Financial News Update June 24, 2009

A Lost Decade for Jobs

Private sector job growth was almost non-existent over the past ten years. Take a look at this horrifying chart:

Between May 1999 and May 2009, employment in the private sector sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period. It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years. Take a look at this chart:

Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs. But even that gives the private sector too much credit. Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support. I’ve been talking about the HealthEdGov sector. Take a look at this table:

10-year Job Growth: HealthEdGov Sector Dominates
Industry	Change, May 1999-2009
	(thousands of jobs)*
Private healthcare	2898
Food and drinking places	1567
Gov educ	1390
Professional and business services	885
Gov except health and ed	843
Social assistance	796
Private education	772
Arts, entertainment, and recreation	188
Gov health	148
Mining	133
Financial activities	130
Utilities	-40
Transportation and warehousing	-43
Retail	-91
Accomodations	-119
Wholesale	-166
Construction	-238
Information	-525
Manufacturing	-5372
*Gov health and gov educ based on April 2009 estimates
Data: BLS

Most of the industries which had positive job growth over the past ten years were in the HealthEdGov sector. In fact, financial job growth was nearly nonexistent once we take out the health insurers. Let me finish with a final chart.

Without a decade of growing government support from rising health and education spending and soaring budget deficits, the labor market would have been flat on its back.

Fears of big bank problems return

Betting against the banks is back in fashion. A key market measure of the health of the biggest global financial institutions has deteriorated this month, after showing sharp improvement in April and May. The price of betting that big banks will default on their debt -- made via derivatives known as credit default swaps -- has risen 17% in June, according to data from New York-based Credit Derivatives Research. The uptick in wagers against banks such as Bank of America, Goldman Sachs and Morgan Stanley comes as the spring's scorching stock market rally peters out and doubts about the health of the global economy and the banking sector re-emerge. The blue-chip S&P 500 has dropped 6% over the past two weeks, with half of that loss coming this week. The KBW Bank index has slid 20% since hitting a recent high May 11.

Some selling is no doubt inevitable after a strong rally. But a World Bank report Monday that predicted the global economy will shrink 2.9% this year "touched a raw nerve," said Mauro Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School. "We have been too optimistic for too long, and we still haven't done the dirty work of fixing the financial system," he said. Guillen said the U.S. will have to take action to restore the credit system before the economy can resume expanding in earnest......... He notes that the economy must start growing again before unemployment -- rapidly approaching 10% -- comes down to a more moderate level. "We have reached this period of apathy, and there's a real danger that the economy will languish with the underlying problems unaddressed," he said.

Given the extensive government support for big financial firms, ranging from Treasury loans to Federal Deposit Insurance Corp. debt guarantees, investor worries about the banks now focus less on their collapse than on anemic profit growth and gnawing credit losses. "Consumers continue to face challenges in the form of reduced liquidity, higher unemployment and lower home prices," banking analyst Meredith Whitney wrote this month in a note to clients. "We believe, at a minimum, consumer spending will remain under pressure thereby challenging hopes for a solid second half rebound currently baked into market expectations." In recent weeks, market sentiment has shifted toward this view..........

Though there is now widespread relief that a depression has been avoided, Guillen said he's still very worried. "The administration seems to be getting distracted, and there's an awful lot left to do," he said.

Citigroup Plans to Raise Salaries by as Much as 50%

Citigroup Inc., the U.S. bank that got $45 billion of government funds, will raise base salaries by as much as 50 percent to help compensate for a reduction in annual bonuses, a person familiar with the plan said. The biggest increases will go to investment bankers and traders, said the person who declined to be identified. Workers in consumer banking, credit cards, legal and risk management will see smaller salary adjustments. The New York-based company also plans to award stock options to try to keep employees after Citigroup’s market value plummeted 84 percent in the past year. Citigroup joins Morgan Stanley and UBS AG in boosting salaries for executives and employees. Morgan Stanley said last month it will increase base pay for many of the New York-based firm’s top executives and double the pay of Chief Financial Officer Colm Kelleher...... The worst financial crisis since the Great Depression has so far led to more than $1.45 trillion in writedowns and credit losses and almost 325,000 job cuts across the worldwide financial industry...... Compensation and benefits were Citigroup’s biggest operating expense last year at $32.4 billion, down 4.3 percent from 2007. The bank had a record net loss of $28 billion in 2008, compared with a $3.62 billion profit in 2007.........

