Saturday, 31 May 2008

XAO gains in May

The All Ords defied my expectations in May rising 2.1%. The XAO actually breached the 6000 barrier closing at a high of 6035 on May 19th only to shed -4.3% over the last two weeks. So what can we expect in June?

If we take a look at history, June has actually been the worst month in terms of how often it rises. In fact June is the only month over the last 23 years in which the XAO has been negative more times than it has been positive. The chart below shows that the month of June has only been positive 39% of the time or in 9 years out of the past 23.

So does that mean June has a high likelihood of being negtive? Absolutely not. However I do think it will decline because the deluge of data both economic and company specific will continue to come in on the negative side.

Despite the bottom-callers best efforts housing is still in the can and defaults on all kinds of credits are rising rapidly, whether it be mortgages, auto loans, credit cards, student loans or HELOC's. Not to mention the tapped-out consumer buffeted by high energy and food costs that is unable to tap the value of their home to fund spending.

Next Friday's US employment report should be interesting as well. Whilst intial unemployment claims are hovering around 370k per week, continuing claims are edging higher, showing that whilst job losses may not be huge, new jobs are not being created.

What are the risks to my outlook? Oil could retreat under $120 a barrell, causing the US dollar to stabilize and the stockmarket to rally. In fact Fed fund futures are now pricing in interest rate hikes by October. That is commensurate with the view that everything will be turning up roses in the second half of the year.

As often repeated here, I think this outlook is overly optimistic. Yes, spending will receive a boost via the rebate checks but the financial sector is going to do it tough as credit standards continue to tighten and banks are forced to raise reserve limits because of a tide of rapidly rising deliquencies. There is just no way the economy can put in a strong recovery whilst the financial sector is battening down the hatches.

Also, company profits will continue to disappoint. Currently 2Q08 operating earnings for S&P500 companies are expected to be down -6.1%. As has been the case for the past 3 quarters, it will be much worse than current expectations.

As usual I believe forecasting the short term direction of the stockmarket is a mugs game but I continue to do it because it provides a bit of entertainment. So after two consecutive monthly rises my view is that the XAO will decline in the month of June.

Thursday, 29 May 2008

UK Home Prices Plunge in May

I used to include the commentary that accompanies the monthly figures from Nationwide. However, the Nationwide economist,Fionnuala Earley is starting to come out with absurdly optimistic statements that rival Lawrence Yun at the NAR.

The point is that house prices have experienced a huge run up this decade and are now reverting back to the mean. House prices are now off -6.7% from their peak in October of last year. Those declines have a lot further to go before there is any kind of stabilization in the UK housing market.

Wednesday, 28 May 2008

More Signs of a Slowing Aussie Economy

There are increasing signs that the Australian economy is slowing. The RBA may have done enough by raising interest rates to 7.25%. However they still remain very concerned about inflation. An overblown fear in my view, particularly given the fultility of inflation targetting in an environment where much of the inflation is being imported. from the smh:

Economy headed for slowdown - survey

Australia is heading for an abrupt slowdown in economic growth, a new survey shows.

The Westpac-Melbourne Institute leading index of economic activity released on Wednesday shows the annualised growth rate was 3.3 per cent in March, below its long-term trend growth rate of 4.4 per cent.

It was also the index's lowest reading since March 2004.

"The leading index continues to point to an abrupt slowdown in economic activity," Westpac senior economist Matthew Hassan said.

The index indicates the likely pace of economic activity three to nine months into the future.

The index has more than halved since November last year when the annual growth rate was 6.9 per cent.

"In fact the index is now further below trend than at any other time in nearly five years," Mr Hassan said.

Meanwhile, the annualised growth rate of the coincident index was 3.4 per cent in March, and below its long term trend of 3.8 per cent.

Mr Hassan said both indices are consistent with Westpac's view that domestic demand has slowed and will continue to slow over the remainder 2008 and into 2009.

The bank expects domestic spending growth to fall to 2.7 per cent in 2008, from 5.7 per cent in 2007, and to 2.1 per cent in 2009.

Case Shiller Home Prices Continue to Plunge

From S&P:

Data through March 2008, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, shows continued broad based declines in the prices of existing single family homes across the United States, a trend that prevailed throughout 2007 and has continued into the first quarter of 2008.

The chart above depicts the annual returns of the U.S. National Home Price, the 10-City Composite and the 20-City Composite Indices. The decline in the S&P/Case-Shiller U.S. National Home Price Index – which covers all nine U.S. census divisions – reached well into double digits, recording a 14.1% decline in the 1st quarter of 2008 versus the 1st quarter of 2007, the largest in the series 20-year history. As a comparison, during the 1990-91 housing recession the annual rate bottomed at -2.8%. The 10-City and 20-City Composites also set new records, with annual declines of -15.3% and -14.4%, respectively.

