Plunkett Research summarizes what it sees as the major trends affecting E-commerce and internet business in 2011, in this complimentary download from the Alacra Store. The 64-page report covers the following topics:
- Introduction to the E-Commerce & Internet Business
- Booking Travel Over the Internet Becomes the Norm
- Apple’s iPod Revitalizes the Music Industry/Amazon and MySpace Follow Suit
- Internet Film and TV Content Grows/Netflix Evolves to Focus on Online Delivery
- User Generated Content Drives Social Media and Generates Ad Revenues
- Car Purchasers Rely on the Internet
- Health Information Research Remains a Leading Use of the Internet
- Bricks, Clicks and Catalogs Create Synergies While Online Sales Growth Surges
- Amazon Gains Market Share
- Online Advertising Becomes Targeted, Nears 17% of Total Advertising Market
- Targeted Online Advertising and Social Network Advertising Boost Revenues
- Banks See Growth in Online Services
- Insurance Direct Selling and E-Commerce Grows
- Wi-Fi is Pervasive and Indispensable
- WiMAX Extends Wireless Range Far Beyond Wi-Fi
- Broadband Market Nears 1 Billion Users
- Fiber-to-the-Home Gains Traction
- U.S. Broadband Connections Rank Behind Other Nations
- VOIP Use Soars and Threatens to Revolutionize Telecom
- Telecommunications Move Online Including Unified Communications, Telepresence
- Security Needs Flourish/Firefox and Google Chrome Grow
E-Commerce and Internet Business Industry Trends, Statistics and Analysis 2011 (Summary) has been made available free of charge to Research Recap users for 30 days by special arrangement with Plunkett Research, an Alacra content partner. After 30 days, the report will revert to its regular Alacra Store price of $149.99)
Plunkett reports on other industries and companies can be purchased from the Alacra Store.
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A new paper from NERA Economic Consulting calls into question the argument that poor underwriting standards played a large role in subprime mortgage losses.
Selected highlights from Is Mortgage Underwriting to Blame for Subprime Losses? Disentangling the effects of poor underwriting from the economic downturn
The default of subprime mortgages has led to an array of litigation over losses allegedly resulting from failures in underwriting and servicing practices. While mortgage loan underwriting and servicing failures have been widely reported, whether or to what extent such shortcomings were responsible for losses is less evident. The economic literature on the topic indicates that many factors contributed to defaults, including the collapse of housing prices and rising unemployment.
Although the Federal Reserve Board’s Senior Loan Officer Opinion Survey shows a net loosening of mortgage underwriting conditions overall in the quarters prior to the summer of 2006 and subprime underwriting standards may have been loosened by some, there is also evidence that subprime underwriting was strengthened along some dimensions in the years preceding the credit crisis.
Careful economic analysis of loan performance is needed on a case-by-case basis to assess whether underwriting failures, to the extent they are identified, contributed to losses. Indeed, such analysis may show that particular loans satisfied all stated standards or, if not, that had all loans met the stated underwriting standards, loss development would not have been dissimilar.
The latter finding would establish that deviations from stated underwriting standards were not material and that subprime mortgage losses mounted for other reasons. Analysis could also be used to assess whether, controlling for the characteristics of borrowers, loan performance was consistent with expectations. Such a finding would preclude recovery of subprime investor losses, given that the risks were known.
The oft-cited observation that delinquency rates rose more quickly with each vintage of subprime loans does not prove a decline in underwriting performance. In fact for low-doc and no-doc loans, a reported measure of loan quality—the FICO score—did not decline over this period.
The delinquency rates of underwriting vintages between 2005 and 2007 experienced similar levels of delinquency at the same point in time in 2008, 2009, and 2010. There was a jump in delinquencies that occurred at the same time across several vintages beginning in 2007, indicating that changes in economic conditions in 2007 and subsequent years likely contributed to delinquencies.
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While stricter underwriting standards could have improved the credit quality of loans and potentially reduced losses, few investors in subprime mortgage-backed securities (MBS) could credibly claim they did not know they were buying securities backed by mortgages made to the least creditworthy class of borrowers. Claims that subprime losses were due to poor underwriting must account for the significant subprime losses that resulted even absent any underwriting failure. In the words of Brian Moynihan, CEO of Bank of America, investors who bought a Chevy Vega cannot now claim they expected a Mercedes.
