Mish's Global Economic Trend Analysis

Spotlight China: Shipping Downturn; Hong Kong Recession; Credit Squeeze Prompts Suicides; HK Home Sales Fall Over 50%; Factory Closure Wave Looms
40 States Show Worsening Trend in Mortgage Delinquencies; $169 Billion and Counting; Taxpayers, the True Lender of Last Resort
Radio Host Interviews Mitt Romney calls him an ahole ON AIR then praises Ron Paul
Italy Prime Minister Offers "Conditional Resignation" If Euro Reforms Are Passed; Bullsheet from German Finance Minister on Italy's Problems
Italy's Bond Rollover Problem Dramatically Worsens; Yield Curve Inverts; 3-Year and 5-Year Bonds Yield Exceed 10-Year Yield
Citigroup CEO Claims Citi has Learned a Lesson on Leverage and Banks Should be Banks, Not Supermarkets
Perfect Storm; Eight Reasons to be Bullish on the US Dollar

Spotlight China: Shipping Downturn; Hong Kong Recession; Credit Squeeze Prompts Suicides; HK Home Sales Fall Over 50%; Factory Closure Wave Looms

Posted: 08 Nov 2011 10:50 PM PST

I have been meaning to write about China for days, but news stories about Europe keep getting in the way. I will rectify that tonight with a "Spotlight" on China.

Global Shipping Downturn Worse Than 2008

Reuters reports Global Shipping Downturn Worse Than 2008

November 3
Global shipping is in a downturn even worse than during the 2008 financial crisis, China's transportation minister said on Thursday, with the outlook for the industry made increasingly uncertain by the European debt crisis.

The shipping industry, a bellwether of economic activity because of its role in world trade, saw freight rates plummet from mid-2008 to the end of that year.

"The shipping industry is in a downturn, which is worse than the financial crisis in 2008," transportation minister Li Shenglin told the conference. "This condition may last for a relatively long period of time."

The supply glut, made worse by economic woes in the United States and Europe, has pushed rates for dry bulk vessels that transport goods such as iron and coal below 2,000 on the Baltic Exchange , less than a fifth of the 2008 peak.

On the flip side, rising fuel and other costs have squeezed operators' margins. Global benchmark Brent crude has averaged more than $100 this year for the first time ever.

"The industry is double hit by the supply and demand imbalance and rising costs, especially fuel costs," Li said.

China Plans 'Orderly' Delivery of New Ships to Combat Shipping Glut

Bloomberg reports China Plans 'Orderly' Delivery of New Ships as Glut Hits Rates, Earnings

November 3
Rates for carrying both commodities and containers have tumbled over the past year as the launch of new vessels outpaces demand for shipments. China contributed to the glut by offering financial support for orders during the global recession to help secure jobs at its roughly 3,000 domestic shipyards.

"We will guide the orderly arrival of new container and dry-bulk ships in the market," Transport Minister Li Shenglin said today in a speech at a conference in Hainan province.

The current slump in the shipping market is worse than in 2008, during the global recession, and it may last for a "relatively long" period, Li said.

Hong Kong Home Sales Fall Over 50% in October

Shanghai Daily reports Hong Kong Home Sales Fall Over 50% in October

November 3
HONG Kong's home sales fell for a 10th straight month, dropping by half in October from a year ago as buyers put off purchases.

The value of transactions last month declined 50 percent to HK$22.5 billion (US$2.9 billion), the city's government said in a statement on its website yesterday. Sales of residential units shed 2.2 percent from September, it said.

"Transactions slowed down quite significantly particularly in the secondary market," said Buggle Lau, analyst at Midland Holdings Ltd, Hong Kong's biggest publicly traded realtor. Lau said while transactions in the primary market rose last month, it wasn't enough to offset the slide in used home sales.

Hong Kong Tips Into Recession

This is a prediction but Hong Kong Tips Into Recession, Most Accurate Forecaster Says

November 7
Hong Kong's economy, a barometer of global growth, probably sank into recession with a contraction in the third quarter, according to Daiwa Capital Markets Ltd. and Australia & New Zealand Banking Group Ltd.

Gross domestic product shrank 1.5 percent from the previous quarter, seasonally adjusted, said Kevin Lai, a Hong Kong-based economist at Daiwa. The report is due Nov. 11. Lai came closest in a Bloomberg News survey to predicting the 0.5 percent contraction in the second quarter.

