CAPM uses a single factor, beta, to compare a portfolio with the market as a whole. But more generally, you can add factors to a regression model to give a better r-squared fit. The best known approach like this is the three factor model developed by Gene Fama and Ken French.
Fama and French started with the observation that two classes of stocks have tended to do better than the market as a whole: (i) small caps and (ii) stocks with a high book-value-to-price ratio (customarily called "value" stocks; their opposites are called "growth" stocks). They then added two factors to CAPM to reflect a portfolio's exposure to these two classes:
r - Rf = beta3 x ( Km - Rf ) + bs x SMB + bv x HML + alpha
Here r is the portfolio's return rate, Rf is the risk-free return rate, and Km is the return of the whole stock market. The "three factor" beta is analogous to the classical beta but not equal to it, since there are now two additional factors to do some of the work. SMB and HML stand for "small [cap] minus big" and "high [book/price] minus low"; they measure the historic excess returns of small caps and "value" stocks over the market as a whole. By the way SMB and HML are defined, the corresponding coefficients bs and bv take values on a scale of roughly 0 to 1: bs = 1 would be a small cap portfolio, bs = 0 would be large cap, bv = 1 would be a portfolio with a high book/price ratio, etc.
One thing that's interesting is that Fama and French still see high returns as a reward for taking on high risk; in particular that means that if returns increase with book/price, then stocks with a high book/price ratio must be more risky than average - exactly the opposite of what a traditional business analyst would tell you. The difference comes from whether you believe in the efficient market theory. The business analyst doesn't believe it, so he would say high book/price indicates a buying opportunity: the stock looks cheap. But if you do believe in EMT then you believe cheap stocks can only be cheap for a good reason, namely that investors think they're risky...
Fama and French aren't particular about why book/price measures risk, although they and others have suggested some possible reasons. For example, high book/price could mean a stock is "distressed", temporarily selling low because future earnings look doubtful. Or, it could mean a stock is capital intensive, making it generally more vulnerable to low earnings during slow economic times. Those both sound plausible; but they seem to be describing completely different situations (and what happens when a company that isn't capital intensive becomes "distressed"?) It may be that the success of this model at explaining past performance isn't due to the significance of any of the three factors taken separately, but in their being different enough that taken together they do an effective job of "spanning the dimensions" of the market.
(There's actually another interpretation that's so much less cerebral that it's probably correct. The broad market index weights stocks according to their market capitalization, making it size-biased and valuation blind; so maybe the extra two factors in this model are just a couple of tweaks to adjust for these two problems. This also explains why momentum is sometimes used as yet another factor: market capitalization shows where the market has been putting its money for years, while momentum shows where it has been putting it lately; so if you want to take advantage of market efficiency you start with the index and then tweak it a little with momentum.)
Friday, December 4, 2009
Unemployment Rate Falls to 10%
By LUCA DI LEO and JEFF BATER
U.S. job losses slowed sharply in November and the unemployment rate unexpectedly declined, in a sign the labor market is finally starting to heal as the economy recovers.
Nonfarm payrolls fell by just 11,000 last month, slowing down from a downwardly revised 111,000 drop seen in October, as the recovery encouraged companies to retain workers, the Labor Department said Friday.
It was the best showing since December 2007, when payrolls rose by 120,000, said a Labor department official. Economists surveyed by Dow Jones Newswires had expected a payroll decrease of 125,000.
The unemployment rate, calculated using a survey of households as opposed to companies, edged lower to 10% in November from 10.2%. Economists had forecast the jobless rate would remain at October's level of 10.2%, when it rose to the highest level since April 1983.
Employment fell in construction, manufacturing, and information, while temporary help service and health care added jobs.
U.S. job losses slowed sharply in November and the unemployment rate unexpectedly declined, in a sign the labor market is finally starting to heal as the economy recovers.
Nonfarm payrolls fell by just 11,000 last month, slowing down from a downwardly revised 111,000 drop seen in October, as the recovery encouraged companies to retain workers, the Labor Department said Friday.
It was the best showing since December 2007, when payrolls rose by 120,000, said a Labor department official. Economists surveyed by Dow Jones Newswires had expected a payroll decrease of 125,000.
The unemployment rate, calculated using a survey of households as opposed to companies, edged lower to 10% in November from 10.2%. Economists had forecast the jobless rate would remain at October's level of 10.2%, when it rose to the highest level since April 1983.
Employment fell in construction, manufacturing, and information, while temporary help service and health care added jobs.
The boost in service-providing jobs was mainly in professional & business services, up 86,000 with most of that coming from temporary help services, up 52,000. Education & health services and government components also posted increases. However, declines were seen in trade & transportation, leisure & hospitality, and financial activities.
Despite the better-than-expected report, the jobs market has still some way to recover. Since the start of the recession in December 2007, the number of unemployed has increased by almost eight million.
The November jobs report should maitain the Federal Reserve's view that interest rates must remain at a record low to bolster a soft recovery. The central bank's rate-setting committee left interest rates close to zero a month ago in the face of low inflation and still-high unemployment.
Fed Chairman Ben Bernanke Thursday told U.S. senators the central bank expects the unemployment rate to decline only slowly from next year as the economic recovery remains "moderate." Bernanke last month warned the U.S. may be at risk of a so-called "jobless recovery", in which output is growing but employment doesn't increase.
President Barack Obama is concerned about the persistently high jobless rate. His administration Thursday kicked off a jobs summit, with the president promising to take "every responsible step to accelerate job creation."
In minutes released after their Nov. 3-4 meeting, Fed officials increased their growth estimates slightly, but projected an economy rebounding so slowly that it barely dents unemployment. They expect the jobless rate to remain between 9.3% and 9.7% by this time next year, and to settle above 8% in 2011, levels usually seen in recessions.
The U.S. economy expanded in the third quarter for the first time in more than a year, growing an annual 2.8%, but the jobs market's weakness, tight bank lending and a fading government stimulus is expected to keep the recovery contained.
"We expect the jobless rate to start falling very gradually in the first half of 2010", said Antulio Bomfim, a former Fed economist now with forecasting firm Macroeconomic Advisors in Washington.
The payroll data reflects a notable improvement in the jobs market. In the prior three months, payroll job losses had averaged 135,000 a month.
Employment in the service sector -- the main source of U.S. jobs -- rose by 58,000 in November. But that was more than offset by manufacturing companies shedding 41,000 jobs and construcion companies cutting 27,000.
Health care employment continued to rise in November, by 21,000. The industry has added 613,000 jobs since the recession began at the end of 2007.
Friday's report showed that average hourly earnings rose by 0.1%, or $0.01, to $18.74.
The average workweek rose by 0.2 hour to 33.2 hours in November.
