Author Archives: WARREN MOSLER

Caterpillar report – what export economies look like

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Caterpillar Sees ‘Definite Threat’ of US Recession

(CNBC)Caterpillar’s fourth-quarter earnings rose more than 10 percent, helped by strong sales to mining, energy and construction customers outside the United States, but the company warned it sees a recession as a “definite threat” to the U.S. economy.

The Peoria, Ill. company, which is often seen as an economic indicator, said it has been seeing “anemic growth” in the U.S. economy.

Total GDP is domestic demand plus export demand. They are seeing weak growth in domestic demand and strong export demand. And that’s exactly what has been keeping US GDP relatively high and more than making up for the lost output in the housing sector. So far.

“Over time, weakness in the economy has spread from housing to nonresidential construction and more recently to employment and manufacturing,” Caterpillar said in a press release announcing its results. “A recession is defined as a broad downturn in the economy, a development that seems to be taking place.”

However, Caterpillar predicted that fast-growing sales overseas would permit it to meet its 2008 sales and earnings forecasts even if a recession does materialize.

Exactly the same point.

The company continues to expect earnings per share will rise between 5 percent and 15 percent from its 2007 profit of $5.37 a share, while revenue will grow between 5 percent and 10 percent from $45 billion.

Caterpillar predicted 2008 would be another tough year for the U.S. residential housing market — a key customer for its earth-moving machines — and predicted “recessionary conditions to persist” in other key markets.

It said it expected housing starts to decline to 1.1 million units, down from 1.35 million in 2007, and said new problems would roil the property market, including “a high level of mortgage resets, an increase in home repossessions and the likelihood of a significant decrease in home prices.”

They must be watching CNBC.

Overall, Caterpillar is expecting North America to be its weakest growth region this year, but sales should be flat to slightly higher than a year ago.

Flat to slightly higher domestic demand with rising exports isn’t what a recession looks like.

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2008-01-25 Balance of Risks Update

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Mainstream economics would put it this way:

  • Inflation risk to long term growth vs short term growth risks

So on the inflation side:

  • CPI year over year up to 4.1%
  • Core CPI 2.4% year over year, 2.9% month over month (2.5% high end of Fed’s comfort zone)
  • Headline PCE deflator 3.6% year over year, core PCE 2.2% (1.9% upper band of their target forecast)
  • PPI up 6.3% year over year, core up 2.0% year over year
  • Crude back to $91 after a brief hiatus (‘high eighties’- relax, only attempt at a pun)
  • CRB testing new highs
  • Grains near the highs
  • Import prices up 10.9% year over year, ex petro up 2.9%, reversing years of pre 2003 declines
  • Export prices up 6.0% year over year
  • Prices paid/received remain on the rise in the various surveys
  • $US index reasonably flat, but other currencies experience domestic inflation
  • Not that anyone cares, but gold is at $913
  • 5 year, 5 years forward implied CPI at 2.51%, vs 2.43% at December 18 meeting

And on the growth side:

  • Housing reports remain weak through the winter months – permits still falling
  • November construction spending up 0.1%
  • Mortgage applications moving higher, 4 week moving average down 2.7% year over year, up 8.5% from November 2006 lows
  • November income and spending (1.1%) came out strong, Oct revised up (0.2% to 0.4%), after December 18 meeting
  • November durable goods on the weak side; December out on Tuesday
  • ADP up 40,000, payrolls up 18,000, unemployment up to 5% from 4.7%
  • Initial claims since meeting: 357K, 334K, 322K, 302K, 301K. Possible seasonal issues but no obvious weakness
  • Continuing claims since meeting: 2,754,000; 2,688,000; 2,747,000; 2,672,000. Still a bit higher than before, but not moving up.. yet
  • November trade gap out to 63.1 billion. December numbers released February 14
  • Fiscal balance: Receipts up 5.7%, spending up 8.8% (with labor day distortion) fiscal year over year
  • December vehicle sales 16.3 million, flat since August
  • December retail sales down 0.4%, core up 0.1% month over month, year over year up 3.2%, core up 3.0%
  • December industrial production flat, up 1.5% year over year
  • GDP and ADP at the meeting, payroll forecast up 65,000 on Friday
  • Fed cut 0.75% coincident with the Soc Gen liquidation related equity weakness
  • February Fed Funds futures now at 3.09%, not fully discounting a 50 cut. Got all the way to 3.15 before stocks sold off.

Market functioning:

  • LIBOR vs Fed Funds under control, 3 month LIBOR down 160 bp since December 18 meeting, TAF functioning well
  • Mortgage spreads still historically wide, but trading, and absolute yields also down since Dec 18 meeting
  • Mtg refi’s way up

Fiscal package is on its way!

