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Heard Off the Street: A Return to Normalcy … Relatively Speaking

Investment Strategy Group — Mon, 28 Nov 2011 16:00:28 +0000

The Investment Strategy Group of Contango Capital Advisors provides regular updates on economic and financial conditions. In this commentary, we examine the prospects for improvement in the long-beleaguered US economy.

Over the last few weeks, we have started to think that things might work out better here in the US than most people currently expect. This brighter future would emerge from the confluence of two unrelated, but equally important, developments:

1. The recently identified – and astonishingly large – accessible deposits of gas and oil in the US, and

2. The potential benefits of a massive, across-the-board forgiveness of principal on underwater mortgages.

Here is how events could unfold.

Oil and Gas Could Fuel Expansion

Tapping into the previously inaccessible oil and gas liquids concentrated in the country’s geographic center should accelerate growth for several reasons, not the least of which would be the increasing demand for – and thus increasing development in – investment in exploration, drilling and development, as well as the manufacture of all the tools, parts and pieces needed to explore, drill and develop.

As economic activity and job growth pick up in these and related areas, we can expect a ripple effect to make itself felt through the entire middle of the country, one of the areas hardest hit by successive recessions.

Cheap oil and gas would lead to cheap energy for businesses as well as gas – a plus for energy-intensive industries like aluminum smelting. Petrochemicals are the feedstock for the plastics and carbon fibers that, in turn, are the raw material of manufacturing. Conversion of coal-powered facilities to gas would provide further employment growth. Cheap real estate in the downtrodden middle of the country could undergo rapid re-pricing, raising collateral potential and facilitating leveraged construction.

From Underground Assets to Underwater Mortgages

A mortgage principal forgiveness program could stop the downward spiral of housing prices by sharply reducing the foreclosures that continue to be dumped on the market. It would also allow formerly underwater homeowners to refinance at historic low rates, increasing both their available cash and their confidence in their future. In addition, once they could afford to sell their houses, they would become mobile again, and able to go further afield to seek employment.

Ending foreclosure dumping would allow residential construction to resume (except in overbuilt locations such as Arizona and Nevada) as it would no longer be possible to buy a house for two thirds the price of a new build.

The Net Effect

Once the full implications of these developments sank in, we would expect a jump in US equity markets and an increase in domestic interest rates (more credit demand for a growing economy, as unemployment shrinks) as well as rapidly improving state and local budget situations.

Even the federal deficit would likely stabilize, as higher funding costs would be offset by improved tax revenue. Because we expect nothing good to come out of Europe and think that emerging markets will still be working out their inflation and credit bubble problems, the probable results would be strong capital inflow to the US and an appreciating dollar. These developments would give US investors the opportunity to buy into emerging market growth potential on the cheap.

Whoever is lucky enough to be president in 2014 would then reap a true and truly undeserved windfall.

This article was prepared by Contango Capital Advisor’s Investment Strategy Group. Contango Capital Advisors is an affiliate of Zions Direct.

IMPORTANT NOTE: Wealth management services are offered through Contango Capital Advisors, Inc. (Contango), a registered investment adviser and a nonbank subsidiary of Zions Bancorporation. Investments are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value of the amount invested. Some representatives of Contango are also registered representatives of Zions Direct, which is a member of FINRA/SIPC and a nonbank subsidiary of Zions Bank. Employees of Contango are shared employees of Western National Trust Company (WNTC), a subsidiary of Zions Bank and an affiliate of Contango. CCA1011-0177

Heard Off The Street: What’s Up?

Investment Strategy Group — Wed, 26 Oct 2011 09:00:37 +0000

In this week’s economic/market commentary, Contango Capital Advisors’ Investment Strategy Group examines why emerging market economies continue to grow faster than developed economies while, over the same period, their stock markets have been languishing.

The most widely used emerging market stock index is the MSCI EM Index. For the 12 months ended in September 2011, this index returned ‐16% in dollar terms. Over that same period, the S&P 500 returned +4%. The spread between the two – almost 20% – is not insignificant for investors, many of whom have 10%‐20% in EM stocks in their globally allocated portfolios.

Yet gross domestic product (GDP) looks likely to grow only about 1.5% this year while the economies of the BRIC emerging countries (Brazil, Russia India and China) will grow collectively somewhere in the 7% range. This is a large difference and one that is likely to continue.

Ups and Downs

Why are emerging market stocks going down if the economies are doing so well? This apparent paradox underscores several important tenets of investing. First, investors don’t invest in economies; they invest in stocks, bonds and other securities. Second, markets – especially stock markets – are forward looking. And third, valuation matters.

In 2010, as we began to scale back emerging market exposure in our portfolios, some clients, understandably, asked us why. We offered several reasons:

–Many emerging economies were overheating, posing the risk of burgeoning inflation. The natural reaction by EM central banks would be an attempt to cool down the economy through tighter monetary policy. This, we suspected, could hurt stocks.

–Fund flows had gotten overly one-sided. From June 2010 through December 2010, total fund assets in EM stock mutual funds rose from $143 billion to $202 billion. That’s a 40% gain in just six months and indicative of an unsustainable move. By September of this year, assets were back down to $171 billion.

