Recent comments from Ambac Financial and MBIA Inc. suggest that the two largest bond insurers may be warming up to the idea of separating their municipal bond businesses from their more troubled structured-finance units.
"There will be a lot of bumps in the road to that outcome," Light explained. "There will be a lot of disappointed counterparties that had what they thought were guarantees on structured debt deals. Some will almost certainly file suits. Not many will want to contribute any capital to the bad insurer
In recent days, investors in credit-default swaps, which act as insurance policies against defaults, have grown increasingly gloomy because of worries about the global economy and the possibility of problems in the market.
The losses are tracked by several indexes, which track the cost of buying insurance on bonds issued by 125 big companies. Two of the indexes are at records and have doubled since the start of the year, meaning investors who sold this insurance suffered losses. The worry is that the indexes' moves could prove to be self-fulfilling prophecies, causing heavy losses for investors and making it even harder for people and companies to borrow money. Adding to the anxiety: Analysts can only guess at the volume of investments tied to the indexes, who is holding them and what it would take to trigger a full-scale sell-off.
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The trouble is brewing in the market for these esoteric investments. Markit iTraxx Europe tracks the cost of insuring a basket of 125 investment-grade debt issues by European companies, including banks such as Barclays PLC, beverage company Diageo PLC, and retailer Tesco PLC. The Markit CDX North America Investment-Grade Index references the cost of insuring against default by 125 U.S. and Canadian investment-grade companies, including telecommunications company AT&T Inc., retailer Wal-Mart Stores Inc. and fast-food operator McDonald's Corp.
As of yesterday, the annual cost of five years of insurance against default on $10 million in bonds on the CDX index had risen to $152,000 from $80,970 at the start of the year. The cost of €10 million ($14.7 million) of insurance on the iTraxx had rose to €123,750 from €51,320 at the beginning of the year.
The Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated in February. The general business conditions index tumbled nearly 21 points to -11.7, falling below zero for the first time since May 2005. The new orders and shipments indexes also dropped into negative territory. The prices paid index rose for a second consecutive month, to its highest level in considerably more than a year, while the prices received index remained elevated but close to January’s level. Employment indexes dipped below zero. Future indexes were generally positive, but well below levels of late last year. In particular, future employment indexes posted significant declines, hovering just above zero.
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, fell from -20.9 in January to -24.0 this month (see Chart). Forty percent of the firms reported no change in activity from January, but the percentage of firms reporting decreases (42 percent) was substantially greater than the percentage reporting increases (18 percent). Other broad indicators also suggested continued declines this month. Demand for manufactured goods, as represented by the survey’s new orders index, remained negative, although the index increased from -15.2 to -10.9. The current shipments index, however, fell 10 points, from -2.3 to -12.2. Indexes for both unfilled orders and delivery times remained negative.
Industrial production increased 0.1 percent in January for a second consecutive month. Output in the manufacturing sector was unchanged in January, as lower output of motor vehicles and parts offset a small net gain elsewhere. The output of utilities climbed 2.2 percent, while the output of mines moved down 1.8 percent. At 114.2 percent of its 2002 average, overall industrial production was 2.3 percent above its January 2007 level. The rate of capacity utilization in January was unchanged, at 81.5 percent, a rate 0.4 percentage point above its year-earlier level and 0.5 percentage point above its 1972-2007 average.
Consumer energy products advanced, consumer non-energy nondurables remained unchanged, and consumer durables fell.
The output of business equipment rose 0.4 percent in January; increases in information processing equipment and in transit equipment outweighed a decrease in industrial and other equipment.
The output of construction supplies fell 1.1 percent in January after a rise of the same magnitude in December; production in January was 1.2 percent below its year-earlier level and about 4 percent below its peak in 2006. The output of business supplies increased 0.5 percent.
The production of non-energy materials edged down 0.1 percent in January, while the output of energy materials was unchanged.
Mortgage applications fell 22.6% in the week ended Feb. 15, the Mortgage Bankers Association said. That's the lowest since the week ended Jan. 4.
The 30-year fixed mortgage rate soared 37 basis points to 6.09%, the highest since late December. It's continued to surge this week.
