Monday, 30 June 2008

RBA Balances Slowdown with Inflation Fears

A reminder today that inflation risks remain in the Australian economy as the TD Securities - Melbourne Institute monthly inflation gauge jumped 0.5% in June from the previous month and is now showing a 4.8% increase year over year - the largest increase in its five and half year history.

However recent interest rate hikes are clearly having an effect as the graph below shows. The RBA released private sector credit data today showing that private sector credit growth grew just 0.6% in the month of May and is 13.4% higher than a year ago. that's the slowest year on year growth rate since November 2005.

Whilst inflation is a concern it should be remembered that it is a lagging indicator. In recent months there has been some clear signs that the Australian domestic economy is slowing.

The RBA is fully expected to remain on hold at tomorrow's meeting with the futures market suggesting no chance of a rate hike. The RBA will be pleased with the slowdown in domestic demand but will no doubt keep the door open if rate hikes are needed down the road.

Analyst Earnings Forecasts Still Too Optimistic

As stated here many times, it is the prediliction of analysts to be overly optimistic in their earnings projections. This becomes even more apparent at turning points in the earnings cycle.

As shown below, even after S&P500 operating earnings fell -9.5% in 3Q07, analysts were predicting positive earnings growth of 2.9% for 4Q07 as late as the middle of November. As we now know, 4Q07 earnings plunged -30.8%.

However analysts were not deterred and returned with some rosy forecasts for 1Q08. As late as the end of February analysts were still expecting positive earnings growth. As shown below, by the end of May it was clear the analysts had it wrong as the quarter ended with a -25.8% decline in S&P operating earnings.

After clinging to forecasts of positive earnings growth for 2Q08 until the end of March, the reality of first quarter results forced analysts to get a little more realistic. As of June 24th S&P500 operating earnings are forecast to decline -9.2%.

Call me skeptical, but given analysts demonstrated track record of being behind the curve, I would estimate that the final number for 2Q08 will be closer to double the decline currently forecast.

As we enter the third quarter year over year comparisons will become much easier and that is why currently S&P500 operating earnings are expected to show positive growth for the full year. However, as can be seen below, those estimates have also been eroding, from a peak of 17.4% expected growth in February to a more modest 6.7% as of a week ago. My bet is that by the end of September, analysts will wake up to the fact that full year earnings growth will be negative.

Of course, sooner or later analyst forecasts will get too pessimistic, however we are still a long way from that point. The chart below shows S&P500 earnings from March 2008 through to December 2009. During this time there have been 2 other earnings recessions which surprise surprise, coincided with an economic recession.

The point of this chart is to show how long it took for earnings to recapture their former highs after the cycle had turned. After the peak in June 1989 earnings did not hit new records until June 1994 - a full 5 years or 20 quarters later. Earnings then peaked again in June 2000 and didn't recover to the previous peak until December 2003, a full 3 and half years or 14 quarters later.

Currenlty analysts would have us believe that the earnings peak in June 2007 will be surpassed in December 2008 of this year, just 1 and a half years or 6 quarters later. Whilst it may be true that every earnings cycle is different I doubt it will be that different.

To be sure, a lot of the over-estimation of earnings growth has been the expectation that the financial sector would recover. Drilling down to the sector level, 5 sectors out of ten are expected to post record earnings for 2Q08. However, as the credit crisis is now infecting the broader US economy, expect companies in an increasing number of sectors to post less than cheery outlooks for the second half of the year.

Friday, 27 June 2008

US Jobless Cliams Hit Fresh 4 Year Highs

The 4 week moving average of Initial Jobless claims hit their (excluding the hurricane Katrina blip) highest level in more than 4 and a half years at 378,250.

Continuing claims also hit levels not seen in almost 4 and half years at 3.1 million. Claims have pulled higher in recent weeks after being in a range for a couple of months.

The chart below comes from Paul Kasriel at Northern Trust and shows the Conference Board survey of whether jobs are hard to get. Let's see what Kasriel has to say about this particular indicator;

The spread between the percentages of respondents saying that jobs are hard to get minus the percentage saying that jobs are plentiful hit its highest level since December 2003. Chart 3 shows that there is a high correlation, 0.87, between this spread and the level of the unemployment rate. So, you might want to prepare for some pyrotechnics on Thursday morning, July 3.

