Saturday, February 2, 2013

Today's links

1---House price rebound cruising for a fall, FT
The National Association of Realtors reckon more than one-third of purchases in 2010 were investment purchases. ....
Home ownership has declined in the US to 65.4 per cent from its peak of 69.2 per cent, but is only back to a historical average.

2----Riskiest Subprime Auto Bonds Shift Into Higher Gear, Fox

Increasing demand for riskier and higher-yielding issues is likely encouraging plans by Ally Financial to sell its first bond backed by weaker loans as early as next week, analysts said.
Ally Financial, a regular issuer of prime auto ABS, has plans to sell $940 million of bonds supported by loans whose quality sits just above the typical subprime designation, according to a preliminary offering document.
As lending volume and investor demand has risen, investors and rating firms have become warier of weaker underwriting.
In December, Moody's Investors Service for the first time in at least three years issued a more cautious outlook on subprime auto loans as lenders face more competition. Because lenders for prime quality loans have saturated the market, volume will be generated by weakening standards, said Moody's, which didn't rate today's deal.
Still, investors have piled into the debt, which is often recommended by Wall Street analysts as a way to pick up yield....

"There could be bumps on the horizon," Mr. Kagawa said.
3---The unemployment crisis that lies behind the US monthly jobs report, guardian

Note this glum start to the Bureau of Labor Statistics' news release today:
"The number of unemployed persons, at 12.3 million, was little changed in January."
Further down, something even more glum:
"In January, the number of long-term unemployed (those jobless for 27 weeks or more) was about unchanged at 4.7m and accounted for 38.1% of the unemployed."
Those figures tell the truth more than any other numbers do. Let's leave the jobs report behind and look at the jobs picture.

In the real economy, we still have a significant number of unemployed people – and more importantly, we have a core group of long-term unemployed people, who become more unemployable the longer they are out of work. There are another 2.4 million people who are "marginally attached", meaning they were "not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the four weeks preceding the survey."

If you add those marginally attached workers – those able-bodied, willing to work, and unable to find jobs – to the number of unemployed, it gets closer to 15 million people out of work. That's a crisis. And even while the Dow Jones Industrial Average rises to new highs – it hit 14,000 just today – big companies are still making layoffs. This week alone, mass layoffs of more than 50 people and up to 1,000 were announced at Time Inc, Disney, BAE Systems, Harman International, Viking Range, Amgen and Boston Scientific.

4---US stocks near record highs---Dismal jobs report sparks Wall Street surge, wsws

The official jobless rate has fallen to 7.9 percent in January from a high of 10 percent in October 2009, but that decline is largely the result of people dropping out of the job market and no longer being counted. A more accurate gauge of the jobs crisis is the population-to-employment ratio, 58.6 percent in January, and the labor force participation rate, which includes people over 16 actively looking for work, which stood at 63.6 percent in January. Both of these indices are at 30-year lows.
Friday’s report showed an actual increase in the number of unemployed people, from 12.2 million to 12.3 million. It also showed the number of people with a job falling by 110,000 and the number of unemployed rising by 117,000.

Long-term unemployment remains at staggering levels. The number of people out of work for 27 weeks or more was 4.7 million, representing 38.1 percent of all of those counted as unemployed. The average duration of unemployment in January was 35.3 weeks.
Average weekly wages grew by 1.9 percent over the last year, barely keeping pace with inflation and continuing the long-term decline in workers’ real wages.

The jobs crisis continued to take its greatest toll on young and minority workers. The teenage jobless rate was 23.4 percent. It was 13.8 percent for African Americans and 9.7 percent for Hispanics.

5---US GDP—On the Road to Double Dip?, Jack Rasmus, z space

In the first quarter 2013, a number of negative developments in the fourth quarter will likely continue, along with new negative developments, together suggesting the first quarter 2013 GDP will at best look much like the fourth quarter—and could even prove worse.

First, more than $100 billion has been taken out of the economy with the end of the payroll tax cut last January 1. Second, consumer sentiment and spending is showing a definite sharp decline in the early months of 2013. Deficit cutting will intensify with a deal on the ‘sequestered’ $1.2 trillion agreement that will occur in March in Congress. Defense spending cuts projected will be reduced, but non-defense spending will occur and perhaps even rise. Consumer spending on autos, which has been a plus in 2012, cannot continue at the prior pace. Health care spending will likely continue to slow, as health insurance premiums of 10-20% continue to be imposed in the new year by price gouging health insurance companies looking to maximize their returns in 2013 in anticipation of Obamacare taking effect in 2014. Business spending that occurred in the fourth quarter to take advantage of tax laws will almost certainly slow in the first quarter. Industrial production and manufacturing will add little, if anything, to the economy and housing will contribute to growth through apartment construction only. In short, the scenario is one of continued very slow growth....

