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8/3/2019 Punchline May 09
1/21
ABRAHAM GULKOWITZ
2009 issue 8May 11, 2009
Turning the Corner, or Turning a CornerSome seeming stability or improvements in some economic releases have helped unleash a down-in-quality rally, with especially large returns in the h
yielding asset classes. Signs that capital markets were healing helped to boost credit and equity; so did a significant reduction in the various ma
defensive posturing. What we seem to have here is some disproportionate celebration of the financial system and the economy avoiding a train w
Although the stress tests have been touted as an important milestone on the way to economic recovery, too much credence has been attached to
public exercises. While economic stimulus and unprecedented government support has been central to markets finally gaining traction, the outloo
households and businesses remain feeble. Lets not forget that this is no run-of-the-mill business cycle. Coming out of an epic collapse in financing and
international economy, we may witness long-lasting attitudinal shifts in spending and borrowing patterns, intense competitive pressures in any reco
scenario, and a long crest of corporate stress that will linger for years. Any outlook cannot ignore the serious risk that corporate defaults may peak a
highs, and recoveries could be constrained. As a result, I worry that it will not be a clean snap-back as the markets seem to assume.
Japans March exports were down 46%, but that still b
February. Overall, Asian trade figures have bounc
somewhat, suggesting their previous drop resulted froinventories and finance, not a deeper problem. This is not t
end of the recession, but maybe the end of its ugliest stage
Swine flu is last thing
fragile global economy
needs
Investor confidence in financial markets is returningafter the U.S.government and the Fed agreed to spend, lend or commit $12.8
trillion to end the longest recession since the Great Depression.
Finance chiefs from the Group of Seven predicted in Washington on
April 24 that the world economy will start to rebound later this year.
Japan Girds for Record ContractionJapan's economy is expected to shrink 3.3%
in the current fiscal year.
Many smaller businesses believe that further
inventory adjustments will still be needed. They
suggest that stockpiles are still seen as too high by
producers and they intend to cut them back further in
the next six months.
Governments become lenders
and spenders of last resort
GM Shutdowns to Weigh onEcon Data in Months Ahead
As we alter our definitions of valuation,our notions of stress change...stress or
stretch tests.
Auto Sector
Too Many Back-Seat DriversComplex solution will offer no quick fix
Second half inventory bounce
It was a setup Markets jump
as fears ebb about bank 'stress testsThe macro assumptions behind the stress test
seem realistic, but not that dire Critics of
the tests say regulators have been walking on
eggshells; cannot risk spooking investor
GM Out.. The editors at Dow Jones are
hinting what everyone else already knew: G
going to be replaced in the Dow Jones Indu
Average and replaced sooner rather than la
Crude Oil climbs to over $58 ag
Rising bond yields loom over rally
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May 11, 2009
In This Issue
Households?Numerous questions for a once free-spending sector whose housing and
mortgage finance machinery have not just collapsed but are severely dama
The boom cannot and should not be recreated (
You Cant Handle the Truth (p
The DNA of Business (pg
Trust Me on This (p
Dislocations (pg
Credit Concerns (p
The New Geography of Business (p Pumping Iron (p
Real Estate and Construction (p
More Construction Data (p
Media ClipsLots of pressure points (p
Break Down in Europe (p
Will Life Ever be the Same? (p
Turning the Corner, or Turning a CornerSome seeming stability or improvements in some economic releases have helped
unleash a down-in-quality rally, with especially large returns in the higher-yielding
asset classes. Signs that capital markets were healing helped to boost credit andequity; so did a significant reduction in the various markets defensive posturing.
What we seem to have here is some disproportionate celebration of the financial
system and the economy avoiding a train wreck. Although the stress tests have
been touted as an important milestone on the way to economic recovery, toomuch credence has been attached to these public exercises. While economic
stimulus and unprecedented government support has been central to markets
finally gaining traction, the outlook for households and businesses remain feeble.Lets not forget that this is no run-of-the-mill business cycle. Coming out of an
epic collapse in financing and in the international economy, we may witness long-
lasting attitudinal shifts in spending and borrowing patterns, intense competitive
pressures in any recovery scenario, and a long crest of corporate stress that will
linger for years. Any outlook cannot ignore the serious risk that corporatedefaults may peak at new highs, and recoveries could be constrained. As a result,
I worry that it will not be a clean snap-back as the markets seem to assume.
(pg 1)
In This Issue (pg 2)
Searching for Bottoms (pg 3)
U.S. Job Picture (pg 4)
DUI (pg 5)
Dimensions of Risk (pg 6)
Since You Asked (pg 7)
Engines of GrowthThere will be ongoing repercussions from this historic bust, and we worry about
the likely contours of the recovery path. And lets not forget that its clearly an
international affair (pg 8)
Headlines and data appearing in The Punch Line came from widely available publications including
national and international newspapers, trade journals, economic and industrial bulletins and news websites.
Contact information:
Abe Gulkowitz
phone: 917-402-9039 email: [email protected]
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May 11, 2009
Searching for Bottoms
The nation's shelves are bare and that could
good news for the economyEven when inventories bottom out, companies are unlikely to g
production boom. Most forecasters expect them only to start cran
merchandise at levels that make sense given an economy with weak
from consumers. There are few signs that consumers are eager to bugoods given the continued weak job market, dysfunctional financial
and steep decline in housing and stock market wealth.
