NEW YORK (Reuters) – Soaring U.S. unemployment and a shrinking economy drove delinquencies on credit card debt and home equity loans to all-time highs in the first quarter as a record number of cash-strapped consumers fell behind on their bills.
Delinquencies on the value of all card debt soared to a record 6.60 percent from 5.52 percent in the fourth quarter as more cardholders relied on plastic to meet day-to-day expenses, the American Bankers Association said.
Late payments on home equity loans rose to 3.52 percent from 3.03 percent, and on home equity lines of credit climbed to 1.89 percent from 1.46 percent.
A broader gauge showing late payments on eight categories of loans rose for a fourth straight quarter to a new record, edging up to 3.23 percent from 3.22 percent. That rate actually understates consumer pain because it excludes credit cards. The ABA tracks loan payments that are at least 30 days late.
“The biggest driver is job losses,” ABA Chief Economist James Chessen said in an interview. “When people lose their jobs or work fewer hours, it makes it that much harder to meet their obligations. Unfortunately, we’re going to see higher job losses in the next year, and I expect elevated delinquencies.”…..
Russia & China To Push The Needle @ G-8 Summit
ROME (Reuters) – China, Russia and Brazil will use this week’s G8 summit in Italy to push their view that the world needs to start seeking a new global reserve currency as an alternative to the dollar, officials said on Tuesday.
As leaders of the Group of Eight rich nations and the major developing powers traveled to Italy for a three-day summit starting on Wednesday, it seemed unlikely the currency debate would get a specific mention in summit documents.
But both G8 member Russia and emerging power Brazil — which like China and India is a member of the “G5” that joins the second day of the summit on Thursday — echoed China’s calls for the currency debate to be taken up by world leaders.
Top Kremlin economic aide Arkady Dvorkovich said China and Russia would “state their stance that the global currency system needs smooth evolutionary development.
Brazilian President Luiz Inacio “Lula” da Silva said he was keen to explore “the possibility of new trade relations not dependent on the dollar” and India has also said it is open to the debate.
But G8 members Germany, France and Canada played down talk of the summit including a detailed currency discussion. A source at President Nicolas Sarkozy’s office said the G8 was “generally not the forum … for discussing currency exchange rates.”
European Markets Trade Higher on German Manufacturing Data
By Justin Carrigan
July 7 (Bloomberg) — European stocks rose as manufacturing orders in Germany jumped the most in almost two years, easing concern that a global economic recovery is stagnating. Government bonds dropped as nations prepared debt sales to revive growth.
The Dow Jones Stoxx 600 Index of European shares added 0.7 percent at 12:16 p.m. in London, reversing earlier declines, as Germany factory orders climbed 4.4 percent in May. U.S. index futures fluctuated between gains and losses. The yield on the benchmark U.S. 10-year note advanced 3 basis points to 3.53 percent before the Treasury holds the second of a record four bond sales totaling $73 billion this week.
Leaders from the Group of Eight most-industrialized nations are due to meet in Italy tomorrow against a backdrop of shrinking economies, record government borrowing and rising unemployment. Laura Tyson, an adviser to President Barack Obama, said in a speech today the U.S. should consider drafting a second stimulus package to revive the world’s biggest economy.
“Is this a turn for the better?” Carsten Brzeski, an economist at ING Group in Brussels, wrote in a note, in reference to today’s German manufacturing report. “The developments of recent months clearly indicate a stabilization of the German economy.”
The factory-orders data helped the euro recover its losses against the yen after falling as much as 0.9 percent. The common European currency was also little changed versus the dollar after dropping 0.6 percent.
Pound, BOE….
Gartner Expects Global IT Spending to Drop 6% This Year
MUMBAI (Reuters) – Research firm Gartner Inc(IT.N) expects global spending on information technology to fall 6 percent in 2009, sharper than an earlier forecast of 3.8 percent, due to the economic downturn and exchange rate movements.
