“Following up on Friday’s abysmal consumer income data, we now take look at the spending side of the equation, without much optimism. Not surprisingly, as Bloomberg’s Richard Yamarone summarizes, the consumer health picture in January was “grim” and “after adjusting for inflation and taxes, is simply insufficient to sustain the expansion.” He adds that “over the last couple of weeks, no fewer than a dozen consumer-related companies made mention of the deterioration in incomes as a risk to  business and performances.” Yamarone concludes: “Spending on discretionary items has softened in recent months. Four of our ‘Fab Five’ spending barometers fell or were unchanged in January from December…”

Full article and charts 

“Investors cut wagers on a rally for commodities to the lowest in almost four years and pulled a record $4.23 billion from funds last week as prices erased this year’s gain on a slowdown for manufacturing in China.

Hedge funds and other large speculators reduced net-long positions across 18 U.S. futures and options in the week ended Feb. 26 by 16 percent to 447,106 contracts, the lowest since March 2009, U.S. Commodity Futures Trading Commission data show. Investors are betting on a decline in copper prices for the first time since November, and reduced their crude-oil holdings by the most in 11 weeks….”

Full article

“China’s swap market turned cautious on the economy last month for the first time since August and global banks are divided on prospects for growth.

The extra cost of locking in interest rates for five years rather than two shrank to 36 basis points, from 46 on Jan. 31, according to data compiled by Bloomberg. The five-year swap that exchanges fixed payments for the floating seven-day repurchase rate fell seven basis points to 3.69 percent, while the two-year rose three basis points. Societe Generale SA and Bank of America Merrill Lynch said the so-called curve flattening will persist, while Deutsche Bank AG and Standard Chartered Plc forecast renewed steepening.

Confidence in the world’s second-biggest economy is being tested as a March 1 report showed manufacturing growth slowed in February, while an Italian election fanned concern Europe’s debt crisis will escalate and the U.S. government is reining in spending. China’s central bank auctioned repurchase agreements on Feb. 19 for the first time since June, withdrawing cash from the banking system to curb inflation. The gap between five- and two-year swap rates narrowed last month in the U.S. and Brazil.

“The latest manufacturing indicator was weaker and this could be the first shift in sentiment against the consensus calling for solid first-half growth,” said Wee-Khoon Chong, a rates strategist in Hong Kong at SocGen. “What’s happening inEurope helped a bit to dent optimism, and see what the U.S. sequestration will bring.”

Manufacturing Cools….”

Full article

“Early last month, Fed Governor Jeremy Stein gave a speech titled Overheating in Credit Markets: Origins, Measurement, and Policy Responses that raised the question of whether or not we might be seeing a bubble, and if so what might be done about it.

You’ve probably heard a lot of talk about the aggressive lengths that money managers are going to to “reach for yield” in the context of this ultra low-rates environment.

Stein didn’t sound too fearful yet, but the overall concern is that we could be setting up another credit bubble, just like before the recent crash.

In the latest version of their US Interest Rates Strategist letter, Morgan Stanley‘s Vincent Reinhart and Matthew Hornbach look at the scene in corporate credit and determine that the market might be “modestly rich” rather than straight-up “overheated.”

Three charts from their work stand out, that nicely call into question the idea of a bubble….”
Full article and charts

“NEW YORK (Reuters) – U.S. companies are expected to contribute $70 billion to their pensions in 2013 with about 40 percent of the money going into bonds, a UBS analyst said in a research note released on Friday.

The amount is below the estimated $80 billion in pension contribution made last year.

Although stocks and other risky investments have fared well since mid-2012, many corporate pensions remain underfunded and cannot depend on strong future returns on equities and higher-yielding vehicles to meet their obligations, according to UBS analyst Boris Rjavinski.

A U.S. corporate pension on average is underfunded by 15 to 25 percent….”

Full article

Personal spending increases 0.2%…

“Smartphone sales in India may suffer from a higher tax on handsets costing more than $37 just as Apple Inc. (AAPL) steps up efforts to tap demand for data services in the world’s second-largest mobile-phone market.

Finance Minister Palaniappan Chidambaram yesterday said he would raise the excise tax on high-end phones to 6 percent from 1 percent to help finance welfare programs for the country’s poor and fund the widest budget deficit among the largest emerging economies. Samsung Electronics Co. (005930), which sells the Galaxy range of smartphones, said the move “won’t have a positive impact” on the mobile-phone industry and will force customers to pay more.

