May 11, 2009

2009 issue 8

Turning the Corner, or Turning a Corner

Some seeming stability or improvements in some economic releases have helped unleash a down-in-quality rally, with especially large returns in the higheryielding asset classes. Signs that capital markets were healing helped to boost credit and equity; so did a significant reduction in the various markets defensive posturing. What we seem to have here is some disproportionate celebration of the financial system and the economy avoiding a train wreck. Although the stress tests have been touted as an important milestone on the way to economic recovery, too much credence has been attached to these public exercises. While economic stimulus and unprecedented government support has been central to markets finally gaining traction, the outlook for households and businesses remain feeble. Lets not forget that this is no run-of-the-mill business cycle. Coming out of an epic collapse in financing and in the international economy, we may witness long-lasting attitudinal shifts in spending and borrowing patterns, intense competitive pressures in any recovery scenario, and a long crest of corporate stress that will linger for years. Any outlook cannot ignore the serious risk that corporate defaults may peak at new highs, and recoveries could be constrained. As a result, I worry that it will not be a clean snap-back as the markets seem to assume.

Rising bond yields loom over rally As we alter our definitions of valuation, our notions of stress change...stress or stretch tests.
Second half inventory bounce
It was a setup Markets jump as fears ebb about bank 'stress tests Auto Sector

Crude Oil climbs to over $58 again.

GM Out.. The editors at Dow Jones are now hinting what everyone else already knew: GM is going to be replaced in the Dow Jones Industrial Average and replaced sooner rather than later.

Too Many Back-Seat Drivers

Complex solution will offer no quick fix

Governments become lenders and spenders of last resort

Many smaller businesses believe that further inventory adjustments will still be needed. They suggest that stockpiles are still seen as too high by producers and they intend to cut them back further in the next six months.

The macro assumptions behind the stress test seem realistic, but not that dire Critics of the tests say regulators have been walking on eggshells; cannot risk spooking investor

GM Shutdowns to Weigh on Econ Data in Months Ahead

Swine flu is last thing fragile global economy needs

Investor confidence in financial markets is returning after the U.S. government and the Fed agreed to spend, lend or commit $12.8 trillion to end the longest recession since the Great Depression. Finance chiefs from the Group of Seven predicted in Washington on April 24 that the world economy will start to rebound later this year.

Japans March exports were down 46%, but that still beat February. Overall, Asian trade figures have bounced somewhat, suggesting their previous drop resulted from inventories and finance, not a deeper problem. This is not the end of the recession, but maybe the end of its ugliest stage

ABRAHAM GULKOWITZ
abe@gulkowitz.com
917-402-9039

Japan Girds for Record Contraction

Japan's economy is expected to shrink 3.3% in the current fiscal year.

May 11, 2009

The PunchLine...

In This Issue
Turning the Corner, or Turning a Corner
Some seeming stability or improvements in some economic releases have helped unleash a down-in-quality rally, with especially large returns in the higher-yielding asset classes. Signs that capital markets were healing helped to boost credit and equity; so did a significant reduction in the various markets defensive posturing. What we seem to have here is some disproportionate celebration of the financial system and the economy avoiding a train wreck. Although the stress tests have been touted as an important milestone on the way to economic recovery, too much credence has been attached to these public exercises. While economic stimulus and unprecedented government support has been central to markets finally gaining traction, the outlook for households and businesses remain feeble. Lets not forget that this is no run-of-the-mill business cycle. Coming out of an epic collapse in financing and in the international economy, we may witness longlasting attitudinal shifts in spending and borrowing patterns, intense competitive pressures in any recovery scenario, and a long crest of corporate stress that will linger for years. Any outlook cannot ignore the serious risk that corporate defaults may peak at new highs, and recoveries could be constrained. As a result, I worry that it will not be a clean snap-back as the markets seem to assume.

Households?
Numerous questions for a once free-spending sector whose housing and mortgage finance machinery have not just collapsed but are severely damaged The boom cannot and should not be recreated (pg 9)

(pg 1)

In This Issue Searching for Bottoms U.S. Job Picture DUI Dimensions of Risk Since You Asked Engines of Growth

(pg 2) (pg 3) (pg 4) (pg 5) (pg 6) (pg 7)

You Cant Handle the Truth The DNA of Business Trust Me on This Dislocations Credit Concerns The New Geography of Business Pumping Iron Real Estate and Construction More Construction Data Media Clips
Lots of pressure points

(pg 10) (pg 11) (pg 12) (pg 13) (pg 14) (pg 15) (pg 16) (pg 17) (pg 18) (pg 19) (pg 20) (pg 21)

Break Down in Europe Will Life Ever be the Same?

There will be ongoing repercussions from this historic bust, and we worry about the likely contours of the recovery path. And lets not forget that its clearly an (pg 8) international affair

Contact information:

Abe Gulkowitz
phone: 917-402-9039 email: abe@gulkowitz.com

Headlines and data appearing in The Punch Line came from widely available publications including national and international newspapers, trade journals, economic and industrial bulletins and news websites.

May 11, 2009

The PunchLine...