–We began to develop some particular worries related to China. Specifically, a property bubble seemed to be emerging that had/has the potential to damage the nation’s banking system. And China has been a credit-fueled success story if there ever was one, so if a tightening of credit were to occur, it would not be likely to have a positive impact. Additionally, we began to detect a pattern of increasing IPOs directed at US investors as well as growing corporate fraud at Chinese-listed companies. It had a dot‐com feel to it.

–Finally, with Ben Bernanke in charge of the Federal Reserve, we bet that monetary policy would stay easy here at home, encouraging a weaker dollar and better trade terms for large US corporations that sell globally to developed as well as emerging market countries. In many ways, the record earnings that US corporations posted earlier this year reflected the Fed’s implicit weak‐dollar policies and helped to bolster US stock prices.

Improved Metrics

A number of metrics that we use to indicate valuation for emerging market stocks as a whole have become more attractive. For example, the dividend yield of emerging market stocks is now as attractive as it’s been since 2008, and above its long-term average.

Similarly “cheap” readings are found when we look at EM price to earnings ratios, price to book value ratios, and company cash flow relative to market price. And, given our still generally bright outlook for these economies as a whole, we are more inclined to add back EM exposures to our portfolios once we see the dark clouds currently looming over the global economy and China begin to give way to clearer skies.

This article was prepared by Contango Capital Advisor’s Investment Strategy Group. Contango Capital Advisors is an affiliate of Zions Direct.

The US Bond Market: Déjà Vu Once More

Investment Strategy Group — Wed, 06 Jul 2011 16:00:01 +0000

This article was prepared by Contango Capital Advisor’s Investment Strategy Group. Contango Capital Advisors is an affiliate of Zions Direct.

For the last couple of years, the US bond market has been batted back and forth by deflation and inflation fears. One consequence has been a lot of “noise” in the data – a racket that it may be best to ignore.

In fall 2008, during the depths of the financial crisis, yields on the 10-year note plummeted to 2% (from around 5% in 2007!) as investors demonstrated genuine worry about deflation – falling prices for goods and declining wages. Central bankers dislike deflation because when the level of debt in an economy stays roughly the same but incomes drop, servicing that existing debt becomes more difficult. Deflation was a big problem during the Great Depression, one that took huge doses of government spending to resolve.

10-Year T-Bond Yields: Ups and Downs
Source: Bloomberg

Buying Spree

After the Treasury Department backstopped the banks with TARP in late 2008 and the Federal Reserve began stuffing its balance sheet with bond purchases in 2009, fears about deflation did a “180” and quickly swung to fears of inflation. After all weren’t we “printing money”? Those 2% yields from the deflationary days of ’08 climbed to nearly 4% by the summer of 2009.

With the economy saved (at least for the moment), the Fed buying bonds and various stimulus programs in place certainly inflation would become a problem the market, pundits predicted. Milton Friedman fans everywhere nodded their heads in agreement.

But by the summer of 2010 – about a year later – the sugar high had worn off the economy. Stimulus programs building bridges to nowhere were ending. Europe was enmeshed in its own debt crisis, the Fed’s large-scale bond-purchasing campaign had ended and stock markets were falling. Surely without support the economy would slow to a crawl and deflation would become the problem investors had reasoned it would the summer before. Surely. By the fall of 2010, bond yields plunged from about 4% back to 2.5%.

The Fed Strikes Again

In an almost Pavlovian response, the Fed – worried that it hadn’t done enough the first time – announced more purchases of still more bonds in a second round of quantitative easing, or QE2 as the press dubbed it. QE2 called for $600 billion more in Treasury purchases.

Not surprisingly, by early 2011, the financial markets were again preoccupied with inflation fears, prompting yields on the 10-year Treasury notes to jump to 3.75% But as of mid-June, it is déjà vu all over again. QE2 is drawing into port. Europe looks sick again. US economic growth is slowing once more. And, well, maybe deflation is the real problem. Bond yields have dropped from 3.75% to 3% in the last couple of months.

Did anybody see Groundhog Day? For “spoilers” on the likely ending of this particular movie, give us a call.

This article was prepared by Contango Capital Advisor’s Investment Strategy Group. Contango Capital Advisors is an affiliate of Zions Direct.

IMPORTANT NOTE: Investment products and services offered through Contango Capital Advisors, Inc., a registered investment adviser, a nonbank subsidiary of Zions Bancorporation and an affiliate of Zions Direct, are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value of amount invested.

The information contained in this article is not intended to be and should not be construed as tax advice. It is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Contango Capital Advisors does not engage in the business of providing tax advice and estimates should not be construed as such. Clients should consult their tax professionals regarding their personal situation prior to taking any action based upon this information. CCA0611-0106

Outlook 2011

Jeff Thredgold — Tue, 07 Dec 2010 16:00:54 +0000

The U.S. Economy

While the American economy has now registered growth for five consecutive quarters, the pace of that growth has been meager, averaging a 2.9% real (after inflation) annual rate…and just a 2.1% rate during the past two quarters. Such growth trails the average 3.6% real annual growth pace of the past 30 years.

