The Chicago PMI is back to its April level.
The Institute for Supply Management-Chicago said on Tuesday its index of Midwest business activity rose in June to 39.9 from 34.9 in May.
(seasonal adj) June May April March Feb Jan NAPM-Chicago 39.9 34.9 40.1 31.4 34.2 33.3 Production 39.3 38.1 38.1 32.7 34.7 29.7 New Orders* 41.6 37.3 42.1 30.9 30.6 30.7 Order Backlog* 37.6 26.3 36.9 21.3 29.3 26.5 Inventories 34.2 31.5 30.6 34.9 33.0 38.0 Employment* 28.9 25.0 31.8 28.1 26.2 34.8 Supplier Deliveries* 43.1 43.0 45.4 48.4 51.0 51.9 Prices Paid 36.3 29.8 28.4 34.1 37.8 39.8
The * indicates components used to calculate index.
The rise in mid and long-term yields during May suggests that fund managers invested the inflow in shorter term maturities during May.
May was a great month for the U.S. mutual fund industry. According to just-released data from the Investment Company Institute (ICI), long-term funds – stock, bond and hybrid funds – experienced a net inflow of $52.8 billion in May. As today’s Hot Chart shows, that was the
largest monthly inflow on record. At this juncture, it is worth noting that even if investors’ interest for equities is coming back, the bulk of
the new inflows are still directed towards bond funds: a two-month cumulative inflow of $60.2 billion vs. $30.2 billion for stocks funds.(…)As shown, the scope for a potential redeployment of funds remains significant with 37.4% of total mutual fund assets still held in cash at the end of May.
Chain-store sales, helped by seasonable weather, thankfully popped higher in the June 27 week — but not enough to salvage the month. ICSC-Goldman’s same-store sales tally jumped 1.6 percent for the biggest weekly gain in six months. The year-on-year rate moved back in the positive column, at 0.6 percent to end three straight negative readings. But for the month of June, it’s too little too late: "This late June spark was a welcome sign for the industry and the economy, however, for the month as a whole, June sales continue to track for a ‘tough’ month with the early part of the month weighing heavy on its performance."
The 4-week moving average is down 0.2% in June. It was down 0.3% in May.
Consumer prices in the 16 countries that use the euro declined in June from a year earlier, marking the first negative reading since records began in January 1997.
The euro zone’s annual consumer-price-index rate fell 0.1% in June from a year earlier, the European Union’s official statistics agency, Eurostat, said Tuesday. In May the annual rate was flat. While a decline was expected, economists surveyed last week had forecast a steeper decline of 0.2%.
The annual CPI rate remains well below the level of about 2% that the European Central Bank targets in the medium term. However, the central bank has previously said it expects consumer prices to decline for several months before returning to positive territory by the end of the year.
Other data reported earlier Tuesday suggest that consumer prices may continue to fall for some time. The forward-looking producer-price indexes for May from both France and Italy dropped sharply from a year earlier
In France, producer prices fell by 0.2% from April and by 6.7% from a year earlier, although the French statistics office Insee said this was a less steep decline than the 7.8% annual fall reported in April.
In Italy, producer prices fell by 0.2% from April and by 6.1% from a year earlier, the sharpest drop since January 2006.
The auto sector is the last of the deeply impacted sectors that have yet to show some encouraging signs. The inventory correction appears over and plants are being restarted. And banks are lending a bit more freely, there is clearly pent-up demand and the cash-for-clunker program will start shortly. Only major caveat: personal income is very weak and consumers are deleveraging.
The beleaguered auto industry could see signs of strengthening demand when auto makers report U.S. sales for June on Wednesday, according to auto makers and analysts.
Buoyed by fewer jobless claims and improved consumer confidence, annualized U.S. sales could hit 10 million this month for the first time in 2009, Ford Motor Co. analyst George Pipas said on Monday. The deep discounts that General Motors Corp. and Chrysler Group LLC have offered to boost sales are also likely to bolster June sales.
Those factors suggest "the worst is behind us," Mr. Pipas said. "Even if sales fail to hit the 10 million milestone, we’re still not slipping back." A GM spokesman also said an annualized 10 million sales rate is possible for June.
