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    Daily Digest – March 13

    by Davos

    Friday, March 13, 2009, 7:00 PM

  • Buy-and-hold champion sells everything (H/T CM)
  • Cramer Crossing the Line
  • Key Obama economic adviser admits he has no answers (H/T Turbo)
  • China’s Exports Collapse
  • Now-needy FDIC collected little in premiums
  • Why Buy A New Car When You Can Build One?
  • Budget Cliff Dive (February, Chart on page)
  • S.C. governor evokes Zimbabwe in arguments against stimulus
  • Cities’ Plans to Swap Cash for Stimulus Are Stopped
  • Foreclosures up 30 percent in February
  • JPMorgan Chase to Increase India Outsourcing 25%
  • Jobless claims: 654,000 means flow is static, stock is up
  • How Can an 8.6% Drop in Retail Sales be a Positive News Alert?
  • Retail Sales Drop Not as Bad as Feared
  • Cornell Endowment Manager James Walsh Is…How Do I Put This Nicely…Incompetent!
  • BoE success may spur Fed buying of Treasuries: report (H/T CM)
  • Household net worth plunges 18% in 2008 (H/T CM)

Economy

Buy-and-hold champion sells everything (H/T CM)

Derek Foster promotes himself as "Canada’s youngest retiree" – a regular guy who punched out of the work force at 34 by investing in blue-chip stocks and living off the dividends.

His seductively simple approach to riding out turbulent markets by focusing on dividends, not day-to-day market gyrations, resonated with tens of thousands of Canadians who bought his bestselling books such as Stop Working, Here’s How You Can! and The Lazy Investor.

So it may come as a shock to his loyal fans that Mr. Foster – the same guy who advised readers to hold good stocks "forever" and to "buy more shares" if there’s a market crash – recently did something out of character: He dumped virtually all of his holdings.

When one of the most fervent advocates of buy and hold investing bails out is it a sign that the bear market is about to get a lot worse? Or is it the ultimate contrarian indicator, signaling that markets have reached the point of maximum pessimism and are poised for a rebound

Cramer Crossing the Line

Key Obama economic adviser admits he has no answers (H/T Turbo)

In a sign of the panic gripping Washington’s policy-makers, one of Barack Obama’s key economic advisors, Paul Volcker, has warned a gathering of his leading peers that the crash of 2008 might be "the mother of all financial crises… I don’t remember any time, maybe even the Great Depression, when things went down quite so fast, quite so uniformly around the world". Volcker, chairman of the president’s Economic Recovery Advisory Board and former chair of the Federal Reserve, told a conference at Columbia University’s Centre for Capitalism and Society on 20 February that the crisis was "characterised by being very international" and was the product of deep global imbalances.

But it is not only for their candour about the scale of the crisis that Volcker’s Columbia comments are notable. The former Fed chief admitted to his star-studded audience (including celebrity economist Jeffrey Sachs, George Soros and three Nobel Prize winners) that the profession of which they were all a part had failed. The breakdown of the world financial system has "occurred in the face of almost all policy and intellectual analysis… Even the experts don’t know what’s going on".

Obama’s chief advisor on economic recovery went on to concede that he himself had no answers, saying: "The first priority is to restore some semblance of stability and order in the market and restore the flow of credit. I’m not going to talk about that. I haven’t got-if I had the answer I might talk about it, but I’m not sure I have it, so I think we’ll neglect that for the moment."

These admissions suggest that even the architects of the bank bailouts and of Obama’s new lending fund have no confidence in those policies and no alternatives to put forward. This is the fund that Obama claimed during his 24 February speech to Congress would "aggressively break [the] destructive cycle [of frozen credit]" by "helping to provide auto loans, college loans, and small business loans to the consumers and entrepreneurs…"

China’s Exports Collapse

Brad Setser quotes the journal:

China’s customs agency said Wednesday that merchandise exports in February plunged 25.7% from a year earlier. That is one of the biggest drops on record, and extends the 17.5% fall in January for a fourth straight monthly decline. Imports declined by a slightly less dramatic 24.1%, thanks in part to government spending, which other data also issued Wednesday showed picking up in February. That left a monthly trade surplus of $4.84 billion – the smallest in three years. The number was just a fraction of January’s $39.11 billion, reversing a string of record surpluses in recent months.

