Morning Report

Vital Statistics:

Last Change Percent
S&P Futures 1368.0 0.7 0.05%
Eurostoxx Index 2503.2 -9.9 -0.39%
Oil (WTI) 108.16 -0.4 -0.37%
LIBOR 0.4875 -0.002 -0.33%
US Dollar Index (DXY) 78.411 -0.123 -0.16%
10 Year Govt Bond Yield 1.91% -0.02%

Markets gave back most of their earlier gains on the back of a disappointing Durable Goods report. January Durable goods orders dropped 4% and durables ex-transportation dropped 3.2%. Cap goods were also weaker than expected.

S&P / Case-Schiller for December came in down 4% YOY. Atlanta showed the biggest decline, while Detroit showed the biggest gains. A couple of highlights from the report:

“After a prior three years of accelerated decline, the past two years has been a story of a housing market that is bottoming out but has not yet stabilized. Up until today’s report we had believed the crisis lows for the composites were behind us, with the 10-City Composite originally hitting a low in April 2009 and the 20-City Composite in March 2011. Now it looks like neither was the case, as both hit new record lows in December 2011. The National Composite fell by 3.8% in the fourth quarter alone, and is down 33.8% from its 2nd quarter 2006 peak. It also recorded a new record low.”

“In general, most of the regions also posted weak data in December. Eighteen of the cities saw average home prices fall in December over November. Seventeen of the cities have seen monthly declines for at least three consecutive months. In addition to both monthly composites, 10 of the cities saw home prices fall by more than 1.0% during the month of December. The pick-up in the economy has simply not been strong enough to keep home prices stabilized. If anything it looks like we might have reentered a period of decline as we begin 2012.”

Yesterday, we got Warren Buffet’s letter to shareholders; today we get Bill Gross’s investment outlook. The theme is defensive investing, which makes sense for a bond guy when interest rates are as low as they can go. Since the early 80s, the Fed has been printing money and providing bond guys like Gross built-in capital gains in addition to income. Bill’s punch line:  “Recognize zero bound limits and systemic debt risk in global financial markets. Accept financial repression but avoid its impact when and where possible.”

The FHA has released some details on the pilot REO-to-Rental program for the Hardest-Hit Areas. They are auctioning of 320MM of properties in 8 MSAs.  The FHA is recognizing the recent strength in rental prices as well as the glut of foreclosed properties and attempting to solve two problems at once. We’ll see if this gets any traction.

Chart:  S&P Case-Schiller Index:

8 Responses

  1. Link of the day:

    “Once Upon a Time in Tehran
    Photos of a swinging Iran when the skirts were short, the dance was the twist, and America wasn’t Enemy No. 1.
    BY CARA PARKS | FEBRUARY 15, 2012”

    http://www.foreignpolicy.com/articles/2012/02/15/once_upon_a_time_in_tehran#0

    Like

  2. Why this rally might have an extra week to run:

    “Why Feb. Jobs Report Isn’t Out This Friday”

    http://www.cnbc.com/id/46555919

    Like

  3. The cost of the bailout vs bankruptcy for AIG. Crony Capitalism in action:

    “Bending the Tax Code, and Lifting A.I.G.’s Profit
    By ANDREW ROSS SORKIN

    Last week, the American International Group reported a whopping $19.8 billion profit for its fourth quarter. It was a quite a feat for a company that was on its death bed just a little over three years ago, so sick that it needed a huge taxpayer bailout.

    But if you dug into the numbers, it quickly became clear that $17.7 billion of that profit was pure fantasy — a tax benefit, er, gift, from the United States government. The company made only $1.6 billion during the quarter from actual operations. Yet A.I.G. not only received a tax benefit, it is unlikely to pay a cent of taxes this year, nor by some estimates, for at least a decade.”

    “Here’s the back story: A.I.G.’s tax benefit comes in large part from its immense “net operating losses” during its depths of despair in 2008 before its rescue. The government had to dump $182 billion into the company after it was crippled by bad bets it had made insuring mortgage-backed securities.

