The Dodd-Frank financial reform bill has opened a 90-day window for banks to buy back $118 billion in high-cost securities, a move that would enable them to replace the instruments with cheaper capital but is likely to cause tensions with regulators and investors.
Wall Street executives and lawyers say several banks are considering redeeming “trust preferred securities” (Trups) – a hybrid of debt and equity – by taking advantage of a clause triggered by the new rules.
Trups – equity instruments that pay interest like bonds – became popular in the financial crisis when banks sold more than $40 billion-worth to investors ranging from Warren Buffett to small savers. Financial groups are interested in buying back the securities because Trups are an expensive form of capital. Banks needed to offer high interest rates to entice investors.
Banks have an extra incentive to redeem Trups because the new law states that they will no longer count as tier one capital – a key gauge of financial strength – from 2013.
The banks can buy back the securities now because most Trups’ contracts state that a legal change gives issuers three months to redeem them at face value. The removal of Trups from tier one capital amounts to such an event, lawyers say.
“It is a big issue,” said a top US lawyer. “The question for banks is: do you want to keep paying high interest rates knowing that Trups are going to lose their status as tier one?”
However, some executives counter that redeeming Trups could upset regulators, who are against reductions in bank capital, and investors, who bought them to hold for the long term.
“Banks may find it desirable to redeem Trups but they have to think about what they are going to say to investors next time they want to raise capital,” said Chip MacDonald at law firm Jones Day.
The dilemma over Trups is emblematic of the regulatory morass faced by banks trying to navigate the effects of the new US law as well as ongoing uncertainty over new international capital standards.
Moody’s estimates that US banks have about $118 billion of Trups outstanding. The securities account for a significant part of tier one capital at lenders like Bank of America [BAC 13.23 0.1675 (+1.28%) ], JPMorgan Chase [JPM 37.50 -0.31 (-0.82%) ], Morgan Stanley [MS 25.90 -0.22 (-0.84%) ] and Citigroup [C 3.88 0.01 (+0.26%) ], according to the credit rating agency.
Monday, August 16, 2010
Sunday, August 15, 2010
Japan's Growth Slows Down Sharply Amid Yen Worries - CNBC
Japan's economic growth slowed markedly in April-June and analysts predict further slowdown, adding to policymakers' difficulties as they grapple with deflation and a rise in the yen that threatens an export-reliant recovery.
Slowing growth in Japan's key export destinations such as the United States and China clouds the outlook, while policymakers step up efforts to talk down the yen after it surged to a 15-year high against the dollar this month of 84.72 per dollar.
Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa are likely to meet later this week to discuss the yen's strength and possible responses, although analysts say likely options would be limited.
"I think the Bank of Japan and the government need to take decisive action against currency moves. Solo currency intervention is possible if the yen approaches 80 to the dollar. If that is accompanied by monetary easing by the Bank of Japan, it may have a certain effect," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
The quarterly expansion of 0.1 percent in gross domestic product (GDP) translates into an annualised growth of 0.4 percent, well below the median market forecast of 2.3 percent annualised growth and much less than the 2.4 percent annualised growth in the United States in the same quarter.
That followed a revised 4.4 percent annualised growth in the first quarter, as export growth moderated and a stimulus-driven recovery in consumption ran out of steam.
It was the third straight quarter of expansion.
"Consumption was flat, showing government payouts to households with children didn't give much of a boost to private spending," Minami said, adding that the yen's rise may begin to hurt export growth in the latter half of the current fiscal year.
Japan's economy has been spotty since emerging from its worst recession since World War Two in the second quarter of 2009 on the back of exports, particularly to Asia, and government stimulus for spending on energy-efficient cars and electronics.
Slowing growth in Japan's key export destinations such as the United States and China clouds the outlook, while policymakers step up efforts to talk down the yen after it surged to a 15-year high against the dollar this month of 84.72 per dollar.
Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa are likely to meet later this week to discuss the yen's strength and possible responses, although analysts say likely options would be limited.
"I think the Bank of Japan and the government need to take decisive action against currency moves. Solo currency intervention is possible if the yen approaches 80 to the dollar. If that is accompanied by monetary easing by the Bank of Japan, it may have a certain effect," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
The quarterly expansion of 0.1 percent in gross domestic product (GDP) translates into an annualised growth of 0.4 percent, well below the median market forecast of 2.3 percent annualised growth and much less than the 2.4 percent annualised growth in the United States in the same quarter.
That followed a revised 4.4 percent annualised growth in the first quarter, as export growth moderated and a stimulus-driven recovery in consumption ran out of steam.
It was the third straight quarter of expansion.
"Consumption was flat, showing government payouts to households with children didn't give much of a boost to private spending," Minami said, adding that the yen's rise may begin to hurt export growth in the latter half of the current fiscal year.
Japan's economy has been spotty since emerging from its worst recession since World War Two in the second quarter of 2009 on the back of exports, particularly to Asia, and government stimulus for spending on energy-efficient cars and electronics.
Economy - Double Dip? A Tipping Point May Be Near - CNBC
Like a car spinning its wheels, the American economy hasn’t been getting much traction. Many financial indicators are issuing worrisome signals, millions of people are still out of work, and growth is slowing.
Will the economy pick up momentum or slip back into recession? Unfortunately, the answer is very much in doubt.
“We are at a very critical moment in the business cycle,” said Lakshman Achuthan, the managing director of the Economic Cycle Research Institute, a private forecasting group with an excellent track record. After the economy began to recover last summer, in his estimation, “growth has definitely slowed.” But he said he wouldn’t have enough data until at least the fall to know “whether we’re dipping back into recession.”
Even the Federal Reserve chairman, Ben S. Bernanke, calls the current economic outlook “unusually uncertain.” And the financial markets have certainly noticed.
“The market is favoring investments thought to have no risk, like Treasuries, as opposed to assets with risk, like stocks — and that’s been becoming more and more pronounced,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco, the big bond manager.
In the bond market last week, safety-seeking investors bid up the prices of Treasury securities, driving down yields to extraordinarily low levels along a broad range of maturities — and extending the astonishing rally of long-term Treasury bonds, which continue to outperform the stock market and nearly every other asset class.
For the year, for example, long-term Treasuries have returned more than 15 percent, as gauged by the Barclays Capital U.S. 20+ Year Treasury Bond index. By comparison, the Standard & Poor’s 500-stock index has lost more than 2 percent, including dividends. And over the decade through July, long-term Treasuries outperformed the S.& P. 500 by more than 8.6 percentage points, annualized, according to Morningstar data.
The stock market was particularly shaky last week. On Wednesday, the Dow Jones industrial average dropped 265.42 points, or 2.5 percent, its biggest decline since June. For the week, the Dow lost more than 350 points, or 3.3 percent, closing at 10,303.15, while the S.& P. fell more than 42 points, or 3.8 percent, to 1,079.25.
This preference for bonds over stocks, which has emerged periodically since the financial crisis began in 2008, came into high relief after the Fed’s announcement on Tuesday that it would recycle the proceeds of its mortgage bond portfolio into Treasuries.
Considering the Fed balance sheet — now approximately $2.3 trillion, up from $900 billion before the financial crisis — the central bank’s latest move was modest. It will translate into $200 million to $400 million in purchases of Treasuries over 12 months, according to an estimate by Bank of America Merrill Lynch. But it was the direction the Fed was taking — its decision to maintain an expansive monetary policy through “quantitative easing,” rather than to begin monetary tightening — that was most striking.
“Ben Bernanke’s motto seems to be that he will do whatever it takes to avoid a depression and avert deflation,” said Edward Yardeni, president of Yardeni Research. “He has been very successful so far,” lowering interest rates along the yield curve and thereby stimulating the economy.
The Fed may need to go it alone over the next several months, several analysts said, because with midterm elections approaching, additional fiscal stimulus legislation may be too controversial.
Mr. Achuthan of the Economic Cycle institute said a weakening in the economy’s growth rate began to appear in the institute’s leading indicators early in the winter. “Now, that slowdown is baked in the cake, it’s already happening,” he said.
The Fed acknowledged as much last week. In a statement on Tuesday, its Open Market Committee said that the recovery pace had “slowed” and that growth “is likely to be more modest in the near term than had been anticipated.”
It’s too early to know whether the economy will tip into an actual decline, Mr. Achuthan said. The institute’s Weekly Leading Index ticked up again on Friday, after a steep plunge through late June. It’s possible that the Fed “will be able to use its influence” to engineer a soft landing and avert another, immediate recession, he said. In September or October, he said, there may be more clarity.