Tech sector many now expect 3% notebook unitgrowth in 09, while desktop units should continue todecline 20%. But revenues are crashing due to ASPerosion and mix shift towards lower-end products,including netbooks.
The Anti-Debt Mkt Positioning
Technology Stocks Are Favorites in S&P 500 on Zero DebtTechnology companies are piling up cash and cutting debt faster than any other industry, a signal to investors that they
will rally even as evidence mounts that the stock markets fastest advance since 1938 is in jeopardy. Cisco Systems
Inc., Salesforce.com Inc. and Cognizant Technology Solutions Corp. have driven technology shares in the Standard &
Poors 500 Index to a 16 percent gain in 2009, the best start since 1998 and the most among the 10 industries in the
measure. Money managers are betting the cash reserves, rising profits and cheapest valuations on record will send U.S.
technology stocks up 24 percent this year, compared with an increase of less than 1 percent for the S&P 500, according
to analyst price forecasts and data compiled by Bloomberg. The S&P 500 fell 0.4 percent last week, the first drop
since early March, after bank losses increased and the International Monetary Fund said world economies may contract
for another year. MFS Investment Management, Harris Private Bank and Huntington Bancshares Inc. say computer
and software makers may climb even as the rest of the market retreats.
A broad range of macro economic indicators is com
somewhat less negative in recent weeks as compared tNovemberFebruary period, when the economy literall
off a cliff. But any careful investigation into the undenumbers and industry specifics continue to suggesteconomic recovery remains in a very precarious state
recovery path will not be a straightline.
Clearly the recent pace of decline in many indicacan't continue indefinitely; nevertheless, one shonot view slower rates of decline or small upwbounces, in and of themselves, as evidence of a tbottoming.
A world of reduced
counterparty risk
Stimulus policies boost expectations
Taiwan Export Values Fell in April
Standing in contrast to marketenthusiasm over a demand recovery,
April exports missed expectations by
dropping -34.3% YoY in USD terms
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May 11, 2009
U.S Job Picture
A 72,000 jump in government payrolls tempered the ove
jobloss figure. Government employment was bolstered
the hiring of about 60,000 temporary workers in preparafor the 2010 census and U.S. Labor Secretary Hilda Solis this figure would fluctuate in the months ahead. Privsector employment fell by 611,000 in April after a 693,
decline in March, the department said, which curbed soof the optimism over the report. Still, the data was no
bleak as financial markets had expected and offered freshest sign that the intensity of the recession, now in
17th month, was starting to fade.
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May 11, 2009
D-U-IUnder the Influence
Sentiment improves Initiatives by the Federal Reserve and Treasury were
enough to instill confidence that Washington is headed in the right directiontoward stabilizing the financial system via removal of troubled assets, and
improving affordability in the housing market, especially with lower rates - both
important elements toward restoring the beleaguered consumer balance sheet andboosting lending capacity. At the same time and perhaps equally important, faint
signs did manage to surface in March-April that various economic indicators may
be getting no worse
Banking on policy effectivenessMarket sentiment is on the mend and in the short term it
suggesting that we should expect less of a pullback in consum
spending and an end to the freefall in macro stats. The seve
break in economic activity has been met by a wide-ranging avigorous fiscal and monetary response. Much of this stimulus
still in the pipeline, which is a major positive for the outlooHowever, on the downside of this effort, the outlook may yet s
some severe disappointments and serious questions will st
haunt regarding the long-term. This is especially disconcerti
regarding the massive budget obligations that will be slow
recede.
Markets infected by exuberance pandemicMany stocks have erased this years losses. USTreasury yields are above 3%. Killer flu? No worries.Negative growth? Not for long. A kind of flight fromsafety is underway. It shows the medicinal power ofmonetary and fiscal injections. But painful side effectswill follow.
GMAC will provide dealer andcustomer financing, receivingliquidity and capital support fromthe US Government.
JUST BELIEVE
Risk Taking on the ComebackThe success of government intervention in credit
markets to stabilize short term markets and ensure funding
for banks turns last years fear into this years greed.
Evidence can be seen most readily in the return of risk taking
as high yield debt markets lead in performance year to date.
The decline in credit market reliance on government
guaranteed funding from declining usage of CPFF in the
commercial paper market to the recent rise in non-guaranteed
term debt issuance from banks points to a return of risk
taking in credit markets coinciding and contributing to a
broader confidence in financial markets.
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Dimensions of Risk
Kansas Fed's Hoenig:
Despite Actions Mkt Still Under Stress NearTerm Outlook for Financial System, Economy Remains 'Uncertain' Ad Hoc Policy Actions Created Uncertainty, Undermined Confidence
Kansas City Federal Reserve Bank President Thomas Hoenig said the U.S.
economic outlook remains "uncertain" and markets are still under stress despite
the timely action by the Fed and other policymakers to respond to the current
crisis. However, Hoenig repeated his concerns about the reactive and ad hoc
nature of policy responses, and the moves to save firms deemed "too big to fail,"which he said will have negative longer-term consequences. Noting the huge
infusion of taxpayer money, Hoenig said, "Despite these actions and some recent
signs of improvement, markets remain under stress and the near-term outlook for
the financial system and the economy remains uncertain."
