US markets have seen some strong rally momentum in recent days. Here is a good piece on bond markets in the US.
"If there really are signs of financial recovery, nobody told the bond market. Treasury Secretary Timothy Geithner's plan to rescue the financial system sent the S&P 500 soaring 7% on Monday alone, bringing its gains from March 6 to an impressive 19% through Wednesday. But credit markets have hardly budged. Corporate debt is still priced for disaster... Until investors recover confidence in financial assets, credit spreads are unlikely to tighten significantly. And without a sustained improvement in the credit market -- the seat of the crisis -- it seems irrational to expect a durable move higher in equities."
Yes, pretty much on the money. Here's how the numbers work: in my post on personal income by states - California is overdue a democratic party payoff and it will come, so the municipals markets and TIPS are going to be a good bet for some time to come. But the stock market is running too hot on absolutely nothing new - US Treasury's latest plan is a net transfer to
shareholders, which, obviously, first reduces any possible haircuts for bondholders, thus giving a fundamentals support to bonds ahead of shares.
What does this mean? If shares rises in the last 20 days is justifiable by fundamentals, there
should be at least a noticeable rally in bonds (although not as strong as in stocks, since bonds have already priced in all seniority over equity, thus a boost to equity holders yields is not going to be translated into 1:1 gains on bond prices).
My estimate would be as follows: for a 19% rally in equities, were the new valuations to set a new 'floor', we we will see a 5-6% gain on equity yields (including cap gains) over the next 3 years.
This would imply a yield differential compression to comparable corporate bonds relative to underlying equity. Assuming average yield differential for equity relative to corporate bonds of 8-10% in favour of bonds prior to equities rally, our post rally differential is ca 7.5-9.5% range. So bond prices have an upside potential of ca 16%. This is just straight math.
Now, take a cautious assumption that a part of equity rally is due to a fall in the perceived risk of default on equities (the recovery rate priced in CDS stays put, but expected recovery rate rises). Say 1/2 of the rally is just that. Then, price upside on corporate bonds is in the regions of 8-11%, holding YTM fixed. Until we see at least such a movement, the equity markets are overshooting the floor. And they are doing so pretty dramatically.
Thursday, March 26, 2009
Daily Economics 25/03/2009
Opening scene: an ICU bed in Awfully General Hospital. Senior consultant, Brian-I, his two junior colleagues - Brian-II and Mary and an army of senior nurses, all at a bed of the patient. Chart reads: "Irish Economy", but the patient is invisible under a mass of frayed cables, yellow and cracked tubes, sparks-throwing electronic equipment and dingy unwashed and holes-ridden sheets. Brian-I, eagerly staring at a pub across the road is performing some procedure on the patient. "Say, we've been out of the ward for sometime now... what are the vitals on that one?" Mary's senior nurse assistant: "Sir, I am afraid no pulse, sir. Flat-line brain activity and body temperature of near zero, sir! Tough luck, sir!" "Aha," replies Brian-I, turning to Brian-II - "Our intervention worked! The patient is stable now! Pints?!"
Today's three sets of stats confirm the Celtic Tiger has been killed by our Brian, Brian & Mary's HSE-styled treatment.
Balance of Payments data - for Q4 2008 and the entire year of 2008. VAT, VRT, Road tax, Income tax, 'whatever-we-find-in-your-pocket' tax that the Government hiked in October and December 2008 have killed off our imports and flatlined our exports, so that in Q4 2008 we have recorded a tiny CA deficit of €133, "the lowest in four years and €2.6bn below that for the same quarter of 2007. For 2008 as a whole, the deficit was €8,375m, over €1.9bn lower than that for 2007. The merchandise surplus of €7,589m in Q4 was €2.7bn higher than one year earlier, while the invisibles deficit at €7,722m was up €116m. Within the latter aggregate, the services deficit at €2,139m was up €844m while the net income outflow at €6,104m was €721m lower."
So what does this mean?
Now, to the beef. Quarterly National Accounts released today are summarized in the graph and table below (both courtesy CSO):
I am not commenting on this in depth because there is nothing to be added to that 7.5% GDP drop figure for Q4 2008, other than - this is bad. Very bad.
Suffices to say that Q4 2008 figures were driven by:
House prices: permanent tsb/ESRI House Price Index released today shows national prices falling 0.8% in February 2009 (after 1.4% fall in January, 0.9% fall in December and 0.5% fall in November 2008) and 2.1% in January-February 2009. This brings average prices to February 2005 level. The rate of decline is obviously faster in Jan-Feb 2009 than a year ago, with Jan-Fen 2008 fall of 1.5% as opposed to 2.1% contraction in the first two months of 2009. So an average price for house nationally is €255,999 in February 2009, relative to the peak of €311,078 in February 2007 - a cumulative loss of 17.7% on peak and a real loss of ca 23%.
Of course, the drones from ptsb, commenting on this data, tell us that all is good - as 'the affordability is improving'. Clearly, these mortgage bankers can't imagine how
Now, Dublin house prices fell hardest in February - 2.1% down (-1.4% in January), while houses outside Dublin were down 0.9% (-0.6% in January). The average price of a Dublin house and outside Dublin in February was €339,042 and €220,741 respectively. The equivalent prices in December 2008 were €351,096 and €223,984. This might be welcoming to those who think Dublin is the seat of evil in Ireland, but be warned - this data is deceptive. I would like ptsb to come out with a detailed analysis of Dublin v outside-Dublin price dynamics by house types, and location types, as I suspect that the Dublin averages are being distorted by the collapsed market for apartments, while outside-Dublin figures are being propped by the lack of turnover in single-family housing.
House prices fell 15.2% and 9.2% y-o-y to February 2009 for first-time and second-time buyers respectively. The equivalent rates to January were-13.5% and -8.9% respectively. House prices for new and existing houses declined 0.6% and 1.0% respectively in February 2009. New and second hand house prices fell by 9.2% and 11.3% respectively y-o-y to February 2009. The latter, of course, is most likely due to the deeper falls in new homes prices during 2008.
Closing scene: pub across the road from Awfully General Hospital. Brian-I and his junior colleagues are having some well-deserved rest. "Stable, I tell ya, lads! Stable!" shouts Brian-I. "Not moving, but stable! Hey, Mary, send some boys from that Nuclear Therapy Medicine Academy - that NTMA thingy - over to Berlin to get some dosh. Tell them we have our real patient's interests in mind, not some vital signs bureaucracy, whatever..." Curtains.
Today's three sets of stats confirm the Celtic Tiger has been killed by our Brian, Brian & Mary's HSE-styled treatment.
Balance of Payments data - for Q4 2008 and the entire year of 2008. VAT, VRT, Road tax, Income tax, 'whatever-we-find-in-your-pocket' tax that the Government hiked in October and December 2008 have killed off our imports and flatlined our exports, so that in Q4 2008 we have recorded a tiny CA deficit of €133, "the lowest in four years and €2.6bn below that for the same quarter of 2007. For 2008 as a whole, the deficit was €8,375m, over €1.9bn lower than that for 2007. The merchandise surplus of €7,589m in Q4 was €2.7bn higher than one year earlier, while the invisibles deficit at €7,722m was up €116m. Within the latter aggregate, the services deficit at €2,139m was up €844m while the net income outflow at €6,104m was €721m lower."
So what does this mean?
- We are a nation of imports and exports. Falling imports volume is falling consumption (and Exchequer revenue). By this measure we are economically dead.
- As a nation that is predominantly dependent on MNCs to produce stuff for export, flatline exports is a sign that our economy's temperature is collapsing. Given that the latest data (released yesterday) shows global trade volumes falling 20% (in absolute, not relative terms - I am not kidding, see here) in Q1 2009, there is absolutely no way we can sustain positive exporting activity into 2009.