Mr. Gross of Pimco said the growing American trade deficit — it jumped to $49.9 billion in June, its highest level since October 2008, according to a report on Wednesday — is cutting into the G.D.P., “implying that second-quarter G.D.P. is going to be in the 1 to 2 percent range.”
In turn, he said, “that implies that the momentum of the economy from the first to the second quarter was downhill, and therefore we think “it’s quite possible that we might actually be somewhere between zero and 1 percent — in other words, very close to a double-dip recession.”
He put the probability of a recession — and of an accompanying bout of deflation — at 25 to 35 percent.
Still, the economic signs are ambiguous. After falling in the spring, industrial commodity prices have risen, suggesting that there is still surging demand from manufacturers. Shipping indexes, which had declined, have ticked upward again over the last month. Mortgage rates are dropping. And thanks in large part to fierce cost-cutting, very low interest rates, and strong demand in developing countries, corporate profits have been strong.
What’s been lacking is broad consumer demand, a revival of the housing market and sufficient business confidence in large-scale hiring. And, of course, there are deep structural economic problems — the highest ratio of public debt to gross domestic product since World War II, for example — that will need to be dealt with over many years.
Nonetheless, if there is good news in the fall — if it becomes clear that the pace of recovery has begun to accelerate — there could easily be another burst of stock market exuberance, Mr. Achuthan said. “Interest rates are very low,” he said, “and if you were to combine that with economic growth, you’ve got a wonderful recipe for profits.”
In the meantime, Mr. Gross said, with the Fed funneling money into Treasuries, the improbable rally in the bond market may still have a way to go.
This story originally appeared in the The New York Times
Will the economy pick up momentum or slip back into recession? Unfortunately, the answer is very much in doubt.
“We are at a very critical moment in the business cycle,” said Lakshman Achuthan, the managing director of the Economic Cycle Research Institute, a private forecasting group with an excellent track record. After the economy began to recover last summer, in his estimation, “growth has definitely slowed.” But he said he wouldn’t have enough data until at least the fall to know “whether we’re dipping back into recession.”
Even the Federal Reserve chairman, Ben S. Bernanke, calls the current economic outlook “unusually uncertain.” And the financial markets have certainly noticed.
“The market is favoring investments thought to have no risk, like Treasuries, as opposed to assets with risk, like stocks — and that’s been becoming more and more pronounced,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco, the big bond manager.
In the bond market last week, safety-seeking investors bid up the prices of Treasury securities, driving down yields to extraordinarily low levels along a broad range of maturities — and extending the astonishing rally of long-term Treasury bonds, which continue to outperform the stock market and nearly every other asset class.
For the year, for example, long-term Treasuries have returned more than 15 percent, as gauged by the Barclays Capital U.S. 20+ Year Treasury Bond index. By comparison, the Standard & Poor’s 500-stock index has lost more than 2 percent, including dividends. And over the decade through July, long-term Treasuries outperformed the S.& P. 500 by more than 8.6 percentage points, annualized, according to Morningstar data.
The stock market was particularly shaky last week. On Wednesday, the Dow Jones industrial average dropped 265.42 points, or 2.5 percent, its biggest decline since June. For the week, the Dow lost more than 350 points, or 3.3 percent, closing at 10,303.15, while the S.& P. fell more than 42 points, or 3.8 percent, to 1,079.25.
This preference for bonds over stocks, which has emerged periodically since the financial crisis began in 2008, came into high relief after the Fed’s announcement on Tuesday that it would recycle the proceeds of its mortgage bond portfolio into Treasuries.
Considering the Fed balance sheet — now approximately $2.3 trillion, up from $900 billion before the financial crisis — the central bank’s latest move was modest. It will translate into $200 million to $400 million in purchases of Treasuries over 12 months, according to an estimate by Bank of America Merrill Lynch. But it was the direction the Fed was taking — its decision to maintain an expansive monetary policy through “quantitative easing,” rather than to begin monetary tightening — that was most striking.
“Ben Bernanke’s motto seems to be that he will do whatever it takes to avoid a depression and avert deflation,” said Edward Yardeni, president of Yardeni Research. “He has been very successful so far,” lowering interest rates along the yield curve and thereby stimulating the economy.
The Fed may need to go it alone over the next several months, several analysts said, because with midterm elections approaching, additional fiscal stimulus legislation may be too controversial.
Mr. Achuthan of the Economic Cycle institute said a weakening in the economy’s growth rate began to appear in the institute’s leading indicators early in the winter. “Now, that slowdown is baked in the cake, it’s already happening,” he said.
The Fed acknowledged as much last week. In a statement on Tuesday, its Open Market Committee said that the recovery pace had “slowed” and that growth “is likely to be more modest in the near term than had been anticipated.”
It’s too early to know whether the economy will tip into an actual decline, Mr. Achuthan said. The institute’s Weekly Leading Index ticked up again on Friday, after a steep plunge through late June. It’s possible that the Fed “will be able to use its influence” to engineer a soft landing and avert another, immediate recession, he said. In September or October, he said, there may be more clarity.
Mr. Gross of Pimco said the growing American trade deficit — it jumped to $49.9 billion in June, its highest level since October 2008, according to a report on Wednesday — is cutting into the G.D.P., “implying that second-quarter G.D.P. is going to be in the 1 to 2 percent range.”
In turn, he said, “that implies that the momentum of the economy from the first to the second quarter was downhill, and therefore we think “it’s quite possible that we might actually be somewhere between zero and 1 percent — in other words, very close to a double-dip recession.”
He put the probability of a recession — and of an accompanying bout of deflation — at 25 to 35 percent.
Still, the economic signs are ambiguous. After falling in the spring, industrial commodity prices have risen, suggesting that there is still surging demand from manufacturers. Shipping indexes, which had declined, have ticked upward again over the last month. Mortgage rates are dropping. And thanks in large part to fierce cost-cutting, very low interest rates, and strong demand in developing countries, corporate profits have been strong.
What’s been lacking is broad consumer demand, a revival of the housing market and sufficient business confidence in large-scale hiring. And, of course, there are deep structural economic problems — the highest ratio of public debt to gross domestic product since World War II, for example — that will need to be dealt with over many years.
Nonetheless, if there is good news in the fall — if it becomes clear that the pace of recovery has begun to accelerate — there could easily be another burst of stock market exuberance, Mr. Achuthan said. “Interest rates are very low,” he said, “and if you were to combine that with economic growth, you’ve got a wonderful recipe for profits.”
In the meantime, Mr. Gross said, with the Fed funneling money into Treasuries, the improbable rally in the bond market may still have a way to go.
This story originally appeared in the The New York Times
Saturday, August 14, 2010
American Cars - Detroit Goes From Gloom to Economic Bright Spot - CNBC
After a dismal period of huge losses and deep cuts that culminated in the Obama administration’s bailout of General Motors and Chrysler, the gloom over the American auto industry is starting to lift.
Jobs are growing. Factory workers are anticipating their first healthy profit-sharing checks in years. Sales are rebounding, with the Commerce Department reporting Friday that automobiles were a bright spot in July’s mostly disappointing retail sales.
The nascent comeback is far from a finished product. Foreign competitors are leaner and stronger, accounting for more than half of all car sales in this country. The sputtering economic rebound is spooking investors and consumers alike, threatening to derail some of Detroit’s gains. And talks next year on a new contract with the United Automobile Workers could revive old hostilities.
Still, the improving mood here reflects real changes in how Detroit is doing business — and a growing sense that the changes are turning the Big Three around, according to industry executives and analysts tracking the recovery.
Ford made more money in the first six months of this year than in the previous five years combined. G.M. is profitable and preparing for one of the biggest public stock offerings in American history. Even Chrysler, the automaker thought least likely to survive the recession, is hiring new workers.
Many of the excesses of the past — overproduction, bloated vehicle lineups, expensive rebates — are gone. All three carmakers have shed workers, plants and brands. And a new breed of top management — the three chief executives are outsiders to Detroit, as is the newly named G.M. chief executive — says it is determined to keep the Big Three lean, agile and focused on building better cars that earn a profit.
“What we’ve come out of this with,” said Sergio Marchionne, who runs both Chrysler and its Italian owner Fiat, “are much more rational, more grounded players making moves for the long term.”
