Financial News Update July 14, 2009

Comment:

This whole waiting game really seems the only strategy right now. Some call it kicking the can down the road. But nothing much has gotten done during this period of spewing "green shoots" around which I attribute success due to nothing more than the rising stock market's "sucker's rally". Recently, I saw it noted that in previous recessions PE ratios hit around 8, and currently we're still in the mid-teens.

Next, note an interesting paragraph from Mish's blog yesterday, and then go on to the news. Today, again there is more to read in the opinion section, than the news section. Have a great day!

On predicting a housing bottom--

Thus I see no reason to switch from my long-held estimate of a 2011-2012 timeframe for a bottom. Furthermore, even once housing does bottom, do not expect a V shaped recovery. Housing prices are likely to remain weak especially in real (inflation adjusted) terms for another decade. For a clue as what to expect, take a look at the period from 1991 to 2000 in the first Case-Shiller chart. Expect a similarly long "fat tail" once housing does bottom. ----From Mish

-Kalpa

Geithner Tell Saudis That the U.S. Is on the Mend

U.S. Treasury Secretary Timothy Geithner said on Tuesday he saw signs of confidence returning to the U.S. financial sector and pledged that the United States would pursue policies that preserve the dollar's value. "The policies of the United States are designed to lay the conditions for a strong dollar for more stability in the international monetary system and among the major economies," he said at the Jeddah Chamber of Commerce. Geithner, who arrived in Saudi Arabia overnight from London, is aiming to reassure Gulf Arab states that the United States wants their investments and that their U.S. dollar assets are safe. He travels to Abu Dhabi in the United Arab Emirates on Wednesday and will also make a stop in Paris on Thursday.......

Comment: Yes, I agree, Tim, it is very important that Saudi's continue to trust our economy and dollar. But do they trust you?


Household Debt Service Ratio

Goldman Sachs Posts Record Profit, Beating Estimates

Goldman Sachs Group Inc. posted record earnings as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10 billion in U.S. rescue funds. Second-quarter net income was $3.44 billion, or $4.93 a share, the New York-based bank said today in a statement. That surpassed the $3.65 per-share average estimate of 22 analysts surveyed by Bloomberg and was 65 percent higher than last year’s second quarter. Chief Executive Officer Lloyd Blankfein, who helped make Goldman Sachs the highest-paying securities firm by wagering its capital and fueling the bets with borrowed money, is reverting to a business model analysts deemed irretrievably broken after a crisis of confidence in Wall Street raised borrowing costs and led to the collapse of Lehman Brothers Holdings Inc. While rivals have pared risks, Goldman Sachs has increased them......

Comment: Some are wondering how the "public" will react to this news. I'm starting to think the public won't react to anything. Not because they're stupid. They're "numb" and feel helpless. And some are just too caught up in their "American dream" life that they are on auto-pilot and think all will just somehow workout like things have in the past.


China Casts an Acquisitive Eye on U.S. Assets

At $1.95 trillion, China's international reserves are more than enough to fund America's entire budget deficit next year, which the U.S. Treasury estimates will reach $1.3 trillion because of the government's massive stimulus spending. There is no direct correlation between these two numbers, but they highlight a reversal of fortune. China now has the cash to cherry-pick the world's best assets, while America has no choice but to pawn its future to finance today's needs. As it is, China already own $763.5 billion worth of U.S. Treasury bills, 24% of the total, and has become the Federal Government's largest single creditor.....

It may only be a matter of time before the Chinese start making bids for iconic landmarks. Like the Japanese before them, who in the late 1980s snatched like the Rockefeller Center and the Pebble Beach golf course, they may succeed in buying some of the world's best properties. The question is whether they can maximize value and get the best returns out of them.

China’s Economic Growth May Accelerate to 7.8% on Credit Boom

China’s economy may have expanded 7.8 percent in the second quarter as record lending and surging investment drove a rebound from the weakest growth in almost a decade, a survey shows. The median forecast of 20 economists in a Bloomberg News survey compares with a 6.1 percent expansion in the previous three months from a year earlier. The government will announce gross domestic product in Beijing on July 16. China’s 4 trillion yuan ($585 billion) stimulus package and the scrapping of lending restrictions for banks powered a revival in the world’s third-largest economy, countering a collapse in exports.

Investment in factories, property and roads surged 34 percent in the first six months of 2009 from a year earlier, the fastest pace in five years, the survey showed. “China will be the first among major economies to confirm an economic recovery,” said Tao Dong, chief Asia economist at Credit Suisse Group AG in Hong Kong. Policy makers will use bill sales, instructions to banks, and loan regulations to “fine- tune” monetary policy, Tao said..........

“China’s economic rebound is still fragile, so any drastic change to macroeconomic policies would be a spring frost that freezes the green shoots,” said Fan Jianping, head of the economic forecast department of the State Information Center, an affiliate of the nation’s top economic planning agency. Record lending may inflate bubbles in stocks and property and add to bad-debt risks. The central bank pledged yesterday to do more to “guide” loan growth after previously urging more lending to small and medium-sized businesses.

