Author Archives: WARREN MOSLER

Falling default credit crisis

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The jobless recovery morphed into the full employment recession characterized by falling credit defaults:

Global loan defaults down in 2007 but expected to rise in 2008

(Thomson Financial) Twenty issuers defaulted on 2.9 bln usd in syndicated bank loans in 2007, down from 32 issuers and 6.3 bln usd in loans in 2006, Moody’s Investors Service said in a new report. Movie Gallery Inc’s default on 900 mln usd in loans in September was the largest loan default in 2007, as well as the only loan defaulter rated by Moody’s.

“Both weaker macroeconomic fundamentals and a worsening in the ratings mix of speculative-grade issuers are the underlying factors driving the 2008 default rate forecasts,” said a Moody’s spokesman.

Doesn’t say which macro fundamentals.

Mirroring the benign credit environment for syndicated bank loans, the dollar volume of Moody’s rated corporate bond defaults also decreased in 2007, says the analyst.

In all, a total of 16 Moody’s-rated issuers defaulted on approximately 4.7 bln in debt in 2007, compared with 27 corporate issuers that defaulted on 7.8 bln usd in 2006.

Given the relatively strong historical correlation between speculative-grade bond and loan default rates, Moody’s expects that the speculative-grade U.S. loan default rate will increase to approximately 3.0 pct from its current 0.1 pct by the end of 2008.

They may have also based the downgrades on recession fears for 2008.

There may be a sharp slowdown coming, but not here yet.

And if it does happen, it won’t last long with all the net federal spending in the pipeline..

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2008-01-24 US Economic Releases

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2008-01-24 Initial Jobless Claims

Initial Jobless Claims (Jan 19)

Survey 320K
Actual 301K
Prior 301K
Revised 302K

Back to the lows.

This means Q4 GDP probably won’t be all that weak.

Full employment recessions are extremely rare.

Exporters must have maintained and/or increased output as well, which will show up in the Dec trade numbers not out until Feb, so watch for upward revisions from next week’s initial GDP report.

And look for exports to continue strong as markets adjust to CB’s no longer accumulating $US financial assets at the same pace.

2008-01-24 Continuing Claims

Continuing Claims (Jan 12)

2008-01-24 Continuing Claims since 1980

Continuing Claims since 1980

Survey 2720K
Actual 2672K
Prior 2715K
Revised 2747K

Also moving lower from a small blip up.

It’s all looking more and more like the great repricing of risk and the rearranging of financial assets hasn’t spilled over into the real economy. Yet.

And it also looks like the Fed may have done the ’emergency cut’ in response to Soc Gen evening up positions.

So the score is 175 bp in cuts into a growing economy and a triple negative supply shock that’s so far generated 4%+ year over year inflation and core numbers rising as well.

And demand for Saudi output is up to 9 million bpd, so their position as swing producer and price setter remains secure.

Not to mention the fiscal package that Bernanke has blessed – gives Congress and the President the green light to pump things up for the election.

And don’t forget Federal spending seems to have been moved forward from 2006 to 2007.

Economy should be at full boil by Q2, as we recover from the full employment recession…

And don’t worry about housing anymore. It’s all backwards looking and is a small enough % of GDP to not be a material negative to growth.

But if/when it turns, and I think that is already happening (but we need to wait until after the winter months to get some reliable data) it all starts to overheat again.

2008-01-24 Existing Home Sales

Existing Home Sales (Dec)

Survey 4.95M
Actual 4.89M
Prior 5.00M
Revised n/a

2008-01-24 Existing Home Sales MoM

Existing Home Sales MoM (Dec)

Survey -1.0%
Actual -2.2%
Prior 0.4%
Revised n/a

Both muddling through the winter months.

2008-01-24 Home Sales Average Price

Home Sales Average Price

2008-01-24 Existing Homes Inventory

Existing Homes Inventory

Inventories did drop some, and prices down only modestly year over year.

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2008-01-24 China Highlights

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Highlights:

China growth reaches 13-year high

Still importing heaps, including capital goods.

