Meredith Whitney: State finances are worse than estimated
It has been rather quiet with regards to the independent analyst Meredith Whitney. After “shocking” some people last year, she is out with her newest (and biggest) report ever regarding the finances of the States. It is a quiet bearish view on the finances she outlines. State finances are much worse than estimated. Fortune reports;
Meredith Whitney is issuing a fresh warning to mutual funds, banks, and politicians: The state of state finances is far worse than what you think, or at least than what you’ve been willing to tell the investors and taxpayers who will eventually carry the burden. In a new report released today to her clients, Whitney summons what appears to be the most comprehensive set of data ever assembled on state budgets and debt.
Her conclusion is that the future deficits that need to be closed, either by new taxes or draconian cuts in social services, are far bigger than the official numbers show, and that debt levels, when all liabilities are counted, vastly exceed the official estimates.
Late last year on 60 Minutes, Whitney predictedhundreds of billions in defaults on municipal bonds in the next five years. That controversial call waswidely condemned, especially on Wall Street, where the muni market is an enormous profit spinner.
Now, Whitney tells Fortune she never meant to make more than a general forecast. “I never intended on framing the scale of defaults as a precise estimate, but I continue to believe that degree of municipal defaults will be borne out over the cycle. I meant to point out that the state debt problem is a massive headwind for the U.S. economy, second in importance only to housing.”
Whether you agree with it or not — and she’s still getting little support from rating agencies or anywhere else — the numbers she’s assembled, and the risks they pose, are daunting.
Whitney’s latest report is even more thorough than last year’s analysis that started the uproar. It covers 25 of the largest states, adding ten new ones to the list, including Arizona, Nevada, Connecticut, and Wisconsin. The problem starts with spending. Since 2003, state governments have raised annual outlays from $1.5 trillion to almost $2.2 trillion, or $700 billion, yet tax receipts have risen only $400 billion or $300 billion less, to $1.4 trillion. In fact, spending kept surging all during the recession, while income from sales, income and corporate taxes went totally flat in 2007.
Further reading;
http://finance.fortune.cnn.com/2011/06/06/meredith-whitney-state-finances-are-worse-than-estimated/
SPX falls on Bernanke speech
zzzzzzzzzzz and then bang. Market reaction to Bernankes no news is Dissapointment. Not that we thought he would say anything of great importance. For the investors buying the dips, anticipating QE3 to take assets higher, sorry to say, you have to wait for the SPX to drop well below 1200, before Bernanke starts accumulating fresh SPX futures.
Full speech,
http://www.marketwatch.com/story/text-of-bernankes-speech-on-economy-2011-06-07?link=MW_story_insert
Greek banks’ deposits down 2.4 billion euros in April
Greeks continue withdrawing funds from Banks. If this trend escalates, we might get a Lehman like situation, ie a run on the banks. Keep track of these reports. From AthensNews;
Greek banks have lost a total of 12.8 billion euros in deposits so far this year, with households’ deposits falling by 2.3 billion euros in April to 163.5 billion euros, was announced on Monday by the Bank of Greece in its monthly report.
In April 2011, the average interest rates on new deposits and loans generally increased, except for the average rate on corporate loans up to one million eurowith floating rate or with an initial rate fixation period of up to one year which remained unchanged and the one on housing loans with an initial fixation period of over one and up to five years which decreased, the central bank said in a report.
Specifically, in April 2011, the average interest rate on overnight deposits from households remained basically unchanged at 0.46 percent, while the corresponding rate on deposits from non-financial corporations decreased by three basis points to 0.38 percent. On the other hand, the average interest rate on deposits from households with an agreed maturity of up to one year increased significantly by 12 basis points to 3.88 percent.
Financial in Context
Some good points on the Financial sector in the US. Capital context reports;
While equity prices for many financials, and specifically US banks and the XLF ETF, have lost significant ground recently, we have been pointing out the considerable divergence between our expectations for where CDS should trade and where equities are trading – especially adjusted for volatility and skews.
We believe US financial CDS are due for considerable widening pressure and this post is designed to provide some contextual evidence and fundamental thesis for why this is the case.
