The budget deficit for the month of July has reached $180.68 billion as the U.S. government struggles to pull the economy out of recession.What isn't helping matters is that because of the economic slowdown tax revenues have also taken a beating. The millions of unemployed people and falling corporate profitability has led to sharp declines in both personal and corporate tax receipts this year.Total receipts have fallen $354 billion or 17% from the same period in fiscal 2008. Government spending on the other hand has risen by $524 billion or 21% during the same period.The wars in Iraq and Afghanistan as well as the bailout packages announced by the government for various sectors of the economy have all contributed their bit to this mess. The net result is a deficit exceeding $1 trillion in the first ten months of this fiscal. It is predicted that the total deficit will reach $1.84 trillion by the end of this year, almost 12.9% of total G.D.P. However this figure is projected to decline to a deficit of $1.26 trillion in 2010,as the economy recovers and also because of cost cutting measures taken by the government.Almost 121 programs have been axed!
So far the Fed has got away with it. But there is no way it can duck the uncomfortable question, of how it plans to finance this deficit going forward, for ever. Various creditors of the U.S., particularly the Chinese have already made it clear that they are worried about their investment in U.S. Treasuries and would not mind looking for a substitute. They fear that reckless U.S. government spending will cause inflation to spike, forcing the government to increase interest rates. This will reduce the value of their existing holdings. Moreover inflationary pressures will dampen U.S. economic growth which will weaken the U.S. dollar further. This too would lead to losses on their investments in U.S. Treasuries. If they slow down future purchases of U.S. government bonds the Fed may have to raise interest rates more sharply than it wants to. This may threaten the fragile economic improvement that we are witnessing right now.
President Obama on his part is attacking his critics."The recession was years in the making, it didn't just start last month.The bank crisis did not happen on my watch.Let's get the history straight,"he said. But his approval ratings have slipped to about 50% now, the lowest since his inauguration. If he fails to get his health care bill through it would signal that finally the American voter is beginning to oppose his policies.
Thursday, August 13, 2009
Tuesday, August 11, 2009
Is The Bull Market Back Again?
An increasing number of market analysts are predicting that this is the start of a new bull market in equities.The latest to lend support to this theory is Abby Joseph Cohen of Goldman Sachs.She feels that the new bull market started in March of this year and that markets can rally a further 10% from here.She sees the S&P 500 index at between 1050-1100 by the end of the year. But she feels that labor markets will be slow to improve and will do so in an erratic way,although the recession,if we use GDP numbers,is almost over.Typically the economy starts improving a few months before the labor market feels the impact.However she has predicted a 'staircase' kind of recovery instead of a 'V' shaped one.
Why is the economic gloom lifting suddenly?There are several indicators that things may finally be brightening up.Firstly and most importantly there is good news on the housing front.Residential home sales are improving and inventories are going down.Housing and related industries put together are perhaps the largest employers in the economy.Upbeat housing data is expected to positively impact both employment as well as consumer spending.However home prices need to stop falling before this sector really picks up again.Then again banks have started repaying TARP funds which indicates easier liquidity conditions in the market.Key indicators of perceived credit risk in the economy are down below 1%.Second quarter results posted by companies have been encouraging.Key sectors like technology,commodities and financials are rallying once again which suggests that industrial activity is picking up once more.
Nevertheless there are diehard skeptics who say that the present recovery in the stock market is nothing but a sucker's rally.Their argument is simple.They point out that that it was the deflation in home prices which triggered the bear market and the recession in the fall of 2007.There are still no signs that housing prices have stabilized.Latest figures show that although the rate of decline in prices is slowing,prices are still down over 12% this quarter from what they were a year ago.Experts are warning that they expect almost 30% of all mortgages to be underwater by next year,and a new wave of foreclosures is set to hit the market.The commercial real estate market being in the greatest danger of collapse.The profitability of companies has improved this quarter due to cost cutting and not due to any improvement in their sales figures.If this were not enough the average American has started saving.The savings rate is around 8% presently and may rise to 10%.This points to weak economic growth going forward.Added to all this is the fear that interest rates may start rising by the end of the year to prevent runaway inflation expected as a result of the loose monetary policy being followed by the Fed.