J.D. Power and Associates predicts annualized June sales of 10.3 million new cars and trucks, up from 9.9 million in May, while Edmunds.com expects the sales rate to top 10 million, though overall sales will still be 25% lower than a year ago.(…)
Underscoring its rosier outlook, Ford said it is now planning production for the third quarter that is 5.4% above its most recent quarterly target.
The company said it would build 485,000 new cars and light trucks during the quarter ending Sept. 30, a 16% increase over the 418,000 produced in the year-ago quarter. It is the second time Ford raised its third-quarter output target.
Ford said earlier this month that it would raise production 10%, to produce 150,000 cars and 310,000 trucks during the quarter. Monday’s revised target adds another 15,000 cars and 10,000 trucks. It would be the first time in two years that Ford’s quarterly output would be increased year-over-year, and comes amid fresh signs that the downturn in U.S. auto sales may be abating.
"We decided last year to break the mold and stop over producing," said Mark Fields, Ford’s president of the Americas. "Our inventory is now down and with demand up, driven by our new products, we are in the position to increase production again. There is definitely a cessation in the deterioration of the economy."
Ford’s increased output comes as GM and Chrysler are still scrambling to adjust output to lower demand while dealing with bankruptcy-induced reorganizations.(…)
Chrysler kept all of its U.S. plants idled during the past two months as it restructured. The company resumed production at seven of its U.S. plants on Monday.(…)
Ford, which unlike GM and Chrysler has not needed bailout loans from the government, will likely report a decline in June sales of less than 20% from a year ago, he said. Most auto makers have suffered year-over-year monthly declines of 30% or higher this year.
June sales also got a boost as hundreds of dealers who are being forced to close their Chrysler franchises sold off their inventory at deep discounts. GM’s Pontiac brand, which is being shuttered as part of the auto maker’s restructuring, has also slashed prices in recent weeks to clear its stock.
U.K. House Prices Rise for Second Consecutive Month
The U.K. economy posted its sharpest decline in more than 50 years in the first quarter, suggesting the recession has been even harsher than previously thought, the Office for National Statistics said Tuesday.
The ONS said the economy slumped a downwardly revised 2.4% in the first quarter, which was narrowly the largest decline since the second quarter of 1958. The annual decline in output was 4.9%, the largest since records began in 1948.
The British pound dropped more than half a cent after the data to $1.6605, from $1.6670. The pound fell more modestly against the euro, while U.K. government bond prices were little changed.(…)
First quarter GDP was originally reported at -1.9% from the previous quarter and -4.1% on a yearly basis.
There were two main causes of the revision to the first-quarter data, the ONS said. One was a sharper decline in construction output than previously reported. In addition, various technical changes pushed the services output down more sharply than previously reported.(…)
However, the data is likely to deepen the uncertainty over the economy’s health. The government says a solid recovery will start late in 2009 and the economy will expand 1.25% in 2010 but the Organization for Economic Cooperation and Development said last week the economy will contract 4.3% this year and stagnate in 2010.
The final reading of the national accounts data showed the household savings ratio slipped to 3% in the first quarter from 4% in the fourth, reflecting lower wages and salaries.
Household expenditure dropped 1.3% in the first quarter on a quarterly basis, the biggest decline since 1980. Real household disposable income fell 2.4%, also the largest since 1980.
The ONS revised 2008 GDP numbers. They found the economy shrunk 0.1% in the second quarter compared with flat output reported previously. That means the U.K. recession started in April 2008.
Separately, U.K. house prices increased again in June and may only post a small single-digit percentage decline for the year as a whole, the Nationwide Building Society said Tuesday.
The mortgage lender said the price of a typical house gained 0.9% from a month earlier to £156,442 ($259,161) in June following a 1.3% gain in May. That left prices down 9.3% from a year earlier, the first time the year-to-year fall has been in single digits since last July, the mortgage lender said.(…)
Nationwide said house prices were 0.9% higher in the latest three months than they were in the previous three months. That’s the first time the three-month measure, which helps smooth out monthly volatility, has posted a rise since December 2007.
