Economic Commentary

NEW -> Contingent Buyer Assistance Program
<strong>Signs of stabilization?</strong>

The most upbeat part of Bernanke?s message was that there are ?some tentative

signs that final demand, especially demand by households, may be stabilizing.?

Working against this stabilization are a weak labor market, which he suggests will

continue to weaken, and tight ?credit conditions for consumers.? In addition to the

upbeat comments on the consumer Bernanke also noted ?some signs of

bottoming? in the housing market. He points towards an improved sales pace for

new homes and a decline in new home backlogs. These comments suggest that

Bernanke remains optimistic in a gradual improvement.



<strong>Second half inventory bounce</strong>

Similar to our forecast Bernanke noted that ?progress has been made? in

shedding unwanted inventories. He goes on to note that the ?reduction in the pace

of inventory liquidation should provide some support to production later this year.?

This outlook is consistent with our view that an inventory-led bounce will boost

second half growth this year.



<strong>Precondition for growth: stability in the financial system</strong>

Bernanke noted that conditions in funding markets have begun to improve but

argued that ?financial institutions remain under considerable stress, and

cumulative declines in asset prices, tight credit conditions, and high levels of risk

aversion continue to weigh on the economy.? Interestingly, the comments on

growth and lending do not take note of the decreased demand for loans evident in

the Senior Loan Officer Survey released yesterday.



<strong>Output gap remains key for the Fed</strong>

Bernanke reiterated that inflation was likely to remain low but argued that stable

inflation expectations ?should limit further declines in inflation.? That said,

Bernanke also warned that unemployment, the most visible output gap measure,

could ?remain high for a time, even after economic growth resumes.? In short,

labor market weakness is, as we expect, likely to remain with us for some time.
 
<strong>April payrolls expected to tumble</strong>

This Friday, the Bureau of Labor Statistics will report nonfarm payrolls for the

month of April. The Banc of America Securities-Merrill Lynch projection is that,

with the ongoing declines in construction and manufacturing jobs and a sharp

contraction in private-sector service employment, payrolls post a monthly decline

of 525,000. We believe that employment in two housing-related service industries

? furniture and building materials stores -- is particularly vulnerable.



<strong>Furniture and building materials staffing too high</strong>

The retail sales data reported by the Census Bureau can be mapped to the retail

trade payroll data released by the Bureau of Labor Statistics. In looking at the

sales per employee data for all retail categories, we found that, relative to current

sales, employment at furniture and building material stores is too high.



<strong>Employment problems continue in furniture ?</strong>

The downturn in the housing industry has had a deleterious impact on furniture

sales. As illustrated in Chart 1, retail furniture sales per employee have tumbled

by 16.8% since the September 2007 peak. Employment at furniture stores is

down by 11.6% over the same period. If the employment decline matched the

sales slump, furniture employment would be 30,000 lower.
 
Since Mr. Rosenberg is leaving Merrill, I'm posting his entire farewell piece



Dave's Top Ten

The 10 major macro

themes of the past week

1) Do we see the recession ending by mid-year? Not so fast.

2) Have markets been too hasty pricing out deflation risks?

3) Interpreting the ISM index

4) Addressing the second-half restocking theme

5) Vanishing trade deficit is a great silver lining

6) Tighter lending standards across the board

7) Recession continues in service sector

8) Households move to pay down debt ? in droves

9) Pace of job cuts slows, but remain substantial

10) Productivity boosted by slashing hours





<strong> 1) Do we see the recession ending by mid-year? Not so fast.</strong>

We get asked all the time ? ?but your own forecast has real GDP growth positive in

the second half of the year, so even you see the recession ending by mid-year?.

Not so fast.

We are not sure this is widely known, but recessions generally occur when real

GDP is declining but the four ingredients that go into the business cycle are

(i) employment; (ii) industrial production; (iii) real retail/wholesale/manufacturing

sales; and (iv) real personal income excluding government transfers. It is not at all

clear to us that we will see the recession, in its classical sense, end until next year.