Searching for Bottoms

A world of reduced counterparty risk
A broad range of macro economic indicators is coming in somewhat less negative in recent weeks as compared to the NovemberFebruary period, when the economy literally fell off a cliff. But any careful investigation into the underlying numbers and industry specifics continue to suggest that economic recovery remains in a very precarious state. The recovery path will not be a straightline.

The nation's shelves are bare and that could be good news for the economy
Even when inventories bottom out, companies are unlikely to go on a production boom. Most forecasters expect them only to start cranking out merchandise at levels that make sense given an economy with weak demand from consumers. There are few signs that consumers are eager to buy more goods given the continued weak job market, dysfunctional financial system, and steep decline in housing and stock market wealth.

The Anti-Debt Mkt Positioning Technology Stocks Are Favorites in S&P 500 on Zero Debt
Technology companies are piling up cash and cutting debt faster than any other industry, a signal to investors that they will rally even as evidence mounts that the stock markets fastest advance since 1938 is in jeopardy. Cisco Systems Inc., Salesforce.com Inc. and Cognizant Technology Solutions Corp. have driven technology shares in the Standard & Poors 500 Index to a 16 percent gain in 2009, the best start since 1998 and the most among the 10 industries in the measure. Money managers are betting the cash reserves, rising profits and cheapest valuations on record will send U.S. technology stocks up 24 percent this year, compared with an increase of less than 1 percent for the S&P 500, according to analyst price forecasts and data compiled by Bloomberg. The S&P 500 fell 0.4 percent last week, the first drop since early March, after bank losses increased and the International Monetary Fund said world economies may contract for another year. MFS Investment Management, Harris Private Bank and Huntington Bancshares Inc. say computer and software makers may climb even as the rest of the market retreats.

Clearly the recent pace of decline in many indicators can't continue indefinitely; nevertheless, one should not view slower rates of decline or small upward bounces, in and of themselves, as evidence of a true bottoming.

Tech sector many now expect 3% notebook unit growth in 09, while desktop units should continue to decline 20%. But revenues are crashing due to ASP erosion and mix shift towards lower-end products, including netbooks.

Taiwan Export Values Fell in April

Standing in contrast to market enthusiasm over a demand recovery, April exports missed expectations by dropping -34.3% YoY in USD terms

Stimulus policies boost expectations

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The PunchLine...

U.S Job Picture

A 72,000 jump in government payrolls tempered the overall jobloss figure. Government employment was bolstered by the hiring of about 60,000 temporary workers in preparation for the 2010 census and U.S. Labor Secretary Hilda Solis said this figure would fluctuate in the months ahead. Private sector employment fell by 611,000 in April after a 693,000 decline in March, the department said, which curbed some of the optimism over the report. Still, the data was not as bleak as financial markets had expected and offered the freshest sign that the intensity of the recession, now in its 17th month, was starting to fade.

May 11, 2009

The PunchLine...

D-U-I
Under the Influence
Sentiment improves Initiatives by the Federal Reserve and Treasury were enough to instill confidence that Washington is headed in the right direction toward stabilizing the financial system via removal of troubled assets, and improving affordability in the housing market, especially with lower rates - both important elements toward restoring the beleaguered consumer balance sheet and boosting lending capacity. At the same time and perhaps equally important, faint signs did manage to surface in March-April that various economic indicators may be getting no worse GMAC will provide dealer and customer financing, receiving liquidity and capital support from the US Government.
JUST BELIEVE

Risk Taking on the Comeback

The success of government intervention in credit markets to stabilize short term markets and ensure funding for banks turns last years fear into this years greed. Evidence can be seen most readily in the return of risk taking as high yield debt markets lead in performance year to date. The decline in credit market reliance on government guaranteed funding from declining usage of CPFF in the commercial paper market to the recent rise in non-guaranteed term debt issuance from banks points to a return of risk taking in credit markets coinciding and contributing to a broader confidence in financial markets.

Markets infected by exuberance pandemic

Many stocks have erased this years losses. US Treasury yields are above 3%. Killer flu? No worries. Negative growth? Not for long. A kind of flight from safety is underway. It shows the medicinal power of monetary and fiscal injections. But painful side effects will follow.

Banking on policy effectiveness Market sentiment is on the mend and in the short term it is suggesting that we should expect less of a pullback in consumer spending and an end to the freefall in macro stats. The severe break in economic activity has been met by a wide-ranging and vigorous fiscal and monetary response. Much of this stimulus is still in the pipeline, which is a major positive for the outlook. However, on the downside of this effort, the outlook may yet see some severe disappointments and serious questions will still haunt regarding the long-term. This is especially disconcerting regarding the massive budget obligations that will be slow to recede.

May 11, 2009

The PunchLine...

Dimensions of Risk

Kansas Fed's Hoenig:

Despite Actions Mkt Still Under Stress

NearTerm Outlook for Financial System, Economy Remains 'Uncertain' Ad Hoc Policy Actions Created Uncertainty, Undermined Confidence Kansas City Federal Reserve Bank President Thomas Hoenig said the U.S. economic outlook remains "uncertain" and markets are still under stress despite the timely action by the Fed and other policymakers to respond to the current crisis. However, Hoenig repeated his concerns about the reactive and ad hoc nature of policy responses, and the moves to save firms deemed "too big to fail," which he said will have negative longer-term consequences. Noting the huge infusion of taxpayer money, Hoenig said, "Despite these actions and some recent signs of improvement, markets remain under stress and the near-term outlook for the financial system and the economy remains uncertain."