Just yesterday I was noting the need of China’s surplus to fall. A couple weeks ago, it seemed very probable that China would follow Japan as global trade collapsed. Now it has — and perhaps some of the external pressure on China to appreciate the renminbi will be replaced by internal pressure to devalue the renminbi (even if it might be of very limited efficacy in assisting exporters).

That would point toward continued dollar strength, especially in light of the continuing dollar funding gap. And it would also point toward a lessening of pressure on American manufacturing to shoulder the burden of global excess capacity contraction, marginally bettering American economic prospects.

But there is still the matter of financing American government deficit spending. As Martin Wolf earlier noted and says again, massive fiscal deficits represented the triumph of Japanese policy in avoiding a deep depression. But having drawn on massive domestic savings, Japan was free to do so without incurring the wrath of foreign exchange markets. And there are other issues which mark out our situation as quite a lot more difficult.

In a world where even radical growth of domestic savings is unlikely to fund even a quarter of planned government deficits, and where the primary foreign buyers of American debt have been contracted into relative insignificance, I can find only two avenues to financing spending of the kind intended to fill the output gap.:

Print the money.

Force the money out of other capital markets – I suspect we’ll see some of both.

Now-needy FDIC collected little in premiums

Then, a booming economy left banks flush with cash, and by 1996 the insurance fund was considered so large that it could grow through interest payments and fees charged only to banks with high credit risk. Congress agreed that premiums didn’t need to be collected if the fund was sustained at a level that was considered safe. Thus, about 95 percent of banks paid no premiums from 1996 to 2006, including some new ones that did not have to pay a premium, the FDIC said.

Why Buy A New Car When You Can Build One?

Shares of car parts supply retailer, AutoZone (AZO), are trading at a 52 week high at $158.00. The company has a market cap of $8.7 billion. GM’s market cap is only a little over $1 billion, even though its revenues are 25 times greater than AutoZone’s.

It is not unusual for the typical American car owner to have a 5-year-old vehicle with 100,000 miles on it. At this point the car will not have a warranty and generally it is owned outright by the driver. Car owners are waiting much longer before trading their old autos in for new ones. A generation ago, it was not unusual for middle class Americans to buy a new model every two or three years. That is no longer an option even with car prices and incentives as attractive as they have ever been. The American consumer is frankly too terrified to take on a monthly payment that could be in the hundreds of dollars to buy or lease a new car.

Budget Cliff Dive (February, Chart on page)

Lower tax revenue and massive government spending on the bank bailout pushed the federal deficit to $765 billion in the first five months of the budget year, well on its way to hitting the Obama administration’s projection of a record annual imbalance of $1.75 trillion.

The Treasury Department also said Wednesday that the February deficit reached $192.8 billion. That’s a record for the month and up 10 percent from a year ago, but below analysts’ expectations of $205.7 billion.

With seven months left in the current budget year, which ends Sept. 30, the deficit already has shattered last year’s record annual gap of $454.8 billion.

S.C. governor evokes Zimbabwe in arguments against stimulus

The United States faces a Zimbabwe-style economic collapse if it keeps "spending a bunch of money we don’t have," South Carolina Gov. Mark Sanford said Wednesday.

South Carolina Mark Sanford says he does not want to spend money that his state doesn’t have.

Sanford, a Republican, has been an outspoken critic of the Obama administration’s $800 billion stimulus plan. He said he’ll turn down about a quarter of his state’s $2.8 billion share unless Washington lets him use that money to pay down debt.

"What you’re doing is buying into the notion that if we just print some more money that we don’t have and send it to different states, we’ll create jobs," he said. "If that’s the case, why isn’t Zimbabwe a rich place?"

Zimbabwe has been in the throes of an economic meltdown ever since the southern African nation embarked on a chaotic land reform program. Its official inflation rate topped 11 million percent in 2008, with its treasury printing banknotes in the trillion-dollar range to keep up with the plummeting value of its currency.