Our institutional clients are able to take advantage of this view via a capital-structure-arbitrage (name-by-name selection and deltas available via our professional services group) but we think there are potential ways to benefit individual investors (by underweighting financial sectors broadly or potential pairs trades via insurance firms and the credit ETFs).
Financials (until recently) have been by far the best performing sector from the MAR09 lows as MtM was removed and various liquidity measures infused through their capital structures. Even as the chart above shows though, the market never quite believed it was all better (in either equity or credit markets) and as it becomes ever more obvious that even with huge reserves and no MtM that banks face significant cost pressures from rising interest expenses and Dodd-Frank implementation earnings drags, we suspect that stocks and bonds have the outlook right, and CDS is technically bound for now – with a break expected anytime.
The first chart (of the post) has some interesting features. The green square shows the peak period of the great moderation when credit risk was basically near its lows (and in fact trending slightly wider in reality) while leverage and an inexorable belief in expending earnings drove stock prices hugely out of line with reality. This is the kind of contextual disconnect we have found most useful over the years and as many of institutional clients will remember – was one reason we became more and more concerned from 2006 on.
The disconnect was also notable then as it is now in the chart below as it drove another of our key indicators – the CDS-Cash basis – apart quite dramatically. A glance at this zoomed in recent chart shows that while financial stocks have lost significant ground since mid Feb11, CDS have somehow remained relatively well-behaved – even as the corporate bond market has been in sync with stocks – also losing notable ground.
This spread (between where bonds and CDS are indicating credit risk to trade) has many nuances that we critically understand as practitioners but at its simplest, should trade clsoe to zero on an apples-to-apples basis. Supply and demand technicals in bonds, stickiness of inventory, counterparty risk, leverage availability (margin reqs), funding costs, and momentum all play important parts in the dynamics of this basis but at its most simple, we tend to see CDS underperform first (as shorts/hedges are easier and more liquidly placed there first) and then bonds follow tending to be more gappy (as stuck longs recognize that CDS may have been telling the truth and the need for rapid exits is upon us).
More reading;
Gold close to Nominal Highs, 1600 next?
Some daily points from Goldcore;
Gold is trading at $1,549.95/oz, €1,056.47/oz and £943.02/oz.
Gold and silver are higher again today with the U.S. dollar and yen in particular under pressure as concerns about the outlook for growth in Japan, the UK, the EU and the U.S. deepen. Gold reached new record nominal highs in sterling yesterday at £949.83/oz on concerns about the UK economy.
The risk of contagion in the Eurozone remains and could see the single European currency project unravel which would negatively impact on the global financial and monetary system.
Worries about contagion will prove long lasting and this will see sustained investment demand for gold.
Whether the euro as we know it will survive the current crisis remains in doubt. Gold’s finite nature and the fact that is not dependent on the performance of central banks and sovereign governments make it an increasingly attractive alternative to dollars, euros and other currencies.
Diversification away from the dollar and euro, and dollar and euro-denominated assets is set to continue with Asian currencies, gold and silver likely to be the primary beneficiaries.
Gold in US Dollars – 30 Days (Tick)
Gold has consolidated and gradually risen since the selloff in early May and looks healthy both technically and fundamentally.
This could result in the record nominal high of $1,577.57/oz being challenged sooner rather than later – especially as we are less than 2% away from the recent record high. The psychological level of $1,600/oz is the next target and should be quickly reached once $1,577.57/oz is breached.
Strong support is now seen between $1,460/oz and $1,500/oz where good physical buying has been consistently seen.
Gold in US Dollars – 180 Days (Daily)
Media coverage of gold and the merits of diversification into gold remains extremely limited – particularly in the UK and Ireland. Gold remains taboo and is covered rudimentarily and skeptically every few months in many media outlets.
The suggestion that gold is a bubble continues – especially among non-gold experts. This has been taking place since gold rose above $850/oz more than three years ago – back in early 2008.
There continues to be a peculiar desire to call the top of the gold market. This is especially the case among analysts who failed to warn regarding the recent stock and property bubbles.
There continues to be an absolute failure to understand gold’s importance as a portfolio diversifier and a safe haven asset.
The fact that gold has retained value throughout history and will continue to retain value is not appreciated by most.