Hong Kong's exports declined in September for the first time in almost two years, and the benchmark Hang Seng Index plunged 21 percent in the third quarter, the biggest loss since 2001, as Europe's debt crisis roiled global markets. Donald Tsang, the city's chief executive, warned yesterday in New York that there's a 50 percent chance of a world recession in the coming year.

"The economy is faltering on a rapidly deteriorating external environment," said Raymond Yeung, an economist at ANZ in Hong Kong. Hong Kong is "the nerve center of regional economic activities" and "any degeneration may signal a global economic downturn," Yeung said.

China Credit Squeeze Prompts Suicides

Bloomberg reports China Credit Squeeze Prompts Suicides

Nov 6, 2011
Hours after a creditor and his gang of tattooed thugs hustled Zhong Maojin into a coffee shop in Wenzhou, he says he wouldn't yield to their demands.

They wanted to take over one of the pharmacies in a chain he'd built by borrowing from private lenders. Instead, he made an offer of traditional retribution in this eastern Chinese city, known for loan sharks who have sometimes meted out violence to bad debtors.

"If you like, you can cut off one of my fingers instead," Zhong, 42, says he told them.

Giving up the store would have made it impossible to pay back another 130 creditors, Zhong said. He'd borrowed 30 million yuan ($4.7 million) at interest rates as high as 7 percent a month to expand the business. Many of the lenders were elderly neighbors who'd mortgaged their homes.

At least 90 bosses in similar situations to Zhong have fled the city since April, and two killed themselves, according to Zhou Dewen, head of a small business association in Wenzhou. One was shoemaker Shen Kuizheng, who jumped to his death from his 22nd-story home on Sept. 21, he said.

The suicide story is not new except perhaps to Bloomberg reporting about it. However, the story is picking up steam and additional suicides. Here are my previous links on the suicide story:

September 29: China Loan Shark Market Crashes; Scores of Chinese Business Owners Unable to Pay Black Market Loans Commit Suicide or Disappear

October 14: Chinese Banks Deteriorate; Loan Sharks Come Knocking; Copper Ponzi Financing Revisited; 5 Reasons to Expect Lower Commodity Prices

Cash Crunch Reported by Ministry of Railways

The Standard reports Rail Authority Faces Dire Cash Crunch

November 7
The Ministry of Railways could be facing a shortfall of up to 800 billion yuan (HK$980 billion), putting many projects on hold, mainland media reported.

The ministry's latest funding request has come as a shock to officials at the Ministry of Finance, National Development and Reform Commission, and the China Banking Regulatory Commission, the Economic Observer reported.

It said the railways ministry had sought 400 billion yuan in addition to 400 billion yuan already requested from the MoF. "How can we provide such a huge sum of 400 billion yuan?" a source close to the MoF told the daily.

Projects encompassing 10,000 kilometers have been held up due to a dearth of capital, the report said.

A Railways Ministry source said that it is indebted to the tune of 2.09 trillion yuan - consisting of 637.7 billion yuan recurring loans and 1.45 trillion long-term debt.

Factory Closure Wave Looms

Reuters reports Gloomy Outlook for China Exporters as Factory Closure Wave Looms

November 8
Up to a third of Hong Kong's 50,000 or so factories in China could downsize or shut by the end of the year as exporters get hit by cost rises and darkening global demand for Chinese goods, a major Hong Kong industrial body said on Tuesday.

The Federation of Hong Kong Industries, which represents around 3,000 industrialists running factories in China, said it expected orders in the second half of this year and the first half of 2012 to fall between 5-30 percent.

The European debt crisis and a fragile U.S. economy have depressed this year's Christmas orders, Stanley Lau, deputy chairman of Hong Kong's leading industrial promotion body, told a news briefing.

He said a consolidation was on the cards, with around a third of Hong Kong's 50,000 or so factories in China likely to scale down operations or close by year-end.

"We feel that this is not an overestimate," said Lau, who is also the owner of a Hong Kong watch factory in China, citing higher raw material costs and rising factory worker wages, which had already risen up to 20 percent this year.

"Many (factory owners) can't see when the market will have a rebound so they are trying to cut their losses by closing, before all their money is gone," Lau said.

China No Global Growth Savior

Anyone expecting China to disconnect from a slowing global economy is not thinking clearly, nor are they looking at the increasingly grim facts.

Europe is in recession and Europe is China's biggest export market. The US is slowing as well, just not as rapidly.

Moreover, and as I have reported on numerous occasions, a regime change is coming in China in 2012. That regime change is highly likely to be more focused on an overheating property bubble as well as China's unsustainable dependency on a heavily overbuilt infrastructure model.