With jobless claims inching higher and with US workers saying that jobs are harder to get, we may start to see some triple digit declines in non-farm payrolls in the months ahead.

Thursday, 26 June 2008

US New Home Sales down 40% Year on Year

The Spring selling season never really got off the ground as shown from the figures released by the US census bureau yesterday:


Sales of new one-family houses in May 2008 were at a seasonally adjusted annual rate of 512,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.5% below the revised April rate of 525,000 and is 40.3% below the May 2007 estimate of 857,000.

Months of supply continues to remain high at 10.9 months.

On the positive side, the number of houses for sale continues to fall, a good sign that inventory is being reduced. However for inventory to really start shifting you need to see a pick-up in sales - something which is unlikely anytime soon.

Wednesday, 25 June 2008

US Home Prices Continue to Slide

As expected home prices continue to correct in the US according to the latest data from the S&P Case-Shiller Home Price Index, from S&P;

Steep Declines in Home Prices Continued in April 2008 According to the S&P/Case-Shiller Home Price Indices

Data through April 2008, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show annual declines in the prices of existing single family homes across the United States continued to worsen in April 2008, with all 20 MSAs now posting annual declines, 13 of which are posting record low annual declines, and 10 of which are in double-digits.

From their peak prices for the 20 city composite are down -17.8%. On the positive side;

One possible bright side to the annual figures is that three
MSAs – Chicago, Cleveland and Denver – while still negative, showed some imprannual figures over those reported last month...

...Looking at the monthly statistics, eight areas were positive for the April-over-March reading.

The above chart shows all 20 cities in the survey. There are so many colours it's tough to see which city is which but I like to post it anyway just because it's a good piece of chart porn.

Tuesday, 24 June 2008

UPS Drops a Bomb

Much is made of the transports as a harbinger of the health of the economy. Yesterday after the market close UPS slashed their earnings forecasts citing the high price of oil and a weak US economy, from

UPS slashes its profit outlook due to fuel, economy

United Parcel Service Inc. said late Monday that it was slashing its second-quarter profit outlook, squeezed by soaring fuel prices and a sluggish U.S. economy.

It marks the second straight quarter that the company has warned it would not meet prior profit expectations. Its stock fell 4% in late trading.

The package-delivery giant cut its second-quarter profit forecast to a range of 83 cents to 88 cents a share. In late April, UPS had expected to earn between 97 cents and $1.04 a share. Since then, crude prices have surged from $110 to $136 a barrel.

On average, Wall Street analysts are expecting UPS (UPS) to earn 99 cents a share in the second quarter, according to a FactSet Research. The shipper will issue earnings July 22.

UPS said slow U.S. economic growth has slowed package volume in the United States and curbed sales of its premium air-delivery services. Shipments into the United States also have been affected, hurting its international-business unit.

Last week, rival FedEx Corp. (FDX) also issued a profit forecast well below Wall Street expectations. See full story.

Stocks of both companies have performed in line with the broader market. UPS shares are down 6% so far this year, while FedEx is down 10%. By comparison, the S&P 500 Index is off 10%.

This shouldn't have come as much of a surprise given the warning from Fedex last week. This is another blow to the goldilocks view of a second half turnaround for the US economy.

Monday, 23 June 2008

Aussie New Car Sales Fall in May

Sales of new motor vehicles fell a seasonally adjusted -1.6% in May. Sales have fallen for 3 of the past 4 months. Before getting carried away that this is further evidence of a slowdown in the economy we should add that new car sales are quite volatile from month to month.

Sales of 4WD's showed their biggest monthly decline since August 2006 falling -4% showing evidence that buyers are trading down from petrol guzzlers to more fuel efficient models. Sales of new passenger cars showed a healthy 1.6% increase for the month of may.

If high oil prices persist it would come as no surprise to see car sales soften in the second half of the year as consumers grapple with higher borrwing costs tighter lending standards and a slowing economy.

