Daily Digest - Jan 6

Monday, January 5, 2009, 8:59 PM
  • U.S. auto sales continue to skid 
  • November 2008 construction at $1,078.4 billion annual rate
  • Office vacancies soaring, rents falling in major cities 
  • Preview: pending home sales to fall for third straight month 
  • Hoteliers see too much room at the inn 
  • The problem of "Burn Rate" hits mainstream companies 
  • New York Fed begins MBS purchase program 
  • By the numbers - How 2008 shakes out  
  • Obama says economy 'getting worse' 
  • Gold Wars (Audio)



U.S. Auto Sales Continue to Skid 

The U.S. auto market closed out its worst year in more than 15 years -- with an even weaker 2009 looming -- as General Motors Corp., Toyota Motor Corp. and Ford Motor Co. reported sales declines of more than 30% for December. Chrysler LLC's sales plunged 53%. 

The grim numbers, heaped on top of paltry results for prior months, underscore how matters went from bad to worse in 2008 for auto makers. The entire industry, including foreign car makers, is now reeling from the spiraling effects of the U.S. housing crisis, tight credit and worries about a lengthy recession.

Ford's senior economist, Emily Kolinski Morris, said the first quarter will be "bad, no matter how you look at it" and that the economic stimulus package taking shape in Washington will be key to a second-half recovery in auto sales.

As sales sank last year, the Detroit Three had to ask Congress for assistance to avert financial disaster. Last month, Washington agreed to a $17.4 billion loan package for GM and Chrysler LLC under the Treasury Department's Troubled Asset Relief Program.

GM, the nation's largest auto maker, said it sold 220,030 light vehicles in December, down 31% from a year earlier. Car sales dropped 25% while light-truck sales dropped 35%. There were 26 selling days in the month, the same as a year earlier. 


The U.S. Census Bureau of the Department of Commerce announced today that construction spending during November 2008 was estimated at a seasonally adjusted annual rate of $1,078.4 billion, 0.6 percent (±1.6%)* below the revised October estimate of $1,085.3 billion. The November figure is 3.3 percent (±2.2%) below the November 2007 estimate of $1,115.3 billion. 

During the first 11 months of this year, construction spending amounted to $998.4 billion, 5.3 percent (±1.3%) below the $1,054.3 billion for the same period in 2007.


Spending on private construction was at a seasonally adjusted annual rate of $756.4 billion, 1.5 percent (±1.1%) below the revised October estimate of $767.7 billion. Residential construction was at a seasonally adjusted annual rate of $328.3 billion in November, 4.2 percent (±1.3%) below the revised October estimate of $342.6 billion. Nonresidential onstruction was at a seasonally adjusted annual rate of $428.2 billion in November, 0.7 percent (±1.1%)* above the revised October estimate of $425.1 billion.


In November, the estimated seasonally adjusted annual rate of public construction spending was $322.0 billion, 1.4 percent (±2.6%)* above the revised October estimate of $317.6 billion. Educational construction was at a seasonally adjusted annual rate of $88.7 billion, 1.3 percent (±2.7%)* above the revised October estimate of $87.6 billion. Highway construction was at a seasonally adjusted annual rate of $83.9 billion, 1.3 percent (±4.6%)* above the revised October estimate of $82.8 billion. 

Office Vacancies Soaring, Rents Falling in Major Cities 

Some months ago we speculated that the sector of the economy to fall out of the sky would be retail real estate as the proliferation of shopping malls and small strip centers ran headlong into what at that time appeared to be a looming wave of retail store closings. That wave is now building to a tsunami and half finished retail construction and newly vacant storefronts can be seen everywhere. But another sector of commercial real estate that is also suffering is office space.

Monday The New York Times reported that there is chaos in all parts of commercial real estate and everywhere in the country. The article cited problems with vacancies, rents, and lending, particularly focusing on office space where it vacancy rates now exceed ten percent in virtually every major city in the country and are rising rapidly.

The Times article pointed to a number of cities where problems are already worse than expected even a few months ago. Chicago vacancies have risen from ten percent and may be at 17 percent by the end of this year. Dallas is expected to hit 19 percent from the current 16.3 percent vacancy rate. Orange County California is particularly hard hit as the many subprime mortgage companies that called the area home have shrunk or disappeared completely and vacancies that were at seven percent two years ago now top 18 percent. 

