U.S. Economic/Financial News
Home Mortgage Refinancings Fall 56%
The rise of interest rates is having a strong effect on housing, as represented by the 115 basis point increase in the yield of 10-year U.S. Treasury bonds since mid-March, the Mortgage Bankers Association reported May 12. Treasury bonds act as a benchmark for all long-term interest rates, and have forced upward the home mortgage interest rate.
As a result, the Mortgage Bankers Association reports that its index of loan applicationsthe Market Composite Indexreached 743 for the week ending May 7, which is down 33.6% from the level of 1,117 for the week ending March 12. This index represents the application for all types of loans, whether they be for new homes or for refinancing existing homes. More specifically, the MBA's index for mortgage refinancings alone reached 2,185 for the week ending May 7, which is down a whopping 56.1% from the level of 4,984 for the week ending March 12.
Corporate Bond Issues Plunge to 18-Month Low
U.S. corporate bond issuance plunged to an 18-month low, a result of rising U.S. interest rates, the Financial Times wrote May 11. In March, U.S. corporations issued $91.1 billion in corporate bonds, which plummeted to $31.7 billion in new issuances in April. Higher interest rates make it more expensive to borrow. Were this process to intensify and cause a drying-up of corporate borrowing, this would produce a sharp reduction of necessary corporate spending for capital formation. It could also produce illiquidity in the multi-trillion-dollar bond market.
U.S. Trade Deficit Soars to New Record Levels
The U.S. trade deficit on goods and services soared to a record $45.96 billion in March, the U.S. Department of Commerce reported May 12. This is $2.5 billion greater than the February level. At the same time, the U.S. merchandise trade deficit jumped to an unprecedented $51.24 billion in March, the first time it has ever exceeded $50 billion for a single month.
The U.S. level of imported crude oil and petroleum products reached $13.83 billion in March, a rise of $1.5 billion from the level of $12.24 billion recorded in February. The average price of oil that was imported during March was $30.64, the highest monthly level since February 1983.
However, America's addiction to imports held strong, despite the 5% lower value of the dollar during March, compared to January of this year. The lower value of the dollar should have made the import of goods into America more expensive, and discouraged them, at least according to the dictums of Economics 101. But the Rome model-based U.S. economy cannot survive without imports: In addition, to the higher price paid for petroleum, the U.S. also increased its purchase of cars, and other consumer goods.
The U.S. merchandise trade deficit for the first quarter of 2004 jumped to $147.23 billion; were that trend to continue, the U.S. would incur an unprecedented $590 billion physical goods trade deficit for 2004. The creates a financing crisis: the U.S. already owes the world several trillion in debt on the account of its foreign trade, and thus will find it very difficult to attract the required new capital flows to cover this deficit. A failure to do soand the likely ensuing disinvestment from the dollarwould trigger a chain-reaction collapse of the dollar-based world financial system.
Columnist: Latest Employment Data Shows Free-Trade Effects
Columnist Paul Craig Roberts, writing in the Washington Times May 12, reviews the latest Bureau of Labor Statistics jobs data for April, and for the last few years. Not only have America's manufacturing jobs been outsourced, Roberts concludes, but now, increasingly, so are "new economy" jobs. This he attributes to free trade. "Once free trade was a reasoned policy based in sound analysis. Today, it is an ideology that hides labor arbitrage. Because of the low cost of foreign labor, U.S. firms produce off-shore for their customers.... [T]he 'new economy' is being outsourced even faster than the old manufacturing economy ... [which] leaves [Americans] in low-pay domestic services."
He indicts free trade for essentially eliminating the standard of living and economy. Engineering jobs are shipped from Boston to India, but, "the Boston engineer cannot work for the Indian salary because his mortgage debt and grocery prices will not adjust with the downward salary."
Delta Airlines May File for Bankruptcy
Delta Airlines, the #3 U.S. air carrier, in a filing with the Securities and Exchange Commission (SEC) on May 10, stated that it is considering filing for bankruptcy. The announcement came just three days after U.S. Airways had issued a similar statement.
In its statement, Delta stated, "If we cannot achieve a competitive cost structure, regain sustained profitability and access the capital markets on acceptable terms, we will need to pursue alternative courses of action ... including the possibility of seeking to restructure our costs under Chapter 11 of the U.S. Bankruptcy Code."
During the first three months of 2004, Delta lost $383 million; it has lost a staggering $3.6 billion since 2000. One of the problems confronting Deltaand other airlines, such as American, United, and U.S. Airwaysis that under deregulation, newer, cut-throat, non-union airlines, such as Southwest and JetBlue, are able to operate at lower costs. In that environment, Delta's chairman, Gerald Grinstein, has demanded huge wage concessions. The Airline Pilot's Association has offered to forgo a wage increase this year, and take a 9% wage-cut, but Delta is insisting upon a 30% wage cut!