But with South Carolina’s unemployment rate now the second-highest in the country, state lawmakers will attempt to override Sanford and take the $700 million if he turns it down, Lt. Gov. Andre Bauer said.

"They will use the total economic stimulus to stimulate the economy, jump-start it, so we can get out of the ditch we are in as a state and as a nation," Bauer, a fellow Republican, said in a written statement Wednesday.

Sanford is one of several Republican governors who have criticized the nearly $800 billion stimulus package, which passed with minimal GOP support in the Senate and none in the House of Representatives. Other governors, such as California Republican Arnold Schwarzenegger or Michigan Democrat Jennifer Granholm, have said they would take any money Republican-led states reject.

But Sanford told reporters that taking the money now would leave the state in the lurch in two years, "when those funds dry up."

"Fundamentally, if you boil down what the stimulus means for South Carolina, it means we would go through the process of spending a bunch of money we don’t have," he said.

The stimulus measure allows state legislatures to override governors and take the money — a provision championed by South Carolina congressman James Clyburn, the No. 3 Democrat in the House. Clyburn said Sanford is unlikely to get any waiver from the administration, and he called the governor’s announcement "100 percent political posturing."

"This recovery package is designed to stabilize communities, to save and create jobs, and help our economy get back in a growth mode," he told reporters. "And you don’t do that by paying down debt that’s been incurred over a long period of time."

And Bauer said that if South Carolina turns down the money, "South Carolina taxpayers will be taking on the debt for economic stimulus money sent elsewhere."

Sanford has been called a potential GOP presidential contender in 2012, but he told CNN that the next election is "not where I’m focused."

"I don’t rule anything in, I don’t rule anything out," he said, adding, "If anything came along like that, it would be an incredibly long shot."

Cities’ Plans to Swap Cash for Stimulus Are Stopped

LOS ANGELES – Suppose the federal government gave you and your neighbor $500 each to buy a new bike, but what you really wanted was a $250 shopping spree for running gear instead. So you offered to sell your $500 federal check to your neighbor for $250 in cash so everyone’s dreams could be realized.

That is essentially what several cities in Los Angeles County planned to do with federal stimulus money, until the local transportation authority, its face slightly reddened, pulled the plug on the plans. A spokeswoman in Washington for the House Committee on Transportation and Infrastructure said Wednesday that the swaps would be illegal.

Foreclosures up 30 percent in February

WASHINGTON (AP) – Despite halts on new foreclosures by several major lenders, the number of households threatened with losing their homes rose 30 percent in February from last year’s levels, RealtyTrac reported Thursday.
Nationwide, nearly 291,000 homes received at least one foreclosure-related notice last month, up 6 percent from January, according to the Irvine, Calif-based company. While foreclosures are highly concentrated in the Western states and Florida, the problem is spreading to states like Idaho, Illinois and Oregon as the U.S. economy worsens.
"It doesn’t bode well," for the embattled U.S. housing market, said Rick Sharga, vice president for marketing at RealtyTrac, a foreclosure listing firm. "At least for the foreseeable future, it’s going to continue to be pretty ugly."
The rise in foreclosure filings came despite temporary halts to foreclosures by Fannie Mae (FNM) (FNM) and Freddie Mac (FRE) (FRE), and major banks JPMorgan Chase, Morgan Stanley (MS), Citigroup and Bank of America. Those companies pledged to do so in advance of President Barack Obama’s plan to stem the foreclosure crisis, which was launched last week.

JPMorgan Chase to Increase India Outsourcing 25%

The second-biggest bank of the US, JP Morgan Chase, which acquired Washington Mutual and Bear Stearns recently, will increase its outsourcing to India by 25% this year to nearly $400 million. It will also manage the integration of the acquired companies from India to bring down the cost of integrating different information technology (IT) systems.

Right now, JP Morgan outsources $250-300 million worth of IT and back-office projects every year to Cognizant, TCS and Accenture, apart from to its own captive centre in Mumbai.

"JP Morgan CIO Guy Chiarello said last week that he will increase outsourcing to India, and will drive several integration projects from there," a New York-based expert, familiar with JP Morgan’s outsourcing plans, told ET last week, on conditions of anonymity. A spokeswoman for JP Morgan India could not reply to an email query sent by ET on Friday, and the bank’s spokesperson in the US too did not reply.

