Racing to the bottom


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Here’s how I see the problem:

  1. The Fed and Treasury have set precedents of, for all practical purposes, wiping out shareholders when providing what they consider ‘taxpayer money at risk’.
  1. With FNMA, the Treasury provided funding on their own initiative without consent of management.

 
 
Therefore, while justified or not, this means the government can, on its own, decide to provide ‘taxpayer money’ AND eliminate all shareholder value.

This creates a serious risk for any shareholder for ANY business.

For an extreme example, the Treasury could decide unilaterally, that ANY corporation (including, for the strongest example, GE) needs a Treasury guarantee to be sure it can fund itself and won’t fail.

And any such action could carry with it eliminating any/all shareholder value.

This is the risk to Lehman shareholders.

Lehman may be perfectly able to function at some level without the need of new capital to survive.

But markets must now discount that possibility that the Treasury or Fed could decide Lehman’s counterparty risk poses sufficient systemic risk to justify intervention with ‘taxpayer money’ at risk, which would carry with it the elimination of all shareholder value.

The means the risk to shareholders from government intervention is much higher than the risk of bankruptcy or any other form of liquidation.

There was no economic reason for the Treasury to take 79.9% of the housing agencies capital. ‘Tax payer money’ was already as senior as the Treasury wanted it, and any funds added by Treasury also carried any type of interest and various other payments the Treasury desired.

All that wiping out most of the residual value for shareholders did was add a new element of catastrophic risk for all shareholders.

So when a stock like Lehman goes down, which increases the perception of risk of government intervention, the risk of shareholder value going to zero due to government intervention increases as well.

Not my first choice of institutional structure.


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MediaCorp: Russia to visit the Caribbean


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The last statement is most troubling.

Venezuela expels US ambassador, threatens to halt oil trade

CARACAS: Venezuelan President Hugo Chavez expelled the US envoy to Caracas late Thursday and threatened to halt crude exports to the United States on a day he highlighted the recent arrival of two Russian Tu-160 strategic bombers.

Chavez on Thursday ordered US ambassador Patrick Duddy to leave the country within 72 hours, in a move he described as an act of solidarity with Venezuela’s ally Bolivia, which also expelled its US envoy.

“Starting at this moment the Yankee ambassador in Caracas has 72 hours to leave Venezuela,” Chavez said at a public event in the port city of Puerto Cabello, 120 kilometres west of Caracas.

He said it was “in solidarity” with the leftist government of President Evo Morales in Bolivia, which on Wednesday ordered the US ambassador to La Paz to leave. Washington late Thursday expelled Bolivia’s ambassador to the United States.

Chavez then threatened to halt the supply of oil to the United States, its main client, if Washington attacks his government.

“If there is any aggression towards Venezuela” from Washington, “there would be no oil for the people of the United States,” said Chavez, who used coarse expletives to disparage the US government.

Chavez also announced Thursday that his government had uncovered a coup plot hatched by active and retired military officers, which he said had tacit US approval.

A military prosecutor said two officers — retired general Wilfredo Barroso and retired major Elimides Labarca Soto – will be tried for incitement to rebellion, a charge punishable by five to 10 years in prison.

At least eight other officers were detained in connection with the plot and were being interrogated, the prosecutor said.

Venezuelan public television aired a recorded conversation allegedly between three high-ranking retired military officers discussing plans to storm the presidential palace in Caracas, target Chavez, and blow up the presidential airplane.

“We have already detained several people,” Chavez said.

“Look, pitiyanquis, don’t even think of launching a coup or some madness such as this. I warn you, I am not the Hugo Chavez of 2002,” he said, referring to a failed coup attempt against him in April of that year, when he was briefly ousted for two days before mass protests saw him freed and return to power.

Chavez, a former paratroop officer, headed a failed coup attempt himself in 1992. He was elected president in 1999.

“I have no doubt at all that the United States is behind plans to bomb this palace,” Chavez said, warning that “difficult times” lied ahead for Venezuela.

The anti-US leader frequently alleges assassination and coup plots against him, usually pointing the finger at the United States.

Chavez said those behind the latest plot were part of the country’s “desperate political opposition” and “the American empire” led by US President George W. Bush.

Earlier in the day Chavez said the presence of two Russian Tu-160 strategic bombers in Venezuela is a “warning” to the US “empire,” as he announced another coup plot against him had been foiled and suspects arrested.

“It’s a warning. Russia is with us… we are strategic allies,” said Chavez. “It is a message to the empire. Venezuela is no longer poor and alone.”

