US consumers have responded to the global economic crisis by curtailing their expenditures, paying down debt, and saving more—all logical responses to a recession. Yet most consumers have acted by choice, not necessity, according to McKinsey. Spending, saving, and debt averages are not at abnormal levels today but rather returning to long-term trends.
It was the behavior of US consumers during the past two decades, our research shows, that was the aberration. The return to traditional spending patterns will cause companies to adjust to a fundamentally altered playing field.
In a McKinsey survey conducted in March 2009, 90 percent of the US respondents said that their households had reduced spending as a result of the recession—33 percent of them “significantly” so. The survey, which included 600 households in three consumer segments comprising around 40 percent of all US homes, found that 45 percent of those who reduced spending did so by necessity, 55 percent by choice.
Technorati Tags: Consumer-spending
Could US housing prices finally be bottoming out? Standard & Poor’s Case-Shiller Index chart looks somewhat encouraging.
“The 10-City and 20-City Composites declined 18.0% and 18.1%, respectively, in April compared to the same month in 2008. These are improvements over their returns reported for March, down 18.7% for both indices. For the past three months, the 10-City and 20-City Composites have recorded an improvement in annual returns. Record annual declines were reported for both indices with their respective January data, -19.4% for the 10-City Composite and -19.0% for the 20-City Composite.”
The pace of decline in residential real estate slowed in April,” according to S&P’s David M. Blitzer. “In addition to the 10-City and 20-City Composites, 13 of the 20 metro areas also saw improvement in their annual return compared to that of March. Furthermore, every metro area, except for Charlotte, recorded an improvement in monthly returns over March.”
While one month’s data cannot determine if a turnaround has begun; it seems that some stabilization may be appearing in some of the regions.
“We are entering the seasonally strong period in the housing market, so it will take some time to determine if a recovery is really here.”
Technorati Tags: Add new tag, house prices, housing, S&P Case-Shiller Home Price Index
Venture capital firms in VC hubs such as Northern California tend to deliver superior performance, but that does not appear to derive from locally-based investments, according to a new working paper published by Harvard Business School.
More than half of the 1,000 venture capital offices listed in Pratt’s Guide to Private Equity and Venture Capital Sources are located in just three metropolitan areas – San Francisco, Boston, and New York, the paper notes. More than 49% of the U.S.-based companies financed by venture capital firms are located in these same three cities.
“Surprisingly, much of the VC outperformance in these venture capital centers arises from their non-local investments. This finding is counterintuitive, since venture capitalists might be expected to be the most involved and add the most value to the geographically closest companies. We observe this outperformance of non-local companies in both early- and latestage investments. ”
“One potential explanation for this higher return to non-local deals is that venture capitalists have a higher hurdle rate (i.e., require a higher expected rate of return) for investments that have a higher monitoring cost. This higher hurdle rate may reflect the imputed (personal) cost of traveling to remote locations.”
Outperformance of non-local investments suggests that policy makers in regions without local venture capitalists might want to mitigate costs associated with established venture capitalists investing in their geographies rather than encouraging the establishment of new venture capital firms.
Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion
Henry Chen, Paul Gompers, Anna Kovner, Josh Lerner
Technorati Tags: venture-capital
Alleviating the state-level fiscal crunch is likely to require more federal support, privatising state assets and services, and shrinking public sector employment, according to Oxford Analytica. However, these moves — particularly public-sector redundancies — will set back the pace of recovery. OxAn says in States face severe fiscal crunch.
“Many states face constitutionally mandated deadlines to balance their budgets today, which marks the end of the second quarter. For the 38 states facing fiscal deficits, achieving balanced budgets in the current economic climate is exceptionally difficult, due to steep revenue shortfalls. Since rises in general taxation are often politically untenable and many states have strict borrowing limits, they face deep spending cuts; many public employees will lose their jobs, creating a renewed surge in unemployment and economic distress.”
Aside from implementing new taxes or cutting spending, many states are also implicitly relying on the federal government to bail them out.
The states’ fiscal crisis is very likely to persist until the 2011 fiscal year, requiring further increases in state taxes, spending cuts or federal aid, OxAn says. State budget problems will also generate three key trends:
- Further federal aid. There will be additional money for states if Obama’s fiscal year 2010 budget blueprint emerges from Congress largely intact — including ambitious healthcare reforms, further increases in unemployment insurance (boosting states’ allocations of unemployment benefits) and money to shore up education spending.
- Privatisation of services. States are likely to return to a policy option dormant since the 1980s — the privatisation of state services. This takes two forms: privatising assets (physical or virtual) to raise funds, or subcontracting some public services to the private sector. For example, some states may consider privatising (or further privatising) their prison systems.
- Smaller government. Over time, this is likely to lead to renewed demands to shrink the size of government, restoring the political appeal of traditionally Republican policies. However, this shift is likely to take many years.
Technorati Tags: state budgets, states, US-economy
Moody’s expects drug store companies CVS Caremark (NYSE: CVS) and Walgreen (NYSE: WAG) to maintain their dominant position over Wal-Mart (NYSE: WMT), due to the convenience factor.
