Chuck's Last Dance

The big news of the day is that Chuck, while the music is playing you've got to get up and dance, Prince's dance card is now empty. From Bloomberg:

Weill's Earnings Machine Stalls as Citigroup Writedowns Deepen

The biggest U.S. bank by assets said yesterday that subprime mortgages and related securities lost as much as $11 billion of their value in the past month, a decline that may wipe out half of the company's profit so far this year. The New York-based company also said in a statement that Charles Prince, Weill's hand-picked successor, stepped down. Former Treasury Secretary Robert Rubin will become chairman, and Citigroup's most senior executive in Europe, Win Bischoff, will be interim CEO.

The company said credit-market upheaval in October impaired by as much as a fifth its $55 billion book of subprime mortgages and related bonds. The writedown costs, which will be recorded in the fourth quarter if markets don't recover, add to the almost $7 billion of costs for bad debt, bond and loan losses recorded in the third quarter.

The fourth-quarter charges may leave the company with a loss of 26 cents a share, Punk Ziegel & Co. analyst Dick Bove wrote in a Nov. 5 report. It would be Citigroup's first quarterly loss since at least 1998, according to data compiled by Bloomberg.

Before the announcement, the company was expected to report $5.32 billion of profit in the fourth quarter, the average estimate of six analysts surveyed by Bloomberg.

No doubt Prince walk away with a nice parachute similar to Stan O'Neal. It doesn't matter if you screw up or do great you'll still get paid on Wall Street. Pick up any financial paper and you'll the knives are out for Prince. Rather than add to that I want to concentrate on the potential fourth quarter write-downs of up to $11 billion that Citi now faces.

I've been saying for a while that this is not a one quarter event. A return to normalcy or anything approaching it is just not going to happen this quarter for the financial industry. 4Q07 earnings estimates are going to start coming down for financial stocks and that is going bring the overall market down as a whole. The optimists cheerily expecting around 10% eps growth in the fourth quarter are going to be disappointed.

Analysts living in Disneyland, who as a group were forecasting a more than $5 billion profit for Citi in the fourth quarter are now contemplating Citi's first quarterly loss since 1998. How many other financial companies earnings will Wall Street analysts completely get wrong due to the lemming like mentality that dominates their ilk? I'd say plenty

As for Citi, there have been questions raised over their capital structure and ability to maintain their dividend. Mish from MGETA has an interesting view on that topic.

Plans or not, Citigroup is going to have to reduce that dividend. And yes, its capital has been called into question. Please see Question of Solvency at Citigroup for more details....

Citigroup will not survive in its current state.

This is going to become an issue now, whether Citigroup should be sliced up. Claims will be made that it is too big and that value would be better realized if certain divisions are spun off. Funny how the wheel turns 180 degrees. 6 months ago Citi were killing it and the behemoth structure was one of it's biggest strengths.

Magical B/D adjustment helps NFP's in October

From the Bureau of Labor Statistics:

Nonfarm payroll employment rose by 166,000 in October, and the unemployment rate was unchanged at 4.7 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job gains occurred in professional and business services, health care, and leisure and hospitality. Manufacturing employment continued to decline, and construction employment was little changed.

That's the biggest monthly growth in NFP's since May this year. A closer look at the detail reveals jobs were lost in following industries: Goods-producing -24,000, Construction -5,000, Manufacturing -21,000, Retail -21,500.

Jobs were added in: Service providing 190,000, Professional & Business Services 65,000, Education and Health Services 43,000, Leisure & Hospitality 56,000, Government 36,000.

It should be remembered that these numbers are subject to large revisions. August NFP's were initially reported as falling -4k, only now to have been revised to a rise of 93k. Last month's NFP number of 110k has been revised back to 94k.


Magical B/D adjustment fairy strikes again.

(click on chart for sharper image)

Moving on to the ever controversial Birth Death adjustment. We see that 103k jobs were added in October by the B/D adjustment. Now remember that the NFP number is seasonally adjusted whereas the B/D adjustment isn't so you can't just subtract the B/D adjustment from the NFP number.

By way of example, the chart below shows the difference between the seasonally adjusted (SA) numbers and the not seasonally adjusted (NSA) numbers. As you can see the NSA numbers fluctuate wildly compared to the SA figures. However the totals year to date are very similar.




In 2006 NFP's averaged 189k per month. In the 10 months to October 2007 NFP's have averaged 125k per month, a decline of -34%. Clearly job growth has slowed but what hasn't slowed is the B/D adjustment. Why is that?

In the period Jun 2006 - Oct 2006 the B/D adjustment totals 430k whilst in the same period in 2007 the B/D adjustment is 422k. A coincidence? I think not. If you look closely at the month to month changes in the B/D adjustment you can see 2006 and 2007 are very closely correlated.


So what does this mean? Whilst employment has slowed the BLS has not changed the way it calculates the B/D adjustment. The BLS admits as much on it's website where it states:

The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.