What we now call the Great Recession enters the history books at 18 months in duration, officially running from December 2007 to June 2009. Never since the Great Depression has a recession wiped out all net job gains of the prior economic expansion. Never since the Great Depression has a painful and lengthy recession been followed by such a limited growth pace.

Growth in 2011? Most forecasting economists see real growth during 2011 at a 2.5%-3.0% annual rate, with the Federal Reserve’s forecast a bit more cheery. As before, major economic headwinds of weak residential and commercial real estate construction, soft housing values, and near double-digit unemployment impair the
economy. In addition, fragile consumer confidence tied to anxiety about massive government spending and unprecedented budget deficits also constrains growth opportunities.

Budget Deficits

Effective steps to reduce future growth rates of U.S. government spending are mandatory to getting this nation’s financial house in order. You cannot tax your way to balanced budgets, nor can you tax your way to economic prosperity.

Greater media focus and rising consumer awareness of painful but vital steps necessary to deficit reduction are critical first steps in the process. Both the political left and the political right have been critical of proposals by various deficit reduction groups, while the middle seems more willing to have a healthy debate. Isn’t that the basis of effective government…give and take on both sides?

Record budget deficits of the past three years, combined with projected $1,000,000,000,000 annual budget shortfalls for as far as the eye can see have, to this point, found domestic and global bond markets willing to provide massive deficit funding. However, financial market uncertainty about ongoing budget deficits and huge national (sovereign) debt levels across southern Europe must be “a wakeup call” for the U.S. We will simply not be immune in coming years to financial market distaste and resistance to boatloads of additional
U.S. Treasury debt issued to fund irresponsible levels of government spending.

U.S. Employment

American job creation is expected to improve somewhat during 2011. However, a modest improvement in net monthly job creation will do little to trim the nation’s unemployment rate, which has been at or above 9.5% for 15 months, the longest such period since the Great Depression.

Greater clarity from Washington DC in regard to income tax rates, combined with progress toward more affordable government spending, would go a long way toward boosting business sector confidence. In a nutshell, rising confidence levels would enhance employment creation.

Inflation

Sluggish U.S. economic performance, soft home values, and major slack in labor markets have led inflation to extremely modest levels in recent months. One measure of consumer inflation recorded its lowest 12-month rise in 53 years!

While inflation is expected to remain mute during 2011, longer-term views remain split between sharply higher inflation and the perils of deflation. The former camp is buying gold and commodities. The latter camp is buying longer-term fixed-rate U.S. Treasury and high-quality corporate debt securities.

The Federal Reserve

This nation’s central bank has drawn extensive criticism in recent weeks for its current program to boost the economy with another $600 billion of newly created money. Such funds are being used to purchase U.S. Treasury notes and bonds, with the intent of pushing longer-term interest rates lower.

Despite such massive bond buying, bond yields (returns) have actually risen in recent weeks, reflecting concern about the Fed’s latest venture and expectations in some camps of stronger economic growth than the consensus view. The Fed’s most important monetary tool, the federal funds rate, has been at a historic low target range of 0.00%-0.25% for nearly 24 months, with little expectation of change any time before the latter part of 2011.

Housing & Home Finance

Most forecasters see average U.S. home prices stabilizing around mid-2011, with only modest gains in home values in subsequent years. Millions of homes in, or potentially to enter, foreclosure remain the fly in the ointment.

Average conventional mortgage interest rates have risen roughly 0.25% during the past few weeks, after plunging to their lowest levels in 50 years. For those interested in refinancing a mortgage, or financing a new home or foreclosed property, the timing remains outstanding.

Global Pivots

Our Tea Leaf issue dated February 17, 2010 entitled “A Shot Across the Bow” discussed the unfolding Greek national debt situation at that time. The article noted, “The greatest threat regarding the current Greek debt solvency debate is the possible domino effect involving other nations. A Greek default on its debt, or a painful plunge in the value and marketability of Greek debt securities, would likely be followed by similar debt issues for other nations. Such a domino or cascade effect would be difficult to stop once the process had begun.”
The article also noted that “any financial support provided for Greece by the Germans and the French would effectively be seen as a similar level of support, if necessary, for Spain, for Ireland, and for Portugal, with Italy and Belgium possibly not far behind.”

The article also noted that if the contagion did spread to these other nations, it “should also be taken seriously by larger nations, including the United Kingdom and the United States.” As is well documented, other European nations and the International Monetary Fund (IMF) did ultimately come to the aid of Greece. In addition, larger European nations set up an enormous financial fund to deal with additional problems in other nations, should they arise.

Ireland bit the dust in recent days, with an agreement to accept a $113 billion bailout package from other euro nations and the IMF. The Irish had already enacted painful spending cuts and tax increases as a means to address a massive annual budget shortfall.

Financial market pressures continue to build on Portugal and Spain. Pressures are also building to tear apart the fragile 16-nation euro currency and euro community mechanism, with a viable chance that one or more nations will opt out of euro membership during 2011 or 2012.

The other major pivot is China. Its efforts to battle inflation and runaway bank lending should see the world’s second largest economy slow during 2011.

