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    Daily Digest – Jan 6

    by Davos

    Tuesday, January 6, 2009, 1:59 AM

  • 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)

 

Economy

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. 

NOVEMBER 2008 CONSTRUCTION AT $1,078.4 BILLION ANNUAL RATE 

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.

PRIVATE CONSTRUCTION

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.

PUBLIC CONSTRUCTION

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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