Thursday, December 3, 2009
海外投行集体唱多明年A股 高盛力荐医保与券商股
高盛维持明年年底沪深300指数目标点位4300点的预测.
A股在3300点徘徊之际，颇有市场号召力的高盛、瑞信等海外投行开始集体唱多明年的A股市场。其中，高盛维持明年年底沪深300指数目标点位4300点的预测。沪深300指数昨日收报3590点。
高盛首选医保、券商
高盛亚洲公司中国策略分析师邓体顺昨日在上海预计，中国经济增长前景仍然向好，上市公司盈利明年将大幅增长，除金融业和电信业以外的工业企业盈利将比今年增四成。
在看好的行业板块方面，高盛首选医保概念和券商组合。在邓体顺看来，中国深化改革及一体化的趋势，将给股市带来不少题材。
其中，改革题材具体包括医改、刺激内需、汽车、A股大量发行对券商股的刺激以及海外上市股票的回归;而一体化趋势带来的题材包括上海世博会及海峡两岸共同发展。
邓体顺预计，今年起的三年内，国家将投入8500亿元改善国内医保体系，最近国家发改委也在考虑降低医疗等垄断部门的准入门槛，再加上老龄化趋势将使医疗保健开支加大，医疗保健业将为长线投资者提供重要的投资机遇。
高盛推荐的高流动性医保股组合包括吉林敖东和复星医药等股票。
此外，邓体顺认为，今年第四季度至明年底，A股市场的新股发行额可能达到400亿美元，而红筹股和跨国公司的A股上市可能进一步扩大发行规模，承销收入对券商收入增长的潜在贡献可能较为明显;期待已久的股指期货和融资融券等创新若能推出，亦将有助于券商扩大收入渠道。
高盛推荐的券商股包括海通证券和中信证券等。
瑞信喜好能源、银行
瑞信集团也唱好A股。瑞信集团亚太区策略师及环球新兴市场策略师SakthiSiva昨日告诉记者，在亚洲各市场当中，仍然看好内地股市表现，仅次于韩国、印尼及印度。
瑞信发布的最新报告预计，A股市场未来12个月仍能上涨16.8%.
瑞信相信，内地经济数据仍然强劲，未来中国出口能从低位复苏，消费增长持续强劲，但投资增长则会相对放缓。
SakthiSiva喜好能源股和银行股，包括中国神华、建设银行、工商银行，还有中国远洋。
与瑞信的观点较为一致，瑞银12月2日也发布研究报告，唱好能源股和银行股。这份将中国股市明年上半年定义为“大牛市”的报告主要推荐H股(恒生国企指数，主要代表中资股走势)，其建议增持房地产、保险、银行、非核心消费(如汽车、零售)、水泥、石油及天然气、生产原料;减持电力、航空、航运、电信及公路。瑞银给出的首选股票包括中石化H股、中国人寿H股、广深铁路H股等。
瑞银的理由与高盛和瑞信如出一辙——中国“强劲的经济增长、企业盈利改善”。
值得注意的是，瑞银和瑞信都对明年下半年的市场持审慎态度。(东方早报)
A股在3300点徘徊之际，颇有市场号召力的高盛、瑞信等海外投行开始集体唱多明年的A股市场。其中，高盛维持明年年底沪深300指数目标点位4300点的预测。沪深300指数昨日收报3590点。
高盛首选医保、券商
高盛亚洲公司中国策略分析师邓体顺昨日在上海预计，中国经济增长前景仍然向好，上市公司盈利明年将大幅增长，除金融业和电信业以外的工业企业盈利将比今年增四成。
在看好的行业板块方面，高盛首选医保概念和券商组合。在邓体顺看来，中国深化改革及一体化的趋势，将给股市带来不少题材。
其中，改革题材具体包括医改、刺激内需、汽车、A股大量发行对券商股的刺激以及海外上市股票的回归;而一体化趋势带来的题材包括上海世博会及海峡两岸共同发展。
邓体顺预计，今年起的三年内，国家将投入8500亿元改善国内医保体系，最近国家发改委也在考虑降低医疗等垄断部门的准入门槛，再加上老龄化趋势将使医疗保健开支加大，医疗保健业将为长线投资者提供重要的投资机遇。
高盛推荐的高流动性医保股组合包括吉林敖东和复星医药等股票。
此外，邓体顺认为，今年第四季度至明年底，A股市场的新股发行额可能达到400亿美元，而红筹股和跨国公司的A股上市可能进一步扩大发行规模，承销收入对券商收入增长的潜在贡献可能较为明显;期待已久的股指期货和融资融券等创新若能推出，亦将有助于券商扩大收入渠道。
高盛推荐的券商股包括海通证券和中信证券等。
瑞信喜好能源、银行
瑞信集团也唱好A股。瑞信集团亚太区策略师及环球新兴市场策略师SakthiSiva昨日告诉记者，在亚洲各市场当中，仍然看好内地股市表现，仅次于韩国、印尼及印度。
瑞信发布的最新报告预计，A股市场未来12个月仍能上涨16.8%.
瑞信相信，内地经济数据仍然强劲，未来中国出口能从低位复苏，消费增长持续强劲，但投资增长则会相对放缓。
SakthiSiva喜好能源股和银行股，包括中国神华、建设银行、工商银行，还有中国远洋。
与瑞信的观点较为一致，瑞银12月2日也发布研究报告，唱好能源股和银行股。这份将中国股市明年上半年定义为“大牛市”的报告主要推荐H股(恒生国企指数，主要代表中资股走势)，其建议增持房地产、保险、银行、非核心消费(如汽车、零售)、水泥、石油及天然气、生产原料;减持电力、航空、航运、电信及公路。瑞银给出的首选股票包括中石化H股、中国人寿H股、广深铁路H股等。
瑞银的理由与高盛和瑞信如出一辙——中国“强劲的经济增长、企业盈利改善”。
值得注意的是，瑞银和瑞信都对明年下半年的市场持审慎态度。(东方早报)
Assessing Housing Risks
December 02, 2009
By Richard Berner New York
Despite recent improvements in housing demand, construction and home prices, housing risks are turning negative immediately ahead. A ‘payback' from the end of the first-time homebuyer tax credit likely will be the main catalyst, and additional negatives involve the interplay among less-favorable demographics, looming foreclosures and rising joblessness. Yet we strongly believe that renewed housing recovery is coming, courtesy of improved affordability, some easing in credit availability, a renewed tax credit and a return to positive employment gains. The upshot: Weakness in demand, activity and prices is likely through year-end, but we still expect modest improvement in 2010 and beyond: A 10% rise in demand and housing activity is still the most likely outcome next year.