SOME RELIEF??? Although credit conditions remain strained, an April survey of loan officers by the Federal Reserve found a smaller number of banks were tightening loan standards compared with a few months ago. Glimmers of improvement were most notable in commercial lending. The Fed said 40% of the 53 domestic banks it surveyed between March 31 and April 14 said they tightened standards on commercial and industrial loans, a smaller percentage than the 65% that said in January that they tightened standards.

May 11, 2009

The PunchLine...

Since You Asked... Reality Check !

Top revenue sources for state and local governments

Sources: U.S. Department of Commerce, Bureau of Economic Analysis; Q1 09, compared with the same period last year: -----------------------------

Federal grants: 15% Income taxes: Property taxes: Sales taxes: Other taxes: -11% 2% -2% 2%

Rating agencies downgraded $71bn worth of HY bonds during the month, bringing cumulative LTM volume of net downgrades to $712bn or 102% of the HY index size. This volume matches the peak reached in the last credit cycle. Given that we are still in early stages of this cycle, it appears likely that HY will breach its previous record in months to come. Separately, rating agencies downgraded $55bn of former investment grade names into HY, making it the second month in a row of $50bn+ in such crossover downgrades. On LTM basis, volume of fallen angel transitions reached $234bn, of a third of the HY index size, again reaching the highs of last credit cycle. Most notable fallen angels of April included CIT, Macys, JC Penney, US Steel, and Colonial Realty. There were no rising stars this month.

May 11, 2009

The PunchLine...

Engines of Growth
Strong China Growth?

But China Power Output Likely Dropped About 4% Y/Y in April

"April power output is likely to have dropped more from a year earlier according to the data from the National Electric Power Dispatching and Communicating Center," said Chang Jianping, vice director of the supervision department under the SERC. The latest data show that the output dropped declined from the large, 3.5% drop posted in the first 10 days of April, Chang said, predicting that power output woulud likely rebound in May or June. Electricity production fell 0.71% from a year earlier in March, with the decline accelerating as the month progressed. Power production decreased 1.4% in middle 10 days of March and 2.08% during last 10 days of the month.

China in Rebound Biz Survey: Key Index Back Up to Q1 08 Levels

Overall Chinese business conditions posted their strongest showing in April in more than a year, led by a sharp improvement in corporate financial positions, the results of the April China Business Sentiment Survey indicate. The headline overall business conditions index jumped to 61.51 in April from 54.20 in March, the highest it has been since March last year.

Canada purchasing managers index jumps to 53.7 in April,

a remarkable 10-percentage point jump over March's reading and a suggestion that the country's beleaguered manufacturing sector is on the mend.

South Korea surprise it posted a +0.1% reading in 1Q real GDP, which compared to a consensus view of 0.2% and a big swing from the 5.1 print in the fourth quarter.

Worst back-to-back US GDP performance in 5 Decades

Not only did 1Q real GDP contract sharply - at a 6.1% annual rate versus consensus expectations of -4.6%, it followed on the heels of a 6.3% decline in the fourth quarter of 2008. That marks the worst back-to-back performance in 50 years.

UK Govt to launch oldfornew vehicle scrap scheme

The government will pay drivers to swap old cars for new in a scheme to boost its stricken auto sector, Chancellor Alistair Darling said in Wednesday's budget, mirroring moves in Germany and other European nations. Alistair Darling told the House of Commons that the scheme, to be introduced from next month, would "provide motorists with a 2,000 pound discount on new cars bought when they trade in cars over 10 years old". The move, which will cost the government around 300 million pounds and runs to March 2010, comes following similar, popular steps taken in other European countries, notably Germany.

US Federal Program to Boost Private Lending Struggles to Get Money into Consumers Hands

German economy to shrink

Germany's economy will shrink by 6% this year and continue to contract in 2010 according to a forecast from the country's leading economic think tanks. The estimates, compiled by eight institutes for the German Economy Ministry, also predicts that the rate of unemployment will hit 10% next year. The gloomy forecast chimes with that of the IMF, which shows the German economy contracting by 5.6% this year. This is faster than any other major economy apart from Japan, says the IMF.

Europe's economic situation remains highly uncertain against the backdrop of a still-fragile banking system and financial markets, but may see a return to growth next year, EU Economic and Monetary Affairs Commissioner Joaquin Almunia said Saturday.

May 11, 2009

The PunchLine...

Households Brave New World

Trauma in Housing
California and Florida metropolitan areas led the U.S. in foreclosures in the first quarter as unemployment and falling property values deepened the housing recession, RealtyTrac Inc. said. Las Vegas had the highest overall rate of foreclosure filings, with 4.5 percent of households receiving a default or auction notice or being seized by a lender. California had 13 cities among the top 25 with the highest rates. Florida had eight while Nevada and Arizona each had two, according to Irvine, Californiabased RealtyTrac, a seller of default data. Unemployment is bound to get worse, Stephen Miller, professor of economics at the University of Nevada, Las Vegas, said in an interview. The real issue is when will prices bottom?