I included the chart above for no particular reason other than that it looks kind of cool. The chart at the top tells the full story. Home price declines continue unabated.

Monday, 26 May 2008

Surge in Bank Failures Inevitable

As the short hiatus in the credit crisis after the Bear Stearns bailout begins to fade, the economic realities of one of the biggest financial crises in history are starting to reassert themselves. from

Bank failures to surge in coming years

"At this point in the crisis, you can't stop bank failures," said Joseph Mason, associate professor of finance at Drexel University's LeBow College of Business, who has studied past financial crises.

"At this point you manage through failures and arrange marriages where another stronger bank takes on the assets and deposits," he said. "You move through the problem. You don't avoid the problem. It's too late to wait and hope that things get better."

Things may get worse before they get better. At least 150 banks will fail in the U.S. during the next two to three years, according to a projection by Gerard Cassidy and his colleagues at RBC Capital Markets.

If the current economic slowdown deteriorates into a recession on the scale of those from the 1980s and early 1990's, the number of failures will be much higher this time around -- probably as high as 300 of them, by RBC's reckoning. That's a massive surge compared to the recent boom years of the credit and real estate markets. From the second half of 2004 through end of 2006 there were 10 consecutive quarters without a bank failure in the U.S. -- a record length of time, Cassidy notes.

"This downturn will trigger a significant amount of bank failures relative to the past five years," he said. "There has been excessive loan growth and some banks won't be able to access capital markets to replace the money that will disappear as credit losses rise."

click on the link for the full story.

Saturday, 24 May 2008

Housing Inventory Continues to Climb

The consistent call from the housing bottom callers has been that as prices come down, buyers will be attracted back into the market, sales will stabilize and inventories would begin to be cleared. However, as evidenced by yesterday's existing home sales report in the US, that is simply not happening. From the NAR:

Total housing inventory at the end of April rose 10.5 percent to 4.55 million existing homes available for sale, which represents an 11.2-month supply at the current sales pace, up from a 10.0-month supply in March.
To put that inventory number in perspective, take a look at the inventory chart below from courtesy of calculated

Inventories have not been this high since the nasty recession of 1982. The bottom-callers continue to be wrong and will continue to be wrong for a couple of very simple reasons.Prices will continue to fall, lending restrictions, despite what the NAR says, will remain tight and the mass of foreclosures which continues to rise, will force yet more inventory onto the market.

Meanwhile OFHEO is confirming what we already knew from the Case-Shiller indices, that home price delines accelerated in 1Q08.


U.S. home prices fell in the first quarter of 2008 according to OFHEO’s seasonally-adjusted purchase-only house price index. The index, which is based on data from home sales, was 1.7 percent lower on a seasonally-adjusted basis in the first quarter than in the fourth quarter of 2007. This decline exceeded the 1.4 percent price decline between the third and fourth quarters of 2007 and is the largest quarterly price decline on record. Over the past year, prices fell 3.1 percent between the first quarter of 2007 and the first quarter of 2008. This is the largest decline in the purchase only index’s 17-year history.

Meanwhile, Alt-A which represents the bulk of the next nasty wave of US mortgage delinquiencies are rising rapidly. From Reuters:

Subprime, Alt-A mortgage delinquencies rising: S&P

Delinquencies for Alt-A mortgages rated between 2005 and 2007 are climbing, with total delinquencies rising as high as 17 percent in some cases, more than 6 percentage points higher than previous estimates, the ratings agency said in a report.Lower-quality subprime mortgage delinquencies soared as high as 37 percent for mortgages originated in 2006, 4 percentage points higher than previous estimates, S&P said.Subprime mortgages originated in 2007 saw delinquencies climb to almost 26 percent, 6 percentage points higher.

Of course, sooner or later the bottom callers will be right, but I doubt that will be anytime soon given the current state of affairs.

Thursday, 22 May 2008

Fed Data Gives Little Cause For Optimism

The Fed released the minutes of the April 29-30 meeting along with a summary of economic projections yesterday. Those projections were none too pretty.

  • 2008 real GDP growth revised from 1.3 - 2.0% to 0.3 - 1.2%.
  • Unemployment rate revised from 5.2 - 5.3% to 5.5 - 5.7%.
  • PCE inflation revised from 2.1-2.4% to 3.1 -3.4%.
  • Core Inflation revised from 2.0 - 2.2% to 2.2% -2.4%.

