Monday, August 31, 2009

Parsing the Health Care Reform Polling Data

As Congress prepares to return home from it's cherished recess, the debate over health care reform stands as the most contentious issue the country is currently dealing with. As such, public opinion polls on the subject are being monitored with a level of vigilance which suggests either ignorance or disregard for these polls' margins of error. Nevertheless, the polls are instructive insofar as offering a reasonably representative snapshot of American opinion. The data I'm using in the following discussion was taken from the most recent NBC News/Wall Street Journal Survey, dated July 2009. The poll interviewed 1011 adults; all but 100 were reached via land-line.

The majority of discussion pertaining to health care reform has, in my opinion, fostered an under appreciation for the role that age plays in determining one's stance on the subject. Perhaps this is because it is easier for the media to discuss this issue in terms of either broad ideological preferences of weak v strong government, or class based, "ability to pay v not" scenarios. Whatever the underlying reasons may be, I believe it's distracted us from the obvious reality that voters tend to advocate for - or against - those policies which they perceive to be the most personally advantageous. For voters who are currently Medicare beneficiaries - or are close enough to the age of eligibility to ascertain that the system will still be solvent at the time of their eligibility - the personally advantageous option is to oppose health care reform. The justification is simply that any new health entitlement program would be partially funded through changes to Medicare; this doesn't necessarily mean cuts to benefits, but seniors would prefer not to test the government on this one. Younger voters on the other hand, are well aware that Medicare will not exist in it's current form by the time they are eligible. They are also somewhat cognizant of the fact that rising health care costs have, over the past decade, taken the place of substantive salary increases. That being said, let's look at the age dispersion from the most recent NBC/WSJ poll:

The age dispersion of the poll's respondents indicates that 50 years old is the 50th percentile; in other words, half of respondents are below 50 years old, and half are below 50 years old. While keeping the age of the poll's respondents in mind, let's move to what I consider to be the most compelling question of the survey: Would you find it acceptable to fund the current health care proposal by reducing payments to hospitals and drug makers for the services or products they provide to patients on Medicaid or Medicare? Below is a chart showing how respondent's answered that question:
With a ~3% margin of error for this survey, you can see that the two answers are statistically very close. My guess is that those between the ages of 18 and 49 answered with a majority "Acceptable" response, and those over 50 responded "Not Acceptable". I'd also guess that as you get closer to the 50th percentile (50 years), the rate of those responding "Not Sure" increases.

Now, however, let me introduce the game-changer: those in the 55+ age bracket show up to the voting booths in far greater numbers than any other age group. Furthermore, this group's voting influence increases significantly during mid-term elections (think 2010). Voters over 55 show up in heavy numbers at both Presidential elections and the mid-terms; younger voters have been known to get excited over a Presidential candidate (think Obama) and increase their turnout at that election, only to dissipate,lose interest, etc. by the time mid-terms roll around. Obviously, this has Congress worried.

Perhaps the above dynamic represents the largest flaw in President Obama's strategy of tossing the health care idea to Congress, and settling into a "hands-off" management approach. I'll reserve final judgment of that strategy until all is said and done; however, should the health reform effort fail, fault may lie with the politically powerful President who ceded the majority of the process to a mid-term fearing Congress. Sphere: Related Content

Saturday, August 29, 2009

Which Credit Rating Agency Provoked SEC "Suspicion"?

The federal government's campaign to tighten the regulatory vice-grip on credit rating agencies (CRO's) intensified yesterday, when the SEC's Inspector General released a report which criticized the very process by which the SEC qualifies and approves those companies designated as Nationally Recognized Statistical Ratings Organizations (NRSRO). The 124 page report featured numerous redaction's, the majority of which seemed to be for the purpose of concealing the identity of one rating's firm in particular. This firm, whose name is as of yet unknown, was discussed in the Inspector's report in the context of SEC "suspicions" regarding the information contained on it's application to become a NRSRO. According to the report, these suspicions pertained to "the accuracy of the financial information provided in its (the secret CRA) application and concerns about the authenticity of a number of certifications". Interestingly, the SEC chose to approve this organization's application prior to any sort of an investigation into the merits, if any, behind these internal "suspicions". In other words, the ratings firm in question is conducting business at this time. Now, for reasons likely based in my own naive/idealistic opinions regarding the need for transparency at all levels of government, I would like to know the identity of this NRSRO.

The Wall Street Journal has already conducted an initial round of leg-work on this issue, mentioning that the SEC's report reveals that the troubled firm is funded by subscriber-fees. With this knowledge in hand, we can apparently rule out S&P, Moody's and Fitch - all three of these major NRSRO's are compensated by the Company whose debt/securities are being reviewed. With the three market share leaders ruled out, the question becomes: who is left?

According to the SEC's website, ten separate companies have received commission orders granting NRSRO registration. Three of those ten have been ruled out, leaving the following seven as potential candidates:
  • Egan-Jones Rating Company
  • Realpoint, LLC
  • LACE Financial Corp.
  • A.M. Best Company, Inc
  • DBRS Ltd.
  • Japan Credit Rating Agency Ltd.
  • Rating and Investment Information, Inc.
Based upon the NRSRO registration orders, both Realpoint and LACE Financial Corp. had to cross an extra hurdle with the SEC prior to receiving their respective designations. In both instances, the firms had to convince the SEC to be lenient in it's application of a regulation which prohibits an NRSRO from receiving greater than 10% of it's revenue from a single client; the obvious implication here is that, above that 10% threshold, a client could wield undue influence on the ratings firm, possibly compromising the independence of the rating decision. It appears that both CRA's were able to circumvent this requirement by asserting that "the 10% client" (SEC documents didn't reveal the identify of these firm's largest client) would only represent ~7% of revenue in the year immediately following NRSRO designation. I'm not sure this specific issue fits the description of the SEC's suspicions from the report; it also appears that the SEC conducted it's due diligence with regards to Realpoint and LACE - an action that was notably not taken insofar as the single suspicious NRSRO is concerned.

A review of the remaining CRA's will take a little more time than I have today, so this will have to be followed up with a more detailed analysis. I will say that it's unlikely A.M. Best is the source of SEC angst, as they have been around for 100 years or so. Anyone with any ideas about this can shoot me an email; the address can be found by following the "view my complete profile" link on the right-handed side of this page.

*no position in any credit rating agency, NRSRO, or their parent or affiliated companies. Sphere: Related Content

Wednesday, August 26, 2009

Durable Goods and New Home Sales: Deciphering Government Noise

The string of positive economic news continued today, as orders for durable goods - bigger ticket items expected to last at least two years - rose 4.9% from a month ago. This news was accompanied by a report which showed new home sales rising 9.6% from a month ago. Unfortunately, both data points could have been significantly influenced by short-term government programs; a prospect that now forces investors to decipher which pieces of economic news are in fact positive, and which are the result of a government distortion.

We all know that Cash-For-Clunkers was a major success, at least in the short term, for overall sales of automobiles. When looking at the durable goods numbers, it's important to realize that new auto orders were included in this data. Whether the rise in durable goods orders is sustainable will be tested in the coming months.

With new home sales, the reality is that buyer's most likely took advantage of the first time home buyers tax credit with a slight bias towards new homes. Builder's are able to price new home more attractively than the individual homeowner, and can offer very appealing incentives. Many homebuilders are offering to pay a buyer's mortgage points, effectively lowering the interest rate to below 5% on a standard mortgage product. A seller of an existing home has an outstanding mortgage balance to contend with, and might not be able to compete with a public corporation's ability to write down the value of newly sold homes for tax purposes.