Consumer delinquencies on the rise

According to Moodys, the amount of bad US credit card loans written off as uncollectible rose to a record high (data back to 1989) of 9.3% annualized in March from 8.8% in February. Moodys is also reporting that the amount of loan balances in which a loan balance was 30 days past due rose to 6.4% annualized from 4.57% this time last year.

Food stamp participation surging

And, as another sign of the stress hitting the consumer sector, we see that food stamp participation jumped 1.1% in February, continuing a string of four consecutive monthly increases, and is running up 17.4% on a year overyear basis. Nearly 15 million US households, or 13% of the total, are now participating in the food stamp program. Local taxes Bite

More signs of stress for high-end consumers

After 14% Water Rate Hike, Another 12% Increase on Horizon

The 14 percent water rate hike on tap this year could be followed by another walletcrunching 12 percent increase in 2010. That would represent the fourth doubledigit boost since 2007 and would propel the annual water bill for typical onefamily homeowners past the $1,000 mark for the first time.

As to the Feds claim that the equity of homeowners as a group stands at 43%, Barrons points out that what the Fed neglects to tell you is that roughly a third of them have their houses free and clear. Lo and behold, some basic arithmetic reveals that 67% of homeowners with mortgages have equity of less than 15%. That suggests the destruction priced into the credit markets hardly seems out of whack with potential reality.

Ben Bernankes own words:

A number of factors are likely to continue to weigh on consumer spending, among them the weak labor market and the declines in equity and housing wealth that households have experienced over the past two years. In addition, credit conditions for consumers remain tight

May 11, 2009

The PunchLine...

YouCant Handle the Truth

Were US Auto Sales a Bubble?

Production Indices to Crash

GMs is to shutter production for the balance of the second quarter; that means 20% of vehicle production will be shuttered

Prof. Paul Krugman Worries about L-Shaped Recession

The country may experience some economic growth in the latter half of this year, but don't expect the rate of job losses to abate anytime soon, noted economist and recent Nobel Prize laureate Paul Krugman told an audience of economists and area business leaders Friday at the University of Cincinnati. "There are two kinds of recessions that are bad - those that take place because of financial crises, and those that are synchronized around the world," he said. "In both cases, the recessions tend to last longer and be deeper. Right now, we've got both going on." Q: What will it take to pull out of this crisis? Krugman: I'm in the camp that really worries about the Lshaped recession. We level off but we don't get the recovery. We hope it isn't, but it has all the markings of it. This looks like the kind of slump that has all the markings of where normal recovery forces are very, very weak. Why, after all, did bankers take such huge risks? Because success offered such gigantic rewards.... Now we're seeing similar (outrageous) rewards offered to people who can play their risky games with federal backing.

GM to Cut 21,000 Jobs, Eliminate Pontiac

Firms Warn of China Protectionism

Mafia and underworld economy thrives in global financial meltdown

Foreign businesses in China are complaining about rising protectionist policies in new spending.

For many firms

Support coming from humiliated and desperate policymakers

the worst case needs to become the base case scenario

Likely to see more evidence that there are big problems with commercial real estate loans. But heavy losses on such assets "likely would cause even deeper misery, and risk of failure, at small and medium banks" not among the giants in the first round "because they tend to have disproportionately more exposure."

Public scrutiny blunted really tough bank stress tests

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The PunchLine...

The DNA of Business Workouts to Define Recovery

German badbank scheme looks ingenious
Banks get funding to hold toxic assets to maturity, thus avoiding firesales. They only take expected hits as they materialise. And the state provides catastrophe insurance, protecting banks in case things are worse than expected.

Avon Posts Sluggish Sales

Avon reported a 36% drop in quarterly profit as weak North American volume and the stronger dollar weighed on revenue. Its shares sank.

supermarket giant capitalizes on booming weapons sales Just trading down

GE Exec Says Economic Crisis Resetting Companies

The top executive of General Electric Co. said Wednesday he couldn't predict when the recession would end or how bad it will be, but said the global economic crisis has "fundamentally reset" the way companies do business and capitalism itself.

Discount Retailers Score in Down Economy

Aggressive discounting as well as an accelerated pace of 2008 federal tax refunds have provided some support to consumer spending in spite of the extreme headwinds of the massive $13 trillion of lost wealth via equity and housing asset destruction - plus 5.5 million jobs lost (and counting) and a well-overdue need to rebuild savings.

RETAIL CLOSINGS
A new report from CoStar Group revealed that major U.S. retailers closed nearly 7,000 stores while opening approximately 5,700 new locations in 2008.

Shipping industry adrift in global slowdown. The global shipping fleet is still growing at a record pace. But world trade is set to decline 9%. The excess supply will last for years. Shippers and their financiers may benefit from lower costs once trade recovers. But in the meantime, it's all about survival.

Moody's cuts Weyerhaeuser's debt ratings to junk

Newcomers Challenge OfficeSupply Stalwarts

With companies trying to cut costs even on pens and paper in this recession, discounters like Wal-Mart and Costco are increasing their efforts to bring in customers of the big office chains like Office Depot. The result: a wave of price competition that is benefitting lower-cost vendors and encouraging companies to switch suppliers.