Whitney: Consumer Still Chewed Up

Closely followed analyst Meredith Whitney continues to caution investors away from U.S. financial stocks as consumer fundamentals are now worse than her previous bearish expectations. And they are devolving rapidly. "Consumers continue to face challenges in the form of reduced liquidity, higher unemployment and lower home prices as shown in June data," said Whitney, who recently opened the Meredith Whitney Advisory Group. "Indeed, the only 'green shoot' appears to be a reduction in card delinquencies, which we attribute to seasonality." In her most recent report on the U.S. consumer, Whitney said that, at a minimum, consumer spending will remain under pressure, blunting hopes for the solid second-half rebound that she says is priced into the stock market.............

In her recent report, Whitney said that just as access to consumer credit is slowing, consumer options for liquidity are shrinking. Looking at cash, unused credit card lines and unused home equity lines to measure liquidity options for the U.S. consumer, she found first-quarter data indicated that these unused lines decreased sharply in the quarter while cash balances rose. "We expect further line reductions and $2.7 trillion in credit card pulled from the system by 2010," Whitney said. Equity levels in homes also dropped to all-time lows of 41.1% in the first quarter. "This is well off the over-80% average equity levels in homes in the 1950s. Those levels have declined greatly until they leveled off at roughly 60% in the 1990s," Whitney said.........

New home sales fall unexpectedly

Sales of newly constructed homes fell unexpectedly in May and were down almost a third from last-year's levels, a government report said Wednesday. New home sales ticked down 0.6% last month to a seasonally-adjusted annual rate of 342,000, the Commerce Department reported. That was from a revised reading of 344,000 in April. Analysts expected the rate of new home sales to rise to 360,000, according to a consensus estimate of economists compiled by Briefing.com. New home sales were 32.8% below the same month a year ago, when the estimate stood at a 509,000 annual rate..........

Britain’s Got No Talent: Half of U.K. Expats May Exit

Almost half of U.K.-based foreign professionals are considering leaving as they endure rising living expenses and the recession, more than in any other country, a survey by HSBC Holdings Plc showed. Forty-four percent of expatriates in Britain are contemplating moving, suggesting the U.K. doesn’t live up to the name of the “Britain’s Got Talent” television show, HSBC said today in a survey of more than 3,100 people who don’t live in their home nation. The bank didn’t define an expat. “Worldwide, 74 percent of respondents claim to have increased disposable income since becoming expats, yet this figure falls to just 47 percent of expats in the U.K.,” HSBC said in a statement. “The U.K. remains one of the most expensive places for expats to live -- and the recession has taken its toll.”

Britain’s worst economic contraction since 1979 has already pushed up unemployment, and the pound’s 17 percent drop against the dollar in the past year has also curbed the value of expats’ U.K. earnings. Business failures will rise to a record this year, BDO Stoy Hayward LLP said in a separate report today. The U.K. recession will be worse than originally forecast this year, the Organization for Economic Cooperation and Development said today. It predicts a 4.3 percent contraction in 2009, compared with a March forecast of 3.7 percent. The largest proportion of expats earning more than $250,000 a year live in Russia, with a total of 30 percent, followed by Hong Kong at 27 percent and Japan at 26 percent, HSBC said. A fifth of the survey respondents in the U.K. make $60,000 a year or less, and three-quarters of expats in Britain have scaled down spending because of the slump.

