Initial Claims Disappoint Again, Failded Banks Weighing On FDIC, Calpers Takes Another Hit, Tishman Faces Office Downturn

The stories below offer further concrete evidence that major issues persist in the US economy. When making investment decisions, we prefer to place more weight behind this type of data than "leading" economic indicators the government likes to laud and CNBC types love to regurgitate.

The rally in the US$ last week stalled this week right at the resistance of a long-term downtrend. We expected as much and wrote about the move last week. Treasury bonds however continue to rally. The direction of this market is perhaps harder to predict on a short-term basis due to the open efforts of the Fed to buy treasuries and support the market.

ECONX Initial Claims Disappoint
The initial claims report did nothing to support the economic recovery scenario. Initial claims for the week ended Aug. 15 increased to 576,000 from a revised 561,000 in the prior week. The number lifted the 4-week moving average to 570,000 from 565,750. Initial claims are up 31.5% from the prior year. Continuing claims rose 2,000 to 6.241 million. The 4-week moving average fell by 2,000 to 6.266 million. No major layoffs were announced yet 10 states reported increases in unemployment of more than 1,000. When you factor in that continuing claims were expected to slowly run down as unemployment benefits lapsed and not due to new hires, this report shows the labor market is more troubled than previously thought.

Failed banks weighing on FDIC - WSJ
WSJ reports banks in the U.S. that failed in the past two years were in far worse shape than those that collapsed during the industry's last crisis, a looming problem for the government agency charged with insuring deposits.

At three of the five banks that failed Friday, increasing the total to 77 so far this year, the financial hit to the agency's deposit-insurance fund is expected by the FDIC to be about 50% of their assets. The biggest hit on a percentage basis is coming from Community Bank of Nevada, a Las Vegas bank with $1.52 billion in assets and an estimated cost of $781.5 million. The failure of Colonial Bank, a unit of Colonial BancGroup that was sold to BB&T Corp., will cost $2.8 billion, or 11% of the Montgomery, Ala., bank's assets. For the 102 banks that have collapsed in the past two years, the FDIC's estimated cost averaged 25% of assets. That is up from the 19% rate between 1989 and 1995, when 747 financial institutions were closed by regulators, according to the FDIC.

The agency's insurance fund already has dipped to $13 billion, with more than 300 battered banks and thrifts still on an undisclosed FDIC list of problem institutions. One problem is that so many banks took risks when the economy was booming, and are seeing their capital dissipate with alarming speed.

Calpers takes another property hit - WSJ
WSJ reports the California Public Employees' Retirement System has given up control of its stake in a trophy office tower in Portland, Ore., a sign that even the largest institutional investors are cutting their losses rather than throwing good money after some badly battered real-estate assets. The decision by Calpers, the country's largest public pension fund by assets, to walk from its investment in the Koin Center, one of Oregon's tallest buildings at about 509 feet, nicknamed the "mechanical pencil" for its signature shape, also shows that leasing problems are cropping up in even the country's healthier markets. While it is on the rise, downtown Portland's Class A office vacancy rate was 6.1% as of June 30, below the average of 12.9% for major U.S. downtown markets, according to Colliers International. Despite Portland's relative health, in July a partnership that includes Calpers and CommonWealth Partners, defaulted on the Koin Center's $70 million mortgage provided by New York Life Insurance Co., according to court papers. A state circuit court judge approved New York Life's request that a receiver be appointed to control and possibly sell the property.

Tishman faces office downturn - WSJ
WSJ reports a partnership led by Tishman Speyer Properties is in default on debt tied to one of the largest office portfolios in the Washington area, the latest in a line of humbling turns for the prominent property developer. Tishman Speyer paid $2.8 billion in late 2006 for what was known as the CarrAmerica portfolio, a collection of 28 buildings leased to law cos, lobbyists and other upscale tenants in and around Washington. But in taking advantage of the easy credit terms of the time, Tishman ended up overpaying. With office vacancies rising and rents falling, the partnership has violated lender's covenants. Tishman also must find a way to refinance the debt when it comes due in 2011, something that analysts say could be a struggle.

Q2 EPS, LIBOR-OIS Spreads Narrow, July Retail Sales, Initail Jobless Claims

Second quarter earnings can be best characterized as light on revenue but strong on cost cutting, leading to better than expected EPS. The more positive bottom line results have helped fuel the equity market rally over the last couple of months.

Meanwhile, Aug. 13 (Bloomberg) -- The Libor-OIS spread narrowed to a level former Federal Reserve Chairman Alan Greenspan said he regarded as “normal,” adding to evidence the freeze in credit markets is thawing. Clearly credit market stabilization has been a major driver of the equity market rally.

While the rally has been a nice reprieve from the bear market the question remains what will compel the markets higher in Q3 and Q4. With credit back to normal that driver is off the table and cost cutting/belt tightening can only work to improve EPS for a short period of time. Revenue must accelerate in the 2nd half of the year for this bear market rally to turn into a bonafide bull market.

With that thought in mind I am publishing the next two stories. If the consumer can't find a job then spending will not return and revenue will continue to be disappointing. I fear this will result in a resumption of the down trend in the back half of the year.

Of course, these are long term questions and as my Mom always says "you must live the questions; the answers reveal themselves." "Living the questions" in this case means trading the trend while keeping your eyes open and your mind alert.

ECONX July Retail Sales Disappoint
The July Retail Sales report is a disappointment and yet another reminder, in the midst of a rising stock market, that the consumer isn't all he/she used to be due to weak wage growth, depressed asset prices, and concerns about job security...

For the month retail sales were down -0.1%. Excluding autos, they were down -0.6%. Both figures were well off the consensus forecasts that called for increases of 0.8% and 0.1%, respectively. The government doesn't provide any context behind the numbers, but with broad declines in most sales categories, it is clear that consumers weren't doing a lot of discretionary spending.

There will be a tendency to dismiss the weakness as being the result of consumers delaying purchases to take advantage of tax-free holidays that got pushed into August this year. There will likely be some makeup in August, but there is still no other way to read the July data than to consider it a disappointment. To the latter point, retail sales, excluding autos, gasoline station, and building materials, which is a measurement that flows into GDP estimates, was down for the fifth straight month.

ECONX Initial Claims Still Way Too High

Initial jobless claims for the week ended August 8 increased to 558,000 from a revised 554,000 in the prior week. The current number lifted the 4-week moving average to 565,000 from 556,500. Continuing claims, in contrast, fell 141,000 to 6.202 million. That dropped the 4-week moving average for the series to 6.259 million from 6.287 million. There is cold comfort in the drop in continuing claims since it most likely reflects people losing benefits. To be sure, there isn't much hiring happening... Separately, while the trend in initial claims has been better of late, a reading north of 500,000 at this point is still downright bad and still well above prior recession levels when the 4-week average for claims was closer to the 400,000-450,000 range. The labor market is weak and these figures aren't a great portent for consumer spending activity.