Low chip and TV sales hit Samsung

South Korea's Samsung Electronics has reported a 72% drop in quarterly profits after more losses at its microchip and LCD television divisions. For the three months to 31 March, its net profit fell to 619bn won ($458m; 330m) from 2.2tn won a year ago. However, the results were better than market expectations and an improvement on the groupwide losses reported for the last three months of 2008. Losses at its semiconductor unit hit 650bn won between January and March. The loss at the LCD television unit was 310bn won. Samsung said both profits and sales at the two divisions had been hit by the continuing global economic slowdown. By contrast, profits at its mobile phone handset business rose 2% to 940bn won as sales held up.

G.E.s Breakthrough Can Put 100 DVDs on a Disc

General Electric says it has achieved a breakthrough in digital storage technology that will allow standard-size discs to hold the equivalent of 100 DVDs.

Record slack in the economy

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The PunchLine...

Trust Me on This
Bank stress tests shouldnt be open to debate
The spectacle of US regulators arguing over the results strains the tests tenuous credibility. Watchdogs run these tests all the time. This cynical public exercise shows regulators need justification for telling banks what to do. That means banks have grown too powerful.

CEO pay outrage

Four of the top five highest paid executives in 2008 ran companies whose stocks underperformed the market.

Canadian Dollar Rises to Highest Since November

Canadas dollar advanced to the highest level since November as speculation the worst of the global economic crisis is over boosted the appeal of currencies that would benefit from renewed growth.

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The PunchLine...

Dislocations - Blurred Vision

The Auto Nightmare Unintended consequences Administration steps to guarantee automaker warrantees and provide financing to parts suppliers appear to be very deliberate steps to ring fence the industry and limit collateral damage from a potential bankruptcy filing by an OEM. But who can say in advance that all of the risks and unintended consequences of a bankruptcy have been identified.

Ben Bernankes own words:

Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high for a time, even after economic growth resumes.

China has reported that it has been secretly increasing its gold reserves.

It was able to keep it secret by buying domestically produced metal, almost doubling the amount of gold it holds to more than 1,000 tons. China has the biggest foreign exchange reserves in the world, totalling almost $2,000bn (1.373bn). An estimated two thirds is held in US dollars, though China has been backing away from the dollar as a reserve currency for a while

Mexican Peso, Markets Tumble as Swine Flu Outbreak Grows

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May 11, 2009

The PunchLine...

Credit The Big Bluff

The stress tests are not stressed enough the adverse scenario is not far from most analysts base case outlooks. As the IMFs latest reports have made blatantly clear, the US banking system (and the European even more so) will need more capital still down the road stress tests or not. The global default rate rose to 7 percent at the end of March from 4.1 in December, with the number of defaulters the greatest for a single month since the Great Depression, according to Moodys. The New York-based ratings firm expects the global default rate to peak at 14.6 percent in the final quarter of this year, it said earlier this month. FAILURE DOESNT SCARE ME
Henry Hu from Texas University points to the empty creditor phenomenon to explain why some lenders prefer to hold out and force a bankruptcy seemingly against the companys and thus their own best interest. In short, creditors with enough credit default swaps may simultaneously have control rights and incentives to cause the debtor firm's value to fall. And if bankruptcy occurs, the empty creditor may undermine proper reorganization, especially if his interests (or noninterests) are not fully disclosed to the bankruptcy court. See: Distressed Debt Investors Dictate The Terms: How Big An Issue Are 'Empty Creditors' With CDS Hedges? Dynamics of this kind make defaults more likely and need to be taken into account when forecasting the severity of the current corporate default cycle.

some recent doubledip bankruptcies show that investing in distressed companies isnt foolproof

Beware part of the Highyield credit index steepening in price terms can be attributed to a series of defaulted names exiting the index over the past weeks
There are still reasons to be cautious on credit risk in the longer term. Credit is already contending with rising defaults, spiraling downgrades and increasing corporate leverage. All such activity is likely to get worse before it gets better. For the record, the key outperformers have been all the consensus underweights: high yield, industrials, autos and bank sub debt.

The credit market improvements in 09, while real in the sense of having reopened issuance and improving liquidity, overstate the degree of fundamental credit repair as that liquidity rests on an artificial foundation of government intervention rather than a significant reduction in credit risk.

81% of proceeds from HY issuance so far this year was used to refinance existing indebtedness, primarily loans. This compares to a normal level of refinancing activity in the 50% range.

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The New Geography of Business

China Pickup
Economic activity is picking up, driven by the extensive fiscal programs pushed by the government and by the surge in bank lending. Government is expanding employment in public works projects as an offset to contracting exports and light industry which are traditionally more laborintensive than public works. These stimulus efforts come at the cost of the efficiency of the economy and will need to be rolled back.

Japan exports fell 45.6 percent last month, compared with March 2008. Although still a significant decline, the numbers were slightly better than those from February, when the slump approached 50 percent. Imports also were down in March, falling 36.7 percent from 2008 levels. Japan normally exports far more than it imports. While its trade balance has remained positive, it shrank by 99 percent compared with a year ago.