“Surprisingly, the drug store sector is one where the top players have a competitive advantage over Wal-Mart,” Moody’s says in a new report on the Drug Store Industry. “On the surface, one would expect that Wal-Mart would have impacted the drug store industry as dramatically as it has impacted the supermarket industry. However, this has not been the case. The drug store industry is one of the few retail sectors in which Wal-Mart is not the number one player in terms of revenue. We estimate that Wal-Mart’s retail pharmacy revenue is about $28 billion, placing it third behind Walgreen (at about $61 billion) and the retail pharmacy division of CVS (at about $49 billion).”
“We believe that the standalone retail drug stores have been able to maintain dominance in their sector over Wal-Mart by their ability to be price competitive. This eliminates Wal-Mart’s ability to differentiate on price, allowing consumers to shop for their prescriptions by what they feel is most important — convenience.”
We believe that CVS and Walgreen will be able to maintain their dominant position over Wal-Mart as we expect them to remain price competitive and we don’t expect any fundamental change in consumers’ preference for convenience.
“This is also one of the drivers behind why we believe that the drugstore chains are less vulnerable to the current economic environment than the discounters and the supermarkets. In addition, our opinion that CVS and Walgreen will be able to maintain their dominant position over Wal-Mart going forward is a key driver of both companies’ ratings.”
CVS beat expectations for its latest quarterly earnings, while Walgreen’s fell slightly short short.
“While our business in a sense is not entirely recession proof, it’s pretty defensive, and we continue to gain share,” CVS Chief Executive Tom Ryan said on a recent conference call.
Thomas Weisel Partners LLC analyst Steven Halper noted the negative effect of Walgreen’s restructuring efforts on profit margins, but said the company reduced inventories substantially and generated “impressive” operating and free cash flow.
Standard & Poor’s issued a stable outlook for CVS on June 29, assuming “the acquired Longs stores will be integrated successfully and that a portion of free cash flow will be used to reduce debt leverage toward the mid-2.0x area in the intermediate term.”
(Disclosure: long CVS.)
Technorati Tags: (CVS), (WAG), (WMT), CVS Caremark Corp., drug retailers, drug stores, prescription drug costs, Wal-Mart, Walgreen
Globalization of the venture capital industry will intensify in coming years, posing significant competitive questions for the United States, and opportunities for emerging markets such as China, accoding to a new survey from Deloitte.
Apparently, among venture capitalists, there’s China and there’s everyone else. That was clearly demonstrated in response to earlier questions about where VCs plan to increase their investments.
Additional findings include the following:
- The clean tech sector is poised to become the leading investment category.
- Investment levels are more likely to increase in countries outside the United States.
- Governments of all countries have a crucial role to play in fostering competitiveness and innovation.
- Just over half of VCs surveyed remain optimistic that it is a terrific time to invest in promising entrepreneurial companies.
For details see 2009 Global Trends in Venture Capital.
Technorati Tags: china, cleantech, entrepreneur, venture-capital
With UK GDP is expected to contract by 4.3% this year, the United Kingdom faces a challenging task in digging out of a deep recession. In a new Economic Survey of the United Kingdom, the OECD says lower house prices and the slump in equity prices will depress household consumption, exacerbated by rising unemployment and weak consumer confidence. “Business investment will decline owing to the challenging prospects and tight financial conditions. While sterling has depreciated by around 20% in effective terms since 2007, exports will decline due to the sharp fall in external demand. However, imports are expected to fall faster meaning that net exports will contribute positively to growth. The unemployment rate is rising sharply and could be close to 10% by 2010.”
“Monetary and fiscal stimulus, the weaker exchange rate and some recovery in foreign demand should promote a recovery during 2010. But, this will depend critically on whether measures to stabilise the financial system are effective. Even if they succeed, growth is expected to remain well below trend as households and firms rebuild their balance sheets.”
“In the short term, the policy priority must be to further improve conditions in credit markets. This is essential for reviving the economy. Alongside this, policy should aim at damping the severity of the downturn and its impact, particularly on the labour market. Policy actions that could undermine longer-term objectives need to be avoided. Over the medium term, fiscal consolidation needs to be underpinned by an effective fiscal framework and financial market regulation and supervision needs to be overhauled.”
The financial crisis and its consequences are likely to lead to a permanent fall in the level of potential output. Therefore, measures to raise long-run living standards will have renewed importance.
Technorati Tags: economic-forecast, UK-economy, United Kingdom
Fitch Ratings says commercial property value declines are responsible for the swathe of downgrades of UK CMBS in recent months.
Payment arrears have increased in the last 12 months following tenant defaults, which have led to specific negative rating actions being taken. However, the majority of downgrades were driven by the severity of declines in capital values, which is not often communicated in conventional investor reporting.
Approximately 15% of UK loans are in breach of a covenant or in outright payment default, and although at a historical high, this figure understates the full impact of falling capital values on UK CMBS leverage,” - Mario Schmidt, Associate Director in Fitch’s EMEA CMBS Performance Analytics team.