I don't want to convey that there is no reason to have hope for an economic recovery; the point is that digesting data now, and in the near future, will require a second or third look to determine the actual viability of a developing trend. Sphere: Related Content

Tuesday, August 25, 2009

Social Security's Cost of Living Conundrum

As anyone who receives Social Security benefits probably knows by now, the trustees who oversee that vast entitlement program have forecast that there will be zero cost of living allowance (COLA) over the next two years. COLA's are calculated by the government every year, and are meant to provide Social Security recipients - many of whose incomes are fixed in nature - with a small "raise" if you will, in order to cover the rising cost of living. The government uses the consumer price index (CPI) as it's preferred measure for determining the acceptable COLA amount for each year. Anyways, this latest news concerning a lack of cost of living allowance for the next two years has obviously aggravated seniors. Although headline CPI is in negative territory, nothing about the cost of living actually feels like it has decreased. Furthermore, prescription drug prices are on the rise, and since many Social Security recipients have their drug premiums deducted straight from their benefits, it's pretty certain that next year's checks will be smaller than today's.

As we all know however, senior citizens are especially fond of the voting booth; in turn, politician's tend to cater towards issues that seniors care about. The National Committee to Preserve Social Security and Medicare (NCPSSM) understands this reality, and has already begun lobbying Congress for a one-time cash payment to social security recipients. This bailout of sorts would, in theory, bridge the gap between what the NCPSSM believes SS recipients should be earning next year, and what the CPI has dictated they shall earn. My research does show that cost of living allowances have been particularly generous in the past; for instance, the 2009 COLA will boost payouts to seniors by 5.8%. As you can see from the 10-year chart below, cost of living allowances have historically been consistent and fair.

As a nation, we frequently and vaguely lament the fact that "tough decisions" will need to be made if we are to ever get our budget balanced and our finances generally in order. Well, this is one of those tough decisions. I completely understand the difficulties that seniors face, particularly with regards to the seemingly parabolic rise in health care costs. However, I would assert the following:
  1. Social Security benefits need to be based in some sort of reality, that is, based in some way upon the ability of the government to tax the wages of those who are currently paying for SS. We all know that current recipients have paid into the "fund" for most of their lives, however, that money is gone. Social Security is a Ponzi-scheme that I am paying for right now. Private sector wages are quite depressed right now, therefore less is available to pay for this program. Continuing to borrow with the hope that the problem will fix itself isn't an option.
  2. This is what a difficult decision looks like. It is difficult because specific examples of hardship can be legitimately cited by opponents of the difficult decision. This is a shortcoming of democracy (the worst form of government, except for all the others of course).
We all know that Social Security is on a ridiculously unsustainable path; let's not destroy it beyond recognition (I'm assuming we're not there yet) because annual CPI didn't go beneficiary's way this year. I'd hate to see such a precedent established. Sphere: Related Content

S&P/Case-Shiller Price Index Turns Positive For June


June of 2009 was a positive month for home prices across most of the nation, according to today's S&P/Case-Shiller Home Price Index report. The release indicated that home prices in the 10 and 20 city composite rose 1.4% MTM. More impressive though, was the news that the 2nd quarter as a whole posted positive price action compared to the first quarter - the first quarterly gain recorded in three years. The chart above illustrates the well-defined trend which began somewhere between March and April of 2009, and characterized by a stabilization of sorts in US housing prices. Other notable observations:
  • Cleveland once again posted the strongest MTM performance, with a 3.8% rise in house prices. Las Vegas was the loser, with a -2.86% decline in home values.
  • Dallas home prices held up the best over the past year, only declining 2.27%. Las Vegas home prices logged a -32.42% YOY price performance, the worst in the nation.
Today's report indicated that, potentially, the adverse pricing effect of foreclosures is beginning to moderate. My read is that the unprecedented level of foreclosure activity will continue to hold down the headline average and median prices for most of the nation's metropolitan areas. However, this report may be a signal that foreclosures will no longer contribute to percentage declines in the headline. The high volume of foreclosure activity recently - they represented roughly a third of July's existing home sales - indicates that for the most part, foreclosures are priced at a level attractive enough to spur investment. I haven't seen any valid data yet showing what proportion of foreclosure sales are being completed by funds investing in distressed real estate, but I suspect that this sort of opportunistic buying is strongly contributing to the uptick in activity.
Sphere: Related Content

Monday, August 24, 2009

API Report Derides Waxman-Markey Legislation (H.R.2454)

An American Petroleum Institute (API) commissioned report, released today, examines the potential consequences of H.R.2454 - a.k.a the Waxman-Markey bill - insofar as it may impact the US refining sector. Readers should understand that the report, produced by consulting firm EnSys Energy, was commissioned and funded by the lobbying arm of the United States oil and gas industry. Proponents of H.R.2454 will likely compare today's report to the infamous tobacco industry research, which for years denied the existence of adverse health outcomes from cigarette use.

I would venture to say however, that EnSys Energy has chosen to focus on some of the oil industry's more valid points, namely that Waxman-Markey will:
  1. Decrease the level of investment in US refineries; thus reducing the country's overall refining capacity, and increasing our dependence on foreign sources of oil.
  2. Have a negligible effect on CO2 emissions produced by emerging markets; the countries that currently represent the lion's share of worldwide growth in carbon dioxide emission.
My major contention with the policy debate surrounding climate change is that skepticism - the default position of science - has been characterized as sheer villainy when applied to any discussion of CO2 and it's effect on climate. Furthermore, I am not convinced that the level of investment supposedly required to curb CO2 emissions is in any way proportionate to the benefits that we can expect to receive. This is not to say that I am against investment in renewable sources of energy; peak oil is fast approaching (if not already here), and the US is dangerously dependent on foreign sources of energy. With that being said, I can live with piling "climate change" on the list of reasons to diversify away from petroleum as our primary source of energy. None of this should be overdone though, as we should, without a doubt, be maximizing our sources of domestic oil while the transition takes place.



ENSYS Cap and Trade Briefing 8-20-09 Sphere: Related Content

Sunday, August 23, 2009

Why Are Banks Raising Credit-Card Interest Rates?

I'm quite interested to know why any credit-card issuing company would be raising the interest rate it charges card holders at this time. If you'd prefer to be realistic about a company's motivation for doing such a thing, you must consider the symbolic nature of what such an act means, particularly in light of the government's recent directive. The Credit Card Accountability, Responsibility and Disclosure Act was a direct challenge to those banks involved in credit card issuance to American consumers. The Act basically reigns in some of the industry's more abusive practices, such as requirements that a bill must be delivered at least 21 days prior to it's due date. Extremely restrictive.

With this knowledge in hand, I'm really wondering why I know people whose credit card interest rates were just raised on Thursday. Perhaps they think that most people will just sit back and absorb the painful rate increase. It's apparent that they are mistaken on this assumption. The funny thing about capitalism, is that it creates a service whenever there is a need. Balance transfers will spike upwards in the next month, considerably. Sphere: Related Content

Friday, August 21, 2009

University-Themed Bud Light Cans Cause Misplaced Furor

I can't help but comment on a front page WSJ article from yesterday, entitled "Team-Color Bud Cans Leave Colleges Flat". Basically, Anheuser-Busch is facing the once-unthinkable prospect of a decline in annual Bud Light sales (by volume). In a bid to revive sales, Anheuser developed a marketing campaign that is the functional equivalent of a politician rallying his base of voters. The base, in this case, is the college drinker. Anheuser apparently identified 27 of the larger state-funded Universities, and began customizing the color scheme of Bud Light cans sold in these markets so that they would correspond approximately to the respective institution's school colors. For instance, Bud Light cans sold in the Baton Rouge, LA area were painted purple and yellow, the official colors of Louisiana State University (LSU). To clarify however, the cans do not bear the school's name, nor do they claim to be affiliated with the university in any way. Needless to say, the marketing campaign was not a big hit with the administrations of several universities; some of which even resorted to calling in the lawyers to demand that the cans be removed from store shelves. I have two problems with this sort of reaction, both of which are derived from my experience in college.