None of these measures are moving in the right direction. They are are all moving in a direction that is commensurate with a weakening economy buffeted by higher prices for food and energy.

Meanwhile more positive news from the Fed in the form of delinquency rates in 1Q08. The graph below comes from Calculated Risk:

Credit card delinquency rates are at 4.86%, about the same level as the peak of '01 recession. Credit card delinquencies peaked at 5.45% in the '91 recession.

Commercial real estate delinquencies are rising rapidly, and are at the highest rate since '95 (as delinquency rates declined following the S&L crisis).

Residential real estate delinquencies are at the highest level since the Fed started tracking the data (since Q1 '91).

You don't have to be an economic forecaster to see where these figures are headed. C'card delinquencies have already hit 2001 recession highs, no doubt they will push through the highs of the 91 recession also.

Commercial Real Estate delinquencies are at a 13 year high and real estate delinquencies are at their highest since statistics started to be compiled back in 1991. None of these trends are headed lower or even look like moderating. Here is what Goldman Sachs had to say about the latest figures:

"The Fed’s first-quarter report on loan performance at commercial banks shows mortgage credit quality deteriorating at an accelerating pace. ...

The rapid pace of deterioration is particularly significant because the mortgage holdings of commercial banks appear to be tilted toward higher-quality loans, with more prime and less subprime. ...

The Fed data suggest that mortgage credit performance outside the subprime sector is deteriorating rapidly. This reinforces our long-standing view that the surge in mortgage defaults is much broader than simply a reflection of poor underwriting standards in specific subprime vintages. We don’t doubt that lax underwriting standards were an important issue. But the main driver of the defaults is the decline in home prices, the increase in negative equity positions, and the resulting inability of borrowers who encounter financial stress to sell or refinance their way out of trouble. Although subprime borrowers are more likely to encounter financial stress than prime borrowers—and the share of negative-equity borrowers who will end up defaulting is therefore much higher in the subprime sector—the qualitative outlook for the trajectory of credit losses in the much larger prime market is not all that different."

The stockmarket once again, has clearly gotten ahead of itself. The notion that this widespread deleveraging of credit has been fully discounted in financial markets is wishful thinking.

Tuesday, 20 May 2008

RBA Mulls More Interest Rate Rises

If you thought the RBA was done cutting rates, you might need to think again. Whilst another rate hike is no certainty, the minutes from the RBA's Monetary Policy meeting on May 6th released today, showed the RBA is still very concerned about the outlook for inflation. Here is the money quote:

The question therefore remained whether the setting of monetary policy was sufficiently restrictive to secure low inflation over time. Members spent considerable time discussing the case for a further rise in the cash rate. But on balance, given the substantial tightening in financial conditions since mid 2007, and the extent of uncertainty surrounding the outlook, the Board decided that it was appropriate to allow the current setting of monetary policy more time to work. However, should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, the outlook, and the stance of policy, would need to be reviewed. The Board would need to evaluate prospects for economic activity and inflation in the light of incoming information.

The RBA is in a tough spot, there are clear signs that demand is slowing domestically but inflation continues to power along above 4% and is now expected to stay at those levels through the rest of 2008. Further evidence of a slowing domestic economy and a moderation in inflation needs to be seen for the RBA to lighten up on its hawkish tone.

Monday, 19 May 2008

1Q08 S&P500 Earnings Continue To Tumble

With 94% of S&P500 companies having reported, 1Q08 operating earnings are down -25.6% from the same time last year. That compares with an estimate of 9.1% six months ago and -5.8% just one month ago. 2Q08 is currently forecast to show an earnings decline of -5.4%, no doubt the actual will be much worse.

Analysts continue to have rosy views of the third and fourth quarters. As mentioned here before, comps for financial companies will be much easier, however estimates of 16.8% growth for 3Q08 and a ridiculous 68.9% for 4Q08 need to come down considerably.

The much worse than expected first quarter has dragged down expected earnings growth in FY08 to 8.4%. Just a month ago it was estimated at more than twice that. However I believe the current estimate is still wildly optimistic and that earnings growth will be negative for the full year.

The market seems content for now to look beyond the first half of 2008 and assume the worst is behind us. However high expectations for a second half rebound in both earnings and economic growth are setting the scene for disappointment if, as I suspect, the data does not live up to expectations.

Friday, 16 May 2008

Bank of Last Resort Backfires

Gee, couldn't see this one coming. It seems banks are taking advantage of the ECB's liquidity facility to originate buckets of crap that can be swapped for treasuries. From the FT:

ECB liquidity scheme fears

The European Central Bank yesterday voiced its "high concern" at growing evidence that banks are exploiting its efforts to unblock the frozen funding markets by using its liquidity scheme to offload more risky assets than it envisaged.