Improvement in many housing metrics. There is no mistaking the improvement in many housing metrics from their trough, at least through October. Sales of new and existing one-family homes jumped by 24.6% and 27.8%, respectively, in the six months ended in October, reflecting some of the positive factors mentioned above. Although one-family housing starts tumbled in October compared with September, they have risen 33% from their February lows. Inventories of new and existing homes have plunged dramatically, promoting a better balance between supply and demand. New home inventories stand at 239,000, the lowest since 1971 in absolute terms. Inventories of existing homes, at 3 million, are well below their peak of 3.8 million in late 2007, although still near the previous peak last seen in 1985. And home prices are either flat or up, depending on the measure used: Over the past six months, the FHFA purchase-only home price index has been flat, while the Case-Shiller S&P home price index is up 2.5%. That compares with declines of 11% and 32% over the previous two and three years, respectively.
Payback coming, plus barriers to activity. Yet those improvements must be set in perspective for two reasons: First, the first-time homebuyer tax credit boosted new and existing sales through October, and a payback is coming. Second, three hurdles still linger for housing: The overhang of inventories of existing homes on the market and a ‘shadow inventory' of yet-to-be foreclosed homes likely will continue to depress new home sales and housing activity for some time to come; demographics are still unfavorable; and rising joblessness is a barrier to qualifying for a mortgage.
Gauging the payback. To gauge the coming payback in sales of existing and new homes, we must calibrate the impact of the first-time homebuyer tax credit on demand. That is difficult, because the US$8,000 maximum tax credit incentive represented only about 5% of the price of homes typically purchased by first-time homebuyers and because there is scant basis for comparison - there is only one example of a similar credit (in 1975, and that was for new homes only). This time around, lawmakers enacted two credits for first-time homebuyers. A US$7,500 credit launched in July 2008 was really an interest-free loan. Then, in February 2009, Congress replaced it with a true credit running up to US$8,000 for low-income buyers who had not owned a residence in the last three years, expiring on December 1, for both new and existing properties.
The just-expiring credit stimulated demand, but it is unclear by how much. According to the National Association of Realtors (NAR), about 350,000 of the 1.8-2.0 million buyers who will claim the credit this year would not have purchased a home without it. But it is uncertain how much of that was genuine additional demand and how much was simply brought forward. Traditional measures of affordability have soared, courtesy of the plunge in home prices and in mortgage rates. But with lenders demanding bigger down payments, and with the credit not available until the deal is closed, down payments and credit availability remain hurdles for many buyers, especially first-time ones.
The 1975 homebuyer credit represents the sole historical parallel and may shed light on the potential payback this time. That earlier incentive, which was aimed only at new homes, initially boosted sales and then triggered a second surge as the expiration date neared. Fueled by lower mortgage rates, pent-up demand and the credit, new home sales jumped by 63% over 1975, but declined by 16% over several months in 1976 after the credit expired. That moderate ‘payback' may foreshadow today's experience, and we assume both home sales and single-family housing starts will soften a bit in the next few months (into early next year) and rise moderately thereafter. Indeed, the sharp decline in mortgage applications underway since early October already hints that the payback is coming. Yet, as discussed in more detail below, a new credit that extends through April 30, 2010 likely will limit the weakness.
Three hurdles for housing. No catalogue of housing risks would be complete without acknowledging three other headwinds. The recession has slowed household formation, looming foreclosures will dump more inventory on the market, and rising joblessness will deter lenders and buyers. Moreover, homebuilders are struggling to compete with distressed property sales, and financing to start construction is still hard to come by.
Less favorable short-run demographics. Demographic trends are critical for assessing long-term housing demand, but short-term changes in demographic fundamentals that are influenced by the business cycle also matter. In the current downturn, both slowing household formation and declining interstate labor mobility have been housing headwinds. The latest Census Bureau report showed that new households grew by only 398,000 between March 2008 and March 2009, compared with increases of 772,000 and 1.6 million in the two previous years. Data are incomplete for March 2009, but it appears that the growth in prime-age households (25-54) slowed even more significantly. That's a time-honored cyclical pattern; many couples postpone marriage and having children in recession, and this time is no different. What is different is the depth of the contraction in payrolls that has affected a broader swath of the population. Thus, the annual demographic increment to housing demand has slowed to perhaps 250,000, even assuming a pick-up in household formation and a 65% home ownership rate.
In a related development, the percentage of grown children moving back in with their parents has also escalated according to data from the Pew Research Center. The authors note that, "Overall, the proportion of adults ages 18 to 29 who live alone declined from 7.9% in 2007 to 7.3% in 2009. Similar drops in the proportion of young people who live by themselves occurred during or immediately after the recessions of 1982 and 2001." In addition, the interplay between housing woes and labor mobility has created frictions in the labor markets: Without a new job, workers wanting to move are unable to do so, depressing housing turnover; conversely, the inability to sell one's home has limited labor mobility and thus the capacity of workers to move to take a new job in another venue.
The ‘shadow inventory': How big? Fully 4.47% of all loans were in the foreclosure process and 9.64% were delinquent at the end of 3Q09, up 150bp and 265bp, respectively, from a year ago according to the Mortgage Bankers' Association; both are records. With about 55 million mortgages outstanding, some analysts estimate that the ‘shadow inventory' of yet-to-be foreclosed homes will rise to more than 13% of that total, or 7 million mortgages. A key trigger for foreclosure is when home owners are in a negative equity position; that is, when the amount they owe exceeds the value of the home. According to First American CoreLogic, 23% of all mortgagees are underwater. Such a surge in foreclosures, even if spread out over a couple of years (as seems likely in any case), would reverse the improved supply-demand balance seen over the past year, put renewed downward pressure on home prices, further discourage housing lenders from offering attractive loans, and pressure household wealth.
Several related factors could reduce the coming rise in foreclosures. First, lenders may be increasingly willing to modify outstanding mortgages by writing down the outstanding mortgage amounts to eliminate negative equity; previous efforts to modify the terms of mortgages by lowering rates or forbearing did not help many lenders or borrowers, because redefault rates ran between 50-60%. Second, lenders may also be more willing to accept short sales (in which they eliminate the sellers' negative equity to allow a sale to occur). Third, the Administration is promising to increase resources to enable eligible borrowers who have undergone trial modifications under the Home Affordable Modification Program (HAMP) to convert to permanent modifications. If successful, these developments could limit price declines by holding otherwise foreclosed homes off the market or taking them out of the supply chain completely. So far, however, delays over documentation and other snafus have held up the modification process, so progress may be slow in coming.
Are there upside risks for housing? In our view, improved affordability, a better balance between supply and demand, some easing in credit availability, a renewed tax credit, and a pick-up in job and income growth are all likely to offset these housing headwinds and promote a modest recovery. The improvement in affordability lately has been the result of lower interest rates, but subdued home prices have also helped. Current coupon MBS yields have recently plunged to the lows seen in the spring, or 3.9%. With 30-year conventional mortgage rates already at a record-low 4.78%, and further declines likely, housing affordability is soaring. The 2.5% recovery in home prices over the past six months only represents a tiny offset to that improvement.