First of all, I must assume that any official efforts on the part of university administrations or advocacy groups to condemn alcohol related marketing have, as their primary purpose, the desire to reduce the total amount of college drinking. I would presume that with regards to students of legal age, these groups would have as a goal the reduction of binge drinking - a push towards moderation if you will. Next, I must also assume that state universities are forced to take the position that there should - in an ideal world - be zero consumption of alcohol by students under the age of 21. Assuming (once again) that these are reasonably attainable goals, the question then becomes whether attacking a Bud Light marketing campaign is an effective strategy towards achieving that goal. I'll go ahead and answer my own question: it is not (an effective strategy). I can state with certainty that a university-themed Bud Light can will not convert a single non-drinker into a drinker. Decisions about whether or not to drink in college are personal in nature, and are not influenced by the uniqueness or cleverness of a beer maker's marketing strategy. The only effect that these specially colored cans will have upon beer purchases is that, almost certainly, Bud Light will steal market-share from other brands of beer. Ironically, it's most likely that Bud Light's gain will come at the expense of Natural Light and Busch Light (the most cost effective choice); both of which are Anheuser/Inbev products! Therefore, I must come to the conclusion that university officials are either out of touch with reality, or - and this is the more likely scenario - their motivation has more to do with creating the "appearance" of doing something about college drinking. The universities that are actually in tune with reality, and setting policy that is truly in the best interest of college students, are those institutions with the courage to offer shuttle services for students to and from the area's nightlife/bar centers. Measures like that are amazingly effective at curbing drinking and driving which, let's face it, poses the more substantial safety risk to students.

My second problem with university officials is that, while condemning the simple color of a beer can, they are actively allowing credit card companies to solicit their product on college campuses; often while using alcohol related marketing to push credit cards onto students. Within a week of arriving on campus as a freshman, I was accosted by a credit card salesman on the way to class. The guy had a booth set up in the middle of university property, where he was prominently displaying free T-shirts available to anyone willing to fill out a credit card application. These T-shirts had a super-sized image of a bottle of Absolut vodka on the back, which were customized with my school's name via the headline message "Absolut [insert university name here]". Luckily, I had the sense to fill out the card application, pocket the free Tshirt, but never accept delivery of the credit card. Others were not so fortunate, and subsequently fell into credit card debt prior to even graduating into the real world. The point is, allowing these solicitations on campus is extremely hypocritical of the universities in light of their attacks against an off-campus Bud Light marketing scheme.

This latest case of alcohol related university furor is completely misplaced, and should be directed towards solutions that will actually help improve the lives of students.

*no position in Anheuser-Busch/Inbev Sphere: Related Content

Housing Market Improves as Tax-Credit Deadline Approaches


The National Association of Realtors this morning announced it's estimate of US existing home sales for the month of July. The data showed a substantial uptick in sales, representing an increase of 7.2% from the month of June, and a 5% increase compared to levels seen a year ago. The latest surge in activity is a relatively well-timed "event", as new housing starts have stagnated at an extremely subdued level over the past few months. The combination of stagnating or declining starts, and rising sales is a confluence of activity that is necessary for a recovery of the US housing market. As I've stated previously, the further that these two trends diverge - think widening spread - the faster the market can absorb the glut of unsold inventory. Although today's release indicates that we are currently diverging in the proper direction, there is a risk that still remains.

As the cognizant amongst us are aware, the stimulus package has provided for a First-Time Home Buyer Tax Credit worth $8,000. And yes, this credit is "the good kind"; in other words, it isn't a deduction against taxable income, but rather a full, refundable even, credit against taxes owed to the federal government. The problem is, to be eligible for the credit, you must purchase your first home prior to December 1st, 2009. The question then is, to what extent can we attribute the recent jump in existing home sales to the existence of an $8,000 tax credit? Additionally, are we merely witnessing a phenomenon whereby the majority of tax credit related purchases have been delayed until the final months of the "program"? Another somewhat similar government program, Cash-For-Clunkers, was exceedingly more measurable due to the real time processing of rebates by auto dealerships. With the home buyer tax credit though, we'll have to wait until tax season before any reliable data becomes available. The alternative indicator would be a severe drop in existing home sales beginning with the December 2009 data. Hopefully we won't have to find out that way. Sphere: Related Content

Thursday, August 20, 2009

Private Prisons: A Reliable American Growth Industry

With the exception of the government's borrowing and spending activities, there are hardly any segments of the US economy that appear to have been inoculated against the recession which began in December 2007. There is one aspect of society however, that has continued to expand despite the difficult economic circumstances: the prison population. Additionally, and contrary to what many believe, the construction and management of jails and prisons are not functions exclusive to the government. In fact, the fourth largest correctional system in the nation is owned and operated by the Corrections Corporation of America (CXW) - only the federal government and two states operate prison systems containing more bed space than CCA. As you can see from the chart below, the United States prison population has consistently risen since 1980 (earliest year I could find available data).
Furthermore, over the same 28 year period, the total US jail and prison population has represented an increasingly larger percentage of the total US civilian population.

Regardless of whether the US economy has technically bottomed or not, the reality is that cities and States across the country are dealing with substantial budget gaps that will require difficult decisions. (The same is obviously true at the federal level, with the exception of the difficult decisions part; Washington tends to avoid those). The situation is unlikely to improve in 2010, as continued property reassessments will diminish the property tax base even further. That being said, the decision to privatize prison construction and operation should appear ever the more attractive to States looking to save money.

Let's assume for a moment though that, for whatever reason, the growth of private prisons does not deviate from it's current trajectory, and CCA simply continues doing what it has over the past 5 years. Construction Corp. of America has clearly demonstrated solid revenue growth over the past half-decade. The Company's earnings have been growing at a more subdued pace since 2005, but capital expenditures have absolutely exploded; growing from $73.9M in 2005, to $516M in 2008. CCA isn't pouring nearly a third of it's annual revenue into new property/plant investments without a reason. I'd expect that in the coming quarters, this amount of investment will begin to yield tangible returns for the Company.
Throughout the history of modern society, there has been a consistent need for the State to remove criminal offenders from the civilian population. In fact, this is considered the most basic responsibility of a government to it's people. As the need for prison space continues it's inevitable rise, the Correctional Corporation of America should be uniquely positioned to offer government an efficient incarceration solution.

*no position in CXW Sphere: Related Content

How Many Votes Does a Health Care Bill Need?

As the August recess nears an end, and those politicians who managed to survive their respective town hall events - intact - prepare to return to Washington, the focus of the health care debate is slowly shifting towards vote calculation scenarios. Although the Democrats command overwhelming majorities in both houses of Congress, it would appear that the Party can not count every Congress person with a "D" beside his/her name as a vote in favor of Health Care reform. Furthermore, the newly invigorated Republican Party has begun to seize upon the tenuous level of support in Congress for the plan, suggesting that any health reform bill must receive the blessing of at least 75-80% of Congress in order to be perceived as a legitimate mandate. Senator Mike Enzi (R.,Wyo.) had the following to say about the health bill, and the Congressional support that is supposedly required of it:
"We need to get a bill that 75 or 80 senators can support...If the Democrats choose to shut out Republicans and moderate Democrats, their plan will fail because the American people will have no confidence in it"


After pondering Senator Enzi's statement for a moment I realized that the Senator simply should know better than to make such a bold assertion. Mike Enzi has been in the Senate for over 12 years you see, so he would have to have been around for the Senate's 2003 passage of the Medicare Prescription Drug Improvement and Modernization Act; the legislation that instituted Medicare's Part D prescription program. Ironically, that bill passed the Senate with a 54-44 vote - a confidence-less margin by Senator Enzi's reckoning - yet has likely become an immutable aspect of our health care system.

This inconsistency could possibly be explained by examining the voting tendencies of Medicare Part D recipients v those who would benefit from today's proposed legislation. Younger people have largely abandoned voting due to disillusionment with the system as a whole, in addition to the pervasive apathy that's too common. Lawmaker's understand who shows up on election day, and they act accordingly.

*there's a great movie entitled "10 Trillion and Counting"that provoked some aspects of this post. Sphere: Related Content

Wednesday, August 19, 2009

Commercial Property Prices Drop 1%, Sales Volume Surges


Moody's and REAL Capital Analytics today released it's monthly commercial property report, which includes price data derived from transactions occurring through June 2009. I was planning on including the full report below, but apparently I had underestimated the technological prowess of Scribd, who emailed me about my copyright violation only seconds after uploading the document. Forgive me for assuming that a public posted document (you can download here) is hands off.