Even if the Chinese economy as a whole does not crash, the real estate and infrastructure sectors will. If so, commodity prices will come down, and that in turn will pressure the hard asset currencies of Australia and Canada.

An outright global recession is likely, led by Europe.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

40 States Show Worsening Trend in Mortgage Delinquencies; $169 Billion and Counting; Taxpayers, the True Lender of Last Resort

Posted: 08 Nov 2011 05:56 PM PST

For the first time in three years mortgage delinquencies on the rise.

Most of my readers would not be surprised by this, but analysts were. Please consider Mortgage Payments Show Surprising Rise in Delinquencies

The rate at which mortgage holders were late with their payments by 60 days or more rose in the June-to-September period for the first time since the last three months of 2009, according to TransUnion.

The credit reporting agency said 5.88% of homeowners missed two or more payments, an early sign of possible foreclosure. That was up from 5.82% in the second quarter.

The increase surprised TransUnion researchers, who had expected late payments, or delinquencies, to fall for the quarter.

"It's much different than we've been talking about the last few quarters," said Tim Martin, group vice president of U.S. Housing in TransUnion's financial services business unit.

The problems were widespread. Between the second and third quarters, all but 10 states and the District of Columbia saw delinquency rates increase.

"More and more homeowners are likely to struggle," Martin said. "I'm not sure this is a one-quarter blip."

That echoes predictions from other sources, like RealtyTrac.

"This isn't just about bad loans anymore," said Blomquist. "It's about a bad economy that's pushing people into foreclosure."

Question About Surprises

Why is a bad economy pushing people into foreclosure a surprise?

Month-after-month the jobs market is not keeping up with demographics. Moreover, stagnant-to-falling housing prices have given more people an incentive to walk away. Finally, real wages continue to drop.

The surprise is "why did this take so long?"

Reader Question on Mortgage Lender Losses

In response to my November 1, post LPS Mortgage Monitor: Over 4 Million Loans 90+ Days Delinquent or in Foreclosure, 72% in Foreclosure Not Made Payment for at Least 1 Year reader Bruce asks writes ...

Hi Mish,

What concerns me arises from the data you cite in the latest LPS data, but it's something I can not find anywhere.

If 2+ million are in foreclosure and 6+ million are non-current,

AND IF those payments on average & hypothetically have not been made for say 6 months,

AND let's just hypothetically assume the average payment not being made is $1,000 per month

then between 2 billion and 6 billion x 6 months = somewhere between 12-36 billion has not been paid to investors..... conservatively!

If the average FC case hasn't paid in 2 years, the total is 50 billion +/- lost just for the FC cases.

So my question is: how can the lender/investors take these kinds of losses and we don't hear them screaming in Congress?

How are they remaining solvent?

Where are these losses felt in the economy/absorbed/reflected on balance sheets, etc?

Thanks!

Hello Bruce.

Fannie Mae and Freddie Mac both went back to taxpayers this month to fund losses and the cumulative losses are huge.

Fannie, Freddie Have Cost Taxpayers $169 Billion

Please consider Fannie Mae taps $7.8 bln from Treasury, loss widens

Fannie Mae , the biggest source of money for U.S. home loans, on Tuesday said it needed a further $7.8 billion in federal aid to stay afloat as a shaky housing market widened its third-quarter loss to $5.1 billion.

Fannie Mae has now drawn $112.6 billion in bailout funds from the Treasury Department since being seized by the government in 2008 as mortgage losses mounted, and it has returned $17.2 billion to taxpayers in the form of dividends.

The government has pledged unlimited funds to keep the firms afloat through the end of 2012. Combined, they have cost taxpayers around $169 billion.

Other Related Losses

Bear in mind that is Fannie and Freddie losses alone total $169 billion. I asked Patrick Pulatie at LFI Analytics if he could shed any additional light on mortgage and servicing losses.

Pulatie writes ...

Good Morning Mish,

Under the Pooling and Servicing Agreement, a servicer must insure continued cash flow into the Trust for payments due, even if borrowers are not paying. This is called Credit Enhancement. Enhancements may be from:

Overcollateralization is present whereby more loans than are needed are placed into the Trust to ensure that needed cash flow payments are met.

Excess Spread is another manner. Interest Rates on the loans are greater than the interest being paid out.

Reserve accounts with funds placed into it to cover losses.

Subordination of Tranches whereby the higher risk tranches absorb the first losses, and the losses continue to work their way through the different tranches, wiping them out one at a time.