Asian countries tend to be cheapest for accommodation, HSBC said. Fifty percent of expats in Malaysia, 49 percent in China and 43 percent in India said that housing costs much less than in their home country. Britain was second-most expensive for food after Switzerland, HSBC said. Seventy-eight percent of U.K.-based expats said they paid more for transport than they did at home. Almost 100 companies will fail every day this year in Britain, pushing the total to 36,200 for the year.......

ECB Lends Record 442 Billion Euros for 12 Months

The European Central Bank said it will lend banks 442 billion euros ($621 billion) for 12 months, the most it has ever allotted in an auction, as it steps up efforts to unblock credit markets in the 16-nation euro region. The Frankfurt-based ECB filled all bids in its first offer of 12-month loans to banks at the current benchmark interest rate of 1 percent. The 1,121 banks that participated receive the funds tomorrow. The euro interbank offered rate, or Euribor, for 12-month loans fell to 1.57 percent today, a record low. “It’s even more than our most optimistic scenario would have suggested,” said Christoph Rieger, a fixed income strategist at Commerzbank AG in Frankfurt. “There is so much liquidity around that it will push money-market rates to new record lows.”

The ECB, battling Europe’s worst recession since World War II, is concentrating its efforts on lubricating the banking system, which accounts for about three quarters of company financing in the region. The central bank has cut interest rates to the lowest on record and will next month start buying 60 billion euros of covered bonds to help free up credit. Today’s allotment is “broadly equivalent to one third of all sovereign issuance in the euro zone this year,” said Erik Nielsen, chief European economist at Goldman Sachs Group Inc. in London. “It’s a big number, providing the intended monetary easing by stealth. I suspect that the ECB is very pleased.”..........

The central bank expects the euro-region economy to shrink about 4.6 percent this year before returning to growth by the middle of 2010. Loans to the private sector declined for a third straight month in May as banks tightened lending standards and demand for credit wilted. “While the ECB’s liquidity support to euro-zone banks sounds the right thing to do, as bank lending is by far the most important source of financing for euro-zone non-financial firms, there is no guarantee that banks will use this extra liquidity to lend to the broader economy,” said Daniele Antonucci, an economist at Capital Economics Ltd. in London..........

EU Tells Belgium to Craft New Budget Plan by Sept. 20

The European Union said Belgium hasn’t provided sufficient information on how it will cut its deficit and told the government to submit a new budget strategy by Sept. 20. “The absence of crucial information in the program, such as the expenditure and revenue ratios, has hampered the possibility to assess the credibility of the deficit and debt targets,” the European Commission, the EU’s executive in Brussels, said in a report today....... The commission issued deficit reports on eight other EU nations today, including Austria, Slovenia, Slovakia and Malta in the euro region. Austria was told to reverse its stimulus measures once the economic crisis subsides in order to bring its deficit back under 3 percent of GDP by 2012.....

Japan Export Slump Deepens, Casting Doubt on Recovery

Japan’s export slump deepened in May, casting doubt on the nation’s growth prospects as the economy struggles to emerge from its worst postwar recession. Shipments abroad dropped 40.9 percent from a year earlier, more than April’s 39.1 percent decline, the Finance Ministry said today in Tokyo..... Declines in shipments to Asia accelerated for the first time since January, damping hopes that demand from the region will spur a recovery in the world’s second-largest economy. A worldwide stock market rally stalled this month on concern that the global recession will deepen. “Final demand just isn’t picking up and it’s still hard to expect a very strong economic recovery,” said Azusa Kato, an economist at BNP Paribas in Tokyo.......

Arcelor Shifts Focus to Emerging Economies

ArcelorMittal, the world's largest steel producer, is shifting focus from the developed world to lower-cost developing regions, acknowledging that growth prospects are dimmer in North America and Europe. Chief Executive Lakshmi Mittal told steel executives at a conference in New York that while the U.S. and European Union will continue to wield considerable influence in pioneering new steelmaking techniques and products, those regions don't promise the same growth as other locales.