Anyways, the key message to take from today's report is that aggregate measures of commercial property prices continued to decline through June. The silver lining however, is that the May-June decline of 1% represents a substantial improvement from the 7% decline during the April-May period. Moreover, the significant lag in data reporting means that the price declines could have moderated further during July and August. Other relevant notes from the report:
  • All commercial property types, on aggregate, have declined 26.9% in price from a year ago
  • Atlanta was the top performing city across all property types (Office,Retail,Apartment,Industrial)
  • Washington DC was the worst performing city across all property types
  • The dollar value of sales volume increased 40% in June v May
The percentage declines in commercial property prices actually seem relatively mild when compared to the year over year declines in dollar value of sales volume. In June of 2008, the Moody's/REAL data recorded nearly $20Billion worth of commercial property transactions; by June 2009 that volume had dropped to $4.4Billion, or a 78% decline. Once again in real estate, we're faced with a dynamic where the headline data may indicate a high percentage increase from the previous month; however, the increase is only high in percentage terms because of the infinitesimally small base from which it's measured. The truly bearish of the world keep waiting for the commercial shoe to drop; hasn't it already? Sphere: Related Content

Bloomberg: Goldman Sees Strong 10- Year Note

Goldman Sachs predicted today that the 10-Year Treasury note will rally considerably in the next 6 months, according to a Bloomberg exclusive. The yield on the 10 year, currently at ~3.45%, is forecast by Goldman to reach 3.3% in the next 3 months, and 3% in the next 6 months.

For reference sake, the 10 Year Treasury note last yielded 3% on April 28th, 2009. At this time, we were in the midst of an 8 month decline in Treasury prices, following the flight-to-safety panic buying of Treasuries that peaked in December of 2008. Consequently, on April 28th, the S&P 500 stood at ~855, or ~13% below today's value of 987.

Many pundits have explained the ferocious rally in US equities as being partially a result of investor's re-allocation of capital out of safe assets and into riskier ones. This trend, according to the punditry, has been most pronounced in the selling of US Treasury notes/bills/bonds, and the purchasing of equities. Assuming that this line of reasoning is correct - the alternative is that there is no rational basis behind the stock market's rally - the logical conclusion is that the next 6 months will feature an under-performance by stocks relative to Government debt. Although such a trend may hurt the feelings of stock market investors, it may be necessary if the US Government is to issue the massive amounts of debt that it has planned for the upcoming months.

*long several components of the S&P500. This will likely change after Friday, as I've overwritten all positions and look to be called away on each. Sphere: Related Content

Tuesday, August 18, 2009

Why July's Decline in Housing Starts is Good News



The Census Bureau, along with HUD, today released it's monthly update on various measurements of new housing construction and related indicators. I'd direct readers to focus on the housing starts figure, as this data series is arguably the most indicative of the future direction of the US housing market. For July, new starts for all categories of residential housing logged in at a seasonally adjusted, annualized rate of 581,000. That number represents a 1% decline from the prior month, and a 37.7% decline from the rate reached in July 2008. Despite being what can be described as the continuation of a sharp decline in new housing activity, today's figures should be construed as positive news for both the economy and the housing market.

Economists talk a lot about the need for an "equilibrium" to be established in the housing market. Basically, this means that excess inventory must be removed from the market so that the supply of housing can be reduced to meet current levels of demand. An equilibrium can also be reached by stronger demand, but in order to remain realistic I'll focus on the supply side of the equation. Clearly, in order to reduce the supply of something, you have to stop producing so much of it. Based upon the chart above, the period between 1959 and the present contained a relatively reliably level to which starts needed to drop in order to compensate for subdued demand. For the most part, housing starts have rarely remained below the 1 million annualized rate for any extended period of time. The current recession however, introduces a destructive wild-card to the equation: foreclosures. There may be some estimates out there, but nobody truly knows just how many foreclosures are sitting on bank's balance sheets. Further exacerbating the problem is that bank's are releasing these toxic properties onto the market in a way very similar to the slow drip of medication from an IV. Moreover, the rate at which this shadow inventory will be released back unto the market is roughly commensurate to the speed at which financial institutions are able to increase earnings growth.

The bottom line is, the faster and further that housing starts fall, the sooner the market will be rid of it's excess inventory. I'd really like to see housing starts drop to the unprecedented annualized rate of between 350-400,000. I'm fairly confident that at that point, we could begin the process of reducing inventory levels that is an obvious pre-requisite to a sustained recovery. The best stimulus measure that the government could have instituted for housing was to purchase vacant homes on a widespread basis, and literally demolish them. For now though, we'll just have to wait for the market to perform the functional equivalent of that idea on it's own. Sphere: Related Content

Does Private Health Insurance Involve Death Panels?

By now, assuming that you are at least vaguely cognizant of what's happening in the health care debate, you are well familiar with the concept of "death-panels". The notion that under a public health insurance option, one's ability to continue receiving care at an old age would be dependent upon the decisions made by a bureaucratic panel of "Deciders", was abruptly injected into the public discourse by Sarah Palin, courtesy of her Facebook page. Thus, we are led to a logical fork in the road: Either Sarah Palin is choosing to be deliberately dishonest, or she has exceedingly poor reading comprehension/analysis skills. In reality, none of the proposed health reform bills contains anything remotely close to the establishment of a death-panel. Perhaps Ms. Palin misunderstood a portion of the bill that would provide Medicare coverage for end of life counseling with a doctor. Regardless of the former vice-presidential candidate's motivations, her guerrilla warfare did provoke some pondering on my part. My logic proceeded as follows:

Let's assume that the government did establish death panels. They are distasteful yes, but the public is provided with the explanation that these death panels will increase efficiency and save everybody money. Still though, critics insist that the government can never be as efficient as the private health insurance industry. I would respond to those critics by completely agreeing with them. Why? Because in the realm of private health insurance, the industry has evolved - in a capitalistic sense - beyond the use of something so inefficient as a death panel. It's an extreme waste of time to force a panel of professionals to hear these cases one by one by one by one. Especially in the coming years, as the baby-boomer population ages, can you imagine how busy that death panel would be? Besides, these death panels - according at least to the popular portrayals of such - would be forced to take into account the person's worth to society, and calculate how many years of productive life he/she had left on this earth. The private health insurance industry however, being an evolved specimen of an industry, long ago realized that the only way to operate the gig profitably was to run the business strictly by the numbers. I had a statistics professor in college who turned out to only be a part-time employee of the university; her full time job was with Blue Cross Blue Shield, where she ran statistical models all day to identify wasteful claims. Health insurance companies don't have death panels, they have actuaries and statisticians running models which have a degree of complexity beyond the grasp of average citizens. Your fate lies in the hands (microprocessor) of a computer.

Perhaps therein lies the heart of the confusion. Maybe folks are just more scared of the easily envisaged Government solution than the insurance models, for which they don't know what they don't know. But wait a minute. If we've already confirmed that a government option has no provision for the mythical "Death Panel" creature, then what are we really to conclude? Sphere: Related Content

Monday, August 17, 2009

Citizens United v FEC Poses Major Campaign Finance Test

An extremely compelling Supreme Court case is approaching oral argument time, currently scheduled for September 9th, 2009. The case, Citizens United v. FEC , will simultaneously invoke issues concerning the First Amendment and Campaign Finance reform. Here's a brief background:

In late 2007, a conservative advocacy group named Citizens United - a 501 (c)(4) nonprofit whose activities include the routine creation of political films - finished production of a film titled "Hillary: The Movie". Without getting into too much detail, it's safe to say that "Hillary: The Movie" is not a film that seeks to portray the Secretary of State in a very positive light. Anyways, one of the ways that Citizens United attempted to promote it's new film was by paying a cable news network to offer it "on-demand" to it's subscribers; that's of course in addition to the typical means by which a movie is promoted. The promotion of this film was abruptly halted however, when the Federal Election Commission determined that the Citizen United film amounted to "electioneering communication" or EC. This relatively new component of campaign finance law, EC, was put in place to prevent corporate treasuries from funding campaign commercials within 30 days of a primary and 60 days of a general election. Although the logic behind the regulation of electioneering communication is immediately recognizable, there is a legitimate case to be made that the government has engaged in suppression of political speech - a first amendment violation.

