U.S. stock index futures look set to open lower on Tuesday.
The dollar is showing some strength and crude oil backed off after hitting
$80 on Monday.
Today's Economic Calendar:
- CSC-Goldman Store Sales 7:45 AM ET
- Redbook 8:55 AM ET
- S&P Case-Shiller HPI 9:00 AM ET
- Consumer Confidence 10:00 AM ET
- State Street Investor Confidence Index 10:00 AM ET
- 4-Week Bill Auction 11:30 AM ET
- 2-Yr Note Auction 1:00 PM ET
News For Thought
State tax receipts recede for fifth straight quarter. According to The
New York Times: "The recession can now claim another troublesome record: state
tax collections shrank at the end of 2009 for a fifth consecutive quarter, the
longest period of continuing state revenue declines since at least the Great
Depression, according to a new report." The Times added: "The revenue decline
comes despite the tax increases imposed by many states since the recession began.
With less tax money coming into state treasuries and expenses for programs like
Medicaid continuing to mount, many states will probably be forced to consider
further tax increases, spending cuts and layoffs — actions that some economists
warn could put a drag on the nation’s fragile economic recovery." Yet, higher
taxes, more mandates, and more government spending are coming. As Pink Floyd
would say: "Hello, Hello? Is there anybody in there? Just nod if you can hear
me..Is there anyone home?"
Teacher layoffs loom. According to The Washington Post: "The revenue decline
comes despite the tax increases imposed by many states since the recession began.
With less tax money coming into state treasuries and expenses for programs like
Medicaid continuing to mount, many states will probably be forced to consider
further tax increases, spending cuts and layoffs — actions that some economists
warn could put a drag on the nation’s fragile economic recovery." The report
blames decreasing tax revenues as a factor as "states and cities are considering
cutting education to keep their budgets balanced." Also responsible is the fact
that the $48 billion worth of stimulus earmarked for states is running out later
this year.
U.S. government may know who key Google hacker is. According to Reuters: "The
man, a security consultant in his 30s, posted sections of the programme to a
hacking forum where he described it as something he was "working on," the paper
said, quoting an unidentified researcher working for the U.S. government. The
spyware creator works as a freelancer and did not launch the attack, but Chinese
officials had "special access" to his programing, the report said."
Let's see, states are running out of money. Especially vulnerable is Illinois.
In this space a couple of weeks ago we noted that a reliable hedge fund source
had told us that Illinois had hired a group of consultants to find out why there
were no bids on any of its most recent major contracts. Oh yeah, other states
are in trouble too, and things are getting worse just as the stimulus is about
to run out.
It's going to be a very interesting summer and runup to the election.
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The economic weakness in Europe continues to show no signs of
abating. In the latest episode, Fiat is idling all of its plants in Italy for
two weeks, due to weak demand.
The news cycle has been heavy on Greece's use of currency swaps and derivatives
to make its books look better over the years in order to meet the criteria for
entering and remaining in the European Union. But, to some degree the thought
of derivatives, swaps, and cloak and dagger transactions by high stakes brokers
and government officials gives that story an ethereal quality. To be sure, the
effects have been anything but ethereal, given the fall in the Euro and the potential
repercussions.
Yet, nothing is more tangible than being out of work because there is no demand
for the product that you make. And that's what's happening to Fiat, which happens
to own the third largest automaker in the U.S., Chrysler. According to The New
York Times: "Fiat has idled all of its Italian auto-manufacturing plants for
two weeks to adjust for weaker demand following the expiration of “cash-for-clunker”
programs, a company official said Tuesday." The plants will remain closed until
the first week of March, idling about one third of all of Fiat's employees in
Italy. What makes this closure significant is that, according to a company spokesman,
this is the first time that all Fiat plants in Italy will be closed simultaneously.
According to The Times: "France, Britain and Spain still have at least some incentives
for new car buyers in place, while Italy and Germany have phased them out. The
government programs use tax breaks or cash rebates to encourage drivers to upgrade
to more environment-friendly cars. Critics have described them as de facto handouts
to the auto industry."
The European issues, according to company spokesmen who spoke to the Times are
not linked "whatsoever" to Fiat's Chrysler operations, although it is widely
accepted that 2010 will be a difficult year for the auto industry.
If you look at the auto industry as a microcosm of how the lack of government
support may affect the rest of the global economy, you can see what's coming,
a potential contraction as government stimulus fades away and private industry
fails to pick up the slack. It's already happening to state and local governments
in the U.S. where teachers may start to lose their jobs as the $48 billion worth
of stimulus money for education starts to fade away.
