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3Q GDP Growth Revised to 2.8% – Analyst Blog

Dirk Van Dijk — Tue, 24 Nov 2009 16:29:18 +0000

This is a revision to the post I put up when the first cut at the GDP report came out on 10/30. In it the new numbers are in bold and the original estimates are put in parentheses, thus a number in parentheses does not mean that it has a negative value (those will have a minus sign in front of them, numbers relating to the first or second quarters are left unchanged. New text will be in italics. This should give the reader a clear sense of not only how strong GDP and its components, but also how the latest numbers match up.

The recession is over! In the third quarter GDP grew by 2.8% (3.5%), slightly below (comfortably ahead) of expectations for 2.9% (3.0%) growth. This is a huge improvement over the 0.7% decline in the second quarter and the 6.4% plunge in the first quarter.

The internals of the report were strong as well, although it appears that much of the growth came from things like the Cash for Clunkers program and the extraordinary levels of support that are currently being given to the housing sector.

I will first go over the percentage growth rates for the main components of GDP, and then how much each part contributed to, or subtracted from, the 2.8% (3.5%) growth rate. This is probably the more important part since the size of the different parts of GDP are very different, and a small percentage change in a big component can have more impact than a large change in a small component. Just as a reminder: GDP is equal to the sum of Consumer spending, Investment spending, Government spending and net exports, or Y = C + I + G + (X – M) and I will be using that framework for the discussion.

Growth Rates

The overall 2.8% (3.5%) growth of GDP was almost matched by its biggest component, Personal Consumption expenditures, or PCE, which grew 2.9% (3.4%), a big improvement over the 0.9% decline in the second quarter and the 0.6% increase in the first three months of the year.

It is important to note that during the recession, consumer spending declined far less than did overall GDP, especially in the first quarter, so the consumer was becoming a much bigger part of the overall economy. This is not healthy over the long run, but at this point I think people are happy to get some growth where ever we can find it

Consumers spend on both goods and services, and goods are broken down into durable and non durable goods. The big mover in the third quarter were goods, which increased by 7.2% (8.1%) following a decline of 3.1% in the 2Q and an increase of 2.5% in the 1Q. Spending on durable goods was the real driver, growing at an annualized rate of 20.1% (22.3%) in the 3Q, following a 5.6% decline in the 2Q and a 3.9% increase in the 1Q.

Spending on non-durable goods tends to be much more stable than spending on durable goods. Non-durable goods spending rose by 1.7% (2.0%) reversing a 1.9% decline in the 2Q, which was in turn a reversal of a 1.9% increase in the 1Q. Spending on services tends to be even more stable than spending on non-durable goods. Service spending grew at an annualized rate of 1.0% (1.2%) in the 2Q up from a 0.2% increase in the 2Q and a 0.3% decline in the 1Q

Historically, spending on durable goods has been one of the key drivers to getting us out of a recession, and not spending on durable goods one of the key reasons for falling into recessions. It is the volatility in the sector that makes it important more than its absolute size.

Now, you might wonder, what caused the recession to be so nasty last winter when Consumer spending wasn’t really all that bad? The answer is that Investment really fell of a cliff. The good news is that it is starting to come back.

Overall Gross Private Domestic investment grew at an 8.4% (11.5%) annualized rate in the 3Q, but it still has a lot of lost ground to make up from the earlier part of the year. In the second quarter overall investment spending fell at a 23.7% annualized rate

Now here is the kicker -- that was actually a dramatic improvement over the 1Q when investment spending absolutely collapsed, falling 50.5%. Clearly the biggest collapse in investment spending since the Great Depression (and it came on the heels of a 24.2% decline in the 4Q of 2008). To anyone who understood what was going on, those were really terrifying times, and the turnaround from them is absolutely spectacular

There are two basic types of investment: fixed and inventory, and right now we are concerned with fixed investment (I will cover inventory later in the contributions to GDP part).

Fixed investment is broken into two parts, Non-Residential or business investment and Residential investment, which is mostly homebuilding.

Overall Fixed investment rose by 0.3% (2.3%) following declines of 12.5% in the 2Q and 39.0% in the 1Q. Business investment, however, continued to decline, but at a much slower rate, falling 4.1% (2.5%) after 9.6% and 39.2% declines in the 2Q and 1Q, respectively. With massive amounts of unused capacity it is not surprising that businesses are cutting back on their capital spending still.

Business investment comes in two flavors, spending on structures like building new factories, malls and office buildings and spending on equipment and software to go into them. Spending on structures continues to be very weak, falling at a 15.1% (9.0%) annualized rate in the 3Q, but that marks an improvement over the 17.3% decline in the 2Q and the 43.6% collapse in the 1Q. With massive amounts of space sitting idle in offices and empty strip malls littering the landscape, look for new investment in commercial real estate to continue to decline in coming quarters.

Moody’s has estimated that the value of commercial real estate has plunged by 41% since the peak a little over a year ago, and that is hardly an inducement to build more. If a business needs the space, it's far cheaper to just buy some existing space.

Spending on Equipment and Software (E&S) on the other hand is starting to come back, if only feebly, rising 2.3% (1.1%) after a 4.9% decline in the 2Q and a 36.4% plunge in the 1Q. Look for some stability in this line going forward as the new Microsoft operating system will probably generate a new PC cycle, but with capacity utilization still around 70% I would not expect a boom in orders for new factory equipment.

The real star of fixed investment though came on the residential side, which rose 19.5% (23.4%). This is the first increase in almost four years, and follows declines of 23.3% in the 2Q and 38.2% in the 1Q. The long string of declines had brought residential investment to a record low share of GDP. The extraordinary support of the housing sector by the government, including the first time buyer tax credit, the Fed buying up $1.25 Trillion of Fannie (FNM) and Freddie (FRE) backed paper to artificially suppress mortgage rates and the FHA acting like the old New Century Financial or Washington Mutual on their worst days have played a big role in the turnaround. I seriously question the sustainability of it after the support is removed, and I don’t think the support can continue indefinitely.

Government spending grew by 3.1% (2.3%) in the 3Q, a big slowdown from the 6.7% increase in the 2Q, but more than the 2.6% decline in the 1Q. It was all at the Federal level where spending rose at an annual rate of 8.3% (7.9%) down from a 11.4% increase in the 2Q, but up from the 4.3% decline in the 1Q.

Remember this measure of government spending does not include spending on transfer payments like Social Security and Medicare, which are largely captured in the consumption numbers. Defense spending was the big driver -- we are still a nation fighting two wars. It grew at an annual rate of 8.3% (8.4%) down from a 14.0% rate of increase in the 2Q but up from a 5.1% decline in the 1Q.

Non-defense spending rose at a 6.9% (6.8%) annual rate following a 6.1% increase in the 2Q and a 2.5% decline in the 1Q. State and local spending on the other hand is constrained by balanced budget laws and falling tax revenues. It declined 0.1% (1.1%) in the 3Q following a 3.9% increase in the 2Q and a 1.5% decline in the 1Q. They were able to increase spending in the 2Q due to support for the Federal government as part of the stimulus package. Now that support looks like it is being overwhelmed by the plunge in property, income and sales taxes.

International trade has started to rebound, and we saw an increase in both imports and exports. Increasing exports are good for GDP and increases in Imports are bad for GDP, and unfortunately imports rose more than did exports. We were able to improve our overseas sales by 17.0% (14.7%) in the 3Q -- a nice turnaround from the 4.1% decline in the 2Q and the 29.9% plunge in the 1Q. Unfortunately we also increase what we bought from overseas by 20.8% (16.4%), a big turnaround from the 14.7% decline in the 2Q and the 36.4% plunge in the first three months of the year. Keep in mind that we import a lot more than we export, so not only was the percentage increase bigger for imports, it was coming off a higher base.

Contributions to Growth

The biggest part of the economy is the Consumer or PCE, over all it contributed 2.07 (2.36) of the 2.80 (3.50) points of total growth. In the second quarter it caused 0.62 of the 0.70 total decline in the 2Q. In the first quarter it actually offset 0.44 points of the 6.40 total decline. In other words, excluding the consumer the economy would have contracted 6.84% rather than 6.40%.

Within consumer spending, spending on goods added 1.60 (1.79) points after subtracting 0.71 points in the 2Q and adding 0.56 points in the 1Q. Spending on durables was the main driver, adding 1.34 (1.47) points after subtracting 0.41 points in the 2Q and adding 0.28 in the 1Q. Non durable goods added 0.26 (0.31) points after subtracting 0.29 in the 2Q and adding 0.29 in the 1Q.

While spending on services is much more stable than spending on goods, it is also a much larger portion of the consumer wallet. Service spending added 0.47 (0.57) points to the overall GDP growth in the 2Q, up from adding 0.09 points in the 2Q and subtracting 0.13 in the 1Q. It is the volatility that gives durable goods there importance to the economy not the overall size. In the third quarter total spending on durable goods was at a $1.055 Trillion annual rate, just 15.4% of the $6.852 Trillion spent on services, but durables goods had an impact on economic growth that was 158% bigger.

Investment spending was a big swing factor in the 3Q. It added 0.91 (1.22) points to overall growth. That is a HUGE improvement over the 3.10 point subtraction in the 2Q and the 8.98 point implosion in the 1Q. Unfortunately. 0.87 (0.94) points of that contribution came from inventories. Inventory investment is the “worst" type of GDP growth since large increases in one quarter are usually reversed in the next quarter, or in this case, large declines being reversed upwards.

In the 2Q inventory investment subtracted 1.42 points from overall growth and in the 1Q they subtracted 2.36 points. Even in the 4Q they subtracted 0.64 points from growth. Three straight quarters of sharply lower inventories is highly unusual and we were due for a bounce. Perhaps we have one more quarter of a solid contribution from inventory investment, but I would not expect it to last much beyond that.

Overall fixed investment added just 0.04 (0.28) points to growth, but that sure was a nice improvement over the 1.68 point subtraction and the 6.62 point disaster that was the 1Q.

However, it was not coming from the business side. Business investment subtracted 0.40 (0.24) growth points in the 3Q, so it is still very soft, but at least it is not imploding like it was earlier in the year. In the 2Q it subtracted 1.01 points and in the 1Q it took away 5.29 growth points. Within business investment it was spending on structures that caused the problem with a deduction of 0.55 (0.32) growth points while spending on E&S offset 0.15 (0.08) points of that. In the 2Q both sides of business investment were drags on the economy with investment in Commercial real estate subtracting 0.69 growth points and spending on equipment deducting 0.32 points. The 2Q was in turn a major improvement over the 1Q disaster where spending on structures subtracted 2.28 growth points and equipment spending subtracted 3.01 points.

Housing finally helped the economy in the 3Q, adding 0.45 (0.53) points to growth, after a string of 15 straight quarters where it was a drag on the economy. In the 2Q it was a 0.67 point drag and in the 1Q it was a 1.33 point drag. The long decline has, however, made housing a much smaller share of the overall economy. In the 3Q residential investment totaled only $360.9 billion, or 2.52% of the overall economy. At the peak of the housing bubble it represented 6.34% of the overall economy. Thus the 19.5 (23.3%) increase in residential investment had far less of an overall impact than it did in the past.

While residential investment is still near a record low share of the overall economy, I have serious questions about the sustainability of the increase. The extension and expansion of the tax credit as is now moving through the Congress might keep things going for the next few quarters, but after that things are likely to fall apart again. Most of the tax credit is going to those who buy existing homes, rather than new homes, and thus it is a very inefficient way of increasing residential investment. It is however, an open question if we really want to be directing resources into housing given the glut of housing units in the country. Just like we saw with the Cash for Clunkers program, it is probably just encouraging those folks who might have bought later to buy now. Cash for clunkers was a much smaller program, totaling only $3.0 billion, yet is had a huge impact on the economy, most of the improvement in consumer durable goods came from autos.

The tax credit is also tricking people into thinking that the house is more affordable that it really is, just the way that teaser rate ARM’s did, and we saw just how well that worked out. The FHA is handing out mortgages with only 3.5% down and people can use the tax credit for that ridiculously small down payment. This has future disaster of biblical proportions written all over it. The next bailouts will not be of the banks like Bank of America (BAC) and Citigroup (C) but of the FDIC and the FHA.

Direct government spending had a small but positive impact on overall growth in the 3Q, adding 0.63 (0.48) points a fairly significant slowdown from the 1.33 contribution in the 2Q, but better than the 0.52 point drag in the 1Q. All the help came from Washington , not city hall or the statehouse.

The Federal government added 0.65 (0.62) growth points, down from 0.85 points in the 2Q but up from a 0.33 point drag in the 1Q. The Pentagon was the main factor in all three quarters, with defense spending adding 0.48 (0.45) points in the 3Q following a 0.70 addition in the 2Q and a 0.27 point drag in the 1Q. Non-defense spending was sort of a non issue, adding just 0.17 (0.17) points in the 3Q, not much difference from the 0.15 point contribution in the 2Q, and up a little bit from the slight 0.06 point drag in the 1Q.

State and Local governments are not allowed to run operating deficits, and so when faced with declining tax revenues they have to cut back, unless Uncle Sam helps them out. Well Washington is helping, but its not enough and S&L spending was a 0.02 (0.14) point drag in the 3Q. The Federal help was enough in the 2Q and so the contribution to growth in the 2Q was a positive 0.48 points. In the 1Q, before the stimulus package could get much traction S&L spending was a 0.19 point drag.

Net exports had been just about the only bright spot in the first half of the year, even though it came the wrong way, from both imports and exports plunging, only with imports falling more than exports did. That reversed in the 3Q as both showed a nice expansion, but our appetite for foreign goods outstripping the desire for U.S. goods and services abroad. The increase in exports added 1.71 (1.49) points to growth, but the increase in imports was a 2.53 (2.01) point drag, for a net negative contribution from net exports of 0.82 (0.52) points. In the 2Q falling exports subtracted 0.45 points but plunging imports added 2.09 points, for a net imports net help to the economy of 1.64 points.

In the first quarter, as world trade came to a near standstill, net exports were just about the only positive you could find for the economy. Yes, plunging exports subtracted an awful 3.95 points of growth, but the fact that we were buying practically nothing from overseas added 6.58 growth points for a net aid to the economy of 2.85 points. In other words, if the U.S. were a closed economy in the first quarter, growth would have fallen not at a 6.4% rate, but at a 9.25% rate.

Overall

Relative to the first cut at the data, the downward revisions were broad based, with smaller contributions from all major areas of the economy, with the exception of the government. Of particular concern is that fixed investments contribution to growth virtually disappeared.

Investment’s share of GDP is near all time low’s and that is not a good thing for the future of the country. Inventory investment really does not count in this regard. The trade deficit (net exports) continues to be a major problem. While consumption spending growth was revised lower, it still grew faster than overall GDP, indicating that it continues to grow as a share of the economy.

This country needs to move its economy towards one that is focused on investment and exports, not one dominated by consumption, and consumption of imported goods in particular. Still, even though it was not as good a report as the original, it sure is an improvement over the second quarter, and especially over the fourth quarter.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market-beating Zacks Strategic Investor service.

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What You Need to Know about Home Equity Loans

Dee Power — Mon, 23 Nov 2009 14:45:49 +0000

Many home owners want to pull some equity out of their home (if they were lucky enough to buy before the real estate boom then bust) and use the proceeds to pay ...

406 Days Until This Market Crashes…

Investment U — Fri, 20 Nov 2009 16:41:53 +0000

406 Days Until This Market Crashes… by Robert Williams, Publisher Friday, November 20, 2009 David Fessler has a sector that warrants your attention. But first, I want to officially raise a red flag in another market. Something’s amiss in the municipal bond market. Year-to-date, “munies” have behaved more like momentum stocks than their intended purpose of [...]

Initial Jobless Claims Flat(-ish) – Analyst Blog

Dirk Van Dijk — Thu, 19 Nov 2009 15:10:28 +0000

This week, initial claims for unemployment insurance (or jobless claims) were 505,000, the same as last week’s revised figure. However, the initial read was 502,000, so it is just as valid to see this as a 3,000 increase.

That, however, is not much in the overall scale of things. The four-week average fell by 6,500 to 514,000, and is now almost 145,000 below its mid-April peak.

The graph below (from http://www.calculatedriskblog.com/) shows the very significant progress that has been made in brining initial claims down, but also the long way we still have to go. The four-week average is still above the peaks of the two previous recessions. It is also still at a level that would indicate continuing net job losses. We probably have to see initial claims fall below the 400,000 level to indicate that, on balance, the economy is adding jobs.

On the positive side, there is no real evidence of a stalling in the decline, or the formation of a high plateau like we saw in those two downturns. So far, the decline looks more like the pre 1990 downturns, which partially assuage fears of a jobless recovery -- but it is too early to celebrate this. It would be better to plateau at a level around 400,000 like we did coming out of the 2001 recession than to be at a level of over 500,000.

The news on continuing claims was more mixed. Regular state claims for unemployment insurance, which run out after 26 weeks, declined by 39,000 to 5.611 million. If you are out of work for longer than that, then you are eligiable for extended claims, which are paid by the Federal Government as part of the Stimulus program. More than one third (35.6%) of all the unemployed currently have been out of work for more than six months and half have been out of work for at least 18.7 weeks.

There are two major extended benefit programs, and combined they are providing benefits to 4.113 million more workers -- an increase of 119,000 from last week (although the data for extended claims is one week behind the data for regular continuing claims, and two weeks behind initial claims).

Those extended claims do not last forever, but fortunately Congress passed a bill that was signed on November 6th that further extended claims for up to another 20 weeks (depending on the level of unemployment in that state). Unfortunately, we learn from this morning's New York Times that the bill was very poorly crafted in the fine print, and there is still the possibility of millions losing this economic lifeline:

“The record extension of emergency benefits that was signed into law on Nov. 6 was widely praised as a lifeline for hundreds of thousands of Americans who had spent a year or more in fruitless searches for jobs.

"The new law provided up to 14 weeks of federally paid aid to unemployed people who had exhausted existing state and federal limits, benefits that already lasted up to 79 weeks in many states. And for the majority of states with particularly high unemployment, it added six more weeks of payments, bringing the potential total to 99 weeks.

"But many legislators, state aid officials and struggling workers apparently failed to read the fine print. The added federal benefits were built on a series of previous extensions that are slated to end on Dec. 31, unless Congress renews these programs. People who lost their jobs after July 1 of this year, for example, would receive no federal extensions once their customary six months of state aid ran out." (Click here to read more.)

The real number to focus on, then, for evaluating the level of continuing claims is not the regular state benefit numbers, but the combination of the regular state and the extended claims, which now stands at 9.774 million. While we have seen some real progress, if one were to just look at the regular continuing claims data -- which peaked at the end of June at 6.904 million -- that is mostly an illusion, since the extended claims have picked up that slack and then some, rising from 2.430 million, an increase of 1.733 million. Thus, combined continuing claims have actually risen by 440,000 since they “peaked" on just a regular continuing claims basis.

With the pace of hiring as slow as it is, this hole in the safety net will have to be repaired as soon as possible. With no income, and more than six job seekers for every available job, those people are going to be in a world of hurt. Most Americans have very little in the way of savings to fall back on, especially outside of IRA’s and 401k plans. Tapping those would expose people to a 10% penalty and it would be considered taxable income for them. Yet many of them will probably be forced to do so, even if unemployment insurance is extended to them.

It is not just for humanitarian reasons that benefits should be extended. Without an income, people will have to do their banking at the local food bank, not at Bank of America (BAC), and even the local food bank needs a bailout these days. People will be hard-pressed to shop at even the Salvation Army, let alone Wal-Mart (WMT).

Extending benefits is one of the most effective forms of economic stimulus there is. It is far more effective than extending lavish tax credits to move-up homebuyers with incomes up to five times the national median. Unfortunately, the unemployed to not have as effective a lobby as the used home dealers (aka Realtors).

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Zacks Analyst Blog Highlights: D.R. Horton, Pulte, Owens Corning, Masco and EnCana Corporation – Press Releases

Zacks Market Commentaries — Thu, 19 Nov 2009 13:13:36 +0000

For Immediate Release

Chicago, IL – November 19, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: D.R. Horton (DHI), Pulte (PHM), Owens Corning (OC), Masco (MAS) and EnCana Corporation (ECA).

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Here are highlights from Wednesday’s Analyst Blog:

Housing Starts, Permits Plunge

Housing prices are still under pressure, despite unprecedented steps by the Federal government and the Federal Reserve to prop up the price of that asset class. Artificial government support is not as durable a way to prop up prices as a better balance between supply and demand would be.

Well, if prices are going down, the last thing you want to see is more new supply on the market. Thus, in the long term, the decline in housing starts is a good thing. If we stop building houses for long enough, then population growth will start to bring the vacancy rate down. On the other hand, as Lord Keynes famously said, “In the long run we are all dead."

One thing is abundantly clear: this report was not good news for the homebuilders like D.R. Horton (DHI) and Pulte (PHM), nor was it encouraging to suppliers to the industry like Owens Corning (OC) or Masco (MAS). It is also bad news for millions of construction workers who are now unemployed.

It is also yet another reason for the Fed to keep interest rates down very low for a very long time. The only reason for the Fed to consider increasing the Fed funds rate would be if we were going to have a very sharp V shaped recovery. With Housing Starts and Permits falling again, that just simply is not going to happen.

EnCana Misses, Profit Tumbles

EnCana Corporation (ECA) – a major Canadian oil and gas exploration and production (E&P) company – reported weak third quarter results, hit by lower prices and volumes. Operating earnings per share, excluding hedging and foreign exchange effects, came in at $1.03. This fell short of the Zacks Consensus Estimate of $1.11 and way behind the year-ago profit of $1.92.

Revenues were down 64.2% year over year to $3.9 billion. During the quarter, total production was down 7.0% to 4,387 million cubic feet equivalent per day (MMcfe/d), of which 81% was natural gas. Natural gas production decreased roughly 9.3% year-over-year to 3,551 million cubic feet per day (MMcf/d), while oil and natural gas liquids (NGLs) production was up 3.7% to 139 thousand barrels per day (MBbls/d).

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Housing Starts, Permits Plunge – Analyst Blog

Dirk Van Dijk — Wed, 18 Nov 2009 16:26:58 +0000

In October, Housing Starts fell to a seasonally adjusted annual rate of just 529,000, a 10.6% decline from September and down 30.7% from a year ago. That puts housing starts at their lowest level since April, and takes a lot of steam out of the incipient economic recovery.

Most of the damage, however, came in the very volatile apartment and condo area. Starts in buildings with five or more units dropped to their lowest level yet in this cycle at an annualized rate of just 48,000. That is down 33.3% from September and is off 78.1% from an already depressed level of a year ago.

When most people think about housing starts, they think about single family starts. There the news was bad, but not quite as bad as the news from "condo-land." Nationwide, single-family housing starts fell 6.8% from September and are down 10.9% from a year ago, the lowest level of single-family housing starts since June.

Geographically, the declines were widespread. On a monthly basis the hardest hit area was the Northeast, which is fortunately the smallest and least important of the four regions (10.6% of the total in October) when it comes to housing starts (and just about any other housing related data). Starts there fell by 18.8% for the month and are down 26.3% on a year-over-year basis.

It was not just a case of the Northeast having relatively more condos and apartments than other areas of the country, as single family starts there were down by 9.6% for the month. The next worst hit was the Midwest, where starts fell by 10.6% for the month and are down 23.1% year-over-year.

The very large and important South region suffered a 9.6% decline for the month and is down 33.2% year over year. In October, the South was responsible for 51.4% of all housing starts nationwide. Out West, housing starts were down by 8.5% for the month and down 32.1% year over year.

Looking forward, the best indicator of future housing starts is Building Permits. There, too, the news was on the downbeat side, with nationwide permits at a seasonally adjusted annual rate of 552,000, down by 4.0% from September and off 24.3% from a year ago. There, however, the declines were very much centered on the Apartment and Condo area, with single-family permits down just 0.2% for the month and 4.0% on a year-over-year basis. Building permits for buildings with five or more units, on the other hand, plunged by 18.3% for the month and are off 62.4% from a year ago.

Regionally, the permits data is sort of opposite what we saw with starts. The worst-hit areas on a month-to-month basis were the West, down 6.7%, and the South, down 5.8%. In contrast, permits in the Northeast were unchanged, and building permits actually rose by 2.0% in the Midwest. On a year-over-year basis, that pattern also holds up, with the Northeast down just 15.8% followed by the Midwest, down 22.9%, the South, down 24.5% and the West, which is down 29.1% year over year.

I'll admit to having mixed feelings about this report. It was clearly much weaker than consensus expectations, which were for starts to rise to 600,000 from 592,000 in September and for permits to increase to 580,000 from 572,000 last month.

Housing is traditionally one of the most important locomotives pulling the U.S. economy out of a recession, and an increase in housing starts is a good leading indicator of unemployment peaking. Thus this report is very bad news for the economic recovery, the second gut punch in as many days after the very weak report on industrial production and capacity utilization yesterday.

The relationship between housing starts and the unemployment rate (inverted) can be seen clearly in the first graph below (from http://www.calculatedriskblog.com/). This is very bad news for the economy over the next several months. It means that the unemployment rate is going to stay elevated for longer than it otherwise would have.

On the other hand, it is not like the U.S. is suffering from a shortage of housing. As a matter of fact, as the second graph (also from http://www.calculatedriskblog.com/) shows, the vacancy rate is sitting at a record high and is still rising. If you have a whole bunch of homes just sitting empty, it is just plain stupid to be building a lot more of them. There are much better and more productive places we could be investing our money.

Housing prices are still under pressure, despite unprecedented steps by the Federal government and the Federal Reserve to prop up the price of that asset class. Artificial government support is not as durable a way to prop up prices as a better balance between supply and demand would be.

Well, if prices are going down, the last thing you want to see is more new supply on the market. Thus, in the long term, the decline in housing starts is a good thing. If we stop building houses for long enough, then population growth will start to bring the vacancy rate down. On the other hand, as Lord Keynes famously said, “In the long run we are all dead."

One thing is abundantly clear: this report was not good news for the homebuilders like D.R. Horton (DHI) and Pulte (PHM), nor was it encouraging to suppliers to the industry like Owens Corning (OC) or Masco (MAS). It is also bad news for millions of construction workers who are now unemployed.

It is also yet another reason for the Fed to keep interest rates down very low for a very long time. The only reason for the Fed to consider increasing the Fed funds rate would be if we were going to have a very sharp V shaped recovery. With Housing Starts and Permits falling again, that just simply is not going to happen.

Read the full analyst report on "DHI"
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Mortgage Delinquencies Still Rising – Analyst Blog

Dirk Van Dijk — Tue, 17 Nov 2009 20:20:13 +0000

This morning Trans Union, the big credit bureau, released its quarterly report on mortgage delinquencies, and it was not pretty. Nationwide, 6.25% of all residential mortgages were at least 60 days past due in the third quarter, up from 5.81% in the second quarter and 3.96% a year ago. This was the 11th straight quarter that delinquencies increased.

Mortgage delinquencies are the first step in a house eventually going into foreclosure, so look for those to start heading up again. Foreclosures have been held down by trial modifications under the HEMP program, but very few of those have gotten to the stage of being final modifications. And even when mortgages are modified, there is a strong tendency for those people to again find themselves in financial trouble. Clearly people not paying on their mortgages is not good news for the big banks like Bank of America (BAC) and Wells Fargo (WFC) that lent them the money.

If there is a silver lining in the data, it is that the rate of increase seems to be slowing. The third quarter increase was "only" 7.6%, which is down from an 11.3% increase in the second quarter and a 14.0% increase in the first quarter. Of course, as the base increases, each additional percentage of increase means a bigger absolute number of delinquent mortgages.

There are huge regional disparities in the rate of mortgage delinquencies. The former bubble states continue to suffer mind-bogglingly high rates of delinquencies -- 14.5% of all mortgages in Nevada and 13.3% of all homeowners in Florida are at least two months behind on their mortgages. That is almost one in seven in Nevada and about two in every fifteen in Florida.