The Nationwide report is the latest data that suggest the severe downturn in the U.K. housing market is bottoming out after the global credit crisis triggered sharp drops in prices and interest rates. Nevertheless, with unemployment rising as a result of the recession, economists say the outlook for demand and prices remains uncertain.(…)
Nationwide noted that the stabilization of prices was unusual because it had taken place even though sales had remained very low by historical standards — with mortgage approvals still 55% below their long-run average due to the recession and continued tight credit conditions.
Nationwide said there was also a risk that any recovery in housing demand could easily stall if and when interest rates begin to rise again. "With the stock of property available for sale likely to eventually increase, house purchase demand will need to rise more convincingly from current levels to prevent a possible relapse in price levels," Mr. Gahbauer said.
Chart from FT Alphaville
And banks are printing money off the fed-engineered yield curve.
The securities firms still standing on Wall Street are about to close the most lucrative quarter since the credit crisis erupted.
And instead of relying on risk and leverage to drive profits, companies such as J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. are getting back to basics, with a strong performance from trading and underwriting.
Investor confidence in the debt markets fueled issuance of $1.5 trillion globally from the start of the second quarter through Monday, according to Dealogic. That was slightly lower than in the first quarter, but the latest results showed a rebound in high-yield issuance.
Equity offerings reached nearly $260 billion during the second quarter, which ends Tuesday. That is almost four times the amount recorded during the first quarter, and the highest since 2008’s second quarter, Dealogic said.
In trading, the gap between bid and offer prices on fixed-income assets remained wide through most of the quarter, boosting profits from buying and selling these securities. Fixed-income trading is one of the main earnings drivers for big Wall Street firms.(…)
Much of this quarter’s equity issuance came after banks rushed to raise nearly $90 billion following the government’s stress tests. There also was a backlog of issuers taking advantage of the market’s upturn since early March, not necessarily a major shift in sentiment, said David Trone, an analyst with Fox-Pitt Kelton.
"There was pent-up demand, and they issued at any cost, and now that’s starting to peter out," he said. "The underwriting fees are really going to pop, but that phase is over."
Meanwhile, the income potential on fixed-income trading has shown signs of narrowing in recent days. And Wall Street is heading deeper into the traditionally sluggish summer months. When second-quarter results are announced later this month, the signs of recovery will be obscured by one-time accounting issues at some banks and securities firms. Companies that repaid the government’s bailout money have said they will take a one-time charge to reflect their payment.
The FT has excellent interactive graphics on the world’s investment banks rankings for the first half of 2009.
(…)Fresh off a chat with executives at Citigroup Richard Bove stopped by the Barron’s offices to talk about why profits at some big banks could quintuple; why former Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and Federal Deposit Insurance Corp. Chairman Sheila Bair are "legitimate American heroes"; and how Citi’s loan losses in the next few quarters "are going to blow your mind."
Barrons.com: If you buy Citigroup stock now, is it like buying Citi in the early ’90s, when the business seemed doomed and the stock price was down around $2 a share?
Bove: I think so — as long as Citigroup is going to do well in the next few quarters.
Q: And will they do better in the next four quarters?
A: Well it depends. If you think we are going into a depression, Citigroup is not going to do well, and the rest of the American banking system is not going to do well. If you think that the economy is going to turn around, which I believe is the case by the end of this year, then the profitability of the American banking industry is going to be explosive on the upside. If it turns around, banks are going to see a fivefold increase in their net income.
Q: So, your view of Citi is that this mess is almost all forgotten in five years? We will be looking at a stock that is trading in double digits?
A: Let me ask you, who the hell remembers what happened in 1990, ‘91? Nobody. And the stock from 1993 to 1998 exploded.
Q: You see that happening again.
A: I’m not going to tell you Citi is ready for it yet, because my sense is that Citi does not understand Citi yet. In other words, the board of directors of Citi has no confidence in the management of Citi for good reason.
The issue is that over a period of three and a half decades [top Citi executives] have destroyed the efficient use of capital, and they have destroyed the whole management crew of that company…. Now people take a look at [Chief Executive Officer] Vikram Pandit, and they say this guy is not moving fast enough. He is not turning this company around. How can you turn around 35 years of mismanagement and inappropriate use of capital in less than a decade? You can’t do it. I think Vikram Pandit is doing everything right, personally. But I don’t think that he has come to grips with these two issues — personnel and capital — because he is spending too much time putting out fires. The government wants him fired. They have got all these loan losses in the next couple of quarters at Citigroup — are going to blow your mind they are going to be so big.