Readers of Research Recap know that we have regularly featured corporate governance research from Audit Integrity, which recently became part of Governance Metrics International. A new report under the GMI name identifies a list of companies that could face financial stress, topped by electrical component company C&D Technologies (CHHP), General Steel Holdings (GSI) and Zale Corporation (ZLC). [Bank of America Merrill Lynch today upgraded Zale to Neutral.]
Also on the list: Barnes & Noble (BKS) and Republic Airways Holdings (RJET).
The recent announcement of Borders’ (BGPIQ) bankruptcy filing came as no surprise to Government Metrics International. “There was substantial evidence that Borders’ business model was broken and that they were struggling to raise capital, even in the recent climate when investors have been willing to take on substantial risk for a small increase in yield.”
While we do not anticipate a dramatic change in monetary conditions over the coming months, accelerating inflation rates and/or bad business models may continue to put a strain on some public companies.
“Below is a list of companies that might feel that strain. Forensic evidence shows that their current financial condition may be deceptively overstated. The majority of these companies are highly leveraged with thin — if any — net income and little evidence that their prospects will improve.”
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The wave of U.S. corporate defaults that accompanied the credit crisis and Great Recession produced average firm-wide recoveries on defaulted debt that were near historical norms and higher than the last two default cycles, Moody’s Investors Service said in a new report.
Recovery rates benefitted from a preponderance of distressed exchanges, which usually have higher recoveries than other types of default, and the comparatively short duration of the default wave, Moody’s said.
“A higher default rate typically leads to lower recoveries, but recoveries in this default cycle were surprisingly ordinary,” said David Keisman, senior vice president at Moody’s and author of the report.
Average firm-wide recoveries were 54.7% for 136 U.S. non-financial corporate issuers that emerged from default between the fourth quarter of 2008 and the first quarter of 2011, compared with an historical average of 55.5%. In the 1990-1991 and 2001-2002 default cycles, firm-wide recoveries averaged 47.7% and 46.7%, respectively.
About one in four defaults during the latest cycle were distressed exchanges, which are favored by private equity firms. The swift decline in the U.S. speculative-grade default rate, which hit 3.6% a year after peaking at 14.6% in November 2009, also bolstered recoveries.
“The default wave was brutal but comparatively quick,” Keisman said. “Many companies emerged from default when the default rate was relatively low and asset values were high in comparison with previous cycles. Stronger recoveries in this cycle partly reflected the shape of the default-rate curve and fortuitous timing for issuers, not a breakdown in the traditional correlation of defaults and recoveries.”
There are still a large number of defaulted companies that have yet to emerge, the report notes, but their recovery rates would have to be very low to meaningfully change the benign average recoveries seen so far.
Hard Data for Hard Times II: The Crisis That Wasn’t is available via the Alacra Store.
Standard & Poor’s says its sovereign ratings have been effective indicators of default risk of governments worldwide on relative and absolute bases, according to its latest annual study on the performance and default rates of its global sovereign ratings.
The study, Sovereign Defaults And Rating Transition Data, 2010 Update, shows that since 1975, on average only 1.0% of investment-grade sovereigns (those rated ‘BBB-’ and above) have defaulted on their foreign-currency obligations within 15 years compared with 28.6% of those in the speculative-grade category.
- The relative rank ordering of sovereign ratings has been consistent with historical default experience.
- Sovereign ratings have exhibited greater stability at higher rating levels than at lower levels.
- Sovereign ratings have been no more volatile than other credit ratings of private-sector corporations and financial institutions; large rating movements in either direction are the exception and not the rule, even over several years.
- The sovereign rating default experience has been in line with Basel II reference default rates, even though default rates for individual years vary widely.
- Over the last 16 years, we’ve raised more foreign-currency sovereign credit ratings than we’ve lowered. However, judging from the greater number of negative outlooks on sovereigns than positive outlooks, downgrades could outnumber upgrades in 2011 as they did in 2008 and 2009.
Fitch Ratings says the recent sharp and sustained increase in commodity prices represents a growing source of concern for fixed-income investors:
Although core inflation measures in the U.S. and other developed economies remain largely in check, input inflation across a broad range of agricultural, energy, and industrial commodities has spiked sharply and is expected to put increasing pressure on margins and end-user prices in a number of commodity-dependent sectors in 2011.