Third party insurance for losses.

Others exist as well.

Given that these enhancements are not enough to prevent losses, the Servicers also have their part. When a loan payment is missed, the Servicer must advance the payment from their own funds to the Trust to make up the difference. This continues each and every month, until such time that the Servicer decides that the money is "unrecoverable".

At that time, dependent upon the agreement, the Servicer might be able to immediately recover the advances, or the Servicer may have to wait until it forecloses to take the money right off the top of the foreclosure sale proceeds, or by modifying a loan, and collecting the advances through the "re-capitalization" of the loan, if the PSA permits.

Given all of this, it is still obvious that by now, the Trusts are losing money. So to the next part of your question.

Some investors are filing lawsuits to collect losses. CalPERS in California is one doing so. But there are many problems with regard to this strategy.

Most of the lawsuit allegations are based upon violations of Reps and Warranties. This is difficult to allege because the violations alleged will be falsified income, falsified employment, occupancy issues, or appraisal issues.

However, to allege this "with specificity", the investors need access to the loan files, which they do not have, and the lenders refuse to provide, unless directed to do so by courts in litigation.

Without the files, the allegations cannot be proven. (There are mechanisms in the Agreements whereby if from 25% to 50% of investors demand to see the files, the lenders must provide them, but to date, this tactic has been unsuccessful to achieve.)

If access is granted to the files, the investors will have even more problems. Each file will at a minimum contain over 500 pages of documents. A trust can have up to 8000 loans in place. Trying to evaluate this number of loans from a logistical perspective is going to be overwhelming.

For example:

I am involved in a similar type of lawsuit currently, a lender vs. mortgage banker action. There are over 50 loans total involved. The Discovery documents, both lender and mortgage banker, run from a low of perhaps 1200 per file, up to over 4000 pages on one file. The documents simply overwhelm the attorney's office.

To properly evaluate even one loan takes many hours. The loan files for both sides must be examined, compared, and verified. Results are then drawn up on each file, correlated, and then patterns of practice must be determined to exist. This is simply overwhelming in the process, if one is to do it properly.

Arguments from exam results will be made regarding Reps and Warranties, but at the same time, wording of the PSA must be considered. Stated Income verbiage in the PSA could work against the Falsified Income allegation. Then, one must consider how much due diligence the lender must practice, especially if they "bought" the loan from another party. And what if it was the broker or borrower who committed the fraud? Again, how much due diligence is required?

The costs of doing the exams will be extensive, as will the litigation costs. Who will fund the costs becomes another problem.

Yet another problem exists: who does one sue? Original lender, or the Sponsor, Depositor, or Trust? One lawsuit is being directed at Deutsche Bank as the Trustee for Fiduciary Duty violations, but that is questionable.

The Trustee is not going to begin lawsuits on behalf of the investor. The Trustees did their own loans and securitized them. Filing lawsuits against lenders by the Trustees would invite similar against them.

Most investors were institutional funds. They may chose to ignore the losses since an action against a lender could conceivably result in opening themselves up to shareholder lawsuits.

Lenders suing other lenders for "repurchases" is not likely to happen, except in unusual circumstances. That is because if a lender is successful in winning the repurchase lawsuit, they set the stage for others, including investors to use the same allegations.

What is amazing is that the FHFA is doing lawsuits on behalf of the GSE's, using Reps and Warranties. It is absolutely incredible that they are doing so since the GSE's knew what was going on and supported the process by ignoring it. I think that the lawsuit is "window dressing" to provide cover for the GSE's, and to try to avoid taxpayer bailouts. It could backfire however.

As to the other questions:

Solvent? Dependent upon the investor, there may be no solvency. This is a big part with pension funds like CalPers right now.

Go to Congress? Congress wants no part of this mess.

Where are the losses felt? They are felt through every part of the economy, from the balance sheets, pension funds, etc. Most important, the losses are felt in the Housing Market, through the drop in values, lack of desire to purchase MBS, artificially reduced interest rates by the Fed to attempt to spur on housing and the economy, lack of new housing construction, shadow inventories, foreclosures, etc. Just about every part of the economy has been affected by the losses.

Of course, the one section of the economy to benefit is the Stock Market. As the Fed buys new "refinanced" mortgages from the GSE's, the old MBS held by the investors are paid off. This money is not used to buy new MBS. Instead, it goes into the market.

After all, what MBS investor would buy the new crap today, knowing that home values will continue to fall, resulting in more defaults among even the new MBS? The risk is too great for a return of perhaps 3.25%.

