Press Catches Up to Us: Taxpayers Are Losers

WSJ article:

http://online.wsj.com/article/SB124897332666294327.html

GSEs Unlikely to Repay U.S. in Full


Please refer to my post on July 10, 2009.

http://populus-vox.blogspot.com/2009/07/taxpayer-will-never-be-paid-back.html

Update: Corporate Bankruptcies

Recent CDS Auctions:

Lear Corporation CDS: 38.5 cents on the dollar

Six Flags, Inc. CDS: 14 cents on the dollar

Visteon Corporation CDS: 3 cents on the dollar

General Motors Corporation CDS: 12.5 cents on the dollar


I guess there is risk in lending to corporate America............

S&P 500 Earnings

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUbVti8SvAMA

Surging Profit Estimates Signal 26% Rally for S&P 500

In the above linked article, the authors state that "Wall Street firms estimate the S&P 500 will earn $74.55 a share next year." They neglect to mention that this is on an OPERATING basis. It does not include items that are not perceived to be parts of everyday business, e.g. write-offs.

In my posts regarding equity valuation, I have been relying on S&P's own estimate of AS REPORTED earnings. My reasoning is that these write-offs have been so pervasive and consequential, that ignoring them would vastly overstate future earnings potential.

For calendar 2010, S&P estimates operating earnings of $74.01, not too far from the Street consensus. However, their as reported number comes in at $37.26. That is basically one-half of operating earnings. The below graph tracks the ratio of the reporting methods. You be the judge. (Note: my analysis consistently tracks historical as reported numbers, I NEVER combine apples & oranges.)

New Home Sales: Some Perspective

New home sales surpassed estimates: 384,000 vs. 352,000

However, please take note:

- This represents a 21.3% fall from June, 2008

- The median price has fallen 12% from June, 2008 and 5.8% from May, 2009

- Inventory stands at 8.8 months. This is a marked improvement from the last few months, but still exceeds the 20 year average of 5.8 months

Upcoming Data Calendar

================================================================
                       Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
================================================================
New Home Sales ,000’s     7/27      June      342       352
New Home Sales MOM%       7/27      June      2.7%      2.9%
Case Shiller Monthly YO   7/28      May      -18.1%    -17.9%
Case Shiller Monthly In   7/28      May      139.2     138.6
Consumer Conf Index       7/28      July      49.3      49.0
Durables Orders MOM%      7/29      June      1.8%     -0.6%
Durables Ex-Trans MOM%    7/29      June      1.1%      0.0%
Initial Claims ,000’s     7/30     18-Jul     554       580
Cont. Claims ,000’s       7/30     11-Jul     6225      6300
GDP Annual QOQ%           7/31      1Q A     -5.5%     -1.5%
Personal Consump. QOQ%    7/31      1Q A      1.4%     -0.5%
GDP Prices QOQ%           7/31      1Q A      2.8%      1.0%
Core PCE Prices QOQ%      7/31      1Q A      1.6%      2.4%
Employ Costs QOQ%         7/31       2Q       0.3%      0.3%
Chicago PM Index          7/31      July      39.9      43.0
NAPM Milwaukee Index      7/31      July      50.0      52.0
================================================================

Failure Friday Update

- 64 banks have failed in 2009

- Insurance fund balance on 3/31/09: $13 billion

- Cost of failures since 3/31/09: $11.26 billion

- Special assessment income (one time): $5.7 billion

- Additional income (my estimate): $1.2 billion

- Current balance: $8.64 billion

It is a certainty that the FDIC will run out of funds and tap their credit line with the Treasury Department. This will necessitate the issuance of more Treasury debt and increase the burned n the taxpayer.

Another Poor Showing For U.K. GDP

The U.K.'s GDP number for the second quarter surprised to the downside: 0.8% decline. Some forecasters were actually predicting an expansion. Remember, this number is not annualized: our BEA would have reported this number as a drop of 3.2% (please see the post on June 30, 2008 regarding calculation methods).

Existing Home Sales

June existing home sales slightly bested expectations. The above graph tracks the median sales price versus the amount of existing home inventory since January, 2008. I am less impressed by the month over month improvement than I am by the year over year performance. June's combination of seasonal factors, pricing and mortgage rates was enough to lure the most buyers into the market in over 12 months (and mortgage rates hit their highs in June)*.

*based on actual number of sales recorded for that month (not annualized)

Weekly Jobless Claims: More Seasonal Impacts

Initial jobless claims came in an 554,000: just around the consensus estimate. Back on July 9, I mentioned that seasonal adjustment factors would distort this number for a few weeks. Starting with next weeks report, the number will jump dramatically higher. In fact, if next week's factor was applied to this week's report, the number would have been 669,000 !!!!!