- Since our MNCs tend to import almost as much as they export (transfer pricing), and given that in the second half of 2008 the MNCs-dominated sectors were booking high level of economic activity, the collapse in imports due to consumer and Irish companies investment demand was even more dramatic than CSO aggregates show. This means that global shock (item 2 above) is now fully merged with domestic shock (demand contraction) and both are exacerbated by our senile tax policy.
- Our Financial Account Balance for Q4 2008 stood at -€3,604m - the worst quarterly performance since Q2 1999. The annual balance was €18.12bn - but that conceals massive issues of bonds in 2008 and repatriation of toxic commercial paper into IFSC by the 'bad bank' asset pools. Our direct investment balance was negative in all 4 quarters of 2008 (first time since at least 1997), and the decline is accelerating q-o-q. Portfolio investment into Ireland was negative at -€37.7bn in Q4 2008 - the worst quarterly performance in at least 12 years.
Now, to the beef. Quarterly National Accounts released today are summarized in the graph and table below (both courtesy CSO):
I am not commenting on this in depth because there is nothing to be added to that 7.5% GDP drop figure for Q4 2008, other than - this is bad. Very bad.Suffices to say that Q4 2008 figures were driven by:
- consumer spending down 2% q-o-q;
- investment down a Cowen-rrendous 15.4% q-o-q that follows after a similar drop in housing and non-residential investment in Q3; and
- sharp declines in global trade with exports down 2.6% q-o-q.
House prices: permanent tsb/ESRI House Price Index released today shows national prices falling 0.8% in February 2009 (after 1.4% fall in January, 0.9% fall in December and 0.5% fall in November 2008) and 2.1% in January-February 2009. This brings average prices to February 2005 level. The rate of decline is obviously faster in Jan-Feb 2009 than a year ago, with Jan-Fen 2008 fall of 1.5% as opposed to 2.1% contraction in the first two months of 2009. So an average price for house nationally is €255,999 in February 2009, relative to the peak of €311,078 in February 2007 - a cumulative loss of 17.7% on peak and a real loss of ca 23%.
Of course, the drones from ptsb, commenting on this data, tell us that all is good - as 'the affordability is improving'. Clearly, these mortgage bankers can't imagine how
- rising negative equity;
- tightening lending standards;
- sky-high unemployment and
- falling after-tax incomes
Now, Dublin house prices fell hardest in February - 2.1% down (-1.4% in January), while houses outside Dublin were down 0.9% (-0.6% in January). The average price of a Dublin house and outside Dublin in February was €339,042 and €220,741 respectively. The equivalent prices in December 2008 were €351,096 and €223,984. This might be welcoming to those who think Dublin is the seat of evil in Ireland, but be warned - this data is deceptive. I would like ptsb to come out with a detailed analysis of Dublin v outside-Dublin price dynamics by house types, and location types, as I suspect that the Dublin averages are being distorted by the collapsed market for apartments, while outside-Dublin figures are being propped by the lack of turnover in single-family housing.
House prices fell 15.2% and 9.2% y-o-y to February 2009 for first-time and second-time buyers respectively. The equivalent rates to January were-13.5% and -8.9% respectively. House prices for new and existing houses declined 0.6% and 1.0% respectively in February 2009. New and second hand house prices fell by 9.2% and 11.3% respectively y-o-y to February 2009. The latter, of course, is most likely due to the deeper falls in new homes prices during 2008.
Closing scene: pub across the road from Awfully General Hospital. Brian-I and his junior colleagues are having some well-deserved rest. "Stable, I tell ya, lads! Stable!" shouts Brian-I. "Not moving, but stable! Hey, Mary, send some boys from that Nuclear Therapy Medicine Academy - that NTMA thingy - over to Berlin to get some dosh. Tell them we have our real patient's interests in mind, not some vital signs bureaucracy, whatever..." Curtains.
Wednesday, March 25, 2009
Daily Economics Update 24/03/2009
Ireland:
I tried to resist commenting too much on Brian Cowen's remarks today concerning the extended borrowing he envisions for Ireland Inc in 2009. I tried, but this is simply an extraordinary statement from a person who is
I tried to resist commenting too much on Brian Cowen's remarks today concerning the extended borrowing he envisions for Ireland Inc in 2009. I tried, but this is simply an extraordinary statement from a person who is
- either clearly not capable of thinking straight in the crisis or
- from a politician, so cynical and obsessed with self-preservation that he is willing to preemptively surrender this nation's hope for economic survival in order to throw another bone to his political cronies.
Either way, Cowen today has managed to achieve nearly impossible in virtually a single breath:
- Putting Ireland closer to fiscal insolvency - by enhancing the (already significant) uncertainty as to how much he will borrow in 2009 (and through 2013) and on which terms (will Ireland be forced to continue borrowing short, front loading 2011-2013 deficits to finance Brian's 'Partners' today?);
- Destroying his own reputation by telling the world that he cannot be trusted on any of his future policy pronouncements (undoing his own pre-commitment to keep the deficit under 10% he stated that no budgetary projection, including yet to be published mini-Budget, from this Government can be trusted);
- Showing that this Government will flip flop not only on soft targets (e.g promises not to tax us to death), but also on hard ones (including his commitments to the EMU);
- Destroying whatever hopes the ECB and the EU Commission might have had that this Government can be a responsible participant in the EMU;
- Forcing the bonds markets into a situation where, from now on, no pricing of Irish debt paper can be conducted on a basis of rational valuation.
Only 3 weeks ago, Cowen was fully committed to keeping 2009 borrowing under 9.5% of GDP. He is now telling the world that this was all a matter for him to change his mind over. Perhaps the only reason for such an extraordinary statement I can think of is that possibly (I am speculating here), Cowen saw preliminary figures from the Exchequer revenue for March. Even then, there has to be a real 'nuke' in these figures to justify such a public humiliation of this economy in the eyes of the developed world.
Cowen said in his address that he is not willing to sacrifice the real economy on the altar of public finances. Coming from him, this is rich. Cowen and his Government
Cowen said in his address that he is not willing to sacrifice the real economy on the altar of public finances. Coming from him, this is rich. Cowen and his Government
- raised taxes in October 2008 and again in December 2008, and is going to raise them in April - 3 times in 7 months - amidst the wholesale collapse of the real economy (incidentally, these tax hikes were necessitated by the decisions on run-away train of public current expenditure growth that he adopted during his tenure as the Minister for Finance);
- raised VAT and other taxes directly impacting businesses, employment and public economic welfare, as his incompetent Minister for Enterprise sat silently beside him;
- raised levies, taxes and charges on all workers, including those who lost their jobs and then cynically turned around to wage an oratorical crusade about 'equality' and 'shared pain';
- paid public sector wage increases and then clawed some of these back, posturing as if a heroic leader who broke the mold 'to do the right thing';
- got in bed with trade unions in the Summer 2008 to produce a partnership agreement that committed the private sector taxpayers to servitude to public sector wage demands;
- once again cowardly moved into the new Partnership Talks last night as an excuse to surrender his policy making authority;
- presided over a largely failed set of actions on the banks that shored up (temporarily) Irish Developers Country Club at the expense of the real economy;
- watched idly as the real economy was falling off the cliff between June 2008 and October 2008;
- made wild promises of reforms and productivity enhancements in the public sector and delivered none;
- blamed everyone - from Americans to the World - for our economic ills, but not a single time managed to tell the nation that he is sorry for serial errors of judgment his Government committed in only 9 months in power;
- appointed the most incompetent person imaginable to run the key ministry in charge of our real economy (and no, I do not mean DofF here); and now
- turned our entire budgeting process into a public farce...