As you can see, a seemingly simple question can have a complex set of answers, ending of course with taxpayers being the lender of last resort.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Radio Host Interviews Mitt Romney calls him an ahole ON AIR then praises Ron Paul

Posted: 08 Nov 2011 04:21 PM PST

Here is an interesting video courtesy of Godlike Productions

The conversation goes on pretty smoothly until the end when Romney attacks Ron Paul prompting the radio host to call Romney an ahole then launching a tirade ....

I've had it with these elitist "F"s.

It does not matter who you vote for Obama, Hillary, McCain, they are all on the same page, every damn one of them.

Debate over a tax plan supported by the Cato Institute started the outbreak. I would tend to side with the Cato Institute but I have not yet read an analysis of the plan.

I cannot support Romney because he is a warmonger on the same page with Obama, Hillary, McCain, and all the rest of them, just as the host says.

Once again I will write in Ron Paul.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Italy Prime Minister Offers "Conditional Resignation" If Euro Reforms Are Passed; Bullsheet from German Finance Minister on Italy's Problems

Posted: 08 Nov 2011 12:15 PM PST

Once again the stock market is cheering something that is supposed to happen in the future, much like the monstrous month long EFSF bailout rally, with terms sill not set. Remarkably, three billion euros of EFSF bonds have been sold on unknown terms.

Today's plan for the planning of the eventual plan says Berlusconi Offers to Quit if Euro Reforms Are Passed

Prime Minister Silvio Berlusconi of Italy offered a conditional resignation on Tuesday, agreeing to step down but only after Parliament passes an austerity package — before the country will go to early elections, government sources said on Tuesday evening.

Earlier in the day, the prime minister won a budget vote in Parliament but the tally showed he no longer had the support of the majority. While the opposition leader called on him to resign, Mr. Berlusconi wrote his options on a piece of paper captured by a news agency photographer. "Resignation" was one. He also wrote "eight traitors" about the lawmakers who failed to support him.

Mr. Berlusconi's coalition received 308 votes in favor of passing the budget bill, but 321 lawmakers did not vote — a clear sign that "Mr. Berlusconi no longer has a majority," said Pier Luigi Bersani, the leader of the opposition Democratic Party. He also called on the prime minister to immediately hand in his resignation to President Napolitano.

Bullsheet from Wolfgang Schaüble

"The problem in Italy is not primarily the real data," Germany's finance minister, Wolfgang Schaüble, said in Brussels on Tuesday. "The debt is high, the deficit is not — economic data are not that bad. The problem is a lack of trust from the financial markets and that of course is a realistic situation. And this trust has to be strengthened."

Italy may not have a huge deficit now, but it soon will and it still has to roll over as much debt as Germany, on an economy a third the size.

Italy and indeed all Europe not headed for recession, but rather already in recession. All of Europe is deteriorating rapidly. Austerity measures will exacerbate the problem for the the intermediate-term.

Reforms are needed, but where are they? Even if reforms come, it will take years not months to benefit the European economies. And just look at the problems getting those reforms. The reform story is the same in Italy, in Spain, in Portugal, in France as it is in Greece.

Schaüble's portrayal of these problems as a "lack of trust" is nonsense.

Schaüble cannot tell the symptom from the disease. The disease is structural uncompetitiveness coupled with a mountain of debt with no way to pay it back, and with every country fighting badly-needed reforms.

The "lack of trust" is not the disease. Rather "lack of trust" a sign the bond market has finally recognized the disease.

Once again the stock market and the bond market have a different perspective. Please see Italy's Bond Rollover Problem Dramatically Worsens; Yield Curve Inverts; 3-Year and 5-Year Bonds Yield Exceed 10-Year Yield for a bond market perspective.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Italy's Bond Rollover Problem Dramatically Worsens; Yield Curve Inverts; 3-Year and 5-Year Bonds Yield Exceed 10-Year Yield

Posted: 08 Nov 2011 10:03 AM PST

With Italian government bond yields, it's a case of "another day, another record". Here are a few charts.

Italy 2-Year Government Bond Yield

Italy 3-Year Government Bond Yield

Italy 5-Year Government Bond Yield

Italy 10-Year Government Bond Yield

Curve Watchers Anonymous notes that 3-year and 5-year Italian bonds now yield more than 10-year bonds, albeit by a small amount.

This is a huge red flag for Italy.