Saturday, 21 June 2008

Joe B Rips Brian Wesbury A New Asshole

I've posted numerous times here about Brain Wesbury's delusional economic and stockmarket forecasts. However if you don't remember or are not familiar with them, here's a refresher;

Kudlow and Co, 12/12/2007, “This whole recession is a figment of people’s imagination.

on CNBC, 12/24/2007, “The US Equity market is about 25% undervalued today.

Kudlow and Co, 06/09/2008, “The economy is now coming out of its slow period, our forecast is that we’re going to have three, three and a half percent growth in the second half of this year.”

Today Wesbury came on spouting his nonsense again, however this time Joe Battapaglia was there to put him in his place. It was a masterful exhibition by Mr Battapaglia and Wesbury was left floundering. Click on the image above to watch a thoroughly enjoyable clip.

The Art of Putting Lipstick on a Pig

We are now in the desperation stages for some financial institutions. The sad attemnpts to postpone the inevitable is showing up in all kinds of ways as outlined in yesterday's WSJ story Banks Find New Ways To Ease Pain of Bad Loans:

In January, Astoria Financial Corp. told investors that its pile of nonperforming loans had grown to about $106 million as of the end of last year. Three months later, the thrift holding company said the number was just $68 million.

How did Astoria do it? By changing its internal policy on when mortgages are classified on its books as troubled. The Lake Success, N.Y., company now counts home loans as nonperforming when the borrower misses at least three payments, instead of two.

At Wells Fargo & Co., the fourth-largest U.S. bank by stock-market value, investors and analysts are jittery about its $83.6 billion portfolio of home-equity loans, which is showing signs of stress as real-estate values tumble throughout much of the country.

Until recently, the San Francisco bank had written off home-equity loans -- essentially taking a charge to earnings in anticipation of borrowers' defaulting -- once borrowers fell 120 days behind on payments. But on April 1, the bank started waiting for up to 180 days.

BankAtlantic Bancorp Inc., which is based in Fort Lauderdale, Fla., earlier this year transferred about $100 million of troubled commercial-real-estate loans into a new subsidiary.

That essentially erased the loans from BankAtlantic's retail-banking unit. Since that unit is federally regulated, BankAtlantic eventually might have faced regulatory action if it didn't substantially beef up the unit's capital and reserve levels to cover the bad loans.

Because the BankAtlantic subsidiary that holds the bad loans isn't regulated, it doesn't face the same capital requirements. But the new structure won't insulate the parent company's profits -- or shareholders -- from losses if borrowers default on the loans, analysts said.

Alan Levan, BankAtlantic's chief executive, declined to comment on how much the loan transfer bolstered the regulated unit's capital levels. "The reason for doing it is to separate some of these problem loans out of the bank so that they can get special focus in an isolated subsidiary," he said.

The part in bold is just complete and utter jibberish and it's testament to the kind of nonsense that CEO's and CFO's are resorting to. Shifting bad loans from a regulated vehicle to non regualted vehicle doesn't allow for any extra attention, it's just a blatant attempt to dress mutton up as lamb and postpone the inevitable losses that are coming down the pike.

You can click on the link above for more examples of pathetic attempts to avoid reality by financial institutions. As noted here 6 months ago when all the talk was of a liquidity crunch, the bigger moore looming problem is one of solvency.

The desperate attempts to obfuscate the truth, dress-up balance sheets, and postpone the inevitable outlined in the WSJ article, is another sign that the environment in the financial services industry continues to deteriorate and that many firms are now just fighting for survival.

A steep rise in bankruptcies for financial institutions is just around the corner and will extend well into 2009 crushing any hopes of a turnaround in the US economy in the second half of 2008.

Friday, 20 June 2008

Citigroup Makes Another Visit to the Confessional

On a conference call on Thursday Citigroup CFO Gary Crittenden put to rest the idea that things are getting better at Citigroup anytime soon. From Bloomberg;

Citigroup Shares Fall on Writedown, Loss Forecast

``We will continue to have substantial additional marks on our subprime exposure this quarter,'' Crittenden said on the call, which was sponsored by Deutsche Bank AG. ``We may continue to see the magnitude of the marks decline, as the exposures that we have have declined.''