Jeff Thredgold is an economic consultant to Zions Bank. The preceding article is featured in the 30 November 2010 issue of Jeff Thredgold’s Tea Leaf newsletter. The views expressed in this article represent Thredgold’s views and do not necessarily represent the views of Zions Bank or Zions Direct.

Economy recovering, but recession’s shadow is long

Anne D'Innocenzio — Tue, 16 Nov 2010 10:00:02 +0000

NEW YORK (AP) — Layaway, once the province of the poor, has gone mainstream. At the Mall of America in Minnesota, shoppers dart in for just one or two things. In New York, socialites do the unthinkable: They wear the same ball gown twice.

During the Great Recession, people made drastic changes in how they spent their money. They stopped treating credit cards as cash. They learned to save and learned to wait. Now the recession is over, at least technically, and the economy is growing again, at least a little. But many changes in spending habits that most Americans first saw as temporary have taken hold, perhaps for good, some economists say.

This is the reality of the new American consumer — focused, cautious and tactical. In Jacksonville, Fla., Bernie Decelles and his wife both have jobs and own their home. They recognize that the economy is still fragile, though, and that they work in industries still struggling. They scrutinize every purchase they make.

“It used to be if we saw something, and liked it, we bought it,” says Decelles, a salesman for a company that makes storage equipment. “Nowadays, no way.” In dozens of interviews nationwide with shoppers, retailers, manufacturers, economists and analysts, The Associated Press identified key changes in consumer behavior that have endured after the recession. They include:

— Americans are buying brands and shopping at stores that they shunned before. They are trying more store-brand products for things like detergent and beer. Goodwill and consignment shops are attracting customers across the income spectrum. And people are putting big-ticket items on layaway rather than whipping out charge cards.

— Consumers are taking a surgical approach to shopping, buying only what they need, when they need it. Pantries are no longer filled with weeks’ worth of food, nor closets with clothes bought seasons in advance. Shoppers are visiting fewer stores, both traditional and online, and getting only what’s on their shopping list.

— The wealthy are spending again, but their behavior is much like everyone else. They are buying more timeless and classic goods: watches and handbags that won’t go out of style quickly. They are even — gasp! — recycling some of their most expensive clothes and wearing them twice. These behavioral shifts aren’t at the extremes of the Great Depression, which produced changes so drastic that many who lived through it adopted frugality as a lifelong habit.

Still, some experts say the changes from the recession of 2007, 2008 and 2009 could last. “This was a massive cultural event for our society,” says John Gerzema, a branding executive at marketing and advertising firm Young & Rubicam and co-author of a new book about the changing ways we spend money. “Eighty percent of Americans were born after World War II, so essentially this is our Depression.”

The impact is hard to overstate. Consumer spending represents 70 percent of economic activity. Every business feels the pullback in some way, and it’s more pronounced for those that sell things directly to people. The new patterns of spending represent a radical turn from the boom years of the last decade. Americans up and down the income ladder piled on credit-card debt and used their homes as ATMs by taking out home-equity loans to pay for third cars, clothes and far-flung vacations.

During that time, the savings rate plunged to nearly zero. Americans accumulated debts that far exceeded their incomes. Household debt, including obligations for mortgages and credit cards, rose to about 140 percent of disposable income, double what it was before the boom years.

Credit was easy, and money seemed readily available. Until it wasn’t. “We saw a period of consumption that was unusual and unstable,” says Jarrett Paschel, vice president of strategy and innovation at The Hartman Group, a consumer research firm in Bellevue, Wash.

A plunge in housing prices set off the economy’s slump. Most Americans were left financially stressed in some way. Millions of people abandoned all but the necessities; for some, the necessities became luxuries.

The worst recession since the Depression ended in June 2009, according to the National Bureau of Economic Research, a group of academic economists that officially declares the starts and ends of recessions. Americans’ psyche hasn’t recovered. An index of consumer confidence from The Conference Board has been in a tight range from the high 40s to high 50s. A reading of 90 indicates a healthy economy, and that level has not been seen since December 2007, the month the recession began. U.S. households lost 17 percent of their wealth over in the past three years, more than $10 trillion, according to the Federal Reserve. The labor market remains in shambles, with nearly one in 10 Americans unemployed. One in six Americans now receives some form of government assistance, including food stamps and extended jobless benefits.

You may not see soup lines, but only because “the soup lines are in the mail,” says David Rosenberg, chief economist and investment strategist at the Toronto-based money management firm Gluskin Sheff.

This stressful economic climate isn’t just affecting Americans who are struggling to get by. Those who are more fortunate also have a new approach to spending. Before the financial meltdown, philanthropist and socialite Allison Weiss Brady didn’t think twice about dropping $20,000 each season on posh accessories. One prized possession she bought at the height of the boom? A $4,950 Fendi lizard handbag.

Brady still springs for luxury labels like Chanel, but she’s snubbing the “it” handbags in favor of clothes and accessories that have staying power beyond a season. She won’t buy a new dress for every occasion, and will be wearing a Lanvin gown bought for a charity event last year to a few parties this year. And for the first time, she bought a peach-colored Chanel bag at a second-hand store, saving $2,000.

