US online spending picked up late in the Holiday Season, bringing the year-on-year growth rate close to the pace for the rest of the year, according to the latest figures from comScore.
Nearly $28 billion was spent online from Nov 1 to Dec 27, marking a 19% gain versus the corresponding days last year. This compares with a 20% growth rate during January-October. ComScore had forecast spending for the full Holiday Season (Nov 1-Dec 31) to reach $29.5 billion, a 20% increase from last year.
During the core holiday shopping period between Thanksgiving and Christmas, online sales grew by 21% versus year ago, a full 2% percentage points higher than the overall holiday season-to-date growth rate. However, there was one more shopping day during the period this year.
Warm weather during the early part of November took its toll on online retail sales, and played a role in holding down the growth in spending over the entire holiday season to a 19%, which is below last year’s level of 26%.
Looking at the period between Thanksgiving and Christmas, comScore notes online spending grew at a healthier 21% rate, which it sees as encouraging given the economic challenges facing consumers this year as a result of higher gas prices, lower home values and a jittery stock market.
Meanhile the Washington Post reports that sales of electronic gadgets seems to have reached a plateau. US spending on electronic gadgets was $4.5 billion from Nov 18 to Dec 9, according to research firm NPD, half a percent less than in the comparable period last year.
Digital cameras topped the list of popular consumer electronics products, but sales did not grow over last year. According to NPD, camera unit sales were up less than 1%, while in dollar terms sales were down 13% because the cameras were less expensive. MP3 player sales were flat.
The sales plateau hit by both gadgets is the result of a saturated market, according to Stephen Baker, an NPD analyst.
The typical consumer is already on his or her third digital camera and probably owns a digital music player too.
It was “subrime-all-the-time” again at Research Recap during the latest week, with the top five posts all related to the topic in some way.
Two posts in particular were highly popular. Topping the list was US “Housing Bust” Effects To Linger Until 2009, in which Moody’s Economy.com offered little respite from the current woes. That view was borne out this week by the the release of the S&P/Case-Shiller Index, showing house prices in major markets fell a record 6.7% in the year through October.
Further adding to the misery, the Commerce Department reported today that new home sales fell 9% in November from October to a seasonally adjusted annual rate of 647,000, the lowest rate in 12 years.
Also very popular was the Role of Hedge Funds in Subprime Crisis Examined, an analysis of the evolution of the subprime crisis by Randall Dodd of the International Monetary Fund.
So Long SuperSIV, We Hardly Knew You played taps for the ill-fated M-LEC fund that was supposed to help untangle the Structured Investment Vehicle knot. Turns out the banks, including Citigroup, one of the fund’s sponsors, have largely taken the matter into their own hands.
The continuing appetite for posts designed to increase the understanding of the subprime crisis was evident in the BBC’s graphical interpretation, Subprime Illustrated, and The Rise and Fall of a Subprime CDO from the Wall Street Journal, which deconstructed one exemplar of the endangerd species.
Reading the lead story in today’s Wall Street Journal brings to mind the children’s ruse of crossing one’s fingers behind one’s back while making a statement, thereby shielding oneself from the consequences. Based on the WSJ’s excellent analysis of how one exotic subprime-mortgage-backed instrument was created, rated and sold, it is hard to escape the conclusion that all parties involved had their fingers figuratively crossed in hope. This includes not just the creators, raters and sellers, but also the buyers – after all, the children’s game contains an element of self-delusion.
The subscription-only WSJ article provides a lengthy but well- worth reading reconstruction of the rise and fall of a Collateralized Debt Obligation named “Norma CDO I Ltd.” Norma was formed in late 2006. Most of its slices were rated AAA by the ratings agencies in March, but were downgraded to junk status in November.
One of the key insights of the article is that rather than dispersing risk as they are designed to do, subprime-backed CDOs can be packaged and sold in a way that in effect concentrates the risk. This implies that bank and other losses from CDOs are far from over.
The subprime-mortage crisis is far greater in terms of potential losses than anyone expected because it’s not just physical loans that are defaulting. – Greg Medcraft, chairman, American Securitization Forum.
As if on cue, Goldman Sachs analyst William Tanona upped his projection for fourth-quarter writedowns at big financial firms, including Merrill Lynch, which helped give birth to Norma. He now puts writedowns for Citigroup, Merrill and JP Morgan Chase at $18.7 billion, $11.5 billion and $3.4 billion, respectively, up from his previous estimates of $11 billion, $6 billion and $1.7 billion .
The article includes an animated graphic (available free from wsj.com) that illustrates the steps in Norma’s rise and fall.