The proof is emerging in dealer showrooms, where customers are buying more of Detroit’s cars and paying higher prices. In July, G.M., Ford and Chrysler sold their vehicles at an average price of $30,400 — $1,350 more than a year ago and higher than an overall industry gain of $1,100, according to the auto research Web site Edmunds.com.
With fewer factories churning out products, inventories are smaller and sales incentives like rebates and low-interest financing are gradually declining. “They were nibbling at these issues before, a little bit here and a little bit there,” said Jeremy Anwyl, Edmund’s chief executive. “It’s just different now that they are in fighting shape.”
Detroit has vowed to change before, slimming down when sales slumped or pouring resources into vehicle quality to catch up to foreign competitors. Those efforts stalled or failed. But many auto analysts say the current makeover has a more permanent feel, largely because of the presence of the outsiders at the top and the lessons learned from the near-death experience of last year’s bankruptcies at G.M. and Chrysler.
Ford’s [F 12.15 -0.12 (-0.98%) ] chief executive, Alan R. Mulally, broke the mold four years ago when he came from Boeing and set out to streamline Ford’s bureaucracy and integrate its worldwide operations.
At G.M., Edward E. Whitacre Jr., a former AT&T chief, has replaced dozens of top officials with outsiders and younger executives, and driven the company to make decisions faster. Those efforts are likely to be accelerated under Daniel F. Akerson, who was named on Thursday to succeed Mr. Whitacre as chief executive in September.
And at Chrysler, Mr. Marchionne, an Italian raised in Canada who is both a lawyer and an accountant, is systematically upgrading the carmaker’s aged product lineup and revamping its plants in Fiat’s image.
“Fundamentally this thing has been reshaped, resized and rethought,” Mr. Marchionne said of Detroit. The biggest difference, he said, is that the Big Three have finally broken the habit of reflexively raising incentives to increase sales volumes.
“We’re not trying to kill each other for this month’s market share,” he said. “Those days are over. We’re not offering $7,000 checks to try to sell a car.”
Wave after wave of plant closings and worker buyouts in recent years has brought Detroit’s production more in line with the demand for its vehicles. Since 2000, the number of Big Three assembly plants in North America has dropped to 40, from 66, according to the consulting firm Oliver Wyman. In turn, overall capacity has shrunk to about eight million vehicles a year, from 13.7 million.
That still may be too much. After several years of sales topping 16 million vehicles, the industry nosedived to 10.4 million last year — the lowest since 1982. At current levels, sales are projected to edge up to about 12 million this year, with Detroit’s share running at 46 percent.
“They carved out a lot of capacity, but I’m not sure it was enough,” said Peter Morici, an economist at the University of Maryland. “There’s still an excess.”
Even under the most hopeful assumptions, a resuscitated United States auto industry in the end would account for less than 3.5 percent of the country’s economic output, economists estimate, compared to 4.6 percent in the late 1970s. But the Obama administration, which argues that the comeback is long-term and sustainable, contends that the Big Three have downsized enough to be profitable with fewer sales.
“They were just barely making money or breaking even in a market of 16 to 17 million a year,” said Brian Deese, a member of President Obama’s auto task force. “The companies are positioned now to move forward in an environment of 11 to 12 million in sales.”
Some Republicans and other critics of the administration are less bullish, and suggest it is too early to know if the restructuring will stick or how much credit the federal assistance is due. That debate will likely play out in the November midterm elections, but in the meantime some of the raw numbers are falling Detroit’s way.
The bankruptcies at G.M. and Chrysler slashed debt, jobs and labor costs, and revised union contracts have brought manufacturing expenses more in line with factories in this country operated by Toyota and other foreign automakers.
The average production worker at G.M. earns $57 an hour in wages and benefits, compared to $51 at Toyota, according to a study by the Center for Automotive Research in Ann Arbor, Mich.
Those costs should continue to fall as the companies hire new workers at lower pay grades agreed to by the U.A.W.
“What’s come out of this crisis is a realization that the interests of both sides are aligned,” Harley Shaiken, a labor professor at the University of California, Berkeley, said of workers and management.
That alignment could be tested next year when the Detroit companies negotiate a new contract with the U.A.W. The union’s president, Bob King, has vowed to get back some of the concessions made in the bankruptcies.
For now, though, the industry is adding jobs for the first time in a decade. More than 330,000 jobs were lost by the American automakers and their suppliers in 2008, White House officials said, while 55,000 jobs have been added since Chrysler and G.M. emerged from bankruptcy in the summer of 2009.
Chrysler, which cut more than half its work force since 2005, has added 3,100 jobs this year, including white-collar jobs at its headquarters in suburban Detroit. The company is recruiting again on college campuses and bringing in entry-level engineers and managers.
One of the first new hires was James Kim, an electrical engineer who recently graduated from the University of Michigan. Mr. Kim also had job offers from Verizon and other companies.
“I saw an opportunity to get into a company that was rebuilding itself from the ground up,” said Mr. Kim. “It’s almost like going to a start-up business.”
Another new white-collar worker, Davida Redmond, joined Chrysler after taking a buyout from Caterpillar. “I felt like the worst was over in Detroit,” she said. “The storm is behind us.”
But for the recovery to last, some economists say, several things need to happen, including continued improvements in quality, a relentless focus on cutting costs — and some luck on the economy’s overall strength.
“Their recovery is not sustainable yet,” said Mr. Morici, the economist. “They need to reduce their costs more if they’re going to be competitive in the long term with the Japanese, the Koreans and ultimately the Chinese.”
Top management says it is well aware of the rough patches ahead. “We still have important work to do,” said Mr. Akerson, the incoming G.M. boss.
Even so, optimism is building in the offices and plants and engineering labs of the Detroit companies, employees say. And promising new electrified vehicles like the Chevrolet Volt and small cars like the Ford Fiesta are slowly changing consumer perceptions that the Big Three are behind the times.
“It wasn’t long ago that people had just written them off,” said Mr. Shaiken, the labor professor. “But they live to fight another day.”
This story originally appeared in the The New York Times
Jobs are growing. Factory workers are anticipating their first healthy profit-sharing checks in years. Sales are rebounding, with the Commerce Department reporting Friday that automobiles were a bright spot in July’s mostly disappointing retail sales.
The nascent comeback is far from a finished product. Foreign competitors are leaner and stronger, accounting for more than half of all car sales in this country. The sputtering economic rebound is spooking investors and consumers alike, threatening to derail some of Detroit’s gains. And talks next year on a new contract with the United Automobile Workers could revive old hostilities.
Still, the improving mood here reflects real changes in how Detroit is doing business — and a growing sense that the changes are turning the Big Three around, according to industry executives and analysts tracking the recovery.
Ford made more money in the first six months of this year than in the previous five years combined. G.M. is profitable and preparing for one of the biggest public stock offerings in American history. Even Chrysler, the automaker thought least likely to survive the recession, is hiring new workers.
Many of the excesses of the past — overproduction, bloated vehicle lineups, expensive rebates — are gone. All three carmakers have shed workers, plants and brands. And a new breed of top management — the three chief executives are outsiders to Detroit, as is the newly named G.M. chief executive — says it is determined to keep the Big Three lean, agile and focused on building better cars that earn a profit.
“What we’ve come out of this with,” said Sergio Marchionne, who runs both Chrysler and its Italian owner Fiat, “are much more rational, more grounded players making moves for the long term.”
The proof is emerging in dealer showrooms, where customers are buying more of Detroit’s cars and paying higher prices. In July, G.M., Ford and Chrysler sold their vehicles at an average price of $30,400 — $1,350 more than a year ago and higher than an overall industry gain of $1,100, according to the auto research Web site Edmunds.com.
With fewer factories churning out products, inventories are smaller and sales incentives like rebates and low-interest financing are gradually declining. “They were nibbling at these issues before, a little bit here and a little bit there,” said Jeremy Anwyl, Edmund’s chief executive. “It’s just different now that they are in fighting shape.”
Detroit has vowed to change before, slimming down when sales slumped or pouring resources into vehicle quality to catch up to foreign competitors. Those efforts stalled or failed. But many auto analysts say the current makeover has a more permanent feel, largely because of the presence of the outsiders at the top and the lessons learned from the near-death experience of last year’s bankruptcies at G.M. and Chrysler.
Ford’s [F 12.15 -0.12 (-0.98%) ] chief executive, Alan R. Mulally, broke the mold four years ago when he came from Boeing and set out to streamline Ford’s bureaucracy and integrate its worldwide operations.
