ToneHall

Wall Street Journal: UCLA Professor Says U.S. Is Still Far From Recession

Call it a contraction, a recession, whatever you'd like, we're definitely in something that's causing a lot of pain for a lot of people.

With pundits predicting that we're maybe 50% of the way through this credit crisis, it's interesting that Leamer states we'd have to see much worse conditions to be in a recession. 

Much of economics is 'backward facing.' Day-to-day causation - what we experience as passing up that double cap at Starbuck's, not purchasing those jeans at Nordstrom or selecting a less-expensive bottle of wine - factors into less at the bottom line for the businesses involved.

There is a tendency to name it after we've left it.  Meanwhile, the tone is one of the algorithm not fitting the experience. 

Here's an excerpt from the WSJ:

Though U.S. economic activity remains subpar, it is still well above recession thresholds thanks to resilient industrial production that has offset a recession-like rise in unemployment, according to a UCLA forecaster in a National Bureau of Economic Research paper.

In his paper, Edward Leamer created an algorithm of three economic indicators — payroll employment, the unemployment rate and industrial production — that he said “nearly perfectly reproduces the NBER official peak and trough dates.”

“Bottom line: things have to get much worse to pass the recession threshold,” Leamer wrote. The NBER, an academic association, is considered the official arbiter of whether the U.S. is in recession, a determination it usually makes many months after the fact. There have been nine NBER recessions since 1950 — the last one being from March 2001 to November 2001.

Leamer isn’t a member of the NBER business cycle committee.

NBER bases its determination on monthly indicators including personal income less transfer payments, employment, industrial production and manufacturing sales volume. According to NBER’s Web site, “there is no fixed rule about which other measures contribute information to the process.” Leamer said the purpose of his model “is to take the guesswork out of the recession definition.”

The thresholds include falling industrial production for six months at a rate of at least 6% per year; declining payroll employment for six months at a minimum 1% rate per year; and a six-month rise in the unemployment rate of at least 0.8 percentage point. “Every recession since World War II has included months that satisfied all three of these limits. And there has never been a time in the expansions during which all three of these limits were satisfied,” Leamer wrote. The one instance when Leamer’s algorithm didn’t line up with NBER was in the early 1970s. NBER had a recession starting November 1973. Leamer’s model had it beginning later in 1974.

Sports Illustrated: Phelps Perfect With Eight

Olympic swimmer Michael Phelps stunned the world with eight wins in Beijing.  An incredible achievement that required swimming 17 races in 9 days. 

Excellent!

Here's an excerpt:

BEIJING (AP) -- Michael Phelps locked arms with his three teammates, as though they were in a football huddle calling a play, then hugged each one of them.

It took a team to make him the grandest of Olympic champions. And one last big push from Phelps himself.

Going hard right to the end of a mesmerizing nine days in Beijing, Phelps helped the Americans come from behind Sunday in a race they've never lost at the Olympics, cheering from the deck as Jason Lezak brought it home for a world record in the 400-meter medley relay. It was Phelps' history-making eighth gold medal of these games.

"Everything was accomplished," he said. "I will have the medals forever."

Phelps sure did his part to win No. 8, eclipsing Mark Spitz's seven-gold performance at the 1972 Munich Games.

Aaron Peirsol got the Americans off to the lead in the backstroke, but Brendan Hansen -- a major disappointment in this Olympic year -- slowed them down with only the third-fastest breaststroke leg.

By the time Phelps dived in for the butterfly, the U.S. was trailing Australia and Japan.

That's when he really went to work.

With his long arms whirling across the water like propellers, Phelps caught the two guys ahead of him on the return lap and passed off to Lezak a lead of less than a second for the freestyle. The Australians countered with former world record-holder Eamon Sullivan as their anchor.

Read it all here.

Financial Times: Lehman Seeks to Unload $40B in Real Estate

In commercial real estate, I've never seen anything like this move before.  Lehman is trying to avoid being the next Bear Stearns by dumping its real estate holdings.