United, the #2 U.S. air carrier is still in Chapter 11 bankruptcy. U.S. Airways, the #7 air carrier, which had already been in bankruptcy once, said on May 7 that it might seek bankruptcy protection a second time. Within the next few weeks, were Delta and U.S. Airways to go into Chapter 11 bankruptcy, then three of America's top seven airlines would be in that condition, jeopardizing America's air grid. Meanwhile, the high cost of jet fuel, prompted by oil reaching $40 per barrel, is causing further havoc for the airlines.
Long, Hot Summer Predicted by Electric Council
Get ready for a long, hot, possibly dark summer. The North American Electric Reliability Council (NERC), released its Summer Assessment report May 12, and provided a phone briefing for the press. The report starts with the ritualized assessment that supply and transmission resources will be adequate to meet summer demand. This is based upon "normal" weather, and few unplanned equipment outages. It might be safer to bet on the stock market.
The report then states that there are "regional areas of interest," meaning they could be in big trouble. These include the upper Midwest, which has a reserve margin of 8.7%, compared to a recommended margin of 17%; transmission bottlenecks in Texas; plus, "under conditions of high demand caused by extreme weather, high unit unavailability, and multiple contigencies, the areas of southwestern Connecticut, New York City, and Long Island, might be susceptible to reliability problems"; and the California Independent System Operator warns that "its operating reserves might not be sufficient to avoid emergency alerts [already issued] if peak demand ... is higher than anticipated."
Addressing last summer's massive East Coast blackout, the report, and the NERC officials giving the briefing, stressed that if everyone adheres to NERC's reliability standards, there should be no blackouts. Instead, there will be, for example, in California, alerts aimed at lowering usage (cut off supplies to interruptible industrial customers), voltage reductions (brownouts), etc., to prevent uncontrolled blackouts.
One reporter asked why it was now considered acceptable to respond to problems with planned outages, and mentioned that FERC chairman Pat Wood is getting updates on California twice a day. George Bartlett, chairman of NERC's reliability subcommittee, could only repeat that the "region believes they have an adequate plan" to deal with shortages.
MCI To Lay Off 7,500 Workers
MCI announced May 10 that it would lay off 7,500 workers15% of its 50,000 employeeson top of the 5,700 layoffs announced earlier this year. The company, formerly known as WorldCom, emerged from bankruptcy in April, and reported a loss of $388 million for the first quarter. Loudoun County, Va.-based MCI did not say where the cuts would be made, but its major employment centers are in Ashburn, Va., Tulsa, Colorado Springs, and its former headquarters in Clinton, Miss.
WALL STREET POLICE BLOTTER
* Citigroup, after repeated denials of any wrongdoing, agreed to pay $2.65 billion to settle a lawsuit brought by investors in the former WorldCom (now MCI), arising out of Citi's role as investment banker and lead lender to the bankrupt telecommunications company. It is the largest payment ever made by a commercial bank, investment bank, or auditor in a lawsuit brought by investors who bought securities issued by a corporation that was advised by one of those firms. Citigroup, which again denied that it had done anything wrong, will take a $4.95 billion charge in the second quarter to reflect the settlement, and set aside reserves to cover exposure to Enron and other litigation. Happily, the $5 billion is only about a quarter of the firm's annual earnings.
* UBS AG, the giant Swiss bank, has been fined $100 million by the U.S. Federal Reserve for delivering dollars to blacklisted countries like Iran and Cuba. UBS also submitted false reports to U.S. authorities to hide the activities. Unlike Citi, UBS admitted its crimes and expressed regret.
* The SEC and NY State are widening their probes into the activities of mutual funds, including whether banks which run their own funds, stuffed client money into those funds as the stock market declined. Citigroup, Merrill Lynch, Morgan Stanley and CSFB are among those said to be targets.
* Conrad Black may have to change his title to Lord Black of RICO after the filing of an amended suit by Hollinger Corp. The 175-page filing alleges that Black treated Hollinger as "a cash cow to be milked of every possible drop," and charges Black, his wife Barbara Amiel Black, and two former Hollinger officers with violations of the RICO statute (which pertains to racketeering and organized crime). The suit says the crooks diverted $391 million from Hollinger during 1997-2003, or about 72% of the company's income for the period. The suit also charges that the Blacks used the company jet for such things as personal trips to Bora Bora, and that Lady Black charged the company for tips she gave to the doorman on shopping trips to Bergdorf Goodman.
|