This is really rich!
Richard Brutton put it perfectly when he said today that “The spectacle of a Government thrashing around, unable to set any clear framework for a Budget that is just two weeks away is damaging our international reputation. It is damaging the confidence of markets from whom we hope to borrow €24 billion this year... This Government is destroying its authority to provide ...leadership.”
May I add that it is also destroying the real economy - the same one that Brian Cowen claims to be protecting.
International:
March McKinsey survey of economic conditions is out today, showing that "the percentage of the executives who say economic conditions have gotten worse at the national level hasn’t increased, but fewer than a third expect an upturn this year... 53 percent expect profits to drop in the first half of 2009, and the number expecting to shed workers has jumped eight percentage points in six weeks." Companies that are thought of as being well managed in the downturn are likelier:
Richard Brutton put it perfectly when he said today that “The spectacle of a Government thrashing around, unable to set any clear framework for a Budget that is just two weeks away is damaging our international reputation. It is damaging the confidence of markets from whom we hope to borrow €24 billion this year... This Government is destroying its authority to provide ...leadership.”
May I add that it is also destroying the real economy - the same one that Brian Cowen claims to be protecting.
International:
March McKinsey survey of economic conditions is out today, showing that "the percentage of the executives who say economic conditions have gotten worse at the national level hasn’t increased, but fewer than a third expect an upturn this year... 53 percent expect profits to drop in the first half of 2009, and the number expecting to shed workers has jumped eight percentage points in six weeks." Companies that are thought of as being well managed in the downturn are likelier:
- to be reducing both operating costs and capital spending,
- not weakening operations a great deal, and
- "are also likelier than others to be improving productivity".
US:
Existent sales up, prices up and now new home sales are up as well - what is the world (ok, the US) is turning into? Well, not anything resembling of a bull market, at least not yet. Per data released today, new homes sales were up 4.7% in February relative to the record low (since 1963) reached in January, but sales are still down 43.8% compared to February 2008. I worry that this is not a floor yet, but a slight bounce before further falls. Even if the current level signals an upturn in sales, things are bound to remain testing for a while, as inventory overhang remains enormous. A 2.9% fall in inventories of unsold homes in February still leaves 12.2-months worth of stuff unsold - up full 3 months on February 2008.
But there is more noisy data coming out today - there was an unexpected and a welcome rise in orders for durable goods - the first increase after six-straight-monthly declines. Offsetting the gain in February somewhat was a sharp downward revision to orders in January (from -4.5% in preliminary estimate, to -7.3% decline).
The best piece of analysis on this is on Bloomberg (here). In my own view - setting aside defense spending and consumer stuff - the gains are reflective most likely of amortization cycle (replacement of capital goods delayed during the previous 15 months) than due to capital inventories build up. There is also a strong 'noise' component to the rebound - given the precipitous fall in orders in Q4 2008, when durable goods orders fell at a rate not seen since the late 1950s.
The fact that we are seeing all this volatility in economic series away from the unrelenting downward trend is a good signal. In my view, as I said before, this is a sign that the markets are now seriously testing the floor of this recession. In other words, I now expect similar modest gains in some parameters and stabilization of other parameters through May, followed by the first positive gains in the capital spending and declines in new unemployment claims in June-August. This will put the US economy onto recovery path by mid-Q3-early-Q4.
Tuesday, March 24, 2009
Daily Economics Update 23/03/2009
I am putting this link (here) to today's WSJ interview with Gary S Becker in red, bold and at the top of this post (and on the front of my blog page) not only because he is the greatest economist alive today (which he is), and not only because he taught me microeconomics (how poor of a student I was is attested to by my self-deception of believing in being right on more occasions than being wrong), but because this interview is a must read for anyone concerned about the state of our world today.
Ireland
A new invitation is out - from Brian Cowen to the social partners - to enter talks on a new National Agreement. Yes, folks, you've heard it right. The Government that can't do anything worth talking about on the crisis is back to talking about doing something on the crisis. Dust out that Excellence in Services medal for Brian. Instead of facing down the unions in their militant stance on the economy, Brian Cowen has done another one of his 'courageous' and 'decisive' flip-flops that our official media got so accustomed to calling upon him to perform. Expect: more blame for private sector, higher taxes, more pay for public servants, rampant price inflation in state-controlled sectors and... well, just expect more of what we had in Autumn 2008.
This time around, the markets will be searching for what to hit next. Given that Brian's first round of 'dealing with the crisis' has spectacularly collapsed into issuing blanket guarantees to the banks, nationalising one bank, handing taxpayers cash to two other banks, passing no meaningful measures on stimulating economy, hammering consumers and taxpayers, slaughtering retail sector and seeing public debt soar, they will be hard pressed to find a new target still standing.
Revolting, is how I can describe this latest move at best.
Just how senile our policy making has become as of late? Think Nationwide scandal. Mr Fingleton is walking away with millions and the Government and the politicos are issuing salvos of outrage. But they can do nothing - he owns the money. How? The truth is that Fingelton gets to keep his millions only because in September 2008, the Exchequer has underwritten the Nationwide. Would they have said then: "Sorry, buddy, but there is no way Nationwide is a systemic bank and so no guarantee", the bank would have gone into a receivership and Mr Fingleton would have received what he deserves after all these years of running his own 'lille piggy bank' - zilch, nada, zero.
So don't blame the bankers - blame the politicos. And let's ask Brian^2+Mary to see that assessment of the Irish banking system that managed to recognize the likes of the Nationwide as a significant enough institution to have caused a systemic risk to the entire financial system were it allowed to fail.
US:
Forbes is now on the inflation case (here): "On a year-over-year basis, the CPI will turn negative this month and stay negative for many more months. As a result, many believe inflation is a distant memory and those who fear deflation will have data to hang their hats on for much of 2009. But, these deflation-istas will be looking in the rear-view mirror. On a month-to-month basis, inflation is already starting to claw its way back. In the first two months of 2009, consumer prices are up at a 4.1% annual rate, while producer prices are up at a 5.8% rate."
Worth a read. I have warned about this threat of inflation a week ago (here), so we are ahead of the curve...
More on the Geithner 'Trillion-dollar Rescue' Plan (GP): let's do some math
But what does this deal buy in the end? Combine that with the fact that
So this implies that very few banks will be willing to sell at $0.80 on the dollar. A more acceptable price for banks would be $0.95 to a dollar, but at that price, the US taxpayers will fall some $833mln short on the deal.
Could someone please tell me why we are talking about GP as some sort of a market-turning deal? Unless, that is, we are buying into the plan because it is the first, and so far the only plan that a new Democratic Party White House has contrived?
US Personal Income data: "US personal income growth slowed to 3.9 percent in 2008 from 6.0 percent in 2007 with all states except Alaska sharing in the slowdown," according to the data released by the US Bureau of Economic Analysis. The U.S. growth was the slowest since 2003. Inflation, as measured by the national price index for personal consumption expenditures, rose to 3.3 percent in 2008 up from 2.6 percent in 2007. Here is a nice map of heaviest (and lightest) hit states:
Can you see the pattern? Well, here is another map:
House Prices (US): Home prices rose 1.7% in January relative to December 2008, says Federal Housing Finance Agency - the first monthly increase in 12 months. This leaves home prices down 6.3% in the past 12 months and -9.6% off from their peak in April 2006. In December, the year-on-year decline was 8.8%. One note of caution - this is the preliminary estimate subject to at least two future revisions. For example, December 2008 preliminary estimate was showing 0.1% fall in prices, but this was revised today to -0.2% decline. Overall, in January, home prices rose in 8 out of 9 regions (only Pacific states registered a decline -0.9%), with strongest gains in East North Central (+3.9%) and South Atlantic (+3.6%) regions.