At G.M., Edward E. Whitacre Jr., a former AT&T chief, has replaced dozens of top officials with outsiders and younger executives, and driven the company to make decisions faster. Those efforts are likely to be accelerated under Daniel F. Akerson, who was named on Thursday to succeed Mr. Whitacre as chief executive in September.
And at Chrysler, Mr. Marchionne, an Italian raised in Canada who is both a lawyer and an accountant, is systematically upgrading the carmaker’s aged product lineup and revamping its plants in Fiat’s image.
“Fundamentally this thing has been reshaped, resized and rethought,” Mr. Marchionne said of Detroit. The biggest difference, he said, is that the Big Three have finally broken the habit of reflexively raising incentives to increase sales volumes.
“We’re not trying to kill each other for this month’s market share,” he said. “Those days are over. We’re not offering $7,000 checks to try to sell a car.”
Wave after wave of plant closings and worker buyouts in recent years has brought Detroit’s production more in line with the demand for its vehicles. Since 2000, the number of Big Three assembly plants in North America has dropped to 40, from 66, according to the consulting firm Oliver Wyman. In turn, overall capacity has shrunk to about eight million vehicles a year, from 13.7 million.
That still may be too much. After several years of sales topping 16 million vehicles, the industry nosedived to 10.4 million last year — the lowest since 1982. At current levels, sales are projected to edge up to about 12 million this year, with Detroit’s share running at 46 percent.
“They carved out a lot of capacity, but I’m not sure it was enough,” said Peter Morici, an economist at the University of Maryland. “There’s still an excess.”
Even under the most hopeful assumptions, a resuscitated United States auto industry in the end would account for less than 3.5 percent of the country’s economic output, economists estimate, compared to 4.6 percent in the late 1970s. But the Obama administration, which argues that the comeback is long-term and sustainable, contends that the Big Three have downsized enough to be profitable with fewer sales.
“They were just barely making money or breaking even in a market of 16 to 17 million a year,” said Brian Deese, a member of President Obama’s auto task force. “The companies are positioned now to move forward in an environment of 11 to 12 million in sales.”
Some Republicans and other critics of the administration are less bullish, and suggest it is too early to know if the restructuring will stick or how much credit the federal assistance is due. That debate will likely play out in the November midterm elections, but in the meantime some of the raw numbers are falling Detroit’s way.
The bankruptcies at G.M. and Chrysler slashed debt, jobs and labor costs, and revised union contracts have brought manufacturing expenses more in line with factories in this country operated by Toyota and other foreign automakers.
The average production worker at G.M. earns $57 an hour in wages and benefits, compared to $51 at Toyota, according to a study by the Center for Automotive Research in Ann Arbor, Mich.
Those costs should continue to fall as the companies hire new workers at lower pay grades agreed to by the U.A.W.
“What’s come out of this crisis is a realization that the interests of both sides are aligned,” Harley Shaiken, a labor professor at the University of California, Berkeley, said of workers and management.
That alignment could be tested next year when the Detroit companies negotiate a new contract with the U.A.W. The union’s president, Bob King, has vowed to get back some of the concessions made in the bankruptcies.
For now, though, the industry is adding jobs for the first time in a decade. More than 330,000 jobs were lost by the American automakers and their suppliers in 2008, White House officials said, while 55,000 jobs have been added since Chrysler and G.M. emerged from bankruptcy in the summer of 2009.
Chrysler, which cut more than half its work force since 2005, has added 3,100 jobs this year, including white-collar jobs at its headquarters in suburban Detroit. The company is recruiting again on college campuses and bringing in entry-level engineers and managers.
One of the first new hires was James Kim, an electrical engineer who recently graduated from the University of Michigan. Mr. Kim also had job offers from Verizon and other companies.
“I saw an opportunity to get into a company that was rebuilding itself from the ground up,” said Mr. Kim. “It’s almost like going to a start-up business.”
Another new white-collar worker, Davida Redmond, joined Chrysler after taking a buyout from Caterpillar. “I felt like the worst was over in Detroit,” she said. “The storm is behind us.”
But for the recovery to last, some economists say, several things need to happen, including continued improvements in quality, a relentless focus on cutting costs — and some luck on the economy’s overall strength.
“Their recovery is not sustainable yet,” said Mr. Morici, the economist. “They need to reduce their costs more if they’re going to be competitive in the long term with the Japanese, the Koreans and ultimately the Chinese.”
Top management says it is well aware of the rough patches ahead. “We still have important work to do,” said Mr. Akerson, the incoming G.M. boss.
Even so, optimism is building in the offices and plants and engineering labs of the Detroit companies, employees say. And promising new electrified vehicles like the Chevrolet Volt and small cars like the Ford Fiesta are slowly changing consumer perceptions that the Big Three are behind the times.
“It wasn’t long ago that people had just written them off,” said Mr. Shaiken, the labor professor. “But they live to fight another day.”
This story originally appeared in the The New York Times
Saturday, August 7, 2010
Battle Looms Over Huge Costs of Public Pensions - CNBC
There’s a class war coming to the world of government pensions.
The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide.
The have-nots are taxpayers who don’t have generous pensions.
Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks.
At stake is at least $1 trillion. That’s trillion, with a “t,” as in titanic and terrifying.
The figure comes from a study by the Pew Center on the States that came out in February. Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers in the way of retiree pension, health care and other benefits and the money they currently had to pay for it all. And some economists say that Pew is too conservative and the problem is two or three times as large.
So a question of extraordinary financial, political, legal and moral complexity emerges, something that every one of us will be taking into town meetings and voting booths for years to come: Given how wrong past pension projections were, who should pay to fill the 13-figure financing gap?
Consider what’s going on in Colorado — and what is likely to unfold in other states and municipalities around the country.
Earlier this year, in an act of rare political courage, a bipartisan coalition of state legislators passed a pension overhaul bill. Among other things, the bill reduced the raise that people who are already retired get in their pension checks each year.
This sort of thing just isn’t done. States have asked current workers to contribute more, tweaked the formula for future hires or banned them from the pension plan altogether. But this was apparently the first time that state legislators had forced current retirees to share the pain.
Sharing the burden seems to be the obvious solution so we don’t continue to kick the problem into the future. “We have to take this on, if there is any way of bringing fiscal sanity to our children,” said former Gov. Richard Lamm of Colorado, a Democrat. “The New Deal is demographically obsolete. You can’t fund the dream of the 1960s on the economy of 2010.”
But in Colorado, some retirees and those eligible to retire still want to live that dream. So they sued the state to keep all of the annual cost-of-living increases they thought they would be getting in perpetuity.
The state’s case turns, in part, on whether it is an “actuarial necessity” for the Legislature to make a change. To Meredith Williams, executive director of the Public Employees’ Retirement Association, the state’s pension fund, the answer is pretty simple. “If something didn’t change, we would have run out of money in the foreseeable future,” he said. “So no one would have been paid anything.”
Meanwhile, Gary R. Justus, a former teacher who is one of the lead plaintiffs in the case against the state, asks taxpayers in Colorado and elsewhere to consider an ethical question: Why is the state so quick to break its promises?
After all, he and others like him served their neighbors dutifully for decades. And along the way, state employees made big decisions (and built lifelong financial plans) based on retiring with a full pension that was promised to them in a contract that they say has the force of the state and federal constitutions standing behind it. To them it is deferred compensation, and taking it away is akin to not paying a contractor for paving state highways.
And actuarial necessity or not, Mr. Justus said he didn’t believe he should be responsible for past pension underfunding and the foolish risks that pension managers made with his money long after he retired in 2003.
The changes the Legislature made don’t seem like much: there’s currently a 2 percent cap in retirees’ cost-of-living adjustment for their pension checks instead of the 3.5 percent raise that many of them received before.
But Stephen Pincus, a lawyer for the retirees who have filed suit, estimates that the change will cost pensioners with 30 years of service an average of $165,000 each over the next 20 years.
Mr. Justus, 62, who taught math for 29 years in the Denver public schools, says he thinks it could cost him half a million dollars if he lives another 30 years. He also notes that just about all state workers in Colorado do not (and cannot) pay into Social Security, so the pension is all retirees have to live on unless they have other savings.
No one disputes these figures. Instead, they apologize. “All I can say is that I am sorry,” said Brandon Shaffer, a Democrat, the president of the Colorado State Senate, who helped lead the bipartisan coalition that pushed through the changes. (He also had to break the news to his mom, a retired teacher.) “I am tremendously sympathetic. But as a steward of the public trust, this is what we had to do to preserve the retirement fund.”