SOME RELIEF??? Although credit conditioremain strained, an April survey of loan officers by
Federal Reserve found a smaller number of banks w
tightening loan standards compared with a few mon
ago. Glimmers of improvement were most notable
commercial lending. The Fed said 40% of the
domestic banks it surveyed between March 31 and Ap
14 said they tightened standards on commercial a
industrial loans, a smaller percentage than the 65% th
said in January that they tightened standards.
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May 11, 2009
Since You Asked... Reality Check !
Top revenue sources forstate and local governmentsSources: U.S. Department of Commerce,
Bureau of Economic Analysis;
Q1 09, compared with the
same period last year:
-----------------------------
Federal grants: 15%
Income taxes: -11%
Property taxes: 2%
Sales taxes: -2%
Other taxes: 2%
Rating agencies downgraded $71bn worth of HY bondsduring the month, bringing cumulative LTM volume of netdowngrades to $712bn or 102% of the HY index size. Thisvolume matches the peak reached in the last credit cycle.Given that we are still in early stages of this cycle, it appearslikely that HY will breach its previous record in months tocome. Separately, rating agencies downgraded $55bn offormer investment grade names into HY, making it the secondmonth in a row of $50bn+ in such crossover downgrades. OnLTM basis, volume of fallen angel transitions reached $234bn,of a third of the HY index size, again reaching the highs of lastcredit cycle. Most notable fallen angels of April included CIT,Macys, JC Penney, US Steel, and Colonial Realty. There wereno rising stars this month.
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May 11, 2009
Engines of Growth
UK Govt to launch oldfornew
vehicle scrap schemeThe government will pay drivers to swap old cars for new in a
scheme to boost its stricken auto sector, Chancellor Alistair
Darling said in Wednesday's budget, mirroring moves in Germanyand other European nations. Alistair Darling told the House of
Commons that the scheme, to be introduced from next month,
would "provide motorists with a 2,000 pound discount on new
cars bought when they trade in cars over 10 years old". The
move, which will cost the government around 300 million pounds
and runs to March 2010, comes following similar, popular steps
taken in other European countries, notably Germany.
US Federal Program to Private Lending Struggles tMoney into Consumers Ha
Strong China Growth?
But China Power Output LikelyDropped About 4% Y/Y in April"April power output is likely to have dropped more from a year earlier
according to the data from the National Electric Power Dispatching and
Communicating Center," said Chang Jianping, vice director of the
supervision department under the SERC. The latest data show that the
output dropped declined from the large, 3.5% drop posted in the first 10
days of April, Chang said, predicting that power output woulud likely
rebound in May or June. Electricity production fell 0.71% from a year
earlier in March, with the decline accelerating as the month progressed.
Power production decreased 1.4% in middle 10 days of March and 2.08%
during last 10 days of the month.
South Korea surprise it posted a +0.1%
reading in 1Q real GDP, which compared toa consensus view of 0.2% and a big swing
from the 5.1 print in the fourth quarter.
China in Rebound Biz Survey:
Key Index Back Up to Q1 08 LevelsOverall Chinese business conditions posted their strongest showingin April in more than a y ear, led by a sharp improvement in corporatefinancial positions, the results of the April China BusinessSentiment Survey indicate. The headline overall business conditionsindex jumped to 61.51 in April from 54.20 in March, the highest ithas been since March last year.
German economy to shrinkGermany's economy will shrink by 6% this year and continue to contract in2010 according to a forecast from the country's leading economic thinktanks. The estimates, compiled by eight institutes for the German
Economy Ministry, also predicts that the rate of unemployment will hit10% next year. The gloomy forecast chimes with that of the IMF, whichshows the German economy contracting by 5.6% this year. This is fasterthan any other major economy apart from Japan, says the IMF.
Europe's economic situation remains highly uncertain
against the backdrop of a still-fragile banking systemand financial markets, but may see a return to growth
next year, EU Economic and Monetary Affairs
Commissioner Joaquin Almunia said Saturday.
Worst back-to-back US GDP performance in 5 DecadesNot only did 1Q real GDP contract sharply - at a 6.1% ann
rate versus consensus expectations of -4.6%, it followed on theels of a 6.3% decline in the fourth quarter of 2008. Th
marks the worst back-to-back performance in 50 years.
Canada purchasing managersindex jumps to 53.7 in April,a remarkable 10-percentage point jump overMarch's reading and a suggestion that thecountry's beleaguered manufacturing sectoris on the mend.
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May 11, 2009
Households Brave New World
Trauma in Housing California and Flmetropolitan areas led the U.S. in foreclosures in thequarter as unemployment and falling property v
deepened the housing recession, RealtyTrac Inc. said.Vegas had the highest overall rate of foreclosure fiwith 4.5 percent of households receiving a defau
auction notice or being seized by a lender. California hcities among the top 25 with the highest rates. Florida
eight while Nevada and Arizona each had two, accordIrvine, Californiabased RealtyTrac, a seller of default Unemployment is bound to get worse, Stephen M
professor of economics at the University of NevadaVegas, said in an interview. The real issue is when
prices bottom?
Consumer delinquencies on the riAccording to Moodys, the amount of bad US credit card
written off as uncollectible rose to a record high (data b
1989) of 9.3% annualized in March from 8.8% in Feb
Moodys is also reporting that the amount of loan balanwhich a loan balance was 30 days past due rose to
annualized from 4.57% this time last year.