The same can be said for the continuing claims number, although to a lesser extent. I have also noted in past posts that this number becomes tougher to interpret because we don't know why this number is falling; new jobs or expiration of benefits?

In summary:

UNEMPLOYMENT INSURANCE DATA FOR REGULAR STATE PROGRAMS

---

	Advance				Prior1
WEEK ENDING	July 18	July 11	Change	July 4	Year

---

Initial Claims (SA)	554,000	524,000	+30,000	569,000	413,000
Initial Claims (NSA)	580,944	671,242	-90,298	581,145	411,408
4-Wk Moving Average (SA)	566,000	585,000	-19,000	607,000	393,000

	Advance				Prior1
WEEK ENDING	July 11	July 4	Change	June 27	Year

---

Ins. Unemployment (SA)	6,225,000	6,313,000	-88,000	6,904,000	3,165,000
Ins. Unemployment (NSA)	6,231,108	6,173,940	+57,168	6,061,619	3,164,970
4-Wk Moving Average (SA)	6,541,500	6,674,000	-132,500	6,774,250	3,176,000

---

Ins. Unemployment Rate (SA)2	4.7%	4.7%	0.0	5.2%	2.4%
Ins. Unemployment Rate (NSA)2	4.7%	4.6%	+0.1	4.5%	2.4%

Equity Market Valuation

Having now entered the 2nd quarter earnings season (37 of the S&P 500 companies have reported so far), it seems like the right time to review valuations:

S & P 500 closed at 954.58 yesterday

My fair value opinion: 726.97

The index needs to drop 23.84% to compel me to buy.

At 726.97, the earnings yield would equal the long term average of 4.795%

The earnings yield at current levels is 3.652%.

The earnings yield calculations are based on 2010 numbers: using S & P's forecasts, I arrived at a figure of $34.86.

Lots 'o Data Coming Up

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior	Revised From
Jul 13	2:00 PM	Treasury Budget	Jun	-	NA	-$77.5B	$33.5B	-
Jul 14	8:30 AM	Core PPI	Jun	-	NA	0.1%	-0.1%	-
Jul 14	8:30 AM	PPI	Jun	-	NA	0.8%	0.2%	-
Jul 14	8:30 AM	Retail Sales	Jun	-	NA	0.5%	0.5%	-
Jul 14	8:30 AM	Retail Sales ex-auto	Jun	-	NA	0.5%	0.5%	-
Jul 14	10:00 AM	Business Inventories	May	-	NA	-1.0%	-1.1%	-
Jul 15	8:30 AM	Core CPI	Jun	-	NA	0.1%	0.1%	-
Jul 15	8:30 AM	CPI	Jun	-	NA	0.6%	0.1%	-
Jul 15	8:30 AM	Empire Manufacturing	Jul	-	NA	-5.00	-9.41	-
Jul 15	9:15 AM	Capacity Utilization	Jun	-	NA	67.9%	68.3%	-
Jul 15	9:15 AM	Industrial Production	Jun	-	NA	-0.6%	-1.1%	-
Jul 15	10:00 AM	Business Inventories	May	-	NA	NA	NA	-
Jul 15	10:30 AM	Crude Inventories	07/10	-	NA	NA	-2.90M	-
Jul 15	2:00 PM	Minutes of FOMC Meeting	June 24	-	-	-	-	-
Jul 16	8:30 AM	Initial Claims	07/11	-	NA	NA	565K	-
Jul 16	9:00 AM	Net Long-Term TIC Flows	May	-	NA	NA	$11.2B	-
Jul 16	10:00 AM	Philadelphia Fed	Jul	-	NA	-5.0	-2.2	-
Jul 17	8:30 AM	Building Permits	Jun	-	NA	523K	518K	-
Jul 17	8:30 AM	Housing Starts	Jun	-	NA	530K	532K	-

The Taxpayer Will Never Be Paid Back

Please click the above graphs to expand. Theses graphs track the cumulative annual earnings for each company (1999, 1999 + 2000, 1999 + 2000 + 2001, etc.). For example, Freddie Mac's net income from 1999 - 2007 was $28.28 billion. Keep this in mind when evaluating the following (I used the most conservative measure of government investment, so use your imagination if you want to see how much worse it can get.):

Freddie Mac:

Current Market Capitalization: $360 million

Government Investment: $50.7 billion

2009 Q1 Earnings: -$10.2 billion


Fannie Mae:

Current Market Capitalization: $570 million

Government Investment: $34.2 billion

2009 Q1 Earnings: -$23.2 billion


AIG:

Current Market Capitalization: $1.3 billion

Government Investment: $69.8 billion

2009 Q1 Earnings: -$5.4 billion

GM:

Current Market Capitalization: $702 million

Government Investment: $50.7 billion

2009 Q1 Earnings: -$6 billion


Quite simply, how are these companies going to generate the earnings to pay the taxpayer back? Why would the government invest so much money when the stock market is placing a dramatically lower valuation on these companies? Question for the ages.....

