Economic Update
U.S. stocks rose sharply on Thursday as the government reported the economy grew at a surprisingly robust clip in the second quarter and oil prices eased, driving gains in major industrial and financial companies and bolstering optimism exporters' earnings will improve. The brighter economic outlook coupled with a management shake-up at top U.S. mortgage finance company Fannie Mae boosted financial shares, which led market gains.
However, spending numbers released on Friday showed that U.S. consumers felt the impact of the tax rebates fading and a pickup in inflation eroding the American buying power.
Incomes dropped 0.7 percent, the first decrease since August 2005, reflecting the end of the rebates, after a 0.1 percent gain the prior month. The median projection was a decline of 0.2 percent.
Wider Financial Concerns
Loan book deterioration starting to hit a wider array of financial institutions as credit losses migrate from subprime into other sectors of household finance such as credit card, prime morrtgages and auto loans
S&P estimates losses on loan books could reach 265bn a year fior the next 2-3 years
Banks have used capital raising to offset losses incurred from writedoens,
Much of the capital raised has been in the form of hybrid securities with both debt and equity characteristics, i.e quality of the bank's capital has eroded
Idea?
With US getting itself slowly sorted while Europe struggling with a lagging economy and uncompetitive currency it may just be a good time to put on a US-outperformance trade?
Eric Tan,London
Friday 29 August 2008
Friday 22 August 2008
Softening commodity fundamentals. Markets for the week ending 22-August
Update: Markets/Indicators
- US PPI came out at 1.2% in July vs consensus of 0.6%.
- European stocks declined on concerns that financial firms will post more losses and reports signaled faster than expected forecast inflation
- July 2008 Housing starts at 965K (lowest since March 2001), this is 11% below July and 59% below the peak of January 2006 (2.292 million)
Commodities
- Softening of oil market fundamentals, seen since the start of the year, are finally being reflected in prices.
- A deteriorating economic outlook is leading to lower demand, and the performance of non-OPEC supply is improving
- OPEC further revised down its estimates for oil consumption in 2009. It had previously suggested that 2009 would be the first year in which demand for OPEC oil fell since 2002, leading some to suggest that it may trim production in its September meeting.
However, Oil rose to $120 on 21-Aug driven by political tensions that Russia was infuriated by US and EU's response on Georgia and has ordered oil exports to be reduced
Recap of economic developments so far:
- Downturn driven by asset deflation and deleveraging in the banking and household sectors
- Bank asset growth has stalled or fallen, with limited access to dearer credit
- Political economy swinging towards more government intervention
- Losses on traditional assets such as mortgages, credit cards, consumer and corporate loans yet to be taken
- Global economy could be in recession by 2009 with little material economic recovery until after 2010
- Next focus would be on consumer-led global economic weakness
Eric Tan, London
- US PPI came out at 1.2% in July vs consensus of 0.6%.
- European stocks declined on concerns that financial firms will post more losses and reports signaled faster than expected forecast inflation
- July 2008 Housing starts at 965K (lowest since March 2001), this is 11% below July and 59% below the peak of January 2006 (2.292 million)
Commodities
- Softening of oil market fundamentals, seen since the start of the year, are finally being reflected in prices.
- A deteriorating economic outlook is leading to lower demand, and the performance of non-OPEC supply is improving
- OPEC further revised down its estimates for oil consumption in 2009. It had previously suggested that 2009 would be the first year in which demand for OPEC oil fell since 2002, leading some to suggest that it may trim production in its September meeting.
However, Oil rose to $120 on 21-Aug driven by political tensions that Russia was infuriated by US and EU's response on Georgia and has ordered oil exports to be reduced
Recap of economic developments so far:
- Downturn driven by asset deflation and deleveraging in the banking and household sectors
- Bank asset growth has stalled or fallen, with limited access to dearer credit
- Political economy swinging towards more government intervention
- Losses on traditional assets such as mortgages, credit cards, consumer and corporate loans yet to be taken
- Global economy could be in recession by 2009 with little material economic recovery until after 2010
- Next focus would be on consumer-led global economic weakness
Eric Tan, London
Monday 18 August 2008
Moulton's conspiracy theory
The trend towards private equity companies buying at a discount the debt of the companies they took private may not be illegal but it raises the concern that during a situation that where other creditors are pressing for a debt renegotiation, these private equity groups with large debt positions could influence the talks to protect their equity.