That is still up for debate, to be sure, but what is not is the historical record, which

shows very clearly that every recession in the past posted at least one quarter of

positive real GDP growth, and we wonder if back then all the media types and

economists were waving their pompoms on the sidelines and cheering over

?green shoots?. Go back and you will see that the 1990-91 and 1980 recessions

included 1 quarterly GDP bounce; and the recessions of 2001, 1981-82, 1974-75,

1970, 1960, 1957-58 and 1953-54 all enjoyed two quarterly spasms to the upside in

real GDP. Something to ponder just in case this impressive equity rally of the past

two months has been merely technical in nature or whether it is rooted in the view

that this downturn is about to come to a close.



<strong>2) Have markets been too hasty pricing out deflation risks?</strong>

You really have to wonder whether or not the markets have been a tad too hasty

to price out deflation risks: There has never been a time in the post-WWII era

where the 12-month trends in wages, producer costs and consumer prices were

all in negative territory at the same time. This is the new reality. As the markets

focus on the noise from green shoots, we are focusing our attention on the

fundamental trends and the end-game ? we are more than happy to buy these

selloffs in Treasuries and add scarce safe income to the portfolio. This move to

3.25% on the 10-year note resembles that inexplicable move to 5.35% back in the

summer of 2007, in our view. Yes, yes, yields are much lower today but the

inflation rate is 300 basis points lower too and the unemployment rate is 400

basis points higher. If we recall back in that summer of 2007, the equity market

was hitting new highs just as were bond yields ? the trade then was to take

profits in the former and scale into the latter. After a near-40% surge in the S&P

500 and a near-60% surge in bond yields off their recent lows, it would seem

logical to us to embark on a similar shift this time around. Even if the recession is

to end soon, and that is still debatable, bond yields do not typically bottom until

we are well into the next cycle as inflation continues to decline even after the

downturn ends.



<strong>3) Interpreting the ISM index</strong>

Please help us on interpreting Friday?s seemingly ripping ISM index ? as it rose to

40.1 from 36.3: We can?t tell you how much comfort clients seemed to obtain from

the diffusion index, not remembering that the improvement in March (35.8 to 36.3)

coincided with a 1.7% plunge in industrial production and that the jump in ISM

orders in March as well (to 41.2 from 33.1) coincided with a 0.9% falloff in total

factory orders. These surveys are only useful insofar as they are capable of

actually foreshadowing the actual data! The ISM is a diffusion index ? if one

small company says things are better but a giant firm says things are worse, then

it?s a wash. But not for the economy, obviously.

Digging beneath the surface, the ISM showed that the grand total of 1 industry ?

5.6% of the universe ? posted growth in April. We have redefined what a ?green

shoot? is. For the third month in a row, not one industry added to payrolls. Yes, the

orders index improved considerably, but the share of respondents saying things got

better last month barely improved (28% to 31%). Much attention was focused on

the big improvement in terms of unwinding the excess inventory backdrop ? but in

fact, the share of companies saying their customer inventories were ?too high? was

the highest April result (21% ? it was 12% a year ago) since 2001!



<strong>4) Addressing the second-half restocking theme</strong>

We really feel the need to address this widely-held view that great strides have

been made to pare inventories and that somehow, restocking is going to be the

second-half theme that propels the economy out of recession. Not so fast. To be

sure, inventories were pared by a record $137 billion at an annual rate in the first

quarter, which is why so many economists and market players took solace out of

that -6.1% GDP print. But real final sales were extremely weak ? sliding at a

5.2% annual rate after a 5.8% contraction in 4Q (is that really a significant

improvement in the second derivative?). And we know from Friday?s factory report

that total manufacturing inventories may have been pared 0.8% in March, but

shipments fell an even larger 1.2%. And we know that we finished off 1Q with a

manufacturing inventory-shipments ratio of 1.46x, up from 1.45x in February and

1.26x a year ago (not to mention a 13-year high). The highest the I/S ratio ever

got during the tech bubble was 1.42x, and now, we are at 1.46x. And everyone is

banking in an imminent recovery. Good luck.