There you have it in bold. The BLS is essentially assuming the same pattern in 2007 that they did in 2006. However we know, because we don't live on another planet, that housing has fallen off a cliff and that mortgage companies have been imploding yet the BLS has shown a net gain of jobs added to new businesses in both construction and financial activities nine consecutive months from February through October.



The graph above shows the three month moving average of NFP growth ticked up to 118k in the period August - October. Also of interest in this graph is that it shows the weakest recovery in jobs growth after a recession out of the last 3 recessions. The graph below, courtesy of the BIG PICTURE, illustrates this point more clearly.


Interestingly the market reacts to a number that is totally unreliable and usually subject to large revisions. What the market should pay more attention to is the revised figures for the previous 2 months which shows growth in NFP's of 93k in August and 96k in September. Not horrible but definitely below trend growth.

ABCP market loses another $9 billion

Total Commercial Paper outstanding rose for the 4th consecutive week, however Asset Backed Commercial Paper (ABCP) declined a further $9 billion in the week to October 31st.

That makes 12 consecutive weeks of falls in ABCP market, shedding a cumulative total value of $308.1 billion or 26.1% since the week ending August 8th.

Last week it appeared the bleeding may stop as the ABCP market shrunk by only $4 billion, the smallest amount since the credit crunch began, however this week's numbers suggest there is still a lack of confidence in much of the ABCP market.

Jobless Claims yet to sound alarm bells

From the US Department of Labor:

UNEMPLOYMENT INSURANCE WEEKLY CLAIMS REPORT

In the week ending Oct. 27, the advance figure for seasonally adjusted initial claims was 327,000, a decrease of 6,000 from the previous week's revised figure of 333,000. The 4-week moving average was 327,000, an increase of 1,750 from the previous week's revised average of 325,250.

This one of the indicators to watch to see if the US labor market is deteriorating. As you can see jobless claims remain relatively subdued. The 4 week average would have to push through the 340,000- 350,000 level to raise any real concerns.

The consensus view seems to be that after yesterday's 25 basis point rate cut that the Fed is done cutting interest rates for a while. However if jobless claims begin to rise, non farm payroll growth deteriorates further along with a slowing in the consumer spending the Fed may not be done just yet.

Suncorp Management Underestimate Shareholders

From the Sydney Morning Herald:

Suncorp admits it got it wrong

THE newly-expanded insurance and banking combine, Suncorp-Metway, yesterday survived an investor rebellion over its plans to hand performance-free shares worth up to $5.3 million to chief executive John Mulcahy but not before admitting it had handled the issue badly....

In all, the new contract could deliver Mr Mulcahy an extra $7.6 million over and above his old deal through to 2010....

As a non-binding vote, the board could not be forced to go back on its deal with Mr Mulcahy. But Mr Story accepted the blame for misreading the mood of investors and said their concerns would be reflected in any future reshaping of Suncorp's executive payments.

"We accept that these matters were not handled well by us in that the same objectives could have been achieved by the utilisation of a different structure without impact on the principle," he told shareholders....

The remuneration report also outlined "sweetheart" arrangements for another 37 senior executives worth a total of $9 million between them if they stay in place until next October.

I must admit to being pleasantly surprised by these events. Institutional shareholder's usually act as a rubber stamp on management remuneration packages. It's nice to see shareholders actually raising objections to being fleeced by the people who are supposed to run the company for their (the shareholders) benefit.

The last thing Australia needs is a corporate culture like Wall Street where a CEO who loses $8.4 billion in a single quarter can walk away with $160 million in severance pay. Hopefully the Suncorp (SUN) saga will send a message to other companies that shareholders won't put up with the brazen theft of their wealth. Unfortunately incidents like the one at Suncorp are still the exception rather than the rule.

ANH completes management shake-up

As I noted last week it would seem rather unusual if Robert Edge stayed on as CEO of Ansearch (ANH) given that the two directors, Ridge and Grigg, that pushed so hard for his appointment had been ousted. Today we learn that Edge has decided to resign. The ASX announcement stated that:

Mr Edge was engaged by the Company earlier this year to review and restructure the business processes in order to establish a robust platform to support the Company’s future growth. Given this process is now complete and new business processes have been successfully implemented, Mr Edge has decided to resign as CEO to pursue other interests.

Sounds all rather congenial, however given that neither Jones nor Jermyn wanted him there for obvious reasons I'd say he didn't have much choice in the matter.

The purge of dead wood and dodgy characters at Ansearch is good news for shareholders. All that remains is a the appointment of a capable individual to the CEO role. I'll be posting a more in depth analysis of ANH in the near future.

Presentation by Jim Rogers

As always Jim Rogers is interesting to listen to. Amongst other things in this presentation Rogers outlines why he is in the process of moving all his assets out of US dollars, why commodities (particularly agricultural) will continue to boom and why the 21st century will be the century of China. Click on the image to listen to the presentation.