Ackermann Says Bad Loans Are ‘Next Wave’ of Crisis

July 31 (Bloomberg) — Rising delinquencies among consumer and corporate borrowers are the “next wave” of the financial crisis and may affect banks that have avoided losses so far, said Deutsche Bank AG Chief Executive Officer Josef Ackermann.

“This crisis has consisted of a series of earthquakes, with changing epicenters,” Ackermann said late yesterday at an event in Zurich. “Bad loans are the next wave. Banks that have fared relatively well so far will also be affected by this.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUKAk1bKBVl8

Water in CHINA is about to get more expensive!

BEIJING — Cities across China are raising the price of water, in moves that try to balance the need to conserve an increasingly scarce resource with the effects on a public used to low fees.

The city government of Luoyang, in central Henan province, prepared to hold a public meeting Friday to argue for a proposed water-price increase of 40% to 48%. Water prices in the dry region haven’t risen since 2003, which the government says is exhausting meager supplies and keeping the local water utility in the red. At least half a dozen other major cities have raised water prices in the past few months.

The changes reflect a growing official consensus that low prices are part of China’s water-shortage problem, since they give companies and households little incentive to use water carefully. The government is also spending billions of dollars on a controversial system of canals to divert water from the flood-prone south to the dry north.

The amount of water available per person in China is just one-quarter of the world average. The World Bank has estimated that water shortages cost China about 1.3% of its annual economic output, with a further 1% lost to water pollution.

“Given the underpricing of water in China and its environmental consequences, I feel it is wise for governments to take the opportunity of low inflation pressure to adjust the water tariff,” said Jian Xie, a senior environmental specialist at the World Bank.

Shanghai raised residential water prices 25% in June and plans a 22% increase in November 2010. The central city of Zhengzhou raised water fees 25% in April, and officials say prices will have to change more rapidly in the future.

There has been “strong public reaction” to the price increases in some cities, the National Development and Reform Commission said in a notice in early July. Some local news reports have suggested the price increases are being driven more by corporate greed than a real need to conserve water. The agency, which supervises the prices of regulated goods like water, said local governments need to take public concerns into account as they plan for necessary price increases.

The eastern city of Nanjing raised residential water prices 12% in April but also rolled out subsidies to reduce the impact on low-income households.

The rise in water bills has upset consumers even in cities where rates haven’t been rising. Zheng Hong, a lawyer in Beijing who lives with seven family members, says his household spends 60 yuan to 70 yuan ($8.78 to $10.25) a month for tap water. He is against any price increases. “The lower, the better,” he says. “Compared to my hometown in Henan province, the water prices in Beijing are already pretty high.”

China’s water prices are still low by global standards, even with the average residential water fee in major cities now up 3% since the end of 2008, to 2.44 yuan per ton. Average water prices in Europe are anywhere from four to 10 times higher, according to Deutsche Bank estimates.

Breakfast with Dave (Rosenberg)

Market thoughts
It is amazing that anyone would go long an equity market with a reported P/E multiple of 700x but that is indeed what we have on our hands. The end of the recession and the onset of a sustainable recovery, as we saw in 2002, are not the same thing. So this could still end badly but we will await confirmation signs that this is more than a very flashy bear market rally before shifting gears. As we said in our Tea session yesterday, the cost of missing out on the first leg of a bull market, between the lows in the major averages and the lows in employment, is 20% — the price to pay to sleep at night. If we are late, and we do not intend on being too late or staying excessively bearish, we will know once the most important component of the business cycle, the engine that keeps the motor turned on, otherwise known as employment, begins to turn around on a discernible basis. We shall wait for that event, then make up our minds, and if this is the real deal, which at this time seems unlikely in the context of an ongoing credit contraction, then we will at least have 80% of the bull market to participate in … that is, if historical experience can be used as a guide.

Show me the dividend!
The dividend yield on the S&P 500 has declined nearly 100 basis points since March, to 2¾%. At one time, the yield was at a premium to the 10-year Treasury note, but no longer. Not only that, but was is depressing the dividend yield isn’t just due to the market price appreciation but also owing to the fact that S&P 500 dividend payments have plunged 32% from a year ago (according to Howard Silverblatt at S&P) — the worst July since 2002. So far this year S&P 500 dividend payouts have declined $29.5 billion and on track to drop $61.5 billion for the year. So, the U.S. stock market as an overall market does not fit our ‘income theme’. In terms of the sectors that provide the yield, they include telecom (5.7%), utilities (4.5%) and staples (3.1%).

Tax Burden of Top 1%

This article by Scott Hodge is from the Tax Foundation’s Tax Policy Blog:

Newly released data from the IRS clearly debunks the conventional Beltway rhetoric that the “rich” are not paying their fair share of taxes.

Indeed, the IRS data shows that in 2007—the most recent data available—the top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government. This is the highest percentage in modern history. By contrast, the top 1 percent paid 24.8 percent of the income tax burden in 1987, the year following the 1986 tax reform act.

Remarkably, the share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined. In 2007, the bottom 95 percent paid 39.4 percent of the income tax burden. This is down from the 58 percent of the total income tax burden they paid twenty years ago.