“I do think my mentality is more need-based now,” says Brady, who lives in Florida and is a vice president of marketing for Florida Dental Benefits, a dental insurance company. “Am I going to show up with a new pair of diamond earrings every times I go to a ball? That’s not happening.” Brady is also buying more items at charity auctions — not only to save but to give to others. Tempered spending by Americans of most income levels means the economic recovery is having a harder time gaining steam. Rosenberg says that at this point of the economic cycle — two years and 11 months since the recession began — things should be much better.

Retail sales are off by 2.6 percent since the recession began in December 2007. That’s a stark contrast to the last 60 years. At this stage in an economic recovery, retail sales on average were up 25 percent, according to Gluskin Sheff. Retail sales include food, autos, clothing, furniture and electronics.

Decelles, of Jacksonville, acknowledges his spending was more careless a few years back. Saving was barely on the radar. Now he eats out far less, doesn’t entertain much and spends little time shopping.

“Things certainly feel a lot different now,” he says, “than they did back then.”

The American Economy …confidence is lacking

Jeff Thredgold — Tue, 21 Sep 2010 10:00:40 +0000

Most forecasting economists will tell you that the U.S. economy returned to growth about 12-15 months ago…statistically at least, if not emotionally. The National Bureau of Economic Research, the “official” scorekeeper for the American economy, is expected to make that call at any time in coming months. We do know that what we now call the Great Recession started in December 2007.

Even as U.S. economic growth has returned, its pace has been weak…and moving in the wrong direction. A reasonably solid growth rate during 2009’s final quarter gave way to the lackluster pace of the April-to-June period. Why? In my view, American businesses and consumers maintain spending close to the vest as they are extremely wary of the enormous and costly expansion of government now underway.

Talk of a possible “double dip” recession has declined in recent weeks as more economic data supports the slow growth scenario. In addition, views of a more vibrant economic expansion are also muted as the “headwinds” of weak residential and commercial real estate values, high unemployment, and low confidence levels take the bloom off the economic rose.

Deficit Spending

…the record books

Unconscionable budget deficits exceeding $1,000,000,000,000 annually are in store in coming years. Even larger deficits were the norm in fiscal years 2009 and 2010, with a slightly smaller deficit projected for 2011.

You cannot tax your way to balanced budgets. Nor can you tax your way to economic prosperity. Valid moves toward deficit reduction must focus on slowing the growth rate of future government spending, particularly in the entitlement area.

Global financial market anxiety focused on the ability of southern European nations to ever repay their national (sovereign) debts could eventually find its way to concerns about enormous U.S. government debt levels. The most serious challenge facing this nation is found right here.

Mid-term Elections

…staying too long

The political party outside of Congressional control typically adds to its seat count in such elections. This year is also expected to see a surprising number of long-term incumbents from both parties sent home. Bragging rights about power and the ability to deliver pork to constituents used to be a major incumbent advantage…no more.

Republicans expect to pick up a substantial number of seats in the Congress, with more optimistic forecasts suggesting the party could regain control of the House of Representatives. Some even talk of major gains…and possible control…of the Senate.

Employment

…weak and weaker

The current rate of U.S. job creation has made only a modest dent in the more than eight million jobs lost in 2008 and 2009. To make matters worse, the U.S. economy needs to add roughly 130,000 net additional jobs each month just to meet the needs of a growing population…and to keep the nation’s unemployment rate from rising.

The nation’s jobless rate has averaged 9.7% so far this year, with only limited prospects of any major downward move before the end of 2011. Major business anxiety about the expansion of government and higher taxes will limit major employment gains anytime soon.

Tax Hikes?

…the job creators

The desire of the Administration to maintain the Bush tax cuts for the majority of U.S. income earners is to be commended. However, tax rates in place should also be maintained for those making over $200,000 annually. Like it or not, these are primarily the people who invest and create jobs.

Inflation…or Deflation?

…pick your poison

Inflation pressures have diminished throughout 2010, with the Consumer Price Index rising a modest 1.2% during the latest 12-month period. Low inflation is likely during 2011 as well.

Where we go from there remains the subject of intense debate. As before, one view sees major inflation pressures about to unfold, resulting from highly aggressive monetary policy and massive budget deficits. The other major view sees a Japanese-style deflation unfolding in coming years, tied to weak residential and commercial real estate values, strong productivity gains, major slack in labor markets, and anxious consumers.

The Federal Reserve

…remaining on hold

The most critical of all short-term interest rates—the federal funds rate—has been at a 97-year-low range of 0.00%-0.25% for 21 months. Most forecasters see the rate remaining unchanged well into 2011.

One view gaining additional footing in some circles is that the Fed should push its key rate somewhat higher in coming quarters…to perhaps 2.00%-3.00%…to lead other short-term interest rates higher. The reason? To provide net savers, including millions of retired people, a chance to boost their investment returns from savings accounts, certificates of deposits, and money market funds. Millions of retirees have seen their interest income—and their ability to spend—slashed in recent years.

Long-Term Rates

…time is now

Thirty-year fixed-rate mortgages on conventional loans have been below 4.50% in recent weeks, near a 50-year low. It remains a very attractive time to refinance a mortgage or to finance a new home or foreclosed property.