In fact, instead of making things better, it's plausible to consider that federal
aid, and the potential lack of or reduction of it in the next twelve months may
accelerate the demise of state and local governments as money starts to run out
in a big way on Main Street.
A report in The New York Times highlights the problems faced by state coffers,
where tax revenues have fallen for five straight quarters, the first time this
has happened since the Great Depression. Citing data from the Nelson A. Rockefeller
Institute for Government, the Times reported that "state tax collections fell
to $134.5 billion in the last quarter of 2009, a 4.1 percent drop from the $140.2
billion collected during the same period a year earlier." The Times notes that
the rate of fall in tax revenues has decreased, with the record fall of 16.%
being recorded in the spring of 2008, the fact that it continues is what's the
most worrisome. And that makes sense, since it means that there is little sign
that it's going to stop any time soon.
And if you're looking for a scenario that could accelerate things, look to commercial
real estate and the potential fallout if that market's decline accelerates. There
are over a trillion dollars worth of commercial real estate mortgages, many of
them still on the books of community banks, that are due to reset within the
next three years. Many of them, just as in the case of many individual mortgages,
are under water, which means that the potential for default is higher than normal.
If businesses continue to experience weakness and can't pay their rent, we could
see the beginning of that highly predicted, but not quite visible double dip
recession scenario taking shape.
And there are some pockets of significant weakness accross the U.S. According
to The Washington Post: "In Washington, the number of troubled properties has
multiplied at a phenomenal rate, with the value growing from only $13 million
in 2007 to $40 billion now, according to CoStar Group, a Bethesda real estate
research company. The region trails only South Florida and metropolitan New York
in the per capita value of commercial real estate assets in foreclosure, default
or delinquency, according to the research group Real Capital Analytics."
One expert told the Post that "half of commercial real estate mortgages will
be underwater by the beginning of 2011," compared to one fifth of the residential
mortgages that are in place now, that are glutting the marketplace.
The major problem is the way commercial loans are structured. Unlike residential
mortgages that are set up for 15 or 30 years the majority of the time, commercial
mortgages are most often set up as five year loans that are then restructured.
Many of the loans that were set up in the last five years are coming due, at
a time when business isn't generally doing well.
Conclusion
Stimulus money, whatever was actually doled out is about to run out. That means
that any business that was subsidized by those funds is about to face a significant
test of survival. At the same time, the specter of higher taxes is looming closer
and closer to reality.
Throw in a bunch of bad commercial real estate loans, and a president who is
hell bent for leather on health care reform that will feature higher taxes and
you can see that one or two sneezes somewhere along the line that connects the
dots in the economy could set up the next down leg.
There is no guarantee that this will actually happen. But, if Washington doesn't
get a couple of things straight in the next few weeks, time will run out, and
businesses will likely start to lay off more employees as consumers start to
retighten their belts.
The only thing that could postpone this scenario is that banks decide to extend
loans and that the tax cuts that the president is proposing, are tangible and
meaningful. So far, all we've seen is that so called tax cuts and incentives
are so pigeon holed that they are unreachable for anyone who actually makes enough
money to actually try to take advantage of them.
That means that the next few months will be a vigil of sorts, as we wait for
the next shoe to drop. And in an election year you can expect the bontha fodder
titer from inside the beltway to be near record levels.
Yup, we are very pessimistic here.
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Shares of the
Ultrashort Real Estate ETF (NYSE: SRS) are out of synch
with the perception that a commercial real estate crash
is coming.
Chart Courtesy of StockCharts.com
It seems like a no brainer, commercial real estate is in
trouble. Increasing numbers of commercial mortgages are
under water, a trillion dollars worth of commercial mortgages
are about to reset, and demand for space is falling, with
lots of empty strip malls dotting the landscape.
Yet, SRS, which shorts real estate investment trusts is near its 52 week lows.
That makes no sense. This ETF, theoretically, should be making 52 week highs.
That means that several things are possible. One is that investors don't believe
that a crash is coming, even though the data suggests that it should already
be well on its way to happening.
Another is that the ETF isn't set up right, and that it's not attracting enough
money from investors to actually reflect the investment style that it's supposed
to represent.
No matter what, this is a huge disconnect that is worth watching. This would
be especially meaningful if the action in this ETF starts to reverse in the next
few weeks. |
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