Chavez had announced Wednesday that two Russian bombers were in Venezuela for “training flights” and that he would be piloting one of the aircraft himself.

“I hope that stings, ‘pitiyanquis’,” he said, using a derogatory term for Venezuelan opponents who have perceived US sympathies.

“What’s more, I’m going to take the controls of one of these monsters,” boasted the president, a former paratrooper and left-wing politician who has avowed antagonism towards the United States.

The United States said it would monitor the deployment of the two Russian bombers, which it described as “Cold War era assets,” to Venezuela.

The moves came amid soaring tensions between Russia and the United States, including over the presence of US naval vessels sent close to Russian shores to deliver aid to Georgia.

Russia said Monday it was dispatching a nuclear cruiser and other warships and planes to the Caribbean for the joint exercises with Venezuela – the first such manoeuvres in the US vicinity since the Cold War.


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2008-09-12 USER


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Producer Price Index MoM (Aug)

Survey -0.5%
Actual -0.9%
Prior 1.2%
Revised n/a

 
A welcome drop for the Fed but only wipes out part of last month’s gain.

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PPI Ex Food and Energy MoM (Aug)

Survey 0.2%
Actual 0.2%
Prior 0.7%
Revised n/a

 
Again, moderating a bit, but the two month average is still very high.

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Producer Price Index YoY (Aug)

Survey 10.2%
Actual 9.6%
Prior 9.8%
Revised n/a

 
Still sky high.

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PPI Ex Food and Energy YoY (Aug)

Survey 3.7%
Actual 3.6%
Prior 3.5%
Revised n/a

 
Less than expected but still too high.

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Advanced Retail Sales MoM (Aug)

Survey 0.2%
Actual -0.3%
Prior -0.1%
Revised -0.5%

 
Weaker than expected and previous month revised lower as well.

A large drop in gasoline sales due to falling prices was a factor. Ex gasoline sales retail sales were flat.

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Advanced Retail Sales YoY (Aug)

Survey n/a
Actual 1.6%
Prior 2.1%
Revised n/a

 
While muddling through with modest increases, the drift looks lower.

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Retail Sales Less Autos MoM (Aug)

Survey -0.2%
Actual -0.7%
Prior 0.4%
Revised 0.3%

 
Lower than expected and more than reverses last month.

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Business Inventories (Jul)

Survey 0.5%
Actual 1.1%
Prior 0.7%
Revised 0.8%

 
Higher than expected. Question is whether this is in response to higher sales or unwanted due to lower sales.

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Business Inventories YoY (Jul)

Survey n/a
Actual 6.4%
Prior 5.7%
Revised n/a

 
Inventory levels look reasonable here.


Karim writes:

  • Gas prices showing their importance

  • Confidence rises from 63 to 73.1 (though level still quite low historically)

  • 1yr fwd inflation expex fall from 4.8% to 3.6%

  • 5-10yr fwd inflation expex fall from 3.2% to 2.9% (back in the range)


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MoneyBlog: Saudis cut production?


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The Saudis will ‘meet demand’ but at their price. So the question remains as to what their price is. With their production (to meet demand) nearing their max capacity, seems they want higher prices to try to cool demand so as not to lose control of price on the upside.

But we can only guess!!!

The death of OPEC

by Douglas McIntyre

Saudi Arabia walked out on OPEC yesterday. It said it would not honor the cartel’s production cut. It was tired of rants from Hugo Chavez of Venezuela and the well-dressed oil minister from Iran.

As the world’s largest crude exporter, the kingdom in the desert took its ball and went home.

As the Saudis left the building the message was shockingly clear. According to The New York Times, “Saudi Arabia will meet the market’s demand,” a senior OPEC delegate said. “We will see what the market requires and we will not leave a customer without oil.”

OPEC will still have lavish meetings and a nifty headquarters in Vienna, Austria, but the Saudis have made certain the the organization has lost its teeth. Even though the cartel argued that the sudden drop in crude as due to “over-supply”, OPEC’s most powerful member knows that the drop may only be temporary. Cold weather later this year could put pressure on prices. So could a decision by Russia that it wants to “punish” the US and EU for a time. That political battle is only at its beginning.

The downward pressure on oil got a second hand. Brazil has confirmed another huge oil deposit to add to one it discovered off-shore earlier this year. The first field uncovered by Petrobras has the promise of being one of the largest in the world. That breadth of that deposit has now expanded.