Long a laggard in wine-drinking, the US could overtake France as the leading per capita consumer in a few years.
For the 15th consecutive year, wine consumption in the United States is projected to rise in 2007, after a 4% gain in 2006, the Washington Post reports.
Citing estimates from the 2007 wine market report by Impact Databank, the Post says consumption will reach a record 304 million cases this year.
That will, for the first time, place the United States ahead of Italy in per-capita consumption, trailing only France . . . At the current rate of growth, Americans will overtake the French by 2015.
Wine consumption in the US is forecast to reach 860 million gallons in 2011 based on growth of 3.7% per year, driven by rising per capita wine consumption, favorable demographics, perceived health benefits, growth in wine tourism and direct-to-consumer wine shipments.
Per capita wine consumption in the US is expected to reach 3.8 gallons in 2011 based on annual increases averaging 2.6% from 3.4 gallons in 2006, according to Freedonia’s recent report Focus on Wine.
The Post quotes analysts as saying reasonably priced domestic, South American and Australian wines will continue to be attractive to US consumers, but European wines, with the drop in the value of the dollar, will lose some appeal: They will rise in price by 10% to as much as 30% in the coming year.
This should benefit companies such as Australia’s Casella Brands, with its top-selling Yellow Tail brand. Also well placed are Constellation Brands and E&J Gallo Winery, which hold strong positions in both the retail and restaurant markets.
Fans of graphic representations will appreciate the BBC’s The U.S. Subprime crisis in graphics, a series of interactive charts, maps and diagrams that vividly illustrate the issue.
Topics covered include:
Noting that banks have announced $60bn worth of losses as many of the mortgage bonds backed by sub-prime mortgages have fallen in value, the BBC adds that losses suffered by financial institutions ultimately could be between $220bn and $450bn, as the $1 trillion in sub-prime mortgage bonds is revalued.
The BBC piece adds to the understanding of the issue, along with the recent International Monetary Fund analysis and NERA Economic Consulting’s Subprime Mortgage Lending Primer.
The scrapping of the “Superfund” designed to help soothe the Structured Investment Vehicle meltdown will have come as no surprise to readers of Research Recap, which has been skeptical about the clumsily-named “M-LEC Superfund” since its inception.
The final nail in the fund’s coffin was the move by one of its lead sponsors, Citigroup, to bring some of its SIV exposure onto its own balance sheet rather than utlilize the SuperSIV. SunTrust has also joined the crowd of banks tackling the problem directly, taking on board $1.4 billion of securities from two SIV-exposed money market funds it manages.
The collapse of the plan to create the $75bn superfund “is embarrassing for the US Treasury, which backed the scheme, but is not likely to have big implications for financial markets,” the Financial Times reports.
The fact that the banks feel it is no longer needed is very good news indeed, according to value investor Todd Sullivan, writing on SeekingAlpha. “It means the write downs for the SIV’s at the institutions can’t go much lower. These things ARE worth something. ”
Sullivan sees financial stocks as “the big winners next year and our next purchases will be in the sector again.”
CreditSights also sees the plan’s demise as a good omen . . .”between the recently announced mortgage modifications, the Fed’s efforts to make bank loan windows more acceptable, and the fact that we are almost beyond the turn, we are almost optimistic about the progress of the clean up in the liquidity markets. ”
Progress, however, does not mean success and we feel that we are still far from the calm waters of Lake Woebegone where every credit was above average . . .
Research Recap gives the last words of this holiday season (with apologies) to Edward Lear, whose nonsense poems seem like they were written with these days in mind:
They went to sea in a SIV, they did;
In a SIV they went to sea;
In spite of all their friends could say,
On a winter’s morn, on a stormy day,
In a SIV they went to sea.
And when the SIV turn’d round and round,
And every one cried, “You ’ll be drown’d!”
They call’d aloud, “Our SIV ain’t big:
But we don’t care a button; we don’t care a fig:
In a SIV we ’ll go to sea!”
Far and few, far and few,
Are the lands where the Jumblies live:
Their heads are green, and their hands are blue;
And they went to sea in a SIV.
The subprime mortgage market crisis and associated turbulence is as much about the breakdown of the structure of US financial markets as it is about bad debt, an analysis published by the International Monetary Fund argues.
The origins of the subprime mortgage crisis are dissected in an article in the IMF’s Finance and Development magazine by Randall Dodd, a Senior Financial Expert in the IMF’s Monetary and Capital Markets Department. The article provides a history of the evolution of the mortgage market and makes a useful companion to NERA Economic Consulting’s Subprime Mortgage Lending Primer
The article examines the role of hedge funds in the unfolding crisis, noting that Fitch ratings warned of the risks in 2005.
