Economic News Update October 28, 2009

Comment:

The poet and singer, Leonard Cohen's "Democracy" seems appropriate today, as I read of the 5,000 protesters around the American Banker's Association convention in Chicago. Though the media's defense is that they are not the appropriate group to target because they are the smaller and regional banks, they do include Wells Fargo and JP Morgan, and since the beginning of 2008, the ABA spent more than $13m on lobbying according to the database Opensecrets.org.

And, if you haven't heard the song, it's definitely worth hearing. I was lucky to hear him sing it live at Red Rocks this fall.

--Kalpa


....more earnings reports...

Insurer WellPoint's profit falls 11%
ConocoPhillips 3Q Profit Falls 71%


...Jobs....

US Airways to cut workforce by 3% in realignment
AMR to cut up to 700 maintenance, engineering jobs



THE LATEST:


New home sales fall 3.6 percent

Sales of new U.S. homes dropped unexpectedly last month as the effects of a soon-to-expire tax credit for first-time owners started to wane. The Commerce Department said Wednesday that sales fell 3.6 percent to a seasonally adjusted annual rate of 402,000 from a downwardly revised 417,000 in August. Economists surveyed by Thomson Reuters had expected a pace of 440,000.

It was the first decline since March. Sales in September were down 7.8 percent from a year ago. The median sales price of $204,800 was off 9.1 percent from $225,200 a year earlier, but up 2.5 percent from August's level of $199,900. The drop in sales was driven by a nearly 11 percent decline in the West and a 10 percent drop in the South. Sales rose 35 percent in the Midwest and were unchanged in the Northeast....

Durable goods orders rise 1 percent in September

Orders to U.S. factories for big-ticket manufactured goods rose in September as the biggest jump in demand for machinery in 18 months offset weakness in commercial aircraft and autos. The second advance in three months for durable goods orders is a hopeful sign for the manufacturing sector, which has helped lead the early stages of the fledgling economic recovery. But many economists worry that demand could falter in the months ahead as various government stimulus programs wind down....

U.S. NEWS:


GMAC Asks for Fresh Lifeline

In a stark reminder of how some battered financial firms remain dependent on government lifelines, GMAC Financial Services Inc. and the Treasury Department are in advanced talks to prop up the lender with its third helping of taxpayer money, people familiar with the matter said.

The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC has received since December 2008, these people said. The latest infusion would come in the form of preferred stock. The government's 35.4% stake in the company could increase if existing shares eventually are converted into common equity....

U.S. MBA Mortgage Applications Index Fell 12 Percent Last Week

Mortgage applications in the U.S. fell to a two-month low, hurt by declines in purchases that may reflect concern over the expiration of government tax credits. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan decreased 12 percent to 562.3 in the week ended Oct. 23, the third consecutive drop. The group’s refinancing gauge fell 16 percent, while the index of purchases declined 5.2 percent....

Pay Czar Increased Base Pay at Firms

....All 136 employees and executives working at the seven companies under his review will earn much less this year than in 2008, even after accounting for the rise in regular salaries, also known as base salaries. But when the banks complained, Mr. Feinberg listened. He adjusted base salaries for the bulk of those employees, in some cases boosting them by hundreds of thousands of dollars, according to an analysis of government data by the Journal.

On average, base salaries climbed to $437,896 a year as a result of Mr. Feinberg's review, compared with $383,409 previously, a 14% increase, according to a Journal analysis of Treasury data. Of the 136 employees under Mr. Feinberg's review, 89 saw their base salaries increase. At Citigroup, which is 34%-owned by the U.S. government, Mr. Feinberg agreed to more than double salaries for 13 of the 21 employees, according to the Journal's analysis.....

Governments Never in Default Pay More Interest Than Companies

California is the world’s eighth- largest economy. Diamond Offshore Drilling Inc. is the largest U.S.-based deepwater oil driller. The state known for its wine, Hollywood and earthquakes collected about $80 billion in taxes in the year ended June 30, compared with $3.6 billion in revenue for Houston-based Diamond. The two have similar credit ratings, and the state can rely on its taxing authority to address deficits. Still, the company got a better deal than California when each borrowed money this month.

Even though California has never defaulted on its debt, the state paid 1.5 percentage point more in interest -- a difference that translates into about $785 million in additional cost for taxpayers over the 30-year life of $1.75 billion in Build America Bonds. California and so many of the 50 states aren’t helping themselves get a better rate, partly because they’re not requiring municipalities to file timely financial information....

Escape From New York

An old saying goes that the time to live in New York is when you're young and poor, or old and rich—otherwise, you're better off somewhere else. That wisdom is getting an update this week from a study by the Empire Center for New York State Policy that shows middle-class people leaving the state in droves. Between 2000 and 2008, the Empire State had a net domestic outflow of more than 1.5 million, the biggest exodus of any state, with most hailing from New York City.

The departures also have perilous budget consequences, since they tend to include residents who are better off than those arriving. Statewide, departing families have income levels 13% higher than those moving in, while in New York County (home of Manhattan) the differential was even more severe. Those moving elsewhere had an average income of $93,264, some 28% higher than the $72,726 earned by those coming in. In 2006 alone, that swap meant the state lost $4.3 billion in taxpayer income....