However convincing this argument may sound, it ignores one basic fact.There are about $11 trillion on the sidelines waiting for an opportunity to be invested.Stock prices like prices of any other article are more a function of money availability rather than of value.Excess money in the system can only lead to higher stock prices in the short to medium term.The 'Bull' is definitely back for the time being.
Why is the economic gloom lifting suddenly?There are several indicators that things may finally be brightening up.Firstly and most importantly there is good news on the housing front.Residential home sales are improving and inventories are going down.Housing and related industries put together are perhaps the largest employers in the economy.Upbeat housing data is expected to positively impact both employment as well as consumer spending.However home prices need to stop falling before this sector really picks up again.Then again banks have started repaying TARP funds which indicates easier liquidity conditions in the market.Key indicators of perceived credit risk in the economy are down below 1%.Second quarter results posted by companies have been encouraging.Key sectors like technology,commodities and financials are rallying once again which suggests that industrial activity is picking up once more.
Nevertheless there are diehard skeptics who say that the present recovery in the stock market is nothing but a sucker's rally.Their argument is simple.They point out that that it was the deflation in home prices which triggered the bear market and the recession in the fall of 2007.There are still no signs that housing prices have stabilized.Latest figures show that although the rate of decline in prices is slowing,prices are still down over 12% this quarter from what they were a year ago.Experts are warning that they expect almost 30% of all mortgages to be underwater by next year,and a new wave of foreclosures is set to hit the market.The commercial real estate market being in the greatest danger of collapse.The profitability of companies has improved this quarter due to cost cutting and not due to any improvement in their sales figures.If this were not enough the average American has started saving.The savings rate is around 8% presently and may rise to 10%.This points to weak economic growth going forward.Added to all this is the fear that interest rates may start rising by the end of the year to prevent runaway inflation expected as a result of the loose monetary policy being followed by the Fed.
However convincing this argument may sound, it ignores one basic fact.There are about $11 trillion on the sidelines waiting for an opportunity to be invested.Stock prices like prices of any other article are more a function of money availability rather than of value.Excess money in the system can only lead to higher stock prices in the short to medium term.The 'Bull' is definitely back for the time being.
Wednesday, August 5, 2009
TARP May Be Profitable For The Government!
Wonders will never cease.Recently while announcing that some institutions will be allowed to repay TARP funds, Treasury Secretary Tim Geithner announced that the Fed ,and therefore the taxpayer,had made a profit of about $6 billion on the bailout funds given to banks via The Troubled Assets Relief Program. True TARP funds were not being given out free of cost in the first place,there being a 5%annual dividend on preferred stock and the requirement that the beneficiary issue warrants to the government which it could repurchase later hopefully at a premium.But critics of the scheme did not even expect a full repayment of the principal let alone anything by way of dividend or premium on repurchase of warrants.They were quite vocal in their criticism of the scheme and charged the government with overpaying for the preferred stock which it got from the institutions which got TARP funds.It is claimed that the government may have paid as much as $159 billion more in aid than it received in securities.
Now as things stand, not only has the Fed made a tidy profit by way of interest and dividends, but it also stands to net a substantial profit due to an increase in the value of the shares and warrants it holds in these institutions. The stock market has risen almost 50% from the lows it touched earlier this year and is poised to rise further given the steady stream of encouraging news about the economy. Goldman Sachs which repaid its TARP funds in time not only paid a dividend of $318 million to the government but it also repurchased its warrants for about $1.1 billion. In the process the government netted an annualized return of 23% on the money it gave to Goldman Sachs last year. Likewise American Express has also repurchased its warrants for $340 million with the government making an annualized profit of 26% on the money injected into American Express.
But it's not been a one way street for the government.Apart from the above high profile deals there have been several small banks also that have repaid TARP funds and repurchased their warrants, but at a discount. This is to be expected because warrants by their very nature are highly illiquid instruments, and apart from those issued by the best known names in the business, are unlikely to find ready buyers. Nevertheless the government's claim, when it issued TARP funds, that it was likely to make a profit on the scheme doesn't sound all that far fetched any more.