In contrast, states where very few people live are experiencing very low rates of delinquencies. North Dakota is holding up best, as it is on a number of economic indicators with a rate of only 1.7%. South Dakota is not faring all that much worse at 2.3% and in Vermont the rate is only 2.6%.

However, the gap is starting to close, and not in a good way. The fastest growth in delinquencies is now coming from areas where there was no real housing bubble. The biggest jump came in Wyoming where delinquencies jumped by 17.9% in the quarter, followed by Kansas at 17.4% and North Dakota at 16.0%. Still, it would take a long time for North Dakota to catch up to Nevada.

There are two key forces that are leading to people not paying their mortgages. One goes to a lack of desire to do so, and the other goes to lack of ability to do so. If your house is substantially underwater, i.e. your mortgage is for a lot more than the house is worth, it is not economically rational to continue to pay your mortgage. After all, most mortgages are non-recourse, which means that the worst thing that happens is that the house gets foreclosed on and you go rent.

At one point, there was a huge social stigma to being foreclosed upon, but as it becomes more common, the stigma diminishes. There are, of course, some non-economic costs associated with not paying and just living rent- or mortgage-payment-free for awhile, and in many areas of the country that can now be well over a year. Your kids might be upset with you since they would have to change schools and leave all their friends if you can’t rent in the same school district. People also develop emotional attachments to their houses. Those factors might be worth a $5,000 or $10,000. However, if the house is underwater by $100,000, most people will just tell little Billy that he will make new friends at his new school.

The second reason for rising delinquencies is unemployment. Quite simply, with no paycheck, it is harder to write the mortgage check. It is not a coincidence that states like Nevada, Florida and California, which have very high delinquency rates, also rank near the top in terms of unemployment -- and the Dakotas and Vermont have unemployment rates that are well below the national average. For the delinquency rate to start to fall significantly, we will need to see progress on both the employment front and on the housing price front.

The government has been doing everything in its power to re-inflate the value of houses. It is throwing money at homebuyers in the form of tax credits. Under the recent extension, you don’t even have to be a first-time home buyer to benefit from Uncle Sam’s generosity. Of course, giving money away to move up buyers does not even reduce the inventory of unsold homes, since for each one bought, another one goes on the market.

The Fed has been artificially depressing mortgage rates by buying up $1.25 trillion of mortgage-backed securities. In the absence of that program, rates on a 30-year fixed rate mortgage would probably be at least a full percentage point higher. The Federal government has also assumed the role of subprime mortgage lender through the FHA, which is offering mortgage loans with only 3.5% down, and the tax credit can be used for the down payment. That is exactly the same sort of behavior that got New Century Financial and Washington Mutual into trouble. It just goes to prove the power of a good lobby over economic rationality.

This gift to the realtors of the country is eventually going to come back and bite the country on the behind, resulting in a massive -- think Fannie Mae (FNM)- and Freddie Mac (FRE)-sized bailout -- of the FHA.

The massive actions have had some effect, and the Case Schiller index has shown some improvement in housing prices over the last few months. Also, housing prices are much closer to normal, relative to incomes and rents, than they were a few years ago at the peak of the bubble.

Notice that I said "closer to normal," not "below normal." In the absence of this extraordinary government support, there is still room for housing prices to fall without them becoming undervalued based on historical relationships. The fact that incomes are not growing much due to high unemployment, and rents are falling due to record high vacancy rates, does not help the situation.

This poses a bit of a dilemma, since new housing starts typically lead changes in unemployment. This can be seen in the first graph below (from http://www.calculatedriskblog.com/). In the graph, the unemployment rate is inverted to better show the relationship between it and the rate of housing starts, as well as the lag involved. The dot.com crash-induced recession of 2001 is the one case where the relationship does not seem to hold.

The good news is that it looks like we have seen the bottom for housing starts this cycle back in January. Based on the historical relationship, that means we might start to see some improvement in the unemployment rate by this coming spring.

The bad news, though, is that new housing right now is a classic case of mal-investment. With lots of vacant housing, the last thing we need as a country is more housing units. The second graph below (also from http://www.calculatedriskblog.com/) shows that the dramatic decline in housing starts has not yet begun to make a dent in the number of houses and apartments that are sitting vacant. Thus it seems unlikely that we will see housing starts return to anything like the 1.1 million a year that has historically been about normal for the country.

More likely the rebound will stall out around the levels that marked the bottom for new housing starts in past cycles of around 600,000 a year. Yes, that is a nice percentage gain from the lows of under a 400,000 rate, but it does not suggest a robust recovery.

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If this is true, we all need a vaccine

Andrew Snyder — Mon, 16 Nov 2009 15:51:33 +0000

pBaltimore #8212; (a href="http://www.todaysfinancialnews.com" target="_blank"TFN/a): It’s confirmation! On Friday I wrote how I may have a touch of the flu or some other mind-altering ailment because my thoughts were far more liberal than I am comfortable with admitting./p pWell, it turns out my ultra-liberal, straight-ticket voting, French-guy marrying sister has a verifiable case of the pig flu. And guess who I had dinner with on Thursday night? You betcha, big sis. /p pThere we have it: cause and effect./p pFortunately, my head case was short-lived. By the time my venison sausage and eggs were off the front burner on Saturday morning, I was back to my old self, almost knocking my O.J. off the table stomping my fist over a local political battle./p pIn Friday’s edition#8230;/p

Zacks Bull and Bear of the Day Highlights: Expedia Inc., Triumph Group, Inc., Target, TJ Maxx/Marshall’s and Abercrombie & Fitch – Press Releases

Zacks Market Commentaries — Fri, 13 Nov 2009 13:00:41 +0000

For Immediate Release

Chicago, IL – November 13, 2009 – Zacks Equity Research highlights Expedia Inc. (EXPE) as the Bull of the Day and Triumph Group, Inc. (TGI) the Bear of the Day. In addition, Zacks Equity Research provides analysis on Target (TGT), TJ Maxx/Marshall’s (TJX) and Abercrombie & Fitch (ANF).

Full analysis of all these stocks is available at http://at.zacks.com/?id=5506

Here is a synopsis of all five stocks:

Bull of the Day:

Expedia Inc. (EXPE) is one of the leading online travel companies in the world. The company reported strong results in the last quarter, beating the Zacks Consensus Estimate. Promotional activity continues to have a positive impact on the conversion rate, and spending is expected to strengthen in the next few quarters.

We are also positive about international initiatives, which we think will be the key to future growth. Cost management, a favorable online advertising environment and solid financials are other encouraging factors.

By comparison, the possibility of increased occupancy taxes and low growth in Egencia (the smallest segment) seem less significant. However, the declining average daily rates could be something to watch. We are reiterating our Outperform rating on EXPE shares.

Bear of the Day:

We maintain our Underperform rating on Triumph Group, Inc. (TGI) based on the belief that there will be no significant recovery in the delivery of new commercial aircraft in the medium term. A weak commercial OEM market is likely to continue for the coming months.

Huge dependence on government spending as well as on Boeing, its largest customer, is also discouraging. Intense competition in the aerospace is likely to have an adverse impact on the company.

The company's strategy to grow through acquisition involves risks that could adversely affect the operating results, including difficulties in integrating its recently acquired business.

EMKR, LXRX, EFJI, DrStockPick.com Watch List! for Friday November 13, 2009, EMCORE Corp., Lexicon Pharmaceuticals, Inc. and EF Johnson Technologies, Inc.

Dr. Stock Pick — Fri, 13 Nov 2009 00:36:07 +0000

Dr Stock Pick HOT News & Alerts! _________________________________________ FREE Daily Stock Alerts From DrStockPick.com _________________________________________ DrStockPick.com Watch List! My Picks for Friday November 13, 2009 are: ************************************************************** EMKR, EMCORE Corporation EMKR provides compound semiconductor-based components and subsystems for the broadband, fiber optic, satellite, and terrestrial solar power markets. EMKR is the world’s largest manufacturer of highly efficient radiation hard solar cells for space [...]

Initial Jobless Claims Fall Again – Analyst Blog

Dirk Van Dijk — Thu, 12 Nov 2009 17:24:40 +0000

Initial claims for unemployment insurance (or jobless claims) fell to 502,000 last week -- a drop of 12,000 from last week's revised level (and 10,000 from last week’s unrevised level). That brought the four-week moving average down to 519,750 -- a decline of 4,500 from last week, and of 139,000 from its mid-April peak. That was the lowest level of initial claims since the first week of January (when the numbers were distorted due to the New Years Holiday).

As the chart below (from http://www.calculatedriskblog.com/) shows, that was probably the high point for this cycle. The decline has been quite smooth and steady -- unlike the experience of the last two economic downturns, where after an initial decline, claims leveled off and remained high for an extended period of time.

The fact that we are back to around the same levels we were in January points to the danger of doing a straight extrapolation from the level of initial claims to job losses in the overall economy. Back then we were dropping jobs at a rate of over 700,000 per month, now we are losing jobs at less than 200,000 per month. If history is much of a guide, we will not be adding jobs until we see in four-week average drop below 400,000 or so.

Still, things age going in the right direction, and at a reasonable pace. The problem is that it is still a long journey from where we are to where we need to go. If initial jobless claims were to continue to fall at the pace they have been (after revisions) for the last two months, we would get below that 400,000 around the Christmas holidays. That would indeed make it a Happy New Year.

However, even if we get to the point where the economy is adding jobs, we still have population growth to contend with. Due to the growth of the population, we need to be adding about 100,000 jobs a month just to keep the unemployment rate stable, let alone bring it down significantly. That is a tall order.

There was also some good news on the Continuing Claims front as they dropped by 139,000 to 5.631 million. That is 1.27 million below the peak set at the end of June of 6.904 million. However, that decline has to be taken with a grain of salt since continuing claims only tracks those in regular state unemployment programs, which run out after 26 weeks.

With the average duration of unemployment at 26.9 weeks, and the median at 18.7 weeks (both all-time records by a very long shot versus other recessions) regular continuing claims is clearly a flawed measure. After regular claims run out, people are then covered under emergency extended claims, paid by the Federal government as part of the stimulus package. Those, too, were in danger of running out for many until they were finally extended earlier this week.

There are now 4.043 million people in the two major extended benefit programs, a decline of just over 5,000 this week (actually two weeks ago, the extended numbers are reported with a delay). That decline is just as likely from people simply running out of their extended benefits as from them getting new jobs. The data should be interesting to look at in a few weeks to see if the numbers shoot back up as the new extension kicks in.

I am encouraged by the steady decline in the initial jobs numbers. They show that we are getting closer to the day when businesses finally, on balance, start to hire people again. That will provide people with the income and confidence in the future that we need to get the economy humming again. It would be the start of a virtuous cycle, as that extra income feeds back into the econo0my creating yet more jobs, and more income.

Right now, we are more likely in "no man's land," where the back of the vicious cycle has been broken, but a virtuous one has not yet taken its place. The hope of this happening could help out the retailers just in time for Christmas. However, I would bet that the discounters like Target (TGT) and TJ Maxx/Marshall’s (TJX) do better than the higher end stores like Abercrombie & Fitch (ANF) this year. Still, it's better to see an economy where people are shopping at Wal-Mart (WMT) than one where the only place doing any business is the Salvation Army.

Read the full analyst report on "TGT"
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Initial Jobless Claims Fall Again – Analyst Blog

Dirk Van Dijk — Thu, 12 Nov 2009 17:24:40 +0000

Corrections Beats by a Penny – Analyst Blog

Zacks Market Commentaries — Wed, 11 Nov 2009 21:44:57 +0000

Corrections Corporation of America (CXW) reported a third quarter profit of 33 cents per share. Results beat the Zacks Consensus Estimate of 32 cents. The company had earned a profit of 33 cents in the year-ago quarter.

However, including an unusual income tax benefit of $7.0 million, the company made a profit of $45.3 million or 39 cents a share, compared with $37.9 million 30 cents per share in the year-ago quarter.

Corrections Corporation’s revenue increased 5.5% from the prior-year period to $426.0 million. Results were driven primarily by a 4.5% increase in its average daily inmate population and a 1.3% increase in revenue per compensated man-day.

Management revenue from state customers increased 6.6% from the prior-year period to $224.9 million. The state revenue increase stemmed from a growth in inmate population from California and Arizona but was partly offset by a fall in inmate count mainly from the states of Minnesota and Washington.

Management revenue from federal customers increased 4.9% year-over-year to $166.4 million. This was due to the company’s new management contract with the Federal Bureau of Prisons at its newly constructed Adams County Correctional Center during the quarter.

Operating income increased 6.6% from a year ago to $79.3 million while EBITDA increased 7.0% year-over-year to $104.8 million. Adjusted free cash flow increased 9.9% from the prior-year period to $68.1 million.

Total operating expenses per compensated man-day increased 0.8% year-over-year. This was primarily due to the ongoing ramp-up expenses incurred at Adams County facility and increase in staffing expenses.

Outlook

Corrections Corporation expects a profit of 33 cents to 35 cents a share for the fourth quarter and a profit of $1.24 to $1.26 per share for the full fiscal year. The company’s projections include the potential for additional pricing pressure and the risk of population declines from some customers. As a result of economic uncertainties, state government agencies are experiencing revenue shortfalls in their budgets.

Corrections Corporation of America is the nation's largest owner and operator of privatized correctional and detention facilities and is one of the largest prison operators in the United States, following only the federal government and three states. Currently, the company operates 65 facilities, including 44 company-owned facilities, with a total design capacity of approximately 87,000 beds in 19 states and the District of Columbia.
Read the full analyst report on "CXW"
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Notes on Janet Yellen Speech – Analyst Blog

Dirk Van Dijk — Tue, 10 Nov 2009 19:02:53 +0000

This morning, Janet Yellen, the President of the San Francisco Fed, spoke about the state of the economy. Below are key excerpts from the speech, as well as my reaction to them (spoiler alert: I am in overall agreement with her).

"This is the first talk I’ve given since the economy has officially been reported to be growing again. The economy’s return to growth after a year and a half of recession marks a major turn, and it looks like more than a flash in the pan. It seems to me that the economy has entered a sustained period of expansion.

"We’ve seen meaningful upturns in areas as diverse as housing, consumer spending, industrial production and foreign trade. And, a number of factors bode well for the future, including a better functioning financial system, low mortgage interest rates, a resurgent stock market, a stabilization of house prices and stronger growth abroad."

Yes, overall, things are much better now than they were a year ago, with the glaring exception of unemployment. Rising output, but done with fewer workers means that productivity is rising, but that is sort of a double-edged sword given the level of slack in the economy (see Economic Productivity Surges).

"All the same, I am not going to paint an entirely rosy picture for you. The strength and durability of the expansion is in question. Some of the rebound is due to temporary government programs and a swing in inventory investment that will not provide an ongoing source of growth.

"Financial conditions have improved markedly in some respects, but many financial institutions are still hobbled with bad loans. The outlook for consumer spending is in doubt because households remain burdened with debt, and they have taken enormous hits to their wealth from declines in house and stock prices in recent years.

"And it’s particularly sobering that labor markets continue to deteriorate badly, leaving many millions of our fellow Americans unable to find jobs. Just last week, we found out that the unemployment rate passed 10 percent in October. The 10.2 percent jobless rate is the highest since 1983.

"Today I will consider this mixed picture in some detail and focus on two subjects of professional interest to many of you -- the residential and commercial real estate markets. I want to stress that my comments are my own and do not necessarily reflect the views of my Federal Reserve colleagues."

It would be too much to ask to have everything perfect just a year after the biggest financial freeze-up in 70 years. Bad debt is still choking the system, particularly at the consumer level, which then flows back to the banks. This is going to take a long time to fix. And the burden of debt is, of course, much higher when you are unemployed than when you have a job.

"As we look at the national economy, it’s important to keep things in perspective. It’s not fun to ponder a subdued recovery. But a year ago, after the near-collapse of the global financial system, there was a real possibility of an outright depression.

"Fortunately, we avoided that. But what we did suffer through was bad enough -- the worst downturn since the Great Depression of the 1930s. The recession began at the end of 2007. Economic output has dropped by just over 3½ percent. Over seven million jobs have been lost in the nonfarm sector of the economy. And the unemployment rate has soared by over five percentage points.

"Few, if any, parts of the economy were unscathed. The labor market was devastated, and housing, consumer spending, business investment, exports and imports all fell off the table."

Imports "falling off the table" actually provided a substantial lift to the economy. The rest of the stuff falling really hurt, though. The decline in business investment, to the lowest share of the economy in the post-war era, is particularly troublesome (see The Shape of GDP).

"Against this backdrop, the nation’s third-quarter return to growth was a great relief. Real gross domestic product -- which is the economy’s total output of goods and services -- increased at a solid annual rate of 3½ percent. The recession hasn’t officially been declared over, but a wide array of data suggests that the corner has been turned.

"In the third quarter, residential investment -- which was at the center of the downturn -- rose at nearly a 25 percent annual rate, albeit from a very low level. Home sales, prices and housing starts are once again climbing. Meanwhile, manufacturing is also beginning to show signs of strength. This was helped by a rebound in motor vehicle production, boosted by the government’s temporary Cash-for-Clunkers program. Our exports surged as growth abroad picked up. And, importantly, consumer spending finally is growing."

In the short-term, growing consumer spending is a good thing, but in the long term it is the last thing we need. Sort of like a shot of Jack Daniels can help a bit with a hangover.

"To me, the explanation for this turnaround is clear: Massive and concerted responses by governments and central banks around the world rescued the financial system, brought down interest rates, provided emergency support and broke the economy’s downward spiral. On the monetary policy side, the Fed has pushed its traditional interest rate lever -- the federal funds rate -- close to zero. And, in order to provide additional stimulus, we put in place an array of unconventional programs to spur the flow of credit to households and businesses.

"These measures provided funding to banks and restored liquidity to a range of markets. We’ve increased the flow of credit for securities backed by small business loans, consumer loans, and other assets. Our large-scale purchases of Fannie Mae and Freddie Mac debt and mortgage-backed securities (MBS) helped lower mortgage rates and bolstered the housing market. We’ve also bought longer-term U.S. Treasury debt to help bring private borrowing rates down."

These policies are likely to stay in place for a while to come, and will only gradually be lifted, particularly the low fed funds rate. What happens to mortgage rates once the Fed stops buying every scrap of paper ever issued or backed by Fannie (FNM) and Freddie (FRE) is very much of an open question. Oh, the buying of longer-term treasuries was just to bring private rates down -- it had nothing to do with keeping the interest costs to the government down .

"These initiatives appear to have eased financial conditions. Clearly, the financial system is not yet back to normal, but it has bounced back notably. The stock market has soared since its low in the winter. That rally has helped households recover some of their lost wealth and provided a much-needed psychological boost.

"Investors perceive that economic risks are not as dire as they once seemed to be. Interest rates on corporate bonds -- especially for less-than-prime firms -- have dropped sharply and issuance has been brisk. And the markets that financial institutions and corporations rely on for short-term funding are functioning reasonably well again, due in part to Fed intervention."

Big firms that can tap the credit markets on their own are in much better position than small firms that have to rely on bank loans. Remember that spreads on low-grade corporate debt last winter were higher than the spreads during the Great Depression. While the Fed intervention has not helped everyone, it clearly has helped many.

"Federal government policies also have contributed, including the fiscal stimulus program passed by Congress in February. Tax cuts have raised disposable income, and government spending is directly adding to payrolls. Much of the stimulus money authorized by Congress remains to be spent and will spur growth in coming quarters. Other government initiatives contributed to the third-quarter expansion as well, including the Cash-for-Clunkers program and the $8,000 tax credit for first-time homebuyers.

"The normal dynamics of the business cycle have also turned more favorable. Demand for houses, durable goods such as autos, and business equipment is beginning to revive as households and businesses replace or upgrade needed equipment and structures. A particularly hopeful sign is that inventories of unsold goods, which have been shrinking rapidly, now seem to be in better alignment with sales. Manufacturers had slashed production dramatically in the face of slumping sales. Recent data suggest that this correction may be near an end, setting the stage for more production."

It is hard to tease out how much of the increased demand for housing and autos is due to the government subsidies, and how much is "real" pent-up demand. The October auto sales were somewhat encouraging in this regard, since Cash for Clunkers was not a factor. The rebound to profits at Ford (F) was real, even if it could be laid at the feet of the Clunkers program. The inventory bounce is real, but is probably temporary.

"The big issue is how strong the upturn will be. With such enormous reservoirs of slack in the form of high unemployment and idle productive capacity, we need a strong rebound to put unemployed people back to work and get underutilized factories, offices and stores humming again. Unfortunately, my own forecast envisions a less-than-robust recovery for several reasons. As the impetus from government programs and inventories diminishes in the quarters ahead, private final demand will have to fill the breach. The danger is that demand may grow at too anemic a pace to support vigorous expansion."

While many criticized the stimulus program as being too back-end loaded, as we move into next year people should be thankful that there is still some of it at work. However, it is the change in stimulus that provides the momentum for growth, which after all is the change in GDP. Thus as we move into the second half of next year, while the stimulus spending might be $75 billion in the third quarter, if it was $100 billion in the second quarter, it will be a net drag on growth.

"First, it may take quite a while for financial institutions to heal to the point that normal credit flows are restored. The credit crunch hasn’t entirely gone away. In the face of massive loan losses, banks have clamped down on underwriting and credit terms for both businesses and consumers.

"Smaller businesses without direct access to capital markets are particularly feeling the pinch. Lenders have had to run hard just to stay in place: Rising unemployment, business failures and delinquencies in real estate markets have fed additional credit losses and made it more difficult for financial institutions to get their balance sheets in good order.

"Second, households have been pummeled and prospects for consumer spending are cloudy. Consumers have surprised us in the past with their free-spending ways, and it’s not out of the question that they will do so again. But I wouldn’t count on them leading a strong recovery. They face high and rising unemployment, stagnant wages and heavy debt burdens. Their nest eggs have shrunk dramatically as house and stock prices have fallen, and their access to credit has been squeezed.

"It may be that we are witnessing the start of a new era for consumers following the harsh financial blows they have endured. We often hear the word 'deleveraging' used to describe the push by financial institutions to scale back debt and build equity. Households too have now begun to pay down debt and rebuild their savings. This phenomenon can be seen not only in the United States, but in most countries that experienced similar housing booms.

"The United States was hardly the only country where households borrowed heavily just before a severe housing bust set in. And those countries with greater increases in debt relative to income before the crisis experienced greater declines in consumption spending once the crisis began."

The consumer spending question is a huge conundrum. At almost 71% of the economy in the third quarter (a post-war record, by the way), it is hard to see how the economy moves forward if it is contracting.

However, it is simply not healthy to have such a large percentage of the economy based on consumption. We need more savings in the economy, and more productive capacity. By not saving we are eating our seed corn, but if we don’t eat that seed corn now, we will be malnourished. True, that it is happening in other countries as well, but the need for consumer deleveraging is much greater here than anywhere else.

Ideally, the savings rate would be rebuilt by income rising a lot, and spending growing very slowly. But if consumers are not spending, then companies will not hire, and incomes will tend to fall not rise, making it even harder to rebuild our savings.

"In the United States, the personal saving rate, which had fallen to an incredibly low 1 percent in early 2008, has averaged 4 percent so far this year and may well rise higher. In the current environment, such belt-tightening makes great sense from the standpoint of individual households. In fact, some households may have no other option because their access to credit has been crimped.

"Over the long run, higher saving is surely a good thing for our economy because it provides capital that can be devoted to modern infrastructure, technology and other productive investments that enhance our standard of living. All the same, the transition to a higher saving plane could be painful if it reduces the growth rate of consumer spending for an extended period."

Back in the 1950’s and 1960’s a savings rate of 9 to 10% was normal. That was the period when U.S. economic dominance was at its greatest. We have had the wind at our backs for decades now as the savings rate declined as a falling savings rate translates into higher economic growth, at least in the short term. We have finished coasting downhill, and now have to climb back up. You go slower and have to work harder to ride a bike up a hill than down it.

"Weakness in the labor market is another factor that may keep the recovery sluggish for quite some time. Payroll employment has been plummeting for more than a year and a half, and even though the pace of the decline has slowed, unemployment now stands at its highest level since 1983. In addition, many workers have seen their hours cut or are experiencing involuntary furloughs.

"To bolster earnings in the face of weak revenue growth, employers have been aggressive in cutting labor costs and jobs, and my business contacts say they will be reluctant to hire again until they see clear evidence of a sustained recovery. Weak demand for workers is also putting a lid on paychecks. Wages are barely rising. A well-known measure of overall employment costs rose by only 1¼ percent over the past year, the smallest increase in the history of the series. High unemployment, weak job growth and paltry wage increases are a recipe for sluggish consumer spending growth and a tepid recovery."

Yup, hard to save more when you are unemployed or have seen your hours cut back drastically. The only way is to spend less, and that means a slow recovery.

There was much more to the speech, you can read it in its entirety here: http://www.frbsf.org/news/speeches/2009/janet_yellen1110.html
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More on Unemployment Duration – Analyst Blog

Dirk Van Dijk — Fri, 06 Nov 2009 19:44:25 +0000

While I touched on unemployment duration at the end of my last blog, this is a very important subject and deserves a bit more elaboration. Quite simply being out of work for three or four weeks is a very different experience with very different economic implications than being out of work for six months to a year or more. The focus on the total number of unemployed obscures that reality. The thing that makes this recession so much different than the ones that have gone before it is how long people are staying out of work once they become unemployed. Yeah if you get laid off for a few weeks, it can be a pain in the butt, but essentially it is just an unplanned vacation. It does not really affect your long term financial solvency, nor do your job skills diminish significantly. After six months, regular state unemployment benefits expire.

Fortunately during recessions, the federal government usually will step in and provide emergency extended benefits. However this recession has gone on for so long, and we have so many long-term unemployed, that millions were in danger of losing even those extended benefits. Fortunately the Senate finally got around to extending those benefits for up to another 20 weeks (depending on the overall level of unemployment in that state). Still, unemployment benefits only replace a fraction of what people were earning before they lost their jobs. This means that as soon as people get their pink slips, they will reduce their spending. However, depending on how long they expect to be out of work, they do not bring their spending levels down all the way to their new unemployment insurance income level. There are all sorts of spending categories that are at least semi fixed. If you think you will get a new job soon, you don't cancel little Jimmy's ballet lessons, or Betty's karate lessons. Instead you draw down your savings and use your American Express (AXP) card more.

However, as the weeks go by and you get no response from all the resumes you sent out, more and more things start to go by the wayside. But still does it make sense to quit the country club and lose the $20,000 initiation fee you paid, especially now that you actually have time to use it? Well after a few months you have to bite that bullet too. In the meantime, your non-retirement savings are probably about gone. Going into this recession the savings rate had been close to zero, so it is a pretty safe bet that most people did not have a lot of savings outside their 401-ks or IRAs. You have probably run up your balance on your credit card, but the card companies are getting wise to that and are starting to cut back the available credit limits for millions of accounts. That is a wise move on their part individually, but collectively for the economy, it acts to reduce overall demand.

Oh, and since a big factor in your credit rating is how much credit card debt you have relative to your available limit, both increasing your balance and the bank cutting back your maximum availability will conspire to knock off more than a hundred points from your FICO score. In past downturns, especially recent ones, if the unemployed person were a homeowner, he could tap the equity in the house. Now with millions and millions of homes worth less than the amount of the mortgage, or at least very close to it, that option is not open. Indeed this time around it seems that people are more likely to go in the other direction.