Local taxes Bite
After 14% Water Rate Hike,
Another 12% Increase on HorizonThe 14 percent water rate hike on tap this yearcould be followed by another walletcrunching
12 percent increase in 2010. That wouldrepresent the fourth doubledigit boost since
2007 and would propel the annual water bill fortypical onefamily homeowners past the
$1,000 mark for the first time.
As to the Feds claim that the equity of homeowners as a group
stands at 43%, Barrons points out that what the Fed neglects to
tell you is that roughly a third of them have their houses free and
clear. Lo and behold, some basic arithmetic reveals that 67% of
homeowners with mortgages have equity of less than 15%. That
suggests the destruction priced into the credit markets hardly
seems out of whack with potential reality.
Ben Bernankes own words: A number of factors are likely to continue
to weigh on consumer spending, among them
the weak labor market and the declines in
equity and housing wealth that households
have experienced over the past two years. In
addition, credit conditions for consumers
remain tight
Food stamp participation surgingAnd, as another sign of the stress hitting the consumer sector, we see that
food stamp participation jumped 1.1% in February, continuing a string offour consecutive monthly increases, and is running up 17.4% on a yearoveryear basis. Nearly 15 million US households, or 13% of the total, are
now participating in the food stamp program.
More signs of stress for
high-end consumers
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May 11, 2009
YouCant Handle the Truth
Were US Auto Sales a Bubble? Production Indices to CrashGMs is to shutter production for the balance
of the second quarter; that means 20% of vehicleproduction will be shuttered
Prof. Paul Krugman Worriesabout L-Shaped RecessionThe country may experience some economic growth in
latter half of this year, but don't expect the rate of job losse
abate anytime soon, noted economist and recent Nobel P
laureate Paul Krugman told an audience of economists
area business leaders Friday at the University of Cincin
"There are two kinds of recessions that are bad - those
take place because of financial crises, and those that
synchronized around the world," he said. "In both cases,
recessions tend to last longer and be deeper. Right now, w
got both going on."
Q: What will it take to pull out of this crisis?
Krugman: I'm in the camp that really worries about the
shaped recession. We level off but we don't get the recov
We hope it isn't, but it has all the markings of it. This lo
like the kind of slump that has all the markings of wh
normal recovery forces are very, very weak.
Why, after all, did bankers take such huge risks? Beca
success offered such gigantic rewards.... Now we're see
similar (outrageous) rewards offered to people who can p
their risky games with federal backing.
GM to Cut 21,000 Jobs, Eliminate Pontiac
Mafia and underworld economy thrives
in global financial meltdown
Firms Warn of China ProtectionismForeign businesses in China are complaining about
rising protectionist policies in new spending.
Support coming from humiliatedand desperate policymakers
For many firms the worst case needsto become the base case scenario
Likely to see more evidence that thebig problems with commercial real loans. But heavy losses on such assetswould cause even deeper misery, andfailure, at small and medium bankamong the giants in the first round "bethey tend to have disproportionatelyexposure."
Public scrutiny blunted reallytough bank stress tests
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The DNA of Business
Workouts to Define Recovery
supermarket giant capitalizes
on booming weapons sales
German badbank scheme looks ingeniousBanks get funding to hold toxic assets to maturity, thus avoiding
fire
sales. They only take expected hits as they materialise. Andthe state provides catastrophe insurance, protecting banks in
case things are worse than expected.
GE Exec Says Economic Crisis Resetting CompaniesThe top executive of General Electric Co. said Wednesday he couldn't
predict when the recession would end or how bad it will be, but said
the global economic crisis has "fundamentally reset" the way
companies do business and capitalism itself.
Just trading down
Discount Retailers Score in Down Economy
Aggressive discounting as well as an accelerated pace of 2008federal tax refunds have provided some support to consumerspending in spite of the extreme headwinds of the massive $13trillion of lost wealth via equity and housing asset destruction - -plus 5.5 million jobs lost (and counting) and a well-overdue need torebuild savings.
Low chip and TV sales hit SamsungSouth Korea's Samsung Electronics has reported a 72% drop in quarterly profits aftermore losses at its microchip and LCD television divisions. For the three months to 31March, its net profit fell to 619bn won ($458m; 330m) from 2.2tn won a year ago.
However, the results were better than market expectations and an improvement on thegroupwide losses reported for the last three months of 2008. Losses at itssemiconductor unit hit 650bn won between January and March. The loss at the LCDtelevision unit was 310bn won. Samsung said both profits and sales at the two divisions
had been hit by the continuing global economic slowdown. By contrast, profits at itsmobile phone handset business rose 2% to 940bn won as sales held up.
G.E.s Breakthrough Can Put 100 DVDs on a DiscGeneral Electric says it has achieved a breakthrough in digital
storage technology that will allow standard-size discs to hold
the equivalent of 100 DVDs.
Newcomers Challenge OfficeSupply StalwartsWith companies trying to cut costs even on pens and paper in this recession,
discounters like Wal-Mart and Costco are increasing their efforts to bring in
customers of the big office chains like Office Depot. The result: a wave of
price competition that is benefitting lower-cost vendors and encouraging
companies to switch suppliers.
