News You Can Use…December 10

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Below, you will find some data that I’ve come across in the past week. The next summary will go out on Monday.




The jobs data is mixed. Last Friday, the jobs report was stronger than expected — only 11,000 jobs were lost.  There were 50,000 temporary workers hired (and that often leads to increased jobs) and the number of hours worked increased.  The unemployment rate dropped from 10.2% to 10.0%.  But, this was the 23rd consecutive month of job losses.  There are 15.4 million unemployed Americans.  The average unemployed American has been out of work for 28.5 weeks.

The broader measure of unemployment (including the officially unemployed as well as people too discouraged to look for work and people who have accepted part time work when they want full time work) dropped from 17.5% to 17.2%.  While that’s good news, that still means that more than one in six Americans is either unemployed, underemployed or too discouraged to look.




Lets hope the ISM indicator is right again. The ISM survey reported the second consecutive month in which companies reported hiring more people than they fired.  In the past, whenever there were two consecutive months of such good news, unemployment had already peaked (or one time it peaked simultaneously).




Fed gives mixed report. The Fed said that economic conditions had improved modestly and pointed to retailers becoming more optimistic about holiday sales and an increase in home sales.  On the down side, business lending is still weak, commercial real estate is deteriorating and the job market is still weak.




Corporate pension funds are very underfunded. At the end of 2008, 92% were underfunded.  Of course, the market rally should help these numbers.




TARP is doing better than my portfolio. The Treasury Dep’t has said that they expect a $42 billion loss on the $370 billion it lent out.  The government lost approximately $60 billion (half of that was to GM, Chrysler and AIG), but the government also received profits from some loans.  Of course, we don’t know the results yet and we have no idea how the Fed is going to do with their new (huge) portfolio of mortgage-backed securities.  Since we didn’t lose as much as we expected in TARP, there’s talk about using some of this money for a jobs program.  I don’t care how we piss it away; just as long as we don’t reduce our deficit.




Bank of America has repaid its $45 billion bailout loan. They felt like this needed to be done so that they wouldn’t be limited in the compensation that they could offer to a new CEO.  This means that Citi and GMAC are the only big banks that still haven’t repaid their loans.




Citi may be at a big disadvantage in the future. Not counting GMAC (which isn’t really a competitor), Citi is the last bank that has compensation limits placed on it.




Some sovereign wealth funds did okay in the bailout. Kuwait earned a 37% (annualized) return from its investment in Citigroup.  Maybe Kuwait could give some investment tips to Dubai.




GS, MS and JPM also must have done okay with the bailout. They are about to pay record bonuses.  Geithner has argued that GS could not have survived without the bailout and that the bonus system needs to be changed.  (The last time our government had such “strong” rhetoric was when they were telling high school kids to “just say no.”  Unfortunately, the only person who found that to be a lasting message was Jenny.)




Maybe this explains why so many Goldman employees go to work for the government. Apparently, a private sector employee who joins the government can obtain an exemption from paying capital gains taxes when they sell their stock (to join the federal work force).  The goal is to avoid a situation in which it is too costly to come work for the government (because of the tax consequences).  It may be, however, that this actually creates an incentive to join the government.  Paulson reportedly avoided up to $200 million of taxes in his diversification move.  Pretty good for government work.




Everyone is worried about commercial real estate. Delinquent commercial real estate mortgages held by banks increased 51 bps to 3.43%.  Delinquent loans held by commercial mortgage-backed securities increased to 4.06% (one year ago, only 1.17% of these loans were delinquent).  Regional and community banks have a much heavier concentration in this type of loan.  The largest regional banks average 37% of their portfolios invested in commercial real estate while banks like Citi and WFC are around 9.5%.  As a result, the government is unlikely to let these banks repay TARP money.




No new news…but here are some real estate numbers. The value of commercial real estate has dropped 21% in the first three quarters of 2009.  Commercial real estate prices dropped 12% in 2008.  With respect to homes, approximately 23% of homeowners (with mortgages) are underwater.




The wealthy are investing in real estate. A recent survey from Barclays said that investors with more than $800,000 to invest are planning to slightly increase their real estate holdings.




Banks are not investing in commercial real estate. Commercial real estate loans from banks are down 86.5% from the 2007 peak.




Signed home contracts have increased for a record nine consecutive months. The index which measures signed contracts has had the greatest yearly gain on record.  The supply of existing homes is down to seven months.  Many have attributed this activity to the homebuyer tax credit (as well as the fact that we are comparing this year’s numbers to a very low base in 2008).




The BIS says that central banks need to consider financial stability when setting monetary policy. The BIS (the central banker to all of the central banks) said that when rates are unusually low for a long period of time, banks take more risk and there are more problems in the banking system.  In the US, we had low rates after the tech bubble, 9/11 and the recession in 2001 – 2002.  Of course, rather than looking backward, we should look ahead.  Currently, the Fed Funds rate is targeted for 0 to 25 bps.  There’s a happy thought for you.




Bernanke didn’t have time to read the BIS research paper. He was busy giving a speech saying that he would keep interest rates near zero for an extended period of time.  He said that while we have seen improvement in the economy, we still don’t know if the recovery will be self-sustaining.




There won’t be any big changes for credit rating agencies. One year ago, everyone was convinced that these firms would face new legislation due to the inherent conflict of interest in their business model (bond issuers pay the rating agency for ratings).  Yet, now it appears that there will be few changes to this model.  There will be greater oversight (maybe we can model this regulation after all of our successful bank regulation?), greater disclosure and it will be easier to sue these firms.   Some commentators view the ratings agencies as “quasi-regulators” and as a result do not agree with the issuers paying them.  As I have said before, I believe that the ratings agencies must be made independent, where ratings fees are paid to the SEC as part of the registration process.  This is the best way to remove the conflict of interest.  Moody’s, S&P and Fitch have an 85% market share.




We don’t need new regulation; we need to change the way we regulate. Moody’s designated compliance officer (a former FBI agent) testified that he was excluded from meetings.  Having an appointed compliance officer does nothing.  Similarly, banks are highly regulated, yet they took too much risk.  We need to embed regulators within firms and give them full access.  These regulators need to be transferred each 12 – 24 months, so that they know others are behind them.  If we’re going to allow firms to profit while creating systemic risk, we’re going to need to protect ourselves.




We live in a bifurcated society. Approximately 12% of Americans (36 million people) are on food stamps.  That’s one in eight people!  Some estimates are that food stamps only reach 2/3 of those who are eligible.




More bifurcation evidence. An FDIC report claims that many Americans live without a bank account.  The study says that 17 million adults are in households without any bank relationship.  Another 43 million had accounts, but still had to rely on pawn shops and “pay-day” lenders.  Some of the reasons for not having an account include not enough money or fees that are too high based on the size of the account.

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