It's an immediate way to replenish the coffers - but even with an offer to relieve the buyer of $5B in losses, the deal could be a real Pandora's box.

More to the point, the firm's value has fallen by 63% since mid-May.  The tone?  A big headache.  Could you please pass the aspirin?

Here's an excerpt of the FT piece:

Lehman Brothers is in talks with potential buyers over the sale of its $40bn portfolio of commercial real estate assets and securities in an effort to replenish its balance sheet.

People who have been in the discussions say the troubled investment bank wants to sell the assets either as a whole or in pieces but added there was a gap between Lehman’s perception of the value of the portfolio and that of buyers.

In a move to lure buyers, Lehman has offered to shoulder the first $5bn of any losses suffered on the portfolio’s assets following a sale, they said.

If the sale talks fail, Lehman is believed to be considering spinning off the entire commercial property division and listing it separately, people close to the discussions said.

Such a move might not raise much fresh capital but could help Lehman to dispel the concerns over its balance sheet and financial health that have dogged it for the past few months.

Since May 15 its shares have fallen by about 63 per cent while the S&P 500 index of financial stocks has dropped about 20 per cent.

Lehman, which has raised more than $13bn in capital after suffering credit-related writedowns and losses of more than $8bn, is expected to make a decision by the time it reports third-quarter results next month.

Read the full piece here.

Wall Street Journal: Goldman Balks at Helping Rich Clients

Maybe wealthy investors who got talked into auction-rate securities won't have such an easy time recovering their money.  This piece notes that Goldman Sachs Group - specializing in financial services for the wealthy only, thank you - isn't running to help them out of the mess.

Looks like an effort to retain cash - so the tone is tight.

Here's an excerpt:

For once, Wall Street isn't bending over backward for its richest clients.

That is causing new controversy for investment banks, which have already committed to reimburse mom-and-pop investors, charities, and small businesses for more than $40 billion in illiquid "auction rate" securities. Wealthy clients, institutions and corporations have been largely left out of those pacts.

Rob Shepperson

The quandary is acute for Goldman Sachs Group Inc., which caters only to the wealthy. While a string of large Wall Street brokers announces daily settlements in the billions, Goldman has been mum about its plans, so far refusing to buy back clients' auction-rate paper.

Goldman was a key player in the auction-rate markets, as the No. 5 underwriter of the securities by dollar amount between 2003 and 2007. The firm is regarded as a key contributor to halting the market in February, after it pulled out of auctions supporting the securities. Goldman's well-heeled clients also bought up auction-rate paper, which today has virtually no buyers save for red-faced issuers looking to make good with their customers.

Wall Street Journal: NY AG Cuomo To Force $8.8B Wachovia Auction-Rate Securities Buy Back

Andrew Cuomo continues his string of wins, this time squeezing an $8.8B buy-back commitment from Wachovia.  One by one, he's lining up the companies responsible and knocking them down. 

The auction-rate securities problem is now developing a tone of inevitability about it - if a company got involved, they're going to do a buy-back, it's just a question of how big a hit they'll take.

Earnings reports over the next 4-5 quarters in particular will be interesting, as these institutions aren't just paying up in the next month.  Wachovia has ten months to complete its payments.  After doing so, they'll likely face stiff recapitalization. 

I'm wondering how much will be left for shareholder dividends.

Here's an excerpt from the Wall Street Journal:

Wachovia Corp. is buying back as much as $8.8 billion in illiquid auction-rate securities, but the decision should have minimal impact on the Charlotte, N.C., bank as it works its way through more-serious headaches relating to the U.S. mortgage rout, analysts said Friday.

Under an agreement between the nation's fourth-largest bank by assets, the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and the Missouri secretary of state, Wachovia Securities LLC and Wachovia Capital Markets LLC will buy back $5.7 billion in auction-rate securities by Nov. 28, according to the SEC. The two units will buy an additional $3.1 billion of the securities by next June, the SEC said.

A person close to the New York attorney general said the buyback numbers are estimates and that Mr. Cuomo's office expects the bank to purchase $6.4 billion in November and a further $2.1 billion in June. Wachovia, which neither admitted nor denied wrongdoing, also will pay $50 million in civil penalties.