    The tax benefit comes in the form of something called net operating losses — NOLs in Wall Street parlance — that could be worth more than $25 billion, possibly more. Those losses can be very valuable, in part because companies can spread them over many years to lower or wipe out their income tax bills.

    However, according to longstanding tax laws, if a company files for bankruptcy or is taken over, it loses the ability to use its net operating losses. A.I.G. would fit that profile perfectly: on the verge of bankruptcy, the federal government took control of A.I.G., exchanging its bailout billions for shares in the company. The government — taxpayers — still own 77 percent of the company, down from 92 percent three years ago.

    Still, the Treasury issued “Notices” exempting A.I.G. from losing its right to make use of its net operating losses. In total, the insurer estimated those losses were worth $26.2 billion as of 2009, and it claimed almost $9 billion in other “unrealized loss on investments.””

    “The tax break for A.I.G. also perversely benefits employees who are paid based on the company’s performance and usually in stock, which is being lifted by this backdoor handout. The biggest beneficiary is Robert H. Benmosche, A.I.G.’s chief executive since 2009, who has been granted tens of thousands of shares.

    In the meantime, the government — desperate to increase revenues — is missing an easy stream of guaranteed taxes from a company that taxpayers bailed out. Sure, the tax bill might hurt the price of A.I.G.’s stock price in the short term, but if Mr. Benmosche does his job right, the company won’t have to post fantasy profits.”

    http://dealbook.nytimes.com/2012/02/27/bending-the-tax-code-and-lifting-a-i-g-s-profit/?hp

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    • jnc:

      The government — taxpayers — still own 77 percent of the company…In the meantime, the government — desperate to increase revenues — is missing an easy stream of guaranteed taxes from a company that taxpayers bailed out.

      If 77% of the company is owned by the government, doesn’t that simply mean that the government itself is receiving 77% of the benefit from the tax break?

      Or, put another way, if the taxes were paid, wouldn’t it be a case of the government largely paying itself?

      Like

  4. Same thing with GM and Chrysler. They were allowed to carry their losses forward, and won’t pay corporate taxes for years as a result.

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  5. “bannedagain5446, on February 28, 2012 at 11:14 am said:

    Same thing with GM and Chrysler. They were allowed to carry their losses forward, and won’t pay corporate taxes for years as a result.”

    Are you sure on that? They had the whole new GM and old GM structure specifically so it was a new company buying the assets. I don’t see how they could carry forward the tax losses of the previous entity since it was left legally intact in the bankruptcy.

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  6. Sorkin’s answer to that question:

    “All of this brings us to the inevitable questions: How did this happen? Why would Treasury exempt A.I.G. from the law? And if taxpayers own a majority of A.I.G., aren’t we the beneficiaries of the rule-bending?

    A Treasury spokeswoman declined to comment, as did a spokesman for A.I.G.

    However, senior Treasury officials said privately that they had exempted A.I.G. because they did not consider the rescue to be a traditional takeover. The original law preventing companies from using the losses after a takeover were intended to prevent corporations from buying failing companies with lots of losses simply for the tax benefits.

    Moreover, the officials said A.I.G.’s tax benefit would help taxpayers because it would raise the insurer’s share price. That may be true, but that assumes that the government is able to sell its shares and exit its investment. That’s still a big “if.” (Though I do bet it will eventually happen.)”

    My issue is with exempting a politically favored company from the tax laws to artificially boost the stock price to help the government sell the company and also to benefit select insiders who were picked to help run the company. It’s the epitome of crony capitalism and illustrates the problems with the government regulating a market that it participates in and companies that it owns stock in.

    Like

    • jnc:

      It’s the epitome of crony capitalism and illustrates the problems with the government regulating a market that it participates in and companies that it owns stock in.

      I sort of agree. I definitely agree that it illustrates the very real problems of the gov regulating a market it participates in. But I don’t think the government owning companies and participating in markets is any kind of capitalism.

      Like

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