Justifications
- prevent fire-sale of debt to hostile hedge funds
Concerns
- Usage of knowledge attained as bidders or shareholders to asess the true value of the debt.
Mitigating factors?
- Chinese walls between debt funds and buy-out funds in PE industry?
Justifications
- prevent fire-sale of debt to hostile hedge funds
Concerns
- Usage of knowledge attained as bidders or shareholders to asess the true value of the debt.
Mitigating factors?
- Chinese walls between debt funds and buy-out funds in PE industry?
Thursday 14 August 2008
Pound falls off the cliff. Markets for the week ending 14-Aug-08
Story of the week: Pound falls off the cliff
- BOE delivered gloomy assessment of the economy paving possibility of rate cuts?
- UK Unemployment rose 60k in Q2 from 13k in Q1
- Jul UK CPI jumped 0.6% to 4.4% and may remain elevated and rising to 5% in coming months - resulting in soaring prices destabilsing the UK economy
- Prospect of 'near term' rate cut unlikely
- UK home sales dropped to 30 year lows
- Dollar may have reached bottom levels and is at the start of long-term uptrend
European GDP contractions
German economy, Europe's largest, contracted 0.5 percent from the first quarter
French economy contracted 0.3 percent from the first quarter
- slump in construction
- stronger euro and slower global growth have damped demand for exports
- exports declined and companies cut spending
- faster inflation erodes domestic spending power.
Bank de-risking. Or are they ?
Qn: Does a bank's practice of lending a large proportion of the finance for the purchase of their assets at a discount factor a cause for concern ?
A) RBS - disposal of $8bn of loans outstanding to private equity
B) Merrill Lynch provided 75% financing of it's $30bn CDO sale to lone star
In the above situations, the banks argue that the finance has been cleverly structured to make it extremely unlikely that the exposure would materialise
But the toxic assets remains a residual exposure if they fell below the equity buffer invested by the private equity firms
Eric Tan, London
- BOE delivered gloomy assessment of the economy paving possibility of rate cuts?
- UK Unemployment rose 60k in Q2 from 13k in Q1
- Jul UK CPI jumped 0.6% to 4.4% and may remain elevated and rising to 5% in coming months - resulting in soaring prices destabilsing the UK economy
- Prospect of 'near term' rate cut unlikely
- UK home sales dropped to 30 year lows
- Dollar may have reached bottom levels and is at the start of long-term uptrend
European GDP contractions
German economy, Europe's largest, contracted 0.5 percent from the first quarter
French economy contracted 0.3 percent from the first quarter
- slump in construction
- stronger euro and slower global growth have damped demand for exports
- exports declined and companies cut spending
- faster inflation erodes domestic spending power.
Bank de-risking. Or are they ?
Qn: Does a bank's practice of lending a large proportion of the finance for the purchase of their assets at a discount factor a cause for concern ?
A) RBS - disposal of $8bn of loans outstanding to private equity
B) Merrill Lynch provided 75% financing of it's $30bn CDO sale to lone star
In the above situations, the banks argue that the finance has been cleverly structured to make it extremely unlikely that the exposure would materialise
But the toxic assets remains a residual exposure if they fell below the equity buffer invested by the private equity firms
Eric Tan, London
Friday 8 August 2008
How Amex's results may give us an insight into the economy in the next 12 months. Markets for the week ending 8-Aug.
Market commentary
- This week, the Federal reserve, MPC and ECB all voted to keep interest rates unchanged.
- Weakening economies left the central banks with little scope to toughen their stance on rising inflation.
- Medium term inflation outlook has improved slightly due to recent drop in oil prices.
