Thursday, June 30, 2011

Today's links

1--Papandreou Clinches Votes for Greek Budget, Bloomberg

Excerpt: Greek Prime Minister George Papandreou clinched enough votes to pass the first part of an austerity plan aimed at meeting European Union aid requirements and staving off default for his debt-laden nation.

Having gained enough votes in the 300-seat Parliament, Papandreou is now on track to secure a bill setting out the strategy for a 78 billion-euro ($112 billion) package of budget cuts and asset sales that is the condition for further rescue funds...

“The overriding feeling across Europe will be relief,” Tobias Blattner, an economist at Daiwa Capital Markets Europe in London and a former European Central Bank official, said before the vote. “There will always be people who say it won’t really change anything and we’ll still get a haircut, but at least it will buy time and calm the markets....

State Assets
Apart from sales of state assets such as a stake in Public Power Corp SA (PPC), the former power monopoly and levies ranging from 1 percent to 5 percent on wages, Papandreou’s plan includes higher taxes on restaurants and bars, higher heating-oil taxes and lowering the tax-free threshold to 8,000 euros from 12,000 euros presently. Greek newspaper To Vima calculated the additional burden for an average Greek family of four at 2,795 euros a year, about the same as one month’s income.

Implementing more austerity measures threatens to deepen a three-year recession and complicate efforts to boost government revenue. Greek gross domestic product, which contracted 4.4 percent in 2010, will shrink a further 3.8 percent this year, according to a report from EU and IMF inspectors in June. The nation’s debt load will peak at 166 percent of GDP next year, and is already the biggest in the euro-region’s history.

2--Shilling: China Heading for a Hard Landing, Pt. 3, Bloomberg

Excerpt: China is hoping to cool its white- hot economy without precipitating a recession. Doing so will be extremely difficult: Inflation fears are growing, the government’s ability to respond is quite limited, and China’s economic model, which leaves bureaucrats guessing about the market effects of their directives, is ultimately untenable....

The government is fearful of rising prices, and has moved to prevent speculation. Buyers must now put down 60 percent of the purchase price on second homes, and 30 percent on first homes. The government is pressing banks to contain mortgages, and some have raised interest rates. In January, the mayor of Shanghai announced a new tax on property transactions that may be copied nationwide as other officials attempt to cool prices.

With these restraints in place, and with supply starting to catch up with demand, housing sales have slowed. But this has not fully curtailed China’s real-estate bubble: Housing starts rose about 40 percent last year. Developers are rushing to build while they try to support faltering prices by delaying completions and creating artificial shortages. Of course, these efforts are difficult to maintain because they tie up capital in uncompleted houses. Houses are now being built at about twice the rate they’re being sold, well above earlier norms...

Prices Rising

Housing isn’t the only area where signs of inflation are popping up. In May, consumer prices increased 5.5 percent versus a year earlier. In December, Chinese leaders agreed to “put stabilizing the overall price level in a more prominent position” in their ranking of economic priorities. In a country where many live at or below the poverty level, food costs are obviously a major concern, and they jumped 11.7 percent in May from a year earlier....

I suspect that such a hybrid market system is too unwieldy to allow the Chinese government to manage a soft landing for its economy. By my reckoning, the Federal Reserve has tried 12 times in the post-World War II era to cool an overheating economy without precipitating a recession. It succeeded only once. Can the politically controlled Chinese central bank, and the government leaders who really call the shots, be more successful than the independent Fed?
That seems unlikely. And the consequences, for China and the world economy, could be unfortunate.

3--Local govts run up huge debts, risk defaulting, China Daily

Excerpt: Top auditor says 10.7 trillion yuan owed nationwide

BEIJING - Local governments had an overall debt of 10.7 trillion yuan ($1.65 trillion) by the end of 2010, said China's top auditor on Monday in a report to the National People's Congress.

He warned that some were at risk of defaulting on payments.

It was the first time the world's second-largest economy publicly announced the size of its local governments' debts. The scale amounts to more than one-quarter of its GDP in 2010, which stood at 39.8 trillion yuan.

Liu Jiayi, head of the National Audit Office (NAO), said local governments at county, city and provincial level all have outstanding debts, with the exception of 54 county-level governments.

4--Pimco’s El-Erian Says U.S. Debt Default Might Have ‘Catastrophic’ Effect, Bloomberg

Excerpt: Pacific Investment Management Co. LLC Chief Executive Officer Mohamed El-Erian said a short-term default by the U.S. on its debt might have “catastrophic” legal consequences.

