Friday, December 24, 2010

Today's links

1--Another bubble? The Economist

Excerpt: For the first time since 2000, internet and technology entrepreneurs can raise seed capital with little more than a half-formed idea and a dozen PowerPoint slides. “There is probably a bubble in the number of start-ups,” says Alan Patricof, a venture capitalist, though he is not yet convinced that there is irrational exuberance in later-stage valuations.

Yet valuations have certainly risen, especially for the leading firms in this latest, “social” phase of the digital revolution. Groupon, a two-year-old firm that offers group discounts to online consumers, reportedly turned down an offer potentially worth $6 billion from Google, prompting analysts to ask if Groupon’s founders had lost their coupons. A secondary-market auction of shares in Facebook in December had a minimum offer-price 77% higher than the price reportedly paid in a similar transaction three months earlier. Twitter is valued at $3.7 billion, up nearly fourfold in a year. The number of deals with (pre-investment) valuations of at least $100m is also increasing, according to Cooley, a law firm...

The emergence of an active secondary market in shares of start-ups yet to go public has allowed founders and early investors in firms such as Facebook and Twitter to bank fortunes without waiting for a traditional exit by IPO or acquisition. These secondary-market prices feed hype about what these firms might be worth, were they to list on the stockmarket. Not many shares are available; many punters are chasing them. And those punters tend to be outsiders, such as fund managers and private-equity firms, who may not understand the tech business as well as insiders do.

2--The end of cheap credit, Huffington Post

Excerpt: Americans are leaving bond mutual funds at the fastest rate in more than two years.

U.S. investors pulled $8.6 billion out of bond funds in the week ended Dec. 15, the largest withdrawal since October 2008 when financial markets were in free-fall. They pulled an average of almost $3 billion every week since Nov. 23, according to the Investment Company Institute. Prior to November, money had been flowing into bond funds every week for nearly two years.

"This is the real deal," says Marilyn Cohen, founder of Envision Capital Management, which oversees $300 million in mostly fixed-income investments.

If she's right, the end of cheap credit is near. Interest rates would rise, which would ripple through the economy. It would become more expensive for cities, states and companies to borrow money to build schools, roads and expand their businesses. It would also cause the value of bond funds to fall, blindsiding Americans who thought they'd stashed their retirement savings in an investment that wouldn't sink.

3--New Home Sales weak in November, Calculated Risk

Excerpt: The Census Bureau reports New Home Sales in November were at a seasonally adjusted annual rate (SAAR) of 290 thousand. This is up from a revised 275 thousand in October...

Months of supply decreased to 8.2 in November from 8.8 in October. The all time record was 12.4 months of supply in January 2009. This is still high (less than 6 months supply is normal)...

The 290 thousand annual sales rate for November is just above the all time record low in August (274 thousand). This was the weakest November on record and below the consensus forecast of 300 thousand....This was another very weak report

4--Overall Housing Stock Growth Likely to Slow Even Further in 2011, Calculated Risk

Excerpt: From economist Tom Lawler: Overall Housing Stock Growth Likely to Slow Even Further in 2011:

Given recent and likely first half housing starts numbers, it seems highly likely that the growth in the US housing stock – which this year was the slowest in US history – will slow even further in 2011, even if housing starts begin to increase next year. Generally there is an average 7-8 month lag between SF housing starts are SF housing completions, and for MF housing starts the average lag is a little over a year. Given what housing starts have done, and given near-term indicators point to low levels of new housing production in the early part of next year, it seems highly likely that overall housing completions will be down in 2011.

While final numbers are not yet in, overall [2010] housing completions plus manufactured housing placements probably will total around 696,000 or so. While there ARE no good timely data on how many homes were on net lost due to demolition, obsolescence, net conversions, etc., past data suggest that somewhere in the range of 300,000 to 325,000 homes were lost this way – implying growth in the housing stock in 2010 (EOY to EOY) of around 371,000 to 396,000. Next year I estimate that housing completions plus MH placements will total around 630,000, implying growth in the housing stock of around 300,000 to 330,000. If the labor market improves and household growth can just move back to 1.1 million a year or so, the combination of faster household growth and de minimus housing-stock growth would put a major dent in the excess supply of housing.

For some unknown reason, many housing “analysts” who talk about housing “supply” (shadow inventory, listings, etc.) do not even MENTION the outlook for the supply of the aggregate housing stock!!!!!!!

5--The Humbug Express, Paul Krugman, NY Times via Economist's View

Excerpt: If you listen to the recent speeches of Republican presidential hopefuls, you’ll find several of them talking at length about the harm done by unionized government workers, who have, they say, multiplied under the Obama administration....

There has not, however, been any visible effort to retract those erroneous claims. And this isn’t the only case... Still, why does it matter what some politicians and think tanks say? The answer is that there’s a well-developed right-wing media infrastructure in place to catapult the propaganda, as former President George W. Bush put it, to rapidly disseminate bogus analysis to a wide audience where it becomes part of what “everyone knows.” ...

And it’s a very effective process. When discussing the alleged huge expansion of government under Mr. Obama, I’ve repeatedly found that people just won’t believe me when I try to point out that it never happened. They assume that I’m lying, or somehow cherry-picking the data. After all, they’ve heard over and over again about that surge in government spending and employment, and they don’t realize that everything they’ve heard was a special delivery from the Humbug Express.

6--The balance sheet recession, Modeled Behavior

Excerpt: Mark Thoma has a good piece up on at the Fiscal Times about why the particular causes of this recession have led to a slow recovery:

Recessions can occur for a variety of reasons. For example, oil price shocks, stock market crashes, housing bubbles, monetary shocks, and productivity shocks can all lead to economic downturns….