Further, although supply still exceeds demand, the balance is improving. The rebound in new home sales and the plunge to record lows in September housing completions has rapidly normalized inventories of newly constructed homes. As mentioned, new home inventories fell by 4% in October to 239,000 units, a 38-year low. At current sales rates, supply fell to 6.7 months' supply, close to the six months generally thought to represent balance. We may see a bit of renewed upside in months' supply if there is a temporary pullback in sales, but it now seems likely that inventories of newly constructed homes (although not the total, which includes the ‘shadow inventory') will be back to balanced levels by early next year.
Credit availability is also easing somewhat. The proportion of banks reporting that they tightened mortgage lending standards in the Fed's October Senior Loan Officer Survey dropped to 26%, down from 77% a year ago. While lending standards are still tight, it is the change in standards that matters for growth (see Calibrating the Credit Crunch, November 20, 2009).
Extending the credit. In addition, the payback from the expiration of the first-time homebuyer tax credit may be short-lived because new relief is on the way. Earlier this month, Congress passed new legislation that extends the credit for first-time buyers and expands it to cover current home owners purchasing a new or existing home (up to a maximum credit of US$6,500) between November 7, 2009 and April 30, 2010 (the purchaser will have until July 1, 2010 to close). Current home owners must have used the home being sold or vacated as a principal residence for five consecutive years within the last eight. Married couples with incomes up to US$225,000 are eligible for the maximum credit, higher than the US$175,000 under the credit expiring this week.
Finally, improving job and income growth are critical for any lasting improvement in housing demand. On that score, there is already some good news. High-frequency labor market indicators, such as initial and continued claims for unemployment insurance, point to some improvement in the immediate future. And the just-reported US$82 billion (1.3%) upward revision to 2Q wage and salary income likely foreshadows more cyclical improvement for both pay and payrolls. The upshot is that despite significant headwinds and near-term payback from the expiration of the first-time homebuyer tax credit, we think powerful offsetting factors will help housing mount a modest recovery into 2010 and beyond.
By Richard Berner New York
Despite recent improvements in housing demand, construction and home prices, housing risks are turning negative immediately ahead. A ‘payback' from the end of the first-time homebuyer tax credit likely will be the main catalyst, and additional negatives involve the interplay among less-favorable demographics, looming foreclosures and rising joblessness. Yet we strongly believe that renewed housing recovery is coming, courtesy of improved affordability, some easing in credit availability, a renewed tax credit and a return to positive employment gains. The upshot: Weakness in demand, activity and prices is likely through year-end, but we still expect modest improvement in 2010 and beyond: A 10% rise in demand and housing activity is still the most likely outcome next year.
Improvement in many housing metrics. There is no mistaking the improvement in many housing metrics from their trough, at least through October. Sales of new and existing one-family homes jumped by 24.6% and 27.8%, respectively, in the six months ended in October, reflecting some of the positive factors mentioned above. Although one-family housing starts tumbled in October compared with September, they have risen 33% from their February lows. Inventories of new and existing homes have plunged dramatically, promoting a better balance between supply and demand. New home inventories stand at 239,000, the lowest since 1971 in absolute terms. Inventories of existing homes, at 3 million, are well below their peak of 3.8 million in late 2007, although still near the previous peak last seen in 1985. And home prices are either flat or up, depending on the measure used: Over the past six months, the FHFA purchase-only home price index has been flat, while the Case-Shiller S&P home price index is up 2.5%. That compares with declines of 11% and 32% over the previous two and three years, respectively.
Payback coming, plus barriers to activity. Yet those improvements must be set in perspective for two reasons: First, the first-time homebuyer tax credit boosted new and existing sales through October, and a payback is coming. Second, three hurdles still linger for housing: The overhang of inventories of existing homes on the market and a ‘shadow inventory' of yet-to-be foreclosed homes likely will continue to depress new home sales and housing activity for some time to come; demographics are still unfavorable; and rising joblessness is a barrier to qualifying for a mortgage.
Gauging the payback. To gauge the coming payback in sales of existing and new homes, we must calibrate the impact of the first-time homebuyer tax credit on demand. That is difficult, because the US$8,000 maximum tax credit incentive represented only about 5% of the price of homes typically purchased by first-time homebuyers and because there is scant basis for comparison - there is only one example of a similar credit (in 1975, and that was for new homes only). This time around, lawmakers enacted two credits for first-time homebuyers. A US$7,500 credit launched in July 2008 was really an interest-free loan. Then, in February 2009, Congress replaced it with a true credit running up to US$8,000 for low-income buyers who had not owned a residence in the last three years, expiring on December 1, for both new and existing properties.
The just-expiring credit stimulated demand, but it is unclear by how much. According to the National Association of Realtors (NAR), about 350,000 of the 1.8-2.0 million buyers who will claim the credit this year would not have purchased a home without it. But it is uncertain how much of that was genuine additional demand and how much was simply brought forward. Traditional measures of affordability have soared, courtesy of the plunge in home prices and in mortgage rates. But with lenders demanding bigger down payments, and with the credit not available until the deal is closed, down payments and credit availability remain hurdles for many buyers, especially first-time ones.
The 1975 homebuyer credit represents the sole historical parallel and may shed light on the potential payback this time. That earlier incentive, which was aimed only at new homes, initially boosted sales and then triggered a second surge as the expiration date neared. Fueled by lower mortgage rates, pent-up demand and the credit, new home sales jumped by 63% over 1975, but declined by 16% over several months in 1976 after the credit expired. That moderate ‘payback' may foreshadow today's experience, and we assume both home sales and single-family housing starts will soften a bit in the next few months (into early next year) and rise moderately thereafter. Indeed, the sharp decline in mortgage applications underway since early October already hints that the payback is coming. Yet, as discussed in more detail below, a new credit that extends through April 30, 2010 likely will limit the weakness.
Three hurdles for housing. No catalogue of housing risks would be complete without acknowledging three other headwinds. The recession has slowed household formation, looming foreclosures will dump more inventory on the market, and rising joblessness will deter lenders and buyers. Moreover, homebuilders are struggling to compete with distressed property sales, and financing to start construction is still hard to come by.