“We would be in the land of the unpredictable” if lawmakers fail to reach an agreement to raise the $14.3 trillion debt ceiling and the U.S. misses a payment “simply because of the technical linkages,” El-Erian said in an interview on CNN’s “Fareed Zakaria GPS” program, scheduled to air today.

U.S. lawmakers are seeking a path to increasing the debt limit and to cutting at least $1 trillion from the long-term deficit before an Aug. 2 deadline. President Barack Obama plans to hold separate meetings at the White House June 27 with Senate leaders Nevada Democrat Harry Reid and Kentucky Republican Mitch McConnell in an effort to break an impasse that scuttled a seven-week negotiating effort led by Vice President Joe Biden.

“My advice is please try and get together and solve this issue in the context of a medium-term reform package,” El-Erian said. “If you can’t do that and you’re going to kick the can down the road, kick the can rather than face something that could be catastrophic in terms of legal contracts being triggered.”...

“A basic rule as an investor is don’t buy something unless you know who else is going to be buying,” he said. “So when we look at Treasuries, we see the big buyer stepping away from the market, for certain. And we ask the question, who else is going to be buying at these levels, and we can’t identify another buyer of the size of the Fed.”

5--Voters give Obama lowest rating yet on economy, McClatchy

Excerpt: — President Barack Obama is in a fragile position as the 2012 campaign begins: Only 37 percent of registered voters approve of his handling of the economy, his lowest rating ever, according to a new McClatchy-Marist poll.

Another ominous sign for Obama: By nearly 2-1, voters disapprove of how he's handling the federal budget deficit, expected to hit a record $1.5 trillion this fiscal year, which ends Sept. 30.

6--Home Prices in U.S. Cities Fell 4% in April, Bloomberg

Excerpt: Home prices decreased in the year ended April by the most in 17 months, showing the housing market remains an obstacle for the U.S. recovery.

The S&P/Case-Shiller index of property values in 20 cities fell 4 percent from April 2010, the biggest drop since November 2009, the group said today in New York. From March to April, prices fell 0.1 percent on a seasonally adjusted basis, the smallest decline since July 2010.

A backlog of foreclosures and falling sales raise the risk that prices will decline further, discouraging builders from taking on new projects. The drop in property values and a jobless rate hovering around 9 percent are holding back consumer sentiment and spending, which accounts for 70 percent of the economy....

Shiller told a conference in New York this month that a further decline in property values of 10 percent to 25 percent in the next five years “wouldn’t surprise me at all.”
The Case-Shiller gauge is based on a three-month average, which means the April data was influenced by transactions in March and February.

“There’s no sign of any real recovery in housing yet,” Jim O’Sullivan, chief economist at MF Global Inc. in New York, said before the report. “There won’t be a significant turn until the labor market shows sustained improvement. The level of foreclosures is still high and a lot of people are delinquent on their mortgages.”

7--Shadow spreading across international banking, Gillian Tett, Financial Times


Excerpt: When Timothy Geithner, US Treasury secretary, recently spoke with senior bankers at a conference in Atlanta, for example, he pointed out that the shadow banking world had been cut in half since 2007.

But on Wall Street, at least, there is little sense right now that the shadow banking sector is in decline: on the contrary, as rules on the banks tighten, activity and personnel are shifting into the shadow world at an accelerating rate. Or as the head of one Wall Street private equity group says, “We are heading towards the golden age of [non-bank] finance companies ... and that is largely because of what regulators are doing with the banks.”

Annaly is a case in point. The group was founded just over a decade ago, originally as a mid-sized real estate investment trust. However, in the past three years – or since the financial crisis erupted – its assets have grown to more than $110bn, comparable to that of America’s small banks. That is partly because the REIT business has boomed, as the securitisation market has suffered in the past three years. However, Annaly has also started moving into sectors which used to be dominated by banks, partly because it can often operate more profitably in some areas because as a non-bank it is regulated by the Securities and Exchange Commission – and thus does not need to meet banking rules on, say, capital adequacy.

Thus Annaly is gobbling up loans being shed by the large banks. It is also providing finance to mortgage companies. Next it hopes to start purchasing the assets currently held by state entities, when these are sold in the coming years. And it is far from alone: a host of Annaly-style funds are now also applying for licences with the SEC, to pursue similar activities. The private equity group TPG is now moving into the business of middle-tier corporate lending. And Fortress, another large private equity firm cum hedge fund, is chasing similar opportunities, along with some hedge funds.