Fitch says the financial impact of sustained commodity inflation varies widely by sector and company in the corporate sector.
At the high end, the most affected commodity-sensitive sectors include protein processors, ethanol producers, and airlines, while at the low end they include beverage producers and automotive suppliers.
Exposure within each category remains important as well, with premium brand producers being relatively insulated and able to neutralize commodity price increases with cost offsets, while low-margin discounters have less room to maneuver and thus might be worse off in a serious commodity crunch.
In contrast to the 2008 commodity spike, most firms in sensitive sectors appear to be in a better position to pass through higher costs via pricing, owing in large part to more resilient demand fundamentals across a range of consumer and industrial products. Nevertheless, the potential for intensifying margin pressure later in the year exists, particularly in light of the fact that firms already exhausted most of the easier restructuring options during the recession.
Fitch’s report Commodity Inflation in a Multi-Speed World — Corporate Winners and Losers reviews overall exposure to commodity inflation by sector; the ability of issuers within a sector to neutralize higher commodity costs through various offsets (SG&A cuts, efficiency programs, change in product mix or marketing); and relative winners and losers within a sector.
Business Monitor International has upgraded its outlook for the US economy in 2011 in this complimentary download of its latest Business Forecast Report via the Alacra Store. However, in the 43-page report, which provides 10-year forecasts, BMI expects weaker long term growth.
We believe that the expansion in 2011 could exceed expectations, assisted by easy monetary policy and new payroll tax cuts. We have made a big upgrade to our US forecast, and now see growth of 2.8% in 2011, up from 2.0% in our previous set of projections, and matching the pace in 2010. However, inflation is likely to remain very low by historical standards, and unemployment is expected to remain elevated. Consequently, we do not see the US Federal Reserve raising interest rates until 2012 at the earliest.
Despite evidence that the recovery is gaining traction across a broader swathe of the economy, we would not characterise present economic conditions as strong. Across the board, the economy is smaller than it was in 2007. Pre-recession levels have yet to be regained for industrial production, unemployment, housing market activity, fixed investment and interest rates; and, of course, the government is still running fiscal deficits at emergency levels.
The rate of positive change is increasing, but needs to be much higher to begin matching previous economic recoveries. Without consistent real GDP growth rates in the 3.5-4.0% area, for example, we would have little reason to believe employment can recover to pre-recessionary levels.
Our expectation of weak long-term growth beyond the next few years, at around 2.3%, has not changed.
We expect economic policy to remain muddled, with little bipartisan agreement on fiscal policy and the difficult budgetary choices to be postponed until after the 2012 elections.
The US ’s accommodative business environment is under threat on several fronts. The deteriorating government budget deficit means that corporate tax increases in the future are a serious possibility.
The banking sector remains fragile, which weakens the outlook for business lending. Furthermore, government involvement in the private sector has increased significantly in the past few years. Despite these challenges, the US still has one of the world’s best environments in which to conduct business, as exhibited by its score of 78.4 in our business environment ratings, which is among the highest in the world.
United States Business Forecast Report Q2 2011 is available for free download by Research Recap users for 30 days by special arrangement with Business Monitor International, an Alacra content partner. After 30 days the 41-page report, which includes ten-year forecasts, will revert to its regular Alacra Store price of $530.00.
Despite a mixed start to 2011, BMI also believes that the UK economy is on course to post stronger growth this year, with scope for a significant rebound in industrial production. Details are available in United Kingdom Business Forecast Report Q2 2011.
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Although the Obama administration’s budget proposal would be a marginal positive for the US credit if it were adopted, Moody’s questions some of the projections.
Excerpts from US Budget Proposal Is Still Not Addressing Biggest Long-Term Issues
In particular, non-security discretionary spending would be 11% lower in nominal terms in 2021 (the end of the projection period) than in the current year. Such an extended period of no-growth in nominal spending would be unprecedented. In real terms, spending would be nearly 25% lower. The feasibility of such a large, prolonged decline in discretionary spending is highly questionable. Whether or not the tax increases for high-income earners after 2012 will actually occur is also an open question.
These uncertainties, combined with the continued, elevated levels of debt, indicate that additional measures would be required to improve the government’s finances and debt position over the long term.