Whether gold goes up or down this month or this year is not important. What is vitally important is how gold retains its value, especially versus fiat paper currencies over the long term.
U.S. funding for future promises lags by trillions and the Mountain of Debt
The story goes on, US takes on more Debt, as the liabilities increase. Is this ever going to stop, and can we “trust” the figures we are getting? From USAToday;
The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record $61.6 trillion the total of financial promises not paid for.
This gap between spending commitments and revenue last year equals more than one-third of the nation’s gross domestic product.
Medicare alone took on $1.8 trillion in new liabilities, more than the record deficit prompting heated debate between Congress and the White House over lifting the debt ceiling.
Further reading;
http://www.usatoday.com/news/washington/2011-06-06-us-owes-62-trillion-in-debt_n.htm
Don’t forget those baby boomers getting older…
The health insurance program for seniors is the nation’s biggest financial challenge.
The first of 77 million Baby Boomers turn 65 this year and qualify for Medicare. Enrollment will grow from 48 million in 2010 to 64 million in 2020 and 81 million in 2030, according to Medicare actuaries. That 33-million increase in the next 20 years compares with 13 million in the last 20.
This demographic burst — combined with the addition of a prescription drug benefit in 2006 and rising health care costs generally — has created an unfunded liability of nearly $25 trillion over the lifetime of those now in the program as workers and retirees. That is the taxpayers’ obligation, beyond what Medicare taxes will bring in or seniors will pay in premiums for Medicare Part B — also called supplemental coverage — that helps pay for doctor visits and other expenses outside the hospital.
http://www.usatoday.com/news/washington/2011-06-06-us-debt-chart-medicare-social-security_n.htm
It sure seems the presses need to print more money….
When a Nobel Prize Isn’t Enough
So, politicians, now more competent than Nobel Prize Winners? Peter Diamond is going back to MIT, despite his Nobel Prize in unemployment economics. With unemployment stubbornly high, he could maybe have some input for the decisionmakers, but it seems they don’t want him, despite his Nobel Prize. On the other hand, Obama, Nobel Peace Prize winner, is still in the White House, despite bombing Lybia to Democracy. Let’s see what happens next, as the last president to be re-elected with unemployment above 7.2% was Franklin Delano Roosevelt….War coming up?
LAST October, I won the Nobel Prize in economics for my work on unemployment and the labor market. But I am unqualified to serve on the board of the Federal Reserve — at least according to the Republican senators who have blocked my nomination. How can this be?
The easy answer is to point to shortcomings in our confirmation process and to partisan polarization in Washington. The more troubling answer, though, points to a fundamental misunderstanding: a failure to recognize that analysis of unemployment is crucial to conducting monetary policy.
In April 2010, President Obama nominated me to be one of the seven governors of the Fed. He renominated me in September, and again in January, after Senate Republicans blocked a floor vote on my confirmation. When the Senate Banking Committee took up my nomination in July and again in November, three Republican senators voted for me each time. But the third time around, the Republicans on the committee voted in lockstep against my appointment, making it extremely unlikely that the opposition to a full Senate vote can be overcome. It is time for me to withdraw, as I plan to inform the White House.
http://www.nytimes.com/2011/06/06/opinion/06diamond.html?_r=1
Food statistics from FAO-just released
Latest statistics on Food Prices from FAO. As we can see, food is not getting cheaper. With all the eartquakes, tornados, droughts etc expect food prices to stay at elevated prices. Don’t forget, food prices is one of the main ingredients that started the Arab Spring, now spreading to the world….Courtesey Silvio, Rome, FAO.
» The FAO Food Price Index (FFPI) averaged 232 points in May 2011, down 1 percent from the revised estimate of 235 points in April and 37 percent higher than in May 2010. Declines in international prices of cereals and sugar were responsible for the slight decrease in the May average value of the index; more than offsetting increases in meat and dairy prices with oils largely unchanged. The FFPI has been hovering above 231 points since the start of the year and hit its all time high of 238 points in February.
» The FAO Cereal Price Index averaged 262 points in May, down 1 percent from April but 69 percent higher than in May 2010. In spite of unfavourable weather negatively influencing crop prospects in Europe and North America, grain prices averaged lower in May. Expectation of large exportable supplies in the Russian Federation and Ukraine coupled with stronger US Dollar and weaker oil prices also put downward pressure on prices.