At the same time, nearly one in four U.S. homeowners is “underwater” on their mortgage…owing more than the home is worth. Many mortgage lenders have tightened credit standards or had onerous new regulations imposed on them by government bureaucrats. Mortgage rates could move higher later this year.

The Global Economy

…led by Asia

The global economy returned to growth mode in late 2009, following its first recession since just after World War II. Growth prospects remain reasonably solid, led by Asia.

China again enjoys powerful growth, led by strong export gains and massive internal spending. Anxiety about loan quality is high. India also enjoys solid growth, while Japan continues to languish.

European growth is modest at best, although Germany has performed well. Russia struggles with low business confidence and high levels of corruption. African and Middle Eastern growth remains solid. South America records positive growth, with rising optimism about the powerful Brazilian economy.

Mexico’s vital tourism sector remains under pressure, tied to almost daily stories about incessant drug trafficking violence. Canadian growth has slowed from its earlier solid pace.

The Bottom Line?

Sluggish U.S. economic growth remains likely, with no shortage of serious domestic challenges. Modest global growth also remains on tap.

Jeff Thredgold is an economic consultant to Zions Bank. The preceding article is featured in the 14 September 2010 issue of Jeff Thredgold’s Tea Leaf newsletter. The views expressed in this article represent Thredgold’s views and do not necessarily represent the views of Zions Bank or Zions Direct.

Less “Double Dip”

Jeff Thredgold — Fri, 17 Sep 2010 12:00:17 +0000

U.S. employment data remained on the weak side in August. At the same time, revisions to prior data, as well as slightly-stronger-than-expected new information regarding manufacturing, consumer confidence, and retail sales, has lessened talk of another downturn—the infamous double dip—in coming months.

The American economy suffered a net loss of 54,000 jobs in August, less painful than the consensus forecast of a 105,000 net loss. As in recent months, the culprit was the elimination of more Census jobs, with another 114,000 jobs ending.

Just as the addition of more than 700,000 temporary Census jobs bloated still modest job gains last spring, the cessation of the jobs has understated “headline” employment data in recent months. An estimated 82,000
additional Census jobs are still to conclude.

The August jobs report saw a net gain of 67,000 jobs in the private sector, better than the 44,000 expected…good news. In addition, net employment gains of the two prior months were revised to show 123,000 more jobs…more people at work…than the initial data suggested…also good news.

9.6%

The nation’s unemployment (jobless) rate moved to 9.6% in August, versus 9.5% in the two prior months. The rise, which matched economists’ forecasts, occurred for the “right” reason…an estimated 550,000 people entering or reentering the labor force in search of a job.

Unless and until these people find a job, they are counted as unemployed. The nation’s unemployment rate has now been north of 9.0% for 16 months, the longest such period in more than 25 years. The current 9.6% rate is also only 0.5% below the 10.1% peak recorded last October.

Most forecasting economists expect the nation’s jobless rate, which has averaged 9.7% so far in 2010, to average more than 9.0% in 2011. It will likely be 5-7 years before the jobless rate declines to a more traditional level of 5.5%-6.5%…and that’s if we’re lucky.

The Numbers

The nation’s goods producing sector saw estimated employment move sideways in August, versus a 37,000 net gain in July. Manufacturing employment fell by a disappointing 27,000 jobs during August, after rising in recent months. Construction employment reversed that pattern, with a 19,000 rise in jobs, following small losses in prior months. However, roughly half of the 19,000 rise represented workers returning after a strike in July.

The nation’s mining sector added 8,000 jobs in August. The Bureau of Labor Statistics notes that since bottoming in October 2009, employment in the mining sector has increased by 72,000 positions.

The nation’s much larger non-government service providing sector added 67,000 jobs in August. As usual, education & health services led the way, with the addition of 45,000 net new jobs. Professional & business services added 20,000 jobs during the month (mostly temporary jobs), while the leisure & hospitality sector added 13,000 jobs.

Retail trade lost 5,000 jobs during August, while transportation & warehousing lost 7,000 jobs. Financial activities and information sectors lost a combined 5,000 jobs.

Other Components

• The number of people counted as unemployed rose to 14,860,000 in August, versus 14,599,000 in July. As noted before, many of these people were new entrants to the labor force.

• The number of people working part-time who would prefer to work full-time rose by 331,000 to 8.9 million in August. The number had been in decline since April.

• The rise as noted above, combined with the actual number of unemployed and those discouraged workers who have left the labor force (known as the “underemployment rate”) rose to 16.7% in August, versus 16.5% in July.

• The number of people unemployed for 27 weeks or longer fell by 323,000 to roughly 6.2 million. This total was 42.0% of the unemployed, versus 44.9% in July. Some of these people found jobs, while others have likely given up looking for a job.

• Average hourly earnings of all employees on private nonfarm payrolls rose by six cents (up 0.3%) to $22.66.

Breakdown

The unemployment rate for adult men (20 years and over) rose to 9.8% in August from 9.7% in July. The rate one year ago for adult men was 10.2%. The unemployment rate for adult women was 8.0% in August, versus 7.9% in July and 7.7% a year ago.