India’s government, after attempting to squeeze wireless operators including Vodafone Group Plc (VOD) and Bharti Airtel Ltd. (BHARTI) with higher license fees and airwave tariffs, is now targeting handsets for revenue from an industry that has boomed since Prime Minister Manmohan Singh opened the economy more than two decades ago. Chidambaram also increased tax on high earners, luxury cars and yachts….”

Full article

“NEW YORK—In its latest Household Debt and Credit Report, the Federal Reserve Bank of New York announced that in the fourth quarter of 2012 outstanding consumer debt increased slightly ($31 billion), breaking the downward trend observed since the fourth quarter of 2008.  The increase was primarily due to a rise in non-housing debt and the stabilization of mortgage debt.

Total consumer indebtedness was $11.34 trillion, 0.3 percent higher than the previous quarter but considerably lower than its peak of $12.68 trillion in the third quarter of 2008. While outstanding mortgage debt remained roughly flat, originations of new mortgages rose to $553 billion, a fifth consecutive quarterly increase.

Non-housing debt balances increased for the third straight quarter and now stand at $2.75 trillion, up 1.4 percent in the fourth quarter.  All non-housing components increased; auto loans up $15 billion, student loans up $10 billion and credit cards up $5 billion.

“The data provides early evidence that consumers may be reaching the end of the four year deleveraging cycle….”

Full report

“U.S. natural-gas production will accelerate over the next three decades, new research indicates, providing the strongest evidence yet that the energy boom remaking America will last for a generation.

The most exhaustive study to date of a key natural-gas field in Texas, combined with related research under way elsewhere, shows that U.S. shale-rock formations will provide a growing source of moderately priced natural gas through 2040, and decline only slowly after that. A report on the Texas field, to be released Thursday, was reviewed by The Wall Street Journal.

The research provides substantial evidence that there are large quantities of gas available that can be drilled profitably at a market price of $4 per million British thermal units, a relatively small increase from the current price of about $3.43.

The study, funded by the nonpartisan Alfred P. Sloan Foundation and performed by the University of Texas, examined 15,000 wells drilled in the Barnett Shale formation in northern Texas, mostly over the past decade. It is among the first to study the geology and economics of shale drilling, a relatively recent development made possible by hydraulic fracturing, or fracking, in which a mixture of water, sand and chemicals is pumped at high pressure into rocks to release gas.

Looking at data from actual wells rather than relying on estimates and extrapolations, the study broadly confirms conclusions by the energy industry and the U.S. government, which in December forecast rising gas production….”

Full article

“European Central Bank President Mario Draghi signaled the bank has no intention of tightening monetary policy anytime soon with inflation projected to “significantly” undershoot its 2 percent target next year.

While the ECB’s balance sheet may shrink naturally as confidence returns to financial markets and banks repay emergency loans, policy makers are “far” from considering an exit from monetary stimulus, Draghi said at an event in Munich late yesterday. “We foresee for next year an inflation rate which is significantly lower than 2 percent.”

The ECB has cut its benchmark interest rate to a record low of 0.75 percent, extended over 1 trillion euros ($1.3 trillion) in cheap loans to banks and pledged to buy the bonds of debt- strapped nations if they agree to economic reforms. The ECB in December forecast the 17-nation euro economy will contract 0.3 percent this year and inflation will slow to 1.4 percent in 2014. It is due to update the forecasts next week.

While conditions on financial markets are improving, Draghi said the euro-area economy is still “weak” and the ECB’s accommodative policy will help to drive a “gradual recovery” in the course of 2013.

“It is clearly too early to pull the carpet as risks are still to the downside,” said Thomas Costerg, an economist at Standard Chartered Bank in London. At the same time, “we cannot ignore that there seems to be growing underlying accommodation fatigue among central bankers,” he said.

ECB Warning

Two ECB Executive Board members yesterday warned about the risks of leaving emergency measures in place for too long…..”

Full article

“Here is a guaranteed way to get paid well if you work on Wall Street. Find a best friend at a competing bank or hedge fund and take opposite sides of the same large bet. In one year’s time one of you will have a huge profit and get paid well. The other person will have lost and perhaps be fired. The sum of both your profits will be zero, but the sum of what you get paid will be positive. Split the pay.

This scheme is one of the more fanciful ways to exploit Wall Street’s compensation structure that pays absurdly well in the good years and just okay in the bad years. Losing money never means having to give anything back.

That asymmetry in pay (money for profits, flat for losses) is the engine behind many of Wall Street’s mistakes. It rewards short-term gains without regard to long-term consequences. The results? The over-reliance on excessive leverage, banks that are loaded with opaque financial products, and trading models that are flawed.