» The FAO Oils/Fats Price Index remained unchanged in May, at 259 points. While international soybean oil prices decreased slightly thanks to larger than expected soy supplies in Latin America, palm oil prices stayed firm despite rising production in Southeast Asia. Overall, the index remains historically high and up 52 percent from May 2010, reflecting the current tightness of supply and demand, which the market does not expect will end soon.
» The FAO Meat Price Index Index averaged 183 points in May, slightly above the revised April value of 181, but 10 percent more than in January. Since February, the index has been hitting new highs every month, sustained by record beef and sheep prices, but also firming poultry and pigmeat quotations.
» The FAO Dairy Price Index averaged 231 points in May, up slightly from April. Dairy prices rose very fast from September 2010 to March 2011, reflecting supply constraints and rebounding import demand. Prices of the major dairy products changed little compared with April, with the exception of cheese which gained 2 percent.
» The FAO Sugar Price Index averaged nearly 311 points, down 10 percent from April and 26 percent below its January record. The recent decline was prompted by prospects of increased market availability, as the new crushing season begins in Brazil, and larger than anticipated production in Thailand. However, strong short-term demand led international sugar prices to level off somewhat in the last week of May.
Full in depth report,
Fall of the American Empire?
We have heard of many new sympoms of USA feeling bad lately. Debt ceiling breached, housing still collapsing, unemployment stubbornly high, food stamp usage highs etc. These are all topics we have written about lately. Larry Eliott asks himself if the US is at the tipping point, just about to start the fall of the great empire?
America clocked up a record last week. The latest drop in house prices meant that the cost of real estate has fallen by 33% since the peak – even bigger than the 31% slide seen when John Steinbeck was writing The Grapes of Wrath.
Unemployment has not returned to Great Depression levels but at 9.1% of the workforce it is still at levels that will have nerves jangling in the White House. The last president to be re-elected with unemployment above 7.2% was Franklin Delano Roosevelt.
The US is a country with serious problems. Getting on for one in six depend on government food stamps to ensure they have enough to eat. The budget, which was in surplus little more than a decade ago, now has a deficit of Greek-style proportions. There is policy paralysis in Washington.
The assumption is that the problems can be easily solved because the US is the biggest economy on the planet, the only country with global military reach, the lucky possessor of the world’s reserve currency, and a nation with a proud record of re-inventing itself once in every generation or so.
All this is true and more. US universities are superb, attracting the best brains from around the world. It is a country that pushes the frontiers of technology. So, it may be that the US is about to emerge stronger than ever from the long nightmare of the sub-prime mortgage crisis. The strong financial position of American companies could unleash a wave of new investment over the next couple of years.
Full article,
What to look for-equities overpriced according to risk indicators
Some more on those risk aspects we have been discussing lately. We still argue risk in equities is to the downside. Below some further insight from CapContext;
The price and macroeconomic action of the last few weeks seems to have confirmed much of the concern that we have been highlighting that technical (flow and risk-aversion) and fundamental weakness is creeping back into global markets and more importantly, that we see US risk assets as over-priced in that context. Our prescient calls in both outright equities and in our various successful arbitrage trades have generated significant interest.
Readers have been asking for a round-up post of what we are focused on, what helped us get the insight to believe trouble was ahead, and furthermore, what we will be looking at going forward for confirmation that a downtrend remains in place. That is the goal of this post and we will try to post regular updates to summarise our views and critical aspects of the many markets we watch for useful context.
In summary, we see our top-down TAA framework indicating equities are notably over-priced (since Late-April), HY credit spreads have notably decompressed since mid Feb (gaining pace recently), secondary bond markets have seen volumes lagging and net selling accelerating, primary bond markets have seen post issuance underperformance, credit term structures have flattened, and global financial systemic risk has elevated considerably. Very little of this has been discussed in the mainstream media except by us as momentum chasers dominated headline flow seemingly – even as this under-current of concern was gaining pace.
Full article;
http://capitalcontext.com/2011/06/06/what-we-are-looking-at/
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