Second-quarter markdowns related to subprime mortgages won't be as large as the $6 billion recorded for the first quarter, Crittenden said. Citigroup may also have to write down the value of assets backed by so-called monoline insurance companies such as Ambac Financial Group Inc., after they were stripped of their AAA credit ratings, the 54-year-old CFO said.

Citigroup last quarter recorded a cost of $1.5 billion to account for the reduced likelihood that the insurers will be able to pay. The company may have a ``similar'' cost in the second quarter, Crittenden said.

Total credit costs, including loan write-offs and reserves for future losses, may exceed those reported for the first quarter, Crittenden said. The company had $5.6 billion of such costs in the first quarter, after a record $7.3 billion in the fourth quarter of last year, according to the firm's financial statements.

``This quarter will still have some of the same challenges that we had in the prior quarter, but it will also, I believe, represent sequential improvement over the prior quarter,'' Crittenden said. The bank expects to build reserves during 2008, particularly in its U.S. mortgage portfolio, he said.

On leveraged loans, Crittenden said the bank expects writedowns to be smaller than the $3.1 billion of markdowns taken in the first quarter.``The marks in this quarter are unlikely to be of that same magnitude, but again they are still sizable marks,'' he said.

Click on the link for the full story. The part in bold is my emphasis. I find this comment interesting. Whilst the writedowns on structured products are starting to decline the credit costs related to rising bad debts across all classes - mortgages, auto loans, HELOC's, credit cards, are rising.

I've mentioned this numerous here before, that the meltdown in structured prodcuts will eventually bleed through to more traditional business and that is what we are seeing in Citi's announcement, or should I say profit warning?

Also of interest was that no mention was made of the dividend. If Citi management continues to pay dividends and then turns around and dilutes shareholders through additional capital raisings then shareholders should be up in arms and management removed.

Wednesday, 18 June 2008

Fedex Paints a Gloomy Picture

Fedex reported fourth quarter earnings today and with it dumped cold water on the idea that things are looking up for the economy in 2009.

Fedex swings to loss on charge, fuel, economy
First-quarter outlook below Wall Street consensus

FedEx Corp. said Wednesday that it swung to a fiscal fourth-quarter loss from a year-earlier profit, reflecting a $696 million after-tax asset-impairment charge tied to the acquisition of Kinko's and hurt by the surge in fuel prices and the weak U.S. economy...

...For the quarter ended May 31, FedEx (FDX) posted a loss of $241 million, or 78 cents a share, compared with profit of $610 million, or $1.96 a share, in the year-earlier period. The operating loss was $163 million compared with operating profit of $1.01 billion a year earlier.

Revenue advanced 7.8% to $9.87 billion from $9.15 billion. Adjusted earnings were $1.45 a share, down 24% from a $1.90 a share in the year-ago period. A survey of analysts by FactSet Research expected, on average, earnings of $1.47 a share for the quarter.

"Looking ahead to '09, we do expect conditions to remain extremely challenging and we anticipate in both the first-quarter guidance and the yearly target the current economic weakness will continue and the current level of fuel costs will not mitigate," said Chief Financial Officer Alan Graf on a post-earnings conference call.

For the first quarter, FedEx forecast earnings in the range of 80 cents to $1 a share, down from a year ago when it reported a profit of $1.58 a share. For the fiscal year, the company expects earnings in the range of $4.75 to $5.25 a share.
Analysts, on average, are looking for first-quarter earnings of $1.30 a share and full-year earnings of $6.08.

Fedex lowered it's guidance last month so the latest quarter's earnings are not surprising, however the guidance for the first quarter and for FY09 are well below analysts forecasts. That doesn't jibe with the polyanna view that analysts currently have of corporate earnings in general going into the second half of 2008 and into 2009. Who do you put your money on, Fedex or the consistently behind the curve analysts?

Leading Index Points to Aussie Slowdown

The Westpac-Melbourne Institute leading index of economic activity released today released today points to a slowing Australian economy over the next 6 months thus giving the RBA more reason to stay on hold for the time being. From the report;

The annualised growth rate of the Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, was 2.8% in April. Well below its long term trend of 4%.The annualised growth rate of the Coincident Index was 3.1%, also below its long term trend of 3.8%.