Germany 2-Year Government Bond Yield

Germany 10-Year Government Bond Yield

Curve Watchers Anonymous also notes the explosion in the 2-year bond spread between Germany and Italy, now at a whopping 5.98 percentage points and rising rapidly, exacerbating Italy's bond rollover financing problem.

Comments from Copenhagen

Steen Jakobsen, chief economist from Saxo Bank pinged me with these comments earlier today:

Italy has 37 billion EUR of maturing debt this year alone, and 347 billion EUR next year. The average funding rate is 4.5% ish, versus the 10-year now trading at 6.77%.

Time is running out. However, we as market players tend to underestimate the political process ability to "buy time".

If Italy makes a credible plan or short-term swaps Berlusconi for a technocrat government, they can buy some more time to put their house in order. So don't expect this week to be the final chapter in neither Italy or Greece.

Don't worry, there are plenty more chapters to come.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Citigroup CEO Claims Citi has Learned a Lesson on Leverage and Banks Should be Banks, Not Supermarkets

Posted: 08 Nov 2011 08:29 AM PST

In stark contrast to the philosophy of former Citigroup CEO Chuck Prince, Citi's current CEO, Vikram Pandit tells Bloomberg TV "we're a bank, not a supermarket" and that Citi will continue to sell off assets.

Pandit on Lessons Learned from the 2008 Financial Crisis

"Although we're seeing some of the signs of 2008 today, I think it is fundamentally different today than it was back then."

"When you go back and think about what brought all of this on, it was leverage. We're still living through the impact of leverage: consumer leverage, bank leverage, government leverage. It seems wonderful to borrow just a little bit more when things are going good, but invariably the history of crises [show] leverage is at the heart of it. We learned it yet again what happens to the world when leverage rises to levels that are unsustainable, and we're still living through that today in the form of what is going on with the governments, including our own, but not only our own. Certainly we're all watching what is going on in Europe."

"The other thing we've learned, and I'm not so sure it is new…is that markets and market confidence move a lot faster than policy makers. Confidence is a big part of what it takes to deal with crises, and we're got to figure that out even better. We're living through today again in Europe…We have to make sure that these things are more synchronized. That's a real danger. It's a real issue for policy makers to deal with on an ongoing basis."

On Citigroup's lessons from the financial crisis:

"For [Citigroup], the lessons are really simple. We understand very well that banking had to go back to its root mission, which is to serve our clients. Banking has to be a means to an end, not an end in itself. For us, the strategic restructuring was straightforward. We went back to the basics of banking."

"By the way, we took a number of actions, which led to realizing we needed to sell 40% of the assets of Citi, to bring it back to the core mission of serving our clients. We have been doing that very steadily. Today as I look back, clearly there were lots of challenges at that time. In many ways, for Citi we are thankful we got started early and understood we had to go back to why banks are in business in the first place, which is to serve the economy."

On selling 40% of assets and the future of the Citi Holdings Division:

"These 40% were not about only assets that we wish we didn't have on our books but it was about businesses like Primerica, Smith Barney -- great businesses, but really not core to the mission we were on. For a period of time, it felt like being a supermarket of financial services businesses was the right strategy. As I looked at it, which every CEO should do when they first come into the job, and I looked at where the world was going, where regulation was going and what we were really good at became pretty clear."

"We're a bank, not a supermarket. So we took the assets and said, We're going to sell them. The number was about $800 billion-ish and last quarter we were about $300 billion-ish in assets and today with some of the changes we've made and some of the assets that we've sold and moved, we started at 40% of assets at Citi Holdings and today we're down to 13%. I wouldn't doubt we get down 10% and then [Citi Holdings division] becomes an issue that's really not core to Citi."

"The core business now is the 60%, what I call the business of connecting the world for our clients, taking U.S. businesses abroad, having them get a chance to export more, and for that matter connecting clients. We have a number of clients around the world who are really global in their aspirations and connections, and those are the kinds of clients we serve best."

Did Citigroup really learn anything?

I doubt it. Then again, a stock chart like this suggests something may have sunk in.

Citigroup Monthly Chart

Anyone who held Citigroup through this crisis will never get back to even.

In 2007, long before Meredith Whitney's call on dividends (a call she describes as obvious), I proclaimed "Citigroup will not survive in one piece".

I did a recap of that idea in Citigroup Pieces For Sale, Starting With Smith Barney

Whitney made headlines with an obvious call for the simple reason no one else in the sell-side had courage to make it. Telling the truth on Wall Street was at the time unheard of, and generally still is.