However the government has not been forthcoming about the true cost of TARP funds to it, inasmuch it is silent about the interest it has to pay on them and also the administrative costs involved. These costs may in fact never be accurately worked out. But given the gravity of the crisis facing the economy it will have been worthwhile even if the government breaks even on the scheme.
Now as things stand, not only has the Fed made a tidy profit by way of interest and dividends, but it also stands to net a substantial profit due to an increase in the value of the shares and warrants it holds in these institutions. The stock market has risen almost 50% from the lows it touched earlier this year and is poised to rise further given the steady stream of encouraging news about the economy. Goldman Sachs which repaid its TARP funds in time not only paid a dividend of $318 million to the government but it also repurchased its warrants for about $1.1 billion. In the process the government netted an annualized return of 23% on the money it gave to Goldman Sachs last year. Likewise American Express has also repurchased its warrants for $340 million with the government making an annualized profit of 26% on the money injected into American Express.
But it's not been a one way street for the government.Apart from the above high profile deals there have been several small banks also that have repaid TARP funds and repurchased their warrants, but at a discount. This is to be expected because warrants by their very nature are highly illiquid instruments, and apart from those issued by the best known names in the business, are unlikely to find ready buyers. Nevertheless the government's claim, when it issued TARP funds, that it was likely to make a profit on the scheme doesn't sound all that far fetched any more.
However the government has not been forthcoming about the true cost of TARP funds to it, inasmuch it is silent about the interest it has to pay on them and also the administrative costs involved. These costs may in fact never be accurately worked out. But given the gravity of the crisis facing the economy it will have been worthwhile even if the government breaks even on the scheme.
Monday, August 3, 2009
U.S. Unemployment-What Lies Ahead.
Unemployment in the U.S. which has already reached 9.5% is predicted to hit 9.6% when the next jobless figures are released. If this wasn't bad enough everybody from Obama and Geithner to Roubini predict that job losses will only get worse and probably cross 10% by the end of the year. They are expected to peak at about 10.6% sometime next year and decline gradually thereafter. This gloomy prediction comes amidst signs that the economy may be bottoming out.
These numbers are very significant for U.S. policy makers given that consumption expenditure accounts for almost 70% of U.S. G.D.P. Growing unemployment threatens to cap any rebound that the economy may witness as businesses rebuild inventories and residential housing stabilizes.Particularly difficult will be to time the withdrawal of stimulus funds from the economy. Economists the world over are warning that unless a plan to gradually withdraw excess liquidity is put in place, the world may witness runaway inflation and the consequences that follow. On the flip side, any increase in interest rates threatens to derail a fragile economic recovery.
Just how bad is the unemployment problem? It's really bad. The official unemployment figure of 9.5% only tells half the story. There are many more who are working only part time or have dropped out of the labor force.Making things worse is that the U.S. savings rate has shot up from 0% to almost 8%. At the same time those who want to spend are unable to borrow. Given that the value of household assets,be it homes or stocks, has plummeted even creditworthy consumers can no longer borrow as much as they used to before. In this scenario, given the dependance on consumption, the U.S. economy can create only a limited number of jobs in the near term.
Experts say that it will require sustained growth of 2.5% and above to create new jobs in the U.S. economy. Additionally, the tendency of U.S. corporates to outsource production to low cost centers outside the U.S. will need to be checked. Giving additional tax breaks if production is undertaken within the U.S. would be a welcome step.
Of late Bernanke sounds increasingly confident that things are under control. He has been joined by the former Fed chief Greenspan who too feels that the economy is on the mend. A few days back Bernanke had said that the Fed had been devoting considerable attention to issues relating to its exit strategy. He felt confident that the Fed has the necessary tools to implement the strategy when appropriate. He said 'We will not allow the broad measures of money circulating in the economy to rise at a rate that will cause inflation eventually'.