Adding a considerable amount of intrigue to this case is the composition of the groups which have filed supporting briefs to the Supreme Court, and more specifically, which side of the issue these groups stand. For instance, the ACLU and Republican Senator Mitch McConnell have sided with Citizen United; doesn't Fox News consistently portray the ACLU as an extreme right wing organization? On the FEC's side, we have a healthy dose of women's advocacy groups, John McCain, and Russ Feingold, among others. My initial inclination is that this case strikes a chord with conservatives, who traditionally speaking, have not been as successful as their liberal counterparts in developing widely distributed film productions.

The case took an interesting turn earlier today, when Senator McConnell (R-KY) successfully petitioned to the Supreme Court to extend the time allotted for oral arguments from 60 to 80 minutes.; obviously, this was so that his lawyer would have time to argue. The Senator's interest in Citizens United v FEC stems from a 2003 case - McConnell v FEC - in which several portions of the Bi-Partisan Campaign Reform Act (BCRA) were overturned as unconstitutional.

Ultimately, I'd say that the conflict which led to Citizens United v FEC is more a reflection of our nation's inability to craft reasonable campaign finance law than it is an issue of Big Brother censorship. In an ideal world, a politician's success would not be contingent upon his or her ability to raise vast sums of cash; unfortunately though, there is an almost unbreakable symbiotic relationship between finance and politics. As long as cash continues to be funneled into nonprofits and special interest groups, for the purpose of advancing their political agenda, it's literally pointless to attempt to impose limitations upon individual donors. Besides, the restrictions on individual giving are even flagrantly violated on a regular basis; just check out OpenSecrets and search for a donor by his last name. Notice all of the donors who list their occupation as "Home Maker", and maxed out their donation along with someone else sharing their last name? Here's my suggestion:

Have everyone in the country contribute 50 cents a year towards election financing. Then, take that $150Million and apportion it across federal elected positions according to some sort of sliding scale. Obviously, Presidential campaigns cost more than a House Seat. Television commercials will be regulated such that each candidate has an equal amount of air time. Television commercials will only be allowed 30 days prior to an election. Republicans and Democrats will not have a monopoly on this funding either; it should be determined based upon the ability to garner a reasonable number of signature on a petition - depending of course upon the size of the electorate. These funds will also be used to purchase a campaign bus for all qualifying candidates; the bus must meet fuel efficiency standards. Each candidate(s) will have the same amount of cash to finance campaign trips - the transportation for which will be limited to trips on the bus of course. Special interest groups will be allowed to set up a website advocating their position. It may include videos or other interactive media features. The federal government will host it's own website, which will link to all of the various special interest group sites according to category or issue. A reasonable site-traffic threshold will be established that must be met in order to have your interest group's site listed. Prior to the election, public libraries will make special accommodations for those who can't afford a computer so that they may view the special interest group websites. Those who are computer illiterate may also visit the library, or they may pay an extra $1 on their tax return to fund a small printing effort that will distribute copies of all interest group literature to those who choose that route. Finally, any politician caught using cash outside of the "public pool" to finance his election will be barred from public office for life. Any other suggestions?

*Research for this post facilitated by InfoNgen Sphere: Related Content

Treasury International Capital (TIC) Update June 2009


The Treasury Department this morning released it's monthly Treasury International Capital (TIC) update. Despite the two month lag time in the data, the TIC update serves as an instructive indicator of foreign appetite for US Treasury bonds and notes. I'll try to update the chart on a monthly basis to include a 24 month rolling snapshot of net foreign purchases of US Treasury bonds and notes. The data provided by Treasury breaks the headline net purchase number into categories based upon the nature of the foreign entity, i.e Foreign Official Institutions, Other Foreigners, and International & Regional Organizations. Barring any substantial deviations in the purchasing ratios between these three groups though, the headline figures from the chart above should suffice in gleaning the overall picture. Other notable data points from the release:
  • US residents net purchases of foreign securities for the month totaled $32.9Billion
  • Banks' net dollar liabilities to foreign residents decreased by $82.9Billion
I would expect the next couple months worth of data to indicate an even larger increase in foreign holdings of US debt, due simply to the record breaking size of Treasury auctions that were conducted in those months. For now, it appears that the US is still a parking garage for the world's surplus capital.

*research for this post facilitated by InfoNgen Sphere: Related Content

Saturday, August 15, 2009

Which Demographics Will Benefit From the Proposed Health Care Reform?

After observing and absorbing the furor which has erupted in opposition to President Obama's health care agenda, I concluded that there are a number of inconsistencies and contradictions inherent to the opposition's argument. As a disclaimer, I'm not speaking from any particular point of view here; simply observing and applying a dose of logic.

First of all I must pose the question of who, exactly, stands to benefit most from a public health care option. Many of my acquaintances, in addition to many in the exasperated town-hall-attending population, are convinced that President Obama's purpose in pushing health care reform is to provide the poorest segment of the American population with free, or heavily subsidized, health insurance. Some of the more ignorant comments - which are not worthy of further examination - attempt to inject some sort of racial angle into the President's calculus.

Another cause for the anger being shown by many is the perception that Medicare will either be viciously trimmed, or in some strange instances, removed altogether. Simply stated, seniors hear the word "inefficiencies" in the Administration's rhetoric, and they immediately interpret this as code for "cuts to benefits".

Some people think that their ability to purchase good old private health insurance will be taken away by any reform effort. I'm not sure why anybody has arrived at this conclusion; most likely they are taking too seriously President Reagan's comments in which he likened a public option to a Trojan Horse, whose ultimate goal is to abolish the private health insurance industry altogether.

Who will benefit from the proposed health care reform? Perhaps the better question is, Who doesn't have health insurance right now? Well, upon turning 65, a citizen is automatically entitled to Medicare; seniors are obviously not the beneficiary. What about the poor? Well, they are eligible for Medicaid; assuming of course that they are eligible under State guidelines. Each State has a separate set of guidelines, but the bottom line is that most people at or below 133% of the federal poverty line will be eligible for Medicaid. For perspective, there are roughly 2.4Million eligible Medicaid recipients in Florida alone. So now we've ruled out both the poor and the old. What's left are the middle-aged and the middle class; my assumption of course being that the upper echelons of society are not overly burdened by health insurance premiums. Why don't people get this? The people doing the most screaming at the town-halls would seem to be those who stand to benefit the most!

To address those amongst the elderly who are concerned about cuts to Medicare, I would simply propose an either or situation that will occur at some point; I am nearly 100% certain. Either taxes must be raised in the near future to fund Medicare's ballooning cost, or the entitlement program will have to be trimmed down to meet the federal government's capacity to pay for it through tax receipts. If you oppose health care reform because "we can't afford to pay for it", I would respond by saying that we certainly can not afford to proceed with a business as usual attitude. Medicare and it's growing costs could potentially bankrupt this country; something will HAVE to be done about. The choice is, whether the elderly would prefer that reform to occur now, or when the nation has literally reached a crisis point over this program. If I were a Medicare recipient, I would prefer that reform happen now. As history has shown, the United States is prone to reacting irrationally in a crisis. Now at least, baby boomers and Medicare recipients represent a majority of the registered voter population. Keep in mind that in 20 years, this likely won't be the case. Proceeding forward with reform now will at least give boomers and the elderly a majority voice in shaping the characteristics of a more sustainable approach to health care. Sphere: Related Content

Recommended Reading: "Making Sense of the Dollar" by Marc Chandler

At a time when characterizing the United States as a dangerously imbalanced and declining nation has become a commonly asserted bit of "conventional wisdom", it is difficult to locate an intelligently constructed, counterveiling argument. Fortunately though, Marc Chandler has written a book that lays out an argument worthy of that precise description. In Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange, Mr. Chandler draws upon 20 years of global capital market experience to present an argument that systematically dispels popular misconceptions about the dollar, trade, deficits, and much more. If you prefer economic literature that dwells entirely in abstraction and theory based analysis, then this book may not be for you; Mr. Chandler focuses on real world situations and knowledge derived from his experience in the foreign exchange market. Making Sense of the Dollar identifies ten specific myths that are widely believed as true; three of these are:

The Trade Deficit Reflects US Competitiveness
Most people are aware that the United States consistently records a multi-billion dollar trade deficit. A common interpretation of this fact is that the United States simply consumes far too much, and is no longer able to compete with foreign manufacturing. Such reasoning, argues Mr. Chandler, ignores the fact that our nation's current system of trade accounting was developed during and for a previous era of corporate evolution. Multinational corporations are increasingly choosing to produce and sell their products in the local foreign market, as opposed to older methods of producing in the corporation's home country, and exporting to foreign customers. This change in ways of conducting business increases the headline US trade deficit, however, profits are still retained by the US corporation. Mr. Chandler points out that every iPod sold in the United States increases the trade deficit by $150. Does this mean that our nation grows closer to collapse every time an iPod is sold?