Citigroup did not survive in one piece and it should not have survived at all. Regardless, it did survive thanks to taxpayers and the Fed.

The question now is "where to from here?"

With reduced leveraged, with the sale of business units, with interest rates low and risk of defaults high, just where is share price going?

I repeat my call that bank shares are "value traps" and dead money for years to come.

Value Trap Reading

Value Traps Galore (Including Financials and Berkshire); Dead Money for a Decade

Earnings Collapse Coming Up; Don't Worry Companies Will Still "Beat the Street"; Value Traps and Road to Ruin

Value Restoration Project: Stock Market Valuations and Trends Over Time

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Perfect Storm; Eight Reasons to be Bullish on the US Dollar

Posted: 08 Nov 2011 12:17 AM PST

One of my much appreciated contacts is Steen Jakobsen, chief economist for Saxo Bank in Copenhagen, Denmark. Today he passed on an "internal note" that he gave permission to share.

For ease in reading, I will not follow with my usual indented blockquote format.

Steen Writes ...

One of my main themes over the last quarter has been a "relative outperformance" of the US economy relative to consensus. This has materialized and our call was almost entirely driven by Consumer Metric data which over the last three years has outperformed any other relevant predictor. This is now slowing down slightly, but still elevated. Meanwhile Europe start election cycle where Spain goes to the election in less than two weeks, while Sarkozy starts his re-election campaign when he is done playing Napoleon in European politics.

The outlook for 2012 is a "Perfect Storm" with increased austerity, higher unemployment, and weaker global growth (read: China).

My colleague Peter Garnry was kind enough to quickly program a small excel thing which can track changes to growth by consensus using the ECST function on Bloomberg. This is the result.

European consensus growth by market consensus

European growth coming off hard and has been in almost free fall since end of July.

US consensus growth by market consensus

US growth has seen a low and looks higher, but there are numerous issues ahead:

The Super Committee needs to finalize its work by this weekend in order to secure proper processing Congress. WSJ journal this morning says sources say some progress is being made and main points for now are: A. Limiting tax deductions replacing tax hikes. B. Getting permanent Bush tax as payment and most importantly for FX markets: C. Republicans seems fighting for repatriating capital back to the US at tax rate of 5.25% vs. presently 35% - this topic has even been on 60 Minutes, so to me it looks like "deal to be done shortly" as it plays nicely to create "Job creating program.

The headwind from fiscal tightening will equal negative 1.00 percent of GDP – this is federal, state and local communities trying to cut back, but also investment will remain meek.

Long-Term Up-Cycle for US Dollar

A long life has taught me that everything "mean-reverts".

When I moved back from the US in 2000, the EURUSD was trading below 0.8400 – since then the US has pursued a policy a "benign neglect" and succeeded in making the US extremely weak by all definitions.

Clearly the US has debt issues on their own, but currencies are relative trades. To me we are entering long-term up cycle for the US dollar. The final QE/Printing of money will come in Q1 of 2012 and could cement the low, but I am willing to start overweighting US dollar relative to Europe, not Japan, and further down the road to go full in.

I suggest the EUR/USD is out of touch with relative rates, funding needs, and relative dynamics of the economies.

Four Reasons to be Bullish on the US Dollar

The EU debt crisis – when ECB becomes lender-of-last-resort we will see 10 figure move lower.
Relative growth differences – The US is more dynamic and with only "one master" . – i.e. Congress vs. Europeans 27 members and lacking fiscal union.
Competitiveness. US will able to compete on labor costs with close to 20 pc real unemployment and incoming tax incentives.
HIA – Homeland investment Act – as stated above the Super Committee is trying to get a reduced tax of 5.25% in place.

My bullishness is relative, but the biggest contributors to long-term wealth tends to be your choice of currency. I have a target of 100 in DXY for next year, so a 25% rise in the US dollar during 2012 – and in EURUSD terms the expected move is changed range from 1.30/1.40 now to 1.20/1.30 on ECB rolling over, another 5-6 figures on interest rates, and then HIA II we end around 1.10-1.15 for 2012 end target.

That said, I will, as always, add, my own believe in me being able to predict anything remains 0.001 percent.

Safe travels,

Steen Jakobsen

Mish Comments:

I do not share Steen's bullishness on the Yen, but otherwise I am in general agreement with his prognosis.

I do not have specific targets, but I too expect the US dollar to strengthen. That is not what Bernanke wants.

However, 58% of the US dollar index is the Euro, and the Euro is a basket case. European banks are in worse shape than their US counterparts, and a breakup of the Eurozone that I expect will certainly exacerbate the problem.