Taxpayers, whose payments are also helping to restock Colorado’s pension fund, may not be as sympathetic, though. The average retiree in the fund stopped working at the sprightly age of 58 and deposits a check for $2,883 each month. Many of them also got a 3.5 percent annual raise, no matter what inflation was, until the rules changed this year.
Private sector retirees who want their own monthly $2,883 check for life, complete with inflation adjustments, would need an immediate fixed annuity if they don’t have a pension. A 58-year-old male shopping for one from an A-rated insurance company would have to hand over a minimum of $860,000, according to Craig Hemke of Buyapension.com. A woman would need at least $928,000, because of her longer life expectancy.
Who among aspiring retirees has a nest egg that size, let alone people with the same moderate earning history as many state employees? And who wants to pay to top off someone else’s pile of money via increased income taxes or a radical decline in state services?
If you find the argument of Colorado’s retirees wanting, let your local legislator know that you don’t want to be responsible for every last dollar necessary to cover pension guarantees gone horribly awry. After all, many government employee unions will be taking contrary positions and doing so rather loudly.
If you work for a state or local government, start saving money outside of the pension plan if you haven’t already, because that plan may not last for as long as you need it.
And if you’re a government retiree or getting close to the end of your career? Consider what it means to be a citizen in a community. And what it means to be civil instead of litigious, coming to the table and making a compromise before politicians shove it down your throat and you feel compelled to challenge them to a courthouse brawl.
“We have to do what unions call givebacks,” said Mr. Lamm, the former Colorado governor. “That’s the only way to sanity. Any other alternative, therein lies dragons.”
The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide.
The have-nots are taxpayers who don’t have generous pensions.
Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks.
At stake is at least $1 trillion. That’s trillion, with a “t,” as in titanic and terrifying.
The figure comes from a study by the Pew Center on the States that came out in February. Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers in the way of retiree pension, health care and other benefits and the money they currently had to pay for it all. And some economists say that Pew is too conservative and the problem is two or three times as large.
So a question of extraordinary financial, political, legal and moral complexity emerges, something that every one of us will be taking into town meetings and voting booths for years to come: Given how wrong past pension projections were, who should pay to fill the 13-figure financing gap?
Consider what’s going on in Colorado — and what is likely to unfold in other states and municipalities around the country.
Earlier this year, in an act of rare political courage, a bipartisan coalition of state legislators passed a pension overhaul bill. Among other things, the bill reduced the raise that people who are already retired get in their pension checks each year.
This sort of thing just isn’t done. States have asked current workers to contribute more, tweaked the formula for future hires or banned them from the pension plan altogether. But this was apparently the first time that state legislators had forced current retirees to share the pain.
Sharing the burden seems to be the obvious solution so we don’t continue to kick the problem into the future. “We have to take this on, if there is any way of bringing fiscal sanity to our children,” said former Gov. Richard Lamm of Colorado, a Democrat. “The New Deal is demographically obsolete. You can’t fund the dream of the 1960s on the economy of 2010.”
But in Colorado, some retirees and those eligible to retire still want to live that dream. So they sued the state to keep all of the annual cost-of-living increases they thought they would be getting in perpetuity.
The state’s case turns, in part, on whether it is an “actuarial necessity” for the Legislature to make a change. To Meredith Williams, executive director of the Public Employees’ Retirement Association, the state’s pension fund, the answer is pretty simple. “If something didn’t change, we would have run out of money in the foreseeable future,” he said. “So no one would have been paid anything.”
Meanwhile, Gary R. Justus, a former teacher who is one of the lead plaintiffs in the case against the state, asks taxpayers in Colorado and elsewhere to consider an ethical question: Why is the state so quick to break its promises?
After all, he and others like him served their neighbors dutifully for decades. And along the way, state employees made big decisions (and built lifelong financial plans) based on retiring with a full pension that was promised to them in a contract that they say has the force of the state and federal constitutions standing behind it. To them it is deferred compensation, and taking it away is akin to not paying a contractor for paving state highways.
And actuarial necessity or not, Mr. Justus said he didn’t believe he should be responsible for past pension underfunding and the foolish risks that pension managers made with his money long after he retired in 2003.
The changes the Legislature made don’t seem like much: there’s currently a 2 percent cap in retirees’ cost-of-living adjustment for their pension checks instead of the 3.5 percent raise that many of them received before.
But Stephen Pincus, a lawyer for the retirees who have filed suit, estimates that the change will cost pensioners with 30 years of service an average of $165,000 each over the next 20 years.
Mr. Justus, 62, who taught math for 29 years in the Denver public schools, says he thinks it could cost him half a million dollars if he lives another 30 years. He also notes that just about all state workers in Colorado do not (and cannot) pay into Social Security, so the pension is all retirees have to live on unless they have other savings.
No one disputes these figures. Instead, they apologize. “All I can say is that I am sorry,” said Brandon Shaffer, a Democrat, the president of the Colorado State Senate, who helped lead the bipartisan coalition that pushed through the changes. (He also had to break the news to his mom, a retired teacher.) “I am tremendously sympathetic. But as a steward of the public trust, this is what we had to do to preserve the retirement fund.”
Taxpayers, whose payments are also helping to restock Colorado’s pension fund, may not be as sympathetic, though. The average retiree in the fund stopped working at the sprightly age of 58 and deposits a check for $2,883 each month. Many of them also got a 3.5 percent annual raise, no matter what inflation was, until the rules changed this year.
Private sector retirees who want their own monthly $2,883 check for life, complete with inflation adjustments, would need an immediate fixed annuity if they don’t have a pension. A 58-year-old male shopping for one from an A-rated insurance company would have to hand over a minimum of $860,000, according to Craig Hemke of Buyapension.com. A woman would need at least $928,000, because of her longer life expectancy.
Who among aspiring retirees has a nest egg that size, let alone people with the same moderate earning history as many state employees? And who wants to pay to top off someone else’s pile of money via increased income taxes or a radical decline in state services?
If you find the argument of Colorado’s retirees wanting, let your local legislator know that you don’t want to be responsible for every last dollar necessary to cover pension guarantees gone horribly awry. After all, many government employee unions will be taking contrary positions and doing so rather loudly.
If you work for a state or local government, start saving money outside of the pension plan if you haven’t already, because that plan may not last for as long as you need it.
And if you’re a government retiree or getting close to the end of your career? Consider what it means to be a citizen in a community. And what it means to be civil instead of litigious, coming to the table and making a compromise before politicians shove it down your throat and you feel compelled to challenge them to a courthouse brawl.
“We have to do what unions call givebacks,” said Mr. Lamm, the former Colorado governor. “That’s the only way to sanity. Any other alternative, therein lies dragons.”
Saturday, July 31, 2010
Stock Market News and Investing: Markets Turn Eye to Economy After Earnings Bounce - CNBC
Economic reports on jobs, manufacturing and the consumer could be what trips up stocks in the week ahead, deflating some of July's 7 percent gain.
About a third of the S&P 500 companies report earnings. Investors may, however, pay more attention to any other measure that casts light on the strength of the economy or the consumer, including Tuesday's important monthly auto sales. The July employment report, released Friday, is the most important economic report.
"We're going to lose that catalyst we had, which was better than expected earnings," said Jefferies managing director Art Hogan. "The problem is we've run out of steam."
"We probably will have more inclination to be concerned about the pace of the economy and will trade off on it," said Hogan. "...If we're shifting our focus to economic data versus earnings, the tendency of that has been to be a negative catalyst rather than a positive catalyst."
The S&P 500 companies reporting so far have seen quarterly profit increases of 45 percent on average. Of those companies, 75 percent topped earnings estimates and 64 percent beat revenue expectations. A mix of consumer, media, insurers and financial companies dominate the coming week's calendar, and the companies reporting include Procter and Gamble [PG 61.16 -0.51 (-0.83%) ], Kraft [KFT 29.21 0.10 (+0.34%) ], Time Warner [TWX 31.46 0.20 (+0.64%) ], News Corp [NWS 14.79 0.17 (+1.16%) ], MasterCard [MA 210.04 1.67 (+0.8%) ] and Berkshire Hathaway
[BRK'B 78.12 0.08 (+0.1%) ]. (See the full earnings calendar here.)