Bloomberg: Pot Calls Kettle Black as UBS Analyst States Sachs and JPMorgan May Snip Dividends

There's an exceedingly ironic tone to this piece in Bloomberg.  We have UBS Analyst Glenn Schorr opining that Sachs and Chase may take it in the shorts during Q3.

This, after UBS agreed to a buy-back of more than $17B of auction-rate securities. 

The blah....blah....blah in the background is the pot calling the kettle black. 

Yes, doubtless there's another shoe to drop for Sachs - and one for JPMorgan.  That said, I'm still betting the companies will weather the current situation better than UBS.

Here's the story from Bloomberg:

Aug. 15 (Bloomberg) -- Goldman Sachs Group Inc. and JPMorgan Chase & Co., which weathered the credit crisis better than most of their peers, may prove ``mortal'' in the third quarter as loan losses increase and banking revenue drops, UBS AG said.

Goldman Sachs is ``not immune'' to declining profits even after the biggest U.S. securities firm ``escaped many of the pitfalls that have snagged rivals,'' said UBS analyst Glenn Schorr in a research note today. JPMorgan, the second-biggest U.S. bank by market value, faces more asset writedowns and deteriorating consumer credit, he said.

Both companies have outperformed the Standard & Poor's 500 Financials Index as their results for the past two quarters topped analysts' estimates and writedowns and credit losses totaled less than those at peers Morgan Stanley, Bank of America Corp. and Citigroup Inc. Goldman dropped 27 percent since the financial index hit a peak in October, while JPMorgan lost 21 percent. The broader measure has plunged 41 percent.

Bloomberg: Auction-Rate Nightmare on Wall Street as Cuomo Chases Merrill Lynch and Goldman Sachs

Merrill Lynch thought they'd settled with New York AG Andrew Cuomo - I thought they had, too.  Now he's baaaaack saying that the $10B repurchase is nowhere near enough and ready to take immediate action if they don't kowtow. 

Subpoenas flew like songbirds, with Goldman Sachs the none-too-happy recipient along with many others.

Cuomo's got a steely tone.  Looks like he's going to use his office to clean the auction-rate securities mess out.  It will be interesting to see where he goes next - a political career is in the making.  His father must be very proud.

Here's the excerpt from Bloomberg:

Aug. 16 (Bloomberg) -- Merrill Lynch & Co. and Goldman Sachs Group Inc. face increased pressure by New York State Attorney General Andrew Cuomo to settle claims they misled investors on auction-rate debt as Wachovia Corp. agreed to buy back $9 billion of the bonds.

Merrill's prior offer to repurchase $10 billion of the securities was inadequate and the firm may face ``imminent'' legal action, Cuomo said yesterday. New York has subpoenaed about 25 firms involved in sales of auction-rate securities, including five that then settled. Goldman is among the firms being probed, he said.

``I want to do it my way,'' he said.

Wachovia joined Citigroup Inc., Morgan Stanley, JPMorgan Chase & Co. and UBS AG in settlements stemming from a nationwide investigation into why auction-rate securities were marketed as safe as cash until the $330 billion market collapsed. Regulators have sought auction-rate buybacks for customers, reimbursement for consumers forced to sell securities at prices below face value and relief for institutional investors.

Bloomberg: Money Pours Into Bank Funds, Then Evaporates

Elizabeth Stanton has written a very good description of insanity.  Even as analysts, long-time investors and many others state repeatedly that the rally around finance stocks is ill-conceived, people are throwing money at them. 

In the midst of a financial crisis, many feel we've hit bottom.  The size of the declines can only be described as huge - and with no proof that I can think of bottom fishers eager to make a buck are diving in.

I'm staying out, thanks. And I think more people should be listening to Michael Price.

Here's part of the Stanton article - well worth reading.  I suggest an aspirin first:

Aug. 14 (Bloomberg) -- Funds that invest in banks and brokerages are luring the most money this year even as the shares they buy post their biggest declines in almost five decades because of mounting credit-market losses.