“Hedge funds have quickly become important sources of capital to the credit market,” but “there are legitimate concerns that these funds may end up inadvertently exacerbating risks.”
That is because hedge funds, which invest in largely high-risk ventures, are not transparent entities—their assets, liabilities, and trading activities are not disclosed publicly—and they are sometimes highly leveraged, using derivatives or borrowing large amounts to invest, Dodd writes. So other investors and regulators knew little of hedge funds’ activities, while, as FitchRatings put it, because of their leverage, their “impact in the global credit markets is greater than their assets under management would indicate.”
Dodd identifies several points of weakness that contributed to the market failure that allowed a 3 percentage point jump in serious delinquency rates on a subsection of US mortgages to throw a $57 trillion US financial system into turmoil and cause shudders across the globe:
- The market first broke down at the juncture where the highest-risk tranches of subprime debt were placed with highly leveraged investors. Hedge funds have no capital requirements (they are unregulated in this regard), and the industry practice of highly leveraged investing allowed for excessive risk taking.
- The market also ruptured because unregulated and undercapitalized financial institutions were liquidity providers to the OTC markets in subprime collateralized debt obligations and credit derivatives. As soon as those markets’ solvency troubles emerged, they became illiquid and trading essentially ceased.
- Unregulated and undercapitalized mortgage originators also contributed to the crunch. The originators, like the hedge funds, operated with too little capital and used short-term financing to fund the subprime mortgages they made and expected to hold only briefly. When they could not sell those mortgages to the firms that packaged them into securities, many unregulated originators were forced out of business.
- Lack of transparency in the OTC markets exacerbated the situation. The inability of market participants to identify the nature and location of the subprime mortgage risk led to a sudden shift in risk assessment. Once overly optimistic about the risks of the subprime market, scared and confused investors suddenly panicked and overestimated risk, shunning even senior, investment-grade tranches.
- OTC markets also suffered from a failure of liquidity. Instead of showing resilience in the face of greater price volatility, these markets ceased trading as counterparties became untrustworthy and buyers fled.
Among the potential remedies suggested by Dodd is “applying industry standards and any existing regulations pertaining to the use of collateral (margin) to OTC derivatives and hedge fund borrowing.”
The ripples from the subprime-mortgage-induced credit crisis continue to extend outward, garnering continued interest among visitors to Research Recap.
The top post of the week was Subprime Woes To Boost Muni Funding Costs, Slow Spending, in which CreditSights outlined how tighter credit conditions and higher risk premiums are pushing up lending costs for state and local governments and therefore will have a negative impact on funds available for public spending.
The impact of the subprime crisis on the monoline bond insurance industry also was a popular topic, with Monoline Bond Insurers Next for Bailout?, also from CreditSights, and the multi-sourced Monoline Bond Insurers Under the Spotlight both making the top five. Since those posts Fitch Ratings has placed monoline insurer MBIA on review for a downgrade. The company posted on its website details of its exposure to collateralized debt obligations backed in part by subprime loans.
Fitch also placed Ambac on Rating Watch Negative on Friday. In the Financial Times, Lex notes that the disclosure showed that MBIA held $8 billion in “CDOs of CDOs (or so called CDOs squared),” sending the company’s stock down 25%.
MBIA can say the underlying collateral is overwhelingly AAA or AA. Nobody is listening. Markets have had enough of supposedly armour-plated securities tanking. – Lex.
The dramatic downgrade by Standard & Poor’s (from A to CCC) of smaller bond insurer ACA is going to have a serious impact, according to Alphaville. “Take, as illustration, the fact that ACA’s downgrade also led to the immediate downgrade of 3024 municipal bond issues on Wednesday. ”
Backgrounders from NERA Economic Consulting on the subprime crisis continued to be popular, with its Primer on Subprime Mortgage Accounting Allegations and Subprime Mortgage Lending Primer both making the top five again.
In a new year-end update of Recent Trends in Shareholder Class Actions NERA notes that there were no subprime-related shareholder class actions in 2006, but 38 such cases were filed between February 8, 2007 and December 15, 2007.
Looks like next year could be a good one for shareholder class action lawyers.
US housing prices will have declined by an average of 13% before the current “housing bust” ends, according to a new study from Moody’s Economy.com. And housing will subtract an estimated over one percentage point from econmic growth this year and a percentage point and a half in 2008, the report predicts.