The Bank of Japan believes that the nation's potential growth rate likely has fallen -- and may
have dropped sharply -- as a result of the impact of the global recession on the export-dependent economy. Labor productivity is still relatively low in Japan, particularly in the non-manufacturing sector, while capital stock is not rising due to cautious business planning, both of which are hold back the nation's potential to grow and limit chances for improving the standard of living. In January, BOJ Governor Masaaki Shirakawa estimated Japan's potential, non-inflationary growth rate had fallen to between 1% and 1.5% from its long-held estimate of 1.5% to 2.0%.

HK Trade Update
Chinas recovery insufficient to offset weakness in the rest of the world Exports to all major markets (except China) saw larger YoY declines in March compared to JanuaryFebruary of this year. Shipments to the US fell 23.3% (20.9% in JanFeb); those to Japan dropped 19.5% (13.3% in JanFeb) and those to Germany fell 11.9% (7.2% in JanFeb). Exports to China fell 19.2%, improving somewhat from the 23.5% decline in the first 2 months, but this modest improvement was not sufficient to offset the weakness in the rest of the world.

Shift to China

PPG Industries Inc, the worlds secondlargest paint and coatings maker, expects China sales to maintain doubledigit growth this year as demand from auto makers grows and it expands market share. The USbased company, which is reducing output and cutting more than 8 percent of its workforce amid weak demand, is counting on Asia, and China in particular, as its growth engine.

Unemployment in Spain just set a national record at four million people, a shocking 17% rate. Yet the government isnt even considering serious reforms of the stultified and discriminatory labour market. Canada's leading indicators fall again
Canada's composite index of leading economic indicators fell 1.3% in March, following a 1.4% decline in February, according to Statistics Canada. The contraction in the manufacturing sector intensified as widespread cutbacks were implemented in the auto industry early in the year. This was offset by a marked slowdown in the fall of the housing and stock markets.

Poland Says Zloty Weakness May Force Euro Entry Delay

Polands government said the zlotys weakness may force it to postpone euro adoption, now planned for 2012, unless the currency starts stabilizing in the second quarter. The government will focus on the secure entrance to the preeuro exchange rate mechanism and not on dates, the Warsaw-based Finance Ministry said today in a document outlining the guidelines for dropping the zloty. East Europes nations are seeking speedier euro adoption to shield their economies from the global economic crisis. Poland in October pledged to target ERM membership in the first half and euro adoption by 2012. Since then, the zloty lost 22 percent against the euro and is too volatile to set a parity rate for a peg to Europes common currency, the ministry said.

Overhaul Needed macroeconomic and social stability at risk

Radovan Jelai: Effects of the financial crisis on Central and Eastern Europe
Speech by Mr Radovan Jelai, Governor of the National Bank of Serbia, at the "Global Crisis in Europe and Central Asia" panel discussion of the IMF and WB Spring Meeting, Washington, 24 April 2009.

*** Dear ladies and gentlemen, Central and eastern Europe has gone through an unbelievable development during the last two decades in all aspects: politically, economically and socially. But the financial crisis has thrown much of that progress into doubt. . . First, most CEE countries, including Serbia, greatly underestimated and are still underestimating the problems they will face in 2009 and 2010, as our economic models built on foreign direct investments, foreign borrowing and, for the regional members of the European Union, additional funds from Brussels need a complete overhaul. the regions macroeconomic and social stability will be at risk. Democracy, during the next couple of months, will undergo its first major test

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The PunchLine...

Pumping Iron - Old Economy New Challenges

Steel Industry Woes Signal Shakeout, Price Cuts
Weak demand is likely to lead to increased losses in the world steel industry next quarter, which could prompt consolidation, the shakeout of marginal players and lower prices, much of the industry now predicts. "The demand for steel is virtually nonexistent," says Dan DiMicco, CEO of steelmaker Nucor Corp., which reported a $189.6 million loss and said it expected a wider loss in the second quarter. Steelmakers were hoping the first quarter would be its worst, in terms of losses, for 2009. Early signs that the housing market would pick up, that stimulus spending for projects such as bridges would boost consumption, and that an auto bailout would shore up a key steel customer were taken as clues that the steel market was headed for a turnaround.

Newsprint prices collapsing down $40/MT to $665/MT. In April, newsprint price declines accelerated given tumbling newsprint demand. This is down a total of $110/tonne from the recent peak of $775/tonne seen in November 2008. In prior months, mills had asked customers to take advance shipments resulting in elevated inventories. Consequently, RISI contacts note that demand over the next few months will be very weak resulting in additional heavy discounting.

Chemicals 2009 to be challenging for most commodity chemical companies because demand remains depressed and significant Middle Eastern capacity is expected to ramp up throughout the year. This capacity will begin to affect the export market in 2Q2009, and supply should continue to outpace demand growth through 2010.The Western Europe market for commodity chemicals is considerably weaker than the US market. Demand shows no signs of improvement and economic growth is forecasted to continue to slow.

