Weekend News Items of Interest

I will start posting more news topics of interest and welcome readers to
forward research and investment ideas at will. Here is the crop from
last week. I will post topics from the weekend later on today, and as
usual will randomly comment on daily news events.

From Alliance
Bernstein:

• Core Intermediate Producer Prices have taken 6 months to rise 5.2%
  annualized, recession of 2002 took 2 years to reach same level
• Operating Rate hit low of 65.4% last year and has only risen to
  69.4%, still short of historical threshold causing rise in raw material
  prices (74%)
• Increases in foreign operating rates have started to indicate US
  may now be a price follower instead of price leader
• The Fed cited lack of resource utilization as reasoning for
  maintaining record low rates, as these concerns begin to wane Alliance
  Bernstein sees easing of emergency Fed policy

Bloomberg.com:

• Christina Romer, Peter Orszag, and Tim Geithner have predicted
  unemployment will settle in 2010 at around 9.7%, citing poor job
  conditions
• Federal deficit projections for 2011 & 2015 are $1.5 trillion
  & $751 billion respectively, White House officials cite Bush's
  medicare and income tax cuts for allowing deficit insanity

Washingtonpost.com:

• Moody's has stated US, UK, Germany, & France, are at risk of
  credit downgrades from AAA (dollar rose on this news)
• All 4 countries estimate debt costs of 80% of annual GDP

Sfgate.com:

• Most financial historians look at the SPDRs as first ETF,
  introduced in 1993 to track S&P 500
• ETFs nearly doubled in AUM over the past year to $1 trillion,
  Mutual Funds have total of $18.7 trillion, but some mutual funds have
  started to structure ETFs
• ETFs cross various asset classes (FX, Commodities, Bonds),
  leverage (1x, 2x, inverse) and offer better fees than traditional
  mutual
  funds
• ETFs have developed into an incredibly large and important asset
  class for the retail investor
• Of course, there is the risk of slippage and tracking error in
  ETFs, particularly the leveraged ones which seem to suffer from time
  decay. This is Reggie's comment, and not necessarily that of the author
  of the article.

Reason.com:

• The $787American Recovery and Reinvestment Act has propped up
  temporary jobs to generate a "pseudo-recovery" [Tell me about it]
• Obama has talked down risky loans, while back handedly pushing
  banks to take "third and forth looks" at potential debtors, meanwhile,
  FHA will take 3.5% down payments
• FHA loans continue to increase in default rate, as do readjusted
  HAMP (Home Affordable Modification Program) loans
• Prime loans have had terrible default rates due to the way prime
  is accessed, primes can include adjustable rate mortgages, low down
  payments, and "debt disguise mechanisms"

Reuters.com:

• Under new chapter 11 plan, "LAMCO" would manage all of Lehman's
  assets outside of its core operations that were liquidated in
  bankruptcy
  court
• Secured, administrative and priority creditors would be paid in
  full under the proposed plan, while general unsecured claims, direct
  intercompany claims and guarantee claims would in part be satisfied by
  some "pro rata" cash distributions

Cepr.net:

• Organization for Economic Co-operation and Development estimates
  that more than 30 percent of Greece's GDP is untaxed [yet Greece
  believes they can fix this in one year, see "Greek

  Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on
  Fire!

  ]
• US Manufacturing produced $1.4 trillion in 2007, even after losing
  1/3 of workforce since 1998 (Greece's economy is based on tourism &
  agriculture)
• Flight from USD for debt reason does not make sense to author
  since Euro nation debt loads are similar or worse, and Japanese debt is
  much greater than the US

Telegraph.co.uk:

• Most business leaders are preparing for minimal economic growth,
  and some are even preparing for worse
• US consumption was 20% of global GDP, on the contrary, Chinese
  consumption would need to rise by 30% to offset a decline of 5% in US
  spending [see Can

  China Control the “Side-Effects” of its Stimulus-Led Growth? Let's
  Look at the Facts 

• Signs

  of a China Credit and Real Asset Bubble Are Now Unmistakable! 

• What

  Are the Odds That China Will Follow 1920's US and 1980's Japan?