This trend leaves some observers fretting about new systemic risks. “It is crazy what is going on – business is being pushed out of the regulated banks into parts of the system that regulators cannot see,” complains one of Wall Street’s most senior lawyers. But Annaly, for its part, denies this: they argue that because they are answerable to hands-on investors, rather than distant regulators, it makes them more – not less – prudent in managing credit risk.

It is impossible right now to tell whether this is true; the real test may not come for several years. But the one thing that is clear is that this trend is unlikely to end anytime soon. Investors and regulators had better hope, in other words, that this new breed of shadow banks does turn out to be better run than before. If not, historians may yet view this period as (yet another) lesson in the unintended consequences of regulatory reform.

8--Window Dressing Proceeds Apace, The Big Picture

Excerpt: With 6 of the past 7 weeks in the red, the markets have managed to string together a series of winning days. Daily gains both this week and last have ranged between 0.50% and 1.25%. Indeed, the Dow’s gains on Monday and Tuesday represent the first consecutive triple digit gain for the Industrials since December 1- 2, 2010. This was the fourth triple digit rally since the April 29th highs.

Are we making a major turn? Has psychology become so bad its a contrary indicator? Has the 200 day moving average proved to be inviolable?

Perhaps any of those explanations might prove to be the case, although I have my suspicions otherwise. I suspect it is simply a case of funds marking up stocks into the close of the 2nd quarter.

What data supports this thesis? I would point to 2 things: Psychology and Trading Volume. Most metrics are showing psychology is either neutral or optimistic. This tends to be supportive of a short term trading bounce, and not a longer-lasting rally.

Second, the volume has been anemic, even by the unusually low levels we have seen all year. The overall volume on Monday was well below the 30-day average on both NYSE and Nasdaq. Tuesday was even lower. Rallies on increasingly lighter volume are not signs of aggressive institutional buying. Rather, it supports the Window dressing thesis.

9--Consumers Weighed Down by Concerns About Jobs, Income, Wall Street Journal

Excerpt: Forget Prozac. Only jobs and bigger paychecks will cure these blues.

The Conference Board said Tuesday its confidence index fell to 58.5 in June, the lowest reading since November 2010. Assessments of both present economy and the future fell. The big trigger for the blues: Increased worries about jobs and future paychecks.

The report showed a deteriorating view of the labor markets both now and six months down the road. And the percentage of consumers who think their income will decrease six months from now rose to 16.5%, the highest rate since August 2010.

These doubts about the future are likely to translate into weaker spending if better data don’t change consumer attitudes. “Given the combination of uneasiness about the economic outlook and future earnings, consumers are likely to continue weighing their spending decisions quite carefully,” said Lynn Franco, director of the board’s Consumer Research Center.

Bear in mind that real consumer spending in the second quarter is on track to increase by the slowest rate since possibly the fourth quarter of 2009. Continued shopping caution will be a problem for second-half growth.

Of course, it’s not just jobs weighing down consumers — although labor prospects are always paramount. The squeeze on budgets and shrinking wealth are also preventing consumers from believing their economic situation is getting better even though the U.S. recovery is now two years old.

According to the S&P/Case-Shiller report released Tuesday, the April composite index of home prices in 20 major cities has plunged 32.8% from its mid-2006 peak. That means homeowners in general are one-third poorer than they were five years ago.

10--White House anticipates “significant” deal with Republicans to slash social spending, WSWS

Excerpt: White House spokesman Jay Carney said after the meeting with Reid that “everybody believes a significant deal remains possible.” He added that Obama and the Democrats are pushing for a “balanced approach” to an agreement tied to the raising of the US debt ceiling. The US Treasury has said that the government will be unable to pay its bills after August 2 if the ceiling is not raised.

By “balanced” it is meant a deal that contains some token gestures—either the elimination of a few select corporate tax loopholes or minimal cuts in defense spending—that will give Democratic legislators political cover to vote for what all sides agree must involve major cuts in social spending....

Obama’s role will be to shift the balance of the discussion further to the right. The Democrats have already made clear that they won’t push for any increase in actual tax rates for the wealthy. The few corporate tax loopholes they are proposing to end are more than offset by the business tax reductions proposed by Obama as part of his “jobs program.”...

According to the AP, the deal would also require federal workers to pay more into their pensions. “Democrats are wary and won’t allow the $120 billion-plus sought by Republicans over the coming decade, but appear to be likely to accede to some of the savings.”

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