..One way to distinguish recessions is through differences in their effects on balance sheets, in particular those of households and banks. For households, the collapse of a housing bubble, which also tends to cause a stock market crash, results in a decline in home equity as well as the loss of retirement and education savings. When combined with the loss of jobs due to the recession, and the fact the debts do not decline with the fall in asset values, the effect on balance sheets can be devastating – much larger than, say, the balance sheet impact of an oil price shock. Households have no choice but to set aside part of their income to both rebuild the asset side of the balance sheet and to pay down their debts.

Monetary policy can help us recover in a recession like this by increasing nominal asset and income values relative to average debt, some portion of which is nominally fixed. But cleaning up household balance sheets while unemployment remains high is difficult.

I don’t see any good way to do this, but as Mark points out banks have repaired their balance sheets, and if there was a good way for some of that wealth to be transferred to households with poor balance sheets I think it would help the recovery. The only thing that comes close to that is mortgage cramdowns, which I am not optimistic could be done without lots of unintended consequences. My secret hope was that the foreclosure fraud debacle would provide a way to transfer wealth from banks to underwater homeowners that would be consistent with a fair interpretation of existing laws, and wouldn’t represent an ad hoc transfer of wealth that would undermine banks future willingness to lend.

7--Incompetent Economists, Not Pensions, Push Property Taxes Higher, Dean Baker, CEPR

Excerpt: The Wall Street Journal told readers today that "pensions push property taxes higher," in a headline of a news article. The article notes that large pension shortfalls, together with a loss of other tax revenue, are causing many local and county governments to raise property taxes.

Of course the reason that pensions face large shortfalls is that economists like Alan Greenspan and Ben Bernanke were not able to see the $8 trillion housing bubble, the collapse of which wrecked the economy. These pension funds also suffered because they listened to highly paid investment advisers who had no idea what they were doing. It is worth noting that almost all of these highly paid investment advisers still hold their high paying jobs.

8--10 Reasons to be Cautious for the 2011 Market Outlook, The Big Picture

Excerpt: (From David Rosenberg) The weekly fund flow data from the ICI showed not only massive outflows, but in aggregate, retail investors withdrew a RECORD net $8.6 billion from bond funds during the week ended December 15 (on top of the $1.7 billion of outflows in the prior week). Maybe now all the bond bears will shut their traps over this “bond-bubble” nonsense....

From a historical standpoint, the yield on the S&P 500 is very low ― too low, in fact. This smacks of a market top and underscores the point that the market is too optimistic in the sense that investors are willing to forgo yield because they assume that they will get the return via the capital gain. In essence, dividend yields are supposed to be higher than the risk free yield in a fairly valued market because the higher yield is “supposed to” compensate the investor for taking on extra risk. The last time S&P yields were around this level was in the summer of 2000, and we know what happened shortly after that. When the S&P yield gets to its long-term average of 4.35%, maybe even a little higher, then stocks will likely be a long-term buy....

Stocks are overvalued at the present levels. For December, the Shiller P/E ratio says stocks are now trading at a whopping 22.7 times earnings! In normal economic periods, the Shiller P/E is between 14 and 16 times earnings. Coming out of the bursting of a credit bubble, the P/E ratio historically is 12. Coming out of a credit bubble of the magnitude we just had, the P/E should be at single digits...

The potential for a significant down-leg in home prices is being underestimated. The unsold existing inventory is still 80% above the historical norm, at 3.7 million. And that does not include the ‘shadow’ foreclosed inventory. According to some superb research conducted by the Dallas Fed, completing the mean-reversion process would entail a further 23% decline in real home prices from here. In a near zero percent inflation environment, that is one massive decline in nominal terms. Prices may not hit their ultimate bottom until some point in 2015.

10. Arguably the most understated, yet significant, issue facing both U.S. economy and U.S. markets is the escalating fiscal strains at the state and local government levels, particularly those jurisdictions with uncomfortably high pension liabilities. Have a look at Alabama town shows the cost of neglecting a pension fund on the front page of the NYT as well as Chapter 9 weighed in pension woes on page C1 on WSJ.

Consumer spending was taken down 0.4 of a percentage point to 2.4%, which of course you never would have guessed from those “ripping” retail sales numbers.

9--More proof the Fed was complicit in the bubble, McClatchy News

Excerpt: In early 2005, at a time when the housing market was overheated and economic danger signs were in the air, the Fed had an opportunity to put a damper on risk taking among banks, especially those that had long been bedrocks of smaller cities and towns across the nation.

But the Fed rejected calls from one of the nation's top banking regulators, a professional accounting board and the Fed's own staff for curbs on the banks' use of special debt securities to raise capital that was allowing them to mushroom in size.

Then-Chairman Alan Greenspan and the other six Fed governors voted unanimously to reaffirm a nine-year-old rule allowing liberal use of what are called trust-preferred securities.

This was like a magic bullet for community banks that had few ways to raise capital without issuing more common stock and diluting their share price. The Fed allowed the banks to count the securities as debt, even while counting the proceeds as reserves. Banks were then free to borrow and lend in amounts 10 times or more than the value of the securities being issued.....

The Fed supervised about 1,400 bank-holding companies, the bulk of them parent companies of community banks.

Data emerging from the carnage of collapsed and teetering banks leaves little doubt that the Fed rule, and regulators' failure to adequately police the issuance of these securities, created big cracks to the already shaky foundations of the nation's banking system.

A four-month McClatchy inquiry found that the Fed rule enabled Wall Street to encourage many community banks to take on huge debt and to plunge the borrowings into risky real estate loans.

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