These numbers are very significant for U.S. policy makers given that consumption expenditure accounts for almost 70% of U.S. G.D.P. Growing unemployment threatens to cap any rebound that the economy may witness as businesses rebuild inventories and residential housing stabilizes.Particularly difficult will be to time the withdrawal of stimulus funds from the economy. Economists the world over are warning that unless a plan to gradually withdraw excess liquidity is put in place, the world may witness runaway inflation and the consequences that follow. On the flip side, any increase in interest rates threatens to derail a fragile economic recovery.
Just how bad is the unemployment problem? It's really bad. The official unemployment figure of 9.5% only tells half the story. There are many more who are working only part time or have dropped out of the labor force.Making things worse is that the U.S. savings rate has shot up from 0% to almost 8%. At the same time those who want to spend are unable to borrow. Given that the value of household assets,be it homes or stocks, has plummeted even creditworthy consumers can no longer borrow as much as they used to before. In this scenario, given the dependance on consumption, the U.S. economy can create only a limited number of jobs in the near term.
Experts say that it will require sustained growth of 2.5% and above to create new jobs in the U.S. economy. Additionally, the tendency of U.S. corporates to outsource production to low cost centers outside the U.S. will need to be checked. Giving additional tax breaks if production is undertaken within the U.S. would be a welcome step.
Of late Bernanke sounds increasingly confident that things are under control. He has been joined by the former Fed chief Greenspan who too feels that the economy is on the mend. A few days back Bernanke had said that the Fed had been devoting considerable attention to issues relating to its exit strategy. He felt confident that the Fed has the necessary tools to implement the strategy when appropriate. He said 'We will not allow the broad measures of money circulating in the economy to rise at a rate that will cause inflation eventually'.
Sunday, August 2, 2009
U.S. Economy--Recovery In Sight?
President Obama warned Saturday it would take 'many more months' for the U.S. to get out of recession even after GDP figures for the 2nd quarter were much better than expected, showing the economy shrank only 1% as against an expected 1.5%. What seems to worry him most is the worsening unemployment situation as figures due out next week are expected to show that more Americans are losing work.
Dr. Roubini had earlier expressed similar views. He said the recession will last roughly 24 months and will be over by year's end. 'I am not forecasting economic growth before year's end', he said.
Nevertheless the consensus is that the worst is definitely behind us and the economy should be returning to the growth path. The only debate now is over how soon recovery will start and how strong it will be. Analysts are now willing to stick their necks out and are predicting that recovery will start in the 3rd quarter itself. The most important reason for this, they say, is inventory rebuilding after businesses aggressively liquidated inventories in the earlier part of the year. Boosted by the 'cash for clunkers' scheme auto demand is expected to increase as is the demand for other consumer durables. The residential housing downturn also seems to have finally hit bottom and there are welcome signs of a rebound. Countrywide home resales in June are up 9% since January this year and the sales of new homes has risen 17%. Construction has climbed 20% and prices are showing signs of perking up. The impact of the fiscal stimulus as well as increased government spending is beginning to be felt.
What now worries analysts is whether the recovery will be a 'W' shaped one or it will be a steady climb out of the financial abyss. There is a definite possibility of the former as once the impetus provided by boosting inventory levels loses steam the economy may start a second leg downwards. Other factors contributing to this possibility are weak final demand due to high rates of unemployment, continuous de-leveraging by the private sector and excess capacity in the economy.
Dr. Roubini feels we are in a deep 'U' shaped recession and that recovery will be weak with growth averaging about 1% over the next couple of years. The latest GDP numbers have however led many analysts to revise growth projections sharply upwards from 0.5% to 3-4% in the third quarter as firms rebuild business inventories and housing ceases to be a drag. Growth is expected to soften once again over the longer term as the economy struggles to create jobs once again. Even the FOMC expects the labor market to improve gradually only from 2010 onwards, and the economy may take five or six years to converge to a sustainable growth rate.
Dr. Roubini had earlier expressed similar views. He said the recession will last roughly 24 months and will be over by year's end. 'I am not forecasting economic growth before year's end', he said.