"JP Morgan is one of the first banks in the US to have fleshed out its outsourcing

strategy ever since the banking meltdown happened. Many others are still undecided about their IT spend," said a senior official at one of the technology firms, who did not wish to be quoted.

The bank, which cancelled its $5-billion outsourcing contract with IBM in 2004-following the merger with Bank One-had brought back around 4,000 IT staff in-house after the new CIO Austin Adams had proposed a "do-it-yourself" strategy for the merged entity.

"In this economic environment, Mr. Chiarello, the current CIO, wants to ensure that he helps JP Morgan meet cost-reduction goals," the expert added. With large global banks like Lloyds TSB and HBOS, and Bank of America & Merrill Lynch merging, India’s top tech firms, including Infosys, TCS and Cognizant, are bidding for at least three $100 million-plus contracts.

As these banks merge, they face a huge task of integrating their software applications, consolidating their data centres and other trading platforms into a single entity, so that their customers are able to transact without having to face any merger-related issues. And since offshoring will help them save costs by 30-40%, these merged banking entities are seeking to partner with a vendor having significant offshore presence. "Apart from looking at cost-saving opportunities, such as offshore outsourcing, these banks also want to partner with their existing vendors because they would know the systems better," said a consultant on condition of anonymity.

As reported by ET recently, Lloyds TSB-which merged with HBOS-is seeking partners to help the merged entity integrate its retail and wholesale banking systems through an IT platform. The company has already outsourced its HR functions to Xansa two years ago, in a five-year deal.

Jobless claims: 654,000 means flow is static, stock is u (2 charts on page)

Initial jobless claims for the U.S. came out today for the week ended March 7th and the number was 654,000, up from an upwardly revised 645,000. This puts the widely quoted 4-week average at 650,000, a business cycle high. All numbers reflect seasonal adjustments.

The real story was in continuing claims. There we saw a rise to 5.3 million from 5.1 million, suggesting those who are unemployed are finding it difficult to get a new job. Just six months ago, this figure was 3.4 million.

My take on the figures goes to the concept of stock and flow. The stock is the number of unemployed on the jobless roles. The flow is the number of people filing new claims. When it comes to calling recessions, I am usually more interested in the flow i.e. initial claims because it is an increase in the flow that is the coincident or even leading indicator of recession. This is true for jobless claims as much as it is true for the unemployment rate. However, the stock is a lagging indicator that does not signal a turn in the economy.

What is interesting about these numbers is the divergence in stock and flow. The flow is rather static (i.e. when one compares unadjusted claims to last year’s numbers). We’re talking about an increase in a year’s time of about 300,000 since mid January. On the other hand, the stock is mushrooming; there are 2.8 million more people on jobless roes than at this time last year. In mid-January that number was 2.1 million. 6 months ago it was 800,000.

What is also interesting here is that the stock is MUCH higher on an unadjusted basis than on a seasonal basis (6.4 million vs. 5.3 million and a 12-month change of 2.8 million vs. 2.4 million). These numbers indicate that the unemployment rate will rise dramatically in coming months, more than is anticipated. In my view we will print a 9% number by the summer.

Given the Obama Administration’s plans are predicated on an average of 8.1% unemployment for 2009, we will probably see a need for more stimulus down the line.

Retail Sales Drop Not as Bad as Feared

Sales at the nation’s retailers fell slightly less than expected in February, suggesting that the economic deceleration may at least be slowing, according to a government report on Thursday.

The Commerce Department said retail sales declined 0.1 percent from January, better than the 0.5 percent drop that economists had expected, but nonetheless returning to negative territory after a surprise 1.8 percent gain in January.

Not including automobiles, which dragged down the overall number, sales ticked up 0.7 percent after a 1.6 percent gain in January.

Retailing analysts and economists said that sales in February were helped by a decline in gasoline prices that provided consumers with more disposable income. Sales at discount chains were up, but so were sales at furniture stores, which is surprising given the miserable state of the housing market.