How Amex's results may give us an insight into the economy in the next 12 months:Profile of Amex:
- Considered the creme de la creme of credit card lenders
- Premium upscale consumer and business clientele that generally does not carry balances on their cards.
Results:
- 2Q2008 net income from continuing operations :$655 million, down from $1.04 billion in 2Q2007,
- Higher-than-expected provisions on its credit card lending portfolio
30 days past due card loans and 90 days past due card receivables rising to one of their highest levels ever at 3.9% and 3.0%
- Predict delinquent credit card payments, credit cards defaults and losses to rise over the current levels as US housing price decline, rising unemployment levels and increasing energy, commodity and food prices borne from burgeoning inflationary pressures continues to take it's toll on the economy.
Eric Tan, London
- This week, the Federal reserve, MPC and ECB all voted to keep interest rates unchanged.
- Weakening economies left the central banks with little scope to toughen their stance on rising inflation.
- Medium term inflation outlook has improved slightly due to recent drop in oil prices.
How Amex's results may give us an insight into the economy in the next 12 months:Profile of Amex:
- Considered the creme de la creme of credit card lenders
- Premium upscale consumer and business clientele that generally does not carry balances on their cards.
Results:
- 2Q2008 net income from continuing operations :$655 million, down from $1.04 billion in 2Q2007,
- Higher-than-expected provisions on its credit card lending portfolio
30 days past due card loans and 90 days past due card receivables rising to one of their highest levels ever at 3.9% and 3.0%
- Predict delinquent credit card payments, credit cards defaults and losses to rise over the current levels as US housing price decline, rising unemployment levels and increasing energy, commodity and food prices borne from burgeoning inflationary pressures continues to take it's toll on the economy.
Eric Tan, London
Saturday 2 August 2008
US indicators hit recessionary levels - Further deterioration likely ? Markets for the week ending 1-Aug
- Initial jobless claims rose to 448k (highest since April 2003)
- Payrolls: July non-farm payrolls fell 51,000 after 62,000 decline in June 08
- Unemployment rate rose to 5.7% with Goldman and Merrill forecasting it to hit 6.25% to 8% from 2H08 to 1H09
- US treasuries advanced as market took the view that interest rate rises before year-end were becoming more unlikely
Scenario:
Although the U.S. economy expanded at 1.9% in Q2 2008, led by the boost of tax rebates on real consumer spending, there's a good chance that growth will slowdown again in Q3 and hit a trough in Q4-08 and Q1-09 as economic and financial weaknesses continue.
Commentary
This week we have seen record earnings announcements from oil companies, alongside depressing results from GM, BA, BT, Vodafone and continuing concerns in the financial sector. Market continues to look towards oil prices after a $20 fall in July for more relief. However, given that US inventories are low, futures curve are flattish till 2016, there is little to suggest that prices will collapse in the short term. Although US motorists are driving less and airlines are grounding uneconomical flights, China and India's thirst for energy will offset any fall in demand for petroleum and keep prices higher for longer.
Eric Tan, London
- Payrolls: July non-farm payrolls fell 51,000 after 62,000 decline in June 08
- Unemployment rate rose to 5.7% with Goldman and Merrill forecasting it to hit 6.25% to 8% from 2H08 to 1H09
- US treasuries advanced as market took the view that interest rate rises before year-end were becoming more unlikely
Scenario:
Although the U.S. economy expanded at 1.9% in Q2 2008, led by the boost of tax rebates on real consumer spending, there's a good chance that growth will slowdown again in Q3 and hit a trough in Q4-08 and Q1-09 as economic and financial weaknesses continue.
Commentary
This week we have seen record earnings announcements from oil companies, alongside depressing results from GM, BA, BT, Vodafone and continuing concerns in the financial sector. Market continues to look towards oil prices after a $20 fall in July for more relief. However, given that US inventories are low, futures curve are flattish till 2016, there is little to suggest that prices will collapse in the short term. Although US motorists are driving less and airlines are grounding uneconomical flights, China and India's thirst for energy will offset any fall in demand for petroleum and keep prices higher for longer.
Eric Tan, London
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