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Refi madness

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Homeowners rushing to refinance mortgages

Federal Reserve’s surprise rate cut sparked a refinancing boom

This week’s surprise rate cut by the Federal Reserve not only held Wall Street and investors in thrall, it’s also kicked into high gear a rush by homeowners across the country to refinance their mortgages at today’s lower rates.

Thirty-year fixed-rate mortgages now carry an average interest rate of 5.57 percent, down from 5.75 percent last week and from 6.32 percent a year ago, according to a Bankrate.com national survey. That’s bringing them within shouting distance of the historic low of 5.21 percent set in June 2003, when the housing sector was expanding quickly and there was a stampede of mortgage refinancings.

(snip)

The Mortgage Bankers Association said refinancings last week reached their highest levels since April, 2004. The trade group’s Market Composite Index, a measure of mortgage loan application volume, rose 8.3 percent from the previous week’s level.

David Motley, president of Fort Worth-based Colonial National Mortgage, which originates loans in all 50 states, is expecting an even larger applications surge this week and beyond.

“For the last six to eight months all people have heard about is the subprime crunch,” he said. “There is an incorrect impression that because of the subprime mess regular people can’t get a loan or a refinancing right now.”

Seems the door is wide open now and seems a lot of potential defaults analysts were predicting may not happen.

Refinancing rush

The rush to refinance could get a further boost from the government’s tentative economic stimulus package. The package would allow government-sponsored Fannie Mae and Freddie Mac to buy mortgages worth as much as $729,750, up from a prior cap of $417,000 limit. This would make refinancing more feasible for some owners of expensive mortgages.

Yes, the government measures are all coming to bear from a variety of angles.

Colonial National’s Motley noted that mortgage rates were attractive before this week’s Fed action, but “the Fed move got everyone’s attention and people are now looking at rates again,” he said, adding that refinancing funds are “readily available to many Americans.”

Even so, experts say that securing refinancings at terms they want may prove difficult for owners whose homes have slumped in value.

Joe Dougherty, a media relations officer for RAND Corp. said his family’s four-bedroom colonial home in Haymarket, Va., was appraised at $500,000 several years ago, but he fears it is now worth only $450,000.

Dougherty hopes to refinance two home loans he holds on the house. He would like to combine them into a single 30-year fixed-rate mortgage and has discussed his situation with a loan officer friend. Dougherty’s calculations indicate a lower valuation that would nix the deal he wants, but he has scheduled a home appraisal.

What to do with stimulus rebate?

There also are fears that many banks, stung by losses on home loans to subprime borrowers, have adopted lending standards that will be too tough or taxing to meet. This is particularly worrisome for those whose credit scores have been hurt by heavy use of credit cards in recent years.

But for owners with good credit, the issue now may be more one of timing.

And that’s still the majority.

“I’m definitely interested in refinancing my mortgage, but I wonder if I should wait until after the Fed meeting next week,” said Matt Schmidt, a market specialist with Computer Task Group Inc. in Buffalo, N.Y. who bought a $150,000 Lewiston, N.Y., home three years ago.

Schmidt noted that the Fed, which holds a two-day meeting starting Tuesday, has signaled it is disposed to further rate cuts that could send mortgage rates still lower. So he doesn’t want to refinance too soon if even better rates will be available shortly.

This is very common.. When the Fed pauses, these people pull the trigger.

Also, the bond rally caused a lot of mortgage securities to shorten and hedges got bought in.

A sell off in bonds will have the reverse effect, and with the increased low coupon production, the convexity selling could be a lot more severe than the buying was on the way down.

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Tax cuts, oil prices, and gasoline consumption

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Oil prices jump after Bush, Congress reach agreement on economic stimulus plan

by John Wilen

Oil futures jumped more than $2 a barrel Thursday after the Bush administration and Congressional leaders agreed to an economic stimulus plan that will give most Americans tax rebates of $600 to $1,200, or even more if they have kids.

With Bernanke’s blessings and with the mainstream seeing demand already strong enough to be driving prices well above the Fed’s comfort zone, the response is no surprise. Gold shot up as well as other commodities, and the $ fell.

Prices were already higher after the government reported a drop in heating oil supplies and as investors anticipated a stimulus plan. But futures took off, posting their largest gains in over three weeks, on word that an agreement had been reached.

“What’s boosting us up today is a little economic optimism because people are going to get a little free money,” said Phil Flynn, an analyst at Alaron Trading Corp., in Chicago.

Yes, and a turnaround in housing probably is underway as well.

Light, sweet crude for March delivery rose $2.42 to settle at $89.41 a barrel on the New York Mercantile Exchange.

(SNIP)

The high prices may be having an impact on consumer behavior. Demand for gasoline fell last week by 152,000 barrels, though demand over the past four weeks _ which included the busy holiday travel period _ rose by 1.1 percent over the same period last year.

Real demand up for the month year over year.

Looking forward to see how a ‘nimble’ Fed responds.

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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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