Maritime

Idle Box Fleet Grows

Idled ocean container capacity increased slightly in the past two weeks, reversing an earlier decline, the first in seven months, as ocean carriers return an increasing number of chartered vessels as they come off hire. Collectively, the top 20 ocean carriers may be facing total losses that could exceed $4 billion for the first quarter alone -- the largest ever quarterly loss in the industry's history. The idled fleet rose to 506 ships of 1.34 million TEUs on April 27 from 486 vessels of 1.31 million TEUs two weeks ago, according to AXSAlphaliner. The idled vessels represent 10.6 percent of the world fleet against 10.4 percent on April 13.

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Real Estate and Construction Outlook

Even Coml Real Estate a massive deterioration in underwriting standards and a buildup leverage can lead to crippling problems, even without massive supply problems. For the 2007 vintage of credits, a vast majority of loans are unlikely to qualify for refinancing without significant equity infusions from borrowers
New York City - As many as 90,000 city apartment units could go into foreclosure as the housing crisis spreads from singlefamily homes to rental properties, city officials warned.

Square Feet: New York Office Landlords Go Small Corporate RE Plays New Role in Tough Times
It's a whole new world for corporate real estate owners, according to the 2009 State of the Industry Report by CoreNet Global, which was released Monday. The report distilled the views and opinions of more than 60 corporate real estate executives from around the world, along with information gleaned from various corporate real estate case studies. In some ways, the report noted, the economic squeeze has caused companies to turn to corporate real estate departments and third-party real estate service providers even more than previously to help contain costs. For example, companies are still interested in greening their real estate holdings, but now they want lower-cost sustainable solutions that offer more immediate payback, especially energy management. Also, alternate workplace strategies, which were previously considered an experiment in reducing the cost of office space through flexible work practices, is no longer so experimental any more, but pretty much mainstream.

Manhattan building owners are trying to make deals by chopping large spaces into smaller units and finishing off the space before a tenant is signed.

The time bomb of unfundable commercial mortgages Stress Test Results Bode Ill for Real Estate Finance
Its not only buyers and sellers who are stuck in the dump of the economic recession. Holders of leveraged property are watching their values drop, and the threat of default impacts not just one propertybut all.

Across the country, local governments are facing rising complaints about environmental and safety hazards from stalled construction sites where work to build new developments has been halted.

New York Purchasing Managers Index

Release for: April 2009 Source: NAPM New York Diffusion indexes, adjusted unless otherwise noted yrago Apr09 Mar09 Feb09 Jan09 Dec08 Apr08 Business Conditions Index 356.0 366.9 369.9 380.1 385.9 421.4 Current* 28.3 43.9 29.6 38.4 43.1 40.0 Outlook 51.2 63.8 31.8 54.2 40.7 53.3 Employment 30.0 23.6 21.9 22.2 27.8 40.4 Quantity of Purchases 27.6 30.6 25.0 20.8 22.2 45.7 Prices Paid 24.5 30.6 35.9 35.7 44.4 66.3 Supplier Delivery Time 50.0 52.8 51.6 52.8 50.0 53.2 * Weighted average of manufacturing and nonmanufacturing indexes.

REIT spreads continue to rally hard, and more may be on the way once all of the 1Q09 earnings releases and conference calls are digested. The technical situation remains very favorable as REIT liquidity has completely dried up with exponentially more buyers than sellers at the now tighter levels, stimulated of course by the flood of secondary offerings and other capital moves as REIT management teams do what they sometimes do well manage risk. The cat is clearly out of the bag regarding REIT bonds, and just as we saw an over-reaction on the downside in November and December, we are potentially set up for an over-reaction on the upside considering still very weak fundamental trends.

CMBS Delinquencies Soar in Q1

Late payments on CMBS loans have tripled, says Reis Inc., while Fitch reports a 500% gain in the volume of specialserviced loans.

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More U.S. Construction Data

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Media Clips
Monthlies' May Ad Pages Are Again Lousy (-25.97%)
Press accounts accompanying last week's release of Publishers Information Bureau first-quarter data were full of Armageddon According to the researcher TNS Media Intelligence, US ad spending remained weak in March after a 9.2% drop in the fourth quarter of 2008. Newspaper ads sank 17%, magazine ads fell 14%, and radio advertising dropped 15% according to the group.

U.S. Newspapers Decline in Circulation Accelerates

Lights out for film firms

Global recession and tax-incentive woes force companies serving the film industry to struggle Amazon.com is widely expected to lift the wraps on a new large-screen Kindle device this week, which could be the first in a line of electronic reading devices geared toward newspapers and textbooks.
Amazon to unveil largerscreen Kindle; students at 6 universities to be given Kindles instead of textbooks

The decline in U.S. newspaper weekday circulation almost doubled in the sixmonth period through March as more readers got their news from the Internet, according to the Audit Bureau of Circulations data. Daily average circulation for 395 newspapers fell 7.1 percent to 34.4 million from 37.1 million a year earlier, Schaumburg, Illinoisbased ABC said today in an email. Circulation fell 3.6 percent in the yearago period. Of the top 10 newspapers, only News Corp.s Wall Street Journal increased circulation. Gannett Co.s USA Today, the largest U.S. newspaper, lost 7.5 percent and the New York Post had the biggest slump with 21 percent. Publishers including New York Times Co. and Gannett have boosted newsstand or subscription prices to help offset the circulation declines. Five publishers sought bankruptcy protection during the period and printed versions of the Seattle PostIntelligencer and Rocky Mountain News were halted.