Exchange-traded funds linked to baskets of financial shares raised $8.67 billion during the first seven months of the year, the most of 94 investment categories tracked by research and investment firm Birinyi Associates Inc. More than $500 billion of subprime-related losses pushed banks in the Standard & Poor's 500 Index down 54 percent from their 2007 record, the biggest drop since at least 1962, Birinyi data show.

Investors were rewarded in the last month after the government agreed on a plan to rescue Fannie Mae and Freddie Mac, the biggest U.S. mortgage-finance companies, while curbs on short selling spurred a rebound in banks. The Financial Select Sector SPDR Fund has surged 20 percent since sinking a month ago to the lowest level since its 1998 creation.

``It goes completely counter to what you read, that everybody is selling, everybody is bearish, everybody is shorting financial stocks,'' said Birinyi's Robert Leiphart, who helps manage $350 million in Westport, Connecticut. ``When people say, `It's the worst it's ever been,' it's usually the bottom and the time to start to buy.''

Bloomberg: Apple Tops Google

Congrats to Apple, its shareholders and its customers - the company's market value surpassed giant Google for the first time. 

More to come, Mr. Jobs?  We know you've got more up your sleeve....the tone is upbeat.

Aug. 14 (Bloomberg) -- Apple Inc., the svelte computer maker turned mobile-phone innovator, surpassed Google Inc.'s market value for the first time yesterday as investors await proof the Internet company can turn new projects into money-makers.

The CHART OF THE DAY shows the maker of the best-selling iPod music player and iPhone passing Google, making it the No. 3 technology company in the Standard & Poor's 500 behind Microsoft Corp. and International Business Machines Corp. Google stock has fallen more than twice as far as Apple this year amid doubts about the health of the market for Web advertising.

``There's no real urgency to go in and buy Google,'' said Ross Sandler, an RBC Capital Markets analyst in New York.

Consumers bought 1 million iPhones in the first three days after Chief Executive Officer Steve Jobs released a faster, cheaper version last month. Apple posted 31 percent profit growth last quarter on sales of computers and music players.

Google shares declined 28 percent this year before today, compared with 9.5 percent for Apple, after telling investors the owner of the most popular search engine will face a challenging economic environment.

Bloomberg: Cleveland Housing Hot After 37% Drop, Portent of Difficulties Elsewhere

It's unbelievable, shocking even.  Yet, if you step back and let it sink in, there's a strange kind of logic to it.

Bloomberg is telling us that good times in the Cleveland housing market are a precursor to worse times in parts of the nation that experienced more robust price gains.  Places like San Francisco or New York.

Here's part of the Bloomberg piece:

Aug. 14 (Bloomberg) -- The good news in the worst housing slump since the Great Depression is that the market in Cleveland is recovering. That's also the bad news.

The Cleveland area led the nation for home price gains in April and May with an 18 percent jump in the lowest price tier of the S&P/Case-Shiller home price index after values fell to levels last seen in 2000. The median home price was $117,500 in the second quarter, 15 percent higher than the prior three months, the National Association of Realtors said in a report today.

A housing revival in this city of 438,000 on the shore of Lake Erie may portend deeper drops in U.S. markets. Prices for entry level homes in Cleveland had to tumble 37 percent from a September 2005 peak to an almost 11-year low in March before enticing first- time buyers. That may be a sign that U.S. markets with the biggest price increases during the 2000 to 2005 boom have much further to fall before stabilizing, said David Blitzer, chairman of Standard & Poor's Index Committee.

``The areas of the country that saw prices go through the roof and then fall into the basement won't be the first ones to see an upturn,'' Blitzer said in an interview. ``It's more likely to come in a place like Cleveland or other Midwestern cities that largely missed the boom.''

Cleveland never experienced the big home-price gains of its coastal counterparts such as New York or San Francisco. Gains were more modest as Cleveland, like other cities in the Midwest, saw jobs in steel, automotive and manufacturing shipped overseas.