China’s 11.2% Fourth-Quarter GDP Gain Props Up Global Growth as U.S. Slows
China’s consumer price index rises 4.8 pct in 2007

Inflation is ripping, meaning higher prices for the rest of the world.

Yuan Rises to Highest Since Link to Dollar; Fitch Calls for Faster Gains

Meaning higher prices for US consumers.

Fixed asset investment up 24.8%, industiral output up 18.5%
China’s industrial output up 18.5% last year

Not too shabby.

Articles:

China growth reaches 13-year high

Building and infrastructure projects are fuelling economic growth.

The Chinese economy has expanded by 11.4% over the past year, reaching its fastest growth rate in 13 years, officials have announced.

Increased exports and a boom in the construction industry helped the rapid expansion during 2007.

But officials warned that overheating remained a danger, despite a slight slow-down in the fourth quarter.

Inflation is also a serious concern, with many Chinese people hit by recent dramatic increases in food prices.

‘Still developing’
Announcing the figures, National Statistics Bureau chief Xie Fuzhan said Beijing was paying “close attention” to the US credit crisis.

He said Beijing would respond by making “timely and proper adjustments” in exchange and interest rate policy, but gave no details.

Speculation has been mounting among analysts over whether China has overtaken Germany to become the world’s third-largest economy.

But Mr Xie played down the comparison, saying: “It’s not really important to know whether China is the fourth-largest or the third-largest.

“Even if the total surpasses Germany, China is still a developing country – in particular, the per capita GDP of China is really low.”

China’s 11.2% Fourth-Quarter GDP Gain Props Up Global Growth as U.S. Slows

(Bloomberg) China’s economy expanded more than 11 percent for the fourth straight quarter, supporting global growth as a recession looms in the U.S. Gross domestic product rose 11.2 percent in the three months ended Dec. 31, compared with 11.5 percent in the third quarter, the statistics bureau said in Beijing today.

Industiral output up 18.5%
Industrial output jumped by 18.5 percent last year, 1.9 percentage points higher over a year earlier.

The industrial output at companies with annual revenue of at least five million yuan (US$691,600) expanded by 17.4 percent in December, compared with 17.3 percent in November.

The output growth rates were 13.8 percent for the state-owned enterprises and those in which the state holds controlling stakes and 17.5 percent for companies invested by foreign, Hong Kong, Macao and Taiwan businessmen, Xie said.

The companies sold 98.1 percent of the goods they produced last year.

Industrial output growth decelerated from September onward, as the government’s tightening measures took effect. The year-on-year growth figures for September and October were 18.9 percent and 17.9 percent, respectively.

Output growth rates were 13.8 percent for state-owned enterprises and organizations in which the state holds controlling stakes and 17.5 percent for foreign-, Hong Kong-, Macao- and Taiwan-invested businesses, Xie told press conference in Beijing.

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THE ECB HAS A SINGLE MANDATE, INFLATION, WITH NO INCENTIVE TO DEVIATE

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Not to mention my bent is inflation and growth are, at best, very weak functions of interest rates, and they work mostly through the cost side, but that’s another story – see ‘MANDATORY READINGS‘.

ECB’s Weber Says Interest Rates ‘Accommodative’, Dismisses Cut Bets

by John Fraher and Andreas Scholz

(Bloomberg) European Central Bank council member Axel Weber said interest rates in the euro region are still “accommodative” and investors’ expectations of reductions later this year may be “wishful thinking.”

“We have a positive economic outlook and as long as that doesn’t change I would say that rates are still on the accommodative side and in no way restrictive,” Weber said in an interview with Bloomberg Television in Davos, Switzerland, at the World Economic Forum’s annual meeting.

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Re: BTIG Earnings Recap for January 23, 2008

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(an email)

On Jan 23, 2008 8:51 PM, Joshua wrote:
>
> Economy is in dire condition?!?!?! Look at today’s earnings reports and
> forecasts…anecdotal, but not so dire at all!

Yes, they’ve been forecasting recession for about a year and it keeps getting put off a quarter.

Now the term is morphing to ‘growth recession’ which mean growth slows for a few quarters.