Regulation is largely toothless if banks and their employees have the financial incentive to be reckless….”

Full article

“FORTUNE — Okay, middle-class taxpayers: Listen up. Our national government in Washington is screwing you again. This time the screwing involves the way that two new income tax surcharges, supposedly designed to affect only the “rich,” will reach deeper and deeper into the middle class unless something is done now to rein them in.

I’m talking about the 0.9% tax surcharge on the amount by which individuals’ “earned income” — such as salaries and fees — exceeds $200,000 this year, and the 3.8% surcharge on some or all the investment income of single households with an adjusted gross income of more than $200,000, and married households with an adjusted gross of $250,000 and up.

These surcharges were built into the Affordable Care Act (a.k.a. Obamacare). The screwing isn’t the tax surcharges themselves — it’s the fact that the thresholds for them aren’t indexed for inflation. This means that unless something is done, more and more people will be subject to these taxes as inflation boosts incomes.

Let me show you how this works, using numbers from a study that the nonpartisan Tax Policy Center did a year ago.

For 2013, the TPC said, about 2.4% of households would pay one or both of the surtaxes. By 2022, the level will have risen to 4.6%. Project it out another decade, and you’re at 9%. Given how things work, you would probably be looking at the surtaxes affecting 20% or more of taxpayers in places like New York and California. (You can find the relevant page from the TPC study here.)

You can make the case that people who are currently subject to either or both taxes — who include me — are upper middle class or rich, and can and should fork over some extra money to help the rest of the country. But when you look 10 or 20 years out, you see that unless you index the tax thresholds, these taxes will have expanded well beyond the “rich,” however you define that, and will be clawing away at increasing swaths of the middle class…..”

Full article

“Wall Street junk-bond underwriters, selling debt at a record pace after the securities returned 19 percent last year, say it’s obvious that prices will drop when interest rates rise. So don’t blame the banks.

“Our job first and foremost is to properly structure deals for companies that can support their debt and perform well,” said Craig Packer, the New York-based head of Americas leveraged finance for Goldman Sachs Group Inc. “The interest-rate risk is just a law of nature.”

JPMorgan Chase & Co., Deutsche Bank AG, Citigroup Inc. and Bank of America Corp. are leading firms benefiting from growth in a market where the average underwriting fee is almost three times as big as for selling more creditworthy bonds. At the same time, bankers warn that demand underpinned by Federal Reserve debt purchases could evaporate, driving down prices.

Banks have underwritten $89.6 billion of high-yield debt so far this year, up 36 percent from the same period in 2012, according to data compiled by Bloomberg. Last year’s $433 billion of sales was an all-time high for the asset class and produced about $6 billion in fees, the data show. Meanwhile, investors poured $33 billion into mutual funds and exchange- traded funds dedicated to junk bonds last year, 55 percent more than in 2011, according to Morningstar Inc.

Misleading Investors…”

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“A large amount of Chinese investment capital is moving abroad, and most of it is landing in Europe rather than in the United States, The Washington Post reports.

A new report by research consultant Rhodium Group estimated that over the past two years, Chinese companies invested more than $20 billion in the European Union, but only $11 billion in the United States.

The growth in foreign direct investment from China is expected to continue to grow, as the country attempts to rely less on exports and internal investment and invests its massive annual budget surpluses in other ways…..”

Read more

“Mario Monti’s caretaker government is considering postponing a 3.9 billion-euro ($5.1 billion) bailout for Banca Monte dei Paschi di Siena SpA, leaving the final decision on the payout to the next government, two people familiar with the discussions said.

According to the decree approved by Monti’s cabinet in December, the payment is set to be completed by March 1. Under the government’s rescue plan, Monte Paschi will sell securities, dubbed “Monti” bonds, to the government with a 9 percent coupon that may rise to as much as 15 percent.

A decision whether to go ahead with the capital injection may be made as soon as today, said one of the people, who asked not to be identified because the talks are private. Government and Monte Paschi officials didn’t answer several phone calls seeking comment. The stock fell as much as 4 percent in Milan trading.

Italian elections this week produced a hung parliament, with comedian Beppe Grillo’s anti-austerity movement winning more than 25 percent of the popular vote, compared with the 10.5 percent of the votes received by Monti’s coalition in the lower house. Grillo opposed the current bailout plan, arguing that a parliamentary commission should investigate the bank’s dealings. A delay may prompt a review of the terms, said Fabrizio Bernardi, a Milan-based analyst at Fidentiis Equities…”

Full article

“India will probably contain the budget deficit at about 5.3 percent of gross domestic product this fiscal year as it tries to slow inflation, and economic growth is set to recover, Finance Ministry advisers said.