To survive, they are simply not paying on their mortgage and waiting for the sheriff to show up at the door to kick them out. Given the huge numbers of people who are falling behind on their mortgages, and to political efforts to slow the rate of foreclosures, this is actually a very rational strategy. In many parts of the country it has been possible to live rent and mortgage free for well over a year before actually getting kicked out of the house. That can free up a lot of cash to spend on other things. However, it is very bad news for the banks that lent the money like Bank of America (BAC) and Wells Fargo (WFC). It is also going to become a serious issue for the Federal Reserve since it is in the process of buying $1.25 trillion worth of mortgaged backed paper. True, the paper is guaranteed by Fannie (FNM) and Freddie (FRE), but since the taxpayers own 80% of both of them, what is the difference? People have to start tapping their 401-ks and IRAs. While the stock market has recovered nicely, it is still far below its peak, making that option even more painful, along with the 10% penalty imposed if you start to withdraw money from those accounts before retirement age.

By the time people have been out of work for six months or more, they have usually depleted their financial resources. Remember that on average, someone who is out of work has been out of work for 26.9 weeks now, and half of all the unemployed have been looking for work for more than 18.7 weeks. That smashes any record prior to this downturn. At the worst point in the Reagan recession, half of all the unemployed were out of work for more than 12.3 weeks. In fact, since the median duration started being tracked at the beginning of 1967, the median duration has only been in the double digits for 36 of those 502 months, and 14 of those have been during his downturn.

To those who say the stimulus bill has not helped, tell that to the almost 5.6 million people who have been out of work for more than six months. If not for the emergency benefits in that bill, they would be left with no income as soon as they passed that mark. I suspect that the vast majority of people who are in that category assumed that they would have found a new job by now when they first got laid off, and thus did not cut back their spending as fast as, in retrospect, they should have when they first got their pink
slip.

It is long term unemployment that is the hallmark of a recession. The graph below shows the number of unemployed (in thousands) in each duration group back to 1960. This is not adjusted for the rather substantial increase in the total population over that period, so some upward trend to the numbers would be normal. Notice how stable the pink short term unemployment line is. There are always people getting laid off, and people getting hired. In good times, the number of people becoming unemployed does not really fall that much, it is just that they don't stay unemployed for all that long. They are either able to find a new job quickly, or in the case of many manufacturing jobs, get called back to work by their previous employer.

The light blue line of moderate length unemployment (5 to 14 weeks) shows a little bit more cyclical behavior, but nothing like the two longer term measures, the yellow 15 to 26 week group and the dark blue over 26 week long term group. What is striking about this recession is just how high that long term dark blue line has soared. While these graphs do not have the recession bars in, I would note that the level of long term unemployment usually continues to rise for many months after a recession ends. The shorter term groups tend to turn down well before the long term group does. This means that the situation is likely to continue to get worse before it gets better.

When these people do return to work, it is highly unlikely that they will be earning anything close to what they were earning before they got laid off. Many will be homeless, without any savings and in pretty desperate shape. We have already seen a steep rise in the poverty rate, which rose to 13.2% in 2008 from 12.5% in 2007 (see Census Bureau: Poverty Rising and Income, Poverty & Health Insurance).

Among children, the poverty rate rose to 19.0% in 2008 from 18.0% in 2007. I would be shocked if it does not exceed the one in five level when the statistics come out next summer for 2009. Since health care coverage is largely tied to employment in this country, the rising number of unemployed means that the number of people without health insurance, already at 46.3 million in 2008, is likely to jump further. While it is true that the stimulus package did subsidize COBRA insurance by as much as 65%, by the time people are unemployed for more than six months, it is very difficult for most of them to be able to afford even those subsidized premiums. When those people get sick, their only option is to go to the hospital emergency room, which is a very expensive and inefficient way of being treated. It is not free either, the hospital will try to bill them for the services, and even send debt collectors on them, although in most of these cases they will be trying to get blood from a stone.

For many, it simply means that they go without treatment, other than over-the-counter medicines they buy at Walgreen's (WAG). If it turns out to be something more serious, it very often results in death. A Harvard study recently estimated that 46,000 Americans die prematurely each year because of a lack of health care coverage. That is a national disgrace.

While unemployment is a lagging indicator of the economy, it does play a role in the economy going forward. It will be very hard to sustain the surprisingly strong growth we have seen in recent months if we don’t start to see some improvement in the employment picture. Yes, huge improvements in productivity are good, but people on the ground need jobs.

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Is it time to panic?

Andrew Snyder — Fri, 06 Nov 2009 16:08:12 +0000

pBaltimore-(a href="http://todaysfinancialnews.com" target="_blank"TFN/a):Time to panic? If you are part of the Obama administration the answer is yes. If you are an American investor, hold off on the freaking out for at least another month or so./p pWith the nation’s unemployment rate officially in double-digit territory and the under-employed rate ready to the 20% mark, the politicians that promised bliss in the days ahead are eating their words today./p pAnd that means Wall Street is eating its recent gains./p pFor nearly a month, the Dow has hovered around the 10,000 mark. After hundreds of billions of dollars were withdrawn earlier this year, it was relatively easy to put that money back to work and send the equities market higher./p pBut now that the economic data is showing#8230;/p

Omnicity Corp. (OMCY.OB) Sees Clear Path to Rapid Growth

QualityStocks — Thu, 05 Nov 2009 16:16:20 +0000

Omnicity Corp wants to be rural America’s premier telecommunications and broadband Internet Service Provider. The company has developed a business model that has proven successful in thousands of rural Indiana homes, providing high-speed Internet service on a mass basis at a lower cost and more efficiently than wire or fiber optic solutions. With this model [...]

An interview with Charlie Gasparino

Prieur du Plessis — Thu, 05 Nov 2009 09:46:25 +0000

Dan Holland has just interviewed Wall Street chronicler Charlie Gasparino's. Excerpts from the interview are published in this post.

Two More Join Toxic Asset Program – Analyst Blog

Zacks Market Commentaries — Wed, 04 Nov 2009 14:16:37 +0000

The U.S. Treasury Department announced on Tuesday that two more large investment companies have fulfilled the necessary requirements and are ready to join the federal government’s toxic assets purchase program.

The federal government initiated buying toxic assets from banks with the intention of helping them resume normal lending, which will fuel economic recovery.

The two investment companies, which together raised more than the $500 million needed to close investment funds, were New York-based Angelo, Gordon & Co. LP and Norwalk, Conn.-based GE Capital Real Estate. These companies will jointly invest in the Public-Private Investment Program (PPIP), under which the Treasury provides financial support for private firms that buy distressed assets, including mortgage-related loans.

These two companies take the total number of firms to have joined the government in buying toxic assets to six. The private sector capital raised by these six firms totaled $3.58 billion. With the Treasury’s additional investment capital, the total amount available for buying bad bank assets stands at $14.34 billion. Invesco Ltd. (IVZ) and TCW Group Inc. have already agreed to invest in PPIP.

In March 2009, the Treasury initially announced that the program would buy as much as $1 trillion worth of toxic assets. However, amid improvements in the economy, the program has been scaled back several times.

However, the Treasury has remained optimistic and now expects PPIP to be a $40 billion program. It expects three more firms to participate in the program soon.
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On Revisions and on Conditioning

Menzie Chinn — Sat, 31 Oct 2009 17:50:01 +0000

Both have to be "handled with care".

Revisions

We're all tempted to make predictions on the basis of the last data point. And even more difficult to resist is the temptation to make definitive statements on the basis of data that are sure to be revised. For instance, we see this question from Casey Mulligan, "Where's the GDP Disaster?".

Last October, when we were told that spending and incomes were about to collapse, I predicted that "real GDP will not drop below $11 trillion (chained 2000 $)."

Professor Mulligan provides this graph.

Figure from Mulligan, "Where's the GDP Disaster?"

I think this is an excellent time to recapitulate the hazards of making definitive assessments on the basis of data that are sure to be revised [0] [1]. To illustrate this point, I go back to the last recession, which according to the NBER extended from 2001Q1-01Q4.

Figure 1: GDP in billion Ch.1996$, SAAR, according to the April 26, 2002 and October 30, 2003, advance releases. NBER defined recession dates shaded gray. Source: St. Louis Fed ALFRED.

I plot the vintages of GDP in Ch.1996$ available as of April 2002 (the advance release for the first quarter after the recession ended), and October 2003 (advance release for 2003Q3).

Note that GDP in the latter vintage was 1.6% lower (in log terms) in 2001Q2 than it was in the corresponding period according to the earlier vintage. This amounted to a 5 148.6 [corrected 11/1, 10:35am] billion Ch.1996$ difference.

Now, I replicate Professor Mulligan's graph. I draw Professor Mulligan's floor, along with real GDP, and an alternate for 09Q1-09Q2 that would obtain if GDP turned out to be 1.6% lower in a later vintage.

Figure 2: GDP in billion Ch.2000$, SAAR. GDP calculation involves deflating nominal GDP by the base year 2000 deflator, obtained by dividing the 2005-base chain deflator by .88648 (the value of the 2005-base deflator in 2000). The "alternate GDP path" applies the difference between the April '02 and October '03 estimates of 2001Q2 GDP (in log terms). NBER defined recession dates shaded gray, assuming recession ends in 09Q2. Source: St. Louis Fed ALFRED, NBER and author's calculations.

I calculate GDP in Ch.2000$ by dividing the 2005-base chained price index by the average value of the index in 2000, which is 88.648, and then dividing nominal GDP by this base-year-2000 index.

The graph indicates that in 09Q2, GDP was only 2.3% above Mulligan's floor.

And Conditional Forecasts

In some sense, the critical aspect of Professor Mulligan's argument that the events of 2008-09 were never going to be disasterous is that he made his projection conditional on none of the extraordinary measures undertaken by the Fed, nor on the the fiscal stimulus by the Federal government being implemented. It's useful to recap his statement from October:

NO DEPRESSION; NO SEVERE RECESSION

The medium term fundamentals point toward more real GDP, more employment, and (to a lesser degree) more consumption. Some employment and real GDP declines may occur in the short run, but they will be small by historical standards. Professor Cooley recently explained "The losses to date represent less than .5% of the work force. In the relatively mild recession of 2001 to 2002, job losses equaled about 1% of the work force. In the much more severe recession of 1981 to 1982, job losses totaled nearly 3% of the labor force--six times today's figure. And in the (truly) Great Depression--invoked, now, with an alarmist frequency--job losses between 1929 and the trough in 1933 were 21% of the labor force." Note that 21% over 3 1/2 years is an average decline of 2% every quarter for 14 consecutive quarters! If employment declines 2% in even one quarter, or 5% over a full year, I will admit well before 2010 that a severe recession is happening and that my 2010 forecasts are unlikely to be attained.
According to the BLS, national nonfarm employment was 136,783,000 (SA) at the end of 2006, as the housing price crash was getting underway. Real GDP was $11.4 trillion (chained 2000 $). Barring a nuclear war or other violent national disaster, employment will not drop below 134,000,000 and real GDP will not drop below $11 trillion. The many economists who predict a severe recession clearly disagree with me, because 134 million is only 2.4% below September's employment and only 2.0% below employment during the housing crash. Time will tell.

Now, I assume that Mulligan feels free to compare a forecast conditioned on no fiscal policy against one with fiscal policy to the extent he believes multipliers are near zero or even negative. And perhaps he believes money is neutral in the short run. If so, then of course it's fine to make the comparisons he does. But for those of us who believe that monetary and fiscal policy have textbook effects, then making that comparison is problematic. In the absence of these stimulus measures, I believe we may very well have breached that 11 trillion floor.

To see this, consider CBO's assessment that by 2009Q4, the stimulus package would have an impact of between 1.4 to 3.8 ppts of baseline GDP. The midpoint is 2.6 ppts. That's well within the range of the Mulligan floor.

So, to conclude, in my view, a "GDP disaster" would have occurred in the absence of aggressive actions by the Federal Reserve, the US Government, as well as fiscal and monetary authorities abroad.

The 2009Q3 Advance GDP Release and Stimulus Measures

Menzie Chinn — Fri, 30 Oct 2009 00:46:01 +0000

The 3.5% growth rate was, in my view, in large part attributable to direct measures to stimulate the economy, including direct spending on goods and services by the government (Federal, state and local), as well as tax measures. First, let's take a look at how each category of final demand accounted for total growth, in the context of a mechanical decomposition, in Figure 1.

Figure 1: GDP growth and contributions to growth of GDP, in ppts; GDP (black), consumpion (red), fixed investment (green), inventory investment (orange), government consumption (purple), and net exports (light brown). Non-shaded area denotes 2009Q3 advance release. Source: BEA, 2009Q3 advance release, October 29, 2009.

Figure 1 breaks down the contributions of overall growth into the broad national income accounting components (overall investment decomposed into fixed and inventory investment). Interestingly, the contribution of government is fairly modest in Q3 (Note change of vertical axis scale).

Figure 2: Government contributions to growth of GDP, in ppts; total government (gray), Federal non-defense(pink), defense (teal), and state and local (brown). Non-shaded area denotes 2009Q3 advance release. Source: BEA, 2009Q3 advance release, October 29, 2009.

Figure 2 breaks down the government consumption growth contribution into that from Federal nondefense, defense, and state and local government.

Government spending on goods and services (not overall government expenditures) accounted for 0.48 percentage points (ppts). Federal nondefense expenditures accounted for 0.17 ppts, while defense accounted for 0.45 ppts. State and local spending accounted for negative 0.14 ppts. At this juncture, one could leap to the conclusion that the stimulus package, and other measures, had no effect on output. And I'm sure many will. But I think it pays to be a bit circumspect in this regard.

First, it's always helpful to recall that the advance estimate incorporates lots of estimates, and is subject to revisions (see this post).

Second, some individuals have argued that since a portion of the government component comes in the defense category, that should not be construed as being attributable to the stimulus package. But in point of fact, according to CRS ARRA does have some defense expenditures (mostly energy efficiency upgrading). One can see what contracts have been let by going to the http://www.Recovery.gov website (noncompetitive contracts here). As an open question, I'm not sure where Army Corps of Engineers expenditures fall in the categories (I think it's under defense as well, in which case the defense category would incorporate even more of the stimulus spending).

Third, the decline in state and local government spending's contribution is notable. Given the big budget shortfalls in state budgets [1], what this outcome tells me is in the absence of the transfers from the Federal government, the negative contribution would have been even larger.

The Joint Economic Committee held hearings today; J Steven Landefeld, the head of the BEA, stated in his testimony:

...let me conclude by describing how it is reflected in GDP and the national accounts. BEA's national accounts include the effects of the federal outlays and tax cuts included in the ARRA. Because most of the outlays and tax reductions from ARRA during the last three quarters were in the form of grants to state and local governments, tax reductions for individuals and businesses, and one-time payments to retirees, their effects on GDP show up indirectly through the effects on GDP components such as consumer spending, residential investment, and state and local government spending. Thus, BEA’s accounts do not directly identify the portion of GDP expenditures that is funded by ARRA. During each of the second and third quarters, the Making Work Pay Credit lowered personal taxes and raised disposable personal income about $50 billion (annual rate). During the second quarter, ARRA provided payments of $250 to beneficiaries of social security and other programs that raised disposable personal income about $55 billion. ARRA also provided special government benefits for unemployment assistance, for student aid, and for nutritional assistance; these special benefits raised disposable income about $49 billion in the third quarter and about $35 billion in the second quarter. ARRA also funded grants (such as Medicaid) and capital grants (such as highway construction) to state and local governments of about $75 billion in the third quarter and $85 billion in the second quarter.

Mark Zandi also testified. His testimony included this interesting table, reporting estimates of expenditures.

Table 2 from Zandi .

Zandi writes:

Criticism that only $175 billion of the $787 billion stimulus plan has been distributed through tax cuts and increased government spending is misplaced (see Table 2). What matters for economic growth is the pace of stimulus spending, which surged from nothing at the beginning of the year to about $80 billion in the third quarter. That is a big change in a short period and is why the economy is growing again after more than a year.

A competing view is presented by Kevin Hassett (of Dow 36,000) in his testimony.

Contributions to GDP Growth – Analyst Blog

Dirk Van Dijk — Thu, 29 Oct 2009 18:02:59 +0000

Not all components of GDP are created equal. Some are very big, and others relatively small. Some tend to be very stable over time, and some tend to swing violently from quarter to quarter. The bigger and more volatile they are, the more they will impact the overall growth rate of GDP.

Thus looking at just the percentage changes in the components does not tell the full story. Of the 3.5% total growth, how many points were added or subtracted by each part of the economy?

The biggest part of the economy is the Consumer, or PCE -- overall it contributed 2.36 of the 3.50 points of total growth. In the second quarter it caused 0.62 of the 0.70 total decline in the 2Q. In the first quarter it actually offset 0.44 points of the 6.40 total decline. In other words, excluding the Consumer the economy would have contracted 6.84% rather than 6.40%.

Within Consumer spending, spending on Goods added 1.79 points after subtracting 0.71 points in the 2Q and adding 0.56 points in the 1Q. Spending on Durables was the main driver, adding 1.47 points after subtracting 0.41 points in the 2Q and adding 0.28 in the 1Q. Non-Durable goods added 0.31 points after subtracting 0.29 in the 2Q and adding 0.29 in the 1Q.

While spending on Services is much more stable than spending on Goods, it is also a much larger portion of the Consumer wallet. Service spending added 0.57 points to the overall GDP growth in the 2Q -- up from adding 0.09 points in the 2Q and subtracting 0.13 in the 1Q.

It is the volatility that gives Durable goods their importance to the economy, not the overall size. In the third quarter, total spending on Durable goods was at a $1.055 Trillion annual rate, just 15.4% of the $6.852 Trillion spent on Services, but Durable goods had an impact on economic growth that was 158% bigger.

Investment spending was a big swing factor in the 3Q. It added 1.22 points to overall growth. That is a HUGE improvement over the 3.10 point subtraction in the 2Q and the 8.98 point implosion in the 1Q. Unfortunately, 0.94 points of that contribution came from Inventories.

Inventory investment is the "worst" type of GDP growth, since large increases in one quarter are usually reversed in the next quarter -- or in this case, large declines being reversed upwards. In the 2Q, Inventory investment subtracted 1.42 points from overall growth and in the 1Q it subtracted 2.36 points. Even in the 4Q, it subtracted 0.64 points from growth. Three straight quarters of sharply lower inventories is highly unusual, and we were due for a bounce. Perhaps we have one more quarter of a solid contribution from Inventory investment, but I would not expect it to last much beyond that.

Overall Fixed investment added just 0.28 points to growth, but that sure was a nice improvement over the 1.68 point subtraction and the 6.62 point disaster that was the 1Q. However, it was not coming from the business side. Business investment subtracted 0.24 growth points in the 3Q, so it is still very soft, but at least it is not imploding like it was earlier in the year. In the 2Q it subtracted 1.01 points and in the 1Q it took away 5.29 growth points.

Within business investment it was spending on structures that caused the problem, with a deduction of 0.32 growth points while spending on E&S offset 0.08 points of that. In the 2Q, both sides of business investment were drags on the economy with investment in Commercial real estate subtracting 0.69 growth points, and spending on equipment deducting 0.32 points. The 2Q was in turn a major improvement over the 1Q disaster, where spending on structures subtracted 2.28 growth points and equipment spending subtracted 3.01 points.

Housing finally helped the economy in the 3Q, adding 0.53 points to growth -- after a string of 15 straight quarters where it was a drag on the economy. In the 2Q it was a 0.67-point drag and in the 1Q it was a 1.33-point drag.

The long decline has, however, made housing a much smaller share of the overall economy. In the 3Q, residential investment totaled only $360.9 billion, or 2.52% of the overall economy. At the peak of the housing bubble, it represented 6.34% of the overall economy. Thus the 23.4% increase in residential investment had far less of an overall impact than it did in the past.

While residential investment is still near a record low share of the overall economy, I have serious questions about the sustainability of the increase. The extension and expansion of the the tax credit by Congress might keep things going for the next few quarters, but after that things are likely to fall apart again. Just like we saw with the "Cash for Clunkers" (C4C) program, it is probably just encouraging those folks who might have bought later to buy now.

It is also tricking people into thinking that a house is more affordable that it really is -- just the way that teaser-rate ARM’s did, and we saw just how well that worked out. The FHA is handing out mortgages with only 3.5% down, and people can use the tax credit for that ridiculously small down payment. This has future disaster of biblical proportions written all over it. The next bailouts will not be of the banks like Bank of America (BAC) and Citigroup (C) but of the FDIC and the FHA.

Direct Government spending had a small but positive impact on overall growth in the 3Q, adding 0.48 points -- a fairly significant slowdown from the 1.33 contribution in the 2Q, but better than the 0.52 point drag in the 1Q. All the help came from Washington, not City Hall or the Statehouse.

The Federal government added 0.62 growth points, down from 0.85 points in the 2Q but up from a 0.33 point drag in the 1Q. The Pentagon was the main factor in all three quarters, with Defense spending adding 0.45 points in the 3Q following a 0.70 addition in the 2Q and a 0.27 point drag in the 1Q. Non-Defense spending was sort of a non-issue, adding just 0.17 points in the 3Q, not much difference from the 0.15-point contribution in the 2Q, and up a little bit from the slight 0.06 point drag in the 1Q.

State and Local governments are not allowed to run operating deficits, and so when faced with declining tax revenues they have to cut back, unless Uncle Sam helps them out. Well, Washington is helping, but it's not enough, and S&L spending was a 0.14 point drag in the 3Q. The Federal help was enough in the 2Q and so the contribution to growth in the 2Q was a positive 0.48 points. In the 1Q, before the stimulus package could get much traction, S&L spending was a 0.19 point drag.

Net exports had been just about the only bright spot in the first half of the year -- even though it came the wrong way, from both imports and exports plunging, only with imports falling more than exports did. That reversed in the 3Q, as both showed a nice expansion, but our appetite for foreign goods is outstripping the desire for U.S. goods and services abroad.

The increase in exports added 1.49 points to growth, but the increase in imports was a 2.01 point drag, for a net negative contribution from net exports of 0.52 points. In the 2Q, falling exports subtracted 0.45 points, but plunging imports added 2.09 points, for a net imports net help to the economy of 1.64 points.

In the first quarter, as world trade came to a near-standstill, net exports were just about the only positive you could find for the economy. Yes, plunging exports subtracted an awful 3.95 points of growth, but the fact that we were buying practically nothing from overseas added 6.58 growth points, for a net aid to the economy of 2.85 points. In other words, if the U.S. were a closed economy in the first quarter, growth would have fallen not at a 6.4% rate, but at a 9.25% rate.

Overall

Overall this is a very welcome report. It confirms that the recession is over and that we are on the right track. However, I am not thrilled about the overall composition of the growth. Over time we need to see the consumer become a much smaller part of the overall economy, and real business investment become a much bigger share.

Unfortunately, we seem to be headed in the wrong direction, with the growth in consumer spending nearly keeping up with the overall growth of the economy. This is especially true if you consider Residential Investment as primarily part of Consumption. We need net exports to play a bigger and more positive role in the economy, and ideally have that happen through exports growing faster than imports, not from a plunge in imports like we saw in the first half of the year.

Seeing net exports turn into a drag again is disappointing. A big part of that, however, is due to oil imports, and the increase in the price of oil. That is a long-term structural problem that needs to be addressed. Fortunately, the opening-up of the shale gas plays gives us a chance to finally do something about it, but I’m not sure how fast that will occur. That, along with more efficiency and alternative energy sources, can make a dent over time, but not overnight.

But it is a fertile place to see an increase in Investment spending, so it could have a double-barreled effect -- on both the investment line and on the net exports line. The contribution from inventories is not sustainable long-term, but given how much they fell prior to this rebound, we might see a bit more of it in the 4Q, though not much beyond that.

The increase in Consumption spending was largely due to the C4C program, which is now over, so don’t look for a big contribution from Durable goods spending in the fourth quarter.

All in all, a better-than-expected report, but don’t be deluded into thinking that we are out of the woods and the coast is clear. We still face major challenges, and getting complacent here would be a big mistake.
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GDP Notes – In Depth – Analyst Blog

Dirk Van Dijk — Thu, 29 Oct 2009 17:31:08 +0000

Senior strategist Dirk van Dijk, CFA has issued notes on this morning's GDP numbers. These notes will be published in two separate blogs -- Growth Rates and Contributions to Growth.

The recession is over!

In the third quarter, GDP grew by 3.5%, comfortably ahead of expectations for 3.0% growth. This is a huge improvement over the 0.7% decline in the second quarter and the 6.4% plunge in the first quarter.

The internals of the report were strong as well, although it appears that much of the growth came from things like the "Cash for Clunkers" (C4C) program and the extraordinary levels of support that are currently being given to the housing sector.

I will first go over the percentage growth rates for the main components of GDP, and then how much each part contributed (or subtracted from the 3.5% growth rate). This is probably the more important part since the size of the different parts of GDP are very different, and a small percentage change in a big component can have more impact than a large change in a small component.

Just as a reminder, GDP is equal to the sum of Consumer spending, Investment spending, Government spending and net exports, or Y = C + I + G + (X - M), and I will be using that framework for the discussion.

Growth Rates

The overall 3.5% growth of GDP was almost matched by its biggest component, Personal Consumption expenditures, or PCE, which grew 3.4% -- a big improvement over the 0.7% decline in the second quarter and the 0.6% increase in the first three months of the year.

It is important to note that during the recession consumer spending declined far less than did overall GDP, especially in the first quarter, so the consumer was becoming a much bigger part of the overall economy. This is not healthy over the long run, but at this point I think people are happy to get some growth wherever we can find it.

Consumers spend on both Goods and Services, and Goods are broken down into Durable and Non-Durable goods. The big mover in the third quarter were Goods, which increased by 8.1% following a decline of 5.6% in the 2Q and an increase of 2.5% in the 1Q. Spending on Durable goods was the real driver, growing at an annualized rate of 22.3% in the 3Q, following a 5.6% decline in the 2q and a 3.9% increase in the 1Q.

Spending on Non-Durable goods tends to be much more stable than spending on Durable goods. Non-Durable goods spending rose by 2.0%, reversing a 1.9% decline in the 2Q, which was in turn a reversal of a 1.9% increase in the 1Q.

Spending on Services tends to be even more stable than spending on Non-Durable goods. Service spending grew at an annualized rate of 1.2% in the 2Q, up from a 0.2% increase in the 2Q and a 0.3% decline in the 1Q. Historically, spending on Durable goods has been one of the key drivers to get us out of a recession, just as not spending on Durable goods has been one of the key reasons for falling into recessions. It is the volatility in the sector that makes it important more than its absolute size.

Now, you might wonder -- what caused the recession to be so nasty last winter when Consumer spending wasn’t really all that bad? The answer is that Investment really fell of a cliff. The good news is that it is starting to come back. Overall Gross Private Domestic investment grew at an 11.5% annualized rate in the 3Q, but it still has a lot of lost ground to make up from the earlier part of the year.

In the second quarter, overall Investment spending fell at a 23.7% annualized rate. Now here is the kicker; that was actually a dramatic improvement over the 1Q when investment spending absolutely collapsed -- falling 50.5% -- clearly the biggest collapse in investment spending since the Great Depression (and it came on the heels of a 24.2% decline in the 4Q of 2008). To anyone who understood what was going on, those were really terrifying times, and the turnaround from them is absolutely spectacular.

There are two basic types of Investment -- Fixed and Inventory -- and right now we are concerned with Fixed investment (I will cover Inventory later in the contributions to GDP part).

Fixed investment is broken into two parts, Non Residential or business investment, and Residential investment, which is mostly homebuilding. Overall Fixed investment rose by 2.3% following declines of 12.5% in the 2Q and 39.0% in the 1Q. Business investment, however, continued to decline, but at a much slower rate, falling 2.5% after 9.6% and 39.2% declines in the 2Q and 1Q, respectively.

With massive amounts of unused capacity, it is not surprising that businesses are cutting back on their capital spending still. Business investment comes in two flavors -- spending on structures like building new factories, malls and office buildings and spending on equipment and software to go into them. Spending on structures continues to be very weak, falling at a 9.0% annualized rate in the 3Q, but that marks an improvement over the 17.3% decline in the 2Q and the 43.6% collapse in the 1Q.