To put this in perspective, the top 1 percent is comprised of just 1.4 million taxpayers and they pay a larger share of the income tax burden now than the bottom 134 million taxpayers combined.

Some in Washington say the tax system is still not progressive enough. However, the recent IRS data bolsters the findings of an OECD study released last year showing that the U.S.—not France or Sweden—has the most progressive income tax system among OECD nations. We rely more heavily on the top 10 percent of taxpayers than does any nation and our poor people have the lowest tax burden of those in any nation.

We are definitely overdue for some honesty in the debate over the progressivity of the nation’s tax burden before lawmakers enact any new taxes to pay for expanded health care.

Buffett Posts $1 Billion Profit on China Hybrid Carmaker BYD

Berkshire’s MidAmerican Energy Holdings Co. unit agreed to buy 225 million new shares of BYD for HK$8 apiece. That stock now has a market value of HK$9.66 billion ($1.25 billion), based on today’s closing price. Buffett will pay HK$1.8 billion.

BYD said last night it completed the sale. Buffett didn’t respond to a request for comment.

http://www.bloomberg.com/apps/news?pid=20601109&sid=amaKePJpsGCk

DOW/Gold Ratio

From our friends at Chart of the Day:

What’s really interesting to note is how far the extremes can go…

Ned Davis on Secular vs. Cyclical Bull Market

Mark Hulbert just wrote this article which is a good summary of some major signals we should be looking at: http://www.marketwatch.com/story/is-the-bull-market-cyclical-or-secular-2009-07-30. Ned Davis is one of the more respected researchers out there.

ANNANDALE, Va. (MarketWatch) — Secular or cyclical?
By Mark Hulbert

I’m referring, of course, to the debate over what kind of bull market began on March 9.

If that day represented a once-in-a-generation stock market low — such as the kind seen in December 1974, for example — then we’re in a secular bull market that can be expected to last for many years and which will eventually take the stock market averages to a final top that is several times current levels.

Or did it mark a mere “cyclical” low, in which our expectations, both in terms of time as well as price, need to be far more modest?

For guidance I turn to Ned Davis, the eponymous head of institutional research firm Ned Davis Research. In my daily readings of what’s being posted in the investment arena, including emails from the nearly 200 newsletters monitored by the Hulbert Financial Digest, I consistently find Davis’ comments to be among the best-reasoned, based on a cool and unsentimental assessment of hard data.

I disagree with Davis at my peril, such as earlier this year when I — but not he — concluded that the sentiment data did not support a powerful rally.

Now is a particularly good time to check in with Davis, since earlier this week he finished a seven-part series in which he compared the March 9 low with the famous secular lows of decades past. Davis was able to identify seven dimensions that he could use to compare the March 9 low to those past secular lows:

• “Monetarily, money should be cheap and amply available:” Neutral. You might think that this factor should be rated as “bullish,” given how accommodative the Federal Reserve is currently. But Davis notes that banks are also significantly tightening their lending standards. Given the heavy load of debt under which both consumers as well as corporations suffer (see next criterion), banks are finding it “increasingly hard to find ‘credit-worthy’ borrowers.”
• “Economically, the debt structure should be deflated.” Bearish. This is the most negative of any of Davis’ seven dimensions, since by no means is the debt structure deflated. On the contrary, Davis calculates that the total credit-market debt load right now is nearly four times the size of gross domestic product, and that it takes more than $6 of new debt for our country to produce just $1 of GDP growth. That’s almost double the amount of debt required in the 1990s.
• “There should be a large pent-up demand for goods and services.” Bearish. Davis acknowledges that there has been improvement along this dimension from where things stood at the beginning of the bear market. But he is particularly worried by the ratio of total Personal Consumption Expenditures to Non-Residential Fixed Investment, which currently stands at a record high. At the secular bear market low in 1982, in contrast, this ratio was at a record low.
• “Fundamentally, stocks should be clearly cheap based upon time-tested, absolute valuation measures.” Neutral. Though the stock market “got undervalued at the March lows,” it never became “dirt cheap.”
• “Psychologically, investors should be deeply pessimistic, both in terms of the stock market and the economy.” Bullish. Davis says that past secular market lows were accompanied by an extreme amount of pessimism, and his indicators show a similar extreme existed earlier this year.
• “Technically, major investor groups should have below-average stock holdings and large cash reserves.” Neutral. While foreign investors have record-low stock holdings, according to Davis, household holdings — while low — are not nearly as low as they were at prior secular bear market lows. And institutional investors’ stock holdings “are only down to an average weighting historically.”
• “A fully oversold longer-term market condition in terms of normal trend growth and in terms of time.” Neutral. Davis believes that, though many of the excesses of the real-estate bubble have been worked off, some still exist. That’s particularly a problem, he says, given that the stock market bubble of the late 1990s never completely deflated either. “As we saw in Japan after 1990, a double-bubble in stocks and real estate leaves it difficult to put ‘humpty dumpty’ together again.”

The bottom line? Only one of the seven foundations of a secular bull market is in place. Three more are neutral, and the remaining three are bearish.