The answers to this are not all that difficult to understand. First, despite $13 trillion in free, no interest money given to banks, investors, and speculators by the US federal reserve for five years now, the banks still continue to dribble out lending to small-medium US businesses. No loans mean no investment mean no hiring mean no income growth for consumption, which is 70% of the economy. Similarly, large non-bank corporations continue to sit on more than $2 trillion in cash. Like the banks, they too refuse largely to invest in the US to create jobs, preferring to hold the cash, or use it to buyback stock and pay shareholders more dividends, to invest it offshore, or to invest it in speculating with financial instruments like derivatives, foreign exchange, commodities futures, and the like.
At the same time, the bottom 80% of households, more than 110 million, are confronted with 5 years now of continuing real disposable income stagnation or decline. This income stagnation and decline translates into insufficient income to stimulate consumption spending, which makes up 71% of the US economy. What spending exists is fundamentally credit driven, not income driven. Thus car loans, student loans, credit cards, and installment loans rise and with it household ‘debt’. 
The problem with the US economy therefore is fundamentally twofold: not only insufficient income but growing household debt. Together they result in consumption becoming increasingly ‘fragile’ (an income to debt ratio term), and therefore unable to play its historic role of generating a sustained economic recovery.
UNLESS lawmakers act by March 1, the budget sequestration process will start cutting government spending automatically — reductions that would amount to $1.2 trillion by 2021. Congress and the White House agreed in 2011 to the sequestration, and many people see it as a kind of political gimmick.
But I believe that it can turn out to be a very good thing — and that most of these cuts should proceed on schedule, though with some restructuring along the way.
One common argument against letting this process run its course is a Keynesian claim — namely, that cuts or slowdowns in government spending can throw an economy into recession by lowering total demand for goods and services. Nonetheless, spending cuts of the right kind can help an economy.
Half of the sequestration would apply to the military budget, an area where most cuts would probably enhance rather than damage future growth. Reducing the defense budget by about $55 billion a year, the sum at stake, would most likely mean fewer engineers and scientists inventing weaponry and more of them producing for consumers.

8---Dow at 14,010: Market peak or new leg up?, USA Today

9---Yield surge fuels fears of market meltdown, IFR

The US investment-grade corporate bond market reached a pivotal point last week following a spike in Treasury yields, raising fears that a further jump in rates will hit demand for deals and cause a market meltdown, bankers warned.
The 10-year Treasury yield climbed more than 20bp to 2.00% on Tuesday from the previous Friday, tipping the total return on the Bank of America Merrill Lynch high grade corporate bond index to negative 0.6% so far this year.
The speed at which the surge in rates occurred, and the fact that it was based on still-early signs of improvement in US business confidence, has dealt a blow to hopes that the US Federal Reserve can finesse a graceful exit from its quantitative easing programme.
“Everyone is talking about this,” said a head of investment-grade syndicate at a major US bank. “At some point this will be the most difficult and ugliest market probably that we have ever seen, because if rates go up quickly and everyone becomes of the opinion that it’s time to get out of fixed income, who is going to be on the other side of that?
“It becomes a self-fulfilling prophecy, especially when the dealer community is not making markets like they used to.”

But when?

When that will happen is the big question – some do not think it will be this year because the economy is not growing strongly.
But even those predicting an aggressive rotation out of bonds and into equities in the near future were taken aback by the speed of the recent rate move.
“I didn’t think we could start to see higher interest rates before March or April, yet we have gotten it already and I am surprised by that,” said Hans Mikkelsen, senior credit strategist at BofA Merrill....

Although a 2.00% 10-year is not enough to kill demand for high-quality corporate bonds, it has got issuers thinking. Berkshire Hathaway made a savvy move on Tuesday to issue a US$2.6bn deal in case Friday’s employment numbers caused another hike. Underwriters are advising other high-grade issuers to be equally agile.
“If we see another 20bp rise [from 2.00%] it will definitely impact demand [for new issues]”, said David Trahan, head of investment grade syndicate at Citigroup.
Mikkelsen expects that the rotation into equity will pick up speed when the 10-year rate gets to around 2.5%. “And 2.5% is closer than it appears,” he said. “If the 10-year gets to 2.15% or 2.3%, you will see mortgage investors shorting Treasuries, and that could easily push Treasuries up to 2.5%.”
It is also possible that the market will not wait for signals from the Fed about the end of QE and a move to hike rates. “The market will anticipate rate hikes before the Fed starts tightening, so we could start to see higher rates in the second half of the year as the economy improves,” said Steve Huber, manager of T Rowe Price’s Strategic Income Fund.
That will be a dicey moment. “It will get really ugly when it is evident the Fed is trying to pull back on QE, and that will not take much. It could be triggered the first time they use any language regarding an exit strategy,” one investor said.

10---About that cash flowing into equities...,IFR

Deposits at the 25 largest US lenders fell by US$114bn, or almost 5%, to US$5.37trn in the week ending Jan. 9, according to Federal Reserve data, in what Barclays Capital says is the biggest such outflow since just after the Sept. 11, 2001 attacks. This could have been driven by the Dec. 31 end of an FDIC program to insure deposits over US$250,000

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