Ireland
A new invitation is out - from Brian Cowen to the social partners - to enter talks on a new National Agreement. Yes, folks, you've heard it right. The Government that can't do anything worth talking about on the crisis is back to talking about doing something on the crisis. Dust out that Excellence in Services medal for Brian. Instead of facing down the unions in their militant stance on the economy, Brian Cowen has done another one of his 'courageous' and 'decisive' flip-flops that our official media got so accustomed to calling upon him to perform. Expect: more blame for private sector, higher taxes, more pay for public servants, rampant price inflation in state-controlled sectors and... well, just expect more of what we had in Autumn 2008.
This time around, the markets will be searching for what to hit next. Given that Brian's first round of 'dealing with the crisis' has spectacularly collapsed into issuing blanket guarantees to the banks, nationalising one bank, handing taxpayers cash to two other banks, passing no meaningful measures on stimulating economy, hammering consumers and taxpayers, slaughtering retail sector and seeing public debt soar, they will be hard pressed to find a new target still standing.
Revolting, is how I can describe this latest move at best.
Just how senile our policy making has become as of late? Think Nationwide scandal. Mr Fingleton is walking away with millions and the Government and the politicos are issuing salvos of outrage. But they can do nothing - he owns the money. How? The truth is that Fingelton gets to keep his millions only because in September 2008, the Exchequer has underwritten the Nationwide. Would they have said then: "Sorry, buddy, but there is no way Nationwide is a systemic bank and so no guarantee", the bank would have gone into a receivership and Mr Fingleton would have received what he deserves after all these years of running his own 'lille piggy bank' - zilch, nada, zero.
So don't blame the bankers - blame the politicos. And let's ask Brian^2+Mary to see that assessment of the Irish banking system that managed to recognize the likes of the Nationwide as a significant enough institution to have caused a systemic risk to the entire financial system were it allowed to fail.
US:
Forbes is now on the inflation case (here): "On a year-over-year basis, the CPI will turn negative this month and stay negative for many more months. As a result, many believe inflation is a distant memory and those who fear deflation will have data to hang their hats on for much of 2009. But, these deflation-istas will be looking in the rear-view mirror. On a month-to-month basis, inflation is already starting to claw its way back. In the first two months of 2009, consumer prices are up at a 4.1% annual rate, while producer prices are up at a 5.8% rate."
Worth a read. I have warned about this threat of inflation a week ago (here), so we are ahead of the curve...
More on the Geithner 'Trillion-dollar Rescue' Plan (GP): let's do some math
- The Feds buy $1 trillion worth of banks assets, in partnership with private buyers (95-97% financed by the Treasury - 85% in the form of a non-recourse loans and remaining in the form of equity). Suppose that 5% comes from private investors. Taxpayers liability is $950bn.
- Now, assume that the average price paid for assets is $0.80-0.85 on the dollar - an assumption consistent with 'clean' assets TARP financing. Banks get an effective disposal of $1tr/0.8=$1.25tr worth of assets. This is the implied value of assets on banks balance sheets. But the banks have marked these assets down already. Suppose the original markdowns were ca 10% impairment. The original, pre-writedown value of the assets that is being purchased under the GP is, therefore $1.25tr/0.9=$1.39tr.
- Current market price for distressed assets is roughly equal to the recovery rate on such assets - ca $0.40-0.55 per dollar value, so the mark to market value of these assets is now $1.39tr*0.45=$625bn.
But what does this deal buy in the end? Combine that with the fact that
- ca 40% of all banks balance sheet assets in the US are in residential mortgages,
- ca 24% - in Commercial mortgages,
- of the remaining stuff, 55% is in corporate and industrial loans,
- of which good 1/5th is again linked to property.
So this implies that very few banks will be willing to sell at $0.80 on the dollar. A more acceptable price for banks would be $0.95 to a dollar, but at that price, the US taxpayers will fall some $833mln short on the deal.
Could someone please tell me why we are talking about GP as some sort of a market-turning deal? Unless, that is, we are buying into the plan because it is the first, and so far the only plan that a new Democratic Party White House has contrived?
US Personal Income data: "US personal income growth slowed to 3.9 percent in 2008 from 6.0 percent in 2007 with all states except Alaska sharing in the slowdown," according to the data released by the US Bureau of Economic Analysis. The U.S. growth was the slowest since 2003. Inflation, as measured by the national price index for personal consumption expenditures, rose to 3.3 percent in 2008 up from 2.6 percent in 2007. Here is a nice map of heaviest (and lightest) hit states:
Can you see the pattern? Well, here is another map:
House Prices (US): Home prices rose 1.7% in January relative to December 2008, says Federal Housing Finance Agency - the first monthly increase in 12 months. This leaves home prices down 6.3% in the past 12 months and -9.6% off from their peak in April 2006. In December, the year-on-year decline was 8.8%. One note of caution - this is the preliminary estimate subject to at least two future revisions. For example, December 2008 preliminary estimate was showing 0.1% fall in prices, but this was revised today to -0.2% decline. Overall, in January, home prices rose in 8 out of 9 regions (only Pacific states registered a decline -0.9%), with strongest gains in East North Central (+3.9%) and South Atlantic (+3.6%) regions.
'Happy Times' at NTMA: Updated
Remember that unrivaled shot of Borat sun-bathing on the banks of the river? Green unitard thong and brownish sand of post-Apocalypse industrial wasteland of a landscape? This is probably the scenery at NTMA today. The guys, and my heart goes to them for their effort (honestly - they did as good of a job as was possible under the circumstances), have gone away with loading into the markets a €700mln worth of 10-year Irish bonds. They wanted to upload €1bn, but stopped selling 30% short of the target. Why, you might ask? Well, it all comes down to terms. There is no actual information on bid spreads, but the average was 5.80%, lowest price of 89.6, average price 89.527. Yikes.
Some time ago I predicted that we might see 6.5-7% yields on Irish Government paper by the year end. Well, that was before the latest 50bps drop in the ECB rate (March 11), implying that at 5.80% today we are in the territory of 6.00-6.10% already if compared with the situation before March 11th.
What is even more telling is that I was right on March 10 when I priced 10-year bonds in the range of 5.7%-5.9% (here).
Lastly, it is worth looking at the volume of issue - €700mln... sunflower seeds for the public sector - at current rate of spending, Brian^2+Mary are going to get through this amount in less than 4 days and 1 hour 30 minutes. NTMA is better start issuing new paper weekly at that rate of spend! Or maybe they should pick up a phone and dial Leinster House, asking to stop the madness of bleeding the taxpayers and companies to feed the beast of our public sector and start cutting fat. Showing the markets that Ireland's Government is not just a public sector unions' crony and is capable of getting its fiscal policy under control just might bring down the cost of borrowing.
Happy Times?
Update: the media is singing praise for yesterday's issue, but hold on: they say we raised €1bn, in reality, we raised only €700mln in 10-year paper and €300mln in 3-year paper. You don't have to be genius to see that the 3-year stuff is going to mature before the expiration of the 2013 deadline for putting our finances in order. So in effect, we kicked €300mln worth of a problem into the scoring zone... This is equivalent to a drug addict's miraculous 'recovery' reports when the chap simply stashed some powder for a quick hit in a couple of hours time. Some success.
More details from NTMA itself: for the 10-year bond, lowest price 89.46 at yield of 5.818%, weighted average yield 5.808%. Pricey stuff this is and wait until the mini-budget shows the rest of the world that Cowen has no intention of seriously tackling the deficit - where will we be next time we shove pile of debt into pre-2013 maturity?