With massive amounts of space sitting idle in offices and empty strip malls littering the landscape, look for new investment in commercial real estate to continue to decline in coming quarters. Moody’s (MCO) has estimated that the value of commercial real estate has plunged by 41% since the peak a little over a year ago, and that is hardly an inducement to build more. If a business needs the space, it's far cheaper to just buy some that already exists.

Spending on Equipment and Software (E&S), on the other hand, is starting to come back, if only feebly -- rising 1.1% after a 4.9% decline in the 2Q and a 36.4% plunge in the 1Q. Look for some stability in this line going forward as the new Microsoft (MSFT) operating system will probably generate a new PC cycle, but with capacity utilization still around 70% I would not expect a boom in orders for new factory equipment.

The real star of Fixed investment, though, came on the residential side, which rose 23.4%. This is the first increase in almost four years, and follows declines of 23.3% in the 2Q and 38.2% in the 1Q. The long string of declines had brought residential investment to a record low share of GDP. The extraordinary support of the housing sector by the government, including the first-time buyer tax credit -- the Fed buying up $1.25 Trillion of Fannie Mae (FNM) and Freddie Mac (FRE)-backed paper to artificially suppress mortgage rates, and the FHA acting like the old New Century Financial or Washington Mutual on their worst days -- have played a big role in the turnaround. I seriously question the sustainability of it after the support is removed, and I don’t think the support can continue indefinitely.

Government spending grew by 2.3% in the 3Q, a big slowdown from the 6.7% increase in the 2Q, but more than the 2.6% decline in the 1Q. It was all at the Federal level, where spending rose at an annual rate of 7.9% down from a 11.4% increase in the 2Q, but up from the 4.3% decline in the 1Q. Remember this measure of government spending does not include spending on transfer payments like Social Security and Medicare, which are largely captured in the Consumption numbers.

Defense spending was the big driver -- remember we are still a nation fighting two wars. Defense grew at an annual rate of 8.4% down from a 14.0% rate of increase in the 2Q, but up from a 5.1% decline in the 1Q. Non-Defense spending rose at a 6.8% annual rate following a 6.1% increase in the 2Q and a 2.5% decline in the 1Q.

State and local spending, on the other hand, is constrained by balanced budget laws and falling tax revenues. It declined 1.1% in the 3Q following a 3.9% increase in the 2Q and a 1.5% decline in the 1Q. They were able to increase spending in the 2Q due to support for the Federal government as part of the stimulus package. Now that support looks like it is being overwhelmed by the plunge in property, income and sales taxes.

International trade has started to rebound, and we saw an increase in both imports and exports. Increasing exports are good for GDP and increases in Imports are bad for GDP, and unfortunately imports rose more than did exports. We were able to improve our overseas sales by 14.7% in the 3Q -- a nice turnaround from the 4.1% decline in the 2Q and the 29.9% plunge in the 1Q.

Unfortunately, we also increase what we bought from overseas by 16.4%, a big turnaround from the 14.7% decline in the 2Q and the 36.4% plunge in the first three months of the year. Keep in mind that we import a lot more than we export, so not only was the percentage increase bigger for imports, it was coming off a higher base.

Look for the Contributions to Growth blog to be uploaded shortly.
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Housing Prices Up Again – Analyst Blog

Dirk Van Dijk — Tue, 27 Oct 2009 16:47:33 +0000

Helped by the "first-time home buyer" tax credit and other forms of government assistance, home prices -- as measured by the Case Schiller Composite 20 index -- rose for the third straight month, up 0.97%, but still down 11.36% on a year-over-year basis, and off 29.89% from its May 2006 peak (note below when I reference peak levels they are from May 2006, not from the individual city peaks, which might have been a few months before or after the national peak).

Since home prices do exhibit a fair amount of seasonality, I am working with the seasonally adjusted numbers. Most of the press has a habit of tracking the unadjusted numbers, which I feel is a mistake. So realize that the numbers presented here might be different from what you read in the newspaper tomorrow.

A total of 16 of the 20 cities registered price increases, so the gains were widespread. The older Composite 10 index registered a similar 1.03% gain for the month and is down 10.67% on a year-over-year basis, and off 30.85% from the peak.

The first graph below (from http://www.calculatedriskblog.com/) shows the history of both the Composite 10 and the Composite 20 indexes. The first-time homebuyer tax credit provides up to $8,000 to buyers of houses, but is scheduled to expire at the end of November. To claim the credit, the closing must be by that date, so any house that is going to qualify pretty much had to be under contract by now, and even in August (the data is released with a 2-month delay) people were scrambling to make the deals in time to qualify.

When a subsidy is given for a purchase, it is very much of an open question as to how much of that subsidy goes to the buyer, and how much goes to the seller. To the extent any of it goes to the seller, then what the Federal government is doing is using tax dollars to prop up housing asset values.

One would expect that a large portion of the subsidy ended up in the hands of the sellers. The acid test will be what happens to housing prices once that subsidy is removed. The Fed is also helping by its purchase of $1.25 Trillion in Fannie Mae (FNM)- and Freddie Mac (FRE)-backed mortgages, which is artificially holding down mortgage rates.

What happens to mortgage rates when they stop in March? Or will they continue to just keep the printing presses turned on and continue to buy every mortgage out there? The HAMP mortgage modification program is helping to keep the number of foreclosures down, even as delinquency rates continue to skyrocket. This keeps the supply of distressed houses for sale down. However, many of these mortgage modifications are likely to eventually fail, especially if the principal left on the mortgage remains higher than the value of the house. It is a game of "extend and pretend."

Geographically, some of the best gains came from California, which has been among the states hardest hit by the collapse of the housing bubble. San Fransciso saw prices rise by 2.59% for the month, although prices are still down 12.49% on a year-over-year basis and off 40.00% from the peak. San Diego rose 1.52% for the month and is now down just 8.86% for the year and down 39.33% from the peak. Los Angeles saw a 1.27% rise for the month, bringing the decline since last year to 12.00% and is 39.70% below peak levels.

There were also two winners in the Midwest, with Minneapolis seeing a 2.32% gain for the month, but down 13.83% year-over-year and down 30.00% from the peak, and Chicago saw a 1.22% monthly gain. Windy City housing prices are down 12.72% from a year ago and off 22.74% from the peak.

The second graph has a somewhat different way of presenting the city performance information. It shows the declines through different dates on a cumulative basis. Thus, if the final red bar is shorter on the down side than the yellow middle bar it means that prices in that city are actually up year-to-date. It shows that many of the cities that were hit hardest early in the downturn (large blue bars) continued to suffer even bigger declines in 2008, and are for the most part still suffering declines on a year-to-date basis.

Meanwhile, cities that largely sidestepped the bubble on the way up, and which held up well as the national housing market started to turn south, such as Dallas and Denver, suffered only minor losses in 2008 and have already started to see housing prices rebound on a year-to-date basis.

While enormously expensive, the government support of the housing market is working. If housing prices continue to fall, it means more and more people will end up underwater on their homes, and being underwater is the single best predictor if a house will end up being foreclosed upon. This is already a huge problem as illustrated by an analysis by First American Core Logic.

"More than 15.2 million U.S. mortgages, or 32.2 percent of all mortgaged properties, were in negative equity position as of June 30, 2009... June’s negative equity share was slightly lower than the 32.5 percent as of the end of March 2009 and it reflects the recent flattening of monthly home price changes. As of June 2009, there were an additional 2.5 million mortgaged properties that were approaching negative equity. Negative equity and near negative equity mortgages combined account for nearly 38 percent of all residential properties with a mortgage nationwide."

As housing prices rebound, it means that some people who were underwater are able to catch a breath, and many who were on the cusp of going underwater will stay above the waves -- at least for now. The actions have served to slow the trainwreck, and that is a good thing since it gives people time to adjust and for banks to try to earn their way out of the mess (the extremely steep yield curve that is a consequence of the Fed Funds rate near zero is a very big part of that).

However, I am not convinced that the housing market has turned for real, that it will not start to fall again after the supports are removed. Prices are still above normal when measured relative to both incomes and rents, although not nearly as out of whack as they were a few years ago.

But rents are now falling, which will put additional pressure on the price to rent ratio, and with the official (U-3) unemployment rate at 9.8% and rising, with the underemployment rate (U-6) at 17.0% the income side of the price to income ratio is not looking so hot either.

Still, this is a welcome report, I just worry that it will not be sustained. I hope I am wrong about that.
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Stock Market News for October 27, 2009 – Market News

Zacks Market Commentaries — Tue, 27 Oct 2009 14:19:02 +0000

US stocks ended Monday with losses on fresh concerns that the current market levels are overblown. A rebound in dollar against key foreign currencies sent commodities lower and financials fell as reports emerged the federal government may require Bank of America to raise more capital. The group took another beating as influential analyst Richard Bove trimmed his ratings on a number of regional banks. Homebuilders also led the market lower on reports the first time homebuilders' tax credit is unlikely to be extended.

The Dow Jones industrial average oscillated within a 200-point range and briefly touched the 10,000 mark, before some profit taking saw the index squandering the earlier advance and ending the day 104-points lower. Technology shares, only sector to have recorded gains last week, fell out of favor and slid along with the broader market. The technology-laden Nasdaq retreated 12.62 points, or 0.6%, to 2,141.63. The CBOE Vix, the market’s measure of volatility, witnessed its sharpest one-day percentage increase in a month.

As risk-appetite fell and investors turned to safer bets, the greenback moved further from last Wednesday's 14-month low of $74.94, up 0.7% against a basket of currencies. Weak demand prospects sent crude prices off $1.82 to a close of $78.68.

The S&P500 witnessed weakness in all ten industry groups, but notable laggards were financials (-2.3%), basic materials (-2.0%), and oil and gas (-1.6%). A moderate 1.39 billion shares traded on the NYSE, sharply lower than last year's average of 2.28 billion, as declining issues beat those that advanced in price by a three-to-one margin.

Financials came under the hammer as Dick Bove of Rochdale Securities lowered ratings on a number of regional banks, including Fifth Third Bancorp (NYSE:FITB), Sun Trust Banks (NYSE:STI), and US Bancorp (NYSE:USB). To add to the weakness, a Saturday WSJ article indicated towards disagreements between Bank of America (NYSE:BAC) and the government over capital requirements before the firm could repay its bailout funds. Rumors surfaced the company might need to sell shares to repay the funds. Furthermore, FDIC Chief Sheila Bair cautioned banks still face "serious challenges."

Shares in homebuilders also witnessed weakness as the government pondered over whether to extend or possibly wind down the first-time homebuyers' tax credit due to expire November 31. Concerned about the state of housing minus the catalyst, investors sold off homebuilders' shares, sending Toll Brothers (NYSE:TOL) down 4.2%, Lennar (NYSE:LEN) down 4%, and Beazer Homes (NYSE:BZH) off 4.4%.

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EIA: Fuel Supplies Fall Further – Analyst Blog

Zacks Market Commentaries — Fri, 23 Oct 2009 17:10:42 +0000

Recently, the federal government’s Energy Information Administration (EIA) issued an overall bullish report, showing a smaller-than-expected build in crude stockpiles. Further, the data showed that gasoline inventories were down as predicted, while distillate stocks also declined, though fell short of expectations.

In its release, the agency said that crude inventories rose by 1.3 million barrels for the week ending October 16, much lower than analysts' expectations. This is the second successive week in which the crude buildup has been lower than originally anticipated. A major contributing factor to the modest increase can be attributed to a fall in crude oil imports, which dropped to the lowest level in two months.

Current crude oil stocks, at 339.1 million barrels, are 8.9% above the year-earlier level and remain above the upper limit of the average for this time of the year (depicted in the first EIA chart below). The supply cover increased from 23.3 days in the previous week to 23.6 days of supply and is above the year-earlier level of 22.6 days.

Supplies of gasoline declined by 2.3 million barrels from the previous week (in-line with analyst estimates), as the refinery processing rate remained low. At 206.9 million barrels, current inventories are above year-earlier levels and are near the upper half of the historical range, as shown in the following chart from the EIA.

Distillate fuel inventories (including diesel and heating oil) dropped by 800,000 barrels last week (less than anticipated) to 169.9 million barrels, but remain above the upper boundary of the average range for this time of year. This is shown in the following chart, also from the EIA.

Refinery utilization was up a marginal 0.2% from the prior week to 81.1%, lower than analyst expectations, as refiners continued with their repairs and upgrades.

Total refined products supplied over the last four-week period -- a proxy for overall petroleum demand -- was down. It fell by 0.1% from the year-earlier period, with gasoline up 4.2%, distillates (includes diesel) down 12.1% and jet fuel down 3.2%.

The continued decline in fuel inventories (gasoline and distillates) has raised hopes that the worst of the recession-induced slump may be over and demand is picking up. Coupled with stronger equity markets and a soft dollar, this has sent oil prices to a new one-year peak, breaching the $80 per barrel level, thereby providing a big boost to energy stocks.

Though we welcome the bullish EIA data, we are not fully convinced about the sustainability of crude oil’s current gains, as the specter of a continued glut in global fuel supplies still weighs and all of the inventories remain higher compared to averages for this time of year. Moreover, the drop in petroleum stocks was triggered by weak refinery activity rather than a much awaited pick-up in oil demand.

As such, we prefer to maintain our cautious stance on oil refiners like Sunoco Inc. (SUN), Tesoro Corp. (TSO) and Western Refining Inc. (WNR), given that the overall environment for refining margins is likely to remain poor going into 2010.

The sharply lower refinery utilization (at just 81.1% of capacity) provides enough evidence that refineries are cutting back on production because the economy is still struggling on the demand side. Being the largest independent refiner, Valero Energy Corp. (VLO) remains particularly exposed to this unfavorable macro backdrop. We see little reason for investors to own Valero and have an Underperform recommendation on the company.

Companies like ConocoPhillips (COP) and ExxonMobil Corp. (XOM) -- oil majors that have significant refining operations -- are also expected to remain under pressure until pricing and demand improve.

We would also like to maintain our cautious outlook (Neutral recommendation) on integrated oil players and oilfield service firms until the demand outlook improves. Companies such as Chevron Corp. (CVX), Marathon Oil Corp. (MRO), Hess Corp. (HES), Schlumberger Ltd. (SLB), Baker Hughes Inc. (BHI) and Weatherford International (WFT) fall in this category.
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Municipal Haste

QualityStocks — Fri, 23 Oct 2009 12:34:00 +0000

The administration has stated that it intends to raise tax rates on people with incomes in the highest tax brackets in order to finance programs such as health-care reform. The current top federal income tax rate of 35% is low by historical standards but is scheduled to revert to its original 39.6% rate after 2010. Meanwhile, [...]

Does Tower Disapproval Go All The Way To The Top?

Robert Amsterdam — Tue, 20 Oct 2009 13:31:48 +0000

The Gazprom tower, which threatens to imperil St Petersburg's UNESCO heritage status, has been the subject of several public protests of late and, as you may remember, some imaginative headlines. Now the project seems to have encountered a new adversary. ...

Gas Storage at New All-Time High – Analyst Blog

Zacks Market Commentaries — Mon, 19 Oct 2009 14:11:58 +0000

Last Thursday, we received a mildly bearish report from the federal government’s Energy Information Administration (EIA), showing a higher-than-expected rise in natural gas supplies. Stockpiles held in underground storage in the lower 48 states rose by 58 billion cubic feet (Bcf) for the week ended October 9.

This takes the current storage level to a new all-time high of 3.72 trillion cubic feet (Tcf), which is up 13.8% from last year's level and 14.6% above the five-year range (as clear from the nearby chart from the EIA). Current stocks are 450 Bcf above last year’s level and 474 Bcf above the five-year average. The inventory addition was lower than the five-year-average injection of 64 Bcf and last year's build of 81 Bcf.

The relentless increase in gas storage levels has meant that with three weeks remaining in the storage injection season, stockpiles are already 96% full. At this pace, by October 31, which is the end of the injection season, inventories could easily test the maximum capacity of 3.89 Tcf.

Despite the bearish EIA report, natural gas prices (we are referring to Henry Hub spot prices here) have edged up over the past few weeks, currently approaching $5.00 per million Btu (MMBtu), helped by indications of an economic rebound and expectations of a cold winter weather waiting just around the corner. Additionally, the presence of colder weather in early October (particularly in the Rocky Mountain region), have also helped support natural gas prices. However, prices are still way off the July 2008 highs, when they rallied to over $13 per MMBtu, before trending down to seven-year low level of sub-$2 per MMBtu recently.

Continued strong domestic production (from a number of unconventional natural gas fields) and recessionary consumption (due to the economic downturn), particularly in the industrial sector, are at the core of the commodity's current woes. Additionally, the Atlantic hurricane season did little to disrupt offshore production and onshore refineries.

But with U.S. natural gas fundamentals still remaining weak (storage levels are 15% above their five-year average), we are not fully convinced about the sustainability of the commodity’s current gains. This translates into limited upside for natural gas weighted companies and related support plays.

As a result, we remain cautious on natural gas-focused E&P players such as XTO Energy (XTO), Chesapeake Energy (CHK), EOG Resources (EOG), Devon Energy Corp. (DVN), EnCana Corp. (ECA) and Anadarko Petroleum Corp. (APC). We currently rate shares of these companies as Neutral.

We also maintain our Neutral recommendations for land drillers such as Nabors Industries (NBR) and Patterson-UTI Energy (PTEN), as well as natural gas-centric service providers such as BJ Services (BJS), given the extent of excess capacity in the sector that is expected to weigh on dayrates and margins well into next year.

Oil majors like BP Plc (BP) – that have significant natural gas operations – are also expected to remain under pressure until pricing and demand improve further.
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EIA: Big Drop in Fuel Stocks – Analyst Blog

Zacks Market Commentaries — Fri, 16 Oct 2009 14:22:41 +0000

Yesterday, the U.S. Energy Department's weekly inventory release showed a less-than-expected build in crude stockpiles. However, the headline news was centered on a sharp drop in gasoline stocks and refinery utilization that pushed oil prices to a fresh 2009 peak and lifted energy stocks.

The federal government’s Energy Information Administration (EIA) reported a 400,000 barrels rise in crude inventories for the week ending October 9, much less than analyst expectations. The modest increase can be attributed to scaled back operations by the refiners (prompted by weak profit margins) even as imports fell. This follows last week’s report, which showed an unexpected rise in oil supply figures, against consensus forecast of a buildup.

Current crude oil stocks, at 337.8 million barrels, are 9.6% above the year-earlier level and remain above the upper limit of the average for this time of the year (depicted in the first EIA chart below). The supply cover increased from 22.9 days in the previous week to 23.3 days of supply, but it remains below the year-earlier level of 23.7 days.

Supplies of gasoline sank by a whopping 5.2 million barrels from the previous week (far exceeding estimates of a build), the biggest drop in a year, as U.S. refiners reduced processing. At 209.2 million barrels, current inventories are below year-earlier levels and are just above the upper half of the historical range, as shown in the following chart from the EIA.

Distillate fuel inventories (including diesel and heating oil) dropped by 1.1 million barrels last week (more than anticipated) to 170.7 million barrels and but remain above the upper boundary of the average range for this time of year. This is shown in the following chart from the EIA.

Refinery utilization was down 4.1% from the prior week to 80.9% (the lowest since mid-April), much higher than analyst expectations, as refiners reduced runs for repairs and upgrades.

Total refined products supplied over the last four-week period – a proxy for overall petroleum demand – went up. It was up 2.1% from the year-earlier period, with gasoline up 5.3%, distillates (includes diesel) down 10.8% and jet fuel down 3.5%.

The bigger-than-expected decline in fuel inventories (gasoline and distillates) has raised hopes that the worst of the recession-induced slump may be over and demand is picking up. Coupled with stronger equity markets and a soft dollar, this sent oil prices sharply higher to a new one-year peak of over $77 per barrel, providing a big boost to energy stocks (in particular oil refinery companies).

Though we welcome the bullish EIA data, we are not fully convinced about the sustainability of crude oil’s current gains, as the specter of a continued glut in global fuel supplies still weighs and all of the inventories remain higher compared to averages for this time of year. Moreover, the drop in petrol stocks was triggered by a big fall in refinery activity, rather than a much awaited pick-up in oil demand.

As such, we prefer to maintain our cautious stance on oil refiners like Sunoco Inc. (SUN), Tesoro Corp. (TSO) and Western Refining Inc. (WNR), given that the overall environment for refining margins is likely to remain poor going into 2010.

The sharply lower refinery utilization (at just 80.9% of capacity) provides enough evidence that refineries are cutting back on production because the economy is still struggling on the demand side. Being the largest independent refiner, Valero Energy Corp. (VLO) remains particularly exposed to this unfavorable macro backdrop. We see little reason for investors to own Valero and have an Underperform recommendation on the company.

Companies like ConocoPhillips (COP) and ExxonMobil Corp. (XOM) – oil majors that have significant refining operations – are also expected to remain under pressure until pricing and demand improve.

We would also like to maintain our cautious outlook (Neutral recommendation) for integrated oil players and oilfield service firms till the demand outlook improves. Companies such as Chevron Corp. (CVX), Marathon Oil Corp. (MRO), Hess Corp. (HES), Schlumberger Ltd. (SLB), Baker Hughes Inc. (BHI) and Weatherford International (WFT) fall in this category.
Read the full analyst report on "SUN"
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Northrop Pockets Four Contracts – Analyst Blog

Zacks Market Commentaries — Wed, 14 Oct 2009 15:30:00 +0000

Northrop Grumman Corporation (NOC) has recently bagged four small contracts from the Pentagon, totaling approximately $116.6 million. Of this, the largest is a $58 million Army contract to complete a counter-rocket artillery and mortar system.

Work on the contract will be performed in Huntsville , Alabama facility. The company expects to complete the contract by the end of the third quarter of fiscal 2010. The Pentagon also awarded a $42 million Navy contract to build spare and repair parts for weapons-system navigation and radars.

Work on the contract will be performed in the Charlottesville , Virginia facility and is expected to be completed by Oct 2012. The company also received a $9.6 million Air Force contract for a preliminary design for a communications system for the MQ-9 Reaper, an unmanned aerial vehicle. Lastly, another $7 million was awarded to Northrop to work on an integrated base-defense system for the Army.

Work on this contract will be performed in Herndon , Virginia facility and is expected to be completed by October 2010. These contracts will boost the dwindling backlog of Northrop which fell to $70.4 billion after the second quarter of fiscal 2009 from $76.9 billion year over year. Though Northrop Grumman is one of the largest defense contractors, its backlog was affected by the cancellation of the $5.1 billion Kinetic Energy Interceptor program by the U.S. Government.

Based in Los Angeles , California , Northrop Grumman provides products, services, and solutions in information and services, aerospace, electronics and shipbuilding to the military, government and commercial customers of the United States and beyond.

The company is the largest IT service provider to the federal government. In addition, Northrop Grumman is the only nuclear-powered aircraft shipbuilder in the United States . We maintain our long term Outperform recommendation on the shares.
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Northrop Bags Army Contract – Analyst Blog

Zacks Market Commentaries — Thu, 08 Oct 2009 19:22:40 +0000

Northrop Grumman Corp. (NOC) yesterday bagged a five-year $599 million contract from the U.S. Army to provide laser rangefinders. Northrop Grumman is supplying the army with its universal terrain lightweight designators/rangefinders since 2002. Till date, the company has delivered more than 800 of the systems to the Army.

This contract will boost the dwindling backlog of Northrop, which fell to $70.4 billion after the second quarter of fiscal 2009 from $76.9 billion year over year. Northrop’s backlog was affected by the cancellation of the $5.1 billion Kinetic Energy Interceptor program by the U.S. Government.

Northrop Grumman’s future success in the competitive defense industry depends upon its ability to develop and market its defense-related products and services to the U.S. Government, as well as its ability to provide the people, technologies, facilities, equipment and financial capacity needed to deliver those products and services with maximum efficiency. The company competes with Force Protection Inc. (FRPT), General Dynamics Corp. (GD) and Boeing Co. (BA).

Based in Los Angeles, California, Northrop Grumman provides products, services and solutions in information and services, aerospace, electronics and shipbuilding to military, government, and commercial customers of United States and beyond. The company is the largest IT service provider to the federal government. In addition, Northrop Grumman is the only nuclear-powered aircraft shipbuilder in the United States. We maintain our long-term Outperform recommendation on the shares.
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Will stimulating nominal aggregate demand solve our problems?

James Hamilton — Wed, 07 Oct 2009 21:34:26 +0000

In which I join the ongoing debate on how much we should expect fiscal and monetary stimulus to accomplish.

Arnold Kling has proposed a "recalculation" theory of macroeconomics:

My claim (which is not original with me-- it is recognizably Austrian) is that a recession can be thought of as a recalculation. Imagine a central planner who decides to radically change plans. He has a huge recalculation to make in order to figure out where to allocate labor and capital. He says to some people, "Wait a minute. I am thinking. Some of you just have to stand idle while I figure this out."

The market economy is like that central planner. We are undergoing a Great Recalculation....

In conventional, hydraulic macro, we think in terms of this one good called GDP, and the output gap is the difference between how much of this GDP stuff we could produce if everybody were working and how much we are actually producing with all the unemployment over and above "normal." We assume that "normal" unemployment, which is structural and frictional, is some roughly constant fraction of the labor force.

The way I look at things, we have a huge amount of structural and frictional unemployment these days. There is very little cyclical unemployment--limited to autos and household durable goods. If you measure the output gap using my definition of cyclical unemployment, then the output gap is tiny.

Paul Krugman finds this unconvincing:

the whole notion falls apart when you ask why, say, a housing boom-- which requires shifting resources into housing-- doesn't produce the same kind of unemployment as a housing bust that shifts resources out of housing.

It is not clear whether Paul is intending his observation as a refutation of all models that attribute a fall in potential output to sectoral imbalances, though Tyler Cowen seems to read his statement that way. To their discussion I'd like to add a paper I published in 1988. There I presented a model in which unemployment arises from a drop in the demand for the output of a particular sector. The unemployed workers could consider trying to retrain or relocate, or might instead decide to wait it out in hopes that the demand for their specialized skills will come back.

If instead of a drop in the demand for sector A there was a boom in the demand for sector B, it is true that some workers in sector A might choose to retrain or relocate, and be temporarily unemployed as a result. But the key kind of unemployment that I think this sort of model describes-- waiting for an opening in the particular area in which you've specialized-- is caused by drops in demand, not increases.

Insofar as the frictions in that model are of a physical, technological nature, increasing the money supply would simply cause inflation and not do anything to get people back to work. I should emphasize that I built that monetary neutrality into the model not because I think it is the best description of reality, but in order to illustrate more clearly that there is a type of cyclical unemployment that stimulating nominal aggregate nominal demand is useless for preventing.

My personal view is that real-world unemployment arises from the interaction of sectoral imbalances with frictions in the wage and price structure of the sort documented by Truman Bewley and Alan Blinder. The key empirical test, in my opinion, is at what point inflationary pressures begin to pick up. If Krugman is correct, we could have much bigger monetary and fiscal stimulus without seeing any increase in inflation. If the sectoral imbalances story is correct, it would be possible for inflation to accelerate even while unemployment remains quite high.

I would also emphasize that even with a sectoral-imbalance interpretation, there is a clear potential for fiscal policy to have made a positive contribution by preventing job losses caused by state and local government spending cuts. Under the "hydraulic macro" view, as long as the federal government increases spending by the same amount that state and local governments decrease spending, we'd be OK. Under the "sectoral imbalances" view, a $1 increase in federal spending combined with a $1 decrease in state spending is on balance contractionary, and that downturn would have been preventable by a simple fiscal transfer from the federal to the state level. I note that one-fifth of the seasonally adjusted job losses in September came from a decrease of 47,000 in the number of state and local government employees. I am still persuaded that the nation would have been better served with the stimulus bill I proposed in January in place of the American Recovery and Reinvestment Act. Whatever your position on that, I'm presuming we could all agree that things have not developed so far in the way that we would have hoped.