Despite more than two years of sliding home sales, construction, and house prices, the market’s difficulties continue to intensify, according to the report Aftershock: Housing in the Wake of the Mortgage Meltdown.
The current housing recession is expected to run through early 2009 and will ultimately be severe enough to be characterized as a housing crash.
The already record number of vacant homes for sale is sure to increase further in coming quarters, the report says. “The housing market will only find a bottom when significant progress is made in working off this inventory.”
Assuming that the economy is able to avoid a recession, interest rates remain low, and mortgage loan modification efforts quickly increase, home sales are expected to hit bottom in early 2008, housing starts by the fall of 2008, and house prices in early 2009.
From peak to trough, sales are expected to fall by over 40%, starts by 55%, and house prices by 13%.
The decline in activity and prices will be substantially more severe in Arizona, California, Florida, Nevada, around Washington, D.C., and throughout parts of the industrial Midwest.
Alternative, much darker, scenarios are of course not difficult to construct, the report says. “The housing recession and erosion in mortgage quality threatens the already very fragile global financial system and the broader economy. Odds of further financial turmoil and recession are high, and the implications for the housing market are of course very serious.”
Policymakers are not standing still, however, and are acting increasingly decisively to head off a more severe downturn, Moody’s says. “Even more action will be necessary to ensure that the housing downturn, the worst in the post-World War II period, does not continue on into the next decade.”
The Freedonia Group says that once the inventory backlog is reduced, US housing construction activity is expected to pick up, as longer-term demographic factors will support demand for new housing.
Through 2011, new housing units are projected to nearly match the 2006 performance at 1.9 million units. That performance will be more than respectable in terms of recent history. Housing starts stayed in a 1.8-2.0 million range from 1996 through 2003 before rising to 2.1 million in 2004 and 2.2 million in 2005.
In a new Industry Study on World Housing, Freedonia says global demand for new housing is expected to increase 2.1% per annum through 2011, generating the construction of nearly 58 million new
The most rapid gains will be in the Africa/Mideast region (led
by Nigeria), spurred by the most rapid increases in population and household formation of any region.
Measured in terms of the inflation-adjusted value of residential
construction, China is forecast to post the fastest advances over the forecast period. Real residential construction expenditures in China will expand 8.1 % per year through 2011.
Mexico will enjoy one of the fastest increases in the number of new
housing units through 2011, with growth of nearly 5% per year to one million units.
The outlook for the US newspaper industry has deteriorated further in the last six months and is likely to worsen in 2008, according to Moody’s Investors Service.
Accelerating declines in print-advertising revenue make us even more pessimistic about the rating outlook for the newspaper industry than we were six months ago, Moody’s says in its latest Outlook Update: U.S. Newspaper Industry.
“The greater potential for a pullback in corporate advertising, triggered by the troubles in the subprime residential-mortgage market that have increased creditor risk aversion and contributed to a housing downturn, could make the already tough and arguably recessionary revenue environment for newspaper publishers more challenging in the year ahead. ”
The downturn in print advertising led by classified ads for real estate continues to support our negative rating outlook on the industry, Moody’s says. Cash operating costs for rated newspapers were down $590 million, or 3.6%, this year through September, compared with the same period last year, but the decline was not enough to offset the drop in revenues. Newsprint accounts for approximately 60% of the decline in cash operating costs, but newsprint manufacturer-capacity reductions could make a repeat performance difficult in 2008.
The proposed spin-offs by Scripps and Belo suggest that event risks remain high, Moody’s says. ” These deals make it clear that family ownership and dual-class structures don’t always insulate companies from shareholder-friendly moves. ” Also,
tighter credit-market conditions increase the refinancing risks for leveraged newspaper issuers.
Since April 2007, we have taken a number of rating actions as a result of the challenging revenue environment and event risks and we anticipate more rating actions in 2008.
The number of downgrades of newspaper issuers topped the number of upgrades for a fourth consecutive year in 2007. Moody’s expects additional rating pressure in 2008; ratings of eight of the 13 newspaper companies are currently under review for downgrade or have been assigned a negative rating outlook. Three of the reviews for downgrade relate to spin-offs (E.W. Scripps Co. and Belo Corp.) and a leveraged buyout (Tribune Company). The other negative rating indications result from revenue and operating cash-flow pressure.
Newspaper companies undoubtedly will be looking for relief through the FCC’s controversial decision Wednesday to allow cross-ownership of newspapers and television stations in major markets. However, as Content Bridges notes, the decision is not likely to have much impact for at least a couple of years, if it is not overturned.