“While the global economic downturn shows signs of easing, this year IT budgets are still being cut and consumers will need a lot more persuading before they can feel confident enough to loosen their purse strings,” Richard Gordon, Gartner’s head of global forecasting, said in a statement on Tuesday.
Global spending was expected to total $3.2 trillion in 2009, down from $3.4 trillion last year, said Gartner, which is the world’s biggest technology research and advisory firm.
Computing hardware will see the steepest fall with a drop of 16.3 percent, while the software segment will hold up best with a drop of 1.6 percent, the firm forecast.
Spending on telecommunications was expected to fall 4.6 percent and IT services may see a 5.6 percent downturn, it said.
CFTC & Congress Look To Police “Speculators” in the Commodities Market
By Tina Seeley
July 7 (Bloomberg) — U.S. regulators say they may clamp down on oil and gas price speculators by limiting the holdings of energy futures traders, including index and exchange-traded funds.
The Commodity Futures Trading Commission will hold hearings to explore the need for government-imposed restrictions on speculative trading in oil, gas and other energy markets, Chairman Gary Gensler said today in a statement. The agency didn’t say when the hearings would start or who would be asked to testify.
Senator Bernie Sanders, a Vermont independent, and Representative Bart Stupak, a Michigan Democrat, have called for action to avoid a repeat of last year’s run-up in crude oil prices to a record $147.21 a barrel, which they blame on speculators. Oil has climbed 44 percent this year in New York Mercantile Exchange trading, even amid a drop in demand and high levels of fuel in storage.
“Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities, such as crude oil, heating oil, natural gas, gasoline and other energy products,” Gensler said in the statement. “This will include a careful review of the appropriateness of exemptions from these limits for various types of market participants.”
Billionaire investor George Soros told a Senate hearing in June 2008 that the oil price increase that year was caused partly by index funds that buy only oil contracts. Index funds and exchange-traded funds, which mimic an index, can hold oil contracts in excess of available supply.
Emergency Authority….
Obama Advisor States The U.S. Should Consider a Second Stimulus Package
By Shamim Adam
July 7 (Bloomberg) — The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was “a bit too small,” said Laura Tyson, an adviser to President Barack Obama.
The current plan “will have a positive effect, but the real economy is a sicker patient,” Tyson said in a speech in Singapore today. The package will have a more pronounced impact in the third and fourth quarters, she added, stressing that she was speaking for herself and not the administration.
Tyson’s comments contrast with remarks made two days ago by Vice President Joe Biden and fellow Obama adviser Austan Goolsbee, who said it was premature to discuss crafting another stimulus because the current measures have yet to fully take effect. The government is facing criticism that the first package was rolled out too slowly and failed to stop unemployment from soaring to the highest in almost 26 years.
Obama said last month that a second package isn’t needed yet, though he expects the jobless rate will exceed 10 percent this year. When Obama signed the first stimulus bill in February, his chief economic advisers forecast it would help hold the rate below 8 percent.
Unemployment increased to 9.5 percent in June, the highest since August 1983. The world’s largest economy has lost about 6.5 million jobs since December 2007.
Worse Than Forecast
“The economy is worse than we forecast on which the stimulus program was based,” Tyson, who is a member of Obama’s Economic Recovery Advisory board, told the Nomura Equity Forum. “We probably have already 2.5 million more job losses than anticipated.”
Republicans, including House Minority Leader John Boehner of Ohio, seized on the latest labor numbers to attack the Obama administration’s handling of the economy.
Even Democrats have bemoaned the pace of the package’s implementation. House Majority Leader Steny Hoyer, a Maryland Democrat, said on “Fox News Sunday” June 5 that congressional Democrats are “disappointed” stimulus funds weren’t distributed faster.
“The money is just really starting to come out in more significant amounts now,” Tyson said. “The stimulus is performing close to expectations but not in timing.”
Package Affordable….
By JAY MILLER
Discover Financial Services launched a $500 million stock offering and is planning to offer senior notes in the near future.