Weekly Jobless Claims: Take Note of Seasonal Factors

Initial jobless claims fell below 600,000 for the first time since late January. This came in lower than most estimates. Continuing claims resumed their upward climb, eclipsing 6.8 million in this week's report.

It is worth noting that the seasonal factors for the next 2 weeks (this week's report as well) are considerably different from the last few weeks. In fact, if the same factor from last week as used in this week's report, the initial claims figure would have been 637,000!

This is one of the major reasons why one week's worth of data is of nominal importance.

The below link will bring you to the whole report:

http://www.dol.gov/opa/media/press/eta/ui/current.htm

Railroads: Economic Insight

The Association of American Railroads reported that:

- Carloads dropped 19.7% from June '08 - June '09

- Intermodal traffic (flatcars) dropped 18.2% from June '08 - June '09

- 1st half of 2009 traffic down 19.5% and 17.0% respectively

- Largest percentage declines experienced by motor vehicles & equipment and metals & metal products

- Canadian traffic suffered comparable declines

On a related note:

Greenbrier Reports Fiscal 3rd Quarter Loss

http://news.moneycentral.msn.com/ticker/article.aspx?Feed=AP&Date=20090707&ID=10122391&Symbol=GBX

Robert Strange McNamara (1916 - 2009)

Mr. McNamara was the subject of one of the best documentaries I've ever seen:

The Fog of War: Eleven Lessons from the Life of Robert S. McNamara

Personally, I accept his remorse as earnest. It is a film all should watch, especially in light of today's political atmosphere.

http://video.google.com/videoplay?docid=-8653788864462752804&ei=KRZSSvTdLILtlQfw8tGoDg&q=fog+of+war&hl=en&client=firefox-a

FDIC Gets Busy: 7 Failures

Seven banks were shuttered yesterday, six of which were domiciled in Illinois. All of the banks were small, Founders Bank was the largest at just under $1 billion in assets. According to a Bloomberg news story, all six Illinois banks were controlled by the same family.

Poor decision making was not reserved to the money center banks or the greed of new banks. The FDIC will be busy for another year.

Sweden Jumps The Shark

http://www.riksbank.com/templates/Page.aspx?id=32047

"The deposit rate is at the same time cut to -0.25 per cent and the lending rate to 0.75 per cent. "


-0.25%


The deposit rate is the "overnight rate of interest paid by the Riksbank on money held in accounts with banks."

So the central bank of Sweden is charging banks money to accept deposits. This is simply astounding. That is what I call deflationary fear.

Update: Job Losses & Recessions

Start	End	Change
Nov-73	Mar-75	-1.62%
Jan-80	Jul-80	-1.07%
Jul-81	Nov-82	-3.08%
Jul-90	Mar-91	-1.13%
Mar-01	Nov-01	-1.21%
Dec-07	?	-4.68%

More Jobs Data: Weekly Claims

Initial claims came in on the screws: 614,000 vs. estimate of 615,000.

Continuing claims came in a bit lower than forecast. This number is showing signs of having hit a peak 3 weeks ago. However, as I have mentioned in previous posts, it is important to know why the number is falling. If it is falling because people are finding jobs, great. If it is falling because people's benefits are expiring, not so good. Thirty-four states (and D.C. & P.R. as well) are offering extended benefits to those still looking for jobs. Those hopeful citizens are not included in this tally. I am trying to quantify.

Employment Thursday?

Non-farm payrolls fell by 467,000 in June. This was considerably more than the consensus estimate of a loss of 350,000 jobs. However, it was only 17,000 more than my estimate of 450,000 (!). Revisions to the previous months were mixed & minor.

- 18 consecutive months of job losses

- 6,340,000 job losses since & including 12/2007

- Employment now stands at the same level as 9/2004

Employment Situation: ADP Jobs Report

Job losses exceeded estimates: 473,000 vs. expectations of 390,000.

The miss was mitigated by upward revisions to previous months.

- 17 consecutive months of job losses

- 6,206,000 job losses since & including 12/2007

- Employment now stands at the same level as 4/2004