Davis therefore concludes that we are more likely to be in a cyclical rather than secular bull market.

This doesn’t have to mean that the stock market will immediately go down from here, by the way. Davis believes that the cyclical bull market that began on March 9 still has more upside potential.

But he doesn’t foresee that upside potential being anything like what existed at past major bear-market lows, such as in December 1974.

I’ve been an optimist on China. But I’m starting to worry

On the surface, China appears to be leading the world from recession to recovery. After coming to a virtual standstill in late 2008, at least as measured quarter-to-quarter, economic growth accelerated sharply in spring 2009.

A back-of-the envelope calculation suggests China may have accounted for as much as

2 percentage points of annualised growth in inflation-adjusted world output in the second quarter of 2009. With contractions moderating elsewhere, China’s rebound may have been enough in and of itself to allow global gross domestic product to eke out a small positive gain for the first time since last summer.

That’s the good news. The bad news is that China’s recent growth spurt comes at a steep price. Fearful that its recent economic short- fall would deepen, Chinese policymakers have opted for quantity over quality in setting macro-strategy, the centrepiece of which is an enormous surge in infrastructure spending funded by a burst of bank lending.

http://www.ft.com/cms/s/0/42d38b2c-7bd6-11de-9772-00144feabdc0.html

Desperate state may sell Capitol buildings, others Under GOP plan, government would pay to lease back most of the sites

Call it a sign of desperate times: Legislators are considering selling the House and Senate buildings where they’ve conducted state business for more than 50 years.

Dozens of other state properties also may be sold as the state government faces its worst financial crisis in a generation, if not ever. The plan isn’t to liquidate state assets, though.

Instead, officials hope to sell the properties and then lease them back over several years before assuming ownership again. The complex financial transaction

would allow government services to continue without interruption while giving the state a fast infusion of as much as $735 million, according to Capitol projections.

http://www.azcentral.com/news/election/azelections/articles/2009/07/29/20090729assets0729.html

Beige Book

http://www.federalreserve.gov/FOMC/Beigebook/2009/20090729/fullreport20090729.pdf

Pimco – Investment Outlook – Bill Gross AUGUST 09

io-august-09-web

Fight against Islamic militants forces Nigerians to flee

Is this something to worry about?

———————————————

LAGOS, Nigeria (CNN) — More than 2,500 Nigerians caught in the fighting between Islamic militants and government forces have fled their homes in the northern part of the country, a Red Cross spokeswoman said Wednesday.

More than 400 people have been killed, and 150 bodies were lying in the general hospital at Maiduguri, according to Aliyu Maikanu, a Red Cross disaster officer in the northeast.

Most of the violence has been on the outskirts of the city, officials said.

“It’s a terrible situation for me. It’s a very serious battle — something I have not seen in my life,” Maikanu said.

http://www.cnn.com/2009/WORLD/africa/07/29/nigeria.violence/index.html

Goldman Says Curbing Speculators May Disrupt Markets

July 29 (Bloomberg) — Goldman Sachs Group Inc., the bank that makes the most money from commodities, fixed-income and currency trading, said attempts to curb speculation may be “disruptive” to markets.

“The role that is played by non-traditional participants such as index investors and other financial participants often has been mischaracterized,” Don Casturo, a Goldman Sachs managing director, said in prepared remarks today for hearings at the Commodity Futures Trading Commission in Washington.

http://www.bloomberg.com/apps/news?pid=20601087&sid=abDChEECtFsI

Goldman’s real estate gambit

s history repeating itself at Goldman Sachs?

In late 2006, Goldman shrewdly began backing away from the residential mortgage market. With little fanfare, the firm began aggressively hedging its exposure to home loans, in particular mortgages to borrowers with shaky credit histories.

This savvy and somewhat stealthy strategy enabled Goldman to pawn off lots of its soon-to-be toxic mortgages and mortgage-backed securities on other institutions — forcing those foolhardy speculators to pay the price when the subprime market blew up.

And much to everyone else’s chagrin, Goldman even made money off the housing meltdown when some of its hedges — specifically a bet that a subprime mortgage index would plunge — paid off handsomely.

It appears Goldman is following a similar script with U.S. commercial real estate, the next big asset class that many believe is on the verge of disaster.

Goldman recently reported owning $6.4 billion in commercial mortgage loans. It also is holding some $1.6 billion in commercial mortgage-backed securities, or CMBS. That’s a big retreat from where it was just two years ago.

http://blogs.reuters.com/commentaries/2009/07/28/goldmans-real-estate-gambit/

Quotable

I can only describe our investment stance here as �uncomfortably defensive. That is, the measures that have guided the performance of the Strategic Growth Fund over time are still holding to a defensive stance, which is admittedly uncomfortable with the market pressing strenuous but persistent overbought levels. It’s a lot like watching people scale across a tenuously secured rope bridge and get a nice meal at the center. You’d like to climb across and join them, but you know that too many things aren’t right with the bridge, and it’s not clear that the people who are eating will ultimately survive.

John Hussman – Hussman Funds