For a discussion and timing of a Eurozone breakup, please see History Suggests Greece Will Freeze Bank Deposits, Exit Euro by Christmas; Spain and Portugal to Follow Next Year; What's the Rational Thing to Do?

Moreover, in conjunction with the upcoming regime change in China, I expect a significant slowdown in China coupled with a shift from huge infrastructure projects to a more consumer-driven model of growth.

When that happens China's demand for commodities will plunge, so will its exports, and a plunge in commodity prices will be good for the US dollar. A plunge in commodity prices will also be bad for the "hard asset" currencies, especially Australia and Canada.

Thus, to Steen's four reasons, we can add

Breakup of the Eurozone
China regime change and shift to consumption model slowing Chinese exports
Falling commodity prices
Weakening of "hard currencies"

Since little of the above scenario is widely believed (either Steen's or mine), and since a strengthening of the US dollar is not likely to be good for equities in general, not only will this scenario be good for the US dollar, it will help contribute to the "Perfect Storm" of deflation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

4 Graphics to Help Illustrate On-Page SEO

Posted: 07 Nov 2011 03:11 PM PST

Posted by randfish

For many SEO professionals, on-page optimization is back to basics. But sadly, there seem to be a lot of us who still make some very basic mistakes. In this post, I'll try to add on to my previous writing on perfecting on-page optimization by sharing some visuals that can hopefully help to hammer key points of the practice home.

#1: The Value of Optimization and the Danger of Overdoing It

I generally abide by the 80/20 rule when it comes to keyword use. 80% of the value to be had comes from 20% of the effort. Nail the title, the headline and make sure the phrase is on the page (and the page is actually on the subject of the keyword) and you've done your job. The additional impact on rankings to be gained from perfectly calculating the number of repetitions or ensuring every paragraph fits into the "theme" of the keyword and document is likely to be a waste of time better spent on other priorities. That's what this graph tries to illustrate:

Value of Keyword Use

Nothing in the on-page world is going to provide exceptional ranking influence, but getting perfect is often only marginally better than just nailing the title and headline. If you're spending a ton of bandwidth on the last 80% of work (providing 20% of value), I might re-consider your to-do list.

#2: On-Page SEO is More than Keywords

When I first got into SEO in the early 2000's, the search engines seemed to have a fairly naive algorithm for content analysis, which led to SEOs adopting equally naive tactics for on-page optimization. Years later, these tendencies, sadly, still persist.

Yes, it's essential to effectively target your keywords in your page titles, headlines (or early in the body copy), URLs, etc. But content analysis has become far more sophisticated with engines "reading" pages almost the way humans do and pattern-matching good content, design, layout and usability. There may even be some elements of on-page analysis that look at the authenticity and passion of the written word (or something that approximates it).

In the graphics below, I've tried to illustrate this:

View of On-Page SEO

I'm not suggesting one shouldn't optimize for keywords or that using terms and phrases that stay relevant and on-topic won't help. I'm merely noting that optimizing for the experience real, human users have and the value they derive from your work can produce outsized returns to simple, classic on-page optimization.

#3: How Search Engines Can Measure a Page's Value

This one's less of an illustration and more of a text-based diagram. I wanted to help explain all the signals Google can measure from their many sources of information, and how this can potentially affect SEO:

Some of Google's Data Sources and the Information They Extract

Google's tremendous reach across the Internet, measuring nearly everything and every way people interact with web pages brings with it powerful data. That data is likely used to improve the quality of search results by helping the stuff that appears authentic, editorial and high quality to rise up while the junk falls to the bottom (at least when the data+algorithms work properly).

For on-page optimization, this means we can't merely focus on keyword targeting. We need truly great content.

#4: Consolidation vs. Multi-Page Targeting

The question of whether to target two keyword terms/phrases on the same page or build individual pages for each seems to be a consistent struggle for SEOs. I field a question like this almost every week, and in 9/10 cases, the following flowchart would provide the right answer:

Splitting Keyword-Targeted URLs

It's not complex - and that's the beauty. When targeting similar phrases or phrases that can work together and target the same intent for most users, a single page should suffice. When the phrases cannot logically work together in a title/headline or when the intents don't have a high liklihood for overlap, it's time to build different pages and target the keywords separately.

Feel free to use these in your presentations, websites and internal/client documents (though a source credit is much appreciated). And best of luck with your keyword targeting + on-page efforts!

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marți, 8 noiembrie 2011