Nevertheless the consensus is that the worst is definitely behind us and the economy should be returning to the growth path. The only debate now is over how soon recovery will start and how strong it will be. Analysts are now willing to stick their necks out and are predicting that recovery will start in the 3rd quarter itself. The most important reason for this, they say, is inventory rebuilding after businesses aggressively liquidated inventories in the earlier part of the year. Boosted by the 'cash for clunkers' scheme auto demand is expected to increase as is the demand for other consumer durables. The residential housing downturn also seems to have finally hit bottom and there are welcome signs of a rebound. Countrywide home resales in June are up 9% since January this year and the sales of new homes has risen 17%. Construction has climbed 20% and prices are showing signs of perking up. The impact of the fiscal stimulus as well as increased government spending is beginning to be felt.
What now worries analysts is whether the recovery will be a 'W' shaped one or it will be a steady climb out of the financial abyss. There is a definite possibility of the former as once the impetus provided by boosting inventory levels loses steam the economy may start a second leg downwards. Other factors contributing to this possibility are weak final demand due to high rates of unemployment, continuous de-leveraging by the private sector and excess capacity in the economy.
Dr. Roubini feels we are in a deep 'U' shaped recession and that recovery will be weak with growth averaging about 1% over the next couple of years. The latest GDP numbers have however led many analysts to revise growth projections sharply upwards from 0.5% to 3-4% in the third quarter as firms rebuild business inventories and housing ceases to be a drag. Growth is expected to soften once again over the longer term as the economy struggles to create jobs once again. Even the FOMC expects the labor market to improve gradually only from 2010 onwards, and the economy may take five or six years to converge to a sustainable growth rate.
Saturday, August 1, 2009
Porsche vs. VW-What went wrong for Porsche?
For long Porsche had been a niche player in the world automobile market producing popular sports cars. It was also one of the most profitable auto companies. It then hit upon the daring idea of taking over VW, the largest European automaker, a company almost fifteen times its own size. For years it quietly built up its shareholding in VW till it reached a little over 50%. It also purchased options for an additional 20% of the shares in VW. How they managed to keep their moves and intentions secret is a mystery which is unlikely to be solved anytime soon.
Speculators,intrigued by the stability in the price of VW shares went short on a large scale. They took it on the chin to the tune of about 30 billion euros after Porshe announced that it controlled almost 75% of all VW shares. For a brief period VW became the world's most valuable company as short sellers scrambled to cover their short positions and VW's share price soared to over 1000 euros. The German regulator BaFin concluded an inquiry into possible share price manipulation by Porsche in the company's favor.
Now all of a sudden the boot's on the other foot. Porsche has agreed to be taken over by VW! What went wrong for Porsche? Following the collapse of Lehman Bros. all kinds of credit simply dried up,especially for the kind of adventure undertaken by Porsche. The economic crisis and the collapse of the auto industry in particular only made things worse. Porsche found it could not profitably hold on to its options and other investments. Additional finance was simply not available. Now it's burdened with about nine billion euros in debt and may have to bring in almost five billion euros in additional capital before merging with VW. The middle east is once again the beneficiary of this financial misadventure. The Sheik of Qatar is rumored to be putting in about seven billion euros in return for a seventeen percent stake in VW, making him its third largest shareholder.
As for the two Porsche executives who masterminded this gamble, their CEO Wendelin Wiedeking and the CFO Holger Haerter, they have been shown the door. They will not leave empty handed though. Wiedeking will receive a fifty million euro payoff while Haerter will receive twelve and a half million. They may receive additional money through other agreements or bonuses.
VW plans to merge Porsche fully with itself by mid 2011.
Speculators,intrigued by the stability in the price of VW shares went short on a large scale. They took it on the chin to the tune of about 30 billion euros after Porshe announced that it controlled almost 75% of all VW shares. For a brief period VW became the world's most valuable company as short sellers scrambled to cover their short positions and VW's share price soared to over 1000 euros. The German regulator BaFin concluded an inquiry into possible share price manipulation by Porsche in the company's favor.