"What this tells us is the consumer is not dead," said Paul Laudicina, chairman of A. T. Kearney, the management consulting company. "They are able to pick through and make purchases when necessary. And they are prepared to come out of the foxhole when the conditions permit them to."

Still, economists cautioned against breathing any sighs of relief.

"Certainly the numbers are better than we expected, but I don’t want to extrapolate this out just yet," said Rosalind Wells, chief economist for the National Retail Federation. "We’re a little cautious that this won’t last. And we still have a rough economy facing us."

Mr. Laudicina said consumers needed income growth, access to financing and stronger stock and housing values to truly begin spending again.

"Until we see those three indicators fundamentally going positive, I don’t think you’re going to see anything but incremental change in these numbers."

Retailers have suffered sales declines in seven of the last eight months.

Rising unemployment, slumping stock portfolios and a depressed housing market are obviously not inspiring the American consumer to spend. Last month, every category of retailer suffered sales declines except for discount stores, and household retailing names like Circuit City and Mervyn’s have gone belly up.

Indeed, looking at the government figures year over year, retail and food services sales for February, seasonally adjusted, were down 8.6 percent.

Gasoline station sales were down 32.3 percent, and motor vehicle and parts sales were down 23.5 percent from last year.

In a report about consumer behavior published Thursday by America’s Research Group and UBS Global Equity Research, C. Britt Beemer, chief executive of America’s Research Group, said "the dramatic drops in shopping levels have no match in our database in the last 30 years."

In another economic report, the Commerce Department said Thursday that business reduced their inventories for a fifth consecutive month in January. Businesses cut inventories by 1.1 percent in January.

The January decline came after a revised 1.6 percent drop in December, which was a bigger decline than the 1.3 percent fall initially reported.

How Can an 8.6% Drop in Retail Sales be a Positive News Alert?

Retail sales dropped 0.1% on a seasonally adjusted basis in February, better than the 0.4% decline expected by economists surveyed by MarketWatch. January’s sales gain was revised much higher, to a 1.8% gain from the 1% increase estimated a month ago. Sales are down 8.6% in the past year and had declined for a record six straight months before January’s surprising gain. Sales had plunged 3.1% in December.

Cornell Endowment Manager James Walsh Is…How Do I Put This Nicely…Incompetent!

From a recent article "Cornell Cuts Back On Hedge Funds":

[March 12, 2009] Hedge funds have helped make the members of the Ivy League among the wealthiest institutions in the world. But in the wake of tremendous losses last year, one of the Ancient Eight is turning its back on the asset class. Cornell University plans to cut its hedge fund investments by a quarter, chief investment officer James Walsh told Bloomberg News. The move comes as Cornell seeks to reduce its endowment costs by 15%. Cornell’s endowment, which currently allocates about 15% of its assets to hedge funds, lost 27% in the second half of last year. While Cornell still boats one of the 20 largest endowments in the U.S., with almost $4 billion, the huge losses have forced the Ithaca, N.Y., school to postpone construction projects, seek staff cuts, and increase both tuition and enrollment. "We are de-emphasizing the hedge funds and more emphasizing the long-only managers," Walsh told Bloomberg. He said that, given their returns, Cornell can no longer justify paying high hedge fund fees. Walsh said that Cornell will increase its allocation to cash, distressed investments and corporate bonds. He would not say from which hedge funds Cornell was redeeming its investments.

You just know he most likely had NO trend following investments. Too smart for that I guess. The hedge funds they did have? Probably leveraged long only nonsense that blew up. In all seriousness do the good people at Cornell even realize how incompetent their guy James Walsh is? Long only is his new strategy? Walsh sounds like a guy who has just lost his life savings at the craps tables, has $5000 left, and is betting it all. Attention: Earth to people at Cornell – wake the *** up!