Some of the stock-offering proceeds may go toward buying back preferred stock issued under the U.S. Treasury’s Capital Purchase Program. In March the company got $1.2 billion in funds under the Troubled Asset Relief Program.
Other potential uses for the proceeds include capital contributions to Discover Bank and investments in the company’s business.
Discover has said it will repay federal funds as soon as it’s “prudent” to do so.
In after-hours trading, the company’s shares were down more than 6% to $9.83. The shares have more than doubled in the past four months.
Discover, which has a market capitalization approaching $5 billion, said the stock offering will include a 15% over-allotment option for the underwriters.
VMW To Lose market Share To MSFT & ORCL
By Jim Finkle – Analysis
BOSTON (Reuters) – VMware Inc (VMW.N) could lose its rich share valuation as a new product from Microsoft Corp (MSFT.O) and potentially more competition from Oracle Corp (ORCL.O) threaten its lead in the virtualization market.
VMware shares trade at about 26 times the average Wall Street forecast for next year’s earnings, according to Reuters Estimates. That is roughly twice as expensive as Microsoft, the world’s biggest software maker, and Oracle, the third.
Analysts say VMware shares could be ready for a sell-off if its quarterly results later this month, or its outlook, miss expectations, with Microsoft preparing to ship in July a souped up rival to VMware’s flagship product…..
Fitch Cuts California’s Debt Rating
By Jim Christie
SAN FRANCISCO (Reuters) – California suffered a new setback in its financial crisis on Monday when Fitch Ratings cut its rating on the state’s general obligation debt to just two notches above junk status.
Fitch cut its rating on California’s long-term bonds to “BBB,” two notches above speculative grade, citing the state’s budget and revenue crisis.
The state last week started issuing “IOU” promissory notes for some bills to conserve cash for priority payments, including payments to investors holding the state’s debt.
The rating agency also kept the debt of the most populous U.S. state on watch for additional downgrades. California ranks as the lowest-rated state general obligation credit by Fitch, followed by Louisiana, at “A+.”
Tom Dresslar, a spokesman for State Treasurer Bill Lockyer, said the other two main credit rating agencies, Standard & Poor’s and Moody’s Investors Service, could soon follow Fitch’s example. “I’m sure their patience is not deep,” he said.
Lower ratings could raise California’s borrowing costs during a severe cash crunch in Sacramento, the state capital, where talks between Governor Arnold Schwarzenegger and lawmakers to plug a $26.3 billion budget deficit for the fiscal year that began on July 1 are plodding along….
AAA Said July 4th Travels Dropped 2.6% YoY
COLUMBUS, Ohio — Economic instability will trump cheaper gas this July Fourth holiday, with more people choosing to stay home rather than hit the road, according to a survey released Wednesday Auto club AAA said it expects 37.1 million travelers — 12 percent of the U.S. population — to take a trip of 50 miles or more from home this year, a decrease of 1.9 percent from last year. Gasoline prices had risen every day for nearly two months until Monday, but remain far below last year’s levels, when a gallon surpassed $4. National average pump prices are now 34 percent lower at about $2.68 per gallon.
Whitney Tillson & Glenn Tongue Expect Considerable Downside in Housing
Whitney Tilson (right) and Glenn Tongue of T2 Partners have updated and expanded their excellent presentation on the housing and mortgage markets.
Here’s the bottom line:
- We are in the “middle innings” of the mortgage and foreclosure crisis
- House prices have at least another 15%-20% to fall and won’t bottom until the middle of next year.
- The recent signs of stabilization are the “mother of all head fakes.”
We’ve summarized house-price portion of T2’s presentation in the slides that follow. The presentation provides an excellent snapshot of the state of the market, as well as the trends that will likely drive prices significantly lower over the next year. You can download it yourself here (PDF), or scroll through the whole thing here.