The biggest long-term issues are entitlements: Medicare and Medicaid have the largest budgetary impact and a significant reduction of their long-term budgetary impact has not yet been addressed. Proposals for Social Security reform are also omitted from the budget.
Spending on these entitlement programs is nearly 2½ times larger than the non-defense discretionary spending that the budget “freezes.” Overall, therefore, the budget, while marginally positive, has not addressed the longer-term issues that would improve US fiscal performance.
Fitch Ratings’ current assessment is that the combination of an enhanced European level policy response, fiscal austerity and structural reform at the national level, and a gradually more broad‐based and secure economic recovery will result in “normalisation” of European sovereign debt going into 2012. But if one or more of these expectations is not realised, the crisis may well intensify, Fitch says in Euro Area Sovereign Debt Crisis: Causes, Consequences and What Next
In many respects the “sovereign debt crisis” reflects a loss of confidence in the governance of the euro area and long–term viability of the euro. The crisis has revealed that economic convergence did not accompany monetary union and the
macroeconomic imbalances between as well as within euro area economies is central to understanding the causes of the current crisis.
Fitch’s current analysis suggests that these imbalances primarily reflected divergences in real interest rates that combined with much easier access to credit and over‐optimistic expectations of future growth, resulted in over‐investment and inflated asset markets and a rapid rise in private sector and foreign indebtedness in the so‐called “peripheral” economies.
As these imbalances unwind, recovery will emerge in these economies despite the gap in relative competitiveness with the “core”. But until economic recovery is secure, concerns over sovereign creditworthiness will persist.
Fitch does not attach a material probability to a “break‐up” of the euro area even though it is not expected to transform itself into a fully fledged fiscal union.
Political commitment to the euro remains extremely strong, in part because of the profound financial, economic and political consequences of a “break‐up”. Moreover, economic adjustment and rebalancing is underway and the agency believes that the euro area will “muddle through”. Nonetheless, some further “dilution” of national sovereignty over economic and fiscal policies is necessary to credibly strengthen the European wide policy framework and reduce the risk of severe macroeconomic imbalances re‐emerging that could once again destabilise the region.
Policymakers are committed to articulating a “comprehensive strategy to preserve financial stability and ensure that the euro area will emerge stronger from the crisis” and “do whatever is required to ensure the stability of the euro area”. This has focused attention on the forthcoming Euro Area and EU Heads of State Summits on the 11 and 24‐25 March respectively. Failure to outline credible and concrete measures would risk a further intensification of the crisis.
This Special Report is based on the speaking notes for a presentation “Euro Area Sovereign Debt Crisis” given at the Fitch European Credit Outlook Conference in January 2011. It is accompanied by a Multimedia Companion.
We are pleased to offer a complimentary download via the Alacra Store of Oxford Economics’ first post-Mubarak economic forecast for Egypt.
Highlights and Key Issues
- With President Mubarak being ousted on 11 February by an astonishing display of ‘people power’, the army is now in effective control of the country. It has suspended the constitution and dissolved parliament, promising that a new constitution will be drawn up and that fresh elections will be held later in the year.
- But although the army is well respected and is clearly essential for maintaining stability, it faces many very tough decisions. It will take time for new politicians and political alliances to be formed and there is mounting concern about the role of the Muslim Brotherhood, the moderate Islamic grouping that has been the main opposition party in recent elections.
- And, with the army having tacitly backed Mubarak for the past 30 years, there must be doubts about whether it can oversee the sort of democratic change that the people are expecting.
For now, the situation remains fluid and this will continue to have an adverse impact on economic policy and the economy, albeit the latter should start to return to some sort of normality in the coming months.
- The closure of many businesses during the political unrest, together with the adverse impact on tourism and foreign investment, means that GDP growth will have slowed sharply in Q1 this year.
- And with no early improvement in tourism or FDI likely, growth in 2010/11 is now seen at under 4%, with a similar result likely in 2011/12. And inflation is still high at around 11%, with food price inflation close to 19%. Given the pressure to limit price rises, increased subsidies are likely to push the budget deficit above 10% of GDP.
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The monthly report Egypt Economic Forecast is available for free download by Research Recap users for 30 days by special arrangement with Oxford Economics, an Alacra content partner. (After 30 days the report will revert to its regular Alacra Store price of $250.00)
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