Tuesday, November 20, 2012

Today's links

1---Investment Falls Off a Cliff--U.S. Companies Cut Spending Plans Amid Fiscal and Economic Uncertainty, WSJ

U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery.

Half of the nation's 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.

Nationwide, business investment in equipment and software—a measure of economic vitality in the corporate sector—stalled in the third quarter for the first time since early 2009. Corporate investment in new buildings has declined.

At the same time, exports are slowing or falling to such critical markets as China and the euro zone as the global economy downshifts, creating another drag on firms' expansion plans.

Companies fear that failure to resolve the fiscal cliff will tip the economy back into recession by sapping consumer spending, damaging investor confidence and eating into corporate profits. A deal to avert the cliff could include tax-code changes, such as revamping tax breaks or rates, that hurt specific sectors....

During the 2007-09 recession, businesses cut back sharply on all kinds of spending. But investment helped propel the recovery, growing faster than the rest of the economy from the second half of 2009, once the recession ended, through the first half of this year. That helped many companies boost productivity and profits without adding new workers.

The pattern changed in the third quarter, when business investment fell at a seasonally adjusted annual rate of 1.3%, according to a preliminary estimate from the Commerce Department. The latest drop included a decline in investment in structures, such as buildings, at a 4.4% annual rate. Investment in equipment and software stalled after growing at a roughly 5% annual pace in the first six months of the year.

"We have really not seen tailwinds to the economy," said OfficeMax Inc. OMX -0.43% chief executive Ravi Saligram. "When that happens, American businesses focus on productivity. You always prepare for the worst and if things get better, that's great.
The slowdown in capital spending contrasts with a rebound in U.S. consumer spending and confidence, which has returned to a five-year high. Meanwhile, the latest survey by the Business Roundtable, which tracks expectations for sales and investment among its big-company CEOs, found the worst sentiment about the economic outlook in three years.

Consumers may be taking their cues from signs of stronger job growth, lower fuel prices and an improving housing market. Businesses, on the other hand, appear more worried about the future, as profit growth and the global economy slow and the outlook for U.S. government policies remains murky.

2--Greatest Real Estate Bubble In Modern History Not Done Bursting, Forbes

My summary insight from studying hundreds of years of all types of manias and panics is simply that bubbles always burst, and then they go back to where they started or a bit lower. Even we’ve seen doubling and better in the stock prices of homebuilders like Toll Brothers, Lennar, KB Home, PulteGroup and others you find in the XHB or ITB ETFs, it’s unlikely that this latest bubble bursting in real estate is truly finished.

The Japanese market went back just below where its bubble started in 1986. For that to occur in the U.S., home prices would have to fall 55% – 65%, not the 34% we saw at worst in 2009. 

3--Coming to trms with the Taliban, American Conservative

The State Department and the intelligence community are acutely aware that without an agreement the situation in Afghanistan will eventually degrade into a major strategic defeat. The best current estimate by the CIA suggests that the wind-down by NATO forces over the next two years would produce an Afghanistan that is one-third controlled by the Taliban when the last foreign soldiers depart, with a gradual erosion of remaining support for the government in Kabul and eventual regime change. The Taliban too are having problems with falling morale and rising casualties, but they are able to exploit their safe havens in Pakistan to keep the government and NATO forces off balance. They are also boasting that they withstood the highly publicized U.S. surge of last year. The Taliban see themselves as winning the conflict and are reluctant to renew negotiations except as a ploy to buy time.

4--Borrowers with modified mortgages re-default as homes re-enter shadow inventory, sober look

This is telling us that mortgage modification programs have not been very successful, as the probability of re-default rises. By modifying mortgages, banks in many cases are simply kicking the can down the road - and now some are writing down these mortgages (which may be what is driving the higher charge-off numbers). We are therefore seeing an increase in delinquencies, but mostly among modified mortgages and concentrated in sub-prime portfolios. This in turn is having an impact on another important housing metric.

Note that once a mortgage is modified, the house is no longer counted as part of the so-called "shadow inventory". Modifications certainly contributed to a significant recent reduction in shadow inventory (see discussion - "mods" in the pie-chart). And now some of these homes are moving into the "shadow" once again.
JPMorgan: - It appears that mod re-defaults drove the increase. The number of re-defaults jumped 24% from the previous month.... We have argued that the sharp decrease in shadow inventory over the past two years was to some extent the result of aggressive modification activity. We think we are now seeing a wave of re-defaults from the modifications over the last two years that failed. This wave should last through 2013, and a greater share of current-to-30 rolls will come from re-defaults going forward.
5-Other Things to Think About Besides the Fiscal Cliff, the Big Picture

1) Earnings are the weakest in 3 years
2) Portfolios have been poorly positioned for higher Capital Gains and Dividend taxes
3) Europe crisis unresolved, and getting worse
4) The 17% rally in first 3 quarters had markets ahead of themselves
5) The decreasing impact of Federal Reserve QE

6---The profit margin crunch, prag cap

As the CHART OF THE DAY shows, the gap has widened this quarter between the percentage of companies in the Standard & Poor’s 500 Index that are exceeding analysts’ sales projections and those coming out ahead on earnings. The figures are based on comparisons with average estimates in Bloomberg surveys.
Fewer than 30 percent of S&P 500 companies are delivering so-called positive surprises on revenue, according to the data. The proportion has fallen from 52 percent a year earlier. S&P 500 earnings surprises have been more consistent, falling to 64.5 percent from 69 percent during the period.

7-Rising down payments and loan costs will hinder a housing recovery, oc housing

1 comment:

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