Stocks in the past month have seen an earnings bounce, as they struggled against a patch of weaker economic reports. The market was nearly flat Friday, overcoming an initial sell off after second quarter GDP of 2.4 percent disappointed some investors and sent economists to work adjusting their second half forecasts.
Mark Zandi of Moody's Economy.com is one of those looking to revise his third quarter GDP forecast, and he may trim it to under 2 percent. "One very big concern was a very large contribution of inventories to Q2 and that sets us up for a soft Q3. That's consistent with the idea the economy is growing but still below trend, and that gets to the employment report of next week," he said.
Zandi expects a decline of 50,000 non farm payrolls for July, including the elimination of 150,000 government census workers. He expects to see private payrolls grow by 100,000. In June, the economy added 41,000 non farm payrolls.
Stephen Stanley, chief economist at Pierpont Securities, expects a decline of 100,000, including a reduction of about 150,000 census workers. He said some consumer driven data in the coming week may show some signs of improvement.
"June was clearly a very soft month for the economy. My sense is July is better. The reports on auto sales are going to be up for the month...The weekly numbers suggest consumers were spending at the mall again," he said.
Whither Stocks
The Dow, up 7 percent for the month, ended up just slightly on the week, gaining 41 points to 10,465. The S&P 500 was up just 1 point for the week, to 1101, but it is up 6.9 percent for the month. The Nasdaq was up 14 points for the week, to 2254, and it has a 6.9 percent gain for the month. Materials shares were the best performers in July, up 12 percent, followed by industrials, up 10 percent. The worst performing major S&P sector was health care, up just 1.3 percent.
"The market's volatile and that's going to continue to be the case. I don't think we're up, up and away. Earnings season has been good generally, but not as good as last quarter," said Stuart Freeman, chief equity strategist at Wells Fargo Advisors.
"We think we're going to see more up and down, up and down volatility. It's possible we move a little higher into the late earnings season, but it's possible we come down in the fall," he said.
Freeman said unlike last year when the market was in a strong recovery, stocks are likely to respond in a more traditional way to seasonal factors and could face a choppy September and October.
"We would expect it to be volatile just because it's a mid-cycle election year, which often causes some consternation and volatility in the market," Freeman said. He expects the market to rise once again after the election is over.
The S&P 500 this past week closed above its 200-day moving average of 1113, but then slid below it. "It doesn't really tell you much about what's going to happen with the fundamentals. I guess that we're sitting at that point where it's going to lead to volatility as we bounce under and over it. There's a good chance we go back over it., but I think that we probably go back under too," said Freeman of the 200-day.
"I think if we don't see some more pullbacks between now and the middle of October, and it looks like investors are feeling better by that period of time, we may have passed through an important period of risk there. Between now and the early part of October, if the seasonal factors and fears of slowing aren't born out in the data we're getting, we may be getting ready to create that second leg up already," he said.
"Our target is still 1100 to 1140 (on the S&P 500) at the end of the year, and I don't think we're going to see it in a straight line," said Freeman.
In the past month, 20 companies in the S&P 500 increased dividends, according to Standard and Poor's. That compares to just eight in the same month last year.
"Yields are so low by historical standards that (dividend yields) are higher than the 10-year Treasury, which you don't get often," said Jack Ablin, CIO of Harris Private Bank.
Ablin has been cautious on the market ever since the S&P fell 5 percent below it's 200-day moving average on June 8.
"Actually, I wouldn't mind if you just clip a dividend and keep your head down," said Ablin. "What we're seeing is in this kind of market is go for dividends right now and growth. It's possible it could come from some other place, but at this stage, dividends to me have a much higher degree of certainty than the prospects for higher revenues."
Ablin said there is a chance the market could surprise on the upside. "It's one of those things where from a technical standpoint, if we break out we're going to add some risk. But we're likely to do it in some place out of the way, like real estate, not equities. Aside from that, I don't see a huge catalyst to the upside unless all of a sudden these temporary jobs turn into full time jobs," he said.
Treasurys this past week saw yields in some durations gap to record levels against the 30-year bond. The gap between the 10-year and 30-year yields reached 110 basis points at one point Friday. It had been about 90 in the spring. The yield on the 10-year was at 2.91 percent Friday, while the 30-year was at 3.99 percent, down from 4.03 percent a week earlier.
"The market could clearly be vulnerable to stronger data at these yield levels," said John Briggs, Treasury strategist at RBS. He pointed to the surprising strength in Chicago Purchasing managers data Friday.
"It will be interesting to see if the ISM confirms that. Chicago was the first growth indicator that went the other way," said Briggs, noting if the ISM confirms that story it will surprise the market.
The dollar was down 0.89 percent on the week against the euro, and is down 6.2 percent for the month, at a level of $1.3033.
"The dollar is the only constant mover this week," said Brian Dolan of Forex.com. "We can see some stabilization and consolidation, but the risk is the dollar breaks down further and we see more dollar weakness on data, and just on flows."
What to Watch
In addition to U.S. data, investors will be watching China's PMI, released overnight New York time on Sunday. There is also a speech on the economy from Fed Chairman Ben Bernanke Monday.
Bernanke's topic is challenges for the economy and state governments, and he speaks at 10:15 a.m. New York time before the Southern Legislative Conference annual meeting in Charleston, S.C. Treasury Secretary Tim Geithner also speaks Monday afternoon, on financial reform at New York University's Stern School at 4 p.m.
Other important reports include ISM manufacturing data Monday and ISM non manufacturing Wednesday. Both of those reports hold a key employment component.
Personal income is released Tuesday, and consumer credit is reported Friday. Economists will be watching monthly auto sales Tuesday and chain stores' monthly sales Thursday for clues as to the consumers' willingness to spend. ADP's employment report is Wednesday and weekly jobless claims are Thursday. Pending home sales are reported Tuesday.
The European Central Bank and Bank of England hold rate meetings Thursday.
About a third of the S&P 500 companies report earnings. Investors may, however, pay more attention to any other measure that casts light on the strength of the economy or the consumer, including Tuesday's important monthly auto sales. The July employment report, released Friday, is the most important economic report.
"We're going to lose that catalyst we had, which was better than expected earnings," said Jefferies managing director Art Hogan. "The problem is we've run out of steam."
"We probably will have more inclination to be concerned about the pace of the economy and will trade off on it," said Hogan. "...If we're shifting our focus to economic data versus earnings, the tendency of that has been to be a negative catalyst rather than a positive catalyst."
The S&P 500 companies reporting so far have seen quarterly profit increases of 45 percent on average. Of those companies, 75 percent topped earnings estimates and 64 percent beat revenue expectations. A mix of consumer, media, insurers and financial companies dominate the coming week's calendar, and the companies reporting include Procter and Gamble [PG 61.16 -0.51 (-0.83%) ], Kraft [KFT 29.21 0.10 (+0.34%) ], Time Warner [TWX 31.46 0.20 (+0.64%) ], News Corp [NWS 14.79 0.17 (+1.16%) ], MasterCard [MA 210.04 1.67 (+0.8%) ] and Berkshire Hathaway
[BRK'B 78.12 0.08 (+0.1%) ]. (See the full earnings calendar here.)
Stocks in the past month have seen an earnings bounce, as they struggled against a patch of weaker economic reports. The market was nearly flat Friday, overcoming an initial sell off after second quarter GDP of 2.4 percent disappointed some investors and sent economists to work adjusting their second half forecasts.
Mark Zandi of Moody's Economy.com is one of those looking to revise his third quarter GDP forecast, and he may trim it to under 2 percent. "One very big concern was a very large contribution of inventories to Q2 and that sets us up for a soft Q3. That's consistent with the idea the economy is growing but still below trend, and that gets to the employment report of next week," he said.
Zandi expects a decline of 50,000 non farm payrolls for July, including the elimination of 150,000 government census workers. He expects to see private payrolls grow by 100,000. In June, the economy added 41,000 non farm payrolls.
Stephen Stanley, chief economist at Pierpont Securities, expects a decline of 100,000, including a reduction of about 150,000 census workers. He said some consumer driven data in the coming week may show some signs of improvement.
"June was clearly a very soft month for the economy. My sense is July is better. The reports on auto sales are going to be up for the month...The weekly numbers suggest consumers were spending at the mall again," he said.
Whither Stocks
The Dow, up 7 percent for the month, ended up just slightly on the week, gaining 41 points to 10,465. The S&P 500 was up just 1 point for the week, to 1101, but it is up 6.9 percent for the month. The Nasdaq was up 14 points for the week, to 2254, and it has a 6.9 percent gain for the month. Materials shares were the best performers in July, up 12 percent, followed by industrials, up 10 percent. The worst performing major S&P sector was health care, up just 1.3 percent.
