Interest Rate Roundup

Monday, July 07, 2008

Still struggling to find its footing

No, not me -- The market! We continue to mull around recent lows thanks to a continuing onslaught of negative headlines on the credit and economic fronts.

For starters, General Motors is reportedly looking into even deeper employment and operational cuts. According to the Wall Street Journal ...

"Bruised by a deep sales slump and a half-century-low in its stock price, General Motors Corp. is preparing to cut thousands more white-collar jobs and is considering whether it should sell or shutter more of its brands, people familiar with the matter said.

"Both moves are part of a broader re-evaluation of GM's strategy and of its ability to meet an internal projection of returning to profitability in 2010, these people said.

"The job cuts are likely to be approved when GM's board of directors meets in early August, these people said. Management may also present the board with options for raising additional cash to help GM make it through the downturn, they said. The board will probably also hear management's latest thoughts on whether GM should trim the number of brands it offers in the U.S."

Or about the commercial real estate market, which I've been saying would slow for some time? (sorry for the excess aliteration -- please don't confiscate my literary license) We're getting more reports of spreading problems in CRE, with the retail subsector getting hit the hardest. Again from the Journal ...

"The faltering economy took a heavy toll on malls and shopping centers in the second quarter, but it didn't hurt the rental-apartment market as much as expected.

"Vacancies at retail properties rose to multiyear highs in the second quarter as retailers closed stores and curtailed expansion plans. Meanwhile, apartment-complex vacancies remained unchanged and rents rose by a stronger-than-expected 1.1% in the quarter, according to real-estate research firm Reis Inc. in New York.

"The higher retail vacancy rate stems from the slowdown in consumer spending and the weak housing market, among other economic pressures. Vacancies at enclosed malls in 76 major U.S. markets rose from 5.9% in the first quarter to 6.3% in the second quarter, the highest level since early 2002, according to Reis.

"Faring worse were open-air retail venues such as big-box centers and grocery-anchored strip centers. Vacancy in those formats climbed from 7.7% to 8.2% in the second quarter, the highest tally since 1995. Open-air centers tend to lose more tenants in a bad economy because they cater more to local, mom-and-pop shops. Malls, on the other hand, house more national retailers that tend to be more stable financially."

Another interesting story that caught my eye: Market players are disillusioned by the wide discrepancy between what the "official" Washington statistics say about the economy and what we're all seeing in our daily lives. Specifically, Bloomberg notes that TIPS are failing as inflation hedges because their values are tied to the CPI, which is arguably understating "real" inflation. An excerpt ...

"Treasury Inflation Protected Securities aren't living up to their name for bond investors who say they can't trust the way the U.S. government calculates the rising cost of consumer goods.

"Morgan Stanley, the second-biggest securities firm, and FTN Financial, a unit of Tennessee's largest bank, are telling clients to pare holdings of TIPS, whose principal amount rises with the Labor Department's consumer price index. Morgan Stanley says derivatives tied to inflation expectations are a better bet, while FTN recommends corporate and agency bonds because the index doesn't reflect the actual rate of U.S. inflation.

"The $500 billion TIPS market's 5 percent returns this year have beat a 2.2 percent gain for Treasuries, according to Merrill Lynch & Co. indexes. TIPS should pay more, because the consumer price index downplays the 39 percent increase in gasoline and a 133 percent rise in corn in the past year, investors say. Yields on TIPS relative to Treasury debt, a gauge of traders' inflation bets, barely changed over the past 18 months even as consumer expectations for prices climbed to 3.4 percent, the highest since 1995.

"The consumer price index underestimates inflation,'' said Jeremy Wolfson, who oversees $8.5 billion as chief investment officer at the City of Los Angeles Department of Water and Power Pension Fund. "Whether TIPS are adding a true inflation hedge, that's arguable based on the CPI component of it."

Of course, you could argue the gloom is so thick that you can cut it with a knife. So maybe that's a contrary indicator. Also, while the European Central Bank did raise interest rates by 25 basis points to 4.25% last week, ECB president Jean-Claude Trichet didn't pre-commit to more rate hikes in his post-meeting comments. That helped put a bid under the dollar, and arguably contributed to the decline in oil prices today. If G-8 members, who are meeting for the next three days in Japan, were to follow up with dollar-supportive talk or action, you never know -- maybe these moves will gather steam.

See, I'm not all doom and gloom!


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