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    Daily Digest – Jan 7

    by Davos

    Wednesday, January 7, 2009, 1:40 AM

  • Metal loses its mettle: Alcoa (AA) cuts like crazy even though it is profitable
  • More observations on the economy, and none of them good
  • Minutes of the Federal Open Market Committee December 15-16, 2008 
  • German billionaire Merckle takes his life amidst financial crisis 
  • Economic slump weakens pending home sales 
  • A sign that credit is going to flow (chart)?
  • The very flawed weekly mortgage applications survey
  • Auto sales (chart)


Metal Loses It Mettle: Alcoa (AA) Cuts Like Crazy Even Though It Is Profitable 

Alcoa (AA) announced that it will fire 13,500 people and 1,700 contractors. The full-time people are 13% of the firm’s work force. Alcoa will also freeze hiring and salaries and cut capex by 50%. 

The company’s CEO made a statement: "These are extraordinary times, requiring speed and decisiveness to address the current economic downturn, and flexibility and foresight to be prepared for future uncertainties in our markets." That sounds like what every large company CEO has said when layoffs hit this year.

The drop in commodities prices and the recession are catching up to the metals industry. That largest firms in the sector will have to keep cutting. It would not be shocking to see this part of the economy lose 100,000 jobs this year. 

More Observations On The Economy, And None Of Them Good  

Going back a year it would have been very hard to find more than a handful of economists who believed that a global recession would potentially drive down GDPs in most of the world’s largest nations. 

The Fed’s notes on its last meeting released today show that the agency was more concerned about the situation than they might of let on.

In the last few days, more experts have been willing to venture unusually pessimistic opinions.

David Rosenberg of Merrill Lynch believes that the recession will not end this year and could go well into next year. According to Reuters, he said that "The housing and stock market slumps have wiped out $13 trillion in household wealth. That means Obama’s tax cut measures may wind up going toward rebuilding savings, which would provide scant immediate economic lift."

Carmen Reinhart, from the University of Maryland, was not willing to be outdone in the gloom department. He reckons that housing will not hit a bottom until the middle of next year and that unemployment will rise to 11%. Reuters reports that "The two emphasized that, despite the best efforts of governments and monetary authorities around the world to stem the crisis, policy measures can only do so much to contain the aftermath of the largest debt bubble in modern history."

That is probably enough bad news for today.

Minutes of the Federal Open Market Committee December 15-16, 2008  

In the forecast prepared for the meeting, the staff revised down sharply its outlook for economic activity in 2009 but continued to project a moderate recovery in 2010. Real GDP appeared likely to decline substantially in the fourth quarter of 2008 as conditions in the labor market deteriorated more steeply than previously anticipated; the decline in industrial production intensified; consumer and business spending appeared to weaken; and financial conditions, on balance, continued to tighten.

Rising unemployment, the declines in stock market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to continue to hinder household spending over the near term. Homebuilding was expected to contract further.

Business expenditures were also likely to be held back by a weaker sales outlook and tighter credit conditions. Oil prices, which dropped significantly during the intermeeting period, are assumed to rise over the next two years in line with the path indicated by futures market prices, but to remain below the levels of October 2008.

All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly bove the rate of potential growth in 2010. Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting.

The disinflationary effects of increased slack in resource utilization, diminished pressures from energy and materials prices, declines in import prices, and further moderate eductions in inflation expectations caused the staff to reduce its forecast for both core and overall PCE inflation. More inflation was projected to slow considerably in 2009 and then to edge down further in 2010.

German Billionaire Merckle Takes His Life Amidst Financial Crisis  

Another prominent figure has reportedly taken his life amidst the turmoil of the financial markets. In this case, it appears that 74 year-old German billionaire Adolf Merckle has committed suicide. German newspaper Die Welt noted that the head of the family business empire was worth an estimated 7 billion euros (nearly $10 billion). 

Merckle is, or was, on Forbes list of the 100 most wealthy. The interests of the family control HeidelbergCement and other conglomerated interests which employ more than 100,000 people with an annual revenue base of roughly 30 billion euros.

Merckle recently was credited with garnering a last minute bridge loan for the interests, but he is also said to be one of the ones caught up on the wrong side of the exponential move seen in the Volkswagen-Porsche SNAFU of late-2008.

It appears that Merckle killed himself by stepping in front of a train, although we won’t go into further detail for many reasons.

Financial loss is starting to take on new extremes.

Economic Slump Weakens Pending Home Sales  

After holding fairly stable for a year, pending home sales declined in the face of job losses and an eroding economy, according to the National Association of Realtors®.

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in November, fell 4.0 percent to 82.3 from a downwardly revised reading of 85.7 in October, and is 5.3 percent below November 2007 when it was 86.9. The current index is the lowest since the series began in 2001.

Lawrence Yun, NAR chief economist, said a weakening was inevitable. "Mounting job losses and very weak consumer confidence deterred home buyers from signing contracts in November," he said. "December’s housing market activity could be comparably lower due to ongoing problems in the economy, so a real estate-focused stimulus plan is urgently needed." 

A Sign That Credit Is Going to Flow (Chart)?

The Very Flawed Weekly Mortgage Applications Survey 

Mortgage and housing are back in the spotlight like never before. Everywhere you look there are silver linings, lights at the ends of tunnels and ‘mustard seeds’ of hope. This is all great – I encourage hope as a broader theme in life. But ‘hope’ should not be the primary metric in an important business or investment decision – most analyst and media have based their mortgage and housing analysis primarily on ‘hope’ for the past two years.

Since conforming mortgage rates (= or <$417k) fell from 5.875% – 6.125% in November to the 5% to 5.25% range today, there has been increasing hype surrounding the weekly mortgage applications survey. In the past, this has been a decent measure of future refi and purchase loan fundings but not any longer.

In mid-December, a weekly release was put out that citing results that compared with 5-years ago. The bottom calling rush was on. The end result was scores of media, economists and analysts calling for the ‘great refi-boom’ to carry the nation out of its housing crisis and onto great things.

Of course, the primary thesis was that ‘if the refi market is at the same pace as 2003 then what followed 2003 in housing, mortgage and the macro economy may follow’. This is not the case. The fact is that refi loan application counts are far fewer than 2003 levels and actual loan fundings far less than that. Data being represented in this manner have led to several disappointments over the past two years. The fall out makes for less trust and weaker markets.

Does anyone really believe that with 60% of CA, AZ and FL home owners and over 90% in NV in or near negative equity that refi’s can be anywhere near 2003 levels?

Auto Sales (Chart)

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