Less favorable short-run demographics. Demographic trends are critical for assessing long-term housing demand, but short-term changes in demographic fundamentals that are influenced by the business cycle also matter. In the current downturn, both slowing household formation and declining interstate labor mobility have been housing headwinds. The latest Census Bureau report showed that new households grew by only 398,000 between March 2008 and March 2009, compared with increases of 772,000 and 1.6 million in the two previous years. Data are incomplete for March 2009, but it appears that the growth in prime-age households (25-54) slowed even more significantly. That's a time-honored cyclical pattern; many couples postpone marriage and having children in recession, and this time is no different. What is different is the depth of the contraction in payrolls that has affected a broader swath of the population. Thus, the annual demographic increment to housing demand has slowed to perhaps 250,000, even assuming a pick-up in household formation and a 65% home ownership rate.
In a related development, the percentage of grown children moving back in with their parents has also escalated according to data from the Pew Research Center. The authors note that, "Overall, the proportion of adults ages 18 to 29 who live alone declined from 7.9% in 2007 to 7.3% in 2009. Similar drops in the proportion of young people who live by themselves occurred during or immediately after the recessions of 1982 and 2001." In addition, the interplay between housing woes and labor mobility has created frictions in the labor markets: Without a new job, workers wanting to move are unable to do so, depressing housing turnover; conversely, the inability to sell one's home has limited labor mobility and thus the capacity of workers to move to take a new job in another venue.
The ‘shadow inventory': How big? Fully 4.47% of all loans were in the foreclosure process and 9.64% were delinquent at the end of 3Q09, up 150bp and 265bp, respectively, from a year ago according to the Mortgage Bankers' Association; both are records. With about 55 million mortgages outstanding, some analysts estimate that the ‘shadow inventory' of yet-to-be foreclosed homes will rise to more than 13% of that total, or 7 million mortgages. A key trigger for foreclosure is when home owners are in a negative equity position; that is, when the amount they owe exceeds the value of the home. According to First American CoreLogic, 23% of all mortgagees are underwater. Such a surge in foreclosures, even if spread out over a couple of years (as seems likely in any case), would reverse the improved supply-demand balance seen over the past year, put renewed downward pressure on home prices, further discourage housing lenders from offering attractive loans, and pressure household wealth.
Several related factors could reduce the coming rise in foreclosures. First, lenders may be increasingly willing to modify outstanding mortgages by writing down the outstanding mortgage amounts to eliminate negative equity; previous efforts to modify the terms of mortgages by lowering rates or forbearing did not help many lenders or borrowers, because redefault rates ran between 50-60%. Second, lenders may also be more willing to accept short sales (in which they eliminate the sellers' negative equity to allow a sale to occur). Third, the Administration is promising to increase resources to enable eligible borrowers who have undergone trial modifications under the Home Affordable Modification Program (HAMP) to convert to permanent modifications. If successful, these developments could limit price declines by holding otherwise foreclosed homes off the market or taking them out of the supply chain completely. So far, however, delays over documentation and other snafus have held up the modification process, so progress may be slow in coming.
Are there upside risks for housing? In our view, improved affordability, a better balance between supply and demand, some easing in credit availability, a renewed tax credit, and a pick-up in job and income growth are all likely to offset these housing headwinds and promote a modest recovery. The improvement in affordability lately has been the result of lower interest rates, but subdued home prices have also helped. Current coupon MBS yields have recently plunged to the lows seen in the spring, or 3.9%. With 30-year conventional mortgage rates already at a record-low 4.78%, and further declines likely, housing affordability is soaring. The 2.5% recovery in home prices over the past six months only represents a tiny offset to that improvement.
Further, although supply still exceeds demand, the balance is improving. The rebound in new home sales and the plunge to record lows in September housing completions has rapidly normalized inventories of newly constructed homes. As mentioned, new home inventories fell by 4% in October to 239,000 units, a 38-year low. At current sales rates, supply fell to 6.7 months' supply, close to the six months generally thought to represent balance. We may see a bit of renewed upside in months' supply if there is a temporary pullback in sales, but it now seems likely that inventories of newly constructed homes (although not the total, which includes the ‘shadow inventory') will be back to balanced levels by early next year.
Credit availability is also easing somewhat. The proportion of banks reporting that they tightened mortgage lending standards in the Fed's October Senior Loan Officer Survey dropped to 26%, down from 77% a year ago. While lending standards are still tight, it is the change in standards that matters for growth (see Calibrating the Credit Crunch, November 20, 2009).
Extending the credit. In addition, the payback from the expiration of the first-time homebuyer tax credit may be short-lived because new relief is on the way. Earlier this month, Congress passed new legislation that extends the credit for first-time buyers and expands it to cover current home owners purchasing a new or existing home (up to a maximum credit of US$6,500) between November 7, 2009 and April 30, 2010 (the purchaser will have until July 1, 2010 to close). Current home owners must have used the home being sold or vacated as a principal residence for five consecutive years within the last eight. Married couples with incomes up to US$225,000 are eligible for the maximum credit, higher than the US$175,000 under the credit expiring this week.
Finally, improving job and income growth are critical for any lasting improvement in housing demand. On that score, there is already some good news. High-frequency labor market indicators, such as initial and continued claims for unemployment insurance, point to some improvement in the immediate future. And the just-reported US$82 billion (1.3%) upward revision to 2Q wage and salary income likely foreshadows more cyclical improvement for both pay and payrolls. The upshot is that despite significant headwinds and near-term payback from the expiration of the first-time homebuyer tax credit, we think powerful offsetting factors will help housing mount a modest recovery into 2010 and beyond.