Why the much higher jobless rate for adult men? Hundreds of thousands of jobs lost in recent years were in manufacturing and construction, industries historically dominated by men. Many, many thousands of these jobs will never return.

The jobless rate for teenagers was a very painful 26.3% in August, up from 26.1% in July. The jobless rate for Whites was 8.7% in August, while the rate for Blacks or African Americans was 16.4%. The Asian jobless rate (not seasonally adjusted) was 7.2%, while the rate for those of Hispanic or Latino ethnicity was 12.0%.
The U.S. economy has added 723,000 net new jobs during 2010, a far cry from what is needed to bring the unemployment rate lower. Those 723,000 jobs, while good news, also do little to replace the 8.4 million jobs lost in 2008 and 2009.

More & More Government

The President and the Congress have more and more programs in mind to help a struggling U.S. economy. On Labor Day, the President proposed another $50,000,000,000 in spending to create jobs…make that union jobs…to bolster the nation’s highways, railways, and runways. This is on top of roughly $38,000,000,000 in additional spending approved a few weeks ago to, in part, support teachers…make that union teachers…across the nation.

The President—with national elections less than two months away and a U.S. economy going nowhere—is expected to propose other tax incentives and other small business job creation incentives in coming days. Some of these, including a permanent extension of tax incentives for business owners who invest in research and development, are worthwhile.

If the President and the Congressional leadership really want to be effective, they could collectively announce that the Bush tax cuts of 2001 and 2003 will be extended for at least two years…for ALL income earners. Another nice and effective touch would be for them to announce that they will be taking the rest of the year off.

Jeff Thredgold is an economic consultant to Zions Bank. The preceding article is featured in the 7 September 2010 issue of Jeff Thredgold’s Tea Leaf newsletter. The views expressed in this article represent Thredgold’s views and do not necessarily represent the views of Zions Bank or Zions Direct.

College loan default rates rise, report says

Eric Gorski — Fri, 17 Sep 2010 10:00:19 +0000

The number of college students who defaulted on their federal student loans climbed in the fiscal year that ended in September 2008, according to new government data released Monday, September 13.

And once again, those who attend for-profit colleges and universities were the most likely to default. The grim numbers are no surprise, given that the timeframe roughly aligns with the start of the recession. But they come at a politically charged time, as for-profit colleges fight proposed regulations that would cut off federal aid to some programs if too many students default on loans or don’t earn enough after graduation to repay them.

Figures from the U.S. Department of Education show 7 percent of borrowers of federal student loans defaulted within two years of beginning repayment, up from 6.7 percent the previous year and 5.2 percent the year before that. Default rates crept up in all sectors of higher education — from 3.7 to 4 percent for private nonprofit schools, 5.9 to 6 percent for public nonprofit schools, and 11 to 11.6 percent for for-profit schools.

The data covers borrowers whose first loan repayments came due between Oct. 1, 2007, and Sept. 30, 2008, and who defaulted before Sept. 30. 2009. “Even before the economy went down, student borrowing had doubled in this decade,” said Patrick Callan, president of the National Center for Public Policy and Higher Education in San Jose, Calif. “More students borrowed and they borrowed more money, and they’re now they’re going out in a very tough economy.”

The Education Department underscored the for-profit default rates. Education Secretary Arne Duncan, repeating what has become his mantra on the fastest growing segment of higher education, voiced concern about excessive debt and useless degrees while simultaneously highlighting the sector’s positive contributions. Students at for-profit schools represented 26 percent of federal loan borrowers and 43 percent of all defaulters in 2008-09, the department says.

Citing those figures and the sector’s rapid growth, the department has proposed a complicated aid eligibility formula that would weigh both the debt-to-income ratio of recent graduates and whether all enrolled students repay their loans on time, regardless of whether they finish their studies.

The department was flooded with more than 80,000 comments on the proposed regulations in a public feedback period that closed last week. For-profit colleges argue the government is soft-pedaling the potential harm and say the changes would disproportionately hurt minority students. Harris Miller, president and CEO of the Career College Association, which represents for-profit schools, said the major factor driving defaults is not an institution’s tax status but student demographics. For-profit colleges accept higher-risk and lower-income students, and Harvard would have higher default rates if it did the same, he said. Experts caution that the two-year rate does not provide a full picture and many more students default in subsequent years. The Education Department is moving to a three-year rate to determine schools’ eligibility to take part in taxpayer-supported student aid programs.

Donald Heller, director of Penn State University’s Center for the Study of Higher Education, also cautioned against comparing for-profit college default rates with those at all public and private colleges. He said it’s more accurate to stack them against community colleges, which are closer to for-profits in programming and student makeup. By that measure, for-profits still have default rates that are worse, but it’s closer. The default rate for students at public two- to three-year programs — which covers the vast majority of community colleges — was 10.1 percent in fiscal year 2008, the new data shows. At for-profit schools, the rate was 12.6 percent in two- to three-year programs.

US budget deficit on pace to hit $1.3 trillion

Martin Crutsinger — Wed, 15 Sep 2010 12:00:58 +0000

WASHINGTON (AP) — The federal government is on track to record the second-highest deficit of all time with one month left in the budget year.