Source: Greg Mankiw

You can find more discussion from Arnold Kling ([1], [2]), Ryan Avent, Robert Waldmann, and Matthew Yglesias.

Prime Star Group (PSGI.OB) Up 48.7% Following Recent Mention by QualityStocks Newsletter

QualityStocks — Wed, 07 Oct 2009 19:18:28 +0000

The stock of Prime Star Group Inc. is currently trading at $0.171, up $0.056 or 48.7% for the day. This strong move has occurred on heavy volume in excess of 1 million shares, which is about ten times the stock’s average daily volume. Prime Star Group was highlighted in QualityStocks FREE Daily Newsletter on September [...]

The Lehman of 2009

Contrarian Profits — Mon, 05 Oct 2009 23:45:26 +0000

pNaturally, at the focus of renewed market pessimism is a struggling financial: CIT Group. (NYSE:a href="http://www.google.com/finance?q=CIT+Group."CIT/a) The company — a hundred-year-old staple of small/medium business lending — is no stranger to walking the credit tightrope. They narrowly averted fiscal meltdown late last year with $2.3 billion in TARP bucks… then again in July by goosing bondholders with a $3 billion a debt-to-equity deal. Back then we joked, “Look for this crisis to repeat in a couple weeks.” We were wrong… it took a couple months./p pSo with some historic irony, one year and two weeks after a href="http://www.google.com/finance?q=OTC:LEHMQ"Lehman Bros./a bit the dust, another debt-burdened, credit-reliant, potentially “too big to fail” institution is looking to either stick its bondholders with a raw deal or enter#8230;/p

Boom, Bust and Rebuild: Bank of America and the Kenneth Lewis Legacy

Contrarian Profits — Fri, 02 Oct 2009 19:27:54 +0000

pKenneth D. Lewis There are many ways to view Kenneth Lewis’ eight-year reign as Bank of America Corp. (NYSE: a href="http://www.google.com/finance?q=NYSE%3ABAC"BAC/a) chief executive, but two seem to hold the most landscape. /p pOn one hand, the $130 billion he spent on acquisitions – FleetBoston Financial Corp., MBNA Corp., LaSalle Bank Corp., Countrywide Financial Corp., Charles Schwab Corp.’s (Nasdaq: a href="http://www.google.com/finance?q=schw"SCHW/a) U.S. Trust private banking unit and Merrill Lynch – that more than tripled the size of Bank of America, making it the largest U.S. lender both by assets and deposits./p pOn the other, his open-wallet policy and the example it set forth almost perfectly encapsulates the boom, bust and nascent rebound of the U.S. housing and banking crisis – which later became the financial#8230;/p

Construction Spending Up Slightly – Analyst Blog

Dirk Van Dijk — Thu, 01 Oct 2009 16:50:11 +0000

In August, total spending on construction rose to a seasonally adjusted annual rate of $941.9 billion, a 0.8% increase from the July rate of 934.6 billion. Through the first eight months of the year, construction spending has totaled $629.5 billion, down 11.9% from the $714.3 billion spent in the first eight months of 2008.

Construction spending is a major component of investment in the GDP accounts, both in terms of residential investment and in non-residential fixed investment in structures. Residential and non-residential construction spending are now headed in opposite directions.

Residential construction rose by 4.7% in August to an annualized rate of $249.5 billion, while non-residential construction dropped a slight 0.1% to an annual rate of $372.6 billion. As the chart below (from http://www.calculatedriskblog.com/) shows, it is unusual to see non-residential spending exceed residential construction.

That said, residential spending got way out of hand during the bubble years. Residential spending is now down 63.1% from its peak in early 2006. On a year-over-year basis, it is still down over 25%, but is starting to turn upward every slightly. Non-residential construction, on the other hand, peaked much later and is down just 12.6% from its top last September, and is down 10.5% year over year.

There is currently a glut of most types of private non-residential structures. Vacancy rates are high and rising for office buildings and stores across the country. I would expect that non-residential construction will continue to fall off as existing projects are completed. My best guess is that non-residential construction eventually gets down to about the $275 to $300 billion level sometime in late 2011.

Residential construction spending has room to increase, as residential investment has fallen to a record low 2.67% of the economy in the second quarter (about 4.5% is normal). Given the amount of housing inventory out there, including the shadow inventory of delinquent mortgage holders who will eventually be foreclosed upon, it will probably take us some time to get back up to that sort of level, and we might never see the over 6% peaks as a share of GDP again in our lifetime.

But it is quite possible that residential spending could get back up to the $350 billion area by late 2011 or so. That would put spending about where it was in 2001, before adjusting for inflation. That would be welcome news for the major homebuilders like D.R. Horton (DHI) and Lennar (LEN).

Public construction actually fell by 1.1% in August to a seasonally adjusted annual rate of $319.8 Billion. Given the ramp-up in stimulus spending, one would expect that public construction would be rising, not falling.

However the Federal government is not the only player in public construction. States and Local governments are under severe budget constraints given falling tax revenues, since when retail sales fall so do sales tax revenues, and when housing prices fall, so do property taxes.

Thus, the smaller branches of government have to either raise taxes or cut spending, and the mood of the public is not exactly favorable towards higher taxes, as everyone is feeling poorer. Therefore they are trying to hold back on big construction projects.

The stimulus bill did specifically earmark money for both education and highway spending, and those two areas have held up pretty well, with education construction spending essentially flat and highway spending up 0.8% from July. Together those two categories accounted for 54.5% of all public construction spending in August.

Going forward, I would expect that total construction spending will be pretty close to flat for the next year or so, with declining non-residential spending offsetting a slow rise in residential construction spending. Just another facet of the sub-par recovery (a recovery, nonetheless) that we are likely to see over the next few years.

Read the full analyst report on "DHI"
Read the full analyst report on "LEN"
Zacks Investment Research

Why You Should Invest in the ‘New’ Germany

Contrarian Profits — Wed, 30 Sep 2009 22:16:52 +0000

pPundits greeted Angela Merkel’s convincing election win in Germany Sunday with a collective yawn. Commentators think the German economy is sluggish and over-dependent on exports, and believe that a change in the German government from a grand coalition to a center-right coalition will make little policy difference./p pI think that’s wrong. It’s an erroneous viewpoint that’s symptomatic of the short memories of the chattering media. It’s also one that could cause investors to miss out on a href="http://www.moneymorning.com/2009/06/18/germany-emerging-market/" target="_blank"one of the best profit plays in the global marketplace today/a./p pI’m talking about Germany – the real powerhouse of Europe./p h3The “New” Germany/h3 pFrom the 1950s to the 1980s, West Germany consistently delivered high growth rates and low inflation. West German engineering proved superior to any other#8230;/p

Who’s Buying Oil?

Contrarian Profits — Wed, 30 Sep 2009 19:35:14 +0000

pAs the US strategic petroleum reserve (SPR) approaches capacity (721.5 million barrels filled out of a total possible 727 million, and will be filled by January 2010), the federal government will fade out of the oil-buying business. Some bearish traders believe that this factor can weigh in on prices, since most petroleum stocks in the United States are government-held rather than private. Bullish traders have also used the filling of the Chinese SPR as a reason that oil should go much higher./p pThe team at Casey’s Energy Opportunities believe that strongplanned government buying or selling of crude oil for SPRs actually have very little impact in the overall market./strong However, an overall drawdown of worldwide inventory could put downward pressure on the#8230;/p

Prieur’s readings (September 29, 2009)

Prieur du Plessis — Tue, 29 Sep 2009 10:24:31 +0000

This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy. Please also add the links to any other worthwhile articles you would like to share to the comments section.

Gander Mountain: Going Private, Sending a Message

Andrew Snyder — Mon, 28 Sep 2009 22:10:37 +0000

pI hope the federal government is paying attention. As regulations and costs increase, more companies, like Gander Mountain (NASDAQ:strong/strongstronga href="http://www.google.com/finance?q=gmtn" target="_blank"GMTN/a/strong) are going private. It is not good news for the nation’s vital financial sector. /p pCould this be a sign of things to come? Earlier today, strongGander Mountain (NASDAQ:a href="http://www.google.com/finance?q=gmtn" target="_blank"GMTN/a) /strongannounced its two largest shareholders have made a deal to take the company private./p pIn an economic environment where regulations are increasing by the minute and costs are rising even faster, middle-weight companies are quickly realizing it is better business to buy their shares from the secondary market and go private./p pSure, the move is costing Gander Mountain a pretty penny – a premium of about 35% of Friday’s closing price – but the handful#8230;/p

The Realities of California’s Water Debate – Note to Hannity:nbsp; The Pumps Are On

Small Cap Pulse — Mon, 28 Sep 2009 19:55:00 +0000

September 28, 2009 - So much disinformation gets pushed on talk radio, and I get the fact that agendas are being served, but what aggravates me isnbsp; how much of that ballyhoo is just bought into asnbsp; fact without the facts actually getting checked. So, just the facts: Re: California Water and the lsquo;pumps being turned offrsquo;: Kennbsp;Salazar of the Department of the Interior said: "They are asking the federal government to turn on water pumps that deliver water through the Bay Delta to Central Valley users, but the pumps are on," according to a Interior fact sheet updated on September 17. "The temporary pumping restrictions that were required under the Endangered Species Act ended on June 30th. They accounted for approximately one-quarter of 2009 water delivery shortages to farms and water users; the other three-quarters of this yearrsquo;s delivery shortage were the result of a lack of run-off." The folks are complaining about 330,000 acre-feet of water (5% to 7% of the total amount being exported from the California Delta Pumps) as a measure to protect California and Oregonrsquo;s fishing industriesnbsp; (fear not ndash; there are legitimate ways to recoup this water, and about 17x more (read the Pac Institute report below). Regarding the statement on the California water issues from the DOI: * Check: http://www.doi.gov/documents/California_Reality_Check.pdf In terms of what is being done, at a Federal level, about the California water shortage: middot;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp; http://www.doi.gov/news/09_News_Releases/041509.html middot;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp; http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/7_0_1RD?printable=trueamp;contentidonly=trueamp;contentid=2009/07/0351.xml middot;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp; http://www.doi.gov/news/09_News_Releases/082009b.htmlnbsp; If you are so inclined, read the Pacific Institutersquo;s report which shows how the state of California could fundamentally address its water shortage issues: middot;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp; http://www.pacinst.org/reports/california_agriculture/final.pdfnbsp; More misinformation clarified by Peter Gleick of the Pacific Institute: Myth 1: Farmers on the west side of the San Joaquin Valley are receiving "just 10 percent of their allocation this year." nbsp;(Note from SCPEditor: Publications as large as Newsweek propagate the myth). Myth 2: Water shortages are causing massive new farm unemployment. Myth 3: Farmers are bearing disproportional impacts of water shortfalls because of court rulings in favor of fish.All three of these statements are false, and they've been shown to be false so many times that continuing to repeat them verges on intentional deception on the part of those who repeat them to gullible politicians or lazy reporters. 1. Farmers in the Central Valley get water from many places, and when one source dries up, another temporarily takes its place. In a remarkable letter sent by DWR Director Lester Snow to Senator Dianne Feinstein on May 15th, official data show that the major Central Valley districts will use at least 75% of their average water use by mixing sources, using stored groundwater, participating in water transfers, and so on. Not 10%. And the biggest moaner is the Westlands Water District. Yet Snow points out that they will apply at least 86% of their normal water. On the other hand, the San Joaquin Valley wildlife refuges will get 75% of its promised water, less than many of the agricultural districts. Some farmers get less than others in dry years because of their junior water rights -- and they always have. Are they arguing to revamp the water rights system? That would be a worthy discussion to have. 2. The overall job problem is not a water problem -- it is a result of a global and national economic crisis. Increases in unemployment are worse, by far, in non-farm industries. In Fresno County, unemployment today is substantially lower than it was just five and ten years ago and farm employment grew; non-farm employment shrunk. Indeed, the only sector showing increases in employment in May 2009 (see http://www.calmis.ca.gov/file/lfmonth/frsn.pdf ) was the farm sector. In some of the hardest hit areas, unemployment is much higher -- but it is always much higher. Unemployment rates in Mendota are above 30% now. But you know what? Nine years ago, unemployment in Mendota was 30%. Six years ago, it was 36%. The problem in Mendota isn't just the current drought. The Central Valley of California has been plagued by poverty and lack of access to reliable jobs and basic services, like clean drinking water, for decades. Turning the pumps back on will do little, if anything, to address the systemic injustice that farm worker communities endure in both wet years and dry. 3. It's not the fish. Two months ago, DWR director Lester Snow testified before Congress that if there had been no court order to protect fish, CVP deliveries to the San Joaquin Valley would only be 5% higher. The problems farmers are facing aren't due to the tiny portions of water offered up for ecosystems; they are due to a drought and a dysfunctional water management system that has been slowly collapsing for decades. I sat through the Hannity hack-job interview with Zeke Grader (http://www.youtube.com/watch?v=1IOf-11wmlY) and this kind of reporting is just shameful. Regardless of what side you take on the issue, there has gotnbsp; to be room for respectful discourse and debate, and god-willing, a mutual interest in discussing the facts as well as coming to a resolution that is the greater interest of the greatest good. The issue is clearly a serious one, and important to farmers and fishermen alike, as well as to the rest of us. nbsp;

Ruinous Debt to Create Futureless Suburbia

Contrarian Profits — Fri, 25 Sep 2009 23:33:54 +0000

pIn our history, the American nation committed obvious sins against select groups of people, and we’ve paid bitterly for some of that. But now it’s our sins against the land itself that threaten to sink the USA as a viable enterprise./p pIt’s odd, that in his otherwise excellent blow-by-blow account (”Eight Days,” in the Sept 21 emNew Yorker Magazine/em) of the September 2008 Wall Street meltdown that left Lehman dead, and a href="http://www.google.com/finance?q=AIG"AIG/a croaking in a ditch, and the banking system in general functionally crippled, reporter James B. Stewart never got around to really describing the cause of it all — namely, the on-the-ground material catastrophe of American suburbia./p pIt was the worthlessness of the tradable securitized debt associated with all those overpriced (and#8230;/p

Toyota Offloads Financial Arm – Analyst Blog

Zacks Market Commentaries — Fri, 25 Sep 2009 17:10:11 +0000

Toyota Motor (TM) plans to sell its entire stake in Toyota Financial Services Securities Corp. to Tokai Tokyo Financial Holdings in January next year. This will enable the company to focus solely on its automobile operations. Ahead of the stock sale, the brokerage unit will acquire a stake of about 5% in Tokai Tokyo Financial in October this year.

Toyota has been battered financially by the economic crisis. The company posted its first annual loss (¥437 billion or $4.4 billion) since 1950 for the fiscal year ended March 2009. Further, management has recently projected net loss to worsen to ¥550 billion ($5.5 billion) for the fiscal year ending March 2010.

However, the recently ended Cash for Clunkers program strengthened demand for Toyota’s fuel-efficient vehicles in the U.S. The federal government program launched in late July allowed consumers to trade in their old gas-guzzling cars and trucks with a mileage of 18 miles per gallon or less for a value of up to $3,500–$4,500.

Toyota ruled the roost in Clunkers program, featuring as many as 3 models among the top 10 buys under the program. These are the Toyota Corolla (ranked first), Toyota Camry (ranked third) and Toyota Prius (ranked seventh). In terms of market share, Toyota enjoyed a lead of 19.4%.

We recommend the shares of Toyota Motor as Neutral.

Read the full analyst report on "TM"
Zacks Investment Research

Debunking The Paradox of Thrift: Why Consumer Spending Won’t Save Our Economy

Investment U — Tue, 22 Sep 2009 21:35:22 +0000

Debunking The Paradox of Thrift: Why Consumer Spending Won’t Save Our Economy by Mark Skousen, Contributing Editor “America’s saving rate has leaped ahead – and it’s sending America to the poorhouse.” – David Fessler An Investment U column attacking the virtue of thrift – surely not? Yet there it was – an article from David Fessler [...]

Natural Gas Builds at Slower Pace – Analyst Blog

Zacks Market Commentaries — Fri, 18 Sep 2009 14:21:23 +0000

Yesterday, we received a mildly positive report from the federal government’s Energy Information Administration (EIA), showing a less-than-expected rise in natural gas supplies. Stockpiles held in underground storage in the lower 48 states rose by 66 billion cubic feet (Bcf) for the week ended September 11.

This takes the current storage level to 3.46 trillion cubic feet (Tcf), which is up 16.7% from last year's level and 16.4% above the five-year range (as clear from the nearby chart from the EIA). Current stocks are 496 Bcf above last year’s level and 487 Bcf above the five-year average. The inventory addition was lower than the five-year-average injection of 82 Bcf but slightly exceeded last year's build of 65 Bcf.

Overall, the relentless increase in gas storage levels continue to add to the long list of issues weighing on the commodity. At this pace, inventories are on course to surpass the all-time high level of 3.57 Tcf recorded at the end of October 2007.

Natural gas prices rallied earlier last year, reaching over $13 per million Btu (MMBtu) in July 2008, before trending down to seven-year low level of sub-$2 per MMBtu (we are referring to Henry Hub spot prices here).

Continued strong domestic production (from a number of unconventional natural gas fields) and recessionary consumption (due to the economic downturn), particularly in the industrial sector, are at the core of the commodity's current woes. Additionally, the Atlantic hurricane season has done little to disrupt offshore production and onshore refineries.

However, prices have rebounded somewhat over the past two weeks, currently settling at well over $3 per MMBtu, helped by back-to-back bullish storage data from the EIA as well as indications of an uptick in industrial production levels. But with U.S. natural gas storage levels still remaining 16% above their five-year average, we do not see any sustained price gains on the commodity front. This translates into limited upside for natural gas weighted companies and related support plays.

As a result, we remain cautious on natural gas-focused E&P players such as XTO Energy (XTO), Chesapeake Energy (CHK), EOG Resources (EOG), Devon Energy Corp. (DVN) and EnCana Corp. (ECA). We currently rate shares of these companies as Neutral.

We also maintain our Neutral recommendations for land drillers such Nabors Industries (NBR) and Patterson-UTI Energy (PTEN), as well as natural gas-centric service providers such as BJ Services (BJS), given the extent of excess capacity in the sector that is expected to weigh on dayrates and margins well into next year.
Read the full analyst report on "XTO"
Read the full analyst report on "CHK"
Read the full analyst report on "EOG"
Read the full analyst report on "DVN"
Read the full analyst report on "ECA"
Read the full analyst report on "NBR"
Read the full analyst report on "PTEN"
Read the full analyst report on "BJS"
Zacks Investment Research

Zacks Industry Outlook Highlights: Peabody Coal, Arch Coal Inc., Rio Tinto and Walter Energy – Press Releases

Zacks Market Commentaries — Fri, 18 Sep 2009 13:25:47 +0000

For Immediate Release

Chicago, IL – September 18, 2009 – Zacks.com announces the latest Industry Outlook. Today, Zacks Equity Research discusses the Coal sector, including Peabody Coal (BTU), Arch Coal Inc. (ACI), Rio Tinto (RTP) and Walter Energy (WLT).

Here is the latest on the Coal sector:

The larger coal players with strong balance sheets will be able to capitalize on the current market environment in the form of acquisitions. With asset prices coming down from mid-'08 levels and smaller producers feeling the strain on margins, this represents opportunities to acquire reserves on the cheap.

In particular, we like companies with exposure to the international coal markets as well as the Powder River Basin (PRB) in the U.S. Companies like Peabody Coal (BTU) and Arch Coal Inc. (ACI) look attractive currently. Both have recently engaged in long-term growth acquisitions.  

Peabody is the largest pure-play coal producer, with significant leverage to the Australian export market. Due to the high quality of coal produced and its proximity to Asia (emerging markets), Australian seaborne coal trades at a premium to all other coals.  

Peabody would benefit especially when China and other Asian emerging markets begin to rebound. The stimulus packages enacted by the federal government during the recent months should start to pay dividends toward the end of '09.  

Arch Coal has a significant amount of reserves and is a top-three producer in the PRB. In our opinion, PRB coal will be in great demand over the coming years. The significant coal-fired power plant build-out will increase annual thermal coal demand by more than 60 MM tons; approximately 50% of this new demand will be met by PRB supply. Its likely acquisition of Rio Tinto’s (RTP) Jacobs Mine will increase ACI's PRB market share while gaining operating synergies.  

We also like companies with leverage to metallurgical coal markets. When the global economy starts to turn around, likely in the beginning of 2010, demand for steel and metallurgical coal should rise. Companies like Walter Energy (WLT) should fare well in this environment.  

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Fitch Downgrades Sallie Mae – Analyst Blog

Zacks Market Commentaries — Wed, 16 Sep 2009 15:45:46 +0000

The corporate ratings of student lender SLM Corp. or Sallie Mae (SLM) was downgraded by Fitch Ratings yesterday. The outlook assigned was negative. The ratings downgrade reflects the agency’s concern about the company’s business model. Fitch expects the company to continue to shift to a fee-for-service business model with its subsidiary Sallie Mae Bank originating higher-risk private education loans.

Fitch downgraded the long-term issuer default and senior debt ratings to "BBB-" from "BBB", while preferred stock was downgraded to "BB" from "BB+". The short-term issuer default rating and short-term debt ratings were affirmed at "F3". About $34.4 billion of debt and preferred stock is affected by these actions.

To restore the $92 billion student loan market, the House Education committee approved a legislation, which closes the Federal Family Education Loan Program and shifts most of the student lending into the Education Department's Direct Loan program.

The bill is expected to go the House for a vote this week. If enacted, Sallie Mae is expected to be a major participant in the Department of Education’s servicing contract under which it will service and collect government guaranteed loans. Though the bill would allow some of the private firms to remain in the market as loan servicers, this business line would however be much smaller compared to that of loan originations.

The servicing contracts are also subject to renewal in five years and the federal government has the discretion regarding the distribution of the contracts and the servicing volume. Hence, any improper distributions of the servicing contracts will weaken the company’s profitability.

Sallie Mae’s management expects credit losses to pile up in the third quarter as non-traditional loans and loans without a co-borrower account for a lower percentage of loans entering repayment. Also, near-term asset quality trends remain a matter of concern.

Besides Sallie Mae, the other companies whose businesses could be at risk under the new legislation are Student Loan Corp. (STU), Nelnet Inc. (NNI), ITT Educational Services (ESI), SunTrust Banks (STI) and Corinthian Colleges Inc. (COCO).
Read the full analyst report on "SLM"
Read the full analyst report on "STU"
Read the full analyst report on "NNI"
Read the full analyst report on "ESI"
Read the full analyst report on "STI"
Read the full analyst report on "COCO"
Zacks Investment Research

Zacks Bull and Bear of the Day Highlights: Joy Global, Zions Bancorporation, Fannie, Freddie and J.P. Morgan – Press Releases

Zacks Market Commentaries — Wed, 16 Sep 2009 14:30:07 +0000

For Immediate Release

Chicago, IL – September 16, 2009 – Zacks Equity Research highlights Joy Global (JOYG) as the Bull of the Day and Zions Bancorporation (ZION) the Bear of the Day. In addition, Zacks Equity Research provides analysis on Fannie (FNM), Freddie (FRE) and J.P. Morgan (JPM).

Full analysis of all these stocks is available at http://at.zacks.com/?id=2676

Here is a synopsis of all five stocks:

Bull of the Day:

We are confident about the long-term fundamentals of the mining industry, which is further supported by a sustainable secular shift in commodity demand in the emerging economies. This will provide Joy Global (JOYG) substantial growth potential once the global economy emerges from the ongoing turmoil.

Joy Global aims at maximizing operating efficiency and useful life of mining equipment through value-added aftermarket services, which gives the company significant edge over its competitors. Additionally, the stable revenue stream from the high-margin aftermarket operations help Joy Global offset its cyclical original equipment business.

Of late, Joy Global management has implemented several strategies to optimize cost-structure and realign production capacity to cope with the slowing customer orders and stay competitive amid the ongoing global slowdown. The company is pushing its overall inventory and working capital efficiency. Moreover, Joy Global is looking at increasingly relocating production capacity to low-cost regions like China, Poland, and South Africa. These actions will improve operational efficiency, boost profitability and also solidify long term viability of the company.

Bear of the Day:

Given the high competitive pressures in the banking industry, we expect continuous deposit pricing pressures as well as growth in higher cost funding accounts to weigh on Zions Bancorporation's (ZION) net interest margins (NIM), creating headwinds on the revenue front.

Loan growth has remained solid, but slowing growth in core deposits could cause a negative mix shift, another setback for the NIM. Management expects deposit growth to continue to lag loan growth and that a portion of future loan growth may be funded from alternative higher cost funding sources.

The growth through acquisition model exposes the company to the risk of overpaying for targets. We are concerned about Zions commercial real estate (CRE) exposure. CRE represents over one-third of Zions overall loan portfolio. Continued weakness in the residential development and construction activity in the southwest has resulted in further deterioration of credit metrics in the past several quarters. Given the sluggish economic conditions, we expect credit to further deteriorate across the industry in the coming quarters.

Obama and Market Regulation – Analyst Blog

Dirk Van Dijk — Tue, 15 Sep 2009 20:52:11 +0000

Yesterday I reviewed key sections of Obama's speech on Wall Street here: Obama On The Street.

In general I liked the speech, but think that the steps he has proposed are, at best, only a good first step. I hope that the proposals are strengthened in Congress, but have zero hope of that happening. More likely they will be watered down significantly. The end result is that we will face another market meltdown in the future; the only question is when.

Regulation of the financial industry is one of those extremely important, yet dry and dull subjects, that the general public will ignore, and the lobbyists will own. The bank lobby is extremely powerful and is going to fight things tooth and nail. Obama got a distinctly cool reception from the financial executives in the audience, with only a single round of applause.

However, one year after the government spent hundreds of billions to save the banking system, not a single major bank CEO even bothered to show up for the speech. The sense of entitlement and the lack of gratitude by Wall Street is simply stunning. Look for a big push by the industry to preserve the status quo, probably with folksy TV ads full of dishonest scare tactics. It could include stuff about killing innovation and all that, attempting to convince people they are safer without someone in D.C. trying to protect consumers from abusive financial products. How many really useful financial innovations have there been in the last 30 years that have helped consumers?

The big useful innovations like credit cards and ATMs all happened back in the 1960s and 1970s, when banks were more closely regulated. Back in the days of 3-6-3 banking, when a banker would borrow at 3% in the form of checking and savings deposits, lend at 6%, and be on the first tee by 3 PM. When that was the shape of banking, we didn't have to worry about meltdowns.

On the other hand, bankers were just members of the upper middle class, not regularly bringing home 8 figure compensation packages. The proposed consumer protection agency for financial products is probably the most important part of the reform package. It is also the one that the banks are going to try the hardest to kill. It is the acid test if the reform package is real, or just a fig leaf. I'll go one step further and say that any congressman of either party who votes against this is representing his big campaign contributors on Wall Street, and not the interests of his or her constituents.

Some of the proposals that Obama has made sound reasonable and possibly workable, but the real devil is in the details. He will attempt to solve the 'too big to fail' problem by requiring the bigger, TBTF banks to hold higher levels of capital than smaller non-systemically important banks. The big question is how much higher?

On the other hand if the higher capital requirements are big enough, the lower leverage will greatly reduce the ROE of the big banks. The big banks will have more of their shareholders money at risk and might want to play it much safer.

Putting the Fed in charge of being the overall systemic risk regulator is somewhat problematic, given how slow the Fed was in recognizing the severity of the problems last year. However, I don't see a better alternative among the existing agencies.

A case could perhaps be made for the FDIC, but their expertise is only with the banks, and the shadow banking system was a big part of the problem. Putting it in the hands of a committee of different agencies is just an excuse to do nothing. Would you be reassured if it was in the hands of some inter agency council? I know I would not be. I would however couple the increased authority for the Fed with the requirement that the Fed actually be audited, a proposal that Rep. Ron Paul has been pushing.