Stimulus Contracts Go to Companies Under Criminal Investigation

The Department of Defense awarded nearly $30 million in stimulus contracts to six companies while they were under federal criminal investigation on suspicion of defrauding the government. According to Air Force documents, the companies claimed to be small, minority-owned businesses, which allowed them to gain special preference in bidding for government contracts. But investigators found that they were all part of a larger minority-owned enterprise in Southern California, making them ineligible for the contracts....

Foreclosures double in Washington area

The number of Washington area homeowners in foreclosure has more that doubled in the past year, according to a report to be released Wednesday that shows the problem remains most acute in a few counties and could get worse as more borrowers fall behind on their payments. About 2.7 percent of local borrowers are in the foreclosure process, meaning that the bank has started the legal process to take back the property, according to the report by the Urban Institute, a nonprofit policy research group based in Washington. That was slightly below the national average of 2.9 percent....

Mortgage Fraud Risk Surges 11%

Fraud risk in the mortgage industry surged more than 11% from Q209 to Q309, according to a mortgage fraud risk index compiled by Agoura Hills, Calif.-based mortgage software developer Interthinx. The index comprises several common types of mortgage fraud....

Enablers of the Housing Bubble

Nation's hottest housing market? Twin Cities

Minneapolis-St. Paul area home prices rose 3.2 percent in August.It's the fourth straight month of improvement and second month in a row the Cities came out on top....

Protests at US bankers' convention

....Not everybody in America sees the banking industry in quite the same warm, sharing terms. Unions coached in around 5,000 protesters to set up what activists billed as the "showdown in Chicago". Among the disenchanted were victims of home repossessions and workers left unemployed by firms starved of credit, plus many people who have simply seen their retirement funds decimated by a plunge in markets during the financial crisis.

....Protesters picketed the Chicago offices of Goldman Sachs and Wells Fargo, then gathered outside the ABA's convention venue waving placards including cardboard images of JP Morgan's chief executive, Jamie Dimon, and Bank of America's boss, Ken Lewis. "The banks have basically gone wild. They did a lot to loosen the regulations keeping commercial banks separate from investment banks. While they make billions, I lose," said Kenn Bowen, who recently lost his job as a telecoms technician in Iowa. "When they get into trouble, they ask for taxpayer bailouts which the government is more than willing to give."....

INTERNATIONAL NEWS:


Norway Lifts Benchmark Rate, Signals More Increases

Norges Bank raised its key interest rate a quarter point from a record low and signaled steeper increases than it previously forecast over the next three years as inflation accelerates and unemployment remains low. The Oslo-based bank raised the overnight deposit rate to 1.5 percent, becoming the first European central bank to reverse its easing cycle since the credit crisis started to abate. Nineteen of 20 economists surveyed by Bloomberg had predicted the move, while one had expected a half-point increase....

Brazil Stocks Fall in Foreign Exodus

Brazil's benchmark Ibovespa stocks index plummeted 4.2% in early afternoon trade Wednesday as foreign investors bailed out of local stocks, locking in profits from the recent rally....

Countries Overloaded With Debt

....Out of the world's 75 largest economies, the United States has the 20th largest as debt-to-GDP ratio, standing at 94.3%, with a gross external debt of $13.454 trillion and an annual GDP $14.26 trillion. In fact, out of the largest 75 economies, this number is just above the worldwide average of 90.8% Western-European and North American countries dominate the upper end of the spectrum, with Switzerland (422%) and the United Kingdom (408%) at the #2 and #3 spots, respectively, and Ireland representing the most drastic debt-to-GDP ratio, according to the most recent World Bank data, the country's number stands at a staggering 1,267%.

....In comparison, notable countries which have extremely low debt-to-GDP ratios are Brazil (13%), Singapore (10.7%), China (4.7%) and India (4.6%), with the lowest ratio boasted by Algeria, at 1.2%. Too low a ratio may not necessarily be a good thing either, and could reflect a combination of lacked foreign investment, low confidence in the nation's finances or the absence of debt-funded growth and investment policies by the national government. Bivens points out that the tendency for emerging market economies to have low external debt levels is counter-intuitive, as these are the places where marginal investment is high, you should see net lending from rich countries to poor countries, not the other way around....

OTHER:


Change passwords: Crooks want keys to your e-mail

.... after a lull at the start of this year, phishing attacks suddenly spiked 200% from May through September, according to IBM's X-Force research team. Phishers are going after log-ons to Web mail, social networking and online gaming accounts, security experts say. In the evolving cyberunderground, valid Web mail accounts, in particular, are considered highly valuable "virgin" assets, useful for sending out viral e-mail messages likely to go unblocked by spam filters, Sophos researcher Beth Jones says. Virgin mail accounts have become hot commodities; a valid log-on to a Windows Live, Gmail, YahooMail or AOL e-mail account can sell for as much as $2 — more than double what a stolen credit card account number fetches, says Fred Rica, principal at PricewaterhouseCoopers' security practice....

Note: The following is a four-minute video reader question interview of Bill Gross on CNBC. At 3 minutes, a question posed to Gross is what he sees as our overall chance of a collapse. He answers that it depends upon our government's ability to fend off deflationary forces.

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