One more thing ? we get so many factoids thrown our way, like ?when you break 40

on ISM on the upside, you always go back to 50?. Well, we are sure we likely will

see 50, but exactly what year, who knows. What we do know is that the linear

extrapolation from the experience of recent cycles is going to prove faulty, as has

been the case so often this cycle which is why so many economists blew the call. If

Chrysler is shutting down its North American plants for the next 30-60 days as it

moves into the bankruptcy process, and if GM is about to close 13 of its factories for

the next eleven weeks, do you really think we are going to 50 on ISM anytime soon?

Furthermore, when the recession began in December 2007 ? and it began due to the

problems in the housing and credit markets, not because of a manufacturing

overhang ? the ISM was 49. Back in September, just before the economy fell apart

for a five-month span, the ISM was over 43. So excuse us if we don?t dance the

tango because we are now at 40 on this diffusion index. It?s still bad!



<strong>5) Vanishing trade deficit is a great silver lining</strong>

The ever-vanishing trade deficit is a really great silver lining in this era of consumer

frugality ? we are becoming more self-sufficient, and relying more on import

substitution to meet our spending needs. The improvement in the external balance

of trade contributed 2 percentage points to real GDP growth in the first quarter ? in

other words, absent the narrower trade deficit, the economy would have shrunk at

an 8.1% annual rate (as if being down 6.1% wasn?t bad enough!). Over the past

four quarters, the contribution from the shrinking trade deficit has been 1.5

percentage points. Now over 100% of this contribution has come from imports, not

exports, given the global downturn in demand which has also hit our outbound

shipments. But the slide in imports actually added 6 percentage points to GDP

growth in 1Q (and the average has been 4.4 percentage points over the past year).
 
<strong>6) Tighter lending standards across the board</strong>

This, the Fed released its quarterly Senior Loan Officer Survey and we

learned that 40% of banks reported tightening standards for commercial and

industrial loans. Banks largely blamed the economy for the tighter credit, with

97% reporting the outlook was ?somewhat? or ?very? important in the decision to

tighten credit. Interestingly, 44% of banks reported less competition as a driver of

the tighter standards while 46% reported reduced demand in the secondary

market. These latter two factors only serve to highlight the importance of the

Fed?s focus on restarting the ABS market via the Term Asset-Backed Lending

Facility. However, supply is only half the story. Lower inventory valuations and a

weaker economy likely played a role in reducing demand as more than two-thirds

of banks reported that demand was weaker.

One of the key standouts in the Fed?s Survey is the extent to which demand for

commercial real estate loans has collapsed. The net percentage of banks

reporting weaker demand for commercial real estate loans jumped to 66% in 2Q

from 55% in 1Q in what is the weakest showing on record. Meanwhile, the

majority of banks continue to tighten their lending standards on commercial real

estate loans. Fully 66% of banks tightened standards and, though that is

marginally better than the 79% in 1Q, this tells us that we can expect continued

declines in commercial construction in the quarters ahead.

49% of banks reported tightening lending standards for prime mortgages while 64%

tightened standards for non-prime mortgages. Demand for prime mortgages rose,

with 51% of banks reporting higher demand. Tellingly, responses for the subprime

category were omitted as there were too few respondents who originate this kind of

mortgage. This suggests the Fed still has their work cut out for them if they hope to

stabilize the housing market simply by making mortgages more affordable.