And you don't have to be a genius to recognize that if the state completes one 'successful' auction like the one yesterday per month, NTMA will have, by the end of 2009:
Some time ago I predicted that we might see 6.5-7% yields on Irish Government paper by the year end. Well, that was before the latest 50bps drop in the ECB rate (March 11), implying that at 5.80% today we are in the territory of 6.00-6.10% already if compared with the situation before March 11th.
What is even more telling is that I was right on March 10 when I priced 10-year bonds in the range of 5.7%-5.9% (here).
Lastly, it is worth looking at the volume of issue - €700mln... sunflower seeds for the public sector - at current rate of spending, Brian^2+Mary are going to get through this amount in less than 4 days and 1 hour 30 minutes. NTMA is better start issuing new paper weekly at that rate of spend! Or maybe they should pick up a phone and dial Leinster House, asking to stop the madness of bleeding the taxpayers and companies to feed the beast of our public sector and start cutting fat. Showing the markets that Ireland's Government is not just a public sector unions' crony and is capable of getting its fiscal policy under control just might bring down the cost of borrowing.
Happy Times?
Update: the media is singing praise for yesterday's issue, but hold on: they say we raised €1bn, in reality, we raised only €700mln in 10-year paper and €300mln in 3-year paper. You don't have to be genius to see that the 3-year stuff is going to mature before the expiration of the 2013 deadline for putting our finances in order. So in effect, we kicked €300mln worth of a problem into the scoring zone... This is equivalent to a drug addict's miraculous 'recovery' reports when the chap simply stashed some powder for a quick hit in a couple of hours time. Some success.
More details from NTMA itself: for the 10-year bond, lowest price 89.46 at yield of 5.818%, weighted average yield 5.808%. Pricey stuff this is and wait until the mini-budget shows the rest of the world that Cowen has no intention of seriously tackling the deficit - where will we be next time we shove pile of debt into pre-2013 maturity?
And you don't have to be a genius to recognize that if the state completes one 'successful' auction like the one yesterday per month, NTMA will have, by the end of 2009:
- raised maximum of €10bn, while we need €15bn just to stay afloat this year;
- pushed some €7bn (€3bn in monthly auctions, plus €4bn in February sale) in new debt into 2011;
- reached €63.5bn national debt level (up from €52.5bn as of the end of February); and
- forced Ireland Inc even further away from meeting its commitment to the European Commission of getting under 3% budget deficit limit by 2013.
Monday, March 23, 2009
Daily Economics Update 22/03/2009
So we are in a rally, at least in the US.
Financials are again in the lead, as chart below showing.
10-year treasuries rise, dollar falls
What can one expect from a relatively rational(ized) market when it is faced with a renewed $1trillion push of cash into draining the toxic pool of mortgages-linked securities.
The DJIA ended gaining 6.84% to close at 7,775.86, the S&P 500 closed at 822.92 (+7.08%), the Nasdaq Comp ended the day at 1,555.77 (op 6.76%).
A friend - high up in international finance - asked me again if this is a sign of a thaw. I again said, it is not - just a rational reaction to a massive push on the dollar. Real values are not changing much, but what is happening is the wholesale repricing for the dollar to reach 1.45-1.50 to euro once again. Here is an illustration of why I am still not buying the permanent rebound hypothesis (courtesy of dshort.com):
What about the Geithner Plan (GP)? Well, whatever one can say about it, words 'original' or 'innovative' are not something that comes to mind. It falls short of a nationalization and nationalization is what will probably be needed. Not a wholesale take over, but certainly not a 20% equity take by the Feds in exchange for a 97% capitalization, as the GP envisions.
Financial services lap-dog economists loves the thing, though. For example, one senior economist from Wells Fargo claimed that the plan "will go a long way toward getting banks... to lend more aggressively and break the deleveraging feedback loop" now in place. This is the lunatic asylum stuff, for it assumes, without even stating so much, that there are hordes of willing borrowers gathering just outside the banks doors. And it further assumes that deleveraging is bad. Given that the whole mess was brought upon us by the excessive leveraging in the first place, either I am losing my mind, or the entire world is now rushing head on to create a new bubble in place of the old one.
The main problem with GP is that it comes on top of the TARP and a host of other asset-purchasing arrangements. Now, all were offering lenders some set of prices for distressed assets. These prices were set arbitrarily high to incentivize the banks to unload their troubled loans. But clearly, TARP was not sufficient, so the GP will have to set prices even higher - at some premium to TARP to further induce the loan holders to part with their distressed paper. And here is a catch. Since inception of TARP, the quality of the loans still on the books in banks have fallen - steadily and rather rapidly. Will this imply that investors are now being incentivized to bid for loans at a price above their true market value? Of course it will and this is precisely why the Feds are offering the bidders a 97% financing package in return for 80% equity in the loans purchased, with Federal financing done on the back of non-recourse loans (loans that are collateralized against the value of the securities purchased alone).
The GP will in effect act as a subsidy to the banks. Hence that nice climb in banks shares in recent days. Geithner's idea is to have a free lunch served to the banks today, for which the taxpayers will pay tomorrow and the restaurant staff (the investors) will get paid a day later. It is, as the Calculated Risk blog puts it, "a European style put option - it can only be exercised at expiration. The taxpayers will pay the price of the option in the future, the investors receive any future benefit, and the banks receive the current value of the option in cash. Geithner apparently believes the future value will be zero, and that is a possibility. If so, this is a great plan - if not, the taxpayers will pay that future value (and it could be significant)."
Note to the Derivatives students: this could have made a good question for exam...
On a somewhat more positive note: sales of existent homes were up 5.1% in February. Although this figure - the largest percentage gain since July 2003 - (a) comes after a 4.6% contraction in yearly sales and (b) was the result of deep price discounts (especially due to rising tide of foreclosures and short sales that accounted for 45% of all transactions), sales rose in all regions. Full 65% of the potential buyers expect the market to bottom out within the next 12 months.
Financials are again in the lead, as chart below showing.
10-year treasuries rise, dollar falls
What can one expect from a relatively rational(ized) market when it is faced with a renewed $1trillion push of cash into draining the toxic pool of mortgages-linked securities.The DJIA ended gaining 6.84% to close at 7,775.86, the S&P 500 closed at 822.92 (+7.08%), the Nasdaq Comp ended the day at 1,555.77 (op 6.76%).
A friend - high up in international finance - asked me again if this is a sign of a thaw. I again said, it is not - just a rational reaction to a massive push on the dollar. Real values are not changing much, but what is happening is the wholesale repricing for the dollar to reach 1.45-1.50 to euro once again. Here is an illustration of why I am still not buying the permanent rebound hypothesis (courtesy of dshort.com):
What about the Geithner Plan (GP)? Well, whatever one can say about it, words 'original' or 'innovative' are not something that comes to mind. It falls short of a nationalization and nationalization is what will probably be needed. Not a wholesale take over, but certainly not a 20% equity take by the Feds in exchange for a 97% capitalization, as the GP envisions.
Financial services lap-dog economists loves the thing, though. For example, one senior economist from Wells Fargo claimed that the plan "will go a long way toward getting banks... to lend more aggressively and break the deleveraging feedback loop" now in place. This is the lunatic asylum stuff, for it assumes, without even stating so much, that there are hordes of willing borrowers gathering just outside the banks doors. And it further assumes that deleveraging is bad. Given that the whole mess was brought upon us by the excessive leveraging in the first place, either I am losing my mind, or the entire world is now rushing head on to create a new bubble in place of the old one.
