Today's Coffee - Credit Collapse & Consumer's Plea
The market collapsed at the close Tuesday, on mounting credit concerns. Mortgage insurance partners MGIC (NYSE: MTG), PMI Group (NYSE: PMI) and Radian (NYSE: RDN) announced that their partnership, Credit-Based Asset Servicing and Securitization LLC (C-BASS), might be worthless. At the same time, American Home Mortgage Investment (NYSE: AHM) sank 88% on its cash shortage. Meanwhile, off in the distance, a solitary figure waves his arms wildly and screams as loud as he can, though he is unheard as his voice is lost in the wind. The consumer is crying for help. He's flashing a mirror, but the rescue squad, the Fed, doesn't see him.
ECONOMIC DATA & ANALYSIS
Personal Income and Spending
This morning at 8:30 a.m., the Commerce Department released this highly anticipated report. Personal income rose 0.4%, below the expectations of Bloomberg's consensus, who were looking for a 0.5% increase. Personal spending in June inched higher 0.1%, missing economists' forecasts for a 0.2% rise. Back in May, spending rose 0.6%. Year-over-year, spending in the second quarter rose at a 1.3% annual pace, according to a previous report, and this was a third the rate of Q1 growth.
Wall Street Greek readers should not be surprised, as we have been tirelessly highlighting the impacts of higher gasoline and food prices on retail sales. With home equity also falling into the red for many new home buyers, and monthly payments on variable rate loans adjusting higher, there's only added pressure to tight budgets. The PCE deflator, the Fed's preferred inflation gauge, showed prices increased 0.1% in June, excluding food and energy. The measure increased 1.9% over last year's level, thereby falling within the Fed's comfort range of 1-2%.
S&P/Case Shiller Home Price Index
We anticipated this barometer might show an increase in pricing, based on recent data from the National Association of Realtors. The NAR's June report on existing homes showed prices had improved within the "existing" segment that makes up the majority of the housing market. Recent new homes sales data indicated a price decrease in the corresponding smaller segment. So, you would think S&P/ Case Shiller must be talking to different folks, since their measure of 20 American cities showed prices dropped 2.8% in May, the steepest decline in at least six years (we're concerned about that lack of precision). They more precisely reported that their index of ten cities showed the greatest decline since 1991. In fact, prices dropped in 15 of 20 cities.
The difference between the two reports may have been partly due to the variance in reporting periods, with the NAR data being one month ahead. Clearly though, logic tells us prices are probably decreasing still, but perhaps nearing stability. Home builders are finally facing the reality of the situation, reducing construction and seeking to move inventory and land. Economists indicate the S&P/Case Shiller data is more accurate, as it traces the actual home sales, while the NAR tracks the median price of aggregate sales. It's possible that a greater percentage of higher priced existing homes sold, relative to less expensive ones, and that this influenced the median price to provide an illusion for us poor little peasants.
But, what if more higher priced homes sold, relative to lower priced ones? What does that tell us? We think it means lower income Americans are backed into a corner by rising food and gasoline prices, and are not anywhere near considering a home purchase. And, as for those who want a home, lending restrictions have increased so much as to price many of them out of the market. It's higher lending restrictions and the consumer burden creating the illusion of rising prices in the NAR data, in our opinion.
Conference Board Consumer Confidence
In our weekly article, "The Greek's Week Ahead - Panic Room," we argued that this month's figure would likely be high, and not accurately reflect the current situation. We posited that the reporting period may not have picked up the stock market's recent weakness, rather incorporating its ascent to Dow 14,000. The Conference Board reported July confidence at 112.6, compared to the year's low point in June of 105.3. As a result, most press outlets are seeking out supporting evidence for high confidence, rather than questioning its validity as we are. We view it as a timing flaw, and one that is now misdirecting analysis and possibly some forecasts as well.
Employment Cost Index
The broadest measure of labor costs was reported today, and it showed its biggest rise in two years. Nice, inflation + potential recession = potential stagflation, or in algebraic terms, a terrible state of affairs. So, the Employment Cost Index for the second quarter posted an increase of 0.9%, quarter to quarter, and 3.4% year to year. The quarterly rise matched consensus. The way it got there was downright weird though. Wages and salaries rose 0.8%, but benefits paid by employers increased some 1.3%. From a distance, this appears as though it may be a timing issue, since first quarter benefits only increased some 0.1%. Thus, the second quarter strength may be due to some make up factor.
Jordan: Where the Ruse of Injustice May Serve Fundamentalists Well
In a desperate and perhaps brilliant move, the Islamic Action Front, a political party in the Kingdom of Jordan, announced its protest of elections and the withdrawal of its candidates. The IAC waited until elections had begun, and maybe noticed how it was going before acting. Based on complaints that the government had dispatched troops to areas where municipal seats were up for grabs, the IAC abruptly claimed injustice and walked away. This is the first time Jordan was offering 68 council member seats through free election, keeping another 34 under the King's thumb. However, the kingdom was guaranteeing 20% of the seats to women, a measure sure to weaken the influence of the IAC. You see, women would not generally support a cause that seeks to lock them up in basements covered from head to toe in last year's burka fashion.
So, by pulling out of the election, support for the IAC could now grow grassroots. Where there is perceived injustice, there is an underground movement to alter it. The IAC may now gain a broader following than it would have through elections. Though likely to take on a militant face, this was probably the only way Islamic fundamentalists could influence Jordan. Is that true though?
In Turkey, perhaps the most conservative of Islamic countries, and I use conservative loosely here, the populous elected an Islamic party president and then reelected him just recently. Wall Street Greek thinks King Abdullah has the right idea here, as dictatorships are always doomed to eventual and sometimes ugly revolution. However, democracy can also drive Islamic revolution, and that may be in process in Iraq.
COMPANY SPECIFIC NEWS
CNBC broke news today that enough of the Bancroft family had agreed to the News Corp. (NYSE: NWS) bid to allow for the sale of Dow Jones (NYSE: DJ). Remember, we thought it wouldn't happen when we issued our article, "Dow Jones Will Sell, but NOT to Potter!" Rupert Murdoch may not be anywhere near as bad a character as Mr. Potter was in It's a Wonderful Life, but to the Bancrofts, we estimated he was no better. In the end, it looks like the Bancrofts were no George Bailey.
What's next for News Corp.? We suspect Mr. Murdoch will leverage the Wall Street Journal and Barron's brands well as he builds out his new financial cable network that is scheduled to hit the airwaves in October. Murdoch has proven a true media mogul, and we expect him to create value in Dow Jones and News Corp. as a result of this deal. Still, how long will it take him to make up for the exorbitant premium he's paying, that's the question. Hey Rupert, if you're looking for a fresh new pen or face, Wall Street Greek is open to offers! Barron's is a wonderful magazine, and we hope it retains its old times appeal. There's nothing better than smoking a cigar in the park while reading Barron's on a Saturday afternoon.
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