<strong>

7) Recession continues in service sector</strong>

The ISM non-manufacturing index rose to 43.7 in April from 40.8 in March and

was better than consensus estimates (42.2), but about in line with BAS-ML

expectations (43.0). Results suggest that service sector growth (which

commands a 90% share of the economy) contracted less sharply over the month

but, nevertheless, continued to contract. New orders staged the most compelling

improvement, rising 8.2 points over the month, but importantly failed to break

above the breakeven mark of 50. This is the most volatile component of the ISM

and we suspect that sluggish demand and the ongoing inventory correction will

weigh on order growth in the months ahead. At 43.0, the inventory change index

suggests that companies continued to pare inventories at a rapid clip in April. At

the same time, inventory sentiment rose 2.5 points over the month, signaling

uncomfortably high stocks in the current environment. Accordingly, we remain

cautious about the near-term outlook.

<strong>

8) Households move to pay down debt ? in droves</strong>

Consumer credit contracted a record $11.2 billion in March (a 5.2% annual rate

and down a total of $32 billion since last September). Revolving credit posted a

large decline ? after sliding at a 12.1% annual rate (-$9.7 billion) in February, it

fell another 6.8% SAAR (or -$5.4 billion) in March. This was the sixth consecutive

monthly decline in revolving credit, and the YoY trend in credit card use is running

at -1.2% ? a huge swing from the +7.7% trend a year ago and the first move into

negative terrain ever. People are cutting up their credit cards and extending the

life of their durable consumer goods ? after all, the average household owns a

record $37,000 of ?stuff?. The fact that non-revolving credit is down $5.4 billion for the month in the face of

the huge improvement in auto loan terms is a story in its own right. What is tough

to square is the huge gap between the seasonally adjusted and non adjusted

data ? for example, credit card outstandings were down $17 billion for the month

and $60 billion year-to-date unadjusted versus the ?smoothed? $5 bln and $16 bln

drawdown respectively.



<strong>9) Pace of job cuts slows, but remain substantial</strong>

Challenger job layoff announcements rose 47% from year-ago levels to 132K in

April signaling an ongoing deterioration in the labor markets. This does mark a

slowing in the pace of layoffs for the second straight month (and the lowest since

last October); however the level remains substantial and compares to 90K a year

ago. Job cuts in the government (namely state and local) and auto sectors led

over the month, accounting for nearly 40% of the total. These two areas in

particular are expected to continue to be a hefty drag ? if not accelerate in the

months ahead ? given beleaguered government finances and

restructuring/downsizing in the auto industry. Elsewhere, layoffs continued to

mount in a broad number of industries including industrial goods, chemical,

financial and electronics. Looking ahead, we anticipate ongoing and significant

job cuts, albeit at a slower pace, with an unemployment rate that we expect will

reach 10% by this summer.



<strong>10) Productivity boosted by slashing hours</strong>

Non-farm business sector productivity rose 0.8% Q/Q at an annual rate in 1Q for

a result better than our estimate (-1.1%) but closer to consensus (0.6%). Output

posted an 8.2% decline (mirroring results from the recent GDP report), while

companies continued to aggressively slash employee hours for the 7th straight

quarter (-9.0% Q/Q to -5.8% Y/Y). Unit labor costs (ULC) were up 3.3% Q/Q for

the third quarterly increase, but a slower gain versus the prior two quarters.

While this boosted the annual rate to 2.4% from 1.8% Y/Y in the 4Q08, we expect

costs to ease over the near term as companies continue to cut hours and jobs to

contain costs. Indeed, the record low 0.3% quarterly gain in the Employment Cost

Index suggests that this slowdown is already well underway. Compensation was also cut by 5.2% Q/Q annualized, reflecting weaker wage and

salary growth, bonus payments and other forms of compensation. Relative to

year-ago levels, compensation is now running at -1.9% versus 2.8% growth in

1Q08 and 5.2% Y/Y in 1Q07. This market turnaround is alone very deflationary in

nature and suggests that any inflation fears are likely still many quarters away.

While easing employment costs are constructive for businesses, the drag on

consumer income growth is substantial and can be expected to lead spending

growth lower in the quarters ahead.
 