中美双双挑起减排大担 三大领域受益最多
就在几天前，中美双方政府十分默契的相继抛出令世界瞩目的“绣球”，以极大的诚意相继公布巨额减排计划：白宫25日宣布，2020 年温室气体排放量在2005 年基础上减少17％，2050年减排83％，而几乎在当天，中国国务院常务会议决定，2020 年中国单位GDP 二氧化碳排放比2005 年下降40-45％。
这一强度明显超出预期。业内专家普遍认为，这使得即将召开的哥本哈根会议将取得超出预期的成果。对此，资本市场表现兴奋，其相关板块股票也在近日表现得非常活跃。
从政策暖风看，金太阳工程、风电上网电价政策、建设坚强的智能电网初步规划、新能源汽车补贴政策已经相继出台，而等待出台的有：新能源发展规划、节能减排规划、战略性新兴产业发展规划、十二五规划、光伏上网电价政策、新能源汽车发展规划、智能电网规划及试点、内陆核电站项目启动，而后面大部分政策有望在明年上半年推出。
利好叫得多了，往往容易被虚化成一个笼统的概念，其实，对于谨慎的投资者来讲，还是有必要区分细分领域，挑出受益最大的板块，做长期价值投资准备。
哪些细分领域将获得蛋糕中的大头？国际能源署认为，2010-2020年，中国将投入1.2万亿到交通运输领域，8720亿到电力供应领域，4400亿到建筑节能减排领域，3000亿到工业领域。而2021-2030年，中国将投入4.7万亿到交通运输领域，2.9万亿到建筑行业，超过电力供应行业的2.5万亿，工业领域也将达到3万亿。也就是说，减排重点集中在电力供应、建筑、交通运输三个领域。
电力供应方面主要指的是替代能源和智能电网领域，申银万国发布报告认为，值得关注的有，核电方面的嘉宝集团 （600622 股吧,行情,资讯,主力买卖）、海陆重工 （002255 股吧,行情,资讯,主力买卖）、东方电气 （600875 股吧,行情,资讯,主力买卖），智能电网方面的思源电气 （002028 股吧,行情,资讯,主力买卖）、国电南瑞 （600406 股吧,行情,资讯,主力买卖）、荣信股份 （002123 股吧,行情,资讯,主力买卖），光伏方面的海通集团 （600537 股吧,行情,资讯,主力买卖）、天威保变 （600550 股吧,行情,资讯,主力买卖）、特变电工 （600089 股吧,行情,资讯,主力买卖），风电方面的东方电气、湘电股份 （600416 股吧,行情,资讯,主力买卖）、金风科技 （002202 股吧,行情,资讯,主力买卖）。
建筑领域，中投证券认为，短期来说，建筑节能领域的减排动力明显，投资回报期较短，相关上市公司有三安光电 （600703 股吧,行情,资讯,主力买卖）、南玻A （000012 股吧,行情,资讯,主力买卖）、海螺型材 （000619 股吧,行情,资讯,主力买卖）、北新建材 （000786 股吧,行情,资讯,主力买卖）、烟台万华 （600309 股吧,行情,资讯,主力买卖）。而工业领域则关注可通过碳交易带来赢利的减排重点企业，比如：巨化股份 （600160 股吧,行情,资讯,主力买卖）、三爱富 （600636 股吧,行情,资讯,主力买卖）。
交通运输方面，中投证券分析认为，投资重点将会在以混合动力汽车和电动汽车为代表的新能源汽车行业。从这个行业看，中国宝安 （000009 股吧,行情,资讯,主力买卖）、杉杉股份 （600884 股吧,行情,资讯,主力买卖）、安凯汽车、上海汽车 （600104 股吧,行情,资讯,主力买卖）、福田汽车 （600166 股吧,行情,资讯,主力买卖）、长安汽车 （000625 股吧,行情,资讯,主力买卖）、大洋电机 （002249 股吧,行情,资讯,主力买卖）、科力远 （600478 股吧,行情,资讯,主力买卖）、江苏国泰 （002091 股吧,行情,资讯,主力买卖）、西藏矿业 （000762 股吧,行情,资讯,主力买卖）值得关注。(中国证券网)
这一强度明显超出预期。业内专家普遍认为，这使得即将召开的哥本哈根会议将取得超出预期的成果。对此，资本市场表现兴奋，其相关板块股票也在近日表现得非常活跃。
从政策暖风看，金太阳工程、风电上网电价政策、建设坚强的智能电网初步规划、新能源汽车补贴政策已经相继出台，而等待出台的有：新能源发展规划、节能减排规划、战略性新兴产业发展规划、十二五规划、光伏上网电价政策、新能源汽车发展规划、智能电网规划及试点、内陆核电站项目启动，而后面大部分政策有望在明年上半年推出。
利好叫得多了，往往容易被虚化成一个笼统的概念，其实，对于谨慎的投资者来讲，还是有必要区分细分领域，挑出受益最大的板块，做长期价值投资准备。
哪些细分领域将获得蛋糕中的大头？国际能源署认为，2010-2020年，中国将投入1.2万亿到交通运输领域，8720亿到电力供应领域，4400亿到建筑节能减排领域，3000亿到工业领域。而2021-2030年，中国将投入4.7万亿到交通运输领域，2.9万亿到建筑行业，超过电力供应行业的2.5万亿，工业领域也将达到3万亿。也就是说，减排重点集中在电力供应、建筑、交通运输三个领域。
电力供应方面主要指的是替代能源和智能电网领域，申银万国发布报告认为，值得关注的有，核电方面的嘉宝集团 （600622 股吧,行情,资讯,主力买卖）、海陆重工 （002255 股吧,行情,资讯,主力买卖）、东方电气 （600875 股吧,行情,资讯,主力买卖），智能电网方面的思源电气 （002028 股吧,行情,资讯,主力买卖）、国电南瑞 （600406 股吧,行情,资讯,主力买卖）、荣信股份 （002123 股吧,行情,资讯,主力买卖），光伏方面的海通集团 （600537 股吧,行情,资讯,主力买卖）、天威保变 （600550 股吧,行情,资讯,主力买卖）、特变电工 （600089 股吧,行情,资讯,主力买卖），风电方面的东方电气、湘电股份 （600416 股吧,行情,资讯,主力买卖）、金风科技 （002202 股吧,行情,资讯,主力买卖）。
建筑领域，中投证券认为，短期来说，建筑节能领域的减排动力明显，投资回报期较短，相关上市公司有三安光电 （600703 股吧,行情,资讯,主力买卖）、南玻A （000012 股吧,行情,资讯,主力买卖）、海螺型材 （000619 股吧,行情,资讯,主力买卖）、北新建材 （000786 股吧,行情,资讯,主力买卖）、烟台万华 （600309 股吧,行情,资讯,主力买卖）。而工业领域则关注可通过碳交易带来赢利的减排重点企业，比如：巨化股份 （600160 股吧,行情,资讯,主力买卖）、三爱富 （600636 股吧,行情,资讯,主力买卖）。
交通运输方面，中投证券分析认为，投资重点将会在以混合动力汽车和电动汽车为代表的新能源汽车行业。从这个行业看，中国宝安 （000009 股吧,行情,资讯,主力买卖）、杉杉股份 （600884 股吧,行情,资讯,主力买卖）、安凯汽车、上海汽车 （600104 股吧,行情,资讯,主力买卖）、福田汽车 （600166 股吧,行情,资讯,主力买卖）、长安汽车 （000625 股吧,行情,资讯,主力买卖）、大洋电机 （002249 股吧,行情,资讯,主力买卖）、科力远 （600478 股吧,行情,资讯,主力买卖）、江苏国泰 （002091 股吧,行情,资讯,主力买卖）、西藏矿业 （000762 股吧,行情,资讯,主力买卖）值得关注。(中国证券网)
Wednesday, December 2, 2009
Comcast, GE Ready to Announce Deal
By SAM SCHECHNER, JEFFREY MCCRACKEN And MAX COLCHESTER
After marathon negotiations, Comcast Corp. and General Electric Co. are poised to announce a deal Thursday that would give Comcast control of GE's NBC Universal, turning the cable-television giant into one of the world's largest suppliers of TV shows and movies.