Q: But your sense is that after that, the business will improve dramatically?
A: If the U.S. government says we are not going to let it go bankrupt, it is not going to go bankrupt. So if it is not going to go bankrupt, ultimately, it is going to be fixed. Ultimately, you are going to figure out how to do it right, and when you figure out how to do it right Citigroup comes out of it in a really strong position. Now what does it have that would make it come out of this thing, and what are the things that Pandit can do when he has a chance to look beyond these political issues? No. 1, Citigroup is in 140 countries. There is no other bank in the world in 140 countries. What if you are the U.S. government and you have a need to function at some point in one or other of these countries. Who are you going to go to, to handle the transmission of cash, to help in placing people? You go to Citigroup. Who do you think is funding Iraq for the U.S. government? Citigroup is.
The wealthy, the powerful in every one of the major countries in the world have accounts at Citigroup. So Citigroup does perform a vital need. Plus, Citigroup has certain businesses that actually do pretty well. Credit cards are a business that they still seem to do reasonably well. They still have corporate services of a wide variety, which they do better than anybody else. So there is a need for Citigroup. And they’ll eventually buy back all the excess stock that was issued recently.
Q: Who else right now has the brightest future, particularly in terms of stock price?
A: Bank of America (BAC). Think about this. In 2006 Bank of America wrote off about $5 billion of bad loans. In 2007 I think they wrote off $8 billion, and in 2008 they wrote off $24 billion. This year they’ll write off — I’m estimating $46 billion. Again, in a decent economy you are not going to be writing off $46 billion. That number will go back down to somewhere around $4 billion or $5 billion a quarter. That’s $41 billion in loan losses which go from loan losses to pretax income, and triples, quadruples Bank of America’s earnings. The stock is going to go back to $35 a share as far as I’m concerned.
Q: Has the government handled the crisis effectively? Was it right to put a gun to the heads of some of these bank executives to basically force them to make acquisitions?
A: The government had to take extraordinary steps. And I think Paulson, Bernanke and Shelia Bair were legitimate American heroes. Why? Because they acted. They saw that the American financial system was going to collapse and they acted. They took the steps necessary to prevent that from happening.
So, now the crisis was resolved. In other words…you have shored up confidence in the banking system, so we’ll go on to the next mania or the next panic. But the point is this: [It] seems to have been resolved for the big banks, and now what is going to happen is you are going to see different regulators go out to the small banks and shut down maybe 150 to 200 of them.
Q: You mean the much smaller banks, not the regional banks?
A: Yes. You have 50% of the assets in the American banking system in four banks. If you take the banks that have over $20 billion in assets, that’s 73% of the assets of the American banking system. So, you subtract 30 banks from 8,246 and you come up with, like, 8,215 banks that have the other 26% or so of the assets of the American banking system. You know there are a lot of them that should be gone.
Q: And they should be gone because they have solvency issues?
A: Because they are unprofitable. Essentially these banks are one-trick ponies. But those 8,200 banks take in deposits and make loans on residential real estate. They make construction loans, they make mortgage loans, they make home-equity loans but that’s all they do, they don’t do anything else. So if residential real estate is in terrible trouble, then these guys have no other options but to live with the cycle. And if the cycle is bad enough — and this one certainly is — then these banks start losing a lot of money.
National Bank Financial Group argues that May’s 6.9% savings rate is a statistical fluke and is not sustainable. Time will tell but if they are wrong and the savings rate stays high, consumer spending will really hit the skids (see THE US CONSUMER: BEWARE!)
The savings rate unexpectedly surged to a 15½ year high of 6.9% in May. This is well above the 5-to-6% range that we assume in our medium term forecast. At this point, we do not see the May data as sufficient to revise our assumptions. That’s because all the increase in
the savings rate in May came from a 1.4% boost to disposable income due to a one-time fiscal stimulus payment. As the impact of the
stimulus wanes, we expect the savings rate to quickly revert back to 5.2% – see Hot Chart. We still believe that the significant improvement in financial markets through Q2 has helped improve the balance sheet of households to the point where an additional increase in the savings rate does not seem to be justified – particularly if the economy begins to recover in Q3 as we expect.