The main problem with GP is that it comes on top of the TARP and a host of other asset-purchasing arrangements. Now, all were offering lenders some set of prices for distressed assets. These prices were set arbitrarily high to incentivize the banks to unload their troubled loans. But clearly, TARP was not sufficient, so the GP will have to set prices even higher - at some premium to TARP to further induce the loan holders to part with their distressed paper. And here is a catch. Since inception of TARP, the quality of the loans still on the books in banks have fallen - steadily and rather rapidly. Will this imply that investors are now being incentivized to bid for loans at a price above their true market value? Of course it will and this is precisely why the Feds are offering the bidders a 97% financing package in return for 80% equity in the loans purchased, with Federal financing done on the back of non-recourse loans (loans that are collateralized against the value of the securities purchased alone).
The GP will in effect act as a subsidy to the banks. Hence that nice climb in banks shares in recent days. Geithner's idea is to have a free lunch served to the banks today, for which the taxpayers will pay tomorrow and the restaurant staff (the investors) will get paid a day later. It is, as the Calculated Risk blog puts it, "a European style put option - it can only be exercised at expiration. The taxpayers will pay the price of the option in the future, the investors receive any future benefit, and the banks receive the current value of the option in cash. Geithner apparently believes the future value will be zero, and that is a possibility. If so, this is a great plan - if not, the taxpayers will pay that future value (and it could be significant)."
Note to the Derivatives students: this could have made a good question for exam...
On a somewhat more positive note: sales of existent homes were up 5.1% in February. Although this figure - the largest percentage gain since July 2003 - (a) comes after a 4.6% contraction in yearly sales and (b) was the result of deep price discounts (especially due to rising tide of foreclosures and short sales that accounted for 45% of all transactions), sales rose in all regions. Full 65% of the potential buyers expect the market to bottom out within the next 12 months.
Inventories of unsold homes - once again a sign of deepening foreclosure pools - on the market rose by 5.2% to 3.80 million, equating to a 9.7-month supply at the February sales pace. Although seasonally inventories usually rise ca 5% in February, this time around the increase came after a prolonged period of stalled construction activity. In other words, there is little reason for rising new inventories other than an acceleration in forced sales and foreclosures.
In fact, just as the subprime tsunami recedes by May-June 2009, the next wave of homeowners defaults is about to start hitting the US markets, as the following two charts (sourced here and here) illustrate:
In fact, just as the subprime tsunami recedes by May-June 2009, the next wave of homeowners defaults is about to start hitting the US markets, as the following two charts (sourced here and here) illustrate:
Securitization is not 'evil', neither is short-selling, nor CDS
A recent paper, Securitization of Mortgage Debt, Asset Prices and International Risk Sharing (CESifo Working Paper No. 2527, downloadable here) provides a refreshingly calm and measured assessment of the effects of mortgages securitization on the markets stability via allowing for greater international diversification of macroeconomic risk. According to the authors, "by making mortgage-related risks internationally tradeable, securitization contributes considerably to better international consumption risk sharing: we find that countries with the most highly developed markets for securitized mortgage debt have consumption responses to a typical idiosyncratic business cycle shock that are 20-30 percent less (my emphasis throughout) volatile than those experienced by countries that do not allow for mortgage securitization. Our results are based on quarterly data from a panel of 16 industrialized countries and cover the sample period 1985-2008Q1. They are robust to a range of controls for other aspects of financial globalization, international differences in the structure of housing markets and the financial system etc. Against the backdrop of the subprime crisis, these findings inevitably raise the question whether securitization could not just facilitate risk sharing in tranquil times but that it actually fails to provide international insurance in severe crisis periods. Indeed, we find that international risk sharing decreases in global asset price downturns and increases in booms. But we do not find evidence that countries with more developed securitization markets are systematically more exposed to these fluctuations in the extent to which risk can be shared across national boundaries."
Funny thing - there is now growing academic literature on the positive effects of such 'evil' forms of fiance as short-selling. See for example here and here (arguing that short-selling is superior to put options and even analysts in predicting negative returns), here, here and here (suggesting that short-selling adds to price efficiency in the case of dividend manipulation), here (arguing that share prices adjust to their fundamentals-justified equilibrium faster when short-selling is less restricted), and here (indicating that bans or restrictions on short-selling can have destabilising effects on even such 'stable' markets as those for government bonds).
While many more papers are available on the subject, what is apparent from the recent events is that politically motivated regulatory interventions in financial markets are exactly what they say they are - politically motivated changes that have little do with markets stability or efficiency. This is precisely why we should actively resist the current political push for restricting securitization, just as we should resist the push for banning short-selling or speculation.
Update: ... and CDS are not bad either... see comprehensive discussion on CDS here. Obviously all evidence flies in the face of our quasi-literate (economically speaking) DofF boffins (recall my post here).
Funny thing - there is now growing academic literature on the positive effects of such 'evil' forms of fiance as short-selling. See for example here and here (arguing that short-selling is superior to put options and even analysts in predicting negative returns), here, here and here (suggesting that short-selling adds to price efficiency in the case of dividend manipulation), here (arguing that share prices adjust to their fundamentals-justified equilibrium faster when short-selling is less restricted), and here (indicating that bans or restrictions on short-selling can have destabilising effects on even such 'stable' markets as those for government bonds).
While many more papers are available on the subject, what is apparent from the recent events is that politically motivated regulatory interventions in financial markets are exactly what they say they are - politically motivated changes that have little do with markets stability or efficiency. This is precisely why we should actively resist the current political push for restricting securitization, just as we should resist the push for banning short-selling or speculation.
Update: ... and CDS are not bad either... see comprehensive discussion on CDS here. Obviously all evidence flies in the face of our quasi-literate (economically speaking) DofF boffins (recall my post here).
Some good news... at last
Per EUObserver, EU leaders last Friday, have failed to provide any specific commitments on funds for third world CO2 reductions. Instead, the summit, designed to formulate some sort of a unified EU-wide position on the issue ahead of the
This is the good news because it postpones the absurd and economically illiterate introduction of the direct subsidies to the developing countries from the advanced economies aiming to reduce the developing nations' output of CO2. Here is how absurd the whole debate is. Quoting EUObserver, "if the EU and US stump up significant chunks of cash for cutting emissions and climate adaptation, developing countries may in return commit to considerable CO2 reductions, even though it is the industrialised north that is responsible for most of the emissions that caused the problem.”
Well, not that simple, folks.
First, even if the EU and the
Second, there is no ceiling on what constitutes 'sufficient' subsidies. The argument in favour of the subsidies rests on the assumption that absent a pay-off, the developing nations will continue pursuing economic growth - in an attempt to catch up with the developed world in standards of living for their growing population - and thus will continue increasing CO2 emissions. But in order to cut-off the growth in CO2 emissions in the third world, the West will have to offer subsidies that replace that part of growth which can (at least theoretically) be lost to curbed CO2 emissions. So how much of growth will we, Western taxpayers, have to replace? Oh, well, that is an open question. In other words, until there is a final price tag placed, any commitment to buy the third world out of its CO2 emissions will be an open one, and unenforceable to boot.
Third, even if we do provide so massive of a subsidy as to deliver the third world to parity in income with the OECD countries, there is absolutely no guarantee that the third world leadership will actually adhere to its end of the bargain.
Fourth, given that the third world has over 4 times more population than the OECD countries, an idea that we can effectively replace their lost income is an absurd one. Only the lunatic fringe of environmental movement can argue that hoisting the welfare of 4 third world country citizens on each working OECD adult is sustainable development.