OPEC needs that Saudis to have any credibility in terms of pricing, supply, and the ongoing success of its bully pulpit. By failing to keep its most critical member it forfeits its leverage.

OPEC has made no announcement to the effect that it is dissolving, but the process is already over

Top Stocks blogger Douglas A. McIntyre is an editor at 24/7 Wall St.


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2008-09-11 USER


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Import Price Index MoM (Aug)

Survey -1.8%
Actual -3.7%
Prior 1.7%
Revised 0.2%

 
A welcome drop, thanks to Mike Masters!

Like the goldman drop of Aug 2006.

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Import Price Index YoY (Aug)

Survey 20.2%
Actual 16.0%
Prior 21.6%
Revised 20.1%

 
Lower than expected, though still up big year over year, which most influences core CPI.

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Import Price Index ALLX 1 (Aug)

 
Interesting details this month.

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Import Price Index ALLX 2 (Aug)

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Trade Balance (Jul)

Survey -$58.0B
Actual -$62.2B
Prior -$56.8B
Revised -$58.8B

 
Deficit higher than expected, due to July oil prices. This should more than reverse in August and, so far, September as sharply lower oil prices reduce the cost of imports.

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Exports MoM (Jul)

Survey n/a
Actual 3.3
Prior 3.7
Revised n/a

 
Still increasing, though at a slightly lower rate.

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Imports MoM (Jul)

Survey n/a
Actual 3.9
Prior 2.1
Revised n/a

 
This should drop next month with lower oil prices.

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Exports YoY (Jul)

Survey n/a
Actual 20.1
Prior 19.9
Revised n/a

 
Still climbing rapidly. next month’s numbers will indicate effects of any global slowdown.

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Imports YoY (Jul)

Survey n/a
Actual 16.8
Prior 13.7
Revised n/a

 
Still up big, falling oil prices should cut this down.

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Trade Balance ALLX (Jul)

 
Worth reading through these.

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Initial Jobless Claims (Sep 6)

Survey 440K
Actual 445K
Prior 444K
Revised 451K

 
Holding steady at higher levels, and getting closer to recession levels.

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Continuing Jobless Claims (Aug 30)

Survey 3460K
Actual 3525K
Prior 3435K
Revised 3403K

 
This continues to move up and is getting closer to recession levels.

Not clear how much new extended benefit.

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Jobless Claims ALLX (Aug 30)

 
Interesting that claims were only 336,600 before the seasonal adjustment.
With seasonals this large improvement is more likely to show up when they reverse.

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Monthly Budget Statement (Aug)

Survey -$108.0B
Actual -$111.9B
Prior -$117.0B
Revised

 
A bit higher than expected, receipts falling some, but nothing serious yet.

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Monthly Budget Statement ALLX (Aug)


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Reuters: Crude update


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The ‘demand destruction’ still leaves a net increase in demand, just smaller than anticipated.

While the US is using a tad less gasoline, consumption elsewhere has picked up.

And this is with a weak world economy:

NYMEX-Oil steadies on OPEC output cut

by Rebekah Kebede

Meanwhile, the International Energy Agency lowered its 2008 world oil demand growth forecast by 100,000 barrels per day (bpd) to 690,000 bpd and also trimmed its forecast for 2009 global demand growth by 40,000 bpd to 890,000 bpd.[ID:nLA109634]

This is confirmed by Saudi production rising to 9.6 million bpd in last month’s report.

OPEC’s decision to stick to quotas gives the Saudis cover should demand for their output fall and be seen as a production cut by the rest of the world.

Oil prices had gained a dollar earlier Wednesday after OPEC ministers meeting in Vienna made the unexpected decision to cut output by around 500,000 barrels per day (bpd) from the market after high fuel prices and wider economic problems hit demand in the United States and other large consumer nations.

Any pickup in the US or Euro economies will probably increase demand for crude, and the Saudis don’t have more than maybe 1 million bpd spare capacity.

The ‘Master’s sell-off’ may have run its course, allowing the Saudis to work prices higher if they so desire.

Lower crude prices continue to support the USD.

*U.S. crude inventories down after Gustav

*OPEC makes unexpected output cut

*IEA cuts 2008, 2009 global demand forecasts

*Hurricane Ike likely to miss offshore oil, refineries

NEW YORK, Sept 10 (Reuters) – U.S. crude oil futures fell more than a dollar in volatile trading on Wednesday as a government report showed crude oil supplies building up in the nation’s primary Gulf Coast refining region after Hurricane Gustav crippled several plants last week.