Record slack in the economy
Shipping industry adrift in global slowdown.
The global shipping fleet is still growing at a
record pace. But world trade is set to decline 9%.
The excess supply will last for years. Shippers and
their financiers may benefit from lower costs once
trade recovers. But in the meantime, it's all about
survival.
RETAIL CLOSINGSA new report from CoStar Group
revealed that major U.S. retailers
closed nearly 7,000 stores while
opening approximately 5,700 new
locations in 2008.
Avon Posts Sluggish SalesAvon reported a 36% drop in qu
profit as weak North American vand the stronger dollar weigh
revenue. Its shares sank.
Moody's cuts Weyerhaeuser'sdebt ratings to junk
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Trust Me on This
Bank stress tests shouldntbe open to debateThe spectacle of US regulators arguing
over the results strains the tests
tenuous credibility. Watchdogs run
these tests all the time. This cynical
public exercise shows regulators need
justification for telling banks what to
do. That means banks have grown too
powerful.
CEO pay outrageFour of the top five highest paid
executives in 2008 ran companieswhose stocks underperformed themarket.
Canadian Dollar Rises to
Highest Since NovemberCanadas dollar advanced to the highest level since
November as speculation the worst of the global
economic crisis is over boosted the appeal of
currencies that would benefit from renewed growth.
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Dislocations - Blurred Vision
The Auto Nightmare Unintended consequences Administration
steps to guarantee automaker warrantees and provide financing
to parts suppliers appear to be very deliberate steps toring fence the industry and limit collateral damage from a
potential bankruptcy filing by an OEM. But who can say in
advance that all of the risks and unintended consequences ofa bankruptcy have been identified.
Mexican Peso, Markets Tumble
as Swine Flu Outbreak Grows
China has reported that it has been secretly increasing its gold reserves.
It was able to keep it secret by buying domestically produced metal, almost doubling the amountof gold it holds to more than 1,000 tons. China has the biggest foreign exchange reserves in theworld, totalling almost $2,000bn (1.373bn). An estimated two thirds is held in US dollars,though China has been backing away from the dollar as a reserve currency for a while
Ben Bernankes own words:Even after a recovery gets under way, the rate of growth of real
economic activity is likely to remain below its longer-run potential for a
while, implying that the current slack in resource utilization will increase
further. We expect that the recovery will only gradually gain momentum
and that economic slack will diminish slowly. In particular, businesses
are likely to be cautious about hiring, implying that the unemployment
rate could remain high for a time, even after economic growth resumes.
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Credit The Big Bluff
Beware part of the Highyield creditindex steepening in price terms can beattributed to a series of defaulted namesexiting the index over the past weeks
The credit market improvements in 09, while real inthe sense of having reopened issuance and improvingliquidity, overstate the degree of fundamental creditrepair as that liquidity rests on an artificial foundationof government intervention rather than a significantreduction in credit risk.
The global default rate rose to 7 percent at th
of March from 4.1 in December, with the nof defaulters the greatest for a single month
the Great Depression, according to Moody New York-based ratings firm expects the
default rate to peak at 14.6 percent in the
quarter of this year, it said earlier this month.
81% of proceeds from HY issuance so far this year wasused to refinance existing indebtedness, primarilyloans. This compares to a normal level of refinancingactivity in the 50% range.
some recent doubledip bankruptcies
show that investing in distressedcompanies isnt foolproof
The stress tests are not stressed enough the adverse
scenario is not far from most analysts base case outlooks.As the IMFs latest reports have made blatantly clear, theUS banking system (and the European even more so) willneed more capital still down the road stress tests or not.
There are still reasons to be cautious on credit risk
in the longer term. Credit is already contending with
rising defaults, spiraling downgrades and increasing
corporate leverage. All such activity is likely to get
worse before it gets better. For the record, the key
outperformers have been all the consensus
underweights: high yield, industrials, autos and bank
sub debt.
FAILURE DOESNT SCARE ME Henry Hu from Texas University pthe empty creditor phenomenon to explain why some lenders prefer to hold
force a bankruptcy seemingly against the companys and thus their own best inteshort, creditors with enough credit default swaps may simultaneously have rights and incentives to cause the debtor firm's value to fall. And if bankruptcy
the empty creditor may undermine proper reorganization, especially if his internoninterests) are not fully disclosed to the bankruptcy court. See: Distresse
Investors Dictate The Terms: How Big An Issue Are 'Empty Creditors' With CDS HDynamics of this kind make defaults more likely and need to be taken into accouforecasting the severity of the current corporate default cycle.
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The New Geography of Business
Canada's leading indicators fall againCanada's composite index of leading economic indicators fell 1.3% in March,
following a 1.4% decline in February, according to Statistics Canada. The
contraction in the manufacturing sector intensified as widespread cutbacks
were implemented in the auto industry early in the year. This was offset by
a marked slowdown in the fall of the housing and stock markets.
Japan exports fell 45.6 percent last month, compared with
March 2008. Although still a significant decline, the numbers were
slightly better than those from February, when the slumpapproached 50 percent. Imports also were down in March, falling36.7 percent from 2008 levels. Japan normally exports far more
than it imports. While its trade balance has remained positive, it
shrank by 99 percent compared with a year ago.