Hardly the stuff of rate cuts for a mainstream economist when inflation is ripping.

warren

> Subject: BTIG Earnings Recap for January 23, 2008
>
> Stocks staged a late day rally (biggest in 2 months) on a report NY
> regulators met with banks to discuss aid for bond insurers. Trading on
> earnings (6:15pm): COF +0.30 (+0.7%), CTXS -1.02 (-3.2%), EBAY -1.63
> (-6.7%), FFIV +3.91 (+19.4%), GILD -0.81 (-1.8%), ISIL -0.72 (-3.1%) , NFLX
> -0.06 (-0.25%), PLCM +1.72 (+7.7%), QCOM +2.67 (+7.3%), QLGC +0.17 (+1.3%),
> SANM +0.04 (+2.8%), SYMC +1.40 (+9.1%) and WDC +1.36 (+5.5%). Expected to
> report in the morning: ABC, BAX, COL, CY, DHR, ED, F, HSY, KMB, LCC, LMT,
> MHP, NOK, NOC, NUE, POT, RESP, SPWR, T, TXT, UNP and XRX. Economic data for
> tomorrow includes Initial Claims for 1/19, December Existing Home Sales and
> Crude Inventories for 1/19.
>
> TickerAnnouncementNote
> AMCC+ 1c better, revs better
> AVCT+ 10c better, revs inline
> BKHM+ 5c better, revs betterguides Q3 revs inline
> CAVM+ 1c better, revs better
> CBT+ 24c better, revs better
> CHIC+ 1c better, revs inlineguides Q2 EPS inline
> CNS+ 2c better, revs better
> CTXS+ 6c better, revs betterguides Q1 inline, FY08 inline
> GILD+ 1c better, revs inline
> HXL+ 1c better, revs betterguides FY08 inline
> ISIL+ 1c better, revs betterguides Q1 EPS, revs inline
> KNX+ 1c better, revs better
> LSI+ 6c better, revs betterguides Q1 inline
> MOLX+ 2c better, revs betterguides Q3 EPS inline, revs above
> NFLX+ 10c better, revs inlineguides Q1 EPS inline, revs above; FY08 EPS
> above, revs inline
> NVEC+ 6c better, revs better
> PLCM+ 3c better, revs better
> PLXS+ 2c worse, revs inlineguides Q2 EPS above, revs above
> PRXL+ 1c better, revs betterguides Q3 EPS inline, revs above; guides FY08
> EPS, revs above
> QLGC+ 3c better, revs better
> QTM+ inline, revs lower
> RGA+ 6c better, revs lowerguides FY08 EPS above
> RKT+ 4c better, revs better
> RYL+ 53c (ex-items), vs loss of 17c (First Call), revs better
> SANM+ 1c better, revs betterguides Q2 EPS inline, revs above
> SXL+ 10c better, revs better
> SYMC+ 4c better, revs betterguides Q4 EPS above, revs above
> TSS+ 3c better, revs inlineguides FY08 above, revs inline
> VAR+ 3c worse, revs betterissues Q2, FY08 guidance
> VARI+ 2c better, revs better
> WDC+ 31c better, revs better
> EFII= inline, revs inlinereaffirms Q1 guidance
> FFIV= inline, revs inlineannounces share repurchase up to $200mln
> SRDX= inline, revs better
> ACXM- 2c worse, revs lowerissues FY08 guidance
> CBST- 1c worse, revs inline
> CLDN- 1c worse, revs better
> COF- 3c worse, revs lower
> DGII- 3c worse, revs inlinereaffirms FY08 inline
> EBAY- 4c better, revs betterguides Q1 EPS, revs below; FY08 EPS inline, revs
> below
> MRCY- 9c better, revs inlineguides Q3 EPS, revs below, FY08 EPS, revs below
> MTSC- 10c worse, revs betterreaffirms FY08 guidance
> NE- 1c worse, revs inline
> PSSI- 1c worse, revs inlinereaffirms FY08 EPS guidance
> PTV- 2c better, revs betterguides Q1 EPS below, FY08 EPS, revs inline
> QCOM- 1c worse, revs betterguides Q2 EPS, revs inline; reaffirms FY08 EPS,
> guides FY08 revs inline
> RJF- 11c worse, revs lower
> SOV- 4c worse
> SYK- inline, revs betterguides FY08 inline
> WSTL- loss of 4c vs loss of 6c (may not be comp), revs slightly betterguides
> Q4 below
>

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The Fed’s next move

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If I were a mainstream economist and on the FOMC (I’m not either, they are both), and world equity markets were firm going into the meeting next week with the monoline issue put to bed, I’d opt for no cut.