Two government bill sales failed last week on speculation that the credit boom will spark inflation. That risk is not immediate. Consumer prices may have fallen 1.3 percent in June from a year earlier, the fifth monthly decline, with producer prices dropping a record 7.4 percent, the survey showed. Industrial-output growth may have quickened to 9.5 percent in June, the fastest pace in nine months after eliminating seasonal distortions in January and February, the survey showed. Retail sales rose 15.3 percent from a year earlier, according to the economists’ forecasts. New loans tripled to 7.37 trillion yuan in the six months through June from a year earlier, overshooting the central bank’s minimum target for the whole year by 47 percent.

Fed buys $7.5 billion in short-term Treasurys

The Federal Reserve bought $7.5 billion in debt maturing in 2011 and 2012 on Tuesday. Dealers offered $14.73 billion to be purchased. The operation is the first of two this week as the Fed continues its efforts to keep a lid on Treasury yields, which are the benchmarks for a broad range of corporate and consumer borrowing rates. At the four previous buybacks in this maturity range, the central bank purchased between $6.9 billion to $7.5 billion, according to RBS Securities. The broader Treasury market remained under pressure from earlier reports that showed larger-than-expected gains in retail sales and wholesale prices.

UAL, Continental Air May Lead U.S. Carriers to $1 Billion Loss

United Airlines parent UAL Corp., Continental Airlines Inc. and other major U.S. carriers may have combined losses of $1 billion, their seventh straight quarterly deficit, as the recession curbs business travel and fares. Second-quarter losses at the eight biggest U.S. airlines may be $1.2 billion, said Michael Linenberg, a Bank of America Corp. analyst in New York. Michael Derchin of FTN Equity Capital Markets Corp. in New York projects a $1 billion deficit for the nine largest companies, which start reporting results tomorrow.

The losses show the strain of dwindling revenue as carriers failed to lure back corporate travelers, the most-profitable passengers, while the H1N1 flu damped demand for business and leisure trips. Jet-fuel prices also climbed 32 percent in the quarter. “It’s putting the airlines in a squeeze,” said Philip Baggaley, a Standard & Poor’s analyst in New York. “Normally they would expect that high fuel prices would accompany a strong economy, so at least they’d be generating good revenue. But they’re getting the worst of both worlds now.”.....

Tim Geithner's latest headache

The Obama Administration has given itself two months to tell Congress what new legislation is needed to control over-the-counter derivatives, and testimony by Secretary of the Treasury Timothy Geithner late last week indicated how incredibly difficult the job of writing a law is going to be. Scores of House members turned up to express their special concerns: Will grain elevator operators be required to register as users of derivatives? Can utilities continue to enter into the customized OTC contracts they regard as essential to their business? How, Secretary Geithner, are you going to prevent the derivatives business from migrating to Dubai?.....

Airwaves Feature Pawn Shops, Plastic Surgeons as Auto Ads Sag

U.S. TV broadcasters, struggling to replace a 20 percent drop in automotive advertising revenue, are turning to pawn shops, plastic surgeons and other nontraditional sources to fill airtime. Local station owners like Nexstar Broadcasting Group Inc. and Gray Television Inc., whose revenue dropped after bankrupt General Motors Corp. and local dealers slashed marketing, are selling mortgage brokers and even landscapers on the notion that TV is affordable.

Across the U.S., the price of an average 30-second local TV commercial tumbled as much as 20 percent last year from 2007, according to the Television Bureau of Advertising, a New York- based trade organization. Auto ad revenue at local stations, down a fifth in 2008 from the year before, plunged another 52 percent in the first quarter, the TV Bureau said. “A lot of local retailers, like the portrait shop or the pet store, haven’t advertised on TV before because they think they can’t afford it,” said Robert Prather, president of Atlanta-based Gray. “We’re out just beating bushes that we should have been doing a long time ago.”.....

In Summer Hideaway for the Rich, Slump Is Visiting, Too

On a winding road, down a white shell driveway, sits a rambling gray-shingled home with a view of the harbor, where beige lounge chairs ring an amoeba-shaped swimming pool and the living room is filled with pristinely white sofas, plumped, pillowed — ready for the next owners. This 7,500-square-foot Nantucket home will be sold at auction by its owner, Paul C. Steinfurth, who put it up for sale a year ago. The 7,500-square-foot house has been on the market for a year with no takers. “We had some good offers,” said the owner, Paul C. Steinfurth, who runs a Miami real estate business and bought the house for $5.4 million in 2004. “Then Lehman happened and they put their hands in their pockets.”

So Mr. Steinfurth is resorting to a risky tactic new to the real estate market here: next Tuesday he’ll offer the house at an “absolute auction.” The highest bidder wins, no matter how low the bid. The sale is testimony to just how drastically the market has turned and how severely the economy has hurt even the country’s most exclusive enclaves. About 600 properties, or 6 percent of all those on the island, are for sale, but almost nothing is selling......