"The market's volatile and that's going to continue to be the case. I don't think we're up, up and away. Earnings season has been good generally, but not as good as last quarter," said Stuart Freeman, chief equity strategist at Wells Fargo Advisors.
"We think we're going to see more up and down, up and down volatility. It's possible we move a little higher into the late earnings season, but it's possible we come down in the fall," he said.
Freeman said unlike last year when the market was in a strong recovery, stocks are likely to respond in a more traditional way to seasonal factors and could face a choppy September and October.
"We would expect it to be volatile just because it's a mid-cycle election year, which often causes some consternation and volatility in the market," Freeman said. He expects the market to rise once again after the election is over.
The S&P 500 this past week closed above its 200-day moving average of 1113, but then slid below it. "It doesn't really tell you much about what's going to happen with the fundamentals. I guess that we're sitting at that point where it's going to lead to volatility as we bounce under and over it. There's a good chance we go back over it., but I think that we probably go back under too," said Freeman of the 200-day.
"I think if we don't see some more pullbacks between now and the middle of October, and it looks like investors are feeling better by that period of time, we may have passed through an important period of risk there. Between now and the early part of October, if the seasonal factors and fears of slowing aren't born out in the data we're getting, we may be getting ready to create that second leg up already," he said.
"Our target is still 1100 to 1140 (on the S&P 500) at the end of the year, and I don't think we're going to see it in a straight line," said Freeman.
In the past month, 20 companies in the S&P 500 increased dividends, according to Standard and Poor's. That compares to just eight in the same month last year.
"Yields are so low by historical standards that (dividend yields) are higher than the 10-year Treasury, which you don't get often," said Jack Ablin, CIO of Harris Private Bank.
Ablin has been cautious on the market ever since the S&P fell 5 percent below it's 200-day moving average on June 8.
"Actually, I wouldn't mind if you just clip a dividend and keep your head down," said Ablin. "What we're seeing is in this kind of market is go for dividends right now and growth. It's possible it could come from some other place, but at this stage, dividends to me have a much higher degree of certainty than the prospects for higher revenues."
Ablin said there is a chance the market could surprise on the upside. "It's one of those things where from a technical standpoint, if we break out we're going to add some risk. But we're likely to do it in some place out of the way, like real estate, not equities. Aside from that, I don't see a huge catalyst to the upside unless all of a sudden these temporary jobs turn into full time jobs," he said.
Treasurys this past week saw yields in some durations gap to record levels against the 30-year bond. The gap between the 10-year and 30-year yields reached 110 basis points at one point Friday. It had been about 90 in the spring. The yield on the 10-year was at 2.91 percent Friday, while the 30-year was at 3.99 percent, down from 4.03 percent a week earlier.
"The market could clearly be vulnerable to stronger data at these yield levels," said John Briggs, Treasury strategist at RBS. He pointed to the surprising strength in Chicago Purchasing managers data Friday.
"It will be interesting to see if the ISM confirms that. Chicago was the first growth indicator that went the other way," said Briggs, noting if the ISM confirms that story it will surprise the market.
The dollar was down 0.89 percent on the week against the euro, and is down 6.2 percent for the month, at a level of $1.3033.
"The dollar is the only constant mover this week," said Brian Dolan of Forex.com. "We can see some stabilization and consolidation, but the risk is the dollar breaks down further and we see more dollar weakness on data, and just on flows."
What to Watch
In addition to U.S. data, investors will be watching China's PMI, released overnight New York time on Sunday. There is also a speech on the economy from Fed Chairman Ben Bernanke Monday.
Bernanke's topic is challenges for the economy and state governments, and he speaks at 10:15 a.m. New York time before the Southern Legislative Conference annual meeting in Charleston, S.C. Treasury Secretary Tim Geithner also speaks Monday afternoon, on financial reform at New York University's Stern School at 4 p.m.
Other important reports include ISM manufacturing data Monday and ISM non manufacturing Wednesday. Both of those reports hold a key employment component.
Personal income is released Tuesday, and consumer credit is reported Friday. Economists will be watching monthly auto sales Tuesday and chain stores' monthly sales Thursday for clues as to the consumers' willingness to spend. ADP's employment report is Wednesday and weekly jobless claims are Thursday. Pending home sales are reported Tuesday.
The European Central Bank and Bank of England hold rate meetings Thursday.
Friday, July 30, 2010
Economists Expect Slower Growth in Second Half - CNBC
Two steps forward, one step back. That describes the current thinking about a year into the putative economic recovery.
On Friday, the government will release its report on the nation’s output for the second quarter, showing how much, if at all, the economy downshifted as the summer began.
Many economists — concerned about the sluggish pace of job creation, dwindling housing activity and decelerating retail sales — say that slowdown is continuing this summer and have recently downgraded their expectations for the second half of the year.
“Practically every Street economist took a knife to Q2 and Q3 G.D.P. growth,” David A. Rosenberg, chief economist for Gluskin Sheff, wrote last week in a note to clients, referring to Wall Street forecasts for gross domestic product. For the second-quarter results to be released Friday, economists project a modest annualized gain of 2.6 percent, down from 2.7 percent in the first quarter and 5.6 percent in the final quarter of last year.
Though some people started the year hoping for stronger results, economists say that the slow pace of growth should have been expected.
“So far, the recovery is remarkably normal for a postfinancial-crisis recovery,” said Kenneth S. Rogoff, a professor at Harvard and co-author, with Carmen M. Reinhart, of “This Time Is Different,” an economic history of financial crises.
“It doesn’t mean that we should cheer that it’s been so grim,” added Mr. Rogoff, who is a former chief economist of the International Monetary Fund. “But on the other hand, it’s not necessarily a reason to panic.”
Even shares in companies that are more ebullient, likeDelta Air Lines and Amazon.com, have been driven down by nervous investors when executives announced plans to increase capacity or hire aggressively.
Perhaps Ben S. Bernanke, chairman of the Federal Reserve, put it best this month when he described the outlook for the United States economy as “unusually uncertain.”
The news in recent weeks has been rather bleak. A crucial index of consumer confidence, which was rising strongly earlier this year, dropped for the second month in a row in July, while sales of existing homes have fallen for two consecutive months. Employers are adding fewer jobs than they were just a few months ago, and banks are lending less to companies than they were a year earlier, even after relatively good second quarter-corporate profits.
Earlier this year, expectations were much higher. The National Association of Home Builders, for example, forecast that buyers would sign contracts for 467,000 new homes this year; now it is projecting that they will buy just 375,000 homes — down almost 20 percent.
“We just thought that overall, the economy would have been doing better than it’s been doing,” said Bernard Markstein, senior economist with the home builders.
At the start of the year, manufacturing seemed to be staging a comeback as companies replenished inventories that fell very low during the recession. Many economists assumed that once products were back on shelves, consumers would start buying enough to deplete warehouse inventories. Now, consumer demand appears not quite strong enough.
Many companies that have reported impressive results this earnings season, including bellwethers like United Parcel Service and 3M, indicated that their sales swelled mostly outside the United States.
As a result, companies are still not hiring nearly as many people in the United States as policy makers — and the unemployed — want. The unemployment rate, at 9.5 percent, is not far off the peak of 10.1 percent, and 6.75 million people have been out of work for more than six months.
Part of the slowdown stems from the expiration of stimulus measures like the home buyer tax credit and the cash for clunkers program to bolster auto sales. But it is also perhaps the inevitable aftermath of a protracted era of credit-driven excess, buoyed by inflated housing prices.
Earlier this year, some economists projected stronger growth rates in part because they were looking at recessions in the early 1990s and the early 1980s. The problem with such analogies is that the latest recession was precipitated by a financial crash rather than more cyclical boom-and-bust factors.
Many Wall Street economists and investors have “been too willing to see this as a normal cyclical event distorted by some crazy things going on in housing,” said Ian Shepherdson, chief United States economist at High Frequency Economics, “whereas this was almost entirely driven by what was going on in the financial markets and houses.”
Consumers who used their skyrocketing home values to borrow ever larger sums of money to feed further spending are now paying off that debt, which hampers their spending. That process is “very slow and painful,” said Joshua Shapiro, chief United States economist at MFR Inc. “There is not that much that can be done about it, as much as politicians would love to find some silver bullet.”