You Can't Have Too Much Money
Yes, you can. The countries that consistenty purchase US Treasuries do so not because they are interested in funding our government's activities, but because the US Treasury market is the only place in the world with the capacity to absorb hundreds of billions of dollars worth of surplus capital. In that respect, the United States has served as a vital store of the world's excess capital; a role that no other country is remotely large enough to assume.

Globalization Destroyed American Industry
It has been technology, not globalization, that has contributed to the declining number of American manufacturing jobs. Manufacturing in the US has remained stagnant or declined for the past fifty years when measured by the population of the manufacturing workforce, and when looking at manufacturing as a percentage of GDP. However, the value of goods manufactured in the United States has continued to rise. In other words, more goods are being manufactured by less workers. This effect is known as productivity.


I found Making Sense of the Dollar to be very well written book, that manages to convey a complex argument without overwhelming the reader. Furthermore, the arguments made are compelling enough that only denial could cause a reader to dismiss their validity.

Disclosures: I recently purchased a new iPod (the Touch) Sphere: Related Content

Friday, August 14, 2009

July CPI Figures Highlight Deflation Risks


The Consumer Price Index (CPI), a broad measure of the prices paid by American consumers for a broad basket of goods and services, fell further into negative territory for the month of July. The data, released today by the Bureau of Labor Statistics, corroborates the assertion made by many - including myself - that deflation poses a more imminent threat to the economy than the widely assumed inflation threat. The inflation-phobes - of which there are many - are simply unable to fathom a future that Doesn't contain rampant inflation. This primarily has to do with a certain relationship which is falsely assumed true by the public, specifically:
  1. Media headlines that have routinely contained figures in the hundreds of billions with respect to the size of Federal Reserve intervention and money-supply creation.
  2. The widely accepted belief that If money is created, Then inflation will follow.
Such analysis completely ignores what is presently occurring in the economy in general, and the labor market in particular. It is common knowledge that labor costs (wages etc.) represent the largest single expense for the majority of companies. With record numbers of unemployed individuals today, competition in the labor market is fiercely intense. That competition results in workers accepting far lower wages; a reasonable trade-off considering the alternative. Thus, the largest expense that a company faces is shrinking. Lower wages beget less consumer spending and heightened price consciousness, triggering high levels of competition for attractively priced goods and services. And so the process continues, resulting in what economists refer to as deflation. Sphere: Related Content

Greenpeace Intercepts Rogue Oil Industry Correspondence

It's important that any organization, whether involved in international espionage or more subdued activities, be careful about what, and to whom, it emails. Such is the lesson learned today by the American Petroleum Institute (API) - the oil and natural gas industry's robust lobbying arm - when the environmental advocacy group Greenpeace purported to have intercepted an email from the API to it's membership. The three page email (below) describes the methods by which the API intends to oppose key climate-change legislation; at times the email even cites the results of public opinion surveys to corroborate the claimed effectiveness of a particular message or strategy.

The API and Greenpeace are mortal enemies. Therefore, we should probably assess this latest development with caution. For it's part, Greenpeace claims to not support the Waxman-Markey bill either - although their opposition stems from the group's feeling that the bill is too industry-friendly. Finally, I'd point out that this leaked correspondence directs API members to engage in what has become known as "Astroturfing" - a nearly worn out phrase intended to suggest that a forgery of a grass roots movement is at hand. In the health care debate, the left has continually accused the right of staging these AstroTurf protests; a claim that the right has both taken offense to and denied. Anyways, the emergence of actual proof that astroturfing is alive and well with the right wing may - just may - help to support liberal claims that the practice is more widespread, and is actually being used by opponents of health care reform. The process by which that occurs is obviously a "find an example and extrapolate to an entire population" procedure; not the most logically/empirically sound, but effective nonetheless.

*Research facilitated by InfoNgen

API Email to Membership Sphere: Related Content

$12M Ad Campaign Launches in Support of Health Care Reform

Yesterday marked the launch of a well-funded, targeted television ad campaign, designed to engender support for President Obama's health-insurance reform agenda. This initial campaign comes with a $12M price tag, and is financed by an unconventional consortium that includes organizations representing union - as well as corporate - interests. The coalition, which is known as Americans for Stable Quality Care, is comprised of the SEIU, the American Medical Association, and the pharmaceutical industry's primary lobbying arm - the Pharmaceutical Research and Manufacturers of America (PhRMA).

The nationwide blitzkrieg of President Obama's health care message comes at a politically crucial moment, as the raucous nature of recent town hall events has virtually consumed all major media coverage of the evolving debate. The media's decision to devote vast swaths of programming time to health care reforms boisterous critics has created an interesting irony of sorts. Most networks have remained skeptical as to the legitimacy of the protesters; continually emphasizing their assertion that these angry demonstrators represent a small yet vocal portion of the population that is ultimately not representative of the nation's aggregate mood towards health insurance reform. By doing so however, the media is undermining it's own message, and further legitimizing the opposition. Just a humble observation here.

I've provided one of the full-length commercials below; as you can see, the 30 second clip keeps it brief and to the point - a strategy proven to be effective. I've previously stated, from an apolitical angle, that the health insurance reform bill(s) had little to no chance of passage. This opinion was based largely upon Obama's ill-rehearsed address to the nation, where he appeared more frustrated than at any time in his nascent political career. However, the expediency and shrewdness of the President's deal with industry stakeholders - the results of which can be viewed below - have necessitated a revision to my previous prognostication.

The next 10 days will inevitably decide the fate of the health care reform effort; specifically, passage of the House or Senate bills will be decided by the effectiveness of the television campaign, and it's ability to undermine the uncivilized town hall events.


Sphere: Related Content

Thursday, August 13, 2009

ABA Objects to Accounting Standard Changes

The American Banker's Association has released a white paper detailing it's concerns about the Financial Accounting Standards Board (FASB) and International Accounting Standards Board's (IASB) "direction in which they are heading"; specifically with regards to some major proposed changes to the scope and reach of fair value accounting. I'll start out with an executive summary of the report, and for those like myself who are blessed with performance enhancers and/or thrive on a little bit more detail, I'll pierce through the surface of the report a little more further below.

Executive Summary

The ABA's entire white paper is best summarized by the statement - which is targeted towards the regulatory bodies of course - "Let's slow down a minute". Both of these standard setting boards (FASB in the US and the IASB in Europe/elsewhere) have, in all fairness, proceeded extremely rapidly - especially for a bureaucracy - through the initial stages of rule changes. To further aggravate the situation, each Board is pursuing a somewhat different end-game, which threatens to create a compliance nightmare on elm street. The proposed changes, argues the ABA, would only exacerbate the cyclical nature of banking, thereby introducing unnecessary and inevitable volatility to the Markets. Keep in mind throughout all of this that the ABA is essentially the lobbying arm of the banking industry; it will pursue policies that have the best interest of that industry in mind.