Yves Mersch, a governing council member, said the ECB was now "looking very hard at whether there is not a specific deterioration of collateral" which the central bank is accepting in return for funds.

He was speaking amid signs of some banks creating low-rated assets specifically so they can be traded for treasuries at the European Central Bank.

Central banks have become important in providing funding for difficult to sell mortgages on what is intended to be a short-term basis while securitisation markets remain frozen.

The Bank of England recently created a facility for UK banks to access funding for mortgages and the Financial Times has learnt that almost £90bn ($175bn) worth of bonds are being created to be placed there - almost twice the £50bn in-itially expected when the scheme was launched only three weeks ago.

But the ECB, which is very proud of having always had in place the same system to support bank liquidity, accepts a far broader range of collateral than other central banks. It now appears to have some worries about what is being used by banks.

Yesterday, however, speaking at the International Capital Market Association in Vienna, Mr Mersch said the type of collateral now being accepted was: "A matter of high concern."

His comments come as banks, whose main centres of operations are not within the eurozone, are structuring new bonds based on assets other than mortgages in order to gain access to ECB funding.

The ECB's main mortgage-bond exposures so far are believed to be from Spanish, Dutch and some UK deals, but the central bank publishes few details on the collateral it holds.

However, this week Glitnir, the Icelandic bank, is in the process of clearing the use of a €890m ($1.37bn) collateralised loan obligation (CLO) for funding at the ECB. Similarly, Lehman Brothers recently structured a €1.1bn CLO, which it is expected to use for ECB funding.

Meanwhile, Macquarie Leasing, a unit of the Australian bank, has done a securitisation of Australian motor loans, which will have a euro-denominated slice designed so that the investors who buy the deal can use it at the ECB.

Investment bankers who work in securitisation say that their main businessis structuring bonds that are eligible for ECB liquidity operations. Some analysts have concerns about whether the bonds being created will ever be saleable if markets recover.

Wednesday, 14 May 2008

US retail sales fell -0.2% in April from the previous month but were up 2.0% from April 2007.
Remember that retail sales are reported in nominal dollars. As the chart from Calculated Risk shows below, adjusted for inflation, retail sales were actually negative on a year over year basis in April.

A closer look at the composition of retail sales for the month of April shows that most categories were either flat or down with the exception of food and gas. The only reason those categories were up of course is because of rising prices.

All in all a very uninspiring report on the state of the US consumer. The consumer continues to face a number of headwinds and whilst rebate checks will prop up spending for a few months, the medium term outlook remains grim for the US consumer.

Tuesday, 13 May 2008

Rate Rises Take Toll on AUS Household Finance

There have been a growing number of signs that the RBA's interest rate hikes are starting to have an effect on Australian households. Yesteday, data from the abs showed that the total value of dwelling finance commitments fell a seasonally adjusted -5.3% from March, whilst the number of loans made to owner occupiers fell a seasonally adjusted -6.1% in March to its lowest level in 3 years.

Meanwhile House prices in some parts of Sydney have started to tumble. From the Daily Telegraph:

Sydney properties halve in price

HOUSE prices in some parts of Sydney have almost halved as battling borrowers struggle to keep up with increasing interest rates.

The falls - in Sydney's west, the Hills district, and Sutherland Shire - are far steeper than previously thought, and show the devastating effects of the RBA's rate-hiking spree.

In the past six months, 30 homes across Sydney have been sold for at least $100,000 less than was paid at the height of the property boom, many as a result of distressed mortgagee sales.

One property in Bankstown, bought for $500,000 in August 2005 sold in February for $215,000 - a loss of $285,000.

Several other properties in Sydney's west have recently been sold for losses of more than 30 per cent.

Sutherland Shire, which was thought to have escaped relatively unscathed, is now having prices plummet.

One property in Oyster Bay, bought for $1.09 million in December 2001, sold in March for $680,000, while a Caringbah apartment bought for $339,000 in June 2004 was sold for a loss of $104,000 last October.

Click here to see those homes

The worst affected suburb was Parramatta, with 11 homes sold at a loss in the past six months. Neighbouring Merrylands had 10, while Punchbowl also suffered substantial losses.

The data - complied exclusively for The Daily Telegraph - showed that even the more affluent suburbs are now beginning to suffer. Several homes in Coogee and Paddington were sold for losses of more than 25 per cent.

And experts predict that the losses will get worse as the year goes on.

Shane Oliver, chief economist at AMP Capital, said: "The pain of higher interest rates has only just started to kick in and we will see further falls over the next 6-12 months.

click on the link for the full story

Monday, 12 May 2008

MBIA Triple A? No Way!