•  Some

  Light Shown on My Developing China Thesis

  ]
  
• Recessions combine business outlook into combination of short term
  survival & long term jockeying for industry power
• The article as a whole addresses creative destruction theory and
  how the effects are amplified during recessions

IMF Working Paper @ http://www.imf.org/

• Current US fiscal policy is becoming a long term liability,
  forecasting is very hard with large deviations between projections and
  outcomes (projections are too optimistic) [This is not just a US
  problem. The Eurozone members are champions at this, see
  Once You Catch a Few EU Countries "Stretching the Truth", Why Should
  You Trust the Rest?]
• While bad real GDP forecasts have contributed to error in fiscal
  forecasts, regression analysis of GDP, CPI, and fiscal policy finds
  only
  a 12% correlation
• Near-Medium term economic outlook is neutral/skeptical,
  potentially downplaying the importance of reducing deficit for that
  same
  term
• The primary balance surplus exceeded expectations throughout most
  of the 1990's, however fell short throughout most of the following
  decade
• According to IMF models, fiscal prudence would stabilize debt/GDP
  at 68%, if policy reaction is slow, reaching 80% is more realistic (IMF
  models are much less optimistic than OMB models)
• There is a wide range of uncertainty about US fiscal policy, but
  it is clear that without adjusting the primary balance the US will see
  debt levels north of the 77% projection by 2020
• Incredible/Impossible balancing act of steady stimulus vs. debt
  reduction is almost underway, but a intermediate term fiscal course
  correction is necessary

Imes Discussion Paper @ http://www.imes.boj.or.jp

• Textbook economic theory regarding sticky prices and low
  nominal inflation may not hold when multiple nations are fighting a
  liquidity trap
• In a global liquidity trap, the country with the biggest gov't
  expenditures will weaken its currency and worsen its terms of trade
• Under normalized conditions (normal central bank policies), fiscal
  multipliers are kept under 1.0, but when interest rates push the
  zero boundary, fiscal spillover and government spending increases,
  terms
  of trade weaken and global trade breaks down [Think US-China trade
  beef, Germany & practically the rest of Europe. See Mainland Chinese Express
  Regret, Anger at Google Move]
  
• Fiscal multipliers >1 usually result in gov't expenditures
  achieving employment growth, but negative results if elasticity of
  consumption is <1

Albert Edwards/ZH Report @
http://www.zerohedge.com

• Private sectors continue to deleverage, governments continue to
  lever up at all levels (perhaps the only reason financials appear to be
  deleveraging is because gov'ts continue to soak up their bad debts?)
• Bank lending continues to decline, deleveraging is not nearly
  finished, contradicts mainstream idea of debt based, leveraged recovery
• Possibility for global debt-deflation crisis continues to grow,
  Edwards & Grice predict the printing presses will heat up
  (hyperdeflationary default followed by hyperinflationary printing to
  pay
  debts due)

ECB Article @ http://www.ecb.int/

• ECB forecasts minimal growth (0.4%-1.2% GDP) this year &
  moderate growth (<2.5%) next year, inflation expectations remain low
• Unsure what the post-crisis "normal" will be, or conditions when
  ECB ends non-standard monetary policy operations
• ECB recognizes individual fiscal prolificacy and calls for tighter
  fiscal policy to avoid sovereign debt crisis (a little late for this
  isn't it???)
• Stark concludes with typical calls for transparency, when the Fed
  calls for transparency it comes off as a back handed joke and I'm going
  to assume this is not much different. See Smoking

  Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer
  Beware!

 ING Forecast@ http://www.ing.be

• With weak consumption/confidence, and stagnating labor demand, GDP
  growth forecasts continue to look sluggish
• Changes in the discount rate are barely a measure of tightening,
  as only $112 billion was borrowed on average per week at the height
  (fall of Lehman) and now is at a mere $14 billion/avg per week
• Greece continues to haunt markets by keeping safe haven fixed
  income at lower yields
• Similar consumption/confidence issues are "plaguing" the Eurozone,
  growth outlook still weak, UK is slightly more optimistic but fiscal
  concerns are starting to hold weight
• Employment conditions in Japan appear to be easing, but deflation
  continues to dominate
• PBoC continues to have issues with balancing inflation and
  stimulus led asset prices
• Funds and banks are waiting out potential RMB appreciation
• Dollar continues to benefit from negative sovereign credit outlook
  in the Eurozone, particularly UK & Greece, no mention of heavy
  hitters Spain & Italy

Flash Economics: Spain@ http://cib.natixis.com

• Spain is currently seeing -3.7% GDP growth, 19% unemployment,
  annual deficits of ~11% debt/GDP
• Spanish "growth" was credit driven, bursting of construction
  bubble was incredibly deflationary for income and resulted in defaults
• Hypothetically, a government default would bankrupt the banks
  because the banks are absorbing most of the fiscal financing as private
  lending has sunk
• Government estimates to reduce deficit to 3% annual GDP by 2012
  are IMPOSSIBLE without economic growth
• Subscribers, see Spanish