More recession signs

Another sign that the US ecnomy has entered into recession is when capacity utlization rates fall under 80%. It has now done that for 2 months in a row falling to 79.4% in May. The chart above courtesy of Calculated risk shows the relationship between capacity utilization and recessions.

No Bottom in Sight for US Housing

It's been a while since I posted on US housing starts. The graph above tells the story. The details for May were as follows;

Permits were at 969,000, -1.3% percent below April and -36.3% below May 2007.

Starts were at 975,000, -3.3% below April and -32.1% below the May 2007.

Completions were at 1,132,000, 11.6% above April and -26.9% May 2007.

Remember that completions follow starts by about 6 months. The decline in permits in May suggests further drops in starts next month. No sign of the bottom callers yesterday.

Tuesday, 17 June 2008

Is the RBA done?

Today the RBA released the minutes from their June 3rd meeting. It was decidedly less hawkish than expected. Here are the money quotes.

In reaching their decision, Board members noted that the bulk of indicators becoming available over the past month continued to suggest moderation in the growth of domestic demand. These included flat retail sales, declining household and commercial loan approvals, lower growth in housing and business credit, and subdued business and consumer confidence. Asset markets were also less buoyant than previously. Labour market conditions, on the other hand, had remained strong to date. This could be explained by lags, in which case a moderation in employment growth could be expected soon.

On balance, the Board’s assessment continued to be that, on current policy settings, the necessary moderation in demand growth was likely to occur. They concluded that it was therefore appropriate to maintain the current setting of monetary policy for the time being. However, should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage- and price-setting behaviour, the outlook, and the stance of policy, would need to be reviewed. The Board would continue to evaluate prospects for economic activity and inflation in the light of new information.

It would seem that the RBA is satisfied that domestic demand is slowing after the more recent hikes in interest rates. The stock market of course liked it and the AUD weakened. The July Cash Rate Futures contract is now showing a 0% chance of a rate hike in July however the market is still expecting another 25 basis point hike before April 2009.

For the Australian economy's sake I hope they're done. However central banks have a tendency to go too far. Witness Bernake's about face in recent weeks. Remember the May employment report came out after the RBA meeting adding credence to the case for a slowing in domestic demand and the RBA's decision to stand pat for the time being.

Monday, 16 June 2008

Foreclosures Just Getting Started

From Bloomberg:

Foreclosures Rise 48% in May as Repossessions Double

Banks repossessed twice as many homes in May and foreclosure filings rose 48 percent from a year ago as falling house prices trapped borrowers in mortgages they couldn't afford, RealtyTrac Inc. said in a report today.

One in every 483 U.S. households either lost the home to foreclosure, received a default notice or was warned of a pending auction, RealtyTrac said. That was the highest rate since the Irvine, California-based company began reporting in January 2005 and the 29th consecutive month of year-over-year increases. Nevada, California and Arizona posted the highest rates in the U.S. and New Jersey entered the top 10.

click on the link for the full story.

If you thought that US housing woes were starting to subside think again, the chart above comes courtesy of Hussman funds and shows that adjustable rate mortgage resets are just starting to kick in in earnest. Expect losses to ratchet up in the coming months for banks and expect earnings expectations for a second half rebound to diminish.

Saturday, 14 June 2008

Whitney on the State of Banks and IB's

Meredith Whitney was on CNBC Thursday sharing her usually cheery outlook on US banks. If you are not familiar with Whitney the preceding sentence was meant to be sarcastic. She has been one of if not the most negative analyst on banks and Investment banks and that makes the most accurate analyst over the last 9 months or so. Click on the image below to listen to the interview:


Whitney still believes we are in the early stages of the credit crunch, a view I wholeheartedly agree with. I mentioned here months ago, once all the writedowns related to CDO's and MBS are cleared, banks are still left with a massive amonut of non-performing loans on their balance sheets of all varieties.

Amongst other things Whitney's sees around -30% downside to go for some US financials. Also thinks that dividends for all the banks are under threat. Interesting stuff.

Thursday, 12 June 2008

Aussie Jobs Shrink for First Time in 18 months

Australian employment fell for the first time in 18 months according to the abs today. Employment fell by 19,700 of which just over half were full-time.