That would be expected to rally the $, take down gold and most other commodities, and be taken as a strong move to ‘keep expectations well anchored’ before they had a chance to elevate.

Equities might sell off initially, but be encouraged with the knowledge the Fed was keeping inflation under control, and therefore not get involved into a prolonged, rate hiking fight against inflation down the road.

Also, confidence in the economy would be conveyed, as the no cut decision would be taken as a statement from the Fed that the economy didn’t need further rate cuts.

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Jan 23 late update

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Monoline problem addressed, stocks suddenly oversold as that risk fades.

Most earning look strong. Guidance may be soft but that’s at least partially a function of the expectation of a recession as per the media reporting and will get ignored as those fears continue to fade.

If initial claims tomorrow are around 325,000 as expected, and continuing claims are reasonably stable, it will indicate the labor markets may not have deteriorated from Q4 as feared.

Existing home sales are still winter numbers, but could surprise on the upside as anecdotal reports indicate aggressive selling of excess inventories.

The Fed and the stock market share the same fears. As the market’s fears fade so will the Fed’s, and the markets and the Fed could start to take away a the cut now priced in for the meeting next week.

This leaves FF futures and ED futures maybe 100 bp over priced, as the improving outlook will price in the possibility that fewer future cuts will be appropriate.

And the fiscal package is growing. This is the first time I’ve ever seen the Fed encouraging adding to the deficit, and in an election year it’s hard to imagine Congress and the President not taking advantage of that opening and in the spirit of bipartisan cooperation expanding the package so all get their favorite tax cut and spending initiative. $250-300 billion wouldn’t surprise me. And they need to do it quick before it’s discovered there is no recession problem, but instead an inflation problem.

Also note WTI and Brent crude have converged quite a bit in the sell off, which probably means WTI was sold off by speculators, and a bounce back to the Saudi’s target price (whatever that is) can be expected.

Exports are also likely to be underestimated in next week’s GDP preview, so there’s a good chance it will be revised up when December trade numbers are announced in February.

And without a rise in unemployment and a meaningful drop in personal income housing can come back very quickly from a very low base. Affordability is up nicely, and the production of new homes is down by maybe a million vs last year.

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Re: tell Paulson to let the MOF buy $

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On Jan 23, 2008 9:26 AM, Mike wrote:
> Trichet and his standard model are going to engineer a market crash in
> europe it looks like… wonder if he will be FT’s man of the year next
> year?

and he’s playing with fire with the lack of credible deposit insurance in the ecb’s member banks.

buy some 2 year german credit default ins if you haven’t already!

I think the ‘chess move’ here is for the BOJ to start buying $US. They would like to, but don’t want Paulson coming down on them for being ‘currency manipulators.’

If I were Tsy sec I’d be calling the MOF and giving them the green light to buy $US.

by the way, Jack Welch is on CNBC saying gdp is muddling along at 1.5% based on what he hears from corp america. no recession, yet

warren

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2008-01-23 US Daily Releases

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2008-01-23 MBA Purchase Index SA

MBA Purchase Index SA (Jan 18)

Survey n/a
Actual 439.90
Prior 461.20
Revised n/a

No recession here.

Mtg apps seem to be continuing on the upward trend that started several months ago.

2008-01-23 MBA Refinancing Index SA

MBA Refinancing Index SA (Jan 18)

Survey n/a
Actual 4178.20
Prior 3575.5
Revised n/a

And the refi machine is going full bore as well.

It was feared credit worthy borrowers would not have access to credit to refi from higher rate mtgs.

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