Detail Oriented - Performance Enhancers Recommended

The policies pursued by both the FASB and IASB will expand the use and application of mark-to-market accounting (MTM) in monumental fashion. Most significantly, the proposed rules will require that banks value all loans on it's book according to market pricing. This determination must be made quarterly, and at least insofar as the IASB is concerned, fluctuations in the loan book will be counted towards - or against - net income. This calculation would in fact require an additional line be added to the income statement, indicating the effect of the quarter's MTM determinations. According to the white paper, the FASB is primarily focused on the effect that marking loans to market will have upon a bank's tangible common equity (TCE). TCE is generally hailed as the "purest" measure of a bank's capital adequacy. The ABA is apparently concerned introducing MTM of loans into the TCE equation will force banks to hold an excessive amount of capital as a cushion against losses.

All of this being said, the ABA seems most confident in it's assertion that the two standard setting boards are:
  1. Proceeding separately towards different solutions.
  2. Failing to exercise "due process" with regards to the rule making process.
On the one hand, it doesn't entirely make sense that the FASB and IASB would be rushing to implement rules that would increase the cyclical nature of banking. On the other hand, I found the ABA's white paper to be somewhat lacking in substantive criticisms of the regulatory proposals; there was a distinct feeling that they were trying to shift the brunt of the attention onto the procedural deficiencies thus far in the process, while only briefly touching on the practical implications. Sphere: Related Content

Parsing the July 2009 Foreclosure Data

Foreclosures - and the combination of adverse consequences thereof - are arguably at the heart of our financial and economic malaise. That being said, the monthly RealtyTrac foreclosure report should be reviewed regularly by anyone hoping to decipher the trends or current state of the economy.

The headline most commonly derived from the latest RealyTrac report - current as of July '09 foreclosure actions - has read something to the effect of "Foreclosures up 7% in July". This headline represents an aggregate, month-to-month rate of change for all 50 states and the District of Columbia. I feel that the year over year figure is far more instructive; in this case indicating that US foreclosure filings (default notices, scheduled auctions, and bank repossessions) were up 32.32% in July from the same period a year ago.

The chart above takes the analysis a step further, and plots the percentage change - in ascending order according to % change from a year ago - for each state + the district of Columbia. As is evident from the illustration, there is a wide range of disparity between the different states and their respective change in foreclosure filings. Relevant points from the data:
  • 13 States (includes DC) recorded a decline in foreclosure filings from a year ago
  • 22 States recorded a greater than 50% increase in filings from a year ago
  • 10 States recorded a greater than 100% increase in filings from a year ago
  • West Virginia, Hawaii, and South Dakota each recorded a greater than 250% increase in filings from a year ago.
  • Florida, California, Nevada, and Arizona accounted for more than 50% of all US foreclosure filings in July.
When assessing recent foreclosure data, it's imperative that readers be aware of the various foreclosure moratoriums that have been enacted in various states. These moratoriums have a severe distorting effect on the data for those States, and serve only to create a dangerous backlog of homes that will be drip-released back to the market for years to come. They do score short term political points with members of State Legislatures though. Sphere: Related Content

Wednesday, August 12, 2009

Adecco Results Confirm Jobless Recovery

Adecco Group, a Zurich based human resources company, yesterday posted dismal Q2 results; no matter which line of the income statement you'd prefer to look at. Top line was down 31% from the prior year's quarter - a relatively disappointing hit to revenue; that is until you drop down to EBITA for the quarter, which declined 90% from Q2 '08. Breaking the results out geographically, revenue for the US & Canada came in only slightly better at -29%.

How is this relevant to the employment situation? Adecco Group's euphemism of a business description - Human Resource services - is known colloquially as a Temp Agency. Adecco isn't just any temp agency though; it's a Fortune 500 Global Company that operates in 60 countries, and supplies roughly 500,000 workers to 100,000 clients each Day. Furthermore, the Company provides more than just the stereotypical temp who shuffles paper and is gone after a week; much to the contrary, Adecco matches workers up with clients who require a wide-range of skill sets, including those in the Finance, Legal, Medical, Scientific and Information Technology industries. They are (to steal a line from the Dos Equis commercials) the most representative employment agency...in the world.

The post-Lehman economic shock caused many businesses to slash payrolls at a merciless rate in order to contend with a shrinking top line. As the economy bottoms out and businesses gain confidence, they are expected to look disproportionally towards temporary and contract workers - you know, the kind that don't require severance packages. That being said, Adecco Group is likely to be one of the first corporations to feel the effect of a turnaround in the labor market. Perhaps they should even be viewed as a leading indicator of the labor markets in North America and Western Europe. Regardless, the Company's precipitous drop in revenue does not bode well for the near term labor market outlook.

*no position in Adecco Group Sphere: Related Content

Bank of England Sees Low Inflation Through 2010

The Bank of England (BOE) released it's quarterly report on inflation expectations today, which stated that the Bank expects inflation to remain in the 1-2% range over the coming two and a half years. What the headlines about this release didn't reveal is that, according to the inflation probability model provided by the BOE (Chart 5.4), the year 2010 will be characterized entirely be year over year percentage decreases in inflation. In fact, the Bank of England's models are forecasting some probability of the country experiencing negative inflation towards the end of 2010. Obviously, there is a difference between disinflation and outright deflation; however the notoriously flexible central bank models are grazing dangerously close to the deflationary realm.

From a macro standpoint, the report below tells us one very important thing: the Bank of England is expecting the next 18 months to be characterized by very slow, very weak growth. Any other assumption, when factored into an inflation probability model, would exert at least some upward pressure on the price of goods and services across the UK. As I've already pointed out, the BOE is expecting an entirely dis-inflationary 2010. For now, I remain firmly in the camp that perceives deflation to be the far greater threat than inflation.

BOE Q2 Inflation Prospects Sphere: Related Content

Assessing Obama's Deal With the Pharmaceutical Industry

When news broke that President Obama, along with the Senate Finance Committee and AARP, had forged an agreement with the Pharmaceutical Research and Manufacturers of America, the left-most portion of the political spectrum reacted with a predictable level of vitriol and general dissatisfaction. The President, exclaimed leftists, had spent his entire campaign excoriating the pharmaceutical industry and it's ill-conceived profits; empowering his supporters with the idea that, once and for all, the strong arm of Government would bring down it's mighty fist and crush this profiteering segment of corporate America. Ignoring the obvious logistical impediments that stand in the way of such an action, I would propose that a widespread desire for retribution, combined with a short-sighted approach to health care reform, has effectively led these critical voices astray; distracting the left from it's much cherished "end" in favor of a myopic obsession with the "means". By allowing themselves to become so utterly obsessed with a perceived "deal with the devil", liberals have completely missed the political genius inherent to the President's newly forged arrangement. To better convey the totality of my argument, let's begin with a cursory review of the deal's term sheet as it exists today.

The Basics
  • The President agreed that any newly formed government health insurance entity will NOT negotiate with pharmaceutical companies to obtain prescription drug savings in excess of the $80Billion that has already been agreed to.
  • The pharmaceutical industry has agreed to run television ads in support of health insurance reform. Roughly $150Million has been budgeted industry-wide to pay for these ad spots.
To begin with the obvious, any criticism of the deal outlined above assumes that there is a dollar amount of savings - which could be reasonably extracted from the industry - that is substantially in excess of the $80Billion already promised. On this fact it's important to realize that despite popular folklore, the pharmaceutical industry is not a bottomless pit of money. Those corporations commonly referred to as Big Pharma face massive competition from generic drugs, in addition to new drug pipelines that are dangerously dry. I've actually heard people refer to the "Trillions of Dollars" that supposedly exist unencumbered on pharmaceutical balance sheets which are said to be available for extraction of some sort. This is not true.