Before getting too excited over these numbers we would do well to remember that employment is a lagging indicator and that one month does not make a trend. There is no doubt that a slowdown in economic activity is underway in Australia, however it typically takes a while to see weakness show up in the labour market.

We would want to see the unemployment rate tick up toward 5.0% to signal a significant pullback in hiring by businesses.

Expect the labour market to remain reasonably tight for a few months yet. That said, the RBA may feel less pressure to raise rates anytime soon. The July futures contract now showing only a 2% chance of a rate hike in July.

Banks Face Losses From Monoline Downgrades

As mentioned numerous times here the AAA rating given to the monoline insureres from the major rating agencies has been nothing but a sham. That sham ended last week when both Moody's and S&P downgraded both companies to AA. However even AA is far too generous to these two businesses that have no business going forward.

The good news is that the stockmarket hardly reacted when the downgrade happened. A Back in January this would have been seen as a disaaster by the market - perception is everything. However despite the muted response from the market there are some very real consequences for some of the major banks. From Bloomberg:

Citi, Merrill, UBS Face Monoline Losses, Whitney Says

Citigroup Inc., Merrill Lynch & Co. and UBS AG may post losses of $10 billion on bond insurance after MBIA Inc. and Ambac Financial Group Inc. lost their top credit ratings, Oppenheimer & Co. analyst Meredith Whitney said.

MBIA and Ambac, the world's largest bond insurers, had their AAA ratings cut two levels by Standard & Poor's June 5, which trimmed ratings on more than $1 trillion of securities they guaranteed. The downgrades may limit the so-called monoline insurers' ability to write new policies, putting further pressure on earnings, she wrote today in a note to investors.

``The limited earnings potential of monolines poses a risk to the value of the insurance and hedges on the subprime-related securities provided to the banks and brokers,'' Whitney wrote. ``The collateral damage could be in excess of an additional $10 billion.''

Whitney, one of the first bank analysts last year to gauge the depth of the U.S. credit crisis, said in January that losses tied to the bond insurers for all banks might top $40 billion. She didn't update her estimate. Citigroup, Merrill and UBS have taken more than $10 billion of writedowns related to the insurers, she wrote.

Citigroup, the biggest U.S. bank, and Merrill, the world's biggest brokerage, have ``underperform'' stock ratings from Whitney. Both companies are based in New York. She doesn't cover Zurich-based UBS, the European bank hardest hit by the U.S. subprime contagion.

UBS had $6.3 billion of ``exposure'' to bond insurers at the end of March, Whitney said. Citigroup had $4.8 billion and Merrill had about $3 billion, she wrote.

Citigroup rose 12 cents to $20.18 at 11:31 a.m. in New York Stock Exchange composite trading, Merrill Lynch fell 28 cents, or 0.7 percent, to $38.74, and UBS slid 80 centimes to 23.82 francs in Zurich trading.

Whitney has been way out in front of the pack in her analysis of the effects on the major banks during the credit crunch so I wouldn't bet against her $40 billion estimates. More writedowns are on the way.

Wednesday, 11 June 2008

How long until we see headlines like this in OZ?

House sales fall is steepest since the 1970s, says RICS

The number of houses changing hands has "collapsed" to the lowest level in 30 years, an influential housing market survey shows today.

The fall in sales far exceeds the depths of the last housing crash in the 1990s and is the lowest since records began in 1978.

The average number of houses that estate agents sold in the past three months was 17.4 - almost a third lower than a year ago, says the Royal Institution of Chartered Surveyors (RICS).

Its report also says that gazundering, the controversial practice of buyers dropping their offer price after they have agreed to purchase a property, has returned.

While prices have started to fall in earnest only in the past two months, the report makes clear that the property market is in a dire state.

Buyers are refusing, or unable, to hand over any money to purchase a house.

"The continuing lack of demand in the housing market is reflected in the collapse in transactions," says the report."

Tim Edmonds, an estate agent and RICS member, said: "Transactions have virtually halted. Where sales have been agreed, it is very difficult to get them through to exchange."

Neil Hunt, a Derbyshire-based estate agent, said: "Demand has plummeted to a crisis point with sales at their lowest May level in memory.

"An avalanche of job losses in the housing industry is beginning to materialise which could make current media stories look like the good old days."

