Tuesday, September 4, 2012 - Review of the Economic News

Review of the Economic News

DOW – 54 = 13,035
SPX – 1 = 1404
NAS + 8 = 3075
10 YR YLD +.02 = 1.58%
OIL +.26 = 95.56
GOLD + 3.60 = 1697.20
SILV + .26 = 32.46
PLAT  + 21.00 = 1576.00

The Institute for Supply Management manufacturing index fell to 49.6% in August, lower than the 49.8% in July and the worst reading since July 2009. Readings below 50% indicate contraction in manufacturing companies surveyed. It appears to be part of a global trend; there has been a slowdown in manufacturing activity in Asia and Europe. Only eight of 18 industries as tracked by ISM were growing in August, led by printing, primary metals and food. August’s new-orders index fell to 47.1% from 48.0% in July; this points to manufacturers ratcheting down production activity, and that might also lead to a slowdown in hiring. The employment index fell to 51.6% from 52%; still positive but heading in the wrong direction.

Another ISM survey of the services sector — things like banking, health care and entertainment — is also expected to show an economy plodding ahead. The services index is forecast to edge down to 52.5 from 52.6.

The monthly jobs report is always an important chunk of economic data, and this Friday's report takes on a little added significance because the Federal Reserve FOMC will be meeting next week to determine policy, and most likely announce something like QE3. It's expected the economy added about 120,000 new jobs in August. While that’s enough to keep pace with the natural expansion of the labor force, it’s far too weak to reduce the 8.3% unemployment rate. And the chances that hiring will accelerate in the final months of the year appear to be fading. There doesn't appear to be any great catalyst to ignite job growth – with the exception of possible action from the Fed; so in a twisted way, a bad jobs report on Friday could serve as justification for Federal Reserve action to spark the economy.

Moody's Investors Service has changed its outlook on the Aaa rating of the European Union to “negative,” warning it might downgrade the bloc if it decides to cut the ratings on the EU's four biggest budget backers: Germany, France, the UK, and the Netherlands.  So, Mario Draghi, the president of the European Central Bank, has been claiming he will do whatever it takes, and this Thursday the ECB Governing Council will be meeting and they are widely expected to provide details of a new debt-buying plan, something that might put a cap on sovereign bond yields.

And then Germany will be determining whether they are constitutionally willing to go along with any deal, and today Moody's simplified the case. Still a new survey shows only a quarter of Germans think Greece should stay in the euro zone or get more help from other countries.  Of course, there is a strong chance the ECB will announce a rate cut and hold back on announcing a bond buying program. Both the ECB meeting and the Federal Reserve meeting hold great potential for major disappointment.

Moody's is only getting around to an obvious situation. The Euro-economies are crumbling. Spain is starting to go the way of Greece. There is a run on the Spanish banks. In July, Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks, an amount equal to 7 percent of the country’s overall economic output; doubts grew about the durability of Spain’s financial system. 

The withdrawals accelerated a trend that began in the middle of last year, and came despite a European commitment to pump up to 100 billion euros into the Spanish banking system. Analysts will be watching to see whether the August data, when available, shows an even faster rate of capital flight. More disturbing for Spain is that the flight is starting to include members of its educated and entrepreneurial elite who are fed up with the lack of job opportunities in a country where the unemployment rate touches 25 percent. According to official statistics, 30,000 Spaniards registered to work in Britain in the last year, and analysts say that this figure would be many multiples higher if workers without documents were counted.

Apple became the world’s most valuable-ever company two weeks ago. It is worth $624 billion, more than all the listed companies in Portugal, Ireland, Greece and Spain together.

General Motors reported auto sales rose 10% in August as all four major brands posted growth, led by Buick. Chrysler reported its US auto sales were up 14% as the company reported broad growth across its brands. Meanwhile, Ford's US new-vehicle sales improved 13% from a year ago on strong growth in utility-vehicle sales.

CoreLogic reports home prices nationwide, including distressed sales, increased on a year-over-year basis by 3.8 percent in July 2012 compared to July 2011. This was the biggest year-over-year increase since August 2006. On a month-over-month basis, including distressed sales, home prices increased by 1.3 percent in July 2012 compared to June 2012. The July 2012 figures mark the fifth consecutive increase in home prices nationally on both a year-over-year and month-over-month basis. Excluding distressed sales, home prices nationwide increased on a year-over-year basis by 4.3 percent in July 2012 compared to July 2011.

Construction spending fell in July from June by the largest amount in a year, weighed down by a big drop in home improvement projects. There are two ways to read this; one – we have run out of money for the improvements, two – we have done everything on the honey-do list. I'm going with the second reason, based upon personal experience.

The Commerce Department said  overall construction spending declined 0.9 percent in July, but spending on construction of single-family homes and apartments increased again, a hopeful sign for the modest housing recovery. It followed three months of gains, which were driven by increases in home and apartment construction.  The June decline left spending at a seasonally adjusted annual rate of $834.4 billion. That's nearly 12 percent above a 12-year low hit in February 2011. Construction activity is roughly half of what might be considered to be healthy.

There is more fallout from the Libor rate-rigging scandal. Reuters reports Barclays has notified FINRA that a top executive and trader have been fired for their roles in the scandal. The regulatory filings disclosing the reasons for the two departures are not normally made public and Barclays did not specifically comment on the terminations, but they issued a statement that said:  "the firm undertook a thorough and robust internal disciplinary process promptly following the regulatory review which was completed in late July."

The dismissals reveal that even after settling with authorities, the full extent of Barclays' role in the rate-rigging scheme is still playing out. Lawyers familiar with the investigation say federal prosecutors continue to reach out to individuals to gauge interest in cooperating or taking pleas. They said US prosecutors are expected to begin making decisions in early September about whether to charge individual traders.

Also, at least a dozen US private equity firms have been subpoenaed by the New York state attorney general as part of a probe into whether a widely used tax strategy that saved these firms hundreds of millions of dollars is proper.  Among the firms that were subpoenaed are Bain Capital, KKR & Co, TPG Capital, Apollo Global Management, and Silver Lake Partners. Bain was once headed by Mitt Romney.  The subpoenas, which were sent out in July, seek documents related to the conversion of fees these private equity firms charge for managing investors' assets into fund investments. This means the investigation predates the release last month of confidential Bain fund documents by Gawker that revealed such a practice.

The practice is known as a "management fee waiver." As fund investments, the income would be taxed as capital gains, which attract rates around 15 percent. Without the conversion, the fees would be ordinary income, taxed at rates around 35 percent. The tax probe is being conducted out of the New York Attorney General's Taxpayer Protection Bureau, which was set up in early 2011. According to the AG's website, the agency was established "to root out fraud and return money illegally stolen from New York taxpayers at no additional cost to the state".