Now all of a sudden the boot's on the other foot. Porsche has agreed to be taken over by VW! What went wrong for Porsche? Following the collapse of Lehman Bros. all kinds of credit simply dried up,especially for the kind of adventure undertaken by Porsche. The economic crisis and the collapse of the auto industry in particular only made things worse. Porsche found it could not profitably hold on to its options and other investments. Additional finance was simply not available. Now it's burdened with about nine billion euros in debt and may have to bring in almost five billion euros in additional capital before merging with VW. The middle east is once again the beneficiary of this financial misadventure. The Sheik of Qatar is rumored to be putting in about seven billion euros in return for a seventeen percent stake in VW, making him its third largest shareholder.
As for the two Porsche executives who masterminded this gamble, their CEO Wendelin Wiedeking and the CFO Holger Haerter, they have been shown the door. They will not leave empty handed though. Wiedeking will receive a fifty million euro payoff while Haerter will receive twelve and a half million. They may receive additional money through other agreements or bonuses.
VW plans to merge Porsche fully with itself by mid 2011.
Sunday, June 21, 2009
Are The Markets Right About The Recession?
Wall Street has had a run up of almost 40% over the last three months. The reason is slightly weird. The market cheered news that was less bad than expected. Die hard believers in the efficiency of the stock market insist that the recession ended sometime this spring. They claim that markets typically look forward at least nine months and they predict the economy will start recovering by the end of the year.
The pessimists are not convinced. They say that although the panic that set in after Lehman Brothers collapsed seems to have subsided the economy is still in decline. A lower rate of decline does not equal a recovery they say. Unemployment rates are rising and that will cap any stock market rally as more people have less money to spend. In any case the stock market has been wrong in the past as there are several instances of bear market rallies even during the Great Depression. They warn of another dip in economic activity before a slow recovery sets in, a classic example of a 'W' shaped recovery. A temporary improvement in economic activity, as businesses rebuild inventory dumped onto the markets at a discount after the credit markets froze,should not be confused with a recovery.
Nevertheless it is hard to ignore the signs of stabilization emerging around us. The Leading Indicators Index which considers consumer goods orders, building permits and several other data points rose in May by 1.2%, the second increase in as many months. The housing market also appears to be improving,by at least as far as the number of houses sold is concerned although not by prices. Cheaper homes are finally attracting buyers and people are beginning to have greater confidence about future incomes. Figures due to be released shortly are expected to show that both existing homes sales as well as fresh homes sales posted a healthy increase in May, helped by low mortgage rates and Obama's $8000 first time home buyer tax credit. The 'cash for clunkers' scheme will pump in additional billions of dollars into the ailing auto sector.
Typically recessions end before people realize they have ended. The economy is expected to start recovering by the last quarter of this year if not earlier. The experts may have got it right this time after all.
The pessimists are not convinced. They say that although the panic that set in after Lehman Brothers collapsed seems to have subsided the economy is still in decline. A lower rate of decline does not equal a recovery they say. Unemployment rates are rising and that will cap any stock market rally as more people have less money to spend. In any case the stock market has been wrong in the past as there are several instances of bear market rallies even during the Great Depression. They warn of another dip in economic activity before a slow recovery sets in, a classic example of a 'W' shaped recovery. A temporary improvement in economic activity, as businesses rebuild inventory dumped onto the markets at a discount after the credit markets froze,should not be confused with a recovery.
Nevertheless it is hard to ignore the signs of stabilization emerging around us. The Leading Indicators Index which considers consumer goods orders, building permits and several other data points rose in May by 1.2%, the second increase in as many months. The housing market also appears to be improving,by at least as far as the number of houses sold is concerned although not by prices. Cheaper homes are finally attracting buyers and people are beginning to have greater confidence about future incomes. Figures due to be released shortly are expected to show that both existing homes sales as well as fresh homes sales posted a healthy increase in May, helped by low mortgage rates and Obama's $8000 first time home buyer tax credit. The 'cash for clunkers' scheme will pump in additional billions of dollars into the ailing auto sector.
Typically recessions end before people realize they have ended. The economy is expected to start recovering by the last quarter of this year if not earlier. The experts may have got it right this time after all.
Subscribe to:
Posts (Atom)