So given how complicated financial regulation is, how should consumers try to follow it? Perhaps the best way is to look at who is pushing for what. If the mortgage bankers association is pushing for a change in the regulation package, you should know that it is not in the best interests of consumers.

For more on this subject, I highly recommend reading this post by Simon Johnson, the former chief economist at the IMF over at the Baseline Scenario.

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Guest Contribution: Reforming Banking by Reforming Housing

Menzie Chinn — Tue, 15 Sep 2009 05:00:21 +0000

By Simon van Norden

Today, we're fortunate to have Simon van Norden, Professor of Finance at HEC Montréal (École des Hautes Études Commerciales), continue as a guest contributor.

In my previous post, I wrote about some of the evidence linking serious banking crises to real estate market collapses. That evidence is far from iron clad; it is simply the observation that many banking crises in mature economies have their origins in a real estate boom and bust cycle. However, the idea is also intuitively appealing.

Remember that at the end of 2008, the Federal Reserve Board estimated that there was $12 Trillion of mortgage debt on residential properties in the US, with the Federal government and its agencies providing about 5% of the total, individuals 9% and the rest coming from the financial sector. The Case-Shiller composite index of housing prices has fallen 1/3 from its peak in 2006 and the latest the Mortgage Banker Association survey finds that 13.5% of residential mortgages in their survey are delinquent or in foreclosure.

Even if losses in the end are only 5% of mortgage debt, that's a $600 Billion drop in equity on private sector balance sheets. It's easy to see how losses of half a trillion dollars or more could push some banks into insolvency and many into illiquidity. That's the recipe for a banking crisis. Remember that the FDIC's Deposit Insurance Fund had reserves of just over $50 billion at the start of 2008 and of which approximately zero is left today. That's the recipe for a costly banking crisis.

Like heart disease, there may be many different significant risk factors for banking crises. However, the evidence to date suggests that real estate volatility is one of the most important, if not the most important. Reducing the risk of future crises (and their drain on the public treasury) requires that something be done to address this risk factor. As I'll discuss in a minute, there seem to be lots of ways to do this, but they boil down to some combination of (1) reducing the volatility of real estate prices, and (2) reducing banking sector exposure to real estate. But first, stop and think about the kinds of proposals that are currently under discussion. There's a long list that includes things like

The creation of a new Consumer Financial Protection Agency, a National Bank Supervisor, and an Office of National Insurance, which would join with several other agencies in a Financial Services Oversight Council.
Requiring reporting of all OTC derivative transactions, as well as clearing and transparent trading of all standardized OTC derivative products.
Expanding the mandate of the Federal Reserve to explicitly include all firms that pose systemic risks to the financial system.
Requiring registration of advisors to hedge funds and other pools of capital.
A reform of executive pay in the financial sector to reduce incentives for excessive risk-taking
The provision of explicit government insurance to mortgage derivatives
A ban on "naked" short-selling
Restricting the sale of CDSs and similar instruments to those with long position in the underlying asset.
[your favorite goes here]

Now ask yourself which of these will be effective in reducing the volatility of real estate prices? Which will effectively reduce the banking sector's exposure to that volatility? With the exception of #6 on the above list, it's not obvious that any of these proposals will do either (and #6 doesn't appear to be high on the public agenda as far as I can tell.) Understand that the word "obvious" is an important caveat; for example, it's conceivable that improving clearing of OTC derivatives might reduce the exposure of the banking sector to real estate collapses by preventing contagion within the banking sector, but it's hard to know how much this will help. The same can be said for most of the items of the list; they might help or there might be other sound reasons for those reforms, but there is little that looks like it will reliably reduce volatility in the real estate market or reduce the banking sector's exposure to those fluctuations.

What I find most surprising about the financial reform debate is that so much of it has focused on reform of regulatory agencies, banking laws and trading environments while so little attention has been paid to reform of mortgage regulations and mortgage-related securities. So to stimulate the debate on such reforms, let me suggest two kinds of measures that deserve further consideration.

1. Highly-leveraged mortgages increase the systemic risk in the financial sector and should be discouraged. This could be done in a number of ways, such as a tax on high loan-to-value mortgages, or compulsory insurance, or via regulation limiting the value of liens that can be attached to real estate, or simply by limiting mortgage-interest deductibility. Doing so should reduce the banking system's exposure to the real estate market by ensuring that borrowers have greater equity investments (or are backed by insurance.) The reduction in leverage may also reduce real estate price swings.

2. The insurance of mortgages and mortgage-related products (including credit-default swaps on mortgage derivatives) requires tighter regulation. Such insurance is a critical buffer between downturns in the real estate market and the solvency of the banking system. While some mortgage risk is diversifiable, a substantial portion is a macroeconomic risk that is not diversifiable. This is particularly true for mortgage-backed securities, which pool risks across many individual mortgages. In the event of a national downturn in housing prices, it is not obvious that private-sector insurers will have the resources to honor their policies. At a minimum, the government needs to impose capital requirements for mortgage insurance and related financial derivatives that require a level of financial reserves commensurate with the degree of macroeconomic risk in this market. Others (such as Mehrling 2009) have argued that the government should simply provide such insurance themselves.

This post written by Simon van Norden.

Deficit Not As Bad As Feared – Analyst Blog

Dirk Van Dijk — Mon, 14 Sep 2009 15:57:49 +0000

Late Friday, the Treasury Department released the budget deficit for August. It came in at $111.4 billion, which was far better than the $140 billion monthly shortfall that had been expected.

It was also slightly less than the budget shortfall in August 2008. And it was a huge improvement over the $180.7 billion deficit in July. However, don’t get too excited about the month-to-month decline as the monthly budget deficit numbers are extremely seasonal. Although that seasonality is reason to be very optimistic.

Not long ago, the projections for the fiscal 2009 budget deficit were running at about $1.8 Trillion. With 11 months now under our belt (the Government's fiscal year ends in September), the cumulative deficit is now $1.38 Trillion. Thus if September were to come in at the same level as August, the deficit for the year would end up at $1.49 Trillion.

However, it is extremely unlikely that September will come in at the August level. It is almost a sure thing that the September deficit will be significantly less than the August deficit. As a matter of fact, since 1980, the Federal Government has run a surplus in September with only four exceptions, the last of which was in 1991 (the others being 1989, '86 and '82). Thus, having a balanced budget for the month is actually a fairly conservative estimate. In 2008, the September surplus was $45.7 billion.

Now if we do run a surplus in September, don’t get too excited -- we will be back to running a deficit in October. However, there is a very real possibility that the budget deficit for fiscal 2009 will come in at under $1.4 Trillion -- a $400 billion improvement from where we thought it was going to be at the start of the summer.

The key is that the stabilization of the economy has led to a stabilization in tax revenues. It looks like the fears about near-term budget deficits were way overblown.

Now, I don’t want to suggest that $1.4 Trillion is small -- it isn’t, and it is a record any way you cut it. It is almost 10% of GDP. However, it is one heck of a lot smaller than $1.8 Trillion.

I am not particularly worried about short-term deficits. In an economic downturn, we need them. Remember the old Y = C + I + G + (X-M) equation: in a downturn, C (Consumption) shrinks -- and this time around C has to shrink by much more than normal given the huge overleveraging of consumer balance sheets. We have allowed C to become far too large a part of the economy at 71%.

It was not always thus: since the end of WWII, Consumption has only averaged 64.7% of the economy. If consumers are not spending, then businesses are not going to invest to increase capacity. And anyway, in recent decades when businesses have invested to increase capacity, they have not done so in the U.S. -- they have spent the money in Asia. Thus I (Investment) also falls.

We have made good progress on improving the (X-M) or net exports part of the equation, even if we have seen a little bit of back-sliding in the last two months. However, with so much of our imports (M) being oil, it is hard to see how over the medium-term we can make up the difference entirely through slowing imports and expanding exports (X).

A weak dollar will help in that regard, but unless we have a complete collapse of the dollar (which has lots of other problems) I don’t see it doing the trick, especially given the magnitude of the needed consumer deleveraging. However, dollar weakness will greatly benefit U.S. exporters such as Boeing (BA) and those firms like Coca Cola (KO) and Aflac (AFL) that get most of their earnings from abroad.

By process of elimination, then, G (Government) must increase as a share of the economy. Cutting spending or raising taxes in this environment would be economic suicide. That is exactly the policy that Hoover carried out that got us into the Depression. It is also the policy that FDR tried in 1937 and caused the economy to fall back after one of the more robust periods of economic growth in our history (albeit off a very depressed base) from 1933 through the first half of 1937.

A budget deficit can help to stabilize the economy. The stimulus package has been extremely effective in that regard. Back on Presidents Day, very few people thought that we would be looking at the possibility of economic growth in excess of 2% in the third quarter, but now that seems likely.

Fiscal stimulus is sort of like, well, a stimulant. A cup of coffee can be very useful in the morning (I sure know it is for me), and there are medical situations where a doctor would want to give a massive dose. However, if you take stimulants for a long time in high doses, well, you might end up being addicted.

It is the long-term structural deficits that pose the real danger. As President Obama pointed out on Wednesday, over the longer term, the deficit problem is the health care problem. The relentless rise in medical costs is the principal factor in the structural budget deficits going forward. Nothing else even comes close.
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The ARRA’s Progress

Menzie Chinn — Sat, 12 Sep 2009 00:20:20 +0000

...and a Rejoinder to Posner.

The CEA Analysis of ARRA's Impact

Yesterday, the Council of Economic Advisers released the first of its mandated reports on the impact of the ARRA on economic activity. Based upon a variety of approaches (VAR, multiplier based), it concludes:

"...our multiplier analysis and estimates from a wide range of private and public sector forecasters confirm the estimates from the statistical projection analysis. There is broad agreement that the ARRA has added between 2 and 3 percentage points to baseline real GDP growth in the second quarter of 2009 and around 3 percentage points in the third quarter.

There is also broad agreement that it has likely added between 600,000 and 1.1 million to employment (again, relative to what would have happened without stimulus) as of the third quarter."

The CEA actually conducted a series of analyses. The first is an informal approach, examining the contributions of components of GDP to overall growth over time, in an accounting exercise, and then correlating changes in component trajectories that might have reasonably been expected to impacted by the stimulus bill (e.g., state and local government spending on goods and services). The second is a bivariate (in levels) VAR in GDP and employment, and attributing the difference between out-of-sample forecast values for 2009Q2 and actual to the stimulus package, as well as financial interventions (both positive) and an unprecedented credit crunch (negative). The third is a multiplier analysis, that applies multipliers to various injections into the economy. (There is also a cross-country analysis, which yields suggestive results, but I will not discuss at length.)

The second (VAR or "projection") approach yields Figure 8 from the report.

Figure 8 from CEA, The Economic Impact of the American Recovery and Reinvestment Act of 2009: First Quarterly Report, September 10, 2009. Estimates from "VAR approach".

The difference between the projected and actual is given by the darker color in the bars in 2009Q2 and 2009Q3. For 2009Q2, that difference is 2.3 percentage points, at annualized rates.

In the third approach (the multiplier approach), the CEA estimates a 3.1 percentage points (at annualized rates) increment to growth in 2009Q2, and 3.6 ppts in 2009Q3. How does this compare to other estimates? This is addressed in the document's Table 7.

Table 7 from CEA, The Economic Impact of the American Recovery and Reinvestment Act of 2009: First Quarterly Report, September 10, 2009. "CEA Model Approach" is a multiplier approach.

I think it's interesting to see the remarkable coherence in estimates (aside from the guesstimates of the NABE survey).

Actual Data, and Posner's Assertions of Negligible Impacts

What is particularly of interest is the updated information regarding what funds have been disbursed. There are two ways to report the data -- the first by administrative category, and the second by function category. The relevant information (cumulative, not annualized) is reported in Tables 1 and 2.

Table 1 from CEA, The Economic Impact of the American Recovery and Reinvestment Act of 2009: First Quarterly Report, September 10, 2009.

Table 2 from CEA, The Economic Impact of the American Recovery and Reinvestment Act of 2009: First Quarterly Report, September 10, 2009.

From the report:

We divide the total dollars of stimulus expended to date into six categories: individual tax cuts and similar payments; the tax cut associated with the adjustment of the Alternative Minimum Tax (AMT); business tax incentives; state fiscal relief; aid to those most directly hurt by the recession; and direct government investment spending. The first three are tax changes of some kind and were established at passage to be roughly one-third of the total package; the second two represent emergency measures and were again estimated to be roughly one-third of the total; the last encompasses a range of direct spending and covers the remaining one-third of the total. At passage, it was anticipated that the tax changes and emergency measures would occur more quickly and direct government spending would be a larger fraction of later expenditures.

We divide the outlays and tax reduction data into these functional categories as follows. Individual tax cuts include the Making Work Pay tax credit, the child tax credit, and a number of smaller individual tax reductions. We also include direct payments (from Recovery.gov) that were made in lieu of a tax cut to certain groups. These include payments of $250 distributed to individuals who receive Social Security and Supplemental Security Income, Railroad Retirement benefits, or veterans' benefits. The business tax incentives and AMT relief are calculated directly by the IRS as part of their simulation process.
We define state fiscal relief to include just the two main programs in this category: a substantial increase in the Federal government’s matching percentage for Medicaid spending (FMAP), and formula grants to state governments for education through the State Fiscal Stabilization Fund. Aid to those directly impacted by the recession includes the increase and extension of unemployment benefits, increased funds for nutritional assistance, and increases in the Temporary Aid to Needy Families (TANF) program. It also includes the government’s substantial subsidy of continuing health insurance benefits (COBRA), which is technically treated as a tax cut.
Government investment outlays include everything else. The obvious components are spending on infrastructure, health information technology, research on renewable energy, and other forms of direct spending excluding transfers. Also included here are tax credits for particular types of private spending, such as weatherization or research and experimentation, since these credits are functionally similar to the direct government spending.

These points are of particular salience in the context of Mr. Posner's post yesterday, in which he states:

No one seems to know how much of the $40 billion was actually received by taxpayers, as opposed to reducing their future tax payments; and of the amount actually received by them, no one seems to know how much they spent rather than saved.

In response to my assertion that he had accused Dr. Romer of making up statistics:

I never accused her of lying about the figure...

This is actually a "revised and extended" version of the argument posed in Mr. Posner's first posting (August 18) on Romer's speech. Reviewing that statement is illuminating:

Romer argues in her talk that by the end of the second quarter of this year, $100 billion of stimulus money had been spent. That is a suspiciously round number, and it is unclear how it was arrived at; but let us assume it is accurate. She then argues that this small expenditure--about two-thirds of one percent of the Gross Domestic Product--is responsible for the fact that the decline in GDP fell (on an annualized basis) from 6.2 percent in the first quarter of the year to 1 percent in the second quarter (though the latter figure is likely to be readjusted upwards).

This assertion is groundless. No one has the faintest idea what effect the stimulus has had. [emphasis added – mdc]

I'll ignore the fact there's a footnote 4 in the Romer speech that tells one how the number was arrived at; further I'll let readers decide what the reference to the "suspiciously round number" is meant to insinuate and focus on the math mistake. Let me reiterate, the emphasized text constitutes a math mistake. $100 billion, divided by quarterly GDP of $ 3535.8 billion is 2.8 percent.

Now, Posner responds on August 21:

Critics have been particularly unsparing of my having expressed the so-called $100 billlion in stimulus disbursements as a percentage of annual GDP. I think it's a fair criticism--and so it is amusing to note the identical procedure in the second sentence of Romer's speech, where she states that the $787 billion is "roughly 5 percent of GDP." It is roughly 5 percent of this year's GDP. But it is to be spent over at least two years.

A couple of observations First, the $787 billion is to be spent over five years (this was, after all, the chief complaint of stimulus critics), although most is to be spent within 18 months of the passage of ARRA. One can see a graph of projected spending (as estimated by CBO) here. However, on Mr. Posner’s source of amusement, when Dr. Romer indicated the share of GDP, she was placing the total stimulus package in context, and not conjoining that calculation to a statement that the entire $787 billion would have an impact within a given year. That sort of calculation only Mr. Posner has made.

Let's return to Posner's assertion that we don’t know anything about the $40 billion on the tax side. Table 1 provides the less "round number" of $43.5 billion cumulative in tax reductions through end-June. I agree that it's hard to say whether any of those tax reductions were "spent" by the recipient households and firms. That's why the functional breakdown in Table 2 is very helpful. We can then consider what is likely to have been spent, on both the tax and expenditures sides.

First, let's take the conservative approach and assume absolutely none of the individual tax refunds, the AMT relief, and the business investment incentives are spent. Second, we have government investment outlays at $5.9 billion; well, that's G in national income accounting-speak, so GDP has to go up there. Third is aid to directly impacted individuals (unemployment insurance, TANF, food stamps) at $14.4 billion. I suspect that these components have a pretty high marginal propensity to consume. Finally, there is state fiscal relief, which is mostly matching for Medicaid, and for education, at $28.2. Here one could argue that the spending is less than dollar for dollar of transfers -- although with a majority of states emplacing furloughs on state workers, I bet this is pretty high. In addition, the turnaround in state and local spending in 2009Q2 is suggestive that the spend-out of these funds is pretty high.

Let's set MPC to zero for all functional tax components, and set it for unity for government investment and for UI/TANF/food stamps, and 0.5 for state fiscal relief. Write this out in plain mathematical terms:

(29.3 × 0) + (7.6 × 0) + (14.4 × 0) + (5.9 × 1) + (14.4 × 1) + (28.2 × 0.5) = 34.4

Convert to Ch.2005$ by dividing by 1.10: 34.4/1.10 = 31.27

Divide by 2009Q2 GDP in Ch.2005$: 31.27/ 3232 = 0.0097

Annualize the quarterly increment: (1.0097)⁴ = 1.039

Convert to percent: (1.039 – 1) × 100% = 3.9%

Let me reiterate, in these calculations I've assume zero consumer and investment spending out of the tax-related provisions, and yet one obtains a 3.9 ppt increment (annualized q/q) growth in 2009Q2.

Now, in his latest post, Mr. Posner has made a new, bewildering statement:

"A neglected point is brought out in an article by Michael Cooper in the September 5 New York Times. The article points out that federal stimulus spending can be nullified by state cutbacks. For example, a federal grant of stimulus money for mass transit has been nullified by reductions in state expenditures on mass transit. The question then becomes what was the consequence of those reductions? Maybe they enabled a state to rescind a tax increase, in which event state taxpayers would have more money in their pockets."

The nullification point is an odd assertion. The state cutbacks presumably would have occurred in the absence of the transfers from the Federal government, so in the absence of the stimulus package, state and local spending would have been even lower. In other words, Mr. Posner is asserting a state and local government spending reaction function that implies each dollar of spending transferred from the Federal government induces and equal and offsetting spending reduction. I'm open to this possibility, but I'd appreciate seeing some data (i.e., not anecdotes) to that effect, rather than mere conjecture.

In addition, Mr. Posner sets forth an alternative scenario, where tax increases are rescinded as a consequence of transfers to the states. On this count, CEA has investigated this hypothesis. Figure 7 from The Effects of State Fiscal Relief is illuminating:

Figure 7 from CEA, The Effects of State Fiscal Relief, September 10, 2009.

Figure 7 compares the size of total funds from these programs that had been transferred to each state through July 3 with the state's maximum reported fiscal 2009 budget gap.22 While these transfers were sizeable in magnitude, in 35 states they are smaller than the reported budget gap. This means that states could have used the funds to increase their rainy day funds only if they reduced expenditures or increased taxes in the same fiscal year. Given that states underwent deep expenditure cuts in 2009 (42 states cutting their fiscal year 2009 budgets by $31.6 billion through June 2009), it seems unlikely that this would have occurred.

In conclusion, it appears to me that we have several pieces of information, from a variety of sources, that suggest a positive impact on 2009Q2 q/q growth stemming from the ARRA. In addition, if one were to do a meta-analysis of estimated impacts, it would seem to me likely that the mean impact would be in range estimated by CEA.

Let end on a note of agreement. Mr. Posner wrote yesterday:

My lefty critics don't believe me when I say I support the stimulus.

Since Mr. Posner is referring to me (among others), let me say I understand that Mr. Posner is a Keynesian and supports the stimulus. My disagreement is with his nihilistic proposition that we can't know anything about whether there was an impact of the ARRA in 2009Q2. (Personally, I don't count myself a "lefty", but that's another debate.)

Dell to Make Electronic Medical Records – Analyst Blog

Zacks Market Commentaries — Fri, 11 Sep 2009 21:00:58 +0000

Dell Inc. (DELL) recently said it would venture into the electronic medical records system business, which is used by doctors and hospitals. The device helps in storing medical records in a way that makes it easy to track the clinical history of patients from anywhere in the world without storing hard copies.

We believe the time is ideal for companies like Dell to enter this space as the federal government has granted around $19 billion in incentives to medical practitioners and hospitals. Electronic record-keeping software has huge prospects as most doctors currently use hard copies of medical records and the market is more or less recession proof.

Only 10% of American health care providers have adopted a full fledged electronic medical record system, so there is substantial growth potential in the segment. Dell is planning to combine its hardware with third-party software and provide services such as need assessment, system configuration, workflow process drawing and providing training and support to medical practitioners and hospitals.

Despite being a technical giant, Dell is likely to face stiff competition from bigger players like Google Inc. (GOOG) and Microsoft Corp. (MSFT). These companies have already launched personal health records storage systems to help patients store their own health data.

Thus, while this is a good business opportunity for Dell, it has to overcome many obstacles to be successful in the field. We believe healthcare professionals are increasingly adopting the concept of a paperless office and recognizing the benefits of cost efficient storage and greater accessibility of medical records.

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The Credit Rating Firms Are Running Scared – It’s About Time

Shah Gilani — Fri, 11 Sep 2009 18:35:17 +0000

pWhen it comes to the U.S. credit crisis, we’ve all heard the numbers. The stock market decline wiped out $7 trillion in shareholder wealth. It forced the federal government to commit to $11.6 trillion in bailout programs and stimulus spending. And it’s led to the longest U.S. downturn since the Great Depression./p pEveryone also knows that a href="http://www.moneymorning.com/2008/12/18/debt-rating-agencies/" target="_blank"some of the key culprits behind this financial mess/a were the credit-rating firms like Standard #38; Poor’s and Moody’s Investors Service, which assigned top-tier “AAA” ratings to investments that were actually backed by subprime mortgages and other toxic debt./p pWhether it was collusion or incompetence almost didn’t matter: The firms claimed that the credit ratings they issued were constitutionally protected free speech. With this a href="http://en.wikipedia.org/wiki/First_Amendment_to_the_United_States_Constitution" target="_blank"First Amendment/a shield, S#38;P,#8230;/p

U.S. Crude Supplies Dip Sharply – Analyst Blog

Zacks Market Commentaries — Fri, 11 Sep 2009 14:50:29 +0000

Yesterday, we got a bullish report from the federal government’s Energy Information Administration (EIA), showing a surprise decline in crude stockpiles. However, the data also showed a buildup in gasoline and distillate inventories, thereby somewhat neutralizing the positive impact.

In its weekly release, the agency reported a much bigger-than-expected 5.9 million barrels drop in crude inventories for the week ending September 4, as imports fell and refiners raised demand. This follows last week’s release, which also reported crude drawdown but were below expectations.

Current crude oil stocks, at 337.5 million barrels, are 13.3% above the year-earlier level and remain above the upper limit of the average for this time of the year (depicted in the first EIA chart below). The supply cover decreased from 23.6 days in the previous week to 22.9 days of supply, but it remains above the year-earlier level of 20.3 days.

Gasoline stocks showed an unexpected 2.1 million barrels week-over-week increase (far off estimates that hoped for a drawdown) as demand weakened. At 207.2 million barrels, current inventories are above year-earlier levels and remain in the upper half of the historical range, as shown in the following chart from the EIA.

Distillate fuel inventories grew by 2.0 million barrels last week (more than anticipated) to 165.6 million barrels and are above the upper boundary of the average range for this time of year. This is shown in the following chart from the EIA.

Refinery utilization was unchanged at 87.2%, though it bettered forecasts for a drop. Still, utilization rates continue to hover below seasonal norms due to low profitability for products.

The overall demand picture remains weak, but for the second successive week, total refined products supplied over the last four-week period, a proxy for overall petroleum demand, turned positive. It was up 2.0% from the year-earlier period, with gasoline up 2.2%, distillates (includes diesel) down 5.6%, and jet fuel down 9.9%.

The higher-than-expected crude stockpile drop and the rise in U.S. petroleum demand have again raised hopes that the worst of the recession-induced slump may be over. As a result, oil prices have gone up by approximately $4 per barrel this week and are currently hovering around the $72 per barrel level. However, the increases in gasoline and distillate stockpiles will limit any sustained crude gains, in our view.

While we expect the commodity's near-term price movement to continue mirroring the evolving macro-economic picture, we do not expect it to revisit its December '08 lows. We believe that oil prices have troughed already and are currently in a consolidation phase.

Oil’s impressive gains this year -- the commodity has gained roughly 60% year-to-date -- have been driven almost entirely by an improving economic outlook and favorable currency moves. However, continued anemic demand and the strong build in excess production capacity over the last few months are expected to prevent any sustained price rallies.

Considering this uncertain scenario, we prefer to maintain our cautious outlook for integrated oil players such as Chevron Corp. (CVX), Marathon Oil Corp. (MRO) and Hess Corp. (HES), as well as oilfield service names such as Schlumberger Ltd. (SLB), Baker Hughes Inc. (BHI) and Weatherford International (WFT). We currently rate shares of these companies as Neutral.
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Notes on Initial Claims Dropping – Analyst Blog

Dirk Van Dijk — Thu, 10 Sep 2009 14:48:47 +0000

Initial claims for unemployment insurance dropped to 550,000, a decline of 26,000 from an upwardly revised total of 576,000 last week, providing a net improvement of 20,000. The four-week moving average fell by 2,750 to 570,000.

As you can see in the chart below (from http://www.calculatedriskblog.com/), we are well off the highs set back in April. But after a rapid improvement in May and June, progress has seemed to come to a halt.

We are most likely moving to the plateau stage that we experienced following the last two recessions. In both of those cases, initial claims stayed at an elevated level, but off their highs for well after a year past the official end of the recession.

While it is nice to be almost 90,000 lower than at the peak, a level of 570,000, or even 550,000, is not good enough. A year ago we were at 336,733 and the economy was still, on balance, losing jobs. While there is not an exact correlation between the level of new claims and net adds to employment (even during the giddiest parts of the Clinton boom there were almost 300,000 new claims) there is obviously some relationship.

The economy probably needs to see the four-week average get down below 400,000 before it can be given a clean bill of health. We are a long ways away from that.

On the continuing claims front (one week delay) there was a big improvement with respect to people receiving regular state benefits, with a decline of 159,000 to 6.088 million. That is nice, but does not tell the whole story (and news outlets that stop there are doing you a serious disservice). Regular state claims run out after 26 weeks.

Six months ago the economy was bleeding jobs faster than the actors at the end of a low-budget slasher film. Many of those people are leaving the rolls for the wrong reason -- because their benefits ran out, not because they got a new job.

Fortunately for these folks, there are a couple of extended benefit programs where the Federal government picks up the tab (two week delay). The two major programs are helping 3.541 million people, and increase of 53,750 on the week.

Still, that increase is less than the drop in regular benefits. Most likely, a majority of the people in that difference are now in for some serious financial pain, with no unemployment benefits coming in and no job. I seriously hope that I am wrong about this and they have found jobs, but hoping will not make it so.

Some of them may be working in the underground economy at varying degrees of legality (technically, being a gardener paid cash is not legal, unless the income is reported to the IRS). Some, out of desperation, may turn to much worse things than cash -- unreported earnings. This could mean more business for Corrections Corp (CXW), but probably a lot less business for Kroger (KR) as these people turn to food banks instead of grocery stores. The food banks are going to need a bail out.