MBIA continues to pretend, with the aid of the ratings agencies, to be a AAA rated company after losing a couple of billion more in 1Q08. From

MBIA loses $2.4 billion after write-downs

MBIA Inc. reported Monday a loss of more than $2 billion for the first quarter, its third straight loss, after the company took a $3.6 billion charge for losses on derivatives.

The bond insurer (MBI) continues to struggle with business difficulties in the face of falling house prices and a global credit crisis.

The company's net loss was $2.41 billion, or $13.03 a share. MBIA had earned $198.6 million, or $1.46 a share, in the year-earlier first quarter.

During the first quarter, it recorded a $3.6 billion unrealized loss on insured derivatives.

MBIA had been expected to lose $1.45 a share excluding special items, according to the consensus of a survey of seven analysts by FactSet Research.

Saturday, 10 May 2008

Fedex Warns Again

Fedex gave good warning of a slowing economy last year when they began guiding earnings forecasts lower. The toll of higher oil prices have prompted yet another downgrade yesterday. From Bloomberg:

FedEx Lowers Profit Outlook, Cites Higher Fuel Costs

FedEx Corp., the second-largest U.S. package-shipping company, said fourth-quarter profit will miss its forecast after surging fuel prices raised costs by at least $100 million more than estimated.

FedEx will earn $1.45 to $1.50 a share in the quarter ending May 31, compared with its previous target of $1.60 to $1.80, the Memphis, Tennessee-based company said today in a statement. The shares fell 3.3 percent after FedEx said the slower U.S. economy is curbing express and freight shipments.

The rising price of oil, which set records every day this week, forced FedEx to cut its earnings forecast for the second time this fiscal year. Fuel costs, coupled with a possible recession in the U.S., are taking a toll on industries from airlines to delivery companies whose profits are more sensitive to economic downturns. United Parcel Service Inc., the largest U.S. shipper, last month lowered its forecast as well....

....For FedEx, the average earnings estimate of 14 analysts surveyed by Bloomberg was for $1.71 a share.....

....FedEx and UPS typically have a two-month lag in recovering fuel expenses through surcharges. In early May, FedEx boosted its surcharge on express shipments to 25 percent, from 20 percent.

``While we have dynamic fuel surcharges in place, they cannot keep pace in the short-term with rapidly rising fuel prices,'' Chief Financial Officer Alan Graf said in the statement.

The new outlook assumes no additional increases in fuel prices and no further weakening of the economy, FedEx said.

That last paragraph is interesting. So what if Oil goes to $150 and the economy doesn't rebound in the second half? We probably haven't heard the last downgrade from FedEx this year.

Friday, 9 May 2008

NAB ekes out 8.7% eps growth in 1H08

National Australia Bank today reported an 8.7% rise in 1H08 eps, however that result was -3.4% below 2H07.

As can be seen below and commensurate with the trend of other Australian major banks reporting recently, provisions for bad debts have been hiked significantly.

NAB wasn't giving much away with respect to the outlook in the results release, they had this to say on credit quality:

“After several years of very good credit conditions, asset quality measures are now reflecting the changed global credit market conditions. The charge for bad and doubtful debts increased by $336 million to $726 million mainly as a result of a small number of corporate exposures. Underlying asset quality remains sound.

Also this on the outlook for prodcut prices:

Primary product prices have remained surprisingly strong through the turmoil in financial markets and US recession concerns. Although slower demand growth is expected to lead to softer prices through next year, these prices should remain high by historical standards.

As mentioned many times before, the economic climate is going to get worse for the banks before it gest better. Earnings and margins are going to come under pressure.

Apart from ANZ the major banks have endured the current credit crunch well. Will they continue to dodge bullets and ride out the storm? Time will tell but more ANZ type exposures are bound to pop up on the radar for Australian banks in the coming 18 months.

Thursday, 8 May 2008

My Portfolio: Year 2, 6 month return

As expected, returns continue to be tough to grind out in 2008. The All Ordinaries index is down -11.7% over the past 6 months. Over the same period my portfolio is up 2.7% over the same period after brokerage and dividends. The out-performance was mainly due to the well timed trade in ANH back in January when the market hit its lows.

I am comfortable with both the companies I own and as always will look to add more positions as the opportunities arise. I'm in no hurry to be fully invested as I believe the market is in for a bit of turmoil yet and I expect above average returns to be difficult to attain over the coming 6 months.