Longer-term mortgage rates are closely tied to the 10-year Treasury yield, which has roared back in part due to inflation concerns. The benchmark yield was unchanged at 3.90% on Wednesday.
Refinancing activity, which skyrocketed as Treasury yields and mortgage rates dived in January, is coming back to earth.
Applications for buying a home fell to their lowest level in nearly five years.
Economists expect that slowing growth will naturally cool inflation. GDP advanced at just a 0.6% annual pace in the fourth quarter. Some analysts are predicting a mild recession in the first half of this year as job growth and consumer spending slow.
Sara Lee Corp. this week told analysts it expects to recoup rising raw-material costs in part by raising prices, especially on bread. Company spokesman John Harris said Sara Lee's significant competitors had matched the increases, with consumers showing no sign of trading down to lower-cost brands. "With commodities reaching unprecedented levels," Mr. Harris said, "it is quite likely we will take pricing up again."
Goodyear Tire & Rubber raised the price of replacement tires 7% on Feb. 1, on top of two increases totaling 11% last year. Chief Financial Officer Mark Schmitz told analysts last week that the hike was the result of rising prices of key raw materials, according to a transcript by Thomson Financial. Mohawk Industries Inc. raised carpet prices in December and again in January because of rising material costs, even though sales have been hurt by the slumping housing market.
The declining dollar, while boosting U.S. exports, is adding to inflation pressure, as goods priced in foreign currencies become relatively more expensive. Prices for imports from China jumped 0.8% in January, the largest monthly increase since the Labor Department began reporting the data in 2003.
Inflation remained hot in January, led by large increases in energy and food prices but also in a host of underlying core prices, the government reported Wednesday.
U.S. consumer prices rose a seasonally adjusted 0.4% last month, the Labor Department reported Wednesday. See full government report.
Excluding food and energy prices, the core CPI rose 0.3% in January, the biggest gain since June 2006.
The increases in the CPI and core CPI rates were above the median estimates of economists surveyed by MarketWatch. Economists had projected a 0.3% gain in the CPI and a 0.2% increase in core inflation. The report contains updated seasonal factors.
As a result, December CPI was revised up to a 0.4% gain compared with the initial estimate of a 0.3% increase.
On a year-over-year basis, the CPI is up 4.3% in January. Core inflation is up 2.5% over the same period, the fastest pace since February 2007.
Last week's follow-through may have marked a bullish turn in the market, but that doesn't mean investors should be in a hurry to buy stocks.
Why? There just aren't many compelling candidates. A strong new rally typically yields a rash of breakouts by new leaders within a few weeks of the follow-through rally confirmation.
This week's IBD 100 is comprised of few new names, especially those with superior fundamentals. That indicates a lack of sector rotation, or emerging leadership.
Meanwhile, much of the market's old guard is still deep in corrections.
Some of their basing patterns show flaws. So even if they look more promising as they build the right side, you need to make sure the stock meets all your fundamental and technical criteria.
Treasuries fell, pushing the 10-year note's yield to the highest level in more than a month, on speculation accelerating inflation will prompt the Federal Reserve to be less aggressive in cutting borrowing costs.
U.S. debt securities extended their decline after an industry report today showed confidence among homebuilders had its first back-to-back monthly increase in almost a year. Traders eliminated bets the Fed will lower the target lending rate by three-quarters of a percentage point at its meeting next month, in favor of a smaller reduction.
``The Fed is almost done easing because the market won't allow more,'' said Mark MacQueen, a partner and portfolio manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $5 billion. ``Every day that passes, people become less assured there's going to be a recession. I find little value in Treasuries.''
The CPI chart on the home page [as reprinted above] reflects our estimate of inflation for today as if it were calculated the same way it was in 1990. The CPI on the Alternate Data Series tab here [the chart above], reflects the CPI as if it were calculated using the methodologies in place in 1980. Further background on the Alternate CPI and Ongoing M3 series is available in the Archives in the August 2006 SGS newsletter.
A measure of the liquid money supply within an economy. MZM represents all money in M2 less the time deposits, plus all money market funds.