The credit crisis has pushed up the cost of mortgages and first-time buyers need to find deposits of 10 or even 25 per cent to get the best rates from some lenders - equating to more than £30,000.

click on the link for the full story.

Monday, 9 June 2008

Lehman Brothers 2nd Quarter Shocker

The rumours surrounding Lehman Brothers having a shocking second quarter were confirmed today as they reported an abysmal 2Q08 result.

Lehman Loses $2.8 Billion, Plans to Raise $6 Billion

Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, reported a record $2.8 billion second-quarter loss and said it will raise $6 billion in capital in a public offering.

Lehman fell as much as 11 percent in New York trading after the firm said it sold about $130 billion of assets during the quarter. The New York-based bank reduced mortgage-related assets and leveraged loans by about 20 percent, it said today in a statement. The figures are preliminary and the final results will be released June 16.

Chief Executive Officer Richard Fuld, 62, is adding to the $8 billion he raised since February to quell concern that the collapse of the mortgage market would bring his firm down. Financial companies have raised more than $285 billion from investors to make up for almost $390 billion in writedowns and credit losses.

``I am very disappointed in this quarter's results,'' Fuld said in the statement. ``However, with our strengthened balance sheet and the improvement in the financial markets since March, we are well-positioned to serve our clients and execute our strategy.''

Lehman dropped $3.49 to $28.80 at 7:24 a.m. in early New York trading after the company said it would sell common and preferred stock that converts to common shares in three years. It didn't say how much of each type would be sold. The company had $3.7 billion of writedowns on its portfolio of mortgage- related assets and leveraged loans during the quarter as hedges against the positions lost money, the bank said.

Dick Fuld has continually stated that Lehman wasn't suffering as much as the other investment banks and didn't need to take the kinds of writedowns that other IB's have. Well guess what? Fuld should go, he has basically lied to the market all along and David Einhorn correctly called him on it. Off with his head!

Sunday, 8 June 2008

Wake up Australia, the Slowdown is Here

As noted here over the past few months there are increasing signs of a slowdown in the Australian economy. Recent data from the from the Housing Institute of Australia on the state of the construction industry confirms that a significant slowdown is underway. From the report:

Key Findings

■ The downturn in the national construction industry deepened in May 2008, due to continued reductions in activity across all sectors.
■ The Australian Industry Group/ Housing Industry Association Performance of Construction Index (Australian PCI®) registered 36.9 in May 2008, to remain below the critical 50.0 points level separating expansion from contraction.
■ Moreover, it marked the third consecutive month of deterioration in overall construction, and the sharpest rate of decline since the survey began in September 2005.

Click on the link above for the full report.

Then we have the Real Estate Institute of Australia's latest report on home prices which showed the biggest decline in national home prices since 2003. From

Record slump in house prices

AUSTRALIA'S housing market took its biggest quarterly dive in five years in the first three months of this year, according to the latest survey figures.

The weighted average median house price dipped 2.7 per cent, slipping from $471,300 in the December 2007 quarter to $458,488 in the March 2008 quarter, according to the Mortgage Choice/REIA Real Estate Market Facts.

The weighted average price for other dwellings including flats, units and townhouses fell by 2.7 per cent in the quarter to $355,297.

Only two capital cities, Sydney and Perth, had a median house price above $450,000, down from four in the December quarter.

Melbourne continued to have the highest median price for other dwellings, while Hobart remained the cheapest capital in which to buy property.

Mortgage Choice and the Real Estate Institute of Australia (REIA) said the fall in the median house price was the biggest in the five years that they have been compiling the data.

click on the link for the full story. Slowly but surely Australia is following the rest of the world into an economic slowdown and it is no surprise that construction and housing are showing the way.

US Unemployment Rate Leaps in May

Friday's US non-farm payroll report made for some interesting reading, none of it good. The headline number of a loss of -49,000. Job losses included:

construction -34,000
manufacturing -26,000
retail trade -27,000
professional and business services -29,000
service providing -8,000

As shown above the birth death model continues to amaze, with an estimated net 217k new jobs added in May including 42k in construction, WTF?