<strong>Food prices are actually falling</strong>

We were criticized for failing to mention a Financial Times article yesterday, which

pointed out the surge in coffee and sugar prices (see ?Coffee and Sugar Prices

Stirred by Shortages?). Prices for these commodities are on the rise because of

poor crops and rising demand; however, this is not at all inflationary, in our view,

for several reasons. Aside from the fact that we are talking about something with

less than a 0.2% weight in the overall CPI data, what gets missed is that the

consumer price level for food and beverages has actually been down for the last

two months, dropping 0.1% in both March and February and down 1.4% at an

annual rate over that time. This is the weakest two-month performance since

1991. Secondly, the general rise in commodities (up 21% since March) is no

competition for the near-unprecedented slack in labor markets, and how we get

any inflation with wages and salaries deflating at nearly a 4% annual rate over the

last six months remains a mystery, in our view.

<strong>

Travel intentions sink</strong>

According to a new poll from the Associated Press, only 42% of Americans

surveyed said they are planning a leisure trip this summer. One-third have

already canceled one trip this year because of financial worries. This time last

year 49% of American surveyed were planning a summer trip.



<strong>Good news on housing!</strong>

Some good news on housing buried on page D3 of today?s Wall Street Journal,

?April Drop in Listings for Homes?. According to data from ZipRealty Inc, the

supply of homes for sale in 29 major metro areas dropped 3.6% in April. What is

unclear, however, is the number of foreclosed properties that will hit the market in

coming months.



<strong>Stimulus package not reaching neediest communities</strong>

The criticism over the stimulus package is mounting. The Associated Press just

released a report showing that across the nation, states are planning to spend

stimulus in areas where joblessness is already low. All in, the government will

reportedly be spending 50% more per person in areas with the lowest

unemployment than it will in communities with the highest. Since the money is

being funneled to shovel-ready projects first, struggling communities tend to be

locked out since they do not have many shovel-ready projects. For more, see the

article from the Associated Press, ?Stimulus Watch: Early Road Aid Leaves Out

Neediest?.



<strong>More budget cuts loom in California</strong>

Yesterday, we pointed out the intensifying budget restraint coming at the state

and local levels of government. Today, we catch the following headline on page

A2 of the Wall Street Journal, ?Cuts Loom in California If Propositions Fail?.

According to the article, if six key ballot initiatives fail on May 19, the state will be

forced to cut $3.6 billion from education, 10% of the firefighting budget, and even

release 40,000 low-risk prisoners to ease prison costs. This scenario is looking

likely too, with five of the six initiatives trailing in recent polling.
 
<a href="http://www.usnews.com/blogs/flowchart/2009/05/14/how-tarp-began-an-exclusive-inside-view.html">How TARP Began: An Exclusive Inside View</a>



Interesting take on the reasoning behind TARP from a couple treasury people. Nason seems to believe that the credit contraction isn't over yet.



I'm still undecided on how much I believe everything they say.
 
[quote author="irvine_grad" date=1242456677]<a href="http://www.usnews.com/blogs/flowchart/2009/05/14/how-tarp-began-an-exclusive-inside-view.html">How TARP Began: An Exclusive Inside View</a>



Interesting take on the reasoning behind TARP from a couple treasury people. Nason seems to believe that the credit contraction isn't over yet.



I'm still undecided on how much I believe everything they say.</blockquote>


I am not being sarcastic. I am shocked that anyone would believe anything they say. I would not necessarily think they are lying, but I would also have no reason to think they are telling the truth.
 
<strong>Consumer sentiment up on hope of a better future</strong>

Consumer sentiment rose to 67.9 in the preliminary May reading. This was

modestly above the consensus estimate of 67.0 and slightly below our

expectation of 68.8. The improvement was driven by the expectations

component.

