Reuters: Asia's exporters suffering as global demand weakens
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Exports make up 10 percent of China's gross domestic product and up to 30 percent for externally vulnerable economies like Hong Kong and Singapore.

Asia -- much of which had remained resilient in the face of the U.S. downturn -- and China are expected to decelerate with interest rates on the rise, inflation mounting and oil at $145 a barrel.
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Deutsche Bank estimates some 20 percent of China's low-end exporters will go belly-up this year.
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And Japanese exports to the United States fell for a ninth straight month in May, while shipments to the European Union -- which had been holding up well -- recorded their first annual drop in more than two years.

"The Euro area and Japan are decelerating and that's really bad news for Asian exporters," said David Fernandez, Head of Economic and Sovereign Research at JP Morgan.

Hong Kong's exports to the United States -- much of which originates in China, the world's workshop -- fell 1.5 percent year on year in the first 5 months. Exports to the United States from South Korea shrank 0.3 percent in January to May.
...

[emphasis added]
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

Surprise:TIPs lose money because gov't understates inflation

Author: Dave
Surprise:TIPs lose money because gov't understates inflation Posted: Mon Jul 07, 2008 12:32 pm (GMT 0)
Topic Replies: 1

We have been pointing out the problem with TIPs (see above) for 18 months now; it appears that Morgan Stanley has caught on. I'm beginning to sense the stirrings of the long-dead bond market vigilantes. At the risk of appearing overly cynical, I am not surprised to find the government less than enthusiastic about paying market interest rates on their debt. I believe that may investors, in hindsight, will find the very proposition of TIPs preposterous.

Perhaps the greatest opportunity in the bond market is to short them. I have no doubt that interest rates are going much, much higher. Shorting the bond market should provide amazing returns over the coming years.

TIPS Flunk Inflation Test as Fuel, Food Overtake CPI

Treasury Inflation Protected Securities aren't living up to their name for bond investors who say they can't trust the way the U.S. government calculates the rising cost of consumer goods.

Morgan Stanley, the second-biggest securities firm, and FTN Financial, a unit of Tennessee's largest bank, are telling clients to pare holdings of TIPS, whose principal amount rises with the Labor Department's consumer price index. Morgan Stanley says derivatives tied to inflation expectations are a better bet, while FTN recommends corporate and agency bonds because the index doesn't reflect the actual rate of U.S. inflation.

``The consumer price index underestimates inflation,'' said Jeremy Wolfson, who oversees $8.5 billion as chief investment officer at the City of Los Angeles Department of Water and Power Pension Fund. ``Whether TIPS are adding a true inflation hedge, that's arguable based on the CPI component of it.''

TIPS ``haven't paid off'' because the breakeven rate has ``barely budged'' over the past 18 months, said George Goncalves, chief Treasury and agency bond strategist with Morgan Stanley in New York.

``One reason why I've never owned TIPS is because I knew the CPI was a cheat,'' he said.

Criticisms of the CPI center on the practice of understating price increases to account for quality improvements in goods like cars and computers. The government also changes the basket of goods it uses to calculate CPI, replacing more expensive products with cheaper ones.

``I figured somewhere along the way people would revolt over these bizarre calculations and maybe someday TIPS would offer some value,'' Fleckenstein said. ``So far they don't.''
_________________
Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

Bankruptcy law: congress to shift power back to consumer with regulation

Author: Dave
Bankruptcy law: congress to shift power back to consumer with regulation Posted: Mon Jul 07, 2008 12:16 pm (GMT 0)
Topic Replies: 6

There is a consumer crisis brewing in the US credit card industry, and the government appears to be riding to the rescue. What I found interesting about this NY Times article is the failure to mention the recent bankruptcy law, and how the advantage has shifted to the credit card industry. Now that bankruptcy has been eliminated as a check on credit card lending practices, it appears that regulation is the only way out. This appears, to me, to be a shift from market control to government control.

NY Times: Credit Card Overhauls Seem Likely

Consumer advocates say regulation of the credit card industry has long been without teeth. But as card holders struggle under the weight of big balances, high interest rates and fees, their pleas to lawmakers for help may well mean that the industry will face some significant regulation by early next year.

They have been pushing the federal government to take firmer control over the industry � specifically, spelling out the circumstances under which lenders can raise and calculate interest rates and impose fees.

�When the Federal Reserve or Congress tries to nip off specific abuses that the credit card industry practices, it becomes a game of Whack-A-Mole,� Mr. Levitin said. �As soon as they put the kibosh on one, the industry figures out another.