Journal Communitydiscuss“ Comcast is a major player in broadband access, and networks like NBC have been trying to figure out for years how to monetize their productions over the Internet. I expect this transaction will go a long way toward answering that question. ”
The deal—which has been in the works for nine months—comes after Paris-based telecom and media company Vivendi SA agreed this weekend to sell its 20% stake in NBC Universal to GE for $5.8 billion, according to people familiar with the matter.
If approved by regulators, the deal would give Comcast control of the U.S.'s oldest television network, more than a dozen cable networks and Universal Studios, which includes both the movie studio and theme parks.
Together with its existing businesses, Comcast would oversee assets with revenue of $51 billion in 2008, greater than that of Time Warner Inc., Walt Disney Co. or News Corp.
It is possible the deal's announcement could still be delayed beyond Thursday.
The deal runs against Wall Street's recent preference for breaking up media companies. Time Warner, which owned cable networks of its own, was cheered when it spun off its cable operation this year. Stockholders have pushed Comcast's shares down more than 11% since word of a potential NBC Universal deal surfaced in September.
But for Comcast, the deal is in part a way to cope with the tumultuous media business. An explosion of ways to watch TV and movies on the Web threatens to undermine some of the most lucrative parts of the entertainment industry. DVD sales are down. Advertising sales are increasingly fragmented.
Even after Comcast absorbs the new business, more than three-quarters of its operating profit will flow from its core cable- and Internet-service business. That business is under siege from satellite, telephone and Internet companies pushing TV shows directly to consumers. In late October, Steve Burke, Comcast's chief operating officer, warned at a conference that the growing popularity of online video could prompt a new generation to cut off their subscriptions to cable TV.
Comcast-GE and the Fairytale of Media M&A Comcast executives argue that owning more cable networks, which have thus far proven resilient, is a good investment and that NBC Universal will give Comcast scale to expand its dominance, according to people familiar with their thinking. Comcast executives often point to others, such as Liberty Media Corp. Chairman John Malone, who built up fortunes controlling content and distribution together.
Already, Comcast, which provides cable-TV service to 23.8 million homes and Internet service to 15.7 million homes, is rolling out a system that will put TV shows on the Web for its customers. Comcast has also been aggressive in pushing video-on-demand services. With NBC Universal, Comcast will gain a ready source of content for those subscription-only ventures.
For GE, giving up control of NBC Universal represents a major shift more than nearly a quarter century after it bought NBC. The media business has been a checkered arena for the financial and industrial giant.
While NBC's prime-time lineup has stumbled in recent years, GE also oversaw the founding of CNBC and MSNBC and the company's 2004 acquisition of Universal and cable networks including USA Network from Vivendi.
In part, GE's growing willingness to give up NBC Universal was a question of capital allocation. GE was unwilling to invest more money to buy other media assets, such as cable channels, that NBC Universal executives thought they would need to grow, according to people familiar with the matter.
The Comcast-NBC Universal tie-up is likely to draw scrutiny from regulators and lawmakers for six months to more than a year, according to legal experts and others familiar with the matter. While the government isn't expected to block the deal, the new venture may be forced to accept tough conditions on how it conducts business, these people said.
Already, at least some owners of competing television networks are communicating their concerns about the deal to Washington legislators and regulators, people familiar with the matter said.
The terms of the deal largely follow a template that Comcast and GE executives first hammered out over the summer, people familiar with the talks said. It merges NBC Universal, valued at approximately $30 billion, with Comcast's portfolio of cable networks and some of its Web assets, valued at about $7 billion.
Comcast will inject cash in the range of $6 billion and receive an initial 51% of the venture, the people said. GE will at first retain the remainder but is slated to be bought out in the seven years following closing.
The deal structure presents risks, said Bob Wright, former chief executive of NBC Universal. "It's going to be a management challenge when one party is looking to grow and the other party is looking to get out," Mr. Wright said. But GE could benefit if the venture performs well, he said, adding, "Yes, it's a risk, but there's also upside."
GE has publicly stated its intentions to focus its spending and research in coming years more on its industrial businesses such as energy turbines, aircraft engines and health care, rather than on service-oriented businesses like finance and media.
For Comcast's part, there are mechanisms in the deal that could reduce the company's cash contributions, potentially lowering the effective valuation of NBC Universal, according to people familiar with the matter.
One mechanism could credit Comcast with some of NBC Universal's cash flow before the deal closes, those people said. Another could alter Comcast's cash contribution based on the financial performance of both the Comcast and GE assets being combined in the joint venture, they added.
"It's an extremely positive transition for both parties," said Scott Singer, a Bank Street Group investment banker who focuses on the media sector. "This is a stellar set of assets with a stellar brand name."
—Paul Glader and Shira Ovide contributed to this article.
Write to Sam Schechner at sam.schechner@wsj.com, Jeffrey McCracken at jeff.mccracken@wsj.com and Max Colchester at max.colchester@wsj.com
After marathon negotiations, Comcast Corp. and General Electric Co. are poised to announce a deal Thursday that would give Comcast control of GE's NBC Universal, turning the cable-television giant into one of the world's largest suppliers of TV shows and movies.
Journal Communitydiscuss“ Comcast is a major player in broadband access, and networks like NBC have been trying to figure out for years how to monetize their productions over the Internet. I expect this transaction will go a long way toward answering that question. ”
The deal—which has been in the works for nine months—comes after Paris-based telecom and media company Vivendi SA agreed this weekend to sell its 20% stake in NBC Universal to GE for $5.8 billion, according to people familiar with the matter.
If approved by regulators, the deal would give Comcast control of the U.S.'s oldest television network, more than a dozen cable networks and Universal Studios, which includes both the movie studio and theme parks.
Together with its existing businesses, Comcast would oversee assets with revenue of $51 billion in 2008, greater than that of Time Warner Inc., Walt Disney Co. or News Corp.
It is possible the deal's announcement could still be delayed beyond Thursday.
The deal runs against Wall Street's recent preference for breaking up media companies. Time Warner, which owned cable networks of its own, was cheered when it spun off its cable operation this year. Stockholders have pushed Comcast's shares down more than 11% since word of a potential NBC Universal deal surfaced in September.
But for Comcast, the deal is in part a way to cope with the tumultuous media business. An explosion of ways to watch TV and movies on the Web threatens to undermine some of the most lucrative parts of the entertainment industry. DVD sales are down. Advertising sales are increasingly fragmented.
Even after Comcast absorbs the new business, more than three-quarters of its operating profit will flow from its core cable- and Internet-service business. That business is under siege from satellite, telephone and Internet companies pushing TV shows directly to consumers. In late October, Steve Burke, Comcast's chief operating officer, warned at a conference that the growing popularity of online video could prompt a new generation to cut off their subscriptions to cable TV.