The increase in crude inventories in the Gulf Coast region offset concerns over a larger-than-expected nationwide drawdown, dealers said.

NYMEX October WTI futures CLV8 CLc1 were down $1.53 at $101.73 a barrel, at 11:01 a.m. EDT (1501 GMT), trading between $101.36 and $104.97 a barrel.

“One reason that crude is selling off in the face of a seemingly supportive 5.9 million barrel (nationwide) crude draw is the fact that stocks actually built by 1.8 million barrels in the Gulf Coast region as crude supply was backed away from the downed refineries,” said Jim Ritterbusch, president, Ritterbusch & Associates, Galena, Illinois.

Weekly data from the U.S. Energy Information Administration showed refinery utilization plunged to 78.3 percent of total capacity in the week ending Sept. 5, the lowest level seen since October 2005 when hurricanes Katrina and Rita ravaged Gulf Coast refineries.


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WSJ: about Mike


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Report Faults Speculators For Volatility in Oil Prices

by Iathe Jeanne Dugan

As crude-oil prices sink back toward $100 a barrel, dueling reports soon will be released weighing in on whether, and how much, investors are to blame for the gyrations in oil prices.

Washington lawmakers and a money manager, stepping up an attack on commodities investors, will unveil a report Wednesday that they say shows speculators are to blame for this year’s rise and fall in oil prices, which have swung by some 50%.

Several Democratic senators intend to use the findings to bolster an energy bill, which includes measures to scale back how institutions can invest in index funds that track commodities markets. These institutions now hold $220 billion in commodities, up from $13 billion in 2003, according to the report, co-authored by hedge-fund manager Michael Masters.

In mid-July, pension funds and other big institutions “began a mass stampede for the exits” of a range of commodities, the report said, partly as a result of several bills that would force a cutback in these investments. In one commodities fund, investors sold futures contracts linked to about 127 million barrels of crude oil.

Prices dropped roughly 20%, or $29 a barrel, according to the report, which is titled “The Accidental Hunt Brothers,” after the Texas family that manipulated the silver market nearly three decades ago.

Democrats are promoting the report on the eve of a report from the main futures-market regulator, the Commodity Futures Trading Commission. The report is expected to offer fresh data that help answer questions about the depth of financial speculation in the oil markets.

The CFTC report will provide results from its data sweep, requiring Wall Street dealers who trade on behalf of institutional investors in the commodities markets to reveal much more about the instruments they sell to them to get exposure to commodities prices.

The derivatives that Wall Street “swaps dealers” package for such clients, which allow them to invest in baskets or indexes of a mix of commodities, aren’t traded directly on futures exchanges and until now the CFTC’s publicly available, weekly trader reports haven’t required Wall Street firms to disclose their clients’ off-exchange trading activities.

The CFTC report will soon be made final; the agency is expected to either discuss or release the results by Thursday, when its officials are likely to participate in a hearing by the House Agriculture Committee convened to “review dramatic movements in agriculture and energy commodity markets.”

Some critics of the agency expect the CFTC to minimize speculators’ impact, in order not to contradict its past assertions that financial participants didn’t appear to be driving up oil prices.

Bets in the Billions
At the center of the debate is the impact of tens of billions of dollars that have poured into indexes that track futures contracts. Under futures contracts, investors promise to pay a certain amount in the future for crops, oil and other commodities.

These contracts, traded on markets such as the Chicago Mercantile Exchange, help farmers and others hedge against price fluctuations. Speculators buy futures contracts to make bets on price direction. It is a third group that is at the center of the controversy — institutions such as pension funds and college endowments, which pour money into indexes that track the futures market.

The reports are part of a battle between Washington and Wall Street over how money is channeled into commodities. The issue took on urgency as food and gas prices soared and after the CFTC in July revealed that more than half of all oil trading came from speculators.

This undermined earlier contentions by the CFTC that speculators weren’t influencing oil prices, and prompted lawmakers to ask the CFTC’s inspector general to investigate how the agency gathers its numbers.

Wednesday’s report said moves by speculative investors have been largely responsible for the oil-price moves of recent months. It will be released by Sen. Byron Dorgan (D., N.D.), Sen. Maria Cantwell (D., Wash.), and Rep. Bart Stupak (D., Mich.), who contend that without controls, these investors could run prices back up. The 50-page report seeks to dispel arguments by some big investors, bankers and economists that oil prices were due to supply and demand.

Crude-oil prices have swung by roughly 50% this year, from about $90 a barrel to more than $145. Tuesday, oil for October delivery settled at $103.26 a barrel, down $3.08, or 2.9%, on the New York Mercantile Exchange.