“The government is committed to fiscal consolidation,” they said in a report in New Delhi today, predicting GDP will rise as much as 6.7 percent in the year through March 2014. Deficit curbs, along with “demand compression and augmented agricultural production should lead to lower inflation, giving the RBI the requisite flexibility to reduce policy rates,” they said.

Finance Minister Palaniappan Chidambaram, who presents the budget tomorrow, faces the task of narrowing the widest fiscal gap in major emerging nations to avert a credit-rating downgrade. The Reserve Bank of India has signaled government spending has added to inflation risks, limiting the extent of interest-rate cuts as the economy falters….”

Full article

“Lenders from JPMorgan Chase & Co. (JPM) to Bank of America Corp. (BAC) that sold $51 billion of securities backed by equity derivatives the past two years are being pushed by regulators to disclose that the banks valued the debt as much as 10 percent less than customers paid.

Banks are being given 10 days to tell the U.S. Securities and Exchange Commission whether they will comply with rules intended to increase transparency in the structured-notes market, the SEC said in a letter sent to some banks this month. Goldman Sachs Group Inc. (GS), Bank of America, and Royal Bank of Canada began disclosures as early as May on securities sold at prices that were typically 2 to 4 cents on the dollar more than where the banks valued them, data compiled by Bloomberg show….”

Full article

“Boston-based VC firm Spark Capital is announcing its fourth fund this evening, raising $450 million for the firm’s biggest investment fund to date. Spark, who raised $360 million for its last fund, now has $1.4 billion under management. Partner Bijan Sabet tells us this fund was oversubscribed.

Founded in 2005 by Todd Dagres, Santo Politi and Paul Conway, Spark Capital invests across a broad group of areas in technology, including advertising and monetization, commerce and services, cloud and infrastructure, social, mobile and content. The portfolio includes Twitter, Tumblr, Foursquare, and OMGPOP (sold to Zynga). Most of the firm’s investments are early stage, but the range varies from $250,000 in seed funding or $25,000,000 in late-stage financing.

In 2005, Spark raised $260 million initially, and then for its second fund, raised $360 million in 2008.

Why the bigger fund this time around? Sabet explains that a larger fund gives the firm more flexibility in not only investing at the early stage but also putting in money at later stages, if necessary. “We like supporting companies throughout their life,” he says. “We want to support our companies properly.”

Sabet adds that the firm is spending more time with and investing in more companies in New York and San Francisco, and additional money gives the firm the flexibility for additional investments in new startups. He adds that 75 percent of the firm’s investments are for early-stage rounds….”

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Some analysts have been warning for years about the shitty loans being issued in the auto industry. Even more worrisome is that these loans have been neatly tucked away into SIVs…

“More Americans fell behind on their auto loan payments in the last three months of 2012, a time of the year when some borrowers’ financial obligations temporarily take a backseat to spending on holiday shopping.

Beyond the seasonal increase, the late-payment rate on auto loans declined on an annual basis and remained near the lowest point in more than a decade, credit reporting agency TransUnion said Tuesday.

The trend comes amid a strong market for cars and trucks. Many Americans are moving to replace older vehicles after holding back on purchases for several years following the last recession….”

Full article 

“Paying for your child’s education is a laudable goal, but may not be realistic for some parents who could wind up jeopardizing their own financial future in order to help put their sons and daughters through college.

Parents who are saving for college frequently raid retirement funds — or plan to do so — to pay their child’s skyrocketing tuition bills, according to a new study released today from the nation’s largest student loan provider Sallie Mae. More parents are currently saving for their retirement than for their children’s education, but these families often plan to draw from retirement savings to help cover the costs of college, especially as other goals — from building up a “rainy day” fund to increasing general savings — take priority. “The economy is putting pressure on families in terms of whether they’re saving, how much they’re saving and where they’re saving,” said Sarah Ducich, senior vice president for public policy at Sallie Mae.

The report “How America Saves For College” surveyed more than 1,600 parents with children ages 18 or younger and found half of parents said they were focused on college savings, while 60 percent were focused on saving for retirement. But if they have to choose, parents are opting to boost their retirement savings — 42 percent of parents who are not saving for college said they are saving for retirement.

The good news: More than three-quarters of those parents surveyed who are saving for college are also focused on saving for retirement.

The bad news: Many of those families who say they are saving for college also admit that they are doing so through their retirement fund. One-third intend to use these savings for college. The other two-thirds say that they would use their retirement savings to pay for college, only if necessary….”

Full article