�I think this has led to an endgame of restricting card issuers to a very limited number of price points � explicit interest rates and fee categories � and letting them compete their hearts out,� he continued. �But I don�t think Congress or the Fed has recognized that reality yet, or has the political will to do it.�
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

Raising rates, depegging currencies not the only solution for other nations

Author: Suresh
Raising rates, depegging currencies not the only solution for other nations Posted: Mon Jul 07, 2008 12:00 pm (GMT 0)
Topic Replies: 35

RGE Monitor: Will the Bretton Woods 2 (BW2) Regime Collapse Like the Original Bretton Woods Regime Did? The Coming End Game of BW2]
...
As argued then the rational response for these [Bretton Woods 2] economies was then to let their currencies to appreciate at a faster rate (and/or phase out their pegs) to avoid the further rise in asset and goods inflation. Some degree of extra exchange rate flexibility did occur in China, India, Russia, and Brazil but not in the GCC countries or Argentina. But even that greater flexibility was not significant as very aggressive forex reserve accumulation occurred among the BRICs and other emerging market economies at rates that actually accelerated in 2008 relative to 2007. Thus, by early 2008 inflationary pressures became severe � with rising and/or double digit inflation in a large set of emerging market economies � and some asset bubbles started to deflate sharply (especially equity markets in China, Asia, GCC and other emerging markets).

By now inflation has become so high in so many emerging market economies that � in some dimensions � it is almost too allow these currencies to appreciate: inflation is so high that only an abandonment of pegs or of heavily managed rates and a very sharp nominal exchange rate appreciation would be able to control inflation Even in that case nominal appreciation would not be enough to control expected inflation: a much tighter monetary and credit policy � that is feasible only if enough exchange rate flexibility is allowed � would be necessary to control actual and expected inflation. But now the global economic outlook has much worsened with the US recession and the sharp economic slowdown in most advanced economies. The need to control inflation with a stronger currency and much tighter monetary policy in emerging markets is happening at a time when downside risks to growth are emerging in these countries because of the US recession and the slowdown in the advanced economies growth rate. Thus, emerging market policy makers face a serious dilemma: controlling inflation requires exchange rate flexibility and much tighter monetary and credit policy. But such policy may exacerbate the growth landing of these economies at the time when global conditions are leading to a sharp slowdown of growth in advanced economies that � in due time � will slow down exports and growth of the emerging market economies.
...
When this rise in inflation becomes significant and persistent three additional outcomes will emerge. First, the competitiveness will be eroded by rising inflation. Second, downward pressures will occur on currencies that from undervalued become � via high inflation � undervalued; an example of that is the case of Argentina. Third, the rise in commodity and goods inflation in emerging markets will lead to an ensuing rise in inflation in advanced economies. This may be thus the beginning of the end of the period of �great moderation� in the global economy where growth was high and inflation low. This great moderation was indeed in part due to the low inflation that the rise of China, India and other emerging markets � with their production of cheap goods and services � had generated. Imported inflation is certainly rising in the US because of rising import prices for goods from China and Asia, a weak dollar and commodity. And it is rising in other advanced economies � even in those whose currencies are rising relative to the US dollar � because of rising prices in emerging markets and in commodity markets.

Thus, even if the BW2 economies were to resist further their currency appreciation and desperately hold on BW2 - as the rate of accelerated forex accumulation in 2008 so far suggests � the result, like the demise of BW1 shows, would be a rise in global inflation that would � at some point � destroy BW2 as rising inflation would erode the competitiveness of the BW2 club....
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The path of least resistance for other nations does not involve crimping money and credit supply by raising key lending rates. It does not involve depegging their currencies from the dollar. The path of least resistance involves doing nothing. Yves Smith at naked capitalism summarizes as follows.

Quote:

Roubini believes they will let inflation run, and even allow it to become embedded. In the long run, this will achieve similar results to a revaluation (as local goods prices rise in nominal terms, it winds up increasing the price of exports, much as currency appreciation would. However, it would happen more gradually and (implicit in Roubini's argument) it would be hard to point fingers (while a change in the currency regime would clearly be tied to specific authorities).

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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

Rents rising, home prices falling may restore value to home market

Author: Dave
Rents rising, home prices falling may restore value to home market Posted: Mon Jul 07, 2008 11:51 am (GMT 0)
Topic Replies: 2

Suresh and I have been pondering rents for years: will they fall or will the rise in the aftermath of the housing bust? In the lost decade of Japan, rents fell. A surplus in real estate and falling prices caused rents to fall. Will the US follow in Japan's footsteps? It's not looking that way. Rents are set to rise at a 4% pace this year; perhaps the WSJ article describing how we get back to normal housing market called it: a 4% annual rise in rents, a 3% annual decline in homes.