Sunday paper circulation fell 5.4 percent in the latest period. This is based on data from 557 U.S. newspapers that reported in both the current and year-ago periods

NY tabloids see steep circulation declines

New York Post drops 20%, while Daily News sees 15% fall off. BIA Advisory Services forecasts a 15% drop, or $3 billion in TV stations advertising revenues for 2009. Total local and national spot advertising revenues will land at $17 billion by year's-end -- down from $20.1 billion in 2008. Although 2008 was a presidential election and Olympics year, BIA said the marketplace sank 6.6%, caught in the vortex of a rapidly weakening economy. For a two-year period from 2007-2009, BIA notes the industry has seen an overall 21.2% decline in advertising revenues.

Good thing Sirius XM Radio resolved the debt issues that threatened to drag it into bankruptcy earlier this year; the companys clearly got other things to worry about. Like fleeing subscribers. Reporting a firstquarter net loss of $236.6 million, Sirius said that anemic car sales had led to its firstever decline in net subscriber additions. And it was a nasty decline. Sirius added 1,338,961 new customers. But it lost 1,743,383.

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Breakdown in Europe?
Spain's unemployment rate leaps to record high More Pointing to Some Recovery Even in 2009
According to the country's National Statistics Institute a record high figure of 17.4 per cent were unemployed in the first quarter of the year. Unemployment leapt from 13.9 per cent in the fourth quarter of 2008, the biggest quarterly jump since 1976. Joblessness in Spain has almost doubled in a year....

German Institutes See Economy Shrinking Record 6% This Year

Germanys leading economic institutes predict the economy, Europes largest, will shrink by a postwar record of 6 percent this year, a government official said today, speaking on the condition of anonymity. The institutes forecast, part of a biannual review of the economy for the government, will be presented tomorrow in Berlin. Combined with government estimates it forms part of the basis of tax-revenue projections and government spending plans. The Sueddeutsche Zeitung newspaper reported today the institutes forecast the economy will shrink by some 0.5 percent in 2010.

Euro nations told 'cut deficits'

Eurozone rates are cut to 1% and the European Central Bank says it plans to pump about 60bn euros into the region's economy.

The EU orders France, Spain, Ireland and Greece to reduce their budget deficits and take control of public finances.

UK Car Production Plunges; Down 51.3% y/y

LONDON - March data from the Society of Motor Manufacturers and Traders highlighted the slump in vehicle production in the UK. UK March car production was down 51.3% on the year, and Q1 car production down 56.6% on the year. Total vehicle production fell by similar amounts, with March production down 52.1% on the year and Q1 down 57.4% on the year. Production for the domestic markets was even weaker than production for the export markets in Q1. Total Q1 vehicle export production was down 54.7% on the year with domestic vehicle production down 65.0%. The government announced a car scrappage scheme in the April 22 budget, but it will take time to impact production.

UK economy 'faces decade of pain'

The UK is facing "two parliaments of pain" following the "breathtaking" damage to the economy, the Institute for Fiscal Studies (IFS) has warned. The UK recession could be the worst since the early 1930s, a leading economic research body has predicted. The National Institute of Economic and Social Research (NIESR) said in 2009 the country's GDP could contract by 4.3%, and then grow in 2010 by 0.9%.

Detroit Of Europe' Hit By Slowing Auto Production

Central Europe had become 'Europes Detroit' in terms of its high concentration of auto production due to cheap but highly skilled labor, EU membership, and good transport links with the west

Housing market woes CEE

Now growth of credit to households is reversing

The Central Euru region experienced a similar housing market boom as did developed countries. Poland and the Czech Republic experienced a surge in house prices (an average 20% p.a. in the last three years), in construction activity, and in the volume of mortgages mostly during 200508, past the 200506 peak in the US boom and the late 2007 peak in WE.

EU/EMU Confidence & Economic Sentiment Index

Release for: April 2009; Source: European Commission, Brussels
Results are differences between % of respondents giving positive and negative replies

Sentiment Sep Oct Nov Dec Jan Feb Mar Apr EU Industrial 13 19 25 32 33 37 39 36 Services 4 10 18 23 28 29 31 30 Consumer 19 23 24 28 31 32 32 29 Retail 13 16 18 25 25 24 22 20 Construction 20 25 28 32 36 38 37 38 Economic 86.9 79.7 73.5 66.6 63.2 60.9 60.4 63.9 EMU Industrial 12 18 25 33 33 36 38 35 Services 0 7 12 17 22 24 25 24 Consumer 19 24 25 30 31 33 34 31 Retail 8 13 13 20 20 19 17 19 Construction 15 20 23 27 30 32 32 34 Economic 88.9 81.6 76.8 68.9 67.2 65.3 64.7 67.2

the ECB released its latest Bank Lending Survey. The headline result was that banks still saw a pronounced tightening in credit standards for business enterprises in 1Q (+43% net balance) but to a lesser extent than in 4Q (+64% net balance).

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Will Life Ever Be the Same?

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