The 5.9 point jump in the expectations index more than offset a 0.4 point decline

in the current conditions index. This suggests that the jump in expectations may

have been based more on wishful thinking than on any rational reason to

anticipate improvement. As such, we continue to expect the consumer to remain

on the sidelines (or the unemployment line) even as the inventory story boosts

growth in the second half of the year.
 
<strong>Forecast Addendum: Meltdown in the auto sector</strong>

The cornerstone of our forecast update released last February was a relatively

swift inventory correction that largely played out in the first half of the year, setting

the stage for a second quarter rebound in GDP growth. However, the situation

playing out in the auto sector suggests that the acceleration will be much more

muted that we expected. Our forecast for 2009 GDP remains broadly unchanged

at -3.0% Y/Y.



<strong>Peak in claims and trough in ISM may still lie ahead</strong>

However, anyone buying into the positive second derivative argument should not

expect it to remain such a supporter of the equity market over the next couple of

months. Indeed, the unfortunate events in the auto sector, which after all is the

next most cyclically vulnerable sector in the US, imply we have not seen the peak

in jobless claims and that the manufacturing ISM may hook lower in May and

June. Indeed, the events in the auto sector threaten well over 300k auto sector

jobs at the manufacturing and retail dealer levels. Moreover, the lower

momentum into next year brings our GDP 2010 forecast down to 1.5% from 1.9%

previously.



<strong>Auto related closures could shave 300K from payrolls</strong>

At the time of writing, auto sector shutdowns by GM and Chrysler are expected to

last through at least mid-summer 2009. Beyond that, some factories could reopen,

though there is a distinct possibility that some will be gone for good. This in

turn suggests a shift of in domestic auto production to an infinitely lower valued

added import base. Such a move threatens to take a large chunk over time in

auto manufacturing jobs -- we estimate that 200k auto production jobs could

disappear. And, the vast auto dealer network that GM and Chrysler have so

deliberately built up over the decades could be pared back over the short-term by

a large enough size to take more than 100k from payrolls.



<strong>Inventory correction subtracts less in 2Q, adds less in 2H</strong>

After incorporating these shutdowns, the quarterly profile of our GDP forecast shifts,

as the aggressive inventory cycle that we expected to have been largely played out

in the first half of the year extends into the third and fourth quarters. About the only

good news in our forecast is that 2Q is now tracking at ?just" -3.5% (was -4.8%)

quarterly annualized, with less of an inventory drag over the period. However, we

also get a commensurate diminished positive inventory swing into the second half of

the year with growth expected to average only 0.5% in 3Q and 1.5% in 4Q in

contrast to what was about a 2.5% average pace expected previously.
 
<strong>Economic expansion seen as fragile</strong>

The minutes of the April 29 FOMC meeting revealed the Committee was

concerned about the fragility of the economic outlook and thus the door is ajar for

more quantitative easing (QE), though a wait-and-see mode in the near term is

most likely. Not surprisingly the bond markets are seeing a sharp rally and the

dollar has sold off on this suggestion that the Fed may need to purchase still more

securities to ensure the economy remains on a sustainable growth path.



<strong>Committee dovish, Staff more optimistic</strong>

In the outlook for the economy, there was a fairly clear dichotomy between the

opinion of the district Fed banks and that of the Board Staff. The central tendency

forecast for GDP forecasts submitted by the banks was lowered by about ? of a

percentage point for 2009 and by about 0.4 percentage points for 2010, with the

achievement of above trend growth pushed off to 2011. In contrast, the discussion

of the Staff forecasts suggested a more optimistic outlook for the economy for 2H

2009 and 2010. Indeed, the Staff revised up its growth forecast in response to

recent favorable financial developments as well as better-than-expected readings

on final sales, notably lower borrowing rates and higher stock prices. Given that

the opinion of the Staff likely carries more weight amongst the more-influential

Board governors, we believe the Fed will stick to their wait-and-see mode.