Bloomberg: U.S. Apartment Vacancy Unchanged at 5.9 Percent, Rents Increase

The vacancy rate for U.S. rental apartment buildings was unchanged at 5.9 percent in the second quarter as the housing slump and a weakening economy deterred people from buying homes, Reis Inc. reported.

The average monthly U.S. asking rent rose 1 percent to $1,047, the 25th consecutive quarter that rents increased or stayed the same, according to Reis, a New York-based research firm.

``Our projection is rent growth will moderate through 2009, but we don't think it will turn negative as it did in the early 2000s,'' Chandan said. ``The bias will be weighted toward rental, in our view. People fear home prices will fall further.''

``There has been very little apartment development because all the money was made in housing development,'' he said. ``We don't have a strong pipeline of apartments.''

San Francisco

San Francisco asking rents grew the most in the second quarter from the previous 12 months, increasing 9.4 percent. New York gained 7.7 percent, Seattle rose 7.4 percent, San Jose, California increased 7.3 percent and Salt Lake City increased 6.1 percent, according to Reis.
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

Emerging market central banks must raise rates to stop inflation

Author: Dave
Emerging market central banks must raise rates to stop inflation Posted: Mon Jul 07, 2008 11:33 am (GMT 0)
Topic Replies: 35

It seems as if central banks in emerging and developing economies have only one choice in dealing with inflation: raise rates, abandon dollar pegs. Although this article describes the medicine, it does not describe the side effects of strengthening currency against the dollar; and the effects on the dollar. If the worlds central banks raise interest rates, and the US does not (as we've seen, raising rates isn't an option for the US), the dollar will fall against those strengthening currencies. The dollar would decline with renewed vigor, and the US would cut its consumption of global output even more.

Bloomberg: Bernanke's Emerging-Market Disciples May Heed Volcker

Policy makers in emerging economies from Russia to Vietnam may have to start acting less like Ben S. Bernanke and more like Paul Volcker if they want to bring inflation under control.

With currencies tied to the U.S. dollar, officials in many developing countries have had to keep their monetary policies linked to the Federal Reserve's. Now, after chairman Bernanke led the Fed's most aggressive easing in two decades, their central banks find themselves with interest rates too low for their economies and the worst bout of inflation in a generation.

Prices are now surging across the developing world. China's inflation rate stayed near a 12-year high of 8.7 percent in May; prices in Vietnam jumped 27 percent in June and Indian wholesale prices increased 11.6 percent last month, the fastest in 13 years. Inflation exceeds benchmark lending rates in China, Russia, India and at least a dozen other emerging economies.

``The sheer difficulty of achieving stability on the growth and inflation fronts will be a shock for Asian assets, equities and currencies,'' says Stephen Jen, chief currency strategist at Morgan Stanley in London. ``It's almost impossible for them to get ahead of inflation.''

``They're hundreds of basis points away from a restrictive policy,'' says David Hensley, JPMorgan's director of global economic coordination in New York.

In the absence of effective strategies, a ``hard landing'' may be the only way to get inflation down, says Morgan Stanley's Jen.

``There does not seem to be another way out,'' Jen says. ``Until recently, the emerging markets were seen as a safe haven from the financial crisis. The tables have turned.''
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

Comparing this recession to the 1970s: will it be as bad?

Author: Dave
Comparing this recession to the 1970s: will it be as bad? Posted: Mon Jul 07, 2008 11:17 am (GMT 0)
Topic Replies: 0

MSNBC: Is this economy worse than past recessions?

Rising food and gas prices, falling home values and more job losses are making readers pretty gloomy. So just how bad is the current economic slump compared to other downturns?

There have been five official recessions in past 35 years. The most recent ones were fairly mild. So if you were born after 1965, you haven�t been through a nasty recession as an adult. Yet.

The 1980-82 recession was a different animal. In fact, it was officially two back-to-back recessions � both of which were the result of the Fed's inflation-killing interest rate policy that would be all but unimaginable today.

In 1979, after a growth and inflation roller coaster that lasted most of the decade, short-term rates were nearly 10 percent � five times the current level � and prices were still out of control. So the Fed decided to snuff out inflation once and for all by doubling rates to nearly 20 percent in April 1980. GDP fell at a 7.8 percent rate in one three-month period.

The early 1980s downturn capped the end of what was, in many ways, the worst decade the U.S. economy faced since the Great Depression, coming after another deep downturn that officially lasted 16 months and ended in November 1973. In that event unemployment peaked at 9 percent and the stock market fell 45 percent.

Economists still debate the causes of the 1970s-era stagflation. But there�s little disagreement about the damage it inflicted. Stock prices ended the 1970s about where they began; inflation cut the dollar�s buying power by more than half. Every time you got a raise, inflation ate it up. For nearly a decade, it seemed as though there was no cure.
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom