International Energy Agency member countries are in a better position to respond to unexpected oil supply disruptions than there were in 2000, according to a new report from the IEA. Nevertheless, numerous factors will continue to test the delicate balance of supply and demand, the IEA says in Oil Supply Security — Emergency Response of IEA Countries 2007.
When Hurricane Katrina hit the Gulf of Mexico in 2005, the region’s oil production and refining infrastructure was devastated and world energy markets were disrupted. The IEA decided in a matter of days to bring 60 million barrels of additional oil to the market. The emergency response system worked as the collective action helped to stabilize global markets.
The hurricane response and the recent reviews confirm that key advances have been achieved, particularly in terms of stockholding to support stockdraw in the event of a supply disruption, the study finds. IEA member countries’ stocks remain on an upward trend: since the last publication of the report (2000), they grew by 14% and stood at 4.1 billion barrels at the end of 2006.
Stocks grew more than just to compensate for the rise in net imports to IEA member countries; at the end of 2006, total stocks covered 122 days of net imports, compared to the all time lowest level of 108 days in early 2000.
There has also been an increase in the number of member countries holding government and/or agency (public) stocks. In 2007, 17 out of the 26 members of the IEA held public stocks. This reflects a rise in the number of member countries with stockholding agencies, which has increased from 4 to 11 since the early 1980s. With the accession of Poland and the Slovak Republic to the IEA, and with Turkey’s intention to create an agency, it is anticipated that 20 out of 28 IEA member countries will have public stocks by 2008.
In addition, an increasing proportion of all stocks held in IEA member countries is publicly controlled. In the mid-1980s, only one-quarter of all IEA member countries’ stocks were publicly held; by 2006, this figure had risen to more than one-third. The collective action of 2005 showed that public product stocks might be necessary when downstream infrastructure is severely damaged and that is why countries who traditionally hold crude oil in their in public reserves are now considering product stocks as well.
Despite the progress, numerous factors will continue to test the delicate balance of supply and demand, the IEA says. “Oil demand growth will continue to accelerate in Asia; oil will be increasingly produced by a shrinking number of countries; and capacities in the supply chain will need to expand.”
The complete report Oil Supply Security — Emergency Response of IEA Countries 2007. is available for purchase at the IEA website.
The number and type of fixed-income exchange-traded funds is growing and the sector is providing an increasingly attractive alternative to fixed-income mutual funds and other investments.
In a new report Why 2007 Is ‘The Year Of The Fixed-Income ETF’ In The US, Standard Poor’s Credit Research says that Fixed-income ETFs are “spreading their wings by broadening their index base and venturing into active management.”
The number of funds has achieved a fivefold increase to about 30 from six over the past year. Since fixed-income funds currently represent only a small fraction of the total ETF count of roughly 550 available in the US (up from about 400 in 2006), they have substantial opportunity for growth, S&P says. “Indeed, scores of fixed-income ETFs are set to launch pending SEC approval.”
What began simply, with a fixed-income ETF tracking a US Treasury index in 2002, has evolved into offerings that include aggregate and corporate-debt indexes and slices of them, as well as ETFs that focus on municipal bonds or high-yield debt.
The ranks of fixed-income ETF sponsors have swelled, with Ameristock and Vanguard joining, and with offerings and funds from Powershares, Van Eck Global Advisors, and Bear Stearns in registration.
Municipal bond funds, which debuted in 2007, are laying the groundwork for the next generation of funds by “opening the door for actively managed ETFs.” Because bonds are generally considered more fungible than equities and the universe of municipal bonds is broad but not deep, ETFs invested in this area use very aggressive sampling, relying on as few as 30 or 40 bonds to track indexes containing thousands of fixed-income securities.
Some equity ETF sponsors are pushing the active management door open even wider, aiming to outperform their benchmark indexes or earn returns that are multiples of an index or are inversely correlated to it, S&P says. Even the index can be eliminated: An ETF can consist of the top picks of its manager. ETFs could also serve as a better vehicle for $310 billion in fixed-income mutual funds.
Standard & Poor’s has assigned investment-grade ratings to 25 of the ETFs it rates, with the majority in the most creditworthy ‘AAA’ range. Just one—a high-yield bond fund—carries a speculative-grade rating, obviously because it focuses on the higher returns that riskier below-investment-grade securities can generate. In addition to fund credit-quality ratings, Standard & Poor’s has assigned volatility ratings to the ETFs it reviews.
As for the future, institutional clients are asking for global and emerging market debt, and individual country debt is expected to follow.
The detailed report is available for purchase.
Interest in subprime-related topics is no longer dominating Research Recap’s Top Posts, possibly indicating that much of the collateral damage has been taken into account. This may be borne out by the most popular post of the week $300 Billion of CDO Losses Factored into Stock Prices, drawn from the OECD’s analysis of the credit crisis.
Retailing issues made a strong showing during the week, led by Forrester Research’s Retailers Dominate Customer Experience Rankings in second place and the Harvard study Warehouse Club Fees and Prices Lead Shoppers to Spend More in the fifth slot. With strong interest in Black Friday and Cyber Monday online and in-store shopping, it will be interesting to see whether this trend persists through the holiday season.
Two Private Equity posts rounded out the top 5, with S&P’s Few Lessons Learned from Failed LBOs of Recent Years at number 3 and the HEC Business School study Private Equity Underperforming Stock Markets, published by the Financial Times, at number four.
The risk of problems affecting large European Union banks spilling over into other EU countries is less likely than spillover problems within a country, a new working paper finds. However, cross-border linkages are increasing and the spillover risk is significant enough to warrant strong cross-border supervisory cooperation, the paper says.
The Working Paper Estimating Spillover Risk Among Large EU Banks was prepared by International Monetary Fund economists Martin Čihák and Li Lian Ong, but does represent the IMF’s official views. The paper uses data through April 2007, so therefore does not include the recent period of financial turmoil.
Spillovers within domestic banking systems generally remain more likely than cross-border spillovers, but the number of significant cross-border links is already larger than the number of significant links among domestic banks, adding a piece of empirical evidence supporting the need for strong cross-border supervisory cooperation within the EU.
For the whole sample period, significant spillovers were found in about 40% of all possible domestic links, compared to about 9% of all possible cross-border links.
The bank with the biggest potential for spillover is Fortis, the Belgo-Dutch banking and insurance group (which ranks 19 in the EU in terms of total assets), which has significant impact on eight other banks (six cross-border and two domestic). HSBC is second, with six spillover links (five cross-border and one domestic).
Adding to cross-border linkages, The Financial Times reports that Ping An Insurance, China’s second largest life assurer, has paid $2.7bn to become the leading shareholder in Fortis. The acquisition of a 4.2% stake, the largest foreign purchase by a Chinese insurer, paves the way for cross-border collaboration to develop banking and insurance products. Ping An in turn is 17% owned by HSBC.
The IMF paper finds the relative frequency of spillovers has been increasing for cross-border linkages (from 7.6% in May 2000–November 2003 to 8.3% in December 2003–April 2007 and 8.7% in November 2005–April 2007), while for domestic linkages it has been declining (from 28.6% in May 2000–November 2003 to 18.8% in December 2003–April 2007 and 18.6% in November 2005– April 2007), the paper says.
Interest in adopting International Financial Reporting Standards appears to growing among US companies, according to a new survey by Deloitte & Touche.
Preliminary results of the survey show that approximately 20% of CFOs and senior finance professionals (representing approximately 300 U.S. companies) would consider adopting IFRS, if given a choice by the Securities and Exchange Commission. Approximately two-thirds of those companies would consider adopting IFRS within the next three years.
While interest in adopting IFRS exists, the survey results indicate that companies believe their personnel lack sufficient knowledge of IFRS to make the conversion and to maintain IFRS financial statements, both among domestic and non-US operations. More than half those companies considering IFRS say they lack skilled resources in their US operations, while approximately one-third felt they lacked skilled resources in their non-US operations.
As more companies outside the US report using IFRS, there will likely be increasing pressure on US companies to do the same.
The survey follows the recent concept release by the SEC on whether US companies should be permitted to prepare their financial statements using IFRS, as published by the International Accounting Standards Board (IASB). On the basis of the responses received, it is possible that by 2010 or 2011, US companies may have a choice of IFRS or US generally accepted accounting principles (GAAP) for public reporting purposes in the United States.
The SEC identified the lack of experience in preparing IFRS financial statements in the US market as a potential issue in its concept release and asks what implementation concerns should be considered by the SEC.
Approximately 20% of US companies say they have insufficient knowledge to determine whether they would consider adopting IFRS, if given a choice. Another 15% were undecided as to whether they would or would not consider IFRS adoption.
Approximately 40% of the Fortune Global 500 companies currently use IFRS, and that percentage will increase in the next couple of years as countries like Canada and Brazil move to IFRS.
Interest in adopting IFRS should grow once US companies become more familiar with the standards.
About one-third of companies that indicated they would not consider adopting IFRS felt the most significant obstacle is that IFRS are not viewed as acceptable as US GAAP by investors and analysts. As many investors and analysts have accepted IFRS as a reporting basis, it appears that more education is needed in helping companies understand how investors and analysts view IFRS, Deloitte said.
There were signs last month that mortgage default activity is slowing, but more people who enter foreclosure are losing their homes. US foreclosure filings — default notices, auction sale notices and bank repossessions — rose 2% in October to 224,451, and were up 94% from a year earlier, according to RealtyTrac.
Default notices were down nearly 9% in October, indicating that some of the efforts on the part of homeowners, lenders and advocacy groups to find alternatives to foreclosure may be starting to have an impact, RealtyTrac said. “On the other hand, bank repossessions were up nearly 35%, evidence that more homeowners who enter foreclosure are losing their homes.”
Overall foreclosure activity continues to register at a high level compared to last year, but it appears to have leveled off over the past two months after hitting a high for the year in August.
Nevada documented the highest foreclosure rate among the states for the tenth straight month, with one foreclosure filing for every 154 households — 3.6 times the national average. A total of 6,618 foreclosure filings were reported in the state for the month, a 20% increase from the previous month and nearly triple the number reported in October 2006.
California foreclosure activity decreased nearly 2% from the previous month, but the state’s foreclosure rate of one foreclosure filing for every 258 households still ranked second highest among the states. A total of 50,401 foreclosure filings were reported in the state for the month, more than triple the number reported in October 2006.
Florida’s foreclosure rate — one foreclosure filing for every 273 households — ranked third highest among the states in October. With 30,190 foreclosure filings reported for the month, the state’s foreclosure activity was down more than 9% from the previous month but still up nearly 165% from October 2006.
Other states with foreclosure rates ranking among the nation’s 10 highest were Ohio, Georgia, Michigan, Colorado, Arizona, Indiana and Illinois.
Ohio’s foreclosure filing total of 17,276 was third highest behind the totals in California and Florida. The state’s foreclosure activity increased nearly 10% from the previous month and was up 136% from October 2006. Ohio’s foreclosure rate of one foreclosure filing for every 290 households ranked fourth highest among the states.
With 13,415 foreclosure filings reported in October, Michigan documented the nation’s fourth highest foreclosure filing total and the sixth highest foreclosure rate — one foreclosure filing for every 334 households. The state’s foreclosure activity was down nearly 6% from the previous month but was up nearly 63% from October 2006.
Texas documented the fifth highest state total, with 12,288 foreclosure filings in October — a 16% decrease from the previous month but a 26% increase from October 2006. The state’s foreclosure rate — one foreclosure filing for every 735 households — dropped out of the top 10 and registered below the national average. Other states with foreclosure totals among the nation’s 10 highest were Georgia, Illinois, Nevada, New York and Arizona.
RealtyTrac’s report includes documents filed in all three phases of foreclosure: Default — Notice of Default (NOD) and Lis Pendens (LIS); Auction — Notice of Trustee Sale and Notice of Foreclosure Sale (NTS and NFS); and Real Estate Owned, or REO properties (that have been foreclosed on and repurchased by a bank).
New benchmark comparisons based on purchasing power parities (PPPs) show the level of gross domestic product per head has risen closer to the OECD average in a number of countries including Turkey, Mexico, the Slovak Republic, Hungary, Poland and the Czech Republic. Purchasing power parities (PPPs) are currency conversion rates that take into account price differences between countries. The benchmark results, released every three years, reflect a new set of price quotations for a basket of about 3000 comparable and representative goods and services that make up GDP.
For example, the OECD says, nominal per capita GDP for Denmark (based on exchange rates) appears to exceed that of the United States. But when PPPs are used (real GDP per head), Denmark’s per capita GDP turns out to be lower than that of the US. This is because the price level is higher in Denmark than in the US. Exchange rates overstate the purchasing power of Danish consumers compared to consumers in the US. The PPP conversion corrects for this bias.
The new PPP figures, produced by the OECD in conjunction with Eurostat, ROSSTAT and CISSTAT, based on the benchmark year 2005, enable a comparison of economic and consumer activity in 55 countries, including Russia and the Balkan states. They show for instance that since 2002, the previous benchmark year used for calculating PPPs, Mexico’s gross domestic product (GDP) per head rose from a level that was 37% of the OECD average to 39% in 2005.
Italy’s GDP per head fell from a level that was 5% above the OECD average to a level 4% below between 2002 and 2005. Switzerland’s GDP per head slipped from 30% to 20% above the OECD average over the same period. Meanwhile, the rising value of Norway’s oil exports helped its GDP per head jump from 45% to 65% above the OECD average.
The latest PPP calculations also show that the share of GDP represented by household consumption of goods and services can vary considerably from country to country.
The UK’s GDP per head is about 7% above the OECD average but its actual individual consumption is 20% above the average. The situation is the opposite in the Netherlands and Australia where the relative ranking of GDP per head is higher than for consumption per head.
The complete report is available at no charge from the OECD website.
Alphaville takes a closer look at the terms of the $7.5 billion investment stake in Citigroup taken by the Abu Dhabi Investment Authority. The post, entitled Junk Citi, opens with the question:
So how, as the world’s largest bank, do you impart news that you have had to seek an emergency capital injection from a country many of your customers have never heard of, at almost two and a half times the Fed’s target lending rate?
The terms of the investment appear pricey. Citigroup has issued $7.5 billion in mandatory convertible securities paying a yield of 11%. According to the Wall Street Journal:
Citi is paying a higher interest rate than companies that borrow on the high-yield, or junk-bond, market; currently they pay roughly 9% for straight bonds. Typically, convertible bonds pay lower interest rates than straight bonds, although a particular bond’s structure could affect the interest rate paid.
Alphaville takes issue with Citigroup’s positioning of the 11% yield as a “slight premium” to the current 7% dividend yield on Citigroup stock, saying “That’s actually a premium of 57 per cent. Even after the spurious tax argument, it is difficult to see how this funding can be costing much less than 9 per cent.”
CreditSights has a different take. According to analyst David Hendler, the 11% coupon is steep, but is in-line with Citigroup’s cost of equity capital:
This equity cost carries with it an aura of turnaround financing, which could be an accurate description as Citi’s market cap has been nearly cut in half (-47%) year-to-date. However, we would point out that recent volatility has raised the equity risk premium in Citi’s weighted average cost of capital (WACC) calculation. According to Bloomberg, Citi’s current cost of equity stands at about 11.63%, which makes the ADIA investment seem more palatable. The move also shows that Citi can raise equity capital amid a credit crunch and line-up a respected sovereign wealth fund to do so.
Fitch Ratings said it expects to assign an ‘AA-’ rating to the securities and that Citigroup’s Rating Outlook remains Negative. Although the sizable addition of fresh capital alleviates some rating pressure, considerable financial uncertainty remains, Fitch says. “The issue boosts Tier I capital by approximately 60 basis points assuming a steady level of risk-weighted assets. However, the likelihood of depressed earnings or even bottom line losses in 4Q07 could significantly offset this positive capital development. ”
The CreditSights report, Citigroup: Gets $7.5 Billion Middle Eastern Capital Makeover, is available for purchase, as is Fitch Expects to Assign ‘AA-’ to Citigroup’s $7.5B Convertible Securities.
Online shopping picked up sharply around Thanksgiving, paced by strong demand for video games, according to comScore.
More than $10.7 billion was spent online from Nov 1-26, marking a 17% gain versus the corresponding days last year. “Cyber Monday” saw $733 million in online spending, representing a 21% increase versus last year and an 84% jump from the average daily online spending totals during the preceding four weeks. This followed increases of 22% on “Black Friday” and 29% on Thanksgiving Day.
The hottest category continues to be video games, consoles & accessories, which more than doubled from the corresponding days last year. Sales of Nintendo Wii, PlayStation 3, and popular game Halo 3 continue to drive growth in the category.
The furniture, appliances & equipment category, consumer electronics and sport & fitness demonstrated above average growth. Apparel & accessories is now growing in line with the overall trend in online retail following a soft start to the season when warm weather dampened winter apparel sales. Online sales of toys are up only about one tenth for the season-to-date, with toy safety concerns appearing to be weighing down the category, according to comScore.
Cyber Monday once again set a record with $733 million in sales, the first time a single day of online retail spending has broken the $700 million threshold.
While that makes it the heaviest online shopping day on record, comScore expects that a number of individual shopping days during the coming weeks will surpass the Cyber Monday total, with some days potentially surpassing $800 million.
Some other notable findings for Cyber Monday 2007 include:
- The number of online buyers was up 38% compared to Cyber Monday 2006, while the average dollars spent per buyer was down 12%. The decline in dollars per buyer may be due to two factors — deeper and broader price discounts offered by online merchants this year and the fact that “new Cyber Monday buyers” tended to spend less online than returning buyers.
- 6% of the Internet users on Cyber Monday made an online purchase.
- 44% of Internet users on Cyber Monday shopped online (i.e. visited an online retail site or used a comparison shopping engine)
- 60% of dollars spent online on Cyber Monday came from work computers, with the balance coming from home and university computers.
Amazon Sites saw the most visitors on Cyber Monday 2007, up 26% gain versus the same day last year and up 50% compared to the average daily visitors during the four weeks leading up to Cyber Monday. Six out of the top ten retail sites saw their visitors more than double compared to the daily average over the four weeks preceding Cyber Monday. Apple’s modest gains are the result of consistently high traffic levels during the weeks preceding Cyber Monday.
US home prices registered their sharpest quarterly decline since the S&P/Case-Shiller® Home Price Indices were created 21 years ago, Standard & Poor’s said in announcing the figures for the July-September quarter. And an analysis by Global Insight sees a further decline of 7% in 2008.
The third quarter decline of 1.7%, was the largest quarterly decline in the index’s history, and the year-over-year decline posted its second consecutive record low at -4.5%. Most of the metro areas continue to show declining or decelerating returns on both an annual and monthly basis.
All 20 metro areas were in decline in September over August. Even the five metro areas that still have positive annual growth rates — Atlanta, Charlotte, Dallas, Portland and Seattle — show continued deceleration in returns.
While Tampa remains the metro area with the largest annual decline, at -11.1%, Miami surpassed Detroit in September, reporting a decline of 10% over the past 12 months. Detroit and San Diego followed with -9.6% each. While the mix is slightly different, once again eight of the 20 metro areas reported their lowest recorded annual returns – these cities are Atlanta, Chicago, Las Vegas, Miami, Minneapolis, Phoenix, San Diego, Tampa, & Washington D.C.
Meanwhile the US Conference of Mayors unveiled today an economic impact report on the foreclosure crisis that forecasts sharp losses in the growth of gross domestic product and projects economic output losses for 361 metro areas — referred to as gross metropolitan product (GMP). The total GDP growth loss equals $166 billion, with the combined economic loss of the top ten metro areas exceeding $45 billion.
Prepared by Global Insight, the report projects that home prices will fall 7% on average next year, the foreclosure crisis will result in 524,000 fewer jobs being created and a potential loss of $6.6 billion in tax revenues in ten states.
While the report stops short of forecasting a recession, 128 metro areas will be pushed into a “sluggish” GMP growth of less than 2 % in 2008
The report, The Mortgage Crisis: Economic and Fiscal Implications for Metro Areas, found that weak residential investment, lower spending and income in the construction industries and curtailed consumer spending resulting from decreased home equity will have “multiplier effects” on the nation’s economy. Other report findings include:
- The foreclosure crisis alone will reduce home values by an additional $519 billion in 2008, bringing the total forecast of lost equity for the nation’s homeowners to $1.2 trillion.
- In 2008, the economy will grow at a rate of 1.9%, a full percentage point lower than would have been the case without the mortgage crisis.
- Foreclosures will increase by at least 1.4 million in 2008; these homes represent a market value of $316 billion.
- In ten states, representing a cross section of the US, the aggregate loss in tax revenue will equal $6.6 billion.
- Home price declines across the US will average 7% in 2008, ranging as high as 16% in California.
- Consumer spending will slip to 2% growth, well below a 3.1% gain in incomes.
- Housing starts will continue to decline until the second quarter of 2008, when the annual rate housing starts will be just 800,000, a drop of almost 20% from current levels.
- Sales of existing homes also will continue to fall by another 10% in 2008.