Having dispelled that fallacy - at least amongst folks open minded enough to change their opinion once in a while - I will turn to what I perceive as the brilliant underlying strategy behind an Obama + Pharmaceutical alliance: Divide and Conquer. We must not forget that there are two very powerful industries - pharmaceutical and health insurance - which stand to be affected by any substantive health care reform. Both of these industries are capable of spending vast amounts of money to fill television ad spots throughout the entire August recess; meanwhile the stalled House and Senate bills sit impotent and prone to attack. An alliance with Big Pharma immediately turns half of those ads into messages of support. Granted, Pharma's ads will be somewhat diluted and feeble messages of support. They will not however be of the mud-slinging nature that has proven itself to be so effective in American politics.

If you can understand the divide and conquer philosophy, then you should also be able to comprehend why the pharmaceutical industry was the correct side to ally with. Simply put, spending on prescription drugs only accounts for 10% of total health care spending. Spending on hospitals (31%) and physician services(21%) account for a far greater share of overall health spending (Source: Kaiser Family Foundation Report). President Obama has conceded a less than 10% portion of the entire health care picture, in exchange for a 50% or greater share of the advertising/public persuasion budget. Therein lies the political genius of the deal.

If after evaluating my argument, you are still angry at the President because of the pharmaceutical industry arrangement, then allow me to make one final claim: Health care reform had zero chance of becoming a reality without the support of a major stake-holding industry. Democrats have a solid majority in both branches of Congress, and they have the Presidency. Despite these numerical advantages however, a bill has not even made it past Committee. That being said, this arrangement must be taken for what it is; a means to an end, and nothing more. Sphere: Related Content

Tuesday, August 11, 2009

Low-Cost Preventive Medical Care Idea: Exercise

One of the more frustrating aspects of the health care reform debate (assuming the discourse is worthy of such a label) is the confusion surrounding preventive medical care. Now, we all know that the Left wants to over-emphasize the efficacy of preventive tactics; primarily to argue that their use - and federal support of - will lower health care costs dramatically, thus making room for their idyllic visions of health for everyone. The Right however, chooses to completely disparage preventive medical care; essentially arguing that there is no such thing. This issue was recently addressed by the now infamous Congressional Budget Office, via a letter to Congress in addition to a friendly blog post on the Director's sounding board. Basically, the CBO's comments on preventive care come down to this: The theoretically cheapest and most effective form of preventive care - wellness services - would take years to show up as cost savings. Furthermore, it is questionable as to whether the government is capable of implementing wellness programs in an effective enough manner to supplant those already offered to the American populace.

This is ultimately not the most palatable of conclusions however, as it would seem to put the onus of staying healthy - to some degree at least - on the individual himself. This is an area of contention that seems to encourage normally intelligent people of differing opinions to trade anecdotal evidence back and forth in the hopes of proving their argument. Example: "I know a man who was healthy his entire life before dropping dead of a heart attack". Counter-Example: "I know a man who exercised his whole life and was still running marathons at age 75". Hopefully you get the point.

Regardless of your stance on this issue though, I would challenge anybody to side with the cave-man reasoning that obesity does not cause a whole host of medical issues that have been, are, and will drive up health care costs for the rest of us. Obesity is, for the vast vast majority of people, a preventable ailment. It is the result of a choice that you have made. That being said, I am prepared to end the entire health care debate by proposing a set of guidelines that, if followed, will lead to improved health for Most people.
  1. Exercise. Preferably running, but walking is acceptable in the event of bad knees or hips.
  2. Eat grilled chicken. These days, grilled chicken can even be purchased at McDonalds
  3. Eat vegetables. They are cheap in the grocery store. I promise.
There you have it. These simple solutions should allow you to make it to Medicare without too much consternation. If issues do arise prior to Medicare eligibility, then no big deal. The population as a whole is much healthier, so you have been able to afford private health insurance your whole life. You're all welcome. Sphere: Related Content

Chinese GDP Growth and Electricity Consumption

Investors have recently been questioning, with intensifying rigor, the validity of the Chinese government's reported GDP figures. The most official - and amusingly flagrant I might add - challenge to the Communist Party's claims of >6% annualized growth was the recent IEA report titled "Another Chinese Riddle". That report, as well as my analysis thereof, can be found here.

In the aforementioned report, one of the more compelling pieces of evidence offered in support of the argument that China overstates it's GDP is that there has been a divergence of the relationship between Chinese electricity consumption and reported growth. Because nearly all significant value-adding economic activity requires the use of electricity, the logical - not to mention historically supported - conclusion is that GDP and electricity consumption should be positively correlated variables having a relatively high r-squared value. (The only exception I would grant for this argument is that maybe, during a spectacular leap in technological advancement, this relationship could be disrupted by new machinery/methods of production that required substantially less electricity to perform the same - or greater - tasks. Needless to say, once this technological advancement was complete (for the time being of course), the relationship between electricity and GDP would simply re-balance itself in the form of another equation that would, in all likelihood, demonstrate the same properties as the original relationship i.e. positive, high r-squared value. This exception does not apply to the current topic however, as China has experienced no "leap forward" in terms of technological advancement over the past 12 months.)

That being said, a piece of analysis from Deutsche Bank's Norbert Walker, titled "Electricity consumption and Chinese GDP - tenuously linked" , has caught my eye as well as my attention. Mr. Walker begins his research note by questioning - as his title would suggest - the existence of a correlation between Chinese macro economic growth and electricity consumption. He even goes so far to say that this relationship "may prove to be fallacious on closer inspection". At this point, as an open minded reader, I am looking forward to a more nuanced version of Mr. Walker's argument; presumably these details are found below the title and bold-typed abstract-ish statement.

Norbert proceeds to explain that 2/3's of China's electricity consumption can be attributed to the industrial production of steel, aluminum and cement. Therefore, concludes the gentleman from DB, the drop in electricity can easily be explained by accounting for the significant drop in Chinese exports over this same period of time. But isn't that exactly the point Mr. Walker? As if this logical leap was not enough, the author further goes on to state that:
"Therefore, the first idea that declining Chinese electricity consumption was a leading indicator for a fall in Chinese GDP has to be dismissed"


Perhaps I have missed something, but I'm fairly certain that nobody has ever accused electricity consumption of being a Leading indicator of GDP. In fact, it is the most obviously Concomitant indicator known to man: Once power is cut to the machines, they are no longer producing anything. To say that electricity is a leading indicator is to assume that something can occur after the electricity has stopped being consumed, albeit only for a short while because it's not lagging too far behind is it?

Ultimately, I was surprised that a professionally produced article would contain two logical twists, a turn, and end up never addressing the claim that it originally sought to dispel. My suspicion is that the Chinese growth story is one that "stock-peddlers" and others who stand to benefit economically from widespread buying of US equities, literally require that the Chinese Growth Riddles be true in order to justify equities in general. No legitimate argument can be made for US consumer growth, so the Chinese (or Brazilian, Russian, Indian) consumer is hailed as "he who will justify the trading of US stocks at high multiples relative to their earnings". Just my theory. Sphere: Related Content

Fitch Downgrades 15 Classes of Commercial Mortgage Securities

Fitch Ratings has stepped up to the plate and downgraded 15 toxic classes of commercial mortgage securities; all were held by a Credit Suisse Commercial Mortgage Trust. For it's part, Fitch deserves credit for coming to the table with a set of realistic assumptions concerning the subject property's cash-flows and market value. The ratings firm is assuming a 15% decline in cash-flows from the end of 2007, and a 35% decline in market values across the board from the date of these securities issuance. From my standpoint, this is about as accurate a set of assumptions as one could realistically come up with at this time, given of course the substantial level of uncertainty in the economy. Additionally, Fitch cited the following two properties for their exceedingly weak fundamentals:
  • 1100 Executive Tower, a 372,814 sqft office complex which boasts the grim location of Orange,CA.
  • Radisson Hotel Dallas North, a hotel secured by 294 rooms whose revenue/available room has slipped over 25%, translating into an even uglier 44.3% decline in the hotel's net operating income.
The question now becomes whether banks can earn their way out of the both the residential and commercial toxic debt holes - at the same time. Who knows though, as anything is possible with a little help from the FASB.

*full report available to subscribers; you'll have to take my word on this one Sphere: Related Content