S&P Raises Loss Expectations On Risky Mortgages
NEW YORK, July 6 (Reuters) – Standard & Poor’s on Monday boosted its expectations for losses on risky loans backing U.S. mortgage securities to as much as 40 percent, suggesting a darkened outlook for the troubled housing market.
The more dire assessment will likely “significantly impact” bonds originally carrying AAA ratings, S&P said in a report.
Increased assumptions for total losses on subprime and Alt-A residential mortgage-backed securities come amid declines in market value of the debt and a surge in the inventory of bank-owned properties, S&P said.
It is another blow to investors who are already suffering from downgrades to their portfolios over the past two years as the housing market fell to the weakest levels since the 1930s. Many bonds are trading for cents on the dollar as investors value them based only on remaining interest payments that may be received.
S&P boosted loss projections for subprime loans made at the peak of the market in 2006 and 2007 to 32 percent and 40 percent from 25 percent and 31 percent, respectively. For 2005 loans, loss projections rose to 14 percent from 10.5 percent.
For Alt-A loans, which were made to borrowers that provided reduced proof of their ability to repay, loss projections for 2006 and 2007 mortgages rose to 22.5 percent and 27 percent from 17.3 percent and 21 percent, respectively. S&P expects Alt-A loans from 2005 to post losses of 10 percent, up from its previous estimate of 7.75 percent.
Loss severities, which include the costs to foreclose and liquidate a home and declines in property value, are expected to rise to 70 percent for 2006 and 2007 subprime bonds and 60 percent for Alt-A bonds issued in those years, S&P added. Some severities have already exceeded 100 percent, it said.
“We have observed increases in loss severities and we expect them to continue to rise until we reach the trough of the market value decline, which we believe will be in the first half of 2010,” S&P said in the report.
Rating companies, including S&P, have frequently revised expectations for losses on subprime, Alt-A and prime loans to reflect the deteriorating environment since 2006.
S&P said it now forecasts defaults on subprime loans issued in 2005, 2006 and 2007 at 11 percent, 30 percent and 49 percent, respectively.
STP Targets 20% of Sales In China
Suntech Power Holdings Co (尚德), the world’s biggest maker of silicon solar panels, expects China to account for as much as 20 percent of its sales within three years as the nation tries to curb greenhouse gas emissions.
Sales in China amount to about 2 percent of the total at the company based in Wuxi, Jiangsu Province, chief executive officer Shi Zhengrong (施正榮) said in a July 3 phone interview from Beijing.
“China, once it decides to do something, it happens very quickly,” Shi said. “I think with solar it will be similar.”
The world’s biggest greenhouse-gas emitting-nation plans to boost capacity for producing electricity from sunlight to 10 gigawatts by 2020, enough to supply about 10 million US homes, from 1.8 gigawatts now, the Chinese Renewable Energy Industries Association said. China’s solar targets are likely to be about a 10-fold increase in the next decade, Shi said.
“If China does invest heavily in solar power as it has promised, it will be an increasingly attractive proposition for solar companies,” said Jenny Chase, an analyst at New Energy Finance in London. “Solar companies don’t follow the sun for business, they follow the subsidies to countries like Germany and Spain, which are the big markets.”
About 78 percent of Suntech’s revenue is generated in Europe, while the US accounts for about 7.5 percent, data supplied by the New York-listed company showed. Germany will likely remain Suntech’s biggest market by 2012, Rory Macpherson, the head of investor relations at the company, said by telephone.
A series of policy announcements in China encouraging renewable energy use, including subsidies for fitting solar panels on roofs, helped Suntech’s US depositary receipts gain 42 percent in the second quarter. The ADRs have climbed 57 percent this year and closed at US$18.37 last Thursday.
Suntech’s targets for sales growth in China are supported by the potential for domestic producers’ business to increase from a low base, Chase said. Chinese companies are well placed to gain from future increased demand because the government will be inclined to favor local manufacturers, she said.
Suntech is building contacts with local authorities as it awaits details of how the government will expand solar power in the coming decade, Shi said.
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