China PickupEconomic activity is picking up, driven by the extensive fiscal
programs pushed by the government and by the surge in bank
lending. Government is expanding employment in public works projects as an offset to contracting exports and light industry
which are traditionally more laborintensive than public works.
These stimulus efforts come at the cost of the efficiency of the
economy and will need to be rolled back.
HK Trade UpdateChinas recovery insufficient to offset weakness in the rest of theworld Exports to all major markets (except China) saw larger YoY
declines in March compared to JanuaryFebruary of this year.Shipments to the US fell 23.3% (20.9% in JanFeb); those to Japandropped 19.5% (13.3% in JanFeb) and those to Germany fell 11.9%
(7.2% in JanFeb). Exports to China fell 19.2%, improving somewhatfrom the 23.5% decline in the first 2 months, but this modest
improvement was not sufficient to offset the weakness in the rest ofthe world.
Shift to China PPG Industries Inc, the worlds secondlargestpaint and coatings maker, expects China sales to maintain doubledigit
growth this year as demand from auto makers grows and it expandsmarket share. The USbased company, which is reducing output andcutting more than 8 percent of its workforce amid weak demand, is counting
on Asia, and China in particular, as its growth engine.
Poland Says Zloty WeaknessMay Force Euro Entry DelayPolands government said the zlotys weakness may force
it to postpone euro adoption, now planned for 2012, unless
the currency starts stabilizing in the second quarter. The
government will focus on the secure entrance to the pre-
euro exchange rate mechanism and not on dates, theWarsaw-based Finance Ministry said today in a document
outlining the guidelines for dropping the zloty. East
Europes nations are seeking speedier euro adoption to
shield their economies from the global economic crisis.
Poland in October pledged to target ERM membership in
the first half and euro adoption by 2012. Since then, the
zloty lost 22 percent against the euro and is too volatile to
set a parity rate for a peg to Europes common currency,
the ministry said.
Overhaul Needed
macroeconomic and social stability at riskRadovan Jelai: Effects of the financialcrisis on Central and Eastern Europe
Speech by Mr Radovan Jelai, Governor of the National Bank of
Serbia, at the "Global Crisis i n Europe and Central Asia" panel
discussion of the IMF and WB Spring Meeting, Washington, 24 April
2009.
* * *Dear ladies and gentlemen,
Central and eastern Europe has gone through an
unbelievable development during the last two decades in
all aspects: politically, economically and socially. But the
financial crisis has thrown much of that progress into
doubt. . .
First, most CEE countries, including Serbia, greatly
underestimated and are still underestimating the problems
they will face in 2009 and 2010, as our economic models
built on foreign direct investments, foreign borrowing
and, for the regional members of the European Union,
additional funds from Brussels need a complete
overhaul.
the regions macroeconomic and social stability will be
at risk. Democracy, during the next couple of months, will
undergo its first major test
Unemployment in Spainjust set a national
record at four million people, a shocking
17% rate. Yet the government isnt even
considering serious reforms of the stultifiedand discriminatory labour market.
The Bank of Japan believes that the natio
potential growth rate likely has fallen -- and
have dropped sharply -- as a result of the impact of the glrecession on the export-dependent economy. L
productivity is still relatively low in Japan, particularly in
non-manufacturing sector, while capital stock is not rising
to cautious business planning, both of which are hold back
nation's potential to grow and limit chances for improving
standard of living. In January, BOJ Governor Mas
Shirakawa estimated Japan's potential, non-inflationary gro
rate had fallen to between 1% and 1.5% from its long-
estimate of 1.5% to 2.0%.
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Pumping Iron - Old Economy
New Challenges
Newsprint prices collapsing down $40/MT to $665/MT.
In April, newsprint price declines accelerated given tumbling
newsprint demand. This is down a total of $110/tonne from therecent peak of $775/tonne seen in November 2008. In prior
months, mills had asked customers to take advance shipments
resulting in elevated inventories. Consequently, RISI contacts
note that demand over the next few months will be very weakresulting in additional heavy discounting.
Steel Industry Woes Signal
Shakeout, Price CutsWeak demand is likely to lead to increased losses in
the world steel industry next quarter, which could
prompt consolidation, the shakeout of marginal players
and lower prices, much of the industry now predicts.
"The demand for steel is virtually nonexistent," says
Dan DiMicco, CEO of steelmaker Nucor Corp., which
reported a $189.6 million loss and said it expected a
wider loss in the second quarter. Steelmakers were
hoping the first quarter would be its worst, in terms of
losses, for 2009. Early signs that the housing market
would pick up, that stimulus spending for projects
such as bridges would boost consumption, and that an
auto bailout would shore up a key steel customer were
taken as clues that the steel market was headed for a
turnaround.
Chemicals 2009 to be challenging for mostcommodity chemical companies because demand remains
depressed and significant Middle Eastern capacity is
expected to ramp up throughout the year. This
capacity will begin to affect the export market in
2Q2009, and supply should continue to outpace demand
growth through 2010.The Western Europe market for
commodity chemicals is considerably weaker than the
US market. Demand shows no signs of improvement and
economic growth is forecasted to continue to slow.