<strong>Inflation outlook stays tame</strong>

On the inflation front the balance of opinion remained decidedly tilted toward a

benign outlook. In fact the Minutes noted, ?Most members expected inflation to

remain subdued over the next few years [emphasis added].? There was even

much discussion of high unemployment and low capacity utilization rates keeping

inflation trends below a pace ?consistent with sustainable economic growth and

prices stability.? Still, the inflation hawks were not completely silent as there was a

comment about the ability of the Fed to shrink its balance sheet quickly enough to

forestall an acceleration of inflation at some point down the road.
 
[quote author="irvine_grad" date=1242864183]For you Rosie fans:</blockquote>


<strong>want:</strong>

<img src="http://cache.deadspin.com/archives/roseygrier.jpg" alt="" />

<strong>do not want:</strong>

<img src="http://www.gossipboulevard.com/wp-content/uploads/2007/12/rosie.jpg" alt="" />
 
[quote author="irvine_grad" date=1242864183]For you Rosie fans:



<a href="http://www.scribd.com/doc/15632652/Breakfast-With-Dave-051909-v5">Breakfast With Dave (David Rosenberg's inaugural report @ Gluskin Sheff)</a></blockquote>


The file has been deleted. But, for now Dave is going to be doing his economic newsletter for free. <a href="https://ems.gluskinsheff.net/index.ncl.html">You can sign up for it here</a>.
 
By DARRELL A. HUGHES and JOHN D. MCKINNON

The federal agency that backstops corporate pension plans reported that its deficit tripled in the last six months, to $33.5 billion. Despite the shortfall, the agency said it has enough assets to pay benefits for many years, even if the holder of one of the largest retirement programs, General Motors Corp., were to file for bankruptcy.



The news came as the Pension Benefit Guaranty Corp.'s former director invoked the Fifth Amendment in response to lawmakers' questions about possible mismanagement under the Bush administration. The PBGC's inspector general last week issued a report saying that the former director had violated prohibitions on contacting bidders that were seeking investment contracts.



The former director, Charles Millard, has denied allegations that he had inappropriate contacts with several Wall Street firms that won contracts to advise the agency, and said his actions were approved by agency counsel. But his attorney, Stanley Brand, said in a statement that it was best if Mr. Millard didn't testify at a Senate hearing Wednesday, in what he described as a "biased and hostile environment."



The PBGC deficit stood at $11 billion, compared with its long-term obligations, as of Sept. 30. The agency attributed the deterioration of its finances since then to the assumption of pension-plan obligations from insolvent companies, as well as investment losses and the current low interest-rate environment.



The PBGC also warned that distressed companies are likely to terminate more pension plans, leading the agency to take on more of those obligations.



"The amount of underfunding in pension plans sponsored by financially weaker employers is very substantial," acting director Vincent Snowbarger said in testimony before the Senate Special Committee on Aging.



The PBGC estimates that pensions for all companies in the auto sector are $77 billion short of the money they need to meet their obligations, of which $42 billion would be guaranteed by the agency. By law, PBGC limits the amount of benefits it will pay to retired workers.



According to the most recent public information available, the pension plans of GM and Chrysler LLC are underfunded by $29 billion. A congressional oversight official, Barbara Bovbjerg, said the Chrysler and GM pension plans pose "considerable financial uncertainty" for PBGC.



But many experts say that the problems of GM's huge pension plan are not as serious as they appear. That's because GM's plan actually was relatively well-funded before last year's market downturn. Assuming financial markets strengthen, it likely would return to health.
 
[quote author="awgee" date=1242964600]BondTrader - I hope you were short today.</blockquote>


I put my money where my mouth is, been shorting since the first time SPY went to 93. Good luck to you all.
 
[quote author="BondTrader" date=1242965473][quote author="awgee" date=1242964600]BondTrader - I hope you were short today.</blockquote>


I put my money where my mouth is, been shorting since the first time SPY went to 93. Good luck to you all.</blockquote>


Sorry, I should have been more specific. I meant bonds.
 