The real story was the leap in the unemployment rate, jumping from 5.0% to 5.5%. The spin from the media was that it was becasue of a hoard of teenagers entering the workforce. However, the entrance of teens into the workforce is only a small part of the story. The following from the BIG PICTURE:

"Teen unemployment rose 3.3 points, which was probably exaggerated by some calendar issues. But teens are less than 5% of the workforce, so they contributed just 0.2 point of the total rise. Adult unemployment rose from 4.5% to 4.8% - and it was a clean move, with no rounding funniness. The adult participation rate rose 0.1 point, and the EPR [Employment Population Ratio] fell by 0.2 point. Also, the composition of the unemployment rise shows that it wasn't just the kids: permanent job losers and re-entrants accounted for 0.2 points of the rise, and new entrants just 0.1 point.

If you want to spin a story out of this, it could be that people are re-entering the labor force because they're having a hard time making ends meet."

-Liscio Report

With 5 consecutive months of contracting payrolls and an unemployment rate now more than a full percentage point higher than the low of the cycle, there is no doubt the US is in recession.

Thursday, 5 June 2008

Moody's Gets Some Religion on the Monolines

Moody's reinforced the major rating agencies reputation for being behind the curve by warning that they may downgrade the ratings of the monoline insurers AMBAC and MBIA. These companies should have been downgraded 6 months ago,but hey, better late than never. From Bloomberg:

MBIA, Ambac Credit Ratings Under Threat at Moody's

Moody's Investors Service placed the Aaa insurance ratings of MBIA Inc. and Ambac Financial Corp. under review for a downgrade for the second time this year after the two largest bond insurers reported wider losses from the mortgage-market slump.

MBIA shares tumbled to the lowest since June 1988, Ambac slumped to a new all-time low and credit-default swaps on their debt rose after Moody's analyst Jack Dorer said a rating cut is ``the most likely outcome'' of the reviews. Dorer cited diminished ``new business prospects and financial flexibility'' and the likelihood for bigger insurance losses.

MBIA Chief Executive Officer Jay Brown rebuked Moody's and said the review is ``unnecessary.'' Ambac CEO Michael Callen said the timing was ``unfortunate'' because the company's problems are temporary. Armonk, New York-based MBIA and Ambac of New York sold a combined $4.1 billion in shares, bonds and convertible debt to bolster capital and save their ratings. With the shares down more than 90 percent in the past year and their debt under review, raising more money may not be possible, analysts said.

``These companies are getting hit from all sides,'' said Robert Haines, an analyst with CreditSights Inc., a bond research firm in New York. They ``aren't writing new business, they're going to have more losses and they can't access the market to replenish capital. How can they be triple-A rated?''

MBIA Insurance Corp.'s insurance financial strength rating likely will fall to the Aa range, and a drop to the A category is possible, Moody's said today in a statement. Ambac Assurance Corp.'s ranking will probably be lowered to Aa, Moody's said in a separate statement.

click on the link for the full story.

Jay Brown and Michael Callen are kidding themselves. Their businesses are effectively dead. The whole business model is based on having a reliable credit rating and confidence in that rating has effectively dried up. I doubt these companies will exist in their current format before the year is out.

Wednesday, 4 June 2008

ADP Report Suggests Job Growth in May

Possibly some good news on the US labor market front today from the ADP payroll report which showed an increase of 40,000 jobs for the month of May. As seen above, the ADP report has tended to over estimate job growth when compared to the BLS numbers in recent months. From

Nonfarm private employment increased 40,000 from April to May 2008 on a seasonally adjusted basis, according to the ADP National Employment Report™. The estimated change in employment from March to April was revised up from an increase of 10,000 to an increase of 13,000.

The market will take this number as a positive however it is a mere sidehshow to the main event on Friday when the BLS releases the Non-farm payroll report.

Monday, 2 June 2008

Aussie Retail Sales Fall in April

Figures released from ther ABS add more evidence to the case that RBA's interest rate hikes are having an effect on the Australian consumer. Retail sales fell a seasonally adjusted -0.2% in April and are up 4.7% from a year earlier.
SFE futures are now factoring in 0% chance of a rate hike at the RBA's meeting tomorrow. I continue to believe the RBA has done enough however inflation fears have not abated and remain a chief concern.