Preview: Pending Home Sales to Fall for Third Straight Month 

The U.S. housing market continues to struggle as prices fall, demand weakens, and inventories build up. An industry index set for release on Tuesday is expected to show that contracts for homes on the market continued to fall in November, suggesting that actual sales last month and into 2009 will continue to decline. 

The pending U.S. home sales index measures housing purchases that have been signed but not finalized, thereby gauging the performance of home sales in the following months.

The index has been oscillating up and down each month for more than a year, yet in October it fell for a second straight month, and is set to fall once again in November.

"Pending home sales numbers are likely to suggest the housing market is still spiraling down," said BMO senior economist Sal Gautieri. "It looks like with mortgage rates falling rapidly in December, we might get some bounce in home sales in December, but at least in November we'll see the third straight decline in home sales."

A Bloomberg poll of 32 economists said pending sales are expected to fall by a full percentage point in November, following a 0.7% decline in October and a 4.3% cutback in September. Estimates range from -5.0% to +1.5%. 

Hoteliers see too much room at the inn 

On New Year's Eve in downtown Los Angeles, hotel lobbies were crowded with revelers and guests, many of whom were planning to attend the Rose Parade or Rose Bowl football game in Pasadena the next day. 

But the holiday crowds concealed the uncomfortable fact that the incoming year would probably not be a very good one for the hospitality business.

A single flight of stairs above the busy lobby at the Westin Bonaventure on Figueroa Street, an arcade of shops was almost entirely devoid of customers, and the "sale" signs posted in the windows looked worn with age.

Visits from splurging tourists have diminished, said Donald Kim, who has operated a boutique in the hotel for more than three decades. He still stocks pricey gifts with gold-plated brands such as Dior and Givenchy, but he has added low-cost knickknacks meant to appeal to the conventioneers who now make up the bulk of his customers.

"Those people only buy souvenirs such as T-shirts," he said. "Not handbags."

Fortunes of the once-highflying hotel industry fell hard at the end of 2008 and the prospects for 2009 look grim as anxious Americans cut travel spending and leave plenty of room at the inn. 

The Problem Of "Burn Rate" Hits Mainstream Companies

At the beginning of the decade a number of internet and next-generation technology companies raised money through venture capitalists and IPOs. Many of these companies had little, if any, revenue. Most had relatively high expense structures. 

As these firms quickly ate through the cash on their balance sheets and continued to have poor sales prospects, the term "burn rate" was coined. If was defined as the amount of cash a company had on its balance sheet divided by the firm's monthly expenses less any revenue. An operation with $12 million in cash less short-term debt and a $1 million a month "burn rate" was expected to be out of business in a year.

At this point, GM (GM) and Chrysler would make any burn rate risk lists as would a number of retailers who had awful holiday seasons and are facing repayment of debt or revolving credit facilities. That is why Pier 1 (PIR) is trading at $.40 and shares of Dillard's (DDS) are off 80% over the last year.

The use of the term has almost disappeared but it is likely to re-emerge now and refer to companies which are more mature and part of the mainstream economy. With credit nearly impossible to come by, operations with high debt and negative operating income are going to be defined by how long the capital they have access to will last.

The newspaper industry is being crippled by the burn rate problem. Big chains Journal Register and Gatehouse are already at the edge of insolvency. McClatchy (MNI), the country's third largest newspaper company may well have debt service problems this year. Even The New York Times (NYT) is facing a $400 million debt payment later this year and does not have the cash on hand to cover it. 

New York Fed Begins MBS Purchase Program 

As promised, the New York Fed plans to begin buying U.S. mortgage and student debt effective immediately, in a move geared at thawing frozen credit markets in the country and restore confidence of the economy. 

"This program, first announced on November 25, 2008, is intended to support the mortgage and housing markets and foster improved conditions in financial markets more generally," said the New York Fed in a press release on its website, promising to publish weekly updates every Thursday on how the program is progressing.

The operation is the first of a $500 billion project and part of a broader monetary policy initiative geared at stimulating an economy whose interest rates are already near zero. 

By the Numbers - How 2008 Shakes Out  

Now that 2008 is finally history, it's time to look back at the year in numbers - most of them pretty terrible. 