Leverage is not consistently being tracked by servicers, and the Fitch loan-to-value ratio (LTV) is in part an effort to redress this and highlight the true state of UK CMBS. In the absence of re-valuations on the majority of loans, it combines Fitch’s assessment of property quality with quoted rental value and yield indices to estimate the likely current market value of the collateral.
“Although less than 10% of loans report an LTV above 100%, Fitch estimates almost 30% to be in negative equity. Over four-fifths of loans have Fitch LTVs over 80%, and given the scarcity of debt available at the moment, this leads us to believe that few of these borrowers would succeed in refinancing today,” says Gioia Dominedo, Director in Fitch’s EMEA CMBS team. “It may currently be of some comfort that few loans are set to mature in the short term, nevertheless without an improvement in lending market conditions the risk of default at maturity remains.”
Despite the magnitude of the rating actions taken, Fitch’s view on the UK commercial property market continues to be negative and, consequently, most tranches remain on Negative Outlook.
For details see Falling Values at the Root of UK CMBS Downgrades and UK CMBS Performance – Summary of Reviews and Rating Actions.
Technorati Tags: CMBS, commercial mortgage-backed securities, commercial real, structured-finance, UK
Prime auto U.S. ABS delinquencies jumped 22% on a monthly basis in May, while net losses improved 17% in May over April clouding expectations for the coming summer months, according to Fitch Ratings. The improvement in net losses was mostly a result of seasonal patterns and losses remain near record high levels.
Prime 60+ days delinquencies rose to 0.72% in May, up from 0.59% in April.
The increase in delinquencies last month was noticeably higher than previous years during this period.
Delinquencies were 26% higher in May versus 2008 levels; they hit a record high of 0.87% in early 2009 but are back off of those levels.
Despite historically high loss rates, the ratings of senior classes of notes continue to perform within expectations, with minimal negative rating actions issued in 2009 to date.
Fitch also says the European auto ABS sector experienced an increased number of negative factors during Q109, including a rise in delinquencies and net losses.
The Fitch 60-180 Delinquency Index (Fitch DI) breached an historic peak in the first quarter, increasing to 1.5% (up 20 basis points compared with Q408). Since December 2007, the Fitch DI has increased by 50 basis points to 1.5% and is not expected to stabilise during the next quarter (Q209).
The Fitch Net Loss Index (Fitch NLI) increased to 0.5% during Q109 (up 40 basis points compared with Q408), but remained within historic levels.
The Fitch Excess Spread Index (Fitch ESI) was slightly lower during the first quarter of the year, and stood at 2.3% (down 20 basis points compared with Q408).
For details see: Tyre Tracks – Fitch European Auto ABS Index.
Technorati Tags: asset-backed-securities, auto-loans, automobiles, structured-finance
Over the past ten years, many economists who feared a global crisis predicted a sudden adjustment of current account imbalances and “disorderly” crash of the dollar, leading to a major international shock to confidence and demand — and possible stagflation in the United States.
As it turned out, these imbalances were not the main cause of the crisis that swept the world last year, Oxford Anytica says in Renminbi appreciation is unlikely. In fact, the dollar appreciated as investors sought the perceived security of US assets. However, there is still risk of a chaotic, sudden adjustment that would further depress global demand and exacerbate the slump. The challenge for policymakers is much the same one that they have been facing for the past decade: find ways gradually to manage an orderly international adjustment in order to head off a disorderly one.
China’s role. There are two main ways for China to contribute to dealing with the current account imbalances:
- One is to reduce its high domestic savings rate, partly by developing its social safety net — which would alleviate the need for individuals to amass wealth in case of poor health or unemployment.
- The second is to allow the renminbi to appreciate in real terms.
A stable world economy is good for China. However, in the short term, appreciation would be a burden for China — though probably not a large one. China is growing faster than any other large economy — but it is still struggling with weak aggregate demand and GDP growth that is below potential. Appreciation would further diminish external demand for Chinese goods at a time when Beijing is furiously implementing a fiscal stimulus and encouraging domestic consumers in order to keep growth strong.
In the near term, an orderly renminbi appreciation would be good for the United States. It would mean a boost in exports — though this effect would by no means be large enough to close the output gap and moderate unemployment.
Worries about US dependence on Chinese official purchases of US assets to finance the current account deficit are overblown.
A smaller current account deficit means more demand for US output — and a smaller deficit also means less external financing is necessary. The one risk is that an abrupt, poorly managed reduction in foreign exchange reserve accumulation by Beijing could spark a disorderly adjustment.
Other economies stand to benefit modestly from an orderly renminbi appreciation in much the same way that the United States would. One exception is the scenario where China simply allows a bilateral appreciation against the dollar, but keeps the renminbi steady in real terms. China might accomplish this by reallocating reserves away from dollar assets towards other currencies. In this case, the United States would receive a fillip to external demand while other countries miss out.
Policymakers now seeking an international consensus to manage exchange-rate adjustment face a somewhat new set of incentives. In particular, China would bear a modest burden from a renminbi appreciation — while the United States and other countries stand to receive some benefit. At any rate, because of other international challenges — including North Korea — the Obama administration will likely continue to be reluctant to pressure China on the currency issues.
Technorati Tags: china, currency, renminbi, trade