Now, Poland was backed by Italy, Lithuania, Latvia, Bulgaria and Hungary alongside UK, Spain and Sweden in opposing the idea of fixed financing commitment and the use of ETS revenue to 'buy-off' the thrid world countries. Overall, only the Netherlands, Slovenia and Belgium backed the deal, implying that 24 out of 27 EU states were not exactly enthused about the proposal. Here you have it - some good news out of the recession...
Private Sector credit supply is being damaged by this Government
A recent working paper from the European Central Bank, titled "Modelling Loans to Non-Financial Corporations in the Euro Area" (ECB WP No 989/January 2009) provided a benchmark model for assessing the impact of twin shocks of increase in the policy rate (ECB main interest rate) and increase in the banking system risk premium on the supply of credit to non-financial corporations across the Eurozone. The authors, Christoffer Kok Sørensen, David Marqués Ibáñez and Carlotta Rossi showed that a 25bps increase in the headline interest rate "causes a reduction in bank lending of about 1.4%, 5.4% and 6.4% after 2, 5 and 10 years, respectively. A 20bp increase in the risk premium on bank lending rate reduces bank lending to non-financial corporations by about 0.6%, 4.0% and 5.1% after 2, 5 and 10 years, respectively."
Of course, the first experiment coincides fully with the ECB's reckless 25bps hike in rates between June 2007 and October 2008. The second, however, is even more dramatically important from the point of view of private credit availability. Between August 2007 and today, Irish bank's risk premia on lending to the banks has risen by some 300%, implying, under the ECB model, an expected drop in the credit supply to Irish non-financial corporations of ca 9-11% in 2009-2010, rising to a whooping 75-99% between 2009-2018.
Alternatively, between December 2008 and today, the average weekly CDS spreads on Irish Government bonds have risen some 160bps. Given our state's exposure to banks debts, this is a comparatively reasonable measure of the overall increase in the risk premium on banks lending. Thus, within the span of only 3.5 months, our expected credit supply to non-financial corporations has fallen by the estimated 5-6% for the period 2009-2010, 30-35% for the period of 2009-2013 and by 40-47% for the period of 2009-2018.
As I always said, Mr Lenihan should stop blaming the Americans for this crisis. And he should stop saying that there is no cost to the broader economy from his rushed general debt guarantee to the banks. Instead he should look at his Government's fiscal imbalances, wobbling decisions on financial sector rescue, blanket and unsustainable guarantees to the banks, appeasement of trade unions at the expense of the taxpayers, destruction of the private sector via higher taxation and charges, etc - in other words all the policies that undermine international markets' confidence in Ireland Inc. His policies, responsible directly for the rising risk premium on Irish Government debt are also destroying the private credit markets here. Not only today, but well into the future.
Of course, the first experiment coincides fully with the ECB's reckless 25bps hike in rates between June 2007 and October 2008. The second, however, is even more dramatically important from the point of view of private credit availability. Between August 2007 and today, Irish bank's risk premia on lending to the banks has risen by some 300%, implying, under the ECB model, an expected drop in the credit supply to Irish non-financial corporations of ca 9-11% in 2009-2010, rising to a whooping 75-99% between 2009-2018.
Alternatively, between December 2008 and today, the average weekly CDS spreads on Irish Government bonds have risen some 160bps. Given our state's exposure to banks debts, this is a comparatively reasonable measure of the overall increase in the risk premium on banks lending. Thus, within the span of only 3.5 months, our expected credit supply to non-financial corporations has fallen by the estimated 5-6% for the period 2009-2010, 30-35% for the period of 2009-2013 and by 40-47% for the period of 2009-2018.
As I always said, Mr Lenihan should stop blaming the Americans for this crisis. And he should stop saying that there is no cost to the broader economy from his rushed general debt guarantee to the banks. Instead he should look at his Government's fiscal imbalances, wobbling decisions on financial sector rescue, blanket and unsustainable guarantees to the banks, appeasement of trade unions at the expense of the taxpayers, destruction of the private sector via higher taxation and charges, etc - in other words all the policies that undermine international markets' confidence in Ireland Inc. His policies, responsible directly for the rising risk premium on Irish Government debt are also destroying the private credit markets here. Not only today, but well into the future.
Saturday, March 21, 2009
Boardrooms in denial: McKinsey study & Ireland Inc
McKinsey has done some homework and published impressive findings on the issue of corporate leadership in the current downturn. You can get the article here, if you have access to the Quarterly, but below are some main findings.
"While half of board members describe their boards as effective in managing the crisis, just over a third say their boards have not been effective; 14 percent aren’t sure how to rate their boards’ effectiveness. At the personal level, roughly half of corporate directors say their boards’ chairs haven’t met the demands of the crisis, and a nearly equal percentage of board chairs believe the same about their board members. Though most boards have implemented various changes to their procedures in response to the crisis, 62 percent say their boards need to change even more." Chart below (courtesy of McKinsey) illustrates.
Now, we all by now can be counted as the slaves of 'innovation' fad - the trend in modern management and policy to label every strategy change an 'innovation', but what McKinsey data shows, strategy is still the king when it comes to responding to changing environments.
"Innovative strategies are the key when corporate directors evaluate their boards’ responses. Among the group who say their boards have been effective in responding to the crisis, 60 percent credit the development of new strategies to manage risk and take advantage of new opportunities (chart below). That same area of management is most frequently cited as lacking among respondents at companies with ineffective boards. (This finding is consistent with the results of another recent survey, in which executives said support for innovation should be the overall focus of governments’ actions in response to the crisis.) Other areas that have been addressed by many effective boards are financing and operational needs; at unsuccessful companies, respondents say their boards have been particularly ineffective at tackling talent management and restructuring."
So let me ask you this question. Since November 2008 I spent inordinate amount of time and effort trying to convince some of our top organizations and companies - amongst hardest hit by the current uncertainty in the markets - to set up some formal research function to evaluate various strategic responses to the crisis that they can adopt. The structures I have been proposing are pretty much in line with those summarized by the McKinsey below:
Not a single Irish corporate took up my challenge. Majority of our corporate leaders are sitting on their hands, in words of Leonard Cohen 'Waiting for the miracle to come". But don't take my word for it - here is hard data on the issue.
Here is the truth - 'miracle' ain't coming, folks. Wake up and smell the roses - if you your board/CEO assessments of counterparty contributions is anywhere close to what McKinsey reports, you are screwed. Your corporate structure is rotten from the head down and you need to do an independent appraisal of it from the head down. Waiting around for 'miracles' is not going to do it.
"While half of board members describe their boards as effective in managing the crisis, just over a third say their boards have not been effective; 14 percent aren’t sure how to rate their boards’ effectiveness. At the personal level, roughly half of corporate directors say their boards’ chairs haven’t met the demands of the crisis, and a nearly equal percentage of board chairs believe the same about their board members. Though most boards have implemented various changes to their procedures in response to the crisis, 62 percent say their boards need to change even more." Chart below (courtesy of McKinsey) illustrates.
Now, we all by now can be counted as the slaves of 'innovation' fad - the trend in modern management and policy to label every strategy change an 'innovation', but what McKinsey data shows, strategy is still the king when it comes to responding to changing environments."Innovative strategies are the key when corporate directors evaluate their boards’ responses. Among the group who say their boards have been effective in responding to the crisis, 60 percent credit the development of new strategies to manage risk and take advantage of new opportunities (chart below). That same area of management is most frequently cited as lacking among respondents at companies with ineffective boards. (This finding is consistent with the results of another recent survey, in which executives said support for innovation should be the overall focus of governments’ actions in response to the crisis.) Other areas that have been addressed by many effective boards are financing and operational needs; at unsuccessful companies, respondents say their boards have been particularly ineffective at tackling talent management and restructuring."