MaritimeIdle Box Fleet GrowsIdled ocean container capacity increased slightly in the past
two weeks, reversing an earlier decline, the first in seven
months, as ocean carriers return an increasing number of
chartered vessels as they come off hire. Collectively, the top
20 ocean carriers may be facing total losses that could exceed
$4 billion for the first quarter alone -- the largest ever
quarterly loss in the industry's history. The idled fleet rose to
506 ships of 1.34 million TEUs on April 27 from 486 vessels
of 1.31 million TEUs two weeks ago, according to AXS-
Alphaliner. The idled vessels represent 10.6 percent of the
world fleet against 10.4 percent on April 13.
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Real Estate and Construction Outlook
Even Coml Real Estate a massive deterioration in underwriting
standards and a buildup leverage can lead to crippling problems, even without
massive supply problems. For the 2007 vintage of credits, a vast majority of
loans are unlikely to qualify for refinancing without significant equity infusionsfrom borrowers
Corporate RE Plays New Role in Tough TimesIt's a whole new world for corporate real estate owners, according to the 2009 State of the
Industry Report by CoreNet Global, which was released Monday. The report distilled the
views and opinions of more than 60 corporate real estate executives from around the world,
along with information gleaned from various corporate real estate case studies. In some ways,
the report noted, the economic squeeze has caused companies to turn to corporate real estate
departments and third-party real estate service providers even more than previously to help
contain costs. For example, companies are still interested in greening their real estate holdings,
but now they want lower-cost sustainable solutions that offer more immediate payback,
especially energy management. Also, alternate workplace strategies, which were previously
considered an experiment in reducing the cost of office space through flexible work practices,
is no longer so experimental any more, but pretty much mainstream.
New York City - As many as 90,000 city apartment units could
go into foreclosure as the housing crisis spreads from single-
family homes to rental properties, city officials warned.
Square Feet: New York Office Landlords Go SmallManhattan building owners are trying to make dealsby chopping large spaces into smaller units andfinishing off the space before a tenant is signed.
The time bomb of unfundcommercial mortgagesIts not only buyers and sellers wh
stuck in the dump of the econ
recession. Holders of leveraged pro
are watching their values drop, an
threat of default impacts not jus
propertybut all.
New York Purchasing Managers IndexRelease for: April 2009
Source: NAPM New York
Diffusion indexes, adjusted unless otherwise noted
yrago
Apr09 Mar09 Feb09 Jan09 Dec08 Apr08
Business Conditions Index
356.0 366.9 369.9 380.1 385.9 421.4
Current* 28.3 43.9 29.6 38.4 43.1 40.0
Outlook 51.2 63.8 31.8 54.2 40.7 53.3
Employment 30.0 23.6 21.9 22.2 27.8 40.4
Quantity of Purchases 27.6 30.6 25.0 20.8 22.2 45.7
Prices Paid 24.5 30.6 35.9 35.7 44.4 66.3
Supplier Delivery Time 50.0 52.8 51.6 52.8 50.0 53.2
* Weighted average of manufacturing and nonmanufacturing indexes.
Stress Test Results Bode Ill
for Real Estate Finance
REIT spreads continue to rally hard, and more may be on the way o
all of the 1Q09 earnings releases and conference calls are digested.
technical situation remains very favorable as REIT liquidity
completely dried up with exponentially more buyers than sellers at
now tighter levels, stimulated of course by the flood of secon
offerings and other capital moves as REIT management teams do w
they sometimes do well manage risk. The cat is clearly out of the
regarding REIT bonds, and just as we saw an over-reaction on
downside in November and December, we are potentially set up fo
over-reaction on the upside considering still very weak fundame
trends.
CMBS Delinquencies Soar in Q1Late payments on CMBS loans have tripled,
says Reis Inc., while Fitch reports a 500%
gain in the volume of specialserviced
loans.
Across the country, local governments are facingrising complaints about environmental and safety
hazards from stalled construction sites where work tobuild new developments has been halted.
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More U.S. Construction Data
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Media Clips
Monthlies' May Ad PagesAre Again Lousy (-25.97%)Press accounts accompanying last week's
release of Publishers Information Bureau
first-quarter data were full of Armageddon
U.S. Newspapers Decline in Circulation AcceleratesThe decline in U.S. newspaper weekday circulation almost doubled inthe sixmonth period through March as more readers got their newsfrom the Internet, according to the Audit Bureau of Circulations data.
Daily average circulation for 395 newspapers fell 7.1 percent to 34.4million from 37.1 million a year earlier, Schaumburg, Illinoisbased
ABC said today in an email. Circulation fell 3.6 percent in the yearagoperiod. Of the top 10 newspapers, only News Corp.s Wall Street
Journal increased circulation. Gannett Co.s USA Today, the largestU.S. newspaper, lost 7.5 percent and the New York Post had thebiggest slump with 21 percent. Publishers including New York
Times Co. and Gannett have boosted newsstand or subscriptionprices to help offset the circulation declines. Five publishers sought
bankruptcy protection during the period and printed versions of theSeattle PostIntelligencer and Rocky Mountain News were halted.
Sunday paper circulation fell 5.4 percent in thelatest period. This is based on data from 557 U.S.newspapers that reported in both the current and
year-ago periods
NY tabloids see steep circulation declinesNew York Post drops 20%, while Daily News sees 15% fall off.
Lights out for film firmsGlobal recession and tax-incentive
woes force companies serving the
film industry to struggle
Amazon.com is widely expected to lift the
wraps on a new large-screen Kindle
device this week, which could be the first
in a line of electronic reading devices
geared toward newspapers and textbooks.