The deficit totaled $1.26 trillion through August, the Treasury Department said Monday, September 13. That puts it on pace to total $1.3 trillion when the budget year ends on September 30, slightly below last year’s record $1.4 trillion deficit. Soaring deficits have become a major issue with voters heading into the midterm elections. Republicans say the deficits illustrate the growth of spending under Democrats and show their poor handling of the economy.

The Obama administration contends the record deficits were necessary to combat the most serious economic crisis since the Great Depression. About one-third of the higher deficits are a result of a drop in government tax revenues. The other two-thirds of the deficit increases reflect higher government spending to stabilize the financial system and boost the economy.

Deficits of $1 trillion in a single year had never happened until two years ago. The $1.4 trillion deficit in 2009 was more than three times the size of the previous record-holder, a $454.8 billion deficit recorded in 2008. Last year’s deficit was equal to 9.9 percent of the total economy — the highest percentage in 65 years. The deficit equaled 21.5 percent of the economy in 1945, at the height of the U.S. involvement in World War II.

The 2010 deficit is expected to show only a slight improvement, dipping to 9.1 percent of the economy as measured by the gross domestic product. That would be the second-highest level in the past 65 years. For August, the deficit totaled $90.5 billion. The government has run deficits in August every year over the past 57 years.

The Congressional Budget Office is forecasting that the deficit for this budget year will total $1.3 trillion, about $70 billion lower than last year. The CBO forecast is in line with expectations of many private economists although it is above the administration’s last official forecast, released in July. At that time, the administration projected this year’s deficit would total $1.47 billion, slightly higher than last year.

For 2011, the administration is forecasting a deficit of $1.42 trillion with the red ink totaling $8.5 trillion over the next decade. However, Obama has appointed a deficit commission to recommend ways to get the deficits under control. That panel will not release its recommendations until after November elections. Through August, government revenues totaled $1.92 trillion, 1.6 percent higher than a year ago, reflecting small increases in government tax collections compared to 2009. Spending has totaled $3.18 trillion, down 2.5 percent from the same period a year ago. That improvement reflected higher outlays for government programs such as defense, Social Security and Medicare, but lower government spending to stabilize the financial system.

Buffett, Ballmer predict bright economic future

Matt Gouras — Tue, 14 Sep 2010 10:00:56 +0000

BUTTE, Montana (AP) — Some of the biggest names in business said Monday, September 13, that they see a bright future for the economy, with famed investor Warren Buffett declaring the country and world will not fall back into the grips of the recession. “I am a huge bull on this country. We are not going to have a double-dip recession at all,” said Buffett, chairman of Omaha, Neb.-based Berkshire Hathaway Inc. “I see our businesses coming back across the board.”

Buffett said the same things that worked for the country through a century of two world wars, a depression and more — all while increasing the standard of living — will work again. He said banks are lending money again, businesses are hiring employees and he expects the economy to come back stronger than ever. “This country works,” Buffett said during a question-and-answer session via video at the Montana Economic Development Summit. “The best is yet to come.”

The likes of Buffett, Microsoft Corp. CEO Steve Ballmer and General Electric Co. Chairman Jeff Immelt told the nearly 2,000 business leaders, government officials, aspiring entrepreneurs and others at the summit that things are getting better. They also offered some ideas for what needs to be done. Ballmer said there soon will be more technological advancement and invention than there was during the Internet era. That will help drive business growth, he said. “I am very enthusiastic what the future holds for our industry and what our industry will mean for growth in other industries,” said Ballmer, whose company is based in Seattle.

He envisions new technologies that move beyond the Internet to tie together computers, phones, televisions and data centers to create amazing new products. And the pace of innovation will increase as technology makes workers more productive. “All areas of science today are moving forward more quickly,” Ballmer said. “The speed of scientific breakthrough is accelerating.” The conference was organized by U.S. Sen. Max Baucus. The Montana Democrat said it leaves “bickering and name-calling” back in Washington, D.C., so leaders can find good ideas.

Immelt said angry political rhetoric is not helpful and headlines are too focused on finding negative indicators. He said business at GE, one of the world’s largest companies, is improving. Immelt said the country is going to need to adjust, though. The economy since the 1970s has been driven by consumer credit and a misguided notion in building a “lazy” service economy, he said, and manufacturing, with an aim to reduce the trade deficit, is the key.

“It was just wrong. It was stupid. It was insane,” Immelt said of the push for a service-based economy. “The future of the economy has to be as an exporter.” He said Fairfield, Connecticut-based GE is now finding it profitable to build manufacturing and service centers in the United States rather than overseas, because it is more competitive to do so.

More investment is needed in technology innovation, exports need to be rejuvenated, and clean energy and affordable health care need to be given top billing for policymakers, Immelt said. But the corporate leader said he recognizes a polarizing environment in Washington makes it unlikely a national energy policy and other helpful guidance will ever take hold. Instead, he urged local business leaders and government officials in the audience to come up with their own local solutions. “Anger is not a strategy. Anger does not create growth. Only optimism creates growth,” he said. “Be the contrarian. Everyone is mad today. Be happy.”