So let me ask you this question. Since November 2008 I spent inordinate amount of time and effort trying to convince some of our top organizations and companies - amongst hardest hit by the current uncertainty in the markets - to set up some formal research function to evaluate various strategic responses to the crisis that they can adopt. The structures I have been proposing are pretty much in line with those summarized by the McKinsey below:
Not a single Irish corporate took up my challenge. Majority of our corporate leaders are sitting on their hands, in words of Leonard Cohen 'Waiting for the miracle to come". But don't take my word for it - here is hard data on the issue.Here is the truth - 'miracle' ain't coming, folks. Wake up and smell the roses - if you your board/CEO assessments of counterparty contributions is anywhere close to what McKinsey reports, you are screwed. Your corporate structure is rotten from the head down and you need to do an independent appraisal of it from the head down. Waiting around for 'miracles' is not going to do it.
Friday, March 20, 2009
Daily Economics Update 21/03/2009
Weekly analysis: Irish shares
The volume of shares traded on the New York Stock Exchange has topped the 50-day moving average on six of the seven days that the stock market has been up since March 6 (the day on which the S&P 500 touched its most recent low). The broad benchmark index has gained 15% since that low, sparking hopes of a recovery. The significant issue here is in the volume figure, not in the actual rise in the index, as stronger volumes on a rising trend tend to support more risk-taking and signal investors' support for the trend.
Interestingly, the same, but less pronounced, process has been starting on Friday in the Irish markets.
Chart above shows last week's movements in ISE Total Price Index (IETP), Irish Financials Index (IFIN), AIB, BofI and IL&P shares. Strong upward trajectories here, with significant volatility. But all underpinned by good (well above the average) volumes, as per chart below.
This is less pronounced when we normalize daily volumes by historical average, as done in the chart below.
Less extraordinary change is underway above, because we are using moving averages as normalizing variable, implying that we actually capture the inherently rising volatility in volumes traded here. So the above chart actually suggests that while Friday up-tick in share prices (and pretty much the last three day's rally) was reasonably well underpinned, it will take some time to see if market establishes a solid floor under the share prices.
Monthly results so far remain weak. Only BofI was able, so far, to recover all monthly losses and post some gains. AIB is just hitting the point of return to late February valuations. Given that at the point of sale - at the end of February, beginning of March - the volumes traded were 5-7 times those of the current week's peak, it is hard to see the present recovery as being driven by pure psychology and the spillover from the broader global markets (US' momentary lapse of optimism).
Two more charts: recall that in mid February I argued that downgrades in all three financials will come to an end by February's expiration and all three will settle into a nice slow bear rally, running at virtually parallel rates of growth. Chart below shows that this is happening, indeed.
Once we normalize prices and account for volumes traded, there is nothing surprising in the share prices movements since the beginning of March. And this is exactly where, as I argued before, the markets should be: awaiting news catalysts...
The volume of shares traded on the New York Stock Exchange has topped the 50-day moving average on six of the seven days that the stock market has been up since March 6 (the day on which the S&P 500 touched its most recent low). The broad benchmark index has gained 15% since that low, sparking hopes of a recovery. The significant issue here is in the volume figure, not in the actual rise in the index, as stronger volumes on a rising trend tend to support more risk-taking and signal investors' support for the trend.
Interestingly, the same, but less pronounced, process has been starting on Friday in the Irish markets.
Chart above shows last week's movements in ISE Total Price Index (IETP), Irish Financials Index (IFIN), AIB, BofI and IL&P shares. Strong upward trajectories here, with significant volatility. But all underpinned by good (well above the average) volumes, as per chart below.
This is less pronounced when we normalize daily volumes by historical average, as done in the chart below.
Less extraordinary change is underway above, because we are using moving averages as normalizing variable, implying that we actually capture the inherently rising volatility in volumes traded here. So the above chart actually suggests that while Friday up-tick in share prices (and pretty much the last three day's rally) was reasonably well underpinned, it will take some time to see if market establishes a solid floor under the share prices.Monthly results so far remain weak. Only BofI was able, so far, to recover all monthly losses and post some gains. AIB is just hitting the point of return to late February valuations. Given that at the point of sale - at the end of February, beginning of March - the volumes traded were 5-7 times those of the current week's peak, it is hard to see the present recovery as being driven by pure psychology and the spillover from the broader global markets (US' momentary lapse of optimism).
Two more charts: recall that in mid February I argued that downgrades in all three financials will come to an end by February's expiration and all three will settle into a nice slow bear rally, running at virtually parallel rates of growth. Chart below shows that this is happening, indeed.
Once we normalize prices and account for volumes traded, there is nothing surprising in the share prices movements since the beginning of March. And this is exactly where, as I argued before, the markets should be: awaiting news catalysts...
Rates of decline, degrees of (construction sector) misery
Earlier today (here), I gave some figures from the CSO data release on planning permissions. Here is what I wrote:
"Also per CSO release, the number of dwelling units approved was down 22.4% in year to the end of Q4 2008. In Q4 2008, planning permissions were granted for 10,375 houses as opposed to 13,135 in the Q4 2007, a decrease of 21%. Only 3,392 planning permissions were granted for apartment units, compared with 4,598 in Q4 2007, a decrease of 26.2%. The total number of planning permissions granted for all developments was 8,977, as compared to 12,330 in Q4 2007, a decrease of 27.2%. Dire stuff once again. I will do the detailed analysis of the sectoral decline dynamics in a follow up to this post."
So, as promised here are some graphs illustrating the dire state of affairs in construction industry.
First chart below shows two things:
Now, the next chart shows total number of permissions granted per quarter. Here, the most dramatic trend is also found in 2008, most specifically in Q3 and Q4 2008, when quarterly rates of decline in total number of permissions granted were the steepest for any quarter since Q3 2000. And the rates of decline are accelerating, relative to Q1-Q2 2008.
Lastly, more detailed quarterly date below, by each broader category of permits. I also included trend lines for the period of peak-to-present contractions, showing that Q4 2008 dynamics were consistent with generally accelerating deterioration in all categories of permits, save for 'Other'. This means that we can expect this category to actually fall further and faster in months to come.
So here you have it, for construction industry - there is no bottom in sight, yet...
"Also per CSO release, the number of dwelling units approved was down 22.4% in year to the end of Q4 2008. In Q4 2008, planning permissions were granted for 10,375 houses as opposed to 13,135 in the Q4 2007, a decrease of 21%. Only 3,392 planning permissions were granted for apartment units, compared with 4,598 in Q4 2007, a decrease of 26.2%. The total number of planning permissions granted for all developments was 8,977, as compared to 12,330 in Q4 2007, a decrease of 27.2%. Dire stuff once again. I will do the detailed analysis of the sectoral decline dynamics in a follow up to this post."
So, as promised here are some graphs illustrating the dire state of affairs in construction industry.
First chart below shows two things:
- Numbers of permissions granted (annual totals) for main categories of dwellings and in total - these are now clearly falling at the fastest annual rate;
- Total area of all construction projects applied for is also falling at the fastest rate of decline.
Now, the next chart shows total number of permissions granted per quarter. Here, the most dramatic trend is also found in 2008, most specifically in Q3 and Q4 2008, when quarterly rates of decline in total number of permissions granted were the steepest for any quarter since Q3 2000. And the rates of decline are accelerating, relative to Q1-Q2 2008.
Lastly, more detailed quarterly date below, by each broader category of permits. I also included trend lines for the period of peak-to-present contractions, showing that Q4 2008 dynamics were consistent with generally accelerating deterioration in all categories of permits, save for 'Other'. This means that we can expect this category to actually fall further and faster in months to come.
So here you have it, for construction industry - there is no bottom in sight, yet...
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