Amazon to unveil largerscreen Kindle;students at 6 universities to be given
Kindles instead of textbooks
BIA Advisory Services forecasts a 15% drop, or $3 billion in TV stations adver
revenues for 2009. Total local and national spot advertising revenues will land a
billion by year's-end -- down from $20.1 billion in 2008. Although 2008
presidential election and Olympics year, BIA said the marketplace sank 6.6%, cau
the vortex of a rapidly weakening economy. For a two-year period from 2007-2009
notes the industry has seen an overall 21.2% decline in advertising revenues.
According to the researcher TNS Media Intelligence, US ad
spendingremained weak in March after a 9.2% drop in thefourth quarter of 2008. Newspaper ads sank 17%, magazineads fell 14%, and radio advertising dropped 15% accordingto the group.
Good thing Sirius XM Radio resolved thedebt issues that threatened to drag it into
bankruptcy earlier this year; thecompanys clearly got other things to
worry about. Like fleeing subscribers.Reporting a firstquarter net loss of $236.6million, Sirius said that anemic car sales
had led to its firstever decline in netsubscriber additions. And it was a nasty
decline. Sirius added 1,338,961 newcustomers. But it lost 1,743,383.
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Breakdown in Europe?
German Institutes See Economy
Shrinking Record 6% This YearGermanys leading economic institutes predict the economy,
Europes largest, will shrink by a postwar record of 6 percent
this year, a government official said today, speaking on the
condition of anonymity. The institutes forecast, part of a
biannual review of the economy for the government, will be
presented tomorrow in Berlin. Combined with government
estimates it forms part of the basis of tax-revenue projections and
government spending plans. The Sueddeutsche Zeitung
newspaper reported today the institutes forecast the economy
will shrink by some 0.5 percent in 2010.
UK Car Production Plunges; Down 51.3% y/yLONDON - March data from the Society of Motor Manufacturers
and Traders highlighted the slump in vehicle production in the UK.
UK March car production was down 51.3% on the year, and Q1 car
production down 56.6% on the year. Total vehicle production fell by
similar amounts, with March production down 52.1% on the yearand Q1 down 57.4% on the year. Production for the domestic
markets was even weaker than production for the export markets in
Q1. Total Q1 vehicle export production was down 54.7% on the year
with domestic vehicle production down 65.0%. The government
announced a car scrappage scheme in the April 22 budget, but it will
take time to impact production.
UK economy 'faces decade of pain'The UK is facing "two parliaments of pain" following the
"breathtaking" damage to the economy, the Institute for Fiscal Studies
(IFS) has warned.
The UK recession could be the worst since the early 1930s, a leading
economic research body has predicted. The National Institute of
Economic and Social Research (NIESR) said in 2009 the country's GDP
could contract by 4.3%, and then grow in 2010 by 0.9%.
Spain's unemployment rate leaps to record highAccording to the country's National Statistics Insti
record high figure of 17.4 per cent were unemplo
the first quarter of the year. Unemployment leap13.9 per cent in the fourth quarter of 2008, the b
quarterly jump since 1976. Joblessness in Spai
almost doubled in a year....
Euro nations told 'cut deficits'The EU orders France, Spain, Ireland
Greece to reduce their budget defi
and take control of public finances.
EU/EMU Confidence & Economic Sentiment IndexRelease for: April 2009; Source: European Commission, BrusselsResults are differences between % of respondents giving positive and negative replies
Sentiment Sep Oct Nov Dec Jan Feb Mar Apr
EU
Industrial 13 19 25 32 33 37 39 36
Services 4 10 18 23 28 29 31 30
Consumer 19 23 24 28 31 32 32 29
Retail 13 16 18 25 25 24 22 20
Construction 20 25 28 32 36 38 37 38
Economic 86.9 79.7 73.5 66.6 63.2 60.9 60.4 63.9
EMU
Industrial 12 18 25 33 33 36 38 35
Services 0 7 12 17 22 24 25 24
Consumer 19 24 25 30 31 33 34 31
Retail 8 13 13 20 20 19 17 19
Construction 15 20 23 27 30 32 32 34
Economic 88.9 81.6 76.8 68.9 67.2 65.3 64.7 67.2
Housing market woes CEE
Now growth of credit to households is reversingThe Central Euru region experienced a similar housing
market boom as did developed countries. Poland and the
Czech Republic experienced a surge in house prices (an
average 20% p.a. in the last three years), in construction
activity, and in the volume of mortgages mostly during
200508, past the 200506 peak in the US boom and the late
2007 peak in WE.
Detroit Of Europe' Hit By Slowing Auto ProducCentral Europe had become 'Europes Detroit' in term
high concentration of auto production due to cheap buskilled labor, EU membership, and good transport linthe west
the ECB released its latest Bank Lending
Survey. The headline result was that banks
still saw a pronounced tightening in credit
standards for business enterprises in 1Q
(+43% net balance) but to a lesser extent
than in 4Q (+64% net balance).
More Pointing to Some
Recovery Even in 2009
Eurozone rates are cut to 1% and the European Central
Bank says it plans to pump about 60bn euros into theregion's economy.
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Will Life Ever Be the Same?
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