Wednesday, 7 May 2008

The Credit Crunch is Over! .........................Not

If you listen to the mainstream media, (not advisable) no doubt you would have heard that the credit crisis is over or that at the very least, the worst is over. Well just in case you happened to believe such reports, below are a few reasons you might want to question such claims.

Fed: Senior Loan Officer Opinion Survey on Bank Lending Practices

In the April survey, domestic and foreign institutions reported having further tightened their lending standards and terms on a broad range of loan categories over the previous three months. The net fractions of domestic banks reporting tighter lending standards were close to, or above, historical highs for nearly all loan categories in the survey. Compared with the January survey, the net fractions of banks that tightened lending standards increased significantly for consumer and commercial and industrial (C&I) loans. Demand for bank loans from both businesses and households reportedly weakened further, on net, over the past three months, although by less than had been the case over the previous survey period. emphasis added

UBS to cut 5,500 jobs, sell assets to BlackRock fund
First-quarter loss of 11.5 bln Swiss francs matches earlier warning

Troubled Swiss banking group UBS said Tuesday that it plans to cut 5,500 jobs and sell a $15 billion chunk of its risky mortgage assets to BlackRock Inc. as it reported a first-quarter loss broadly in line with an earlier warning.

The group posted a loss of 11.54 billion Swiss francs ($10.99 billion), compared to a profit of 3.03 billion francs a year earlier, driven by write-downs of $19 billion. The bank had disclosed the write-downs at the start of April and said it would report a loss of around 12 billion francs.

UBS (UBS) said it's planning to cut 2,600 jobs in its investment banking unit by the end of the year and around 5,500 -- or 7% of its workforce -- across the group by the middle of 2009. click on the link for the full story

Fannie Mae reports $2.2 billion loss in first quarter

Mortgage-finance giant Fannie Mae (FNM) reported a much greater-than-expected loss in the first quarter, losing $2.2 billion as credit-related expenses took a bite out of its bottom line, and said it's planning to raise $6 billion in new capital. On a per-share basis, Fannie Mae lost $2.57 in the first quarter, much more than the 81-cent-a-share loss expected by Wall Street analysts surveyed by FactSet. In the same period a year ago, Fannie Mae earned 85 cents a share. Shares of Fannie Mae were recently down 13% in pre-market trading.

Countrywide Takes Away Home-Equity Credit Lines in Las Vegas

May 6 (Bloomberg) -- Countrywide Financial Corp. has suspended the home equity credit lines of almost all its Las Vegas customers, including the $60,000 Christopher Whipple says he needed to expand his cell-phone accessories business.

``I hope this doesn't break me,'' the 35-year-old retailer said. His credit score was 790 out of a possible 850, putting him in the top 40 percent of borrowers. ``It's going to hurt more than I thought.''

Since January, Countrywide, Bank of America Corp., Washington Mutual Inc. and IndyMac Bancorp Inc. have frozen about 600,000 equity credit lines nationwide, said Michael Kratzer, president of a Bankrate Inc.-owned Web site that's fielding consumer complaints. The lenders are targeting borrowers in cities where property values are falling, including Las Vegas, Chicago and Los Angeles, he said.

Frozen credit and real estate declines are putting a chill on spending and hurting the economy. In February, taxable sales in Clark County, Nevada, which includes Las Vegas, fell 3.1 percent from a year earlier, dropping 13 percent at furniture stores and 6 percent for durable-goods wholesalers. In the same month, as it became harder to borrow money across the U.S., consumer spending rose at the slowest pace in more than a year. click on the link for the full story

Tuesday, 6 May 2008

B of A Genius Comes Home to Roost

Back in September, I noted that B of A's so-called bargain of purchasing Countrywide stock at $18 a share was no bargain at all. That was borne out when B of A decided to purchase the whole company for $7.16 in January.

At that time I said that B of A was throwing good money after bad. Yesterday a report from an analyst at FBR Capital Markets suggests B of A could and should lower their bid or walk away from the deal altogether.

BofA may lower Countrywide bid to $2/share or below: analyst

Bank of America Corp. (BAC) is highly likely to negotiate a sharply lower price for Countrywide Financial Corp. (CFC), and should just walk away from the deal altogether, an analyst said Monday.

Bank of America could face $20 billion to $30 billion in write-downs of Countrywide's mortgage loans after it closes its acquisition of the troubled mortgage lender, FBR Capital Markets analyst Paul J. Miller Jr. told clients in a research note.

"BAC should completely walk away from the CFC deal, as CFC's loan portfolio will prove a drag on earnings and could force BAC to raise additional capital," Miller wrote.

Shares of Countrywide fell in premarket trading to $5.10 a share, down 14.7%, before recovering slightly in recent trading to $5.40 a share, down 9.7%.