BoE success may spur Fed buying of Treasuries: report (H/T CM)

(Reuters) – U.S. Federal Reserve officials were struck by the early apparent success the Bank of England’s plans to buy government bonds and could further consider moving forward on a similar effort in the United States, the Wall Street Journal said on Wednesday.
Britain will officially start quantitative easing — effectively printing money to help pull the economy out of recession — on Wednesday with the central bank offering to buy 2 billion pounds ($2.77 billion) of gilts.
Gilts prices have soared, bringing yields lower, since the Bank of England announced last week it would start buying bonds.
The U.S. central bank said in December it would consider buying long-dated Treasury bonds in an effort to lower borrowing costs. However, the subject has been rarely raised this year, leaving investors to bet that if the plan goes forward, it will happen later rather than sooner.
It is unclear whether the Fed will decide to take new steps at its next scheduled policy meeting on March 17 and 18, the paper said.

 

The Bank of England said last week that it would buy assets — mainly government bonds — with 75 billion pounds of newly created money to get the recession-hit economy growing again, writing a new chapter in the country’s monetary history.

Household net worth plunges 18% in 2008 (H/T CM)

WASHINGTON (MarketWatch) — Hit by a double whammy of declining home prices and a falling stock market, U.S. households saw their net worth fall by $11.2 trillion, or 18%, to $51.5 trillion at the end of 2008, wiping out four years of gains, the Federal Reserve reported Thursday.
In the fourth quarter alone, household net worth fell by $5.1 trillion, a record 31% annualized decline. Consumers lost $937 billion on the value of their real estate. Their direct holdings of corporate equity dropped by $1.68 trillion, while holdings in pension and life insurance reserve dropped by $1.46 trillion. 

Columnist David Wessel argues that the government has big questions to answer about reconstructing the financial regulatory structure.

Net worth has fallen for six straight quarters since peaking at $64.4 trillion in the second quarter of 2007. Net worth — defined as assets minus liabilities — is down 20% from the peak.

The decline in wealth was accompanied by a sharp pullback in consumer spending at the end of the year. According to Commerce Department data, real consumer spending fell at a 4.1% annual rate in the final six months of 2008, the sharpest decline since 1980. Economists figure consumers will spend about 5 cents out of each additional dollar of wealth, or cut spending by about 5 cents for every dollar lost.

"Consumers have turned a lot more cautious and are saving more," said Richard Berner, chief economist for Morgan Stanley. In the longer term, Berner sees a "sea change in consumer behavior" that will bring the personal savings rate to 7% or 8% within the next few years as consumers begin to understand that quick and easy increases in wealth aren’t likely.

"Households are being forced to rely less on rising asset prices and more on their paycheck to fund everyday living expenses," wrote Drew Matus, an economist for Bank of America/Merrill Lynch. "In other words, frugality is coming back into fashion."

The decline in net worth raises the risks of deflation, Matus said. He said money supply growth turned negative in the fourth quarter, based on more complete information about the shadow banking system.
Lost decade

At the end of the year, households owned $9.9 trillion in equity shares outside of pension plans, less than the $11.3 trillion they owned in 1998.

At the end of 2008, assets fell by $11.3 trillion to $65.7 trillion. Liabilities fell $87 billion to $14.2 trillion.
Home owners’ equity in their houses fell to a record low 43%. "It’s an old lesson: Asset values can fall quickly, but debt lingers!" wrote Bill McBride on his blog, Calculated Risk.

At the same time their assets were falling, households were taking on less debt, deleveraging their balance sheets after five years of double-digit growth in debt.

In the fourth quarter, households paid off more debt than they took on for the first time since at least 1952, when the Fed began reporting the information in its quarterly Flow of Funds report. Household debts fell at a 2% annual rate in the quarter, including a 1.6% decline in mortgage debt and a 3.2% decline in consumer credit, including credit cards and auto loans.

For all of 2008, household debt rose just 0.4%. Since the early 1950s, debt had never risen less than 5% in a year.

Businesses also took on less debt. Total debt grew 4.8% in the corporate sector after a 13.4% gain in 2007. In the fourth quarter, corporate debt increased at a 2.2% annualized rate, the slowest since early 2004.

The federal government made up for the deleveraging by families and businesses, however. Federal debt increased 24% in 2008 and rose at 37% annual rate in the fourth quarter.

Total nonfinancial debt — individuals, businesses and government — rose 5.8% in 2008 and increased at a 6.3% pace in the fourth quarter. It was the slowest annual increase in debt since 2000.

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