Comcast-GE and the Fairytale of Media M&A Comcast executives argue that owning more cable networks, which have thus far proven resilient, is a good investment and that NBC Universal will give Comcast scale to expand its dominance, according to people familiar with their thinking. Comcast executives often point to others, such as Liberty Media Corp. Chairman John Malone, who built up fortunes controlling content and distribution together.
Already, Comcast, which provides cable-TV service to 23.8 million homes and Internet service to 15.7 million homes, is rolling out a system that will put TV shows on the Web for its customers. Comcast has also been aggressive in pushing video-on-demand services. With NBC Universal, Comcast will gain a ready source of content for those subscription-only ventures.
For GE, giving up control of NBC Universal represents a major shift more than nearly a quarter century after it bought NBC. The media business has been a checkered arena for the financial and industrial giant.
While NBC's prime-time lineup has stumbled in recent years, GE also oversaw the founding of CNBC and MSNBC and the company's 2004 acquisition of Universal and cable networks including USA Network from Vivendi.
In part, GE's growing willingness to give up NBC Universal was a question of capital allocation. GE was unwilling to invest more money to buy other media assets, such as cable channels, that NBC Universal executives thought they would need to grow, according to people familiar with the matter.
The Comcast-NBC Universal tie-up is likely to draw scrutiny from regulators and lawmakers for six months to more than a year, according to legal experts and others familiar with the matter. While the government isn't expected to block the deal, the new venture may be forced to accept tough conditions on how it conducts business, these people said.
Already, at least some owners of competing television networks are communicating their concerns about the deal to Washington legislators and regulators, people familiar with the matter said.
The terms of the deal largely follow a template that Comcast and GE executives first hammered out over the summer, people familiar with the talks said. It merges NBC Universal, valued at approximately $30 billion, with Comcast's portfolio of cable networks and some of its Web assets, valued at about $7 billion.
Comcast will inject cash in the range of $6 billion and receive an initial 51% of the venture, the people said. GE will at first retain the remainder but is slated to be bought out in the seven years following closing.
The deal structure presents risks, said Bob Wright, former chief executive of NBC Universal. "It's going to be a management challenge when one party is looking to grow and the other party is looking to get out," Mr. Wright said. But GE could benefit if the venture performs well, he said, adding, "Yes, it's a risk, but there's also upside."
GE has publicly stated its intentions to focus its spending and research in coming years more on its industrial businesses such as energy turbines, aircraft engines and health care, rather than on service-oriented businesses like finance and media.
For Comcast's part, there are mechanisms in the deal that could reduce the company's cash contributions, potentially lowering the effective valuation of NBC Universal, according to people familiar with the matter.
One mechanism could credit Comcast with some of NBC Universal's cash flow before the deal closes, those people said. Another could alter Comcast's cash contribution based on the financial performance of both the Comcast and GE assets being combined in the joint venture, they added.
"It's an extremely positive transition for both parties," said Scott Singer, a Bank Street Group investment banker who focuses on the media sector. "This is a stellar set of assets with a stellar brand name."
—Paul Glader and Shira Ovide contributed to this article.
Write to Sam Schechner at sam.schechner@wsj.com, Jeffrey McCracken at jeff.mccracken@wsj.com and Max Colchester at max.colchester@wsj.com
Tuesday, December 1, 2009
Growth's Albatross: Inventory Rebound By MARK GONGLOFF
When businesses dumped inventories ruthlessly during the depths of the recent recession, it made the bad economy worse. But there was supposed to be a silver lining: a quick restocking would make the recovery stronger.
Those hopes are still unfulfilled.
A fresh read on inventories of manufactured goods—among the most sensitive to the economy's ups and downs—will come on Tuesday, when the Institute for Supply Management releases its November manufacturing indexes.
The ISM's inventories index for the past four months has bounced back from a deep trough to its highest level since August 2008. The index is still below 50, meaning inventories are still vanishing.
That has been the case since 2006. What matters for the economy is the pace of inventory reduction. If inventories merely shrink more slowly quarter to quarter, then gross domestic product growth benefits.
Inventories are being depleted more slowly now, but that hasn't helped growth as much as economists had hoped. Inventories added 0.9 percentage point to third-quarter GDP growth. But they subtracted 2.4 and 1.4 percentage points, respectively, from the first and second quarters.
If inventories soar from here, then growth will benefit. But there is little sign that is going to happen.
The gap between the ISM's indexes of new orders and inventories has slipped from a 34-year peak in August to a level just above its long-term average, indicating less appetite to gear up production and risk boosting inventories.
Meantime, the ratio of inventories to actual shipments of durable goods is still high, at 1.76, compared with a 10-year average of about 1.5, according to the Commerce Department. This suggests inventories are still high relative to demand.
The ISM also asks manufacturers to assess customer inventory levels. In October, 63% said customer inventory levels were "about right," highest since August 2008. This suggests little need to move the needle in either direction.
More broadly, as long as final demand is anemic, crimping revenue, businesses will keep squeezing costs, notes MFR Inc. chief U.S. economist Joshua Shapiro. Having already slashed payrolls to the bone, inventories make fat targets for future cost-cutting.
Those hopes are still unfulfilled.
A fresh read on inventories of manufactured goods—among the most sensitive to the economy's ups and downs—will come on Tuesday, when the Institute for Supply Management releases its November manufacturing indexes.
The ISM's inventories index for the past four months has bounced back from a deep trough to its highest level since August 2008. The index is still below 50, meaning inventories are still vanishing.
That has been the case since 2006. What matters for the economy is the pace of inventory reduction. If inventories merely shrink more slowly quarter to quarter, then gross domestic product growth benefits.
Inventories are being depleted more slowly now, but that hasn't helped growth as much as economists had hoped. Inventories added 0.9 percentage point to third-quarter GDP growth. But they subtracted 2.4 and 1.4 percentage points, respectively, from the first and second quarters.
If inventories soar from here, then growth will benefit. But there is little sign that is going to happen.
The gap between the ISM's indexes of new orders and inventories has slipped from a 34-year peak in August to a level just above its long-term average, indicating less appetite to gear up production and risk boosting inventories.
Meantime, the ratio of inventories to actual shipments of durable goods is still high, at 1.76, compared with a 10-year average of about 1.5, according to the Commerce Department. This suggests inventories are still high relative to demand.
The ISM also asks manufacturers to assess customer inventory levels. In October, 63% said customer inventory levels were "about right," highest since August 2008. This suggests little need to move the needle in either direction.
More broadly, as long as final demand is anemic, crimping revenue, businesses will keep squeezing costs, notes MFR Inc. chief U.S. economist Joshua Shapiro. Having already slashed payrolls to the bone, inventories make fat targets for future cost-cutting.
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