Even if Bank of America sticks with the deal, it's likely that it will cut its offer "down to the $0 to $2 level," and force Countrywide's bondholders to absorb the remainder of any write-downs, the analyst said.

Whether this analysts predictions will come true is far from certain. However when B of A paid $18 a share for Countrywide those in the know said it was a bargain. Then, when they offered just over $7 a share, Wall Street lemmings said that they should know what CFC is worth because they had 6 months to work it out.

The fact is B of A didn't have a clue when they paid $18 a share, had barely any more of a clue when they offered $7 and change a share and now looks even sillier because CFC is basically worthless.

Monday, 5 May 2008

Inflation Gauge Dampens Prospects For Rate Cuts

Hopes that the RBA may be done raising rates and might start to cut before the end of the year didn't receive any support from the latest inflation gauge released by TD Securities-Melbourne Institute today which showed inflation rose 0.5% in April. From the smh:

Inflation gauge up 0.5% in April

Inflation is growing at its fastest rate on record as petrol prices reach new heights, a leading private sector indicator shows.

Economists say an interest rate cut by Christmas is now looking less likely, as price pressures persist.

The TD Securities-Melbourne Institute monthly inflation gauge showed headline inflation surging by 4.3 per cent in the year to April, after rising by 0.5 per cent in the month of April.

"This is the highest year-end figure in the five-year history of the gauge," the report said.

Annual inflation, as measured by the gauge, has been running at or above four per cent since February.

The level is also well above the Reserve Bank of Australia's (RBA) longstanding two to three per cent target.

TD Securities senior strategist Joshua Williamson said the high inflation numbers could jeopardise the chance of a rate cut in 2008.

"This is a truly shocking result," said Mr Williamson, who forecast a rate cut by December in an AAP survey of 19 economists last week.

"With inflation accelerating in April, we are tempted to change our view that the next move in Australian interest rates is down.

"Certainly a rate cut before year end is looking an increasingly remote possibility as inflation remains at a level well above the RBA's target."

Petrol prices climbed by 12.6 per cent in the year to April while rents were up 12 per cent in the same period.

The inflation gauge's trimmed mean measure rose by 4.3 per cent in the year to April, after climbing by 0.6 per cent in the month.

Underlying inflation, which excludes volatile items, was up by 3.9 per cent in the 12 months to April, after rising by a monthly pace of 0.5 per cent.

This annual core inflation reading has been above three per cent since June 2007.

Professor Don Harding, a co-creator of the inflation gauge, said price pressures were broadly based and were likely to continue unabated.

Headline consumer price index inflation grew by a seven-year high of 4.2 per cent in the year to March, Australian Bureau of Statistics data showed.

Core inflation, based on the RBA's preferred measures, was up by 4.25 per cent, its fastest growth pace since 1991.

The RBA board is widely expected to leave interest rates on hold at 7.25 per cent when it meets on Tuesday morning.

Hardly, as Mr Williamson put it "a shocking result." Inflation is a lagging indicator and it is not surprising that it continues to persist even as the economy shows signs of slowing. No doubt the RBA is aware of that but they would still be concerned at the elevated level of inflation.

CBA's economists are expecting a rate rise at tomorrows RBA meeting. As of Friday, the SFE futures contract was factoring in just a 7% chance of an RBA hike in rates. That may well go higher after today's number. However it is likely that the RBA will stand pat in May as the economy digests the recent interest rate rises in February and March.

Saturday, 3 May 2008

Small Decline in April Non-farm payrolls

The Bureau of Labor Statistics reported yesterday that US non-farm payrolls fell -20k in April. February and March were revised down slightly. Highlights include:

Goods-producing -110k
Service-providing 90k
Government 9k

As always the Birth/Death adjustment is worth taking a look at below. According to the BLS 267k jobs were added in April including 45k in contruction and 72k Professional and business services. That seems highly unlikely. Remember you can't subtract the B/D number from the non-farm payroll number as the NFP number is seasonally adjusted and the B/D number is not.

Also, it's worth noting that hourly earnings rose just $0.01 and hours worked declined 0.1 hours - signs typically seen in recesions. Of course many of the headlines harped on the surprising drop in the unemployment rate from 5.1% to 5.0%.

Obviously when an economy needs around 150k new jobs created per month just to keep up with population growth, when employment actually contracts the only way the unemployment rate can go down, is if people are leaving the workforce - that is they have stopped looking for work.

This same euphoria was shown back in February when the unemployment rate unexpectedly fell to 4.8%. That was subsequently reversed to 5.1% in March. Expect the April drop in the unemployment rate to be reversed in the coming months. The trend in the unemployment rate is still up.