The number of people expected to run out of their extended benefits is about 1.5 million by the end of the year. This recession is causing a serious rise in poverty in this country. The stimulus package has helped ameliorate some of the pain, but it is only an aspirin, when far more serious painkillers are needed. However, those painkillers are addictive, and unemployment benefits were never meant to last for a lifetime.

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The Two Reasons it’s Time to Short U.S. Stocks

Contrarian Profits — Wed, 09 Sep 2009 17:30:54 +0000

pThe stock market is up 51% from its March 9 lows. The leading economic indicators have turned sharply positive, a href="http://www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1"showing gains for each of the last four months/a. Manufacturing is on the rebound. And banks are promising to pay record bonuses, as their earnings have rebounded./p pWith this recent rush of upbeat economic news, it’s no wonder commentators are trumpeting the rebound of the U.S. economy./p pBut I think it’s time to short U.S. stocks./p pShocked?/p pDon’t be./p pWhat most experts see as a strengthening U.S. rebound, I see as an increasingly dangerous “false dawn” – for these two key reasons:/p ul type="disc" liAn overly expansive monetary policy that’s almost certain to spawn inflation./li liAnd a record-level budget deficit that will cause interest rates to spike, crimping economic growth./li /ul h3A#8230;/h3

The Two Reasons it’s Time to Short U.S. Stocks

Martin Hutchinson — Wed, 09 Sep 2009 15:11:43 +0000

$172,000 Payday First subscribers to Martin Hutchinson’s new advisory service were able to collect $13,301 in guaranteed cash in record time. Now, Martin’s using the same “guaranteed payment” strategy to help new subscribers collect $172,000. He explains how here. The stock market is up 51% from its March [...]

The Five Financial Shockwaves to Expect When China’s Yuan Swaps Places with the U.S. Dollar

Keith Fitz-Gerald — Fri, 04 Sep 2009 17:04:59 +0000

The $300 Trillion “Money Bang” Keith Fitz-Gerald and his team have just produced a groundbreaking report that shows how this historic “Money Bang” is gaining steam. You’ll find out why China is investing $200 billion in one company – and why it’s expected to gain 356%… Why the Dept. of Energy is “backing” one [...]

Employment Report in Depth – Analyst Blog

Dirk Van Dijk — Fri, 04 Sep 2009 16:41:44 +0000

By just about any measure, this has been the worst recession since the Great Depression. While I think we are coming out of it, the employment market is the last thing to turn, particularly if we follow the pattern of the last two recessions and their aftermath.

We have seen a steady pattern of lower job losses since January, when we hemorrhaged over 700,000 jobs in that single month. August’s loss of 216,000 is sure an improvement over that, and is even a big improvement over the 276,000 lost in July, which in turn was a huge improvement over the 463,000 lost in June.

It is, however, not good enough -- the economy needs to add jobs, not just avoid losing them. Every year, the workforce grows by a little over a million, so just to stay even we should be adding about 100,000 a month. To recoup the 6.9 million jobs lost since December 2007, it will have to be much, much higher than that. Historically, though, the participation rate falls as we go into a recession, but then starts to increase as the recovery begins.

Just how bad has this recession been versus other recessions? I think the following graph (from http://www.calculatedriskblog.com/) shows it very clearly. In raw numbers of jobs lost, it simply blows away anything since the end of WWII -- but then again, the country is a lot larger now than it was then.

However, even when measured as a percent of jobs at the peak of the cycle, only one recession, that in 1948, even rivals it. Then we were winding down from WWII, no longer putting people to work building battleships and tanks and the GI’s were coming home -- so in some respects, those job losses were a good thing, or mostly represented friction in the transition to a peacetime economy. Further, by this point, that recession had already recovered all the jobs lost.

By contrast, this time we have yet to bottom out. Also, look at the historical pattern of the amount of time it has taken to get back to square one:

It took a little over two years to recover from the deep 1981 downturn. In the 2001 downturn, it took us almost four years from the start of the recession to get back to the number of jobs at the start of the recession. In the 1990 recession it took almost three years. This is despite both of those more recent recessions being extremely short and mild in terms of the length and depth of the decline in GDP.

It is very possible that it could take until 2015 before we pass the previous peak of 138.2 million jobs in the economy set in December 2007.

We now have 14.9 million unemployed, an increase of 466,000 in just the month of August and of 7.4 million since the recession started. Note the difference between the increase in the number of unemployed and the number of jobs lost.

Part of that is due to the numbers coming from two separate surveys. However, it does have a lot to do with the behavior of the unemployment rate. In July, the unemployment rate fell to 9.4% from 9.5% despite the economy losing 276,000 jobs as people were feeling too discouraged to even look for work.

The drop in the unemployment rate was clearly a bit of an anomaly, but it was an extreme representation of that change in the participation rate I was talking about. If the labor force is growing (in terms of people in normal employment ages) by a million a year, and the recession has now been going on for 20 months, then why is the difference between the number of jobs lost and the number of unemployed only 500,000?

Some of it may have to do with multiple job holders. If you are holding down three jobs, you are only counted as employed once, and if you lose one of them you are still counted as employed, but your three jobs still count as three jobs in the establishment survey.

However, part of it is due to the “there are no jobs out there, so why waste gas driving around trying to find them" effect. In that respect, the fact that the number of unemployed rose by 250,000 more than the number of jobs lost in August is actually good news (well, at least a silver lining in a very dark cloud) since it indicates that people are thinking it is time to get off the couch and start looking for work again.

Don’t get to hung up on the precise numbers, since coming from two different surveys there is plenty of room for statistical discrepancies, but a quarter of a million differential in a single month is too big to be just from such discrepancies.

While the 9.7% (U-3) rate is the one that gets all the headlines, it counts you as employed even if you used to work 40 hours a week, but due to the recession your employer has cut you back to only 10 hours a week. Yeah you still have a job, but you aren’t working much.

A broader measure of unemployment, which includes people working part-time for economic reasons (as opposed to, say, a teen working part time after school) and people marginally attached to the labor force (have not looked in the last 4 weeks because of say family responsibilities, but would be happy to take a job if one were available) showed an even bigger jump, rising from 16.3% in July to 16.8% in August. There were 9.1 million involuntary part-time workers and 2.3 million marginally attached workers in August.

There was a little bit of good news on the duration of unemployment front -- the average length of time people were out of work dropped to 24.9 weeks in August from 25.1 weeks in July. That is still a seriously ugly number, though; a year ago it was at 17.6 weeks.

Similarly, the median duration of unemployment dropped to 15.4 weeks from 15.7 weeks in July, but is still well above the 9.3 week level a year ago. Keep in mind that a year ago the recession had already been going on for as long as each of the previous two recessions lasted.

Those changes, however, were driven by changes in the middle of the unemployment duration distribution. The number of people out of work between 5 and 14 weeks rose sharply, to 4.120 million from 3.557 million in July, while the number of people out of work between 15 and 26 weeks dipped to 2.828 million from 2.916 million.

Of particular concern are those that have been out of work for more than 26 weeks, since that is when regular state unemployment benefits run out. That number is still rising, but more slowly than it has been, up to 4.988 million from 4.965 million in July.

One measure I like to look at is the ratio of the long-term unemployed to the number of short-term unemployed (less than five weeks). The history of that ratio is shown in the graph below.

This recession is simply in a whole different league than any other recession we have had. In August, the ratio was 1.65, up from 1.54 in July. A year ago it stood at 0.58, which was already elevated by historical standards. Prior to this downturn, the highest it had ever reached was 0.78 in February of 1983. If we exclude the last year, the average since 1960 is 0.35.

Most of the almost five million long-term unemployed are getting emergency extended benefits paid for by the Federal Government as part of the stimulus package. However, those do not last forever, and by the end of the year they are expected to run out for almost 1.5 million people. Those are people who are going to have to get their groceries from the food bank rather than Kroger’s (KR) and their clothes from the Salvation Army rather than from Wal-Mart (WMT).

The recession has not hit all demographic groups equally. As usual, it has hit the more underprivileged people hardest. The unemployment rate rose for all major demographic segments in August, but there are vast differences in the levels of unemployment.

Teens have the highest rate at 25.5%, up 1.7 points on the month. Blacks have a 15.1% unemployment rate (up 0.6 points) while Hispanics have a 13.0% rate (up 0.7 points), while the unemployment rate for Whites is 8.9% (up 0.3 points).

The one exception to the normal pattern of under-privilege and unemployment is that this downturn has been much harder on men than on women. The adult male unemployment rate now stands at 10.1% (up 0.3 points) while for women it is “only" 7.6% (up 0.1 points). A year ago, the rate for men stood at 5.8%, while for women it was at 5.3%.

The recession also points out the age-old wisdom of staying in school. It holds in good times and in bad, but especially in bad times. The unemployment rate for HS dropouts is now at 15.6% up from 9.7% a year ago. For high school grads, it is now 9.7% vs. 5.8% a year ago. For those who have some college or got a 2 year degree, it is at 8.2%, up from 5.0% a year ago, and for those with a bachelors or better the unemployment rate is now 4.7%, up from 2.7% last year.
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Natural Gas Stockpiles Expand – Analyst Blog

Zacks Market Commentaries — Fri, 04 Sep 2009 15:25:32 +0000

Yesterday, in its weekly release, the federal government’s Energy Information Administration (EIA) reported another rise in natural gas supplies. Stockpiles held in underground storage in the lower 48 states rose by 65 billion cubic feet (Bcf) for the week ended August 28.

This takes the current storage level to 3.32 trillion cubic feet (Tcf), which is up 17.3% from last year's level and 17.8% above the five-year range (as clear from the nearby chart from the EIA). Current stocks are 489 Bcf above last year and 501 Bcf above the five-year average.

The inventory addition was smaller than last year's build of 92 Bcf but exceeded the five-year-average injection of 64 Bcf. The relentless increase in gas storage levels continue to add to the long list of issues weighing on the commodity. At this pace, inventories are on course to surpass the all-time high level of 3.57 Tcf recorded at the end of October 2007.

Natural gas prices rallied earlier last year, reaching over $13 per million Btu (MMBtu) in July 2008, before trending down. Prices have since plummeted to the current seven-year low level of around $2.2 per MMBtu (we are referring to Henry Hub spot prices here).

Continued strong domestic production (from a number of unconventional natural gas fields) and recessionary consumption (due to the economic downturn), particularly in the industrial sector, are at the core of the commodity's current woes. Additionally, the Atlantic hurricane season has done little to disrupt offshore production and onshore refineries.

The supply picture is expected to reverse in the coming months as the lagging effect of the sharp drop in domestic drilling activity takes effect. Partly offsetting the production drop is the expected ramp-up of LNG imports this year.

The commodity’s weak near-term outlook, coupled with the ongoing credit market turmoil, has prompted natural gas producers to curtail capital expenditure plans for 2009. As a result, this has been an extremely difficult period for natural gas and related energy support plays.

Considering the plunge in the commodity prices, we remain cautious on natural gas-focused E&P players such as XTO Energy (XTO), Chesapeake Energy (CHK), EOG Resources (EOG) and EnCana Corp. (ECA). We currently rate shares of these companies as Neutral.

In particular, we remain wary of land drillers such Nabors Industries (NBR) and natural gas-centric service providers such as BJ Services (BJS), given the extent of excess capacity in the sector that is expected to weigh on dayrates and margins well into next year. We have Underperform recommendations on both the companies.
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The Bear Market is Not Over

Bill Bonner — Fri, 04 Sep 2009 11:33:02 +0000

pYesterday might turn out to be an important day. The market should have bounced. It didn’t. Instead, it fell 29 points. strongIt’s September, too…a dangerous month./strong And this rally has already run longer than the rally following the ’29 crash./p pMr. Market can do what he wants, of course. We’re just trying to read his mind. If we were Mr. Market, what would we do? We’d give investors a fright!/p pstrongTwo things make us think the bear market is not over./strong/p pFirst, there is market history. Bear markets do not end with stocks still trading at nearly 20 times earnings and the dividend yield barely at 3%. And they don’t end when people are hoping, praying and expecting them to end. They end in#8230;/p

EIA Inventory Data Mixed – Analyst Blog

Zacks Market Commentaries — Thu, 03 Sep 2009 15:37:44 +0000

Yesterday, the federal government’s Energy Information Administration (EIA) reported mixed inventory data. The crude drawdown was below expectations and distillate stocks were up more than anticipated. On the positive side, gasoline supplies dropped steeply and total U.S. oil demand over the last four-week period turned positive after a long time.

In its weekly release, the agency reported a lower-than-expected 372,000 barrels drop in crude oil stockpiles for the week ending August 28, as a jump in imports offset a rise in petroleum demand. This follows last week’s report, which showed an unexpected rise in oil supply figures, missing estimates of a drop.

Current crude oil stocks, at 343.4 million barrels, are 13.0% above the year-earlier level and remain above the upper limit of the average for this time of the year (depicted in the first EIA chart below). The supply cover decreased marginally from 23.8 days in the previous week to 23.6 days of supply, but it remains significantly above the year-earlier level of 20.3 days.

Gasoline stocks showed a steep 3.0 million week-over-week decline, better than expectations and in line with seasonal tendencies. However, at 205.1 million barrels, current inventories are above year-earlier levels and remain in the upper half of the historical range, as shown in the following chart from the EIA.

Distillate fuel inventories grew by 1.2 million barrels last week (more than anticipated) to 163.6 million barrels and are above the upper boundary of the average range for this time of year. This is shown in the following chart from the EIA.

Meanwhile, refinery utilization was up 3.1% to 87.2%, much larger than analyst expectations, reflecting incremental increase in throughput. Still, utilization rates continue to hover below seasonal norms due to low profitability for products.

The overall demand picture remains weak, but for the first time in months total refined products supplied over the last four-week period, a proxy for overall petroleum demand, turned positive. It was up 0.1% from the year-earlier period, with gasoline up 0.5%, distillates (includes diesel) down 7.3%, and jet fuel down 12.1%.

The lower-than-expected crude stockpile drop has again raised concerns about the U.S. crude demand and the sluggish pace of a global economic recovery. As a result, oil prices have been currently hovering around the $68 per barrel level after briefly hitting a 10-month high of $75 last week.

While we expect the commodity's near-term price movement to continue mirroring the evolving macro-economic picture, we do not expect it to revisit its December '08 lows. We believe that oil prices have troughed already and are currently in a consolidation phase.

Oil’s impressive gains this year -- the commodity has gained roughly 50% year-to-date -- have been driven almost entirely by an improving economic outlook and favorable currency moves. However, continued anemic demand and the strong build in excess production capacity over the last few months are expected to prevent any sustained price rallies.

Considering this uncertain scenario, we prefer to maintain our cautious outlook for integrated oil players such as Chevron Corp. (CVX), Marathon Oil Corp. (MRO) and Hess Corp. (HES), as well as oilfield service names such as Baker Hughes Inc. (BHI) and Weatherford International (WFT). We currently rate shares of these companies as Neutral.
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Initial Claims Hovering – Analyst Blog

Dirk Van Dijk — Thu, 03 Sep 2009 15:12:31 +0000

Last week (8/29), there were 570,000 initial claims for unemployment insurance -- down from 574,000 the week before, but that 574,000 was revised up from 570,000, so it really is about flat with last week.

The four-week moving average ticked up again, for the third week in a row now, but remains well below the peak set in mid-April. The current four-week average of 571,250 is 4000 above last week.

The Chart below (from http://www.calculatedriskblog.com/) puts the recent uptick in perspective. You have to look very closely to see it. I remain convinced we have seen the highs for the cycle, but we are probably in for a long period of jagged sideways movement. That was the pattern in the last two recessions, where initial claims stayed elevated for about two years after hitting their highs.

Historically, it has been the peak that has signaled the end of recessions, although I would be surprised if the NBER dates the end of this recession to April. July or August seem much more likely to me. Even if the recession is over, it does not mean we are going to have a healthy job market. A level of 570,000 new claims still indicates that the economy is losing jobs at a rapid clip.

We probably need to get under 400,000 new claims to indicate that the economy is adding jobs. Also, keep in mind that the population is growing, so we can’t really declare victory even when we get net job losses down to zero. We really need to be adding about 150,000 jobs a month just to keep up with the population treadmill.

Continuing claims are issued with a one-week lag. In the week ending 8/22, they rose to 6.234 million -- a rise of 92,000. The picture is actually much worse than that since it contains only those people who are on regular state benefits. Those run out after 26 weeks. There were a lot of people getting laid off towards the end of February, and if they have not found jobs by now, they will be dropping off the rolls.

Those people, then, go to one of the extended unemployment benefit programs. These were part of the stimulus package and are paid by the Federal Government, rather than from the state unemployment funds.

Combining the two largest of these programs, there are 3.459 million people receiving extended benefits, an increase of 50,000 from last week (at least from what was reported last week, the numbers are one week behind continuing claims and two weeks behind initial claims). Thus if you ignore the one week lag, there are actually 9.693 million people getting unemployment benefits.

The extended benefits do not last forever, and we are soon going to start seeing large numbers of people (some estimates are as high as 1.5 million by the end of the year) who are going to have no (legal) income whatsoever. Those people have probably already drawn down their savings and maxed out their credit cards. They will probably not be able to afford even the subsidized COBRA (another Stimulus Package benefit) at that point. Heaven help them if they get sick.

Look for the number of bankruptcies to continue to soar. If they are homeowners, they will probably stop paying their mortgages, especially if they are underwater on their houses. Living rent-free until the sheriff shows up eases their financial situation somewhat, but what happens after the sheriff knocks on the door?

At least they have avoided that fate so far due to the Stimulus Package. Those who claim that the stimulus has had no effect ignore the very real benefits it has brought to these people.

Under these circumstances, is it any big surprise that the back-to-school shopping season was a bust for stores ranging from Saks (SKS) to Macy’s (M) to Abercrombie & Fitch (ANF). "Sorry Billy, your brother’s hand-me-downs are going to have to do. Keeping the lights on is more important than you looking cool."

In the week ending Aug. 29, the advance figure for seasonally adjusted initial claims was 570,000, a decrease of 4,000 from the previous week's revised figure of 574,000. The 4-week moving average was 571,250, an increase of 4,000 from the previous week's revised average of 567,250.

... The advance number for seasonally adjusted insured unemployment during the week ending Aug. 22 was 6,234,000, an increase of 92,000 from the preceding week's revised level of 6,142,000.
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Cannabis Science, Inc. (CBIS.OB) Signs Strategic Agreement to Advance State and Federal Agencies Programs

QualityStocks — Mon, 31 Aug 2009 17:36:36 +0000

Cannabis Science Inc., an emerging pharmaceutical cannabis company, was pleased to announce this morning that it has signed an agreement with Leading Points Corp. to represent its products, services and initiatives to various government and military agencies. Leading Points is led by its founder who retains 20 years of service as an active duty commissioned [...]

Moody’s Confident About U.S. – Analyst Blog

Zacks Market Commentaries — Mon, 31 Aug 2009 16:44:25 +0000

Moody's Investors Service on Friday affirmed its Aaa credit rating on the United States. The action considers the country’s ability to survive the credit crisis, its political stability and favorable long-term economic prospects.

Though the rising debt burden could threaten the creditworthiness of the world's largest economy, much of the debt the country is accumulating is backed by equity and securities purchases, which lessens the negative effect on the government's net worth.

According to the nonpartisan Congressional Budget Office, the U.S. government and the Federal Reserve have injected about $12 trillion to revive the economy and credit markets. As a result, the budget deficit is expected to reach $1.6 trillion this year and $1.4 trillion next year. In its mid-year economic review, the Office of Management and Budget increased its estimate of the 10-year deficit by almost $2 trillion from the previous level to $9.05 trillion.

The U.S. government has also invested hundreds of billions of dollars to rescue many financial institutions including American International Group (AIG) and Citigroup (C) as part of its goal to stimulate the economy. These spending programs have also increased debt.

Most banks still have short-term debt guaranteed by the government. However, some large financial firms have repaid the government funds, including Morgan Stanley (MS), Bank of New York Mellon Corporation (BK), Goldman Sachs (GS), U.S. Bancorp (USB), American Express Company (AXP), BB&T Corporation (BBT) and State Street Corporation (STT). The repayment of government money can be viewed as a sign of recovery of the institutions as well as the economy.

Given the U.S. economy’s relatively decentralized fiscal structure, Moody’s considers the federal government debt ratios most relevant to the rating. According to the rating agency, the ratios of general government debt to gross domestic product (GDP) and to revenue are deteriorating sharply, and this trend will continue at least through 2010. After the crisis they are likely to be higher than the ratios of other top credit-rated countries. However, a substantial portion of the deterioration results from asset purchases, which does not have a major impact on the net worth of the federal government.

According to the agency, the budget deficit will fall to about 4% of output by 2015, improving the ratio of debt to gross domestic product to 77% in 2019, the highest level since World War II.
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History Lesson: September Is Best Month for Gold

Frank Holmes — Mon, 31 Aug 2009 05:00:00 +0000

Wersquo;re heading into September this week, so itrsquo;s a good time to revisit the historic seasonality of gold and gold stocks. Over the past four decades, September has been the best time for gold in terms of its month-over-month price appreciation. You can see this on the chart belowmdash;in a typical year, the price of gold in September rises 2.5 percent above its August price. The gold price has risen in 16 of the 20 Septembers since 1989, by far the best success ratio of any month of the year. What accounts for this predictable trend? September kicks off several of the planetrsquo;s most potent gold-demand drivers: The post-monsoon wedding season in India and Diwali, one of the countryrsquo;s most important festivals; Restocking by jewelry makers in advance of the Christmas shopping season in the United States; The holy month of Ramadan in the Muslim world, whose end in late September is marked by a period of celebration and gift-giving; And in China, the week-long National Day celebration starting October 1 and the run-up to the Chinese New Year in early 2010. This could be a challenging September in India, the worldrsquo;s largest gold consumer. The economic slowdown and gold prices near record highs drove jewelry demand down 31 percent in the second quarter compared to the same period in 2008. On the other hand, the World Gold Council says Indiarsquo;s bank deposits saw 22 percent year-over-year growth in the second quarter of 2009, so cash is available to be spent if the rupee price for gold weakens even slightly. The WGC also expects the wedding and Diwali season to ldquo;underpin a seasonal improvement over the remainder of 2009.rdquo; China, the worldrsquo;s #2 gold market, actually saw a year-over-year gold demand increase of 6 percent in the latest quarter, with buyers favoring 24-carat gold jewelry for its quality and as a store of value. The WGC says that trend toward the purer form of gold should continue, though the third quarter is usually the low season for this segment of the market. While September is a good month for gold, it is historically a great month for gold stocks as measured by the NYSE Arca Gold Miners Index (ticker GDM), as seen in the chart above. The GDM index comprises a broader collection of gold minersmdash;including more smaller-cap companiesmdash;than either the NYSE Arca Gold Bugs Index (HUI) or the Philadelphia Stock Exchange Gold and Silver Index (XAU). After the typically soft months of June and July, the gold miners start to bounce back with a 2 percent bump in August before shooting up another 8 percent in September. Since 1993, when it was created, the GDM has been up 11 times in September and down just five times. In September 1998, the GDM had by far its best-ever month (up 54.3 percent) when the bullion was bouncing off a two-decade low price of less than $275 per ounce. A decade later in September 2008, however, amid the severe credit squeeze triggered by the global financial crisis, the GDM fell 10.2 percent. The strong correlation between the gold price and the value of gold-mining stocks explains much of the average September jump for gold stocks. But the relationship is not lock-stepmdash;gold stocks (particularly for companies that do not hedge their production) have historically offered leverage to the gold price. In up markets, earnings growth has tended to exceed the increase in gold price. Of course, the leverage also works in the opposite directionmdash;gold stocks also tend to decline more when the price of bullion is falling. One of the most consistent correlations for gold is its inverse relationship with the U.S. dollarmdash;when gold is up, the dollar tends to be down, and vice versa. Looking at weekly data going back 20 years, this relationship occurs nearly 70 percent of the time. The seasonality chart above shows that September is only second to December in terms of dollar weakness, the average result for the U.S. Trade Weighted Dollar Index (DXY) being a 0.66 percent decline from August. Looking at the 39 Septembers going back to 1970, the dollar has seen negative performance 26 times, more than any other month of the year. The Federal Reserversquo;s massive stimulus spending and the expectation that the current low-interest-rate environment will continue for many more months are additional headwinds for the dollar, and thus tend to be positive for gold. In our June commentary ldquo;Why the Time Could Be Right for Gold Stocks,rdquo; we pointed out that gold stocks tend to outperform the overall stock market when the federal government is engaged in deficit spending. This yearrsquo;s federal deficit is expected to be a record $1.6 trillion, and the White House projected this week that the deficit will grow another $9 trillion between 2010 and 2019. These huge deficits will fan inflation fears and keep downward pressure on the dollar. Based on the long-term record, this may represent a good time for investors who want to establish or add to a gold or gold-stock position in advance of seasonal demand growth. The guidance provided by historical patterns may improve the chances for investment success, but of course, there are no guarantees that this September will follow the well-established trend. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The index benchmark value was 500.0 at the close of trading on December 20, 2002. The NYSE Arca Gold Bugs Index (HUI) is a modified equal-dollar weighted index of companies involved in major gold mining. The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver. The U.S. Trade Weighted Dollar Index (DXY) provides a general indication of the international value of the U.S. dollar. 09-589

History Lesson: September Is Best Month for GoldHistory Lesson: September Is Best Month for Gold

Frank Holmes — Mon, 31 Aug 2009 05:00:00 +0000

Savings Rate Dips in July – Analyst Blog

Dirk Van Dijk — Fri, 28 Aug 2009 21:17:56 +0000

In July, personal income was essentially unchanged (up by $3.8 billion, or less than 0.1%). If one subtracts out taxes to get disposable personal income (DPI), it was also essentially unchanged -- except it was a decline of $4.6 billion, but that is also less than 0.1%.

On the other hand, consumer spending, or personal consumption expenditures (PCE), increased by $25.0 billion or 0.2%. Well what happens if income is flat and spending rises? The savings rate falls.

In July, the savings rate dipped to 4.2% from 4.5% in June and from 6.0% in May. The rise in spending appeared to mostly be tied to the Cash for Clunkers program. Since it was only in effect for the last week of July, and for most of August, I would not be surprised to see spending rise again in August. I'm not sure about the direction of DPI.

The chart below (from http://www.calculatedriskblog.com/) shows the history of the savings rate, but uses a 3-month moving average to smooth out the fluctuations. Even with that, you can see that it is a pretty noisy series.

However, a few things are clear. First, the savings rate is still far above where it has been in recent years. The second is that we were on a relentless downward trend in the savings rate from the early 1980's until the start of the recession. Prior to the mid-1980's, it was rare to see the savings rate dip below 8.0%, but we have never gotten back close to that level since 1992.

A falling savings rate acts as a powerful tailwind for the economy. As people spend, they put money back into the economy, thus causing jobs to be created, which gives those people income that they spend and so on. The drop in the savings rate coincided with the rise in PCE as a share of the economy.

Over the long term, though, an economy cannot go without savings. Savings are needed for investments, and if they are not available domestically, then we have to find them abroad.

As a matter of accounting identity, the amount of capital we import is equal to our trade deficit. If savings are zero, then all the investments we make are ultimately being made by people abroad. Yes, there are a few intermediary steps in there, but ultimately that is what happens.

The rise in the savings rate is one of the key reasons that the Federal Government has been able to borrow at its current mind-boggling rate even as the trade deficit has been falling rapidly and has been able to do so without causing the interest rate it has to pay to rise significantly. In effect, with the savings rate higher, we have been able to borrow more from ourselves, rather than from the Chinese. The extremely low savings rates of the last decade are at the heart of the reason we owe so much abroad now.