  • -33.84% The percentage loss in the Dow industrials, worst since 1931, third-worst in history.
  • -38.49% The percentage loss in the S&P 500, worst since 1937.
  • -40.54% The percentage loss for the Nasdaq Composite Index, worst in history.
  • 126 The number of up days on the S&P 500 in 2008.
  • 126 The number of down days on the S&P 500 in 2008. (The difference, of course, is that on the down days, the market lost an average of a kajillion points.)
  • 28 The number of Dow industrials components ending lower on the year. The outliers were Wal-Mart Stores and McDonald's.
  • 15 The number of Standard & Poor's 500-stock index members that ended the year in positive territory. This is the worst breadth for the S&P going back to 1980; second-worst was 2002, when 131 stocks, or 26% of the issues, rose on the year.
  • 18 The number of daily 5%+ moves on the S&P 500 in 2008.
  • 17 The number of 5%+ moves on the S&P 500 between 1956 and 2007.
  • 280.80 The daily average point range on the Dow Jones Industrial Average.
  • 421.01 The daily average point range on the Dow Jones Industrial Average between Sept. 1 and Dec. 31.
  • -7.87%. The worst one-day percentage change on the Dow in 2008, which ranks ninth all-time.
  • -87.14% The performance of General Motors in 2008, making it the worst among Dow components. (There are issues here of survivorship bias - American International Group was removed from the 30-stock average during the year, and that stock lost 97.31% in 2008, making it the worst performer among the members of the S&P 500.)
  • 1.78 The percentage-point decline in the benchmark 10-year Treasury yield, which fell to 2.253% by the end of the year.
  • 6 The number of days in 2008 that rank among the Dow's top 20 up days and top 20 down days in terms of percentage change. (The leader, with 10 appearances, is 1932.)
  • -17.7%.The performance of the S&P's consumer staples sector - the best performer among the S&P's 10 industry sectors.
  • 24.03% The gain in the Barclays long-term Treasury Index in 2008.
  • 15.66 The difference, in percentage points, between the lowest spread over Treasurys for the Merrill Lynch High Yield Index for the year, and the highest spread over Treasurys. (At its peak, the index was at 20.68 percentage points over comparable Treasurys.)
  • $61,000 The cost of insuring $10 million in U.S. Treasurys against default for five years. At the beginning of 2008, this cost was $6,000. 

 Obama says economy 'getting worse' 

WASHINGTON (AP) - President-elect Barack Obama describes the economy as "bad and getting worse."
He's been on Capitol Hill today, meeting with House and Senate leaders to talk about an economic stimulus plan. 

Before meeting with Senate Majority Leader Harry Reid, Obama told reporters, "We have to act and act now," in order to break what he called the "momentum of this recession."

Obama earlier met with House Speaker Nancy Pelosi. He said he went to Capitol Hill ahead of his inauguration because "the people's business cannot wait." 

Gold Wars (Audio 16 Minute +/- WWII not FDR's New Deal, 18 Minute +/1 Derrivatives)

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Davos's picture
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Re: Daily Digest - Jan 6


djhester1940's picture
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Re: Daily Digest - Jan 6

Good morning Davos,

I just wanted to let you know that I really appreciate your daily digests. They have become an important part of my day.

I have just one question: are the construction statistics provided by the Census Bureau any more reliable than any of the other data that we get from the government? Do you know of any way that the Census Bureau is cooking these data? I'm just curious.

Our local newspaper presented data summarizing the 2008 gains and losses on companies here in San Antonio that are traded on the exchanges. Out of the 29 companies listed only two were in the positive range while the other 27ranged from -16.22 to -99.49 percent (with 20 of these showing losses greater than 50%).

In my mind, and believe me I'm no expert, this tends to indicate to me that the Dow Jones index does not even come close to showing us what is really going on in the rest of the economy outside of the 30 industrials.

I look at these data and I wonder what is happening to the other small to medium sized companies around the country that are not reported in the Dow.

Thanks again for your daily Digest.


Davos's picture
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Re: Daily Digest - Jan 6

Hello Don:

Thank you, it is a pleasure to contribute to this community. And, it is rewarding because of the fantastic comments that get added to the cutting an pasting of what I consider the best of what I peruse through each day.