[quote author="awgee" date=1242969824][quote author="BondTrader" date=1242965473][quote author="awgee" date=1242964600]BondTrader - I hope you were short today.</blockquote>


I put my money where my mouth is, been shorting since the first time SPY went to 93. Good luck to you all.</blockquote>


Sorry, I should have been more specific. I meant bonds.</blockquote>


We are buying CDS and long bonds, you probably saw tons of debt issuances out of the bank/insurance spaces these days (Principal, Allstate, Aflac, COF (WTF!!!)), we didn't participate in anyone of them.
 
<strong>Macro Viewpoint</strong>



<strong>It is so over</strong>

Are the markets trying to tell us something about the second derivative story? The

S&P 500 is headed for a second consecutive week in the red, copper prices are

down $15 from the recent peak hit last April and high yield spreads have stalled

out at 9.2% after staging a stunning 7 percentage point rally since last December.

Could it possibly be that markets are no longer in love with a second derivative

that mainly tells of less negative activity but no sign yet of an upturn in growth? In

other words: are the markets ?over? the second derivative?



<strong>Payroll losses of 465k expected</strong>

There was certainly no lack of fodder for the second derivative that doesn?t

produce a positive first derivative story in this week?s batch of economic

indicators. Initial jobless claims fell to 631k from an upwardly revised 643k the

prior week. The numbers suggest an improvement in the May nonfarm payroll

report from the -539k job loss in April, but we will still see a hefty 465k jobs lost.

Moreover, it is quite likely payrolls could once again swell as more auto workers

hit the unemployment ranks. Continuing claims rose by another 75k in the week

ending May 9th. The cumulative rise in continuing claims has been 542k,

suggesting that the unemployment rate will rise to 9.2% from 8.9% in April.



<strong>Philly a hope and a dream</strong>

The Philadelphia Fed index rose to -22.9 in May from -24.4 in April, less of a rise

than markets had expected. Here again, the events in the auto sector could yet

send this indicator southward. Sentiment 6-months from now saw a marked

improvement, up 11.5 points to 47.5 in May, the highest read since mid-2004.

However, caution on a read-through to market direction is needed here since it is

most likely the equity market upturn that is behind this upturn in sentiment. We

will see if this sentiment is validated; after all, there was a similar swell in

sentiment in early 2002 that never translated into an economic lift-off.
 
THE MARKET SURGED ON THE BACK OF THE CONFERENCE BOARD

CONSUMER CONFIDENCE REPORT FOR MAY



? The headline index surged to 54.9 from 40.8 in April and the 25.3 low in

February. The 29.6 point jump over the last three months is a record. This

will revive the ?green shoot? advocates.



? The confidence index is back to where it was in September when the

economy was nine months into recession. In the last two recessions, as an

example, the end of the recession coincided with this index north of 80. So

it is telling us what so many other indicators are signaling which is it that

things are ?less bad? than they were; but this is not enough to terminate the

recession call.



? The bulk of the increase in the index was in ?expectations?, which surged to

72.3 from 54.0 in April ? to stand at its best level since December 2007!

This index is influenced largely by the rally in the equity market, which

becomes circuitous since the market then rallies off a number like this.



THE LAST TIME THAT THERE WERE MORE EQUITY MARKET BULLS (35.8%)

THAN BEARS (30.8%) WAS BACK IN OCTOBER OF 2007 WHEN THE MARKET

WAS HITTING ITS PEAK. THIS METRIC WORKS LIKE A CHARM BECAUSE

LAST MARCH, AT THE MARKET LOWS, THE GAP BETWEEN THE BEARS

(52.8%) AND THE BULLS (19.6%) IN THE OTHER DIRECTION WAS THE

LARGEST SPREAD SINCE JULY 2008 (AND THE SECOND LARGEST GAP ON

RECORD).
 
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