Another thing to note is that the savings rate does tend to rise sharply in recessions. At first this seems to be counter-intuitive, since it is really hard to increase your savings when you are unemployed. Growth in DPI usually slows or turns negative in a recession, but not by as much as consumption does. The person who is out of work can't save more, but his neighbor who fears he or she might be next tries to build up as much of a cushion as he or she can, so the overall savings rate goes up.

After all, even in the worst of times most people still have jobs. That was even true during the worst point of the Great Depression. The slowdown in consumer spending is a big part of the vicious cycle that makes a recession a recession.

Thus, we are sort of in a dilemma, over the long term -- our low savings rate is totally unsustainable, yet in the short term a rising savings rate slows down the economy and causes unemployment to rise. Ultimately we need to get the savings rate up to the 9 or 10% level -- that was the norm in the 1960's and 1970's. It will have to stay there for a prolonged period. We need for that to happen gradually or the economy will never climb out of its slump.

Indeed, I would argue that the somewhat better economic numbers we have been seeing in recent months are directly tied to the recent retreat of the savings rate. To paraphase St. Augustine, "Lord make us thrifty...but not yet."

This long-term rise in the savings rate that is desperately needed should coincide with a decline in consumption as a share of the economy. In the second quarter, PCE was 70.6% of GDP, whereas back in the 1960's and 1970's it was less than 65% of GDP.

So what is going to make up that gap? Since GDP is made up of Consumption plus Investment plus Government plus Net Exports, we will have to see one of those three areas rise as a share of the economy. However, if people are keeping their wallets shut, it is not going to make a lot of sense for businesses to invest to expand capacity. This is especially true now with capacity utilization near post-war record lows (up slightly to 68.5% in July from a record 68.1% in June -- 80% is normal -- and it rarely falls below 75% even in bad recessions).

As I mentioned above, we have already seen a dramatic improvement in the trade deficit over the last year -- more than cutting it in half. However, most of that improvement is due to the fall in the price of oil, and we are past the anniversary of the oil price peak, so that effect is going to fade. We have seen some pick-up in the economies of other major countries recently, but they are far from booming (with the exceptions of China and India, but even there things are going slower than they used to). That does not auger well for a dramatic increase in exports.

Thus, by process of elimination, it means that we will have to dramatically reduce our non-oil imports (or cut the volume of oil imports if we are not getting the help on the price side). The only other option is an increase in Government as a share of GDP.

This is a trend that has all sorts of implications. If we are going to be saving more, it should help investment management companies like Franklin Resources (BEN). On the other hand, if we are consuming less, it means that the consumer discretionary sector will face a particularly stiff headwind. People will take fewer vacations which will hurt airlines like United (UAUA) and hotel companies like Marriott (MAR).

Retailers, particularly in the mid-range like The Gap (GPS) and J.C. Penney's (JCP) will find growth very hard to come by. Spending will not come to a stop, but it will slow, and people will be more concerned with cost as opposed to cash. This makes discounters like Family Dollar (FDO) relatively much better positioned.

Keep in mind here that I am talking about a trend that will play out over a decade, and it will not be a straight line, so from time to time some of the less-well-positioned firms might be good trades, but I suspect that they will be lousy long-term investments.

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Steelworkers Support Lakeside Bid – Analyst Blog

Zacks Market Commentaries — Fri, 28 Aug 2009 18:17:14 +0000

The workers of the largest steel producer in the U.S., United States Steel Corporation (X), are supporting a bid made by Lakeside Steel, a steel pipe and tubing manufacturer in Welland, Ontario to take over U.S. Steel's Ontario production assets. U.S. Steel had acquired the Ontario assets when it bought Stelco Inc. for about $1.1 billion in 2007.

On August 5, 2009, Lakeside had filed for an intervener status in the federal government's action against U.S. Steel. U.S. Steel had violated commitments for production and employment when it had temporarily shut down most of the Ontario operations in March this year due to weak steel demand. The company’s facilities are operating at barely half their capacity.

U.S. Steel’s production of 5 million tons in July 2009 was the highest monthly output this year, but it was 41.6% lower than July 2008. The company has laid off most of the workers at the site and has locked out the remaining unionized workers at Nanticoke this month after failing to reach a new labor deal.

Lakeside claimed that if it acquires U.S. Steel, it would comply with all its commitments on production and employment. The company hopes Canada's Federal Court will force Pittsburgh-based U.S. Steel to sell the Ontario assets.

Lakeside and the United Steel’s workers will submit their case at a Canadian Federal Court hearing in Toronto on August 31, 2009.
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It’s Raining Contracts for Northrop – Analyst Blog

Zacks Market Commentaries — Fri, 28 Aug 2009 17:15:19 +0000

Northrop Grumman Corp. (NOC) yesterday bagged two Pentagon contracts worth $5.87 billion. The first contract is worth $3.44 billion, from the Air Force for providing services for the stealth bomber B-2 bomber fleet. The second contract is of $2.43 billion from the Navy for providing services on overhaul, alterations, repair, maintenance and refueling of the nuclear-powered aircraft carrier USS Theodore Roosevelt.

Northrop Grumman is the second largest defense contractor after Lockheed Martin Corp. (LMT). These contracts will boost the dwindling backlog of Northrop, which fell to $70.4 billion after the fiscal second quarter from $76.9 billion year over year. Northrop’s backlog was affected by the cancellation of the $5.1 billion Kinetic Energy Interceptor program by the U.S. Government.

The Air Force contract will maintain the status-quo of the Electronic Systems segment as the star performer. In the fiscal second quarter Electronic Systems’ operating income grew by one-fourth year over year.

Similarly the navy contract will rejuvenate the Shipbuilding segment where sales shrunk by 10%, year over year in the second quarter. The shipbuilding segment’s performance was weak due to lower volume year over year for expeditionary warfare programs.

Based in Los Angeles, California, Northrop Grumman provides products, services, and solutions in information and services, aerospace, electronics and shipbuilding to the military, government, and commercial customers of United States and beyond. The company is the largest IT service provider to the federal government. In addition, Northrop Grumman is the only nuclear-powered aircraft shipbuilder in the United States. We maintain our Long-Term Outperform recommendation on the shares.
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JPMorgan Helps California IOUs – Analyst Blog

Zacks Market Commentaries — Fri, 28 Aug 2009 16:00:56 +0000

California State Treasurer, Bill Lockyer, said on Thursday that JPMorgan Chase & Co. (JPM) purchased $1.5 billion of California’s short-term, “interim" revenue anticipation notes according to a lending agreement with the state. The amount will provide the state with money to pay for some of its recently issued IOUs.

To conserve declining cash during its recent budget crisis, the state had issued the IOUs at an interest rate of 3.75%. Per the contract, California will pay 3% interest to JPMorgan on those notes.

The loan is expected to help bolster the California government's financial position as it prepares for a multi-billion dollar sale of short-term debt next month to raise money for its cash-flow needs.

Through Aug 25, California has issued 414,000 of the IOUs with a total value of $2.3 billion. The state is scheduled to redeem the IOUs beginning Sept 4, 2009.

In another piece of good news for the state, Fitch Ratings on Wednesday removed California's General Obligation (GO) debt from alert for a possible downgrade. The rating agency has taken such action as a result of the recent actions of the state government to tackle its cash crisis. The agency affirmed California's GO rating of BBB, or two notches above "junk" status, and said the ratings outlook is stable.

However, according to the agency, the government of California still faces serious challenges as recession mauls the state's economy and hacks revenues.

Last month, some of the largest U.S. banks, including Bank of America (BAC), Citigroup (C), Wells Fargo (WFC) and JPMorgan were unwilling to cash the state's IOUs despite request from the State Treasurer. However, $2 billion in outstanding IOUs are earning a tax-free annualized yield of 3.75%, which would have accumulated to the banks if they had continued to cash them for customers and then held them to maturity.

JPMorgan was one of the first banks to exit the federal government’s Troubled Asset Relief Program (TARP), and has been restructuring its balance sheet to capitalize on its strength of capital. The loan to California comes from a different pool of funds that the company has used to buy notes worth billions issued by states facing cash crunch, including Illinois and New Jersey.
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$9 trillion– what, me worry?

James Hamilton — Fri, 28 Aug 2009 13:58:02 +0000

Paul Krugman may not be that concerned by the Obama administration's new projection that the unified federal budget deficits will sum to $9 trillion dollars over the next 10 years. But I am.

Here's the argument Paul Krugman gave for why $9 trillion maybe isn't as huge a sum as it sounds:

even if we do run these deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II. It will also be substantially less than, say, debt in several European countries in the mid to late 1990s.

Political Math (hat tip: Russ Roberts) takes a closer look at Paul's first comparison:

implicit in his observation is the concept that since we did fine after WWII, we'll do fine now. But the years after WWII saw drastic reductions in the inflation-adjusted debt driven by drastic reductions in spending. Mr. Krugman points to no similar possibility in the post-Obama world.... Back in 1945, at the height of the spending that saw our national debt rise so dramatically, entitlement spending and interest on the national debt made up a meager 5% of our total budget.

Source: Political Math.

And whereas in 1945 Americans could reasonably look ahead to a huge decrease in military expenditures, in 2009 when I look ahead what I see is a looming increase in federal medical expenditures.

I also believe it is relevant to compare these deficits not just with GDP but also with current federal tax revenues. $1 trillion is approximately the total personal income tax receipts of the federal government in 2006. My preferred metric for what each additional trillion dollars would require from me personally is to take what I paid in federal income taxes in 2006 and double that amount. To pay off $9 trillion, I'd have to do that for 9 years.

Unfortunately, $9 trillion may not be the whole iceberg. Diane Lim Rogers highlights the Concord Coalition estimate that current policy would imply a cumulative $14.4 trillion deficit over the next ten years.

You also can't ignore the off-balance sheet federal liabilities, such as the $5 trillion in debt and loan guarantees from Fannie and Freddie. A quarter trillion dollars worth of those loans we've guaranteed are currently nonperforming. That's just Fannie and Freddie-- doesn't include FHA, FDIC, Federal Reserve,...

If the government tries to double taxes on people like me, it's in real political trouble. If it doesn't try to double taxes on people like me, it's in real solvency trouble.

It looks like we may have a problem here.

Northern Trust Off TARP List – Analyst Blog

Zacks Market Commentaries — Thu, 27 Aug 2009 15:45:33 +0000

Northern Trust Corp. (NTRS) on Wednesday declared that it has completed the final step to free itself from the government bailout program. The Chicago-based custody bank paid $87 million to repurchase stock warrants issued to the federal government as part of the Troubled Asset Relief Program (TARP).

With this repurchase, Northern Trust has paid a total of nearly $1.71 billion to the Treasury under TARP. This includes repurchase of preferred stock issued to the government and preferred dividends. According to the bank, the total payments represent a 14% annualized return on investment to the US taxpayers.

The $700 billion bailout program was launched by the federal government to help revive deteriorating credit markets during the height of the financial crisis. The government provided capital to institutions in exchange of preferred stock and warrants to purchase common shares.

Most banks still have short-term debt guaranteed by the government. However, some large financial firms that have redeemed warrants issued under the TARP include Morgan Stanley (MS), Bank of New York Mellon Corp. (BK), Goldman Sachs (GS), U.S. Bancorp (USB), American Express Co. (AXP), BB&T Corp. (BBT) and State Street Corp. (STT).

Although Northern Trust has been healthy with respect to its balance sheet, we think there is limited room for improving its results in the near future as the market turmoil is expected to persist for a while. The shape of its bottom line will depend on near-term economic trends.

However, repayment of TARP money will bring some relief on the preferred dividend payment front. We expect the company to emerge from this testing environment and become more competitive in the long run.

Read the full analyst report on "NTRS"
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Nemtsov on the Violence in North Caucasus

Robert Amsterdam — Thu, 27 Aug 2009 14:01:12 +0000

Boris Nemtsov has an aggressive piece running in the Wall Street Journal today criticizing the Russian government's handling of the escalating violence in the North Caucasus. Agree with him or not, he is pointing at a very important problem which...

Northrop Wins Security Contract – Analyst Blog

Zacks Market Commentaries — Wed, 26 Aug 2009 15:00:12 +0000

On Monday, Northrop Grumman Corp.’s (NOC) cyber security team bagged a follow-on $430 million indefinite delivery/indefinite quantity (ID/IQ) contract from the US Army. In lieu of the deal, the company will continue providing a wide array of information operations (IO) and computer network operations (CNO) to the 1st Information Operations Command (Land), Fort Belvoir, Virginia, and its regional Computer Emergency Response Teams.

The contract had originally been awarded to Northrop by the Army's Intelligence and Security Command, Fort Belvoir in 1997. Through this follow-on contract, valid for five years, Northrop will coordinate multiple battlefield functions such as electronic warfare, military deception, psychological warfare, operations security and computer-network operations to disrupt enemy decision-making while protecting information necessary for the US troops.

The deal will boost Northrop’s dwindling backlog subsequent to termination of the $5.1 billion Kinetic Energy Interceptor program by the US Government. The company’s total backlog fell to $70.4 billion after the second quarter from $76.9 billion year over year.

Based in Los Angeles, California, Northrop Grumman provides products, services, and solutions in information and services, aerospace, electronics and shipbuilding to the military, government and commercial customers in the United States and beyond. The company is the largest IT service provider to the federal government. In addition, it is the only nuclear-powered aircraft shipbuilder in the United States. We maintain our Neutral recommendation on the stock.

Read the full analyst report on "NOC"
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Zacks Bull and Bear of the Day Highlights: Intuitive Surgical, Cost Plus Inc., Ford, Honda and The Gap – Press Releases

Zacks Market Commentaries — Wed, 26 Aug 2009 14:00:06 +0000

For Immediate Release

Chicago, IL – August 26, 2009 – Zacks Equity Research highlights Intuitive Surgical (ISRG) as the Bull of the Day and Cost Plus Inc. (CPWM) the Bear of the Day. In addition, Zacks Equity Research provides analysis on Ford (F), Honda (HMC) and The Gap (GPS).

Full analysis of all these stocks is available at http://at.zacks.com/?id=2676

Here is a synopsis of all five stocks:

Bull of the Day:

Intuitive Surgical’s (ISRG) story is improving. A new product was developed as an upgrade to the existing daVinci Surgical System. Furthermore, the company enjoys a virtual monopoly in robotic surgery without direct competition.

The company's razor/razor blade business model ensures recurring revenues even during difficult times. In the second quarter, earnings of $1.62 per share were higher than the Zacks Consensus Estimate of $1.27.

Growth in revenues was witnessed across all the segments. We believe the company will continue leveraging its monopoly position in the industry. We rate this stock Outperform with a target price of $260 per share.

Bear of the Day:

First quarter sales and earnings per share for Cost Plus Inc. (CPWM) were slightly above our estimates. Even so, the company's sales declined 9% year-on-year and it reported a net loss of $20 million.

The company is closing stores, cutting costs, and trying to preserve cash, but those moves will do little reverse its weak sales trends and merchandise margins. In addition, management's guidance for the second quarter cautioned investors to prepare for more of the same.

Cost Plus expects same-store sales to decrease 9.5%-14.5% and a pre-tax loss from continuing operations of $14-$21 million. We have an Underperform rating on CPWM shares. Our six-month target price is 50 cents per share.

Another Sad Day For The Economy: Bernanke Re-Nominated By Obama

Steve Warshaw — Wed, 26 Aug 2009 04:31:04 +0000

A big piece of not so surprising news was released today; president Obama has decided to nominate Ben Bernanke for a second term as fed chairman. This is a sad day indeed, as Mr. Bernanke’s financial shenanigans have caused many economic analysts and market pundits much consternation. Frankly, Mr. Bernanke has as been outright dishonest about his financial policy. He has continuously revoked Freedom of Information Act (FOIA) requests by several news organizations claiming that the Federal Reserve is above the law, and that the FOIA doesn’t apply to him ...

Chemical Giants Utilize Lobbying – Analyst Blog

Zacks Market Commentaries — Tue, 25 Aug 2009 20:40:56 +0000

The recent disclosure reports have revealed that lobbying is a frequent phenomenon with the chemical giants such as DuPont (DD) and Eastman Chemical (EMN).

The second quarter report suggested that DuPont spent more than $1.2 million to lobby on biotechnology, trade, taxes and more. During April-June, the company also lobbied Congress, the White House and a number of federal agencies including the departments of Agriculture, Commerce, Defense and Treasury on chemical plant security, patent reform, energy efficiency and climate change.

On the other hand, Eastman, the Tennessee-based manufacturer of coatings and specialty plastics spent $270,000 lobbying the federal government on clean energy, antitrust and other issues. During April-June, the company also lobbied Congress and the Energy Department on legislation dealing with industrial gasification incentives, shareholder rights as well as antitrust and labor issues.

The chemical industry is susceptible to environment-based litigation. This has prompted many chemical companies to seek safe haven through lobbying. Further, the global economic recession has generated weak demand across most of the U.S. markets. This has led the chemical companies to engage in lobbying to maintain their market share.
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Gaining Confidence – Analyst Blog

Dirk Van Dijk — Tue, 25 Aug 2009 19:20:04 +0000

The Conference Board's Consumer Confidence index soared to 54.1 in August, up from 47.4 (upwardly revised from 46.6) and blowing away expectations of just a slight increase to 47.5. However, while improving, it still remains very low; 90 is about normal.

On the other hand, it sure beats the record low 25.3 set back in February. Since the Consumer represents over 70% of the economy, this is very good news indeed -- especially coupled with the better news on housing prices we got today.

The total index has two major components: the present situation and expectations for the future. The big imporvement came on the expectations side, where that sub-index rose to 73.5 from 63.5. The increase in the present situation was more muted, and remains well below the expectations index at 24.9 up from 23.3 in July.

The difference between the present situation and the expectations components is even more apparent if we back up and look where they were just a few months ago. The present situation is actually lower than it was in April (25.5), but the expectations component is up from 51.0 then. As the graph below (from http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm) shows, the expectations part is nomally higher than the persent situation part, but the difference in direction is pretty extreme right now.

The rise in consumer confidence means that "animal spirits" may be returning to Main Street, not just Wall Street. If consumers feel more confident, they are more likely to go out and spend, particularly on big-ticket discretionary items. This will greatly help retailers and the companies that make discretionary items.

Even with the "Cash for Clunkers" program running out again, it means that some folks might just feel confident enough about the future to go out and buy a new car from Ford (F) or Honda (HMC), even if they are not bribed to do so by the Federal Government. It means they might go do their back-to-school shopping at The Gap (GPS) instead of the Salvation Army.

In the process, they will increase demand and put people back to work. Those workers will then have incomes that they can spend, further increasing economic activity. In short, a vicious cycle would be turning into a virtuous cycle.

As good as the news is about the increase, keep in mind that it is still at a very low level, with the present situations scraping along at near-record lows. Even the "good" expectations part has only climbed back to be in-line with the lowest levels seen during the last recession.

Yes, it is very good news, but keep it in perspective. More evidence that the recession is over, but I still think that the recovery is going to be a very slow and muted one. The economy remains brittle and any adverse shock to the system could easily put us back in the nightmare we were in last winter.

Still, the improvement we have seen since those dark days, and the trajectory we were on then has been remarkable. The medicine administered by the Fed (record low interest rates, big increases in the monetary base, backstopping everything in sight) and the Federal Government (the stimulus program, and -- let's face it -- huge deficits) is working.

That doesn't mean that everything is going to be great right away. In particular, the employment market is likely to remain weak until at least the first quarter of 2010, and the banking system still has major problems. The improvements we are seeing are in big part artificial, due to those extraordinary measures, which cannot be sustained forever without causing massive problems (inflation, a collapse in the dollar, public debt climbing over 100% of GDP, etc).

It remains to be seen if the patient will be able to get up and be healthy after the IV is pulled out of his arm. However, it sure beats the end of the economic world as we knew it, and just a few months ago that was a very real possibility.

With more than 25 years of experience as an analyst and portfolio manager, Dirk van Dijk is Zacks’ Chief Equity Strategist. He also manages the new long-term investing service, Strategic Investor">Strategic Investor.
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In the Race for a U.S. Economic Rebound, Growing Debt and Budget Deficits Remain the Biggest Possible Roadblock

Contrarian Profits — Mon, 24 Aug 2009 22:33:22 +0000

pEven as investors get more and more bullish about the outlook for the U.S. economy, the economy’s underlying foundation continues to erode./p pIn a report to be released this week, the Obama administration will boost its 10-year projection for the federal budget deficit to about $9 trillion – an increase of roughly $2 trillion, or 29%, from its prior projection, strongemFox News/em/strong reported over the weekend, citing a source from the a href="http://www.whitehouse.gov/omb/" target="_blank"Office of Management and Budget/a (OMB)./p pThe new cumulative deficit projection – for 2010-2019 – replaces the a href="http://www.foxnews.com/politics/2009/08/21/official-obama-increase-year-deficit-trillion/?test=latestnews#38;test=health" target="_blank"administration’s previous estimate of $7.108 trillion./a Changes in budget projections – whether they result in a surplus or a deficit – are often refined as economic conditions change. This new projection was necessary because the recession has#8230;/p

A Truckload of Bad Data

Mogambo Guru — Fri, 21 Aug 2009 22:31:31 +0000

pA guy comes into the bar, and I figure he is a trucker because he looks like a trucker and he is wearing a greasy Peterbilt hat. So I say, “Are you a trucker?” and he answers “Yeah. What’s it to you, old man?”/p pSo I say, “I was just wondering, because it looks like the economic slowdown has shown up in the Dow Jones Transportation Average, which has made so little money in shuffling goods hither and thither that a share of all the companies in the index earned a total of 82 cents, which is down from the $170.63 they earned at this time last year.”/p pHe looks at me and asks, “Who cares? And what in the hell is#8230;/p

Opel to Choose Suitor – Analyst Blog

Zacks Market Commentaries — Fri, 21 Aug 2009 20:32:02 +0000

General Motors will choose a preferred bidder for a controlling stake in its European Opel/Vauxhall business today. The deal has become a race between two suitors, Canada-based auto parts supplier Magna International (MGA) and Brussels-based industrial investment group RHJ International.

GM sits uncomfortably in the deal amidst the German government’s bias towards Magna. This is because Magna has vowed to make most of its job cuts outside Germany if it wins the deal. Both the suitors had indicated they would cut Opel’s workforce by a fifth – about 10,000 jobs – to make the unit financially viable.

GM is in a dilemma fearing that Magna, backed by Russia’s Sberbank, could capture Opel's technology for the Russian car industry. Thus, if Magna wins the deal, GM may lose Russia’s increasingly important market for its models such as Chevrolet. Magna and Sberbank are planning to manufacture Opel cars in Russia with the biggest automaker in the nation, Gaz Group – jointly owned by the tycoon Oleg Deripaska and Avtovaz (partly owned by France ’s Renault). This has led GM to favor RHJ for the deal.

The German Government has revealed that funds are only available to Magna as the federal government and various German states have agreed to put up the entire €4.5 billion ($6.4 billion) in credit needed to finance the deal.

GM requires clearance from Opel/Vauxhall Trust Board, which holds a 65% stake and a German Government task force for the deal to go through. The five-member Trust Board set up in June includes two voting representatives of the German Federal and Regional Governments and two from GM.
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Stock Market News & Stocks to Watch from StraightStocks » Federal Government

3Q GDP Growth Revised to 2.8% – Analyst Blog

What You Need to Know about Home Equity Loans

406 Days Until This Market Crashes…

Initial Jobless Claims Flat(-ish) – Analyst Blog

Zacks Analyst Blog Highlights: D.R. Horton, Pulte, Owens Corning, Masco and EnCana Corporation – Press Releases

Housing Starts, Permits Plunge – Analyst Blog

Mortgage Delinquencies Still Rising – Analyst Blog

If this is true, we all need a vaccine

Zacks Bull and Bear of the Day Highlights: Expedia Inc., Triumph Group, Inc., Target, TJ Maxx/Marshall’s and Abercrombie & Fitch – Press Releases

EMKR, LXRX, EFJI, DrStockPick.com Watch List! for Friday November 13, 2009, EMCORE Corp., Lexicon Pharmaceuticals, Inc. and EF Johnson Technologies, Inc.

Initial Jobless Claims Fall Again – Analyst Blog

Initial Jobless Claims Fall Again – Analyst Blog

Corrections Beats by a Penny – Analyst Blog

Notes on Janet Yellen Speech – Analyst Blog

More on Unemployment Duration – Analyst Blog

Is it time to panic?

Omnicity Corp. (OMCY.OB) Sees Clear Path to Rapid Growth

An interview with Charlie Gasparino

Two More Join Toxic Asset Program – Analyst Blog

On Revisions and on Conditioning

The 2009Q3 Advance GDP Release and Stimulus Measures

Contributions to GDP Growth – Analyst Blog

GDP Notes – In Depth – Analyst Blog

Housing Prices Up Again – Analyst Blog

Stock Market News for October 27, 2009 – Market News

EIA: Fuel Supplies Fall Further – Analyst Blog

Municipal Haste

Does Tower Disapproval Go All The Way To The Top?

Gas Storage at New All-Time High – Analyst Blog

EIA: Big Drop in Fuel Stocks – Analyst Blog

Northrop Pockets Four Contracts – Analyst Blog

Northrop Bags Army Contract – Analyst Blog

Will stimulating nominal aggregate demand solve our problems?

Source: Greg Mankiw

Prime Star Group (PSGI.OB) Up 48.7% Following Recent Mention by QualityStocks Newsletter

The Lehman of 2009

Boom, Bust and Rebuild: Bank of America and the Kenneth Lewis Legacy

Construction Spending Up Slightly – Analyst Blog

Why You Should Invest in the ‘New’ Germany

Who’s Buying Oil?

Prieur’s readings (September 29, 2009)

Gander Mountain: Going Private, Sending a Message

The Realities of California’s Water Debate – Note to Hannity:nbsp; The Pumps Are On

Ruinous Debt to Create Futureless Suburbia

Toyota Offloads Financial Arm – Analyst Blog

Debunking The Paradox of Thrift: Why Consumer Spending Won’t Save Our Economy

Natural Gas Builds at Slower Pace – Analyst Blog

Zacks Industry Outlook Highlights: Peabody Coal, Arch Coal Inc., Rio Tinto and Walter Energy – Press Releases

Fitch Downgrades Sallie Mae – Analyst Blog

Zacks Bull and Bear of the Day Highlights: Joy Global, Zions Bancorporation, Fannie, Freddie and J.P. Morgan – Press Releases

Obama and Market Regulation – Analyst Blog

Guest Contribution: Reforming Banking by Reforming Housing

Deficit Not As Bad As Feared – Analyst Blog

The ARRA’s Progress

Dell to Make Electronic Medical Records – Analyst Blog

The Credit Rating Firms Are Running Scared – It’s About Time

U.S. Crude Supplies Dip Sharply – Analyst Blog

Notes on Initial Claims Dropping – Analyst Blog

The Two Reasons it’s Time to Short U.S. Stocks

The Two Reasons it’s Time to Short U.S. Stocks

The Five Financial Shockwaves to Expect When China’s Yuan Swaps Places with the U.S. Dollar

Employment Report in Depth – Analyst Blog

Natural Gas Stockpiles Expand – Analyst Blog

The Bear Market is Not Over

EIA Inventory Data Mixed – Analyst Blog

Initial Claims Hovering – Analyst Blog

Cannabis Science, Inc. (CBIS.OB) Signs Strategic Agreement to Advance State and Federal Agencies Programs

Moody’s Confident About U.S. – Analyst Blog

History Lesson: September Is Best Month for Gold

History Lesson: September Is Best Month for GoldHistory Lesson: September Is Best Month for Gold

Savings Rate Dips in July – Analyst Blog

Steelworkers Support Lakeside Bid – Analyst Blog

It’s Raining Contracts for Northrop – Analyst Blog

JPMorgan Helps California IOUs – Analyst Blog

$9 trillion– what, me worry?

Source: Political Math.

Northern Trust Off TARP List – Analyst Blog

Nemtsov on the Violence in North Caucasus

Northrop Wins Security Contract – Analyst Blog