In fact, politicians are debating quite ferociously whether more needs to be done to usher the economy along. The fiercest arguments are over whether to inject further stimulus spending into the economy and whether to let the tax cuts for the wealthy enacted under President George W. Bush expire at the end of the year.
There are those who argue that the current slowdown is just a hiccup, caused in part by tremors in Europe and concerns about a hard landing in China.
“We were hit by these shocks,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “But as we get additional evidence that the European economies are able to withstand the debt crisis and as banks are showing they have stronger capital and Chinese policy makers are successfully able to avoid any sharp downturn, that will be reflected in higher confidence among U.S. businesses and consumers.”
On the ground, slow growth has spawned a cautious mood that is feeding — you have it — slow growth.
“A lot of people are looking at things with the glass half empty,” said Douglas C. Yearley Jr., chief executive of Toll Brothers, the home builder. “And they’re temporarily on the sidelines.”
Companies, meanwhile, are not yet ready to capitalize on good news. Although 3M, which makes things as diverse as Post-it Notes and screen coatings for iPads, announced strong earnings growth in the second quarter, its chief executive, George W. Buckley, told analysts that he expected a slowdown in the second half and that “hiring will likely be low.”
At U.P.S., the company’s familiar brown trucks delivered an average of 153,000 more packages a day in the United States during the second quarter than in the comparable period a year earlier.
But the company, which has about 18,000 fewer people in package sorting centers and on driving routes in the United States than at its peak two years ago, said it was not yet hiring in great numbers. “The bottom line is that the growth in the U.S. just isn’t quite there in terms of generating jobs right now,” said Norman Black, a U.P.S. spokesman.
Industrial companies may wait to hire until early next year, after they have maximized productivity gains among current workers. “Traditionally, when you come out of a down cycle, there’s normally a fairly high reluctance to hire,” said Scott R. Davis of Morgan Stanley. “Investors and boards of directors don’t want to see them hire people until business is 100 percent back.”
Some businesses are desperate to hire but just do not see the demand to justify it. Dan Cutillo, the owner of a string of pizza delivery shops near Toledo, said penny-pinching customers are not ordering as much. At one of his stores, he said, the staff is now half the size it was a year ago.
“I should be doing larger sales,” Mr. Cutillo added. “I should be hiring more people.”
This story originally appeared in the The New York Times
On Friday, the government will release its report on the nation’s output for the second quarter, showing how much, if at all, the economy downshifted as the summer began.
Many economists — concerned about the sluggish pace of job creation, dwindling housing activity and decelerating retail sales — say that slowdown is continuing this summer and have recently downgraded their expectations for the second half of the year.
“Practically every Street economist took a knife to Q2 and Q3 G.D.P. growth,” David A. Rosenberg, chief economist for Gluskin Sheff, wrote last week in a note to clients, referring to Wall Street forecasts for gross domestic product. For the second-quarter results to be released Friday, economists project a modest annualized gain of 2.6 percent, down from 2.7 percent in the first quarter and 5.6 percent in the final quarter of last year.
Though some people started the year hoping for stronger results, economists say that the slow pace of growth should have been expected.
“So far, the recovery is remarkably normal for a postfinancial-crisis recovery,” said Kenneth S. Rogoff, a professor at Harvard and co-author, with Carmen M. Reinhart, of “This Time Is Different,” an economic history of financial crises.
“It doesn’t mean that we should cheer that it’s been so grim,” added Mr. Rogoff, who is a former chief economist of the International Monetary Fund. “But on the other hand, it’s not necessarily a reason to panic.”
Even shares in companies that are more ebullient, likeDelta Air Lines and Amazon.com, have been driven down by nervous investors when executives announced plans to increase capacity or hire aggressively.
Perhaps Ben S. Bernanke, chairman of the Federal Reserve, put it best this month when he described the outlook for the United States economy as “unusually uncertain.”
The news in recent weeks has been rather bleak. A crucial index of consumer confidence, which was rising strongly earlier this year, dropped for the second month in a row in July, while sales of existing homes have fallen for two consecutive months. Employers are adding fewer jobs than they were just a few months ago, and banks are lending less to companies than they were a year earlier, even after relatively good second quarter-corporate profits.
Earlier this year, expectations were much higher. The National Association of Home Builders, for example, forecast that buyers would sign contracts for 467,000 new homes this year; now it is projecting that they will buy just 375,000 homes — down almost 20 percent.
“We just thought that overall, the economy would have been doing better than it’s been doing,” said Bernard Markstein, senior economist with the home builders.
At the start of the year, manufacturing seemed to be staging a comeback as companies replenished inventories that fell very low during the recession. Many economists assumed that once products were back on shelves, consumers would start buying enough to deplete warehouse inventories. Now, consumer demand appears not quite strong enough.
Many companies that have reported impressive results this earnings season, including bellwethers like United Parcel Service and 3M, indicated that their sales swelled mostly outside the United States.
As a result, companies are still not hiring nearly as many people in the United States as policy makers — and the unemployed — want. The unemployment rate, at 9.5 percent, is not far off the peak of 10.1 percent, and 6.75 million people have been out of work for more than six months.
Part of the slowdown stems from the expiration of stimulus measures like the home buyer tax credit and the cash for clunkers program to bolster auto sales. But it is also perhaps the inevitable aftermath of a protracted era of credit-driven excess, buoyed by inflated housing prices.
Earlier this year, some economists projected stronger growth rates in part because they were looking at recessions in the early 1990s and the early 1980s. The problem with such analogies is that the latest recession was precipitated by a financial crash rather than more cyclical boom-and-bust factors.
Many Wall Street economists and investors have “been too willing to see this as a normal cyclical event distorted by some crazy things going on in housing,” said Ian Shepherdson, chief United States economist at High Frequency Economics, “whereas this was almost entirely driven by what was going on in the financial markets and houses.”
Consumers who used their skyrocketing home values to borrow ever larger sums of money to feed further spending are now paying off that debt, which hampers their spending. That process is “very slow and painful,” said Joshua Shapiro, chief United States economist at MFR Inc. “There is not that much that can be done about it, as much as politicians would love to find some silver bullet.”
In fact, politicians are debating quite ferociously whether more needs to be done to usher the economy along. The fiercest arguments are over whether to inject further stimulus spending into the economy and whether to let the tax cuts for the wealthy enacted under President George W. Bush expire at the end of the year.
There are those who argue that the current slowdown is just a hiccup, caused in part by tremors in Europe and concerns about a hard landing in China.
“We were hit by these shocks,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “But as we get additional evidence that the European economies are able to withstand the debt crisis and as banks are showing they have stronger capital and Chinese policy makers are successfully able to avoid any sharp downturn, that will be reflected in higher confidence among U.S. businesses and consumers.”
On the ground, slow growth has spawned a cautious mood that is feeding — you have it — slow growth.
“A lot of people are looking at things with the glass half empty,” said Douglas C. Yearley Jr., chief executive of Toll Brothers, the home builder. “And they’re temporarily on the sidelines.”
Companies, meanwhile, are not yet ready to capitalize on good news. Although 3M, which makes things as diverse as Post-it Notes and screen coatings for iPads, announced strong earnings growth in the second quarter, its chief executive, George W. Buckley, told analysts that he expected a slowdown in the second half and that “hiring will likely be low.”
At U.P.S., the company’s familiar brown trucks delivered an average of 153,000 more packages a day in the United States during the second quarter than in the comparable period a year earlier.
But the company, which has about 18,000 fewer people in package sorting centers and on driving routes in the United States than at its peak two years ago, said it was not yet hiring in great numbers. “The bottom line is that the growth in the U.S. just isn’t quite there in terms of generating jobs right now,” said Norman Black, a U.P.S. spokesman.
Industrial companies may wait to hire until early next year, after they have maximized productivity gains among current workers. “Traditionally, when you come out of a down cycle, there’s normally a fairly high reluctance to hire,” said Scott R. Davis of Morgan Stanley. “Investors and boards of directors don’t want to see them hire people until business is 100 percent back.”
Some businesses are desperate to hire but just do not see the demand to justify it. Dan Cutillo, the owner of a string of pizza delivery shops near Toledo, said penny-pinching customers are not ordering as much. At one of his stores, he said, the staff is now half the size it was a year ago.
“I should be doing larger sales,” Mr. Cutillo added. “I should be hiring more people.”
This story originally appeared in the The New York Times
Subscribe to:
Posts (Atom)