I don't know the answer to the Census question you pose. I hope someone here is intimately familiar with the Census. I myself am not, and after seeing Chris's Fuzzy Math video (I believe it is number 16 of the Crash Course) I  question any and all numbers by any government agency. Enron math is what flashes in my mind when I see the government seal. And I'm not busting on just the governemnt, I know businesses get very creative with their books and financial institutions use some amazing math when it comes to derrivatives defaulting.

I find it amazing that even a good read like I.O.U.S.A. today has some very smart economist and government officials or ex-officials being interviewed and they spout off debt in relationship to GDP as if GDP was a reliable number.

Chris's videos really bought to light that our economy is like one of those stereogram pictures, I believe that is the name for those pictures you stare at and then another picture below it comes into view.

Sad to say that it isn't a pretty picture that becomes visible! 

Take care 

fredbrent's picture
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Re: Daily Digest - Jan 6

Ditto Davos! 

Your daily digest is also a part of my moring routine. Thankyou for your diligent summaries and links. I would imagine most of us are pretty hungry for this and similar information detailing what I am calling the "slow tumble" of our (and the world's) economy, which is with "great momentum".  Hopefully things turn before we tumble over the cliff, though I am carefully considering how to "jump clear" if that is possible.  Thanks again, we appreciate what you do.  Brent

Damnthematrix's picture
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Re: Daily Digest - Jan 6


is perfect!


(of Calvin & Hobbes) explanation of his Lemonade Stand's business
perspective has a resonance to the American (and Australian) Auto industry's
position in the economy.  Remember that this cartoon was drawn over
15 years ago!



Damnthematrix's picture
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Re: Daily Digest - Jan 6



Gado's picture
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Re: Daily Digest - Jan 6

Hi Davos

Just like to add my name to the growing list of people expressing appreciation for the fine job your doing.

My morning coffee wouldnt be the same without your Daily digest.

And now we have your smiling face to go with it. LOL

Cheers  Gaddo

Davos's picture
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Re: Daily Digest - Jan 6

Hello Gaddo and Brent:

The pleasure is really mine and just takes me a few extra minutes to cut and paste in. I read a lot and skim too much so when I go back and read the comments I pick up on the important stuff that I often skim over.

Yeah, I told Chris when I first went to the site after they added the pictures I thought I was at some aviation blog of days past and I told him now that readers can see my face it will likely drive off traffic :)

Take care 

Damnthematrix's picture
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Massive Dollar Collapse
What ! - 2 to 5 years before the collapse !
I can't wait that long.
Willem Buiter Warns of Massive Dollar Collapse
Americans must prepare
themselves for a massive collapse in the dollar as investors around the
world dump their US assets, a former Bank of England policymaker has
By Edmund Conway, Economics Editor

January 06, 2009 "

The Telegraph" - -- The
long-held assumption that US assets - particularly government bonds -
are a safe haven will soon be overturned as investors lose their
patience with the world's biggest economy, according to Willem Buiter.

Buiter, a former Monetary Policy Committee member who is now at the
London School of Economics, said this increasing disenchantment would
result in an exodus of foreign cash from the US.

The warning
comes despite the dollar having strengthened significantly against
other major currencies, including sterling and the euro, after hitting
historic lows last year. It will reignite fears about the currency's
prospects, as well as sparking fears about the sustainability of
President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.

Writing on his blog , Prof Buiter said: "There will, before long (my best guess is between two and five years from now)
be a global dumping of US dollar assets, including US government
assets. Old habits die hard. The US dollar and US Treasury bills and
bonds are still viewed as a safe haven by many. But learning takes

He said that the dollar had been kept elevated in recent
years by what some called "dark matter" or "American alpha" - an
assumption that the US could earn more on its overseas investments than
foreign investors could make on their American assets. However, this
notion had been gradually dismantled in recent years, before being
dealt a fatal blow by the current financial crisis, he said.

past eight years of imperial overstretch, hubris and domestic and
international abuse of power on the part of the Bush administration has
left the US materially weakened financially, economically, politically
and morally," he said. "Even the most hard-nosed, Guantanamo
Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."

said investors would, rightly, suspect that the US would have to
generate major inflation to whittle away its debt and this dollar
collapse means that the US has less leeway for major spending plans
than politicians realise.

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