Friday, 2 May 2008

Tis The Season For Bankrupticies

Linens 'n Things files for bankruptcy protection

Linens Holding Co., the operator of Linens 'n Things home furnishings retail chain, said Friday it filed for Chapter 11 bankruptcy protection with plans to shut 120 underperforming stores, becoming the latest retailer to fall under the weight of declining housing markets and other economic worries.

The chain, which private equity firm Apollo Management LP bought for $1.3 billion in February 2006, will continue to operate without interruption. It also expects to be well stocked ahead of the back-to-school and holiday selling seasons as it secures $700 million in debtor in possession financing from General Electric Capital Corp.

Chief Executive Robert DiNicola will become executive chairman while restructuring expert Michael Gries was named chief restructuring officer and interim CEO.

The retailer, which had 2007 sales of about $2.8 billion with 589 stores across the U.S. and Canada, also expects the bankruptcy court to allow it to continue paying employee salaries and honor gift cards. It said its key vendors have been supporting the company with new merchandise in recent weeks.

The company also said the filing doesn't apply to its Canadian operation, where stores are among the strongest performers in its chain.

"The significant deterioration in the mortgage, housing and credit markets and the resulting impact on the retail marketplace, particularly the home sector, has overwhelmed the operating and merchandising improvements that we have made over the past two years," DiNicola said.

Click on the link for the full story. As flagged previously expect more bankrupticies to come in the year ahead and into 2009.

Aussie Retail Sales Show Continued Weakness

Australian Retail Sales rose a seasonally adjusted 0.5% in March according to the abs report released today. That doesn't sound too bad until you realise that most of the gain was driven by food retailers. Why does that matter? Basically because the rise in food retailing has been driven by inflation. Retail sales are reported in nominal terms(they aren't adjusted for inflation).

As can be seen above, 5 out of 7 components turned negative in the latest month. Food and Household goods were the only components showing positive gains and as stated above the increase in food can be attributed to price inflation.

Recent data suggests that the Australian economy is slowing and that may be enough to prevent the RBA from raising rates again this cycle.

Thursday, 1 May 2008

WBC ekes out 8% eps growth in 1H08

WBC today reported an 8% increase in cash eps for 1H08 although that result was slightly below 2H07. Not bad given the tough credit environment, business growth was strong across the board. However as predicted months ago, as the credit cycle turns bad loans will ratchet up and growth will slow.

Whilst nowhere near the levels of ANZ's loan loss provisions for the first half, WBC has upped their loan loss provisions significantly. On the all important outlook, CEO Gail Kelly had this to say:

The tighter conditions in global capital markets will continue to dominate the near–term outlook for the financial services sector, with higher funding costs and slower system growth expected.

Despite these conditions, the Australian economy remains sound. However, we expect that the higher interest rate environment will contribute to a dampening of economic growth through the remainder of 2008.

Westpac expects the sector to have slower loan growth, higher impairment charges in both consumer and business segments, continuing market volatility and for higher funding costs to persist.

Growth in earnings will be difficult in the coming 12 - 18 months for Australian banks. The ones that fare the best will be the ones that can dodge the coming wave of bankruptcies and defaults best. Unfortunately investors there is no way to predict when and where the blow-ups will occur. It will pay to be cautious on the banks for some time yet.

UK Home Prices Decline for Sixth Straight Month

Last month I said we may see year over year declines in UK home prices as early as April. That turned out to be correct as the latest figures from Nationwide show that UK Home prices fell for the 6th consecutive month and showed year over year declines for the first time since January 1996. From Nationwide:

• House prices fell for the sixth consecutive month in April
• The price of a typical house is now 1% lower than this time last year
• The Bank of England’s Special Liquidity Scheme should help to improve wholesale markets
• More than 5 million borrowers have directly benefited from Bank of England rate cuts

Commenting on the figures Fionnuala Earley, Nationwide's Chief Economist, said:

“April was another difficult month for the housing market. Falling levels of market activity meant that prices fell by 1.1% during the month and ended up 1% lower than this time last year. April’s fall in prices continues the trend of the last six months and reflects the weakening sentiment in the market brought about by poor affordability and tighter financial market conditions. This is the first year-on-year fall in prices since March 1996 and brings the price of a typical house to £178,555, £1,759 lower than at this time last year.

Year over year declines in UK home prices are here to stay for at least a year but probably longer. Year over year declines persisted for more than 3 years in the early 1990's, that was also the time of the last UK recession. If you believe the current housing bust to be worse that the late 80's early 90's experience, (which it most certainly is in the US) UK home prices are unlikely to rise for quite some time.