The recent oil selloff came after several senators proposed laws to curb investments they say drove up the price of gas and food, a notion heralded by Mr. Masters and derided by many economists. Critics said Mr. Masters is trying to buoy his own investing portfolio, which is laden with transportation-related stocks, and lawmakers are trying to show they are addressing high gas prices.

Between January and May, the report said, the price of crude oil rose nearly $33 a barrel, as institutional investors pumped more than $60 billion into commodities through funds that track indexes, the report said.

Meanwhile, the idea that investors are driving up prices is gaining some credence. European Central Bank President Jean-Claude Trichet last week told attendees at a Frankfurt conference that speculation had contributed to the oil-price shock that has hindered global growth. The two presidential nominees, among others, have attacked the trend.

One of the biggest champions of the antispeculation movement is Mr. Masters, 42 years old, who lives in St. Croix and manages Masters Capital Management LLC. The firm reported holdings of about $600 million in a recent regulatory filing, down about half from year end.

Mr. Masters won’t comment on the firm’s holdings; about 10% are in airlines, autos and other transportation companies that would benefit from lower oil prices. He said profits have been about flat this year.

‘Index Speculators’
Mr. Masters stumbled into the spotlight after sending an email to acquaintances earlier this year, complaining that institutions were driving up the price of fuel, food and metals. They are “index speculators,” he wrote — using a term coined by the report’s co-author, Adam White, the head of a research and trading firm — and had to be stopped.

The email found its way to an aide to Sen. Joseph Lieberman (I., Conn.) and ricocheted to other legislators. Mr. Masters soon testified before Congress, and began informally advising legislators.

“You may be the most powerful guy in Washington right now,” Sen. Claire McCaskill told Mr. Masters at a June hearing about the impact of investments on oil prices.

Mr. Masters gained admiration from farmers, crop distributors and others who invited him to speak around the country. But he has drawn ridicule from some economists and others, who question his analysis and say he isn’t a commodities expert and is trying to boost his own portfolio.


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2008-09-10 USER


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MBA Mortgage Applications (Sep 5)

Survey n/a
Actual 9.5
Prior 7.5
Revised n/a

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MBA Mortgage Purchasing (Sep 5)

Survey n/a
Actual 371.5
Prior 349
Revised n/a

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MBA Mortgage Refinancing (Sep 5)

Survey n/a
Actual 1222.9
Prior 1059.7
Revised n/a

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MBA Mortgage Table 1 (Sep 5)

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MBA Mortgage Table 2 (Sep 5)

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MBA Mortgage Table 3 (Sep 5)

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MBA Mortgage Table 4 (Sep 5)


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2008-09-09 USER


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ICSC-UBS Store Sales WoW (Sep 9)

Survey n/a
Actual -0.1%
Prior 0.1%
Revised n/a

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ICSC-UBS Stores Sales YoY (Sep 9)

Survey n/a
Actual 1.9%
Prior 2.0%
Revised n/a

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Redbook Store Sales Weekly YoY (Sep 9)

Survey n/a
Actual 1.8%
Prior 2.3%
Revised n/a

 
Muddling through, well off the bottom, and not at recession levels.

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ICSC-UBS Redbook Comparison TABLE (Sep. 9)

 
Pretty much the same, muddling through and far from recession levels.

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Pending Home Sales (Jul)

Survey n/a
Actual 86.5
Prior 89.4
Revised n/a

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Pending Home Sales MoM (Jul)

Survey -1.5%
Actual -3.2%
Prior 5.3%
Revised 5.8%

 
A bit lower but last month’s gain revised even higher.

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Pending Home Sales YoY (Jul)

Survey n/a
Actual -6.5%
Prior -11.6%
Revised n/a

 
Still negative but looks to be surfacing rapidly.

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Wholesale Inventories MoM (Jul)

Survey 0.7%
Actual 1.4%
Prior 1.1%
Revised 0.9%

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Wholesale Inventories YoY (Jul)

Survey n/a
Actual 10.6%
Prior 9.3%
Revised n/a

 
Inventories up but within normal fluctuations.

The question is causation- weak sales and unwanted inventories or building inventories for increasing demand

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Wholesale Inventories ALLX 1 (Jul)

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Wholesale Inventories ALLX 2 (Jul)

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IBD TIPP Economic Optimism (Sep)

Survey 44.0
Actual 45.8
Prior 42.8
Revised n/a

 


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