"We must recognize that these are not long-term growth markets. It will be China and other emerging markets that will drive future growth for our industry," he said Tuesday. Per capita consumption of steel in developing economies remains low, promising a larger upside to investment, especially as infrastructure projects take hold, he said. "Their powers of recovery are likely to be faster." Emerging economies also don't have the same costs as developed nations from regulations on carbon-dioxide emissions, he said........

Housing, unemployment woes leave movers shaken

Sinking home prices and a weak job market have forced normally restless Americans to stay put in an uncharacteristic shift that has, among other things, clobbered the moving industry. "Property values have dropped so much, people can't pick up and move the way they used to," said Michael Hicks, a demographer at Ball State University in Indiana who has tracked the nationwide slowdown using data from several sources, including moving companies........ "The annual migration rate has gone way down to historic low levels," Frey said. "This includes long-distance moves and moving across town." During the 1950s and 1960s, Frey said, as many as 20 percent of Americans moved in any given year. Mobility rates slowed to 15 percent to 16 percent during the 1990s. But in 2008, only 11.9 percent of Americans moved, he said..........

$6 billion in federal money ready for buying foreclosures

Home prices are at their most affordable in many years, which has opened up homeownership to many who had been locked out during the housing boom. And now, the federal government -- and many states - are launching plans to hook up buyers of repossessed properties with very attractive terms. The feds made nearly $6 billion available for the Neighborhood Stabilization Program, which intends to combat blight by reducing the number of foreclosed homes on the market. The money, which has only started to flow during the past few weeks despite much of it being authorized last summer, will go to state and local housing authorities and non-profit organizations involved in providing housing for middle- and low-income families.

"The NSP was designed to help deal with all the properties in foreclosure around the nation," said Antonio Reilly, executive director of the Wisconsin Housing and Economic Development Authority (WHEDA), which will administrate the program in several counties in the state. The bulk of the NSP funds will come from the $3.92 billion that was approved as part of the Housing and Economic Recovery Act of 2008 passed in August. By regulation, these funds must be spent in communities with the highest incidences of foreclosures and subprime loans. They'll go to helping households earning no more than 120% of the median income of the local area, with 25% of the money going to families earning less than half the median.........

Faulty home appraisals 'snowballing'

Home sellers and real estate agents have a new worst enemy: inaccurate home value appraisals. Even as prices begin to stabilize and buyers re-enter the market, the appraisals many banks rely on to approve financing are causing some deals to fall apart at the last minute, or forcing sellers to agree to lower prices. National Association of Realtors chief economist Lawrence Yun said the appraisal problem is serious. “Lenders are using appraisers who might not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales,” he said. “In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment.”.......

Chicago Turns to Workers to Close Deficit

For half a century, Chicago has proclaimed itself "the city that works." This year, Mayor Richard Daley might consider an addendum: "excluding furloughs and the day after holidays." Chicago is grappling with a sinking tourism-and-convention sector, plummeting revenue from real-estate transfers and a deflated financial-services industry. After patching a $469 million budget shortfall for 2009 late last year, the city is now scrambling to fill a projected further deficit of $250 million to $300 million. The city of Chicago, facing a budget shortfall, will funnel some of the money from a deal to privatize parking meters into its operating budget.

In response, Mr. Daley's administration last week sent out the last of 1,500 pink slips to city workers, but he also offered unions a choice: Take the layoffs, or accept 16 days of involuntary furloughs through the end of the year. The cuts would mean workers get several weeks of unpaid vacation and amount to a virtual shutdown of nonessential city services the day after holidays. "This is a serious budget crisis," said Laurence Msall, president of the Civic Federation of Chicago, a business-backed government-watchdog organization. "There are no easy answers." Big-city mayors across the country are scrambling to cut costs as revenue shrinks. In New York, Mayor Michael Bloomberg said last week he would cut about 2,000 jobs while increasing the sales tax by half a percentage point. Atlanta is imposing a shortened work week and Boston Mayor Thomas Menino has threatened to lay off 700 workers.