  Banking Macro Discussion Note

Flash Economics: Greece v. Germany@ http://cib.natixis.com

• Greek gov't expenditures have outpaced Germany 10x, as percentage
  of GDP, gov't payrolls are twice as high
• Germany has not exasperated the Greek trading surplus as much as
  some analysts state, Germany has lower costs of production and still
  exports manufactured goods to Greece
• 85% of all external financing of Greece's current account deficit
  has been financed by the Eurozone, not just Germany
• German banks hold $67.5 billion worth of Greek financial assets
• See The

  Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western
  European Countries

  and,
• Financial

  Contagion vs. Economic Contagion: Does the Market Underestimate the
  Effects of the Latter?

• "Greek

  Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on
  Fire!

   
• Germany

  Finally Comes Out and Says, "We're Not Touching Greece" - Well, Sort
  of...

• The
  Greece and the Greek Banks Get the Word "First" Etched on the Side of
  Their Domino

BBVA Weekly Article @ http://serviciodeestudios.bbva.com

• EU industrial output grew 1.7% MoM due to Germany, France, and
  Italy
• German exports continued to increase, thanks to a weaker Euro,
  even as French confidence fell and Italian GDP was revised negative
• Lighter trade continues to hold back the UK, private demand in
  Spain continues to be incredibly weak
• Trichet continues to highlight potential sovereign debt crisis
  while maintaining very low rates to support stimulus measures

State Sreet G7 Weekly @ http://www.ssga.com/

• US retail sales for February were upbeat thanks to substantial
  downward adjustments from December and January
• US current account deficit continues to grow while trade
  deficit also widens on "recovery" signs
• Canadian exports, employment, capacity utilization, and housing
  data continue to look optimistic, chance for rate increases looks
  good at first glance, but the BoC rarely acts before the Fed
• In the UK, industrial output continues to disappoint, but retail
  sales numbers continue to improve
• German, French, and Italian output continue to rise slightly, but
  are still unimpressive, graphs are generating an "L shaped
  recession"
• Japanese data continues to act erratically as the BoJ attempts
  to fight deflation for the seemingly 1,000^th time, but
  manufacturers are seeing orders rise in potential signs of export
  growth
• Japanese corporate prices are rising due to oil prices,
  deflation still reigns supreme
• Australian home loan approvals have fallen by 7.9%, this is
  the 4^th consecutive decline and could be a leading indicator
  for a decline in construction activity
• Chinese M2 grew 25% YoY, Indian production is up 16% YoY (India
  raised rates, also something to follow), and Brazil posted its first
  annual GDP gain (4.3%) in a year
• US household wealth is up $5 trillion over the past 3 quarters,
  but $12 trillion remains in losses

FT Alphaville Article @
http://ftalphaville.ft.com/

• Santander hemorrhaged cash (and equivalents) at a loss of €10.892
  billion over the past year, meanwhile, competitor BBVA posted cash
  gains
  of €1.69 billion and operating cash flow of positive €2.567
• Boosts in operating cash flows at both BBVA and Santander
  potentially line up with alleged assistance from the ECB, which a
  Santander spokesperson took the time to go after the blog post, stating
  if Santander wanted more cash it could get it from the market, not
  resort to the ECB
• To follow up on the previous bullet, does Santander really want to
  try and raise funds from the market? A terrible bond auction for
  Santander would raise its risk profile as well as Spanish sovereigns,
  which would help unwind the "extend and pretend" policies currently
  used
• See The

  Spanish Inquisition is About to Begin...

  and subscriber download Spanish

  Banking Macro Discussion Note

Comments

[Dirtt]

Why bother adding the Washington Post?  Just use the WhiteHouse Post instead. Getting news from Rahm's surrogates is substandard.

Thanks for the outstanding research.

[Leo Kolivakis]

Reggie,

In the future, can you filter out the top ten news items? A little too much to digest here.

Thanks.

[i.knoknot]

i respectfully disagree!

this broad-stroke view is invaluable to me, as i tend to agree with the relevance of virtually everything you've highlighted, and the few that don't are easy to skip in thhe format you've presented.

this rocked!

[rubearish10]

Great stuff and plenty to support an investment thesis "despite" what we're seeing.

[illyia]

This is incredibly useful, Reggie.

Although, I will have to get back to it. A lot here to digest...

Thanks.

[AR]

REGGIE  /  As always, thanks for your post and hard work on trying to keep us all informed. Good work...