In Chicago, the budget crisis is particularly jarring. The city had been enjoying years of expanding budgets. It paid the bills through a high sales tax, a proliferating array of fees and surcharges and the privatization of the Chicago Skyway toll road and the city's parking meters and garages. Now, more than one-third of the $3.5 billion those sales generated have been funneled into the operating budget, an unsustainable practice that Mr. Msall likened to "burning the furniture to heat the house." With the severity of the recession and Illinois Gov. Pat Quinn's proposal to raise the state income tax by 50% to cover the state's $7 billion deficit, Mr. Daley has little room to raise Chicago's property taxes.

So Mr. Daley has returned to city workers for givebacks. He has trimmed the city's work force by 15% this decade to 33,621 jobs, and that doesn't include the 1,500 pending layoffs. Despite those cuts, personnel costs absorb 80% of Chicago's budget, compared with roughly 70% for many cities. "It's a tremendously inefficient use of resources," said Mr. Msall, pointing to city garbage trucks that operate with three workers instead of one in neighboring suburbs and the six-figure salaries of the city's 50 aldermen...........

World's rich lost 20 percent of wealth in 2008

The world's rich lost nearly 20 percent of their total wealth in 2008 as volatile markets wiped out two years of growth, a Merrill Lynch study showed on Wednesday. The total value of the wealth of people with net assets of more than $1 million, excluding their main home and consumables, dropped to $32.8 trillion -- below 2005 levels, the 13th annual Merrill Lynch World Wealth Report showed. The number of people with more than $1 million in net assets fell 14.9 percent, while the number of people with fortunes of more than $30 million fell by a quarter, the study showed.

Group Shines Light on Hefty Government Pensions

A campaign to publicize the identities of thousands of people receiving hefty government pensions -- from onetime professors to former fire chiefs -- is catching on around the country. The effort was launched earlier this year by a California interest group determined to promote its view that steep pension payments are bankrupting states and localities. Newspapers in New York, Rhode Island, Massachusetts, Illinois and elsewhere have published lists of their six-figure public retirees. Those named are former public employees and their dependents who receive an annual pension of more than $100,000. Atop one list is a former city administrator from the small Southern California town of Vernon, whose annual pension is $499,674.84.

The so-called $100k Club movement has raised privacy concerns and frustrated pension officials who point out that only a tiny fraction of retirees receive that much and that most pensions are far smaller. It has also hit a nerve among private-sector workers whose retirement savings have been devastated. "I had no idea how much some people are making from pensions," said Jack Chu, a 48-year old materials engineer in Santa Rosa, Calif., who read about the $100k Club in his local newspaper and has chatted with co-workers about it.

During the stock-market boom of the 1990s, pensions became passé and the 401(k) was considered the ticket to a cushy retirement. But the average 401(k) plan, heavy in stocks, lost around 40% last year, leaving those nearing retirement with little time to recover. Mr. Chu's 401(k) tanked last year and he doesn't think he will be able to retire at 70. "But in the public sector," he said, "some retire around 50. I'm very concerned if the system can sustain them." Pension funds provide guaranteed payouts, so even though public funds lost a collective $1 trillion last year, their retirees' monthly checks are unchanged. And the funds' solvency is ultimately backed by taxpayers. In the current political climate, local legislators may be loath to vote for tax increases to make up for pensions' investment losses..........

The interest group that lit the spark, the California Foundation for Fiscal Responsibility, is pursuing the effort as part of its plan to promote a ballot initiative that would raise the retirement age and reduce benefits for future public employees. "Rising pension costs will bankrupt" cities, counties and school districts throughout the state, said Keith Richman, co-founder of the group. He said the plan would